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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ~~FORM 10-Q~~

~~(Mark~~FORM ~~One)~~10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

For the quarterly period ended September 30, 2001

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

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

() Indicate by ~~TRANSITION~~check ~~REPORT~~mark ~~PURSUANT~~whether TOthe ~~SECTION~~registrant 13is ORan 15accelerated filer (d)as OFdefined ~~THE~~in ~~SECURITIES~~Rule 12b-2 ~~EXCHANGE ACT~~of OFthe ~~1934~~ Exchange Act). Yes ý No o

~~For~~ This combined ~~the~~Form 10-Q ~~transition~~is ~~period~~separately ~~from~~filed ~~___________to__________~~by Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

~~Commission Registrant,~~ The ~~State~~Union ~~of Incorporation~~Light, ~~I.R.S.~~ ~~Employer File~~Heat ~~Number Address~~ and ~~Telephone~~Power ~~Number Identification~~Company ~~No. 1-11377 CINERGY~~meets ~~CORP. 31-1385023 (A~~the ~~Delaware~~conditions ~~Corporation) 139~~set ~~East~~forth ~~Fourth~~in ~~Street Cincinnati,~~General ~~Ohio~~Instruction ~~45202~~ H(~~513) 421-9500~~ 1~~-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030~~ )(~~An Ohio Corporation~~a) ~~139~~ ~~East~~and ~~Fourth Street Cincinnati, Ohio 45202~~ (~~513~~b) ~~421-9500~~ of 1Form 10-~~3543 PSI~~Q ~~ENERGY,~~and ~~INC. 35-0594457 (An~~is ~~Indiana~~therefore ~~Corporation) 1000~~filing ~~East~~its ~~Main~~company ~~Street Plainfield,~~specific ~~Indiana~~information ~~46168 (513)~~with ~~421-9500 2-7793 THE~~the ~~UNION~~reduced ~~LIGHT,~~disclosure ~~HEAT~~format ~~AND~~specified ~~POWER~~in ~~COMPANY 31-0473080 (A~~General ~~Kentucky~~Instruction ~~Corporation) 139 East Fourth Street Cincinnati, Ohio 45202~~ H(~~513~~2) ~~421~~of Form 10-~~9500~~ Q.

~~Indicate by check mark whether the registrants (1) have filed all reports required to be filed by~~ As ~~Section 13 or 15(d)~~ of ~~the~~October 31, ~~Securities~~2002, ~~Exchange~~shares ~~Act~~ of ~~1934~~common ~~during~~stock ~~the~~outstanding ~~preceding 12 months (or~~ for ~~such~~each ~~shorter~~registrant ~~period that the registrants~~ were ~~required~~as tolisted: ~~file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No __~~

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

Registrant	Description	Shares
Cinergy Corp.	Par value $.01 per share	168,326,377
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

~~The~~ ~~Union Light, Heat and Power Company meets the conditions set forth in General Instruction~~ ~~H(1)(a)~~ ~~and (b) of Form 10-Q and is therefore filing its company specific~~ ~~information~~TABLE ~~with~~OF ~~the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.~~ CONTENTS

As of October 31, 2001, shares of Common Stock outstanding for each registrant were as listed:

Item Number				Page Number
PART I FINANCIAL INFORMATION
1	Financial Statements
		*Cinergy Corp.*		1
			Consolidated Statements of Income	2
			Consolidated Balance Sheets	3
			Consolidated Statements of Changes in Common Stock Equity	5
			Consolidated Statements of Cash Flows	7
		*The Cincinnati Gas & Electric Company*
			Consolidated Statements of Income and Comprehensive Income	9
			Consolidated Balance Sheets	10
			Consolidated Statements of Cash Flows	12
		*PSI Energy, Inc.*
			Consolidated Statements of Income and Comprehensive Income	14
			Consolidated Balance Sheets	15
			Consolidated Statements of Cash Flows	17
		*The Union Light, Heat and Power Company*
			Statements of Income	19
			Balance Sheets	20
			Statements of Cash Flows	22
	Notes to Financial Statements			23
	Cautionary Statements Regarding Forward-Looking Information			48
2	Management's Discussion and Analysis of Financial Condition and Results of Operations
			Introduction	50
			Organization	50
			Liquidity and Capital Resources	51
			2002 Quarterly Results of Operations—Historical	57
			2002 Year to Date Results of Operations—Historical	61
			Results of Operations—Future	66
3	Quantitative and Qualitative Disclosures About Market Risk			80
4	Controls and Procedures			80
PART II OTHER INFORMATION
1	Legal Proceedings			80
6	Exhibits and Reports on Form 8-K			81
	Signatures			82
	Certifications			83

Registrant Description Shares Cinergy Corp. Par value $.01 per share 159,112,108 The Cincinnati Gas & Electric Company Par value $8.50 per share 89,663,086 Without par value, stated PSI Energy, Inc. value $.01 per share 53,913,701 The Union Light, Heat and Power Company Par value $15.00 per share 585,333 i

~~TABLE~~ ~~OF CONTENTS~~ ~~--------------------------------------------------------------------------------~~ ~~Item~~ ~~Number ------ PART~~CINERGY ~~I FINANCIAL INFORMATION 1 Financial Statements Cinergy Corp~~CORP. ~~Consolidated~~ AND ~~Statements~~SUBSIDIARY of Income Consolidated Balance Sheets Consolidated Statements of Changes in Common Stock Equity Consolidated Statements of Cash Flows The Cincinnati Gas & Electric Company Consolidated Statements of Income and Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows PSI Energy, Inc. Consolidated Statements of Income and Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows The Union Light, Heat and Power Company Statements of Income Balance Sheets Statements of Cash Flows COMPANIES Notes to Financial Statements Cautionary Statements Regarding Forward-Looking Information 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Organization Liquidity Capital Resources 2001 Quarterly Results of Operations - Historical 2001 Year to Date Results of Operations - Historical Results of Operations - Future 3 Quantitative and Qualitative Disclosures About Market Risk PART II OTHER INFORMATION 1 Legal Proceedings 6 Exhibits and Reports on Form 8-K Signatures

CINERGY CORP. CONSOLIDATED STATEMENTS OF INCOME Quarter Ended Year to Date September 30 September 30 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) (unaudited) Operating Revenues Electric $2,515,665 $1,599,468 $ 6,773,567 $3,916,518 Gas 786,345 677,917 3,836,946 1,668,272 Other 21,604 22,400 61,722 67,586 ---------- ---------- ----------- ---------- Total Operating Revenues 3,323,614 2,299,785 10,672,235 5,652,376 --------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel and purchased and exchanged power 1,864,994 1,048,189 5,066,490 2,249,519 Gas purchased 761,325 634,917 3,667,603 1,490,868 Operation and maintenance 265,518 267,454 782,073 817,965 Depreciation 97,109 86,562 277,876 255,000 Taxes other than income taxes 59,325 66,892 175,826 201,481 ----------- ---------- ---------- ---------- Total Operating Expenses 3,048,271 2,104,014 9,969,868 5,014,833 --------------------------------------------------------------------------------------------------------------- Operating Income 275,343 195,771 702,367 637,543 --------------------------------------------------------------------------------------------------------------- Equity in Earnings (Losses) of Unconsolidated Subsidiaries (4,333) 165 (3,500) 6,340 Miscellaneous - Net 5,366 12,073 13,845 12,187 Interest 68,762 60,166 200,379 164,709 --------------------------------------------------------------------------------------------------------------- Income Before Taxes 207,614 147,843 512,333 491,361 --------------------------------------------------------------------------------------------------------------- Income Taxes 78,284 52,959 178,073 180,285 Preferred Dividend Requirements of Subsidiaries 859 1,070 2,575 3,708 ------------------------------------------------------------ Net Income $ 128,471 $ 93,814 $ 331,685 $ 307,368 ============================================================ --------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 159,097 158,938 159,049 158,928 --------------------------------------------------------------------------------------------------------------- Earnings Per Common Share Net Income $ 0.81 $ 0.59 $ 2.08 $ 1.93 --------------------------------------------------------------------------------------------------------------- Earnings Per Common Share - Assuming Dilution Net Income $ 0.80 $ 0.58 $ 2.06 $ 1.92 --------------------------------------------------------------------------------------------------------------- Dividends Declared Per Common Share $ 0.45 $ 0.45 $ 1.35 $ 1.35 --------------------------------------------------------------------------------------------------------------- The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

CINERGY CORP. CONSOLIDATED ~~BALANCE~~STATEMENTS ~~SHEETS ASSETS September~~OF 30 December 31 2001 2000 (unaudited) ----------------------------------------------------------- --------------------------------- (dollars in thousands) Current Assets Cash and cash equivalents $ 147,781 $ 93,054 Restricted deposits 10,927 4,195 Notes receivable 29,426 35,945 Accounts receivable less accumulated provision for doubtful accounts of $37,693 at September 30, 2001, and $29,951 at December 31, 2000 1,740,986 1,623,402 Materials, supplies, and fuel - at average cost 228,132 159,340 Energy risk management current assets (Note 1(c)) 629,006 1,413,281 Prepayments and other 168,655 129,666 ----------- ---------- Total Current Assets 2,954,913 3,458,883 --------------------------------------------------------------------------------------------- Property, Plant, and Equipment - at Cost Utility plant in service 8,019,141 7,681,612 Construction work in progress 374,016 323,350 ---------- ---------- Total Utility Plant 8,393,157 8,004,962 Non-regulated property, plant, and equipment 4,474,415 3,401,203 Accumulated depreciation 4,791,878 4,586,089 ---------- ---------- Net Property, Plant, and Equipment 8,075,694 6,820,076 --------------------------------------------------------------------------------------------- Other Assets Regulatory assets 999,759 976,614 Investments in unconsolidated subsidiaries 198,092 538,322 Energy risk management non-current assets (Note 1(c)) 132,840 37,228 Other investments 151,893 146,986 Other 299,427 351,619 ---------- ---------- Total Other Assets 1,782,011 2,050,769 --------------------------------------------------------------------------------------------- Total Assets $12,812,618 $12,329,728 =========== =========== --------------------------------------------------------------------------------------------- The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements. INCOME

                                                   CINERGY CORP.
                                            CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                   September 30  December 31
                                                                       2001         2000
                                                                   (unaudited)
--------------------------------------------------------------------------------------------
                                                                     (dollars in thousands)

Current Liabilities
   Accounts payable                                                 $ 1,607,656  $ 1,496,494
   Accrued taxes                                                        275,092      247,006
   Accrued interest                                                      70,740       47,351
   Notes payable and other short-term obligations (Note 3)            1,210,970    1,128,657
   Long-term debt due within one year (Note 2)                           80,631       40,545
   Energy risk management current liabilities (Note 1(c))               632,383    1,456,375
   Other                                                                129,871      106,679
                                                                     ----------  -----------
                  Total Current Liabilities                           4,007,343    4,523,107

--------------------------------------------------------------------------------------------

Non-Current Liabilities
   Long-term debt (Note 2)                                            3,682,965    2,876,367
   Deferred income taxes                                              1,224,065    1,185,968
   Unamortized investment tax credits                                   129,582      137,965
   Accrued pension and other postretirement benefit costs               431,001      404,764
   Energy risk management non-current liabilities (Note 1(c))           153,766       97,507
   Other                                                                211,024      252,255
                                                                     ----------  -----------
                  Total Non-Current Liabilities                       5,832,403    4,954,826

--------------------------------------------------------------------------------------------

Total Liabilities                                                     9,839,746    9,477,933

--------------------------------------------------------------------------------------------

Cumulative Preferred Stock of Subsidiaries
   Not subject to mandatory redemption                                   62,833       62,834

--------------------------------------------------------------------------------------------

Common Stock Equity
   Common stock - $.01 par value; authorized shares - 600,000,000;
     outstanding shares - 159,099,158 at September 30, 2001 and
     158,967,661 at December 31, 2000                                     1,591        1,590
   Paid-in capital                                                    1,625,343    1,619,153
   Retained earnings                                                  1,297,648    1,179,113
   Accumulated other comprehensive income (loss)                        (14,543)     (10,895)
                                                                     ----------  ------------
                  Total Common Stock Equity                           2,910,039    2,788,961

---------------------------------------------------------------------------------------------

Commitments and Contingencies (Note 4)

Total Liabilities and Shareholders' Equity                          $12,812,618  $12,329,728
                                                                    ===========  ===========
--------------------------------------------------------------------------------------------

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

			Quarter Ended September 30					Year to Date September 30
			2002		2001			2002		2001
			(in thousands, except per share amounts) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	2,554,687	$	2,539,365		$	5,178,481	$	6,838,286
	Gas			1,281,411		786,345			3,301,625		3,836,946
	Other			49,890		21,604			89,668		61,722

		Total Operating Revenues		3,885,988		3,347,314			8,569,774		10,736,954
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			1,871,365		1,888,694			3,357,585		5,131,209
	Gas purchased (Note 1(d))			1,243,507		761,325			3,142,899		3,667,603
	Operation and maintenance			365,373		265,518			973,165		782,073
	Depreciation			103,565		97,109			303,996		277,876
	Taxes other than income taxes			64,890		59,325			201,559		175,826

		Total Operating Expenses		3,648,700		3,071,971			7,979,204		10,034,587
Operating Income				237,288		275,343			590,570		702,367
Equity in Earnings (Losses) of Unconsolidated Subsidiaries				3,248		(4,333	)		7,956		(3,500	)
Miscellaneous—Net				5,035		5,366			888		13,845
Interest				63,543		68,762			186,414		200,379
Preferred Dividend Requirement of Subsidiary Trust				5,966		—			17,847		—
Income Before Taxes				176,062		207,614			395,153		512,333
Income Taxes				44,635		78,284			121,299		178,073
Preferred Dividend Requirements of Subsidiaries				859		859			2,575		2,575

Net Income			$	130,568	$	128,471		$	271,279	$	331,685

Average Common Shares Outstanding				167,967		159,097			166,544		159,049
Earnings Per Common Share (Note 10)
	Net Income		$	0.78	$	0.81		$	1.63	$	2.08
Earnings Per Common Share—Assuming Dilution (Note 10)
	Net Income		$	0.77	$	0.80		$	1.61	$	2.06
Dividends Declared Per Common Share			$	0.45	$	0.45		$	1.35	$	1.35

CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY Accumulated Total Other Common Common Paid-in Retained Comprehensive Stock Stock Capital Earnings Income/(Loss) Equity ---------------------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited) Quarter Ended September 30, 2001 Balance at July 1, 2001 $ 1,591 $ 1,623,458 $ 1,240,761 $ (16,927) $2,848,883 Comprehensive income: Net income 128,471 128,471 Other comprehensive income (loss), net of tax effect Foreign currency translation adjustment 7,664 7,664 Unrealized gain (loss) on investment trusts (1,191) (1,191) Minimum pension liability adjustment (4) (4) Cash flow hedges (Note 1(b)) (4,085) (4,085) ----------- Total comprehensive income 130,855 Issuance of 11,105 shares of common stock - net - 587 587 Treasury shares reissued (190) (190) Dividends on common stock ($.45 per share) (71,593) (71,593) Other 1,488 9 1,497 -------------------------------------------------------------- Ending balance at September 30, 2001 $ 1,591 $ 1,625,343 $ 1,297,648 $ (14,543) $2,910,039 ============================================================== ---------------------------------------------------------------------------------------------------------------------- Quarter Ended September 30, 2000 Balance at July 1, 2000 $ 1,589 $ 1,612,572 $ 1,135,703 $ (5,316) $2,744,548 Comprehensive income: Net income 93,814 93,814 Other comprehensive income (loss), net of tax effect Foreign currency translation adjustment (5,466) (5,466) Unrealized gain (loss) on investment trusts (156) (156) ------------ Total comprehensive income 88,192 Issuance of 44,262 shares of common stock-net 1 1,769 1,770 Treasury shares reissued (956) (956) Dividends on common stock ($.45 per share) (71,516) (71,516) Other 3,071 327 3,398 -------------------------------------------------------------- Ending Balance at September 30, 2000 $ 1,590 $ 1,616,456 $ 1,158,328 $ (10,938) $2,765,436 ============================================================== ---------------------------------------------------------------------------------------------------------------------- The accompanying notes as they relate to Cinergy Corp. are an ~~ingral~~integral part of these consolidated financial statements.

CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (Continued) Accumulated Total Other Common Common Paid-in Retained Comprehensive Stock Stock Capital Earnings Income/(Loss) Equity ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited) Nine Months Ended September 30, 2001 Balance at January 1, 2001 $ 1,590 $1,619,153 $ 1,179,113 $ (10,895) $2,788,961 Comprehensive income: Net income 331,685 331,685 Other comprehensive income (loss), net of tax effect Foreign currency translation adjustment 4,959 4,959 Unrealized gain (loss) on investment trusts (1,334) (1,334) Cumulative effect of change in accounting principle (Note 1(b)) (2,500) (2,500) Minimum pension liability adjustment 64 64 Cash flow hedges (Note 1(b)) (4,837) (4,837) ---------- Total comprehensive income 328,037 Issuance of 131,497 shares of common stock - net 1 4,278 4,279 Treasury shares purchased (10,015) (10,015) Treasury shares reissued 5,810 5,810 Dividends on common stock ($1.35 per share) (214,689) (214,689) Other 6,117 1,539 7,656 --------- --------- --------- ---------- ---------- Ending balance at September 30, 2001 $ 1,591 $1,625,343 $ 1,297,648 $ (14,543) $2,910,039 ========= ========== =========== ========== ========== ------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, 2000 Balance at January 1, 2000 $ 1,589 $1,597,554 $ 1,064,319 $ (9,741) $2,653,721 Comprehensive income: Net income 307,368 307,368 Other comprehensive income (loss), net of tax effect Foreign currency translation adjustment (1,180) (1,180) Unrealized gain (loss) on investment trusts (17) (17) ---------- Total comprehensive income 306,171 Issuance of 44,262 shares of common stock-net 1 1,769 1,770 Treasury shares purchased (1,490) (1,490) Treasury shares reissued 9,409 9,409 Dividends on common stock ($1.35 per share) (213,707) (213,707) Other 9,214 348 9,562 ------- --------- --------- ---------- ----------- Ending Balance at September 30, 2000 $ 1,590 $1,616,456 $ 1,158,328 $ (10,938) $2,765,436 ======= ========== =========== ========== ========== ------------------------------------------------------------------------------------------------------------------------ The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.

CINERGY CORP. CONSOLIDATED ~~STATEMENTS~~BALANCE OF CASH FLOWS Year to Date September 30 2001 2000 -------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited) Operating Activities Net income 331,685 $ 307,368 Items providing or (using) cash currently: Depreciation 277,876 255,000 Unrealized (gain) loss from energy risk management activities (79,070) (3,070) Deferred income taxes and investment tax credits - net 40,716 3,414 Equity in earnings of unconsolidated subsidiaries 3,500SHEETS (6,340) Allowance for equity funds used during construction (5,163) (4,667) Regulatory assets - net (6,633) (5,111) Changes in other current assets and current liabilities: Restricted deposits (4,281) (153) Accounts and notes receivable, net of reserves on receivables sold (114,127) (692,256) Materials, supplies, and fuel (68,785) 21,908 Accounts payable 108,518 582,243 Accrued taxes and interest 51,475 45,118 Other items - net (18,482) (8,507) ---------- --------- Net cash provided by (used in) operating activities 517,229 494,947 -------------------------------------------------------------------------------------------------------- Financing Activities Change in short-term debt 82,313 268,435 Issuance of long-term debt 870,661 126,420 Redemption of long-term debt (42,403) (95,570) Retirement of preferred stock of subsidiaries (1) (29,392) Issuance of common stock 4,279 1,770 Dividends on common stock (214,689) (213,707) ---------- --------- Net cash provided by (used in) financing activities 700,160 57,956 ------------------------------------------------------------------------------- ---------- --- --------- Investing Activities Construction expenditures (less allowance for equity funds used during construction) (587,428) (332,922) Acquisitions and other investments (575,234) (180,414) ---------- --------- Net cash provided by (used in) investing activities (1,162,662) (513,336) ------------------------------------------------------------------------------- ---------- --------- Net increase (decrease) in cash and cash equivalents 54,727 39,567 Cash and cash equivalents at beginning of period 93,054 81,919 ---------- -------- Cash and cash equivalents at end of period $ 147,781 $ 121,486 ========== ========= ------------------------------------------------------------------------------------------------------- The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.



                                       THE CINCINNATI GAS & ELECTRIC COMPANY
                             CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                                                Quarter Ended                    Year to Date
                                                                September 30                     September 30
                                                            2001             2000             2001           2000
----------------------------------------------------------------------------------------------------------------------
                                                                                           (dollars in thousands)
                                                                                                (unaudited)

Operating Revenues
   Electric                                              $1,267,582        $  791,655       $3,398,342      $1,976,646
   Gas                                                       53,217            48,733          457,717         286,793
                                                         -------------------------------------------------------------
         Total Operating Revenues                         1,320,799           840,388        3,856,059       2,263,439

----------------------------------------------------------------------------------------------------------------------

Operating Expenses
   Fuel and purchased and exchanged power                   922,036           522,958        2,498,551       1,102,486
   Gas purchased                                             24,729            21,534          314,575         135,396
   Operation and maintenance                                117,067           118,096          349,462         360,653
   Depreciation                                              47,135            45,636          139,398         134,962
   Taxes other than income taxes                             43,617            51,504          135,585         155,326
                                                         -------------------------------------------------------------
         Total Operating Expenses                         1,154,584           759,728        3,437,571       1,888,823

----------------------------------------------------------------------------------------------------------------------

Operating Income                                            166,215            80,660          418,488         374,616

----------------------------------------------------------------------------------------------------------------------

Miscellaneous - Net                                             336               671           (1,396)           (340)
Interest                                                     25,353            24,400           79,236          73,873

----------------------------------------------------------------------------------------------------------------------

Income Before Taxes                                         141,198            56,931          337,856         300,403

----------------------------------------------------------------------------------------------------------------------

Income Taxes                                                 51,808            17,835          117,490         109,462
                                                         -------------------------------------------------------------

Net Income                                               $   89,390        $   39,096       $  220,366      $  190,941

Preferred Dividend Requirement                                  211               211              634             636
                                                         -------------------------------------------------------------

Net Income Applicable to Common Stock                    $   89,179        $   38,885       $  219,732      $  190,305
                                                         =============================================================

----------------------------------------------------------------------------------------------------------------------

Net Income                                               $   89,390        $   39,096       $  220,366      $  190,941

Other Comprehensive Income (Loss), Net of Tax Effect         (4,608)                -           (7,268)              -
                                                         -------------------------------------------------------------

Comprehensive Income                                     $   84,782        $   39,096       $  213,098      $  190,941
                                                         =============================================================

----------------------------------------------------------------------------------------------------------------------
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these
consolidated financial statements.

				September 30 2002		December 31 2001
				(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents			$	119,267	$	111,067
	Restricted deposits				142,120		8,055
	Notes receivable (Note 5)				78,946		31,173
	Accounts receivable less accumulated provision for doubtful accounts of $17,943 at September 30, 2002, and $35,580 at December 31, 2001 (Note 5)				1,459,804		1,123,214
	Materials, supplies, and fuel—at average cost				308,438		240,812
	Energy risk management current assets (Note 1(c))				363,132		449,397
	Prepayments and other				133,505		110,311

			Total Current Assets		2,605,212		2,074,029
Property, Plant, and Equipment—at Cost
	Utility plant in service				8,547,851		8,089,961
	Construction work in progress				366,099		464,560

		Total Utility Plant			8,913,950		8,554,521
	Non-regulated property, plant, and equipment				4,702,486		4,527,994
	Accumulated depreciation				5,087,644		4,845,620

			Net Property, Plant, and Equipment		8,528,792		8,236,895
Other Assets
	Regulatory assets				1,049,266		1,015,863
	Investments in unconsolidated subsidiaries				383,942		339,059
	Energy risk management non-current assets (Note 1(c))				161,995		134,445
	Other investments				167,615		164,155
	Goodwill				55,163		53,587
	Other intangible assets				21,024		22,250
	Other				232,531		259,530

			Total Other Assets		2,071,536		1,988,889
Total Assets				$	13,205,540	$	12,299,813

THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS ASSETS September 30 December 31 2001 2000 (unaudited) -------------------------------------------------------------------------------------- (dollars in thousands) Current Assets Cash and cash equivalents $ 21,974 $ 20,637 Restricted deposits 4,019 160 Notes receivable from affiliated companies - 91,732 Accounts receivable less accumulated provision for doubtful accounts of $24,589 at September 30, 2001, and $19,044 at December 31, 2000 638,387 494,501 Accounts receivable from affiliated companies 4 26,743 Materials, supplies, and fuel - at average cost 135,534 99,061 Energy risk management current assets (Note 1(c)) 23,496 697,488 Prepayments and other 25,171 39,320 --------------------------- Total Current Assets 848,585 1,469,642 ------------------------------------------------------------------------------------- Property, Plant, and Equipment - at Cost Utility plant in service Electric 1,984,200 1,905,795 Gas 896,155 865,303 Common 253,471 211,424 --------------------------- Total Utility Plant In Service 3,133,826 2,982,522 Construction work in progress 95,498 132,577 --------------------------- Total Utility Plant 3,229,324 3,115,099 Non-regulated property, plant, and equipment 3,262,158 3,181,076 Accumulated depreciation 2,535,098 2,444,867 --------------------------- Net Property, Plant, and Equipment 3,956,384 3,851,308 ------------------------------------------------------------------------------------- Other Assets Regulatory assets 555,672 502,328 Energy risk management non-current assets (Note 1(c)) 26,654 7,000 Other 121,622 156,692 ---------------------------- Total Other Assets 703,948 666,020 ------------------------------------------------------------------------------------- Total Assets $ 5,508,917 $ 5,986,970 ============================ ------------------------------------------------------------------------------------- The accompanying notes as they relate to ~~The Cincinnati Gas~~Cinergy ~~& Electric Company~~Corp. are an integral part of these consolidated financial statements.

THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY September 30 December 31 2001 2000 (unaudited) -------------------------------------------------------------------------------------------- (dollars in thousands) Current Liabilities Accounts payable $ 653,318 $ 543,006 Accounts payable to affiliated companies 38,788 23,927 Accrued taxes 170,669 152,750 Accrued interest 27,384 17,645 Notes payable and other short-term obligations (Note 3) 196,100 264,000 Notes payable to affiliated companies 278,177 163,478 Long-term debt due within one year 1,200 1,200 Energy risk management current liabilities (Note 1(c)) 28,369 717,902 Other 52,527 37,603 --------------------------- Total Current Liabilities 1,446,532 1,921,511 ------------------------------------------------------------------------------------------- Non-Current Liabilities Long-term debt 1,205,320 1,205,061 Deferred income taxes 752,732 735,799 Unamortized investment tax credits 92,695 98,624 Accrued pension and other postretirement benefit costs 165,438 164,901 Energy risk management non-current liabilities (Note 1(c)) 38,945 26,337 Other 93,149 118,421 --------------------------- Total Non-Current Liabilities 2,348,279 2,349,143 ------------------------------------------------------------------------------------------- Total Liabilities 3,794,811 4,270,654 ------------------------------------------------------------------------------------------- Cumulative Preferred Stock Not subject to mandatory redemption 20,486 20,486 ------------------------------------------------------------------------------------------- Common Stock Equity Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at September 30, 2001 and December 31, 2000 762,136 762,136 Paid-in capital 565,777 565,777 Retained earnings 373,969 368,911 Accumulated other comprehensive income (loss) (8,262) (994) --------------------------- Total Common Stock Equity 1,693,620 1,695,830 ------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 4) Total Liabilities and Shareholder's Equity $5,508,917 $5,986,970 =========================== -------------------------------------------------------------------------------------------- The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

~~THE~~ ~~CINCINNATI GAS & ELECTRIC COMPANY~~ ~~CONSOLIDATED~~ ~~STATEMENTS OF CASH FLOWS~~ ~~Year~~CINERGY toCORP. CONSOLIDATED ~~Date September~~BALANCE 30 2001 2000 --------------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited) Operating Activities Net income $ 220,366 $ 190,941 Items providing or (using) cash currently: Depreciation 139,398SHEETS 134,962 Deferred income taxes and investment tax credits - net 18,788 6,110 Unrealized (gain) loss from energy risk management activities (22,587) (5,473) Allowance for equity funds used during construction (1,526) (3,560) Regulatory assets - net (36,150) (15,881) Changes in current assets and current liabilities: Restricted deposits (3,859) 2 Accounts and notes receivable, net of reserves on receivables sold (20,992) (184,125) Materials, supplies, and fuel (36,473) (15,691) Accounts payable 125,173 243,239 Accrued taxes and interest 27,658 30,305 Other items - net (5,458) 10,316 -------------------------- Net cash provided by (used in) operating activities 404,338 391,145 --------------------------------------------------------------------------------------------------------- Financing Activities Change in short-term debt 46,799 (53,180) Retirement of preferred stock - (168) Dividends on preferred stock (634) (630) Dividends on common stock (214,674) (160,800) -------------------------- Net cash provided by (used in) financing activities (168,509) (214,778) --------------------------------------------------------------------------------------------------------- Investing Activities Construction expenditures (less allowance for equity funds used during construction) (234,492) (169,191) -------------------------- Net cash provided by (used in) investing activities (234,492) (169,191) --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,337 7,176 Cash and cash equivalents at beginning of period 20,637 9,554 -------------------------- Cash and cash equivalents at end of period $ 21,974 $ 16,730 ========================== --------------------------------------------------------------------------------------------------------- The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.



                                PSI ENERGY, INC.
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                                  Quarter Ended         Year to Date
                                                   September 30         September 30
                                                2001        2000       2001       2000
-------------------------------------------------------------------------------------------
                                                           (dollars in thousands)
                                                                 (unaudited)

Operating Revenues

   Electric                                 $1,258,286   $  804,234  $3,358,223 $1,957,746
-------------------------------------------------------------------------------------------

Operating Expenses
   Fuel and purchased and exchanged power      990,164      586,480   2,646,143  1,255,716
   Operation and maintenance                   105,844      104,006     301,984    339,755
   Depreciation                                 37,492       35,876     111,487    105,301
   Taxes other than income taxes                15,000       14,850      37,535     43,259
                                             ----------------------------------------------
         Total Operating Expenses            1,148,500      741,212   3,097,149  1,744,031

-------------------------------------------------------------------------------------------

Operating Income                               109,786       63,022     261,074    213,715

-------------------------------------------------------------------------------------------

Miscellaneous - Net                              3,837        3,421       9,397      3,904
Interest                                        21,580       18,309      60,117     58,162

-------------------------------------------------------------------------------------------

Income Before Taxes                             92,043       48,134     210,354    159,457

-------------------------------------------------------------------------------------------

Income Taxes                                    35,589       17,521      78,251     59,715
                                            -----------------------------------------------

Net Income                                  $   56,454   $   30,613  $  132,103 $   99,742

Preferred Dividend Requirement                     648          858       1,941      3,071
                                            -----------------------------------------------

Net Income Applicable to Common Stock       $   55,806   $   29,755  $  130,162 $   96,671
                                            ===============================================

-------------------------------------------------------------------------------------------

Net Income                                  $   56,454   $   30,613  $  132,103 $   99,742

Other Comprehensive Income (Loss),
Net of Tax Effect                                 (965)        (784)     (1,092)      (749)
                                            -----------------------------------------------

Comprehensive Income                        $   55,489   $   29,829  $  131,011 $   98,993
                                            ===============================================
-------------------------------------------------------------------------------------------

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

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
	Accounts payable		$	1,448,647		$	1,029,173
	Accrued taxes			107,000			195,976
	Accrued interest			43,076			56,216
	Notes payable and other short-term obligations (Note 4)			714,125			1,155,786
	Long-term debt due within one year (Note 4)			22,387			148,431
	Energy risk management current liabilities (Note 1(c))			316,179			429,794
	Other			108,768			127,375

		Total Current Liabilities		2,760,182			3,142,751
Non-Current Liabilities
	Long-term debt (Note 3)			4,248,961			3,596,730
	Deferred income taxes			1,531,030			1,301,407
	Unamortized investment tax credits			120,416			127,385
	Accrued pension and other postretirement benefit costs			488,276			438,962
	Energy risk management non-current liabilities (Note 1(c))			115,212			135,619
	Other			315,918			246,340

		Total Non-Current Liabilities		6,819,813			5,846,443
Total Liabilities				9,579,995			8,989,194
Preferred Trust Securities
	Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company			307,752			306,327
Cumulative Preferred Stock of Subsidiaries
	Not subject to mandatory redemption			62,828			62,833
Common Stock Equity (Note 2)
	Common stock—$.01 par value; authorized shares—600,000,000; outstanding shares—168,267,726 at September 30, 2002, and 159,402,839 at December 31, 2001			1,683			1,594
	Paid-in capital			1,889,119			1,619,659
	Retained earnings			1,385,887			1,337,135
	Accumulated other comprehensive income (loss)			(21,724	)		(16,929	)

		Total Common Stock Equity		3,254,965			2,941,459
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholders' Equity			$	13,205,540		$	12,299,813

PSI ENERGY, INC. CONSOLIDATED BALANCE SHEETS ASSETS September 30 December 31 2001 2000 (unaudited) --------------------------------------------------------------------------------------- (dollars in thousands) Current Assets Cash and cash equivalents $ 31,035 $ 1,311 Restricted deposits 1,020 341 Notes receivable - 3 Notes receivable from affiliated companies 278,177 12,798 Accounts receivable less accumulated provision for doubtful accounts of $9,454 at September 30, 2001, and $9,317 at December 31, 2000 701,111 464,930 Accounts receivable from affiliated companies 19,716 5,385 Materials, supplies, and fuel - at average cost 83,897 53,838 Energy risk management current assets (Note 1(c)) 23,496 697,488 Prepayments and other 43,643 49,049 ------------------------ Total Current Assets 1,182,095 1,285,143 --------------------------------------------------------------------------------------- Property, Plant, and Equipment - at Cost Utility plant in service 4,885,315 4,699,090 Construction work in progress 278,518 190,773 ------------------------ Total Utility Plant 5,163,833 4,889,863 Accumulated depreciation 2,196,129 2,110,747 ------------------------ Net Property, Plant, and Equipment 2,967,704 2,779,116 --------------------------------------------------------------------------------------- Other Assets Regulatory assets 444,087 474,286 Energy risk management non-current assets (Note 1(c)) 26,654 7,000 Other investments 56,724 51,343 Other 45,297 32,887 ------------------------ Total Other Assets 572,762 565,516 --------------------------------------------------------------------------------------- Total Assets $ 4,722,561 $ 4,629,775 ========================= --------------------------------------------------------------------------------------- The accompanying notes as they relate to ~~PSI~~Cinergy ~~Energy, Inc~~Corp. are an integral part of these consolidated financial statements.

PSI ENERGY, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY September 30 December 31 2001 2000 (unaudited) ---------------------------------------------------------------------------------------- (dollars in thousands) Current Liabilities Accounts payable $ 614,752 $ 392,206 Accounts payable to affiliated companies 14,536 32,448 Accrued taxes 101,434 80,995 Accrued interest 27,446 23,708 Notes payable and other short-term obligations 128,600 188,391 Notes payable to affiliated companies 288,571 146,381 Long-term debt due within one year 42,424 38,325 Energy risk management current liabilities (Note 1(c)) 28,369 717,902 Other 16,522 12,748 ----------------------- Total Current Liabilities 1,262,654 1,633,104 --------------------------------------------------------------------------------------- Non-Current Liabilities Long-term debt (Note 2) 1,375,022 1,074,255 Deferred income taxes 487,041 458,593 Unamortized investment tax credits 36,887 39,341 Accrued pension and other postretirement benefit costs 152,219 143,990 Energy risk management non-current liabilities (Note 1(c)) 38,946 26,337 Other 64,680 78,112 ----------------------- Total Non-Current Liabilities 2,154,795 1,820,628 --------------------------------------------------------------------------------------- Total Liabilities 3,417,449 3,453,732 --------------------------------------------------------------------------------------- Cumulative Preferred Stock Not subject to mandatory redemption 42,347 42,348 --------------------------------------------------------------------------------------- Common Stock Equity Common stock - without par value; $.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at September 30, 2001 and December 31, 2000 539 539 Paid-in capital 413,522 413,523 Retained earnings 850,316 720,153 Accumulated other comprehensive income (loss) (1,612) (520) ---------------------- Total Common Stock Equity 1,262,765 1,133,695 --------------------------------------------------------------------------------------- Commitments and Contingencies (Note 4) Total Liabilities and Shareholder's Equity $4,722,561 $4,629,775 ======================= --------------------------------------------------------------------------------------- The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

~~PSI~~CINERGY ~~ENERGY, INC~~CORP. CONSOLIDATED STATEMENTS OF ~~CASH~~CHANGES ~~FLOWS Year~~IN toCOMMON ~~Date September~~STOCK 30 2001 2000 ---------------------------------------------------------------------------------------------------- (dollars in thousands) (unaudited) Operating Activities Net income $ 132,103 $ 99,742 Items providing or (using) cash currently: Depreciation 111,487 105,301 Deferred income taxes and investment tax credits - net 25,100EQUITY 318 Unrealized (gain) loss from energy risk management activities (22,586) (276) Allowance for equity funds used during construction (3,637) (1,107) Regulatory assets - net 29,517 10,770 Changes in other current assets and current liabilities: Restricted deposits (679) (155) Accounts and notes receivable, net of reserves on receivables sold (515,916) (228,050) Materials, supplies, and fuel (30,059) 38,647 Accounts payable 204,634 262,243 Accrued taxes and interest 24,177 (33,608) Other items - net (10,622) (4,026) -------------------- Net cash provided by (used in) operating activities (56,481) 249,799 --------------------------------------------------------------------------------------------------- Financing Activities Change in short-term debt 82,399 42,333 Issuance of long-term debt 322,471 53,075 Redemption of long-term debt (19,825) (86,276) Retirement of preferred stock (1) (29,226) Dividends on preferred stock (1,941) (3,259) Dividends on common stock - (54,000) -------------------- Net cash provided by (used in) financing activities 383,103 (77,353) --------------------------------------------------------------------------------------------------- Investing Activities Construction expenditures (less allowance for equity funds used during construction) (289,916) (164,034) Other investments (6,982) (6,454) -------------------- Net cash provided by (used in) investing activities (296,898) (170,488) --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 29,724 1,958 Cash and cash equivalents at beginning of period 1,311 8,842 -------------------- Cash and cash equivalents at end of period $ 31,035 $ 10,800 ===================== --------------------------------------------------------------------------------------------------- The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.

                     THE UNION LIGHT, HEAT AND POWER COMPANY
                              STATEMENTS OF INCOME

                                                            Quarter Ended        Year to Date
                                                             September 30        September 30
                                                            2001     2000       2001       2000
-----------------------------------------------------------------------------------------------
                                                               (dollars in thousands)
                                                                         (unaudited)

Operating Revenues
   Electric                                              $ 63,899  $ 61,540  $ 180,761 $ 165,908
   Gas                                                     10,008     9,871     82,778    54,418
                                                         ---------------------------------------
         Total Operating Revenues                          73,907    71,411    263,539   220,326

------------------------------------------------------------------------------------------------

Operating Expenses
   Electricity purchased from parent company for resale    48,230    47,242    119,597   122,382
   Gas purchased                                            4,802     4,475     56,038    27,457
   Operation and maintenance                               10,781     9,328     28,982    28,022
   Depreciation                                             4,285     3,992     12,689    11,650
   Taxes other than income taxes                            1,126       955      3,388     3,078
                                                         ---------------------------------------
         Total Operating Expenses                          69,224    65,992    220,694   192,589

------------------------------------------------------------------------------------------------

Operating Income                                            4,683     5,419     42,845    27,737

------------------------------------------------------------------------------------------------

Miscellaneous - Net                                           (87)      (72)      (700)     (702)
Interest                                                    1,496     1,662      4,739     4,806

------------------------------------------------------------------------------------------------

Income Before Taxes                                         3,100     3,685     37,406    22,229

------------------------------------------------------------------------------------------------

Income Taxes                                                1,112     1,500     10,552     9,121
                                                         ---------------------------------------

Net Income                                               $  1,988  $  2,185  $  26,854 $  13,108
                                                         =======================================

------------------------------------------------------------------------------------------------

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

			Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Common Stock Equity
			(dollars in thousands) (unaudited)
Quarter Ended September 30, 2002
Balance at July 1, 2002			$	1,675	$	1,861,689		$	1,330,780		$	(4,787	)	$	3,189,357
Comprehensive income:
	Net income								130,568						130,568
	Other comprehensive income (loss), net of tax effect of $12,501
		Foreign currency translation adjustment (Note 1(g))										4,810			4,810
		Unrealized gain (loss) on investment trusts										(3,003	)		(3,003	)
		Cash flow hedges (Note 1(b))										(18,744	)		(18,744	)

	Total comprehensive income														113,631
Issuance of 781,597 shares of common stock—net				8		22,888									22,896
Dividends on common stock ($.45 per share)									(75,469	)					(75,469	)
Other						4,542			8						4,550

Ending balance at September 30, 2002			$	1,683	$	1,889,119		$	1,385,887		$	(21,724	)	$	3,254,965

Quarter Ended September 30, 2001
Balance at July 1, 2001			$	1,591	$	1,623,458		$	1,240,761		$	(16,927	)	$	2,848,883
Comprehensive income:
	Net income								128,471						128,471
	Other comprehensive income (loss), net of tax effect of ($854)
		Foreign currency translation adjustment (Note 1(g))										7,664			7,664
		Unrealized gain (loss) on investment trusts										(1,191	)		(1,191	)
		Minimum pension liability adjustment										(4	)		(4	)
		Cash flow hedges (Note 1(b))										(4,085	)		(4,085	)

	Total comprehensive income														130,855
Issuance of 11,105 shares of common stock—net						587									587
Treasury shares reissued						(190	)								(190	)
Dividends on common stock ($.45 per share)									(71,593	)					(71,593	)
Other						1,488			9						1,497

Ending balance at September 30, 2001			$	1,591	$	1,625,343		$	1,297,648		$	(14,543	)	$	2,910,039

THE UNION LIGHT, HEAT AND POWER COMPANY BALANCE SHEETS ASSETS September 30 December 31 2001 2000 (unaudited) -------------------------------------------------------------------------------- (dollars in thousands) Current Assets Cash and cash equivalents $ 6,309 $ 6,460 Accounts receivable less accumulated provision for doubtful accounts of $2,184 at September 30, 2001, and $1,492 at December 31, 2000 13,717 28,518 Accounts receivable from affiliated companies 199 2,279 Materials, supplies, and fuel - at average cost 12,261 6,300 Prepayments and other 450 274 ------------------- Total Current Assets 32,936 43,831 -------------------------------------------------------------------------------- Property, Plant, and Equipment - at Cost Utility plant in service Electric 246,279 234,482 Gas 190,180 184,878 Common 49,888 44,603 ------------------- Total Utility Plant In Service 486,347 463,963 Construction work in progress 12,416 15,069 ------------------- Total Utility Plant 498,763 479,032 Accumulated depreciation 178,290 169,403 ------------------- Net Property, Plant, and Equipment 320,473 309,629 -------------------------------------------------------------------------------- Other Assets Regulatory assets 8,530 10,177 Other 3,346 5,110 ------------------- Total Other Assets 11,876 15,287 -------------------------------------------------------------------------------- Total Assets $365,285 $368,747 =================== -------------------------------------------------------------------------------- The accompanying notes as they relate to ~~The~~Cinergy ~~Union~~Corp. ~~Light, Heat and Power Company~~ are an integral part of these consolidated financial statements.

THE UNION LIGHT, HEAT AND POWER COMPANY BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY September 30 December 31 2001 2000 (unaudited) -------------------------------------------------------------------------------- (dollars in thousands) Current Liabilities Accounts payable $ 3,386 $ 24,249 Accounts payable to affiliated companies 15,100 20,192 Accrued taxes 4,212 (5,760) Accrued interest 1,243 1,215 Notes payable to affiliated companies 23,435 29,403 Other 4,487 11,669 ---------------------- Total Current Liabilities 51,863 80,968 -------------------------------------------------------------------------------- Non-Current Liabilities Long-term debt 74,613 74,589 Deferred income taxes 36,926 35,822 Unamortized investment tax credits 3,477 3,684 Accrued pension and other postretirement benefit costs 13,163 13,041 Amounts due to customers - income taxes 7,439 7,439 Other 8,591 6,016 ---------------------- Total Non-Current Liabilities 144,209 140,591 -------------------------------------------------------------------------------- Total Liabilities 196,072 221,559 -------------------------------------------------------------------------------- Common Stock Equity Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at September 30, 2001 and December 31, 2000 8,780 8,780 Paid-in capital 20,305 20,305 Retained earnings 140,128 118,103 ---------------------- Total Common Stock Equity 169,213 147,188 -------------------------------------------------------------------------------- Commitments and Contingencies (Note 4) Total Liabilities and Shareholder's Equity $365,285 $368,747 ====================== -------------------------------------------------------------------------------- The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

~~THE~~CINERGY ~~UNION~~CORP. CONSOLIDATED ~~LIGHT, HEAT AND POWER COMPANY~~ STATEMENTS OF ~~CASH~~CHANGES ~~FLOWS Year~~IN toCOMMON ~~Date September~~STOCK ~~30 2001 2000 -------------------------------------------------------------------------------------------------~~ EQUITY (~~dollars in thousands~~Continued) (unaudited) Operating Activities Net income $ 26,854 $ 13,108 Items providing or (using) cash currently: Depreciation 12,689 11,650 Deferred income taxes and investment tax credits - net 897 (1,289) Allowance for equity funds used during construction (123) (32) Regulatory assets - net 1,393 237 Changes in current assets and current liabilities: Accounts and notes receivable, net of reserves on receivables sold 18,558 9,286 Materials, supplies, and fuel (5,961) 92 Accounts payable (25,955) (7,677) Accrued taxes and interest 10,000 2,288 Other items - net (8,098) 7,482 -------------------- Net cash provided by (used in) operating activities 30,254 35,145 ---------------------------------------------------------------------------------------------- Financing Activities Change in short-term debt (5,968) (7,493) Dividends on common stock (4,829) (4,975) -------------------- Net cash provided by (used in) financing activities (10,797) (12,468) ----------------------------------------------------------------------------------------------- Investing Activities Construction expenditures (less allowance for equity funds used during construction) (19,608) (19,030) -------------------- Net cash provided by (used in) investing activities (19,608) (19,030) ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (151) 3,647 Cash and cash equivalents at beginning of period 6,460 3,641 -------------------- Cash and cash equivalents at end of period $ 6,309 $ 7,288 ==================== ----------------------------------------------------------------------------------------------- The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

NOTES TO FINANCIAL STATEMENTS

			Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Common Stock Equity
			(dollars in thousands) (unaudited)
Nine Months Ended September 30, 2002
Balance at January 1, 2002			$	1,594	$	1,619,659		$	1,337,135		$	(16,929	)	$	2,941,459
Comprehensive income:
	Net income								271,279						271,279
	Other comprehensive income (loss), net of tax effect of $7,879
		Foreign currency translation adjustment (Note 1(g))										20,123			20,123
		Unrealized gain (loss) on investment trusts										(4,637	)		(4,637	)
		Minimum pension liability adjustment										136			136
		Cash flow hedges (Note 1(b))										(20,417	)		(20,417	)

	Total comprehensive income														266,484
Issuance of 8,864,887 shares of common stock—net				89		258,300									258,389
Dividends on common stock ($1.35 per share)									(222,551	)					(222,551	)
Other						11,160			24						11,184

Ending balance at September 30, 2002			$	1,683	$	1,889,119		$	1,385,887		$	(21,724	)	$	3,254,965

Nine Months Ended September 30, 2001
Balance at January 1, 2001			$	1,590	$	1,619,153		$	1,179,113		$	(10,895	)	$	2,788,961
Comprehensive income:
	Net income								331,685						331,685
	Other comprehensive income (loss), net of tax effect of $490
		Foreign currency translation adjustment (Note 1(g))										4,959			4,959
		Unrealized gain (loss) on investment trusts										(1,334	)		(1,334	)
		Cumulative effect of change in accounting principle										(2,500	)		(2,500	)
		Minimum pension liability adjustment										64			64
		Cash flow hedges (Note 1(b))										(4,837	)		(4,837	)

	Total comprehensive income														328,037
Issuance of 131,497 shares of common stock—net				1		4,278									4,279
Treasury shares purchased						(10,015	)								(10,015	)
Treasury shares reissued						5,810									5,810
Dividends on common stock ($1.35 per share)									(214,689	)					(214,689	)
Other						6,117			1,539						7,656

Ending balance at September 30, 2001			$	1,591	$	1,625,343		$	1,297,648		$	(14,543	)	$	2,910,039

1The accompanying notes as they relate to Cinergy Corp. ~~Summary~~are an integral part of ~~Significant~~these ~~Accounting~~consolidated ~~Policies~~financial statements.

~~(a) Presentation~~6

~~Our~~ ~~Financial Statements~~ ~~reflect~~ ~~all adjustments (which include normal, recurring adjustments) necessary,~~ inCINERGY ~~the opinion of the registrants, for a fair presentation of the interim results~~CORP. CONSOLIDATED ~~These~~STATEMENTS ~~statements~~OF ~~should~~CASH be read in conjunction with the Financial Statements and the notes thereto included in the combined 2000 Form 10-K of the registrants. Certain amounts in the 2000 Financial Statements have been reclassified to conform to the 2001 presentation. FLOWS

(b) Financial Derivatives

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	271,279		$	331,685
	Items providing or (using) cash currently:
		Depreciation				303,996			277,876
		Change in net position of energy risk management activities				(61,838	)		(79,070	)
		Deferred income taxes and investment tax credits—net				169,377			40,716
		Equity in earnings of unconsolidated subsidiaries				(7,956	)		3,500
		Allowance for equity funds used during construction				(8,802	)		(5,163	)
		Regulatory assets deferrals				(69,923	)		(99,985	)
		Regulatory assets amortization				93,163			93,978
		Accrued pension and other postretirement benefit costs				49,314			26,237
		Changes in current assets and current liabilities:
			Restricted deposits			(2,465	)		(4,281	)
			Accounts and notes receivable			(339,704	)		(114,127	)
			Materials, supplies, and fuel			(71,276	)		(68,785	)
			Prepayments			(31,247	)		(65,604	)
			Accounts payable			429,778			108,518
			Accrued taxes and interest			(102,116	)		51,475
		Other items—net				51,291			20,259

				Net cash provided by (used in) operating activities		672,871			517,229
Financing Activities
	Change in short-term debt					(441,661	)		82,313
	Issuance of long-term debt					649,020			870,661
	Redemption of long-term debt					(134,640	)		(42,403	)
	Funds on deposit from issuance of debt securities					(131,600	)		—
	Retirement of preferred stock of subsidiaries					(3	)		(1	)
	Issuance of common stock					258,389			4,279
	Dividends on common stock					(222,551	)		(214,689	)

				Net cash provided by (used in) financing activities		(23,046	)		700,160
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(593,682	)		(587,428	)
	Acquisitions and other investments					(47,943	)		(575,234	)

				Net cash provided by (used in) investing activities		(641,625	)		(1,162,662	)
Net increase (decrease) in cash and cash equivalents						8,200			54,727
Cash and cash equivalents at beginning of period						111,067			93,054

Cash and cash equivalents at end of period					$	119,267		$	147,781
Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	207,659		$	186,059
		Income taxes			$	30,900		$	84,860

WeThe ~~use~~accompanying ~~derivative~~notes ~~financial~~as ~~instruments~~they relate to ~~manage:~~Cinergy Corp. are an integral part of these consolidated financial statements.

~~funding costs;~~ 7

~~exposure~~ to ~~fluctuations~~ THE inCINCINNATI ~~interest~~GAS & ~~rates;~~ELECTRIC ~~and~~ COMPANY AND SUBSIDIARY COMPANIES

~~exposure to foreign currency exchange rates.~~ 8

We ~~account for derivatives~~ ~~under~~ ~~Statement of Financial Accounting Standards No. 133, Accounting for~~ ~~Derivatives~~THE ~~and~~CINCINNATI ~~Hedging~~GAS & ~~Activities~~ELECTRIC ~~(Statement~~COMPANY CONSOLIDATED ~~133),~~STATEMENTS ~~which~~OF ~~requires~~INCOME ~~all derivatives~~AND ~~that~~COMPREHENSIVE are not exempted to be accounted for at fair value. Changes in the derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivatives that qualify as hedges can (a) offset related fair value changes on the hedged item in the income statement for fair value hedges; or (b) be recorded in other comprehensive income for cash flow hedges. To qualify for hedge accounting, financial instruments must be designated as a hedge (for example, an offset of foreign exchange or interest rate risks) at the inception of the contract and must be effective at reducing the risk associated with the hedged item. Accordingly, changes in the fair values or cash flows of instruments designated as hedges must be highly correlated with changes in the fair values or cash flows of the related hedged items. INCOME

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

			Quarter Ended September 30						Year to Date September 30
			2002			2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	1,747,379		$	1,275,979		$	3,249,715		$	3,420,928
	Gas			41,452			53,217			277,069			457,717

		Total Operating Revenues		1,788,831			1,329,196			3,526,784			3,878,645
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			1,391,221			930,433			2,300,565			2,521,137
	Gas purchased			12,594			24,729			145,033			314,575
	Operation and maintenance			150,247			117,067			394,443			349,462
	Depreciation			49,005			47,135			146,057			139,398
	Taxes other than income taxes			50,304			43,617			149,509			135,585

		Total Operating Expenses		1,653,371			1,162,981			3,135,607			3,460,157
Operating Income				135,460			166,215			391,177			418,488
Miscellaneous—Net				4,140			336			4,002			(1,396	)
Interest				23,746			25,353			68,375			79,236
Income Before Taxes				115,854			141,198			326,804			337,856
Income Taxes				44,085			51,808			124,780			117,490

Net Income			$	71,769		$	89,390		$	202,024		$	220,366
Preferred Dividend Requirement				211			211			634			634

Net Income Applicable to Common Stock			$	71,558		$	89,179		$	201,390		$	219,732

Net Income			$	71,769		$	89,390		$	202,024		$	220,366
Other Comprehensive Income (Loss), Net of Tax Effect				(17,588	)		(4,608	)		(19,673	)		(7,268	)

Comprehensive Income			$	54,181		$	84,782		$	182,351		$	213,098

WeThe ~~also~~accompanying ~~use~~notes ~~interest~~as ~~rate swaps~~they ~~(an~~relate ~~agreement by two parties~~ to ~~exchange~~The ~~fixed-interest~~Cincinnati ~~rate~~Gas ~~cash~~& ~~flows for~~Electric ~~floating-interest~~Company rate cash flows). Through December 31, 2000, we utilized the accrual method to account for these interest rate swaps. Accordingly, gains and losses were calculated based on the current period difference between the fixed-rate and the floating-rate interest amounts, using agreed upon notional amounts. These gains and losses were recognized in our Consolidated Statements of Income as a component of Interest over the life of the agreement. Effective with our adoption of Statement 133 in the first quarter of 2001, we began accounting for interest rate swaps using mark-to-market accounting and are ~~assessing~~ ~~the~~an ~~effectiveness~~integral ofpart ~~any swaps used in hedging activities. At September 30, 2001, the fair value, and ineffectiveness,~~ of ~~instruments~~these ~~that~~consolidated ~~we have~~financial ~~classified as cash flow hedges of variable rate debt instruments was not material~~statements. Reclassification of unrealized gains or losses on cash flow hedges of variable-rate debt instruments from other comprehensive income occurs as interest payments are made on the debt instrument. See Note 1(d) below for further discussion of Statement 133.

~~(c) Energy Marketing and Trading~~9

We ~~market and trade~~ ~~electricity,~~ ~~natural gas, and other energy-related products. We designate~~ ~~transactions~~THE asCINCINNATI ~~physical~~GAS & orELECTRIC ~~trading~~COMPANY CONSOLIDATED atBALANCE the time they are originated. Physical refers to our intent and projected ability to fulfill substantially all obligations from company-owned assets. We sell generation to third parties when it is not required to meet native load requirements (end-use customers within our public utility companies’ franchise service territory). All other energy contracts (including most natural gas contracts) are classified as trading. We account for physical transactions on a settlement basis and trading transactions using the mark-to-market method of accounting, consistent with our application of EITF 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. To the extent that physical transactions constitute derivatives under Statement 133, we typically utilize the normal purchases and sales exemption, when the criteria for the application of the normal exemption are met. To the extent trading transactions constitute derivatives under Statement 133, we typically do not attempt to identify them as a hedging instrument. Under the mark-to-market method of accounting, trading transactions are shown at fair value in our Consolidated Balance Sheets as Energy risk management assets and Energy risk management liabilities. We reflect changes in fair value resulting in unrealized gains and losses in Fuel and purchased and exchanged power and Gas purchased. We record the revenues and costs for all transactions in our Consolidated Statements of Income when the contracts are settled. We recognize revenues in Operating revenues; costs are recorded in Fuel and purchased and exchanged power and Gas purchased. SHEETS

Although we intend to settle physical contracts with company-owned generation, occasionally we settle these contracts with power purchased on the open trading markets. The cost of these purchases could be in excess of the associated revenues. We recognize the gains or losses on these transactions as the power is delivered. Due to the infrequency of such settlements, both historical and projected, and the fact that physical power settlement to the customer still occurs, we continue to apply the normal purchases and sales exemption to such physical contracts that constitute derivatives. Open market purchases may occur for the following reasons:

					September 30 2002		December 31 2001
					(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents				$	8,526	$	9,074
	Restricted deposits					88,305		3,540
	Notes receivable from affiliated companies (Note 5)					51,772		—
	Accounts receivable less accumulated provision for doubtful accounts of $6,005 at September 30, 2002, and $25,874 at December 31, 2001 (Note 5)					536,406		332,970
	Accounts receivable from affiliated companies					2,012		12,112
	Materials, supplies, and fuel—at average cost					131,543		138,119
	Energy risk management current assets (Note 1(c))					35,583		44,360
	Prepayments and other					25,140		13,087

				Total Current Assets		879,287		553,262
Property, Plant, and Equipment—at Cost
	Utility plant in service
		Electric				2,067,341		2,000,595
		Gas				960,992		926,381
		Common				242,205		253,978

			Total Utility Plant In Service			3,270,538		3,180,954
	Construction work in progress					99,475		96,247

			Total Utility Plant			3,370,013		3,277,201
	Non-regulated property, plant, and equipment					3,407,761		3,314,285
	Accumulated depreciation					2,678,476		2,555,639

				Net Property, Plant, and Equipment		4,099,298		4,035,847
Other Assets
	Regulatory assets					597,001		592,491
	Energy risk management non-current assets (Note 1(c))					61,796		48,982
	Other investments					983		1,080
	Other					118,617		128,082

				Total Other Assets		778,397		770,635
Total Assets					$	5,756,982	$	5,359,744

~~generating~~The accompanying ~~station~~notes ~~outages;~~ as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.

~~least-cost alternative;~~ 10

~~native~~ ~~load~~ ~~requirements; and~~ THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS

extreme weather.

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	531,770		$	352,450
	Accounts payable to affiliated companies			65,802			30,419
	Accrued taxes			111,549			116,616
	Accrued interest			14,336			16,570
	Notes payable and other short-term obligations (Note 4)			196,100			196,100
	Notes payable to affiliated companies (Note 4)			2,915			444,801
	Long-term debt due within one year (Note 4)			—			100,000
	Energy risk management current liabilities (Note 1(c))			19,757			23,341
	Other			37,662			33,217

		Total Current Liabilities		979,891			1,313,514
Non-Current Liabilities
	Long-term debt (Note 3)			1,689,389			1,105,333
	Deferred income taxes			865,925			779,295
	Unamortized investment tax credits			86,709			91,246
	Accrued pension and other postretirement benefit costs			172,459			165,326
	Energy risk management non-current liabilities (Note 1(c))			23,063			41,773
	Other			138,966			105,681

		Total Non-Current Liabilities		2,976,511			2,288,654
Total Liabilities				3,956,402			3,602,168
Cumulative Preferred Stock
	Not subject to mandatory redemption			20,485			20,486
Common Stock Equity
	Common stock—$8.50 par value; authorized shares—120,000,000; outstanding shares—89,663,086 at September 30, 2002, and December 31, 2001			762,136			762,136
	Paid-in capital			571,926			571,926
	Retained earnings			471,384			408,706
	Accumulated other comprehensive income (loss)			(25,351	)		(5,678	)

		Total Common Stock Equity		1,780,095			1,737,090
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	5,756,982		$	5,359,744

WeThe accompanying ~~value~~notes ~~contracts~~as inthey ~~the~~relate ~~trading~~to ~~portfolio~~The ~~using~~Cincinnati ~~end-of-the-period~~Gas ~~market~~& ~~prices,~~Electric ~~utilizing~~Company ~~the~~are ~~following factors~~an ~~(as~~integral ~~applicable):~~part of these consolidated financial statements.

~~closing exchange prices (that is, closing prices for standardized electricity and natural gas products traded on an organized exchange such as the New York Mercantile Exchange);~~ 11

~~broker-dealer~~ ~~and~~ ~~over-the-counter~~ THE ~~price~~CINCINNATI ~~quotations;~~GAS & ~~and~~ ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS

model pricing (which considers time value and historical volatility factors of electricity and natural gas).

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	202,024		$	220,366
	Items providing or (using) cash currently:
		Depreciation				146,057			139,398
		Deferred income taxes and investment tax credits—net				95,730			18,788
		Change in net position of energy risk management activities				(19,560	)		(22,587	)
		Allowance for equity funds used during construction				261			(1,526	)
		Regulatory assets deferrals				(45,007	)		(81,869	)
		Regulatory assets amortization				38,024			46,346
		Accrued pension and other postretirement benefit costs				7,133			537
		Changes in current assets and current liabilities:
			Restricted deposits			(765	)		(3,859	)
			Accounts and notes receivable			(199,985	)		(112,724	)
			Materials, supplies, and fuel			6,576			(36,473	)
			Prepayments			(14,830	)		9,250
			Accounts payable			214,900			125,173
			Accrued taxes and interest			(7,301	)		27,658
		Other items—net				(5,759	)		(16,137	)

				Net cash provided by (used in) operating activities		417,498			312,341
Financing Activities
	Change in short-term debt, including net affiliate notes					(451,627	)		138,531
	Issuance of long-term debt					580,570			—
	Redemption of long-term debt					(100,000	)		—
	Funds on deposit from issuance of debt securities					(84,000	)		—
	Retirement of preferred stock					(1	)		—
	Dividends on preferred stock					(634	)		(634	)
	Dividends on common stock					(138,712	)		(214,674	)

				Net cash provided by (used in) financing activities		(194,404	)		(76,777	)
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(223,740	)		(234,492	)
	Other Investments					98			265

				Net cash provided by (used in) investing activities		(223,642	)		(234,227	)
Net increase (decrease) in cash and cash equivalents						(548	)		1,337
Cash and cash equivalents at beginning of period						9,074			20,637

Cash and cash equivalents at end of period					$	8,526		$	21,974

Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	68,749		$	67,464
		Income taxes			$	16,121		$	55,520

~~We anticipate that some of the electricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation.~~ The ~~cost~~accompanying ofnotes ~~this generation~~as isthey ~~usually~~relate ~~below the market price at which the trading portfolio has been valued. We expect earnings volatility from period~~ to ~~period~~The ~~due~~Cincinnati toGas ~~the risks~~& ~~associated~~Electric ~~with~~Company ~~marketing~~are ~~and~~an ~~trading~~integral ~~electricity,~~part ~~natural~~of ~~gas,~~these ~~and~~consolidated ~~other energy-related~~financial ~~products~~statements.

Throughout 2001, our natural gas trading volumes increased substantially. Because of this volume change and the potential volatility of gas prices, our risk exposure to these markets has increased. However, we continue to employ value-at-risk analysis and other methodologies to mitigate our risks in all trading operations, including natural gas trading. 12

~~(d)~~ ~~Accounting~~ ~~Changes~~ PSI ENERGY, INC. AND SUBSIDIARY COMPANY

~~Business Combinations and Intangible Assets~~ 13

On ~~July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial~~ ~~Accounting~~ ~~Standards No. 141, Business Combinations (Statement 141), and~~ ~~No.~~PSI ~~142~~ENERGY, ~~Goodwill and Other Intangible Assets (Statement 142)~~ INC. CONSOLIDATED ~~Statement 141~~STATEMENTS ~~requires~~OF ~~all~~INCOME ~~business~~AND ~~combinations~~COMPREHENSIVE initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the “reporting unit” level, which will be defined within Cinergy, after further review, and will be a level no broader than the current business segments discussed in Note 5. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. We began applying Statement 141 in the third quarter of 2001 and we will adopt Statement 142 in the first quarter of 2002. Until we adopt Statement 142, goodwill will continue to be amortized. We do not believe that the discontinuance of amortization of goodwill will be material to our 2002 results of operations. We are analyzing the impact of the initial impairment test, and are unable to predict, at this time, whether the implementation of these accounting standards will be material to our financial position or results of operations. INCOME

Asset Retirement Obligations

			Quarter Ended September 30						Year to Date September 30
			2002			2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	776,837		$	1,266,683		$	1,874,109		$	3,380,809
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			474,748			998,561			1,078,596			2,668,729
	Operation and maintenance			128,931			105,844			386,559			301,984
	Depreciation			39,826			37,492			115,954			111,487
	Taxes other than income taxes			13,446			15,000			46,992			37,535

		Total Operating Expenses		656,951			1,156,897			1,628,101			3,119,735
Operating Income				119,886			109,786			246,008			261,074
Miscellaneous—Net				4,434			3,837			14,155			9,397
Interest				18,782			21,580			55,862			60,117
Income Before Taxes				105,538			92,043			204,301			210,354
Income Taxes				37,895			35,589			68,861			78,251

Net Income			$	67,643		$	56,454		$	135,440		$	132,103
Preferred Dividend Requirement				648			648			1,941			1,941

Net Income Applicable to Common Stock			$	66,995		$	55,806		$	133,499		$	130,162
Net Income			$	67,643		$	56,454		$	135,440		$	132,103
Other Comprehensive Income (Loss), Net of Tax Effect				(2,716	)		(965	)		(3,684	)		(1,092	)

Comprehensive Income			$	64,927		$	55,489		$	131,756		$	131,011

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time such obligations are incurred. The ~~initial recognition of this liability will be~~ ~~accompanied~~accompanying bynotes aas ~~corresponding~~they ~~increase~~relate ~~in property, plant, and equipment (PP&E). Subsequent~~ to ~~the~~PSI ~~initial recognition~~Energy, the liability will be adjusted for revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to PP&E), and for accretion of the liability due to the passage of time (recognized as an operation expense)Inc. ~~Additional depreciation expense will be recorded prospectively for any PP&E increases. We will adopt Statement 143 in the first quarter of 2003. We~~ are ~~beginning~~an ~~to analyze~~integral ~~the~~part ~~impact~~ of ~~this~~these ~~statement,~~consolidated ~~but, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our~~ financial ~~position or results of operation~~statements.

~~Derivatives~~ 14

~~During~~ ~~1998, the FASB~~ ~~issued~~ ~~Statement 133. This standard was effective for Cinergy beginning~~ inPSI ~~2001~~ENERGY, ~~and requires us to record derivative instruments which are not exempt under certain provisions of Statement 133 as assets or liabilities, measured at fair value (i~~ INC.~~e.,~~ CONSOLIDATED ~~marked-to-market).~~BALANCE Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use mark-to-market accounting, the effects of implementation were not material. SHEETS

Our adoption did not reflect the potential impact of applying mark-to-market accounting to selected options and capacity contracts. We had not historically marked these instruments to market because they are intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB staff issued final guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While much of the criteria this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material.

				September 30 2002		December 31 2001
				(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents			$	5,724	$	1,587
	Restricted deposits				48,153		519
	Notes receivable from affiliated companies (Note 5)				33,685		444,801
	Accounts receivable less accumulated provision for doubtful accounts of $5,788 at September 30, 2002, and $6,773 at December 31, 2001 (Note 5)				68,982		336,994
	Accounts receivable from affiliated companies				47,015		10,470
	Materials, supplies, and fuel—at average cost				122,904		87,661
	Energy risk management current assets (Note 1(c))				13,063		28,201
	Prepayments and other				39,932		41,041

			Total Current Assets		379,458		951,274
Property, Plant, and Equipment—at Cost
	Utility plant in service				5,277,313		4,909,007
	Construction work in progress				266,624		368,313

		Total Utility Plant			5,543,937		5,277,320
Accumulated depreciation					2,297,678		2,216,908

			Net Property, Plant, and Equipment		3,246,259		3,060,412
Other Assets
	Regulatory assets				452,265		423,372
	Energy risk management non-current assets (Note 1(c))				17,832		30,164
	Other investments				55,573		57,633
	Other				24,919		47,927

			Total Other Assets		550,589		559,096
Total Assets				$	4,176,306	$	4,570,782

~~In October 2001, the FASB~~The ~~staff~~accompanying ~~posted~~notes ~~revised~~as ~~guidance~~they onrelate ~~the~~to ~~normal~~PSI ~~purchases~~Energy, ~~and sales exemption for these contracts~~Inc. ~~This~~are ~~revised~~an ~~guidance~~integral ~~will~~part ~~change the applicability~~ of ~~this exemption~~these ~~for~~consolidated ~~certain of our contracts and will be adopted during the first quarter of 2002. Based on a review of existing contracts, we do not believe this revised guidance will have a material impact to our~~ financial ~~position or results of operations upon adoption~~statements. However, given our activity in energy trading, it could increase volatility in future results. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward component) and flexibility to take additional quantity (an option component). This guidance concludes that such contracts are not eligible for the normal purchases and sales exemption due to the existence of optionality in the contract. Cinergy has certain contracts that contain optionality, primarily fuel supply contracts, for which the accounting may be impacted by this new guidance. We will adopt this guidance in the second quarter of 2002, consistent with the transition provisions. We have begun analyzing contracts to determine the applicability of this guidance and to determine the interaction between this guidance and Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. However, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our results of operations or financial position.15

2 PSI ENERGY, INC. CONSOLIDATED ~~Long-Term~~BALANCE ~~Debt~~SHEETS

In January 2001, PSI Energy, Inc. (PSI) retired $19.8 million principal amount of non-interest bearing Series 1994 Promissory Note, which had matured. The securities were not replaced by new issues of debt. In March 2001, Cinergy Global Resources, Inc., a subsidiary of Cinergy, borrowed $26 million at a fixed interest rate of 6.10%, maturing on March 31, 2003.

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	161,568		$	312,707
	Accounts payable to affiliated companies			30,710			27,370
	Accrued taxes			110,977			102,317
	Accrued interest			15,975			23,760
	Notes payable and other short-term obligations (Note 4)			82,600			148,600
	Notes payable to affiliated companies (Note 4)			80,749			422,263
	Long-term debt due within one year (Note 4)			979			23,000
	Energy risk management current liabilities (Note 1(c))			11,634			23,185
	Other			37,741			41,695

		Total Current Liabilities		532,933			1,124,897
Non-Current Liabilities
	Long-term debt (Note 3)			1,371,916			1,325,089
	Deferred income taxes			595,007			486,694
	Unamortized investment tax credits			33,707			36,139
	Accrued pension and other postretirement benefit costs			159,771			154,799
	Energy risk management non-current liabilities (Note 1(c))			18,026			41,773
	Other			80,750			63,557

		Total Non-Current Liabilities		2,259,177			2,108,051
Total Liabilities				2,792,110			3,232,948
Cumulative Preferred Stock
	Not subject to mandatory redemption			42,343			42,347
Common Stock Equity
	Common stock—without par value; $.01 stated value; authorized shares—60,000,000; outstanding shares—53,913,701 at September 30, 2002, and December 31, 2001			539			539
	Paid-in capital			416,412			416,414
	Retained earnings			930,181			880,129
	Accumulated other comprehensive income (loss)			(5,279	)		(1,595	)

		Total Common Stock Equity		1,341,853			1,295,487
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	4,176,306		$	4,570,782

~~On June 22, 2001,~~The ~~PSI~~accompanying ~~issued~~notes ~~$325~~as ~~million~~they ~~principal~~relate ~~amount~~to ofPSI ~~First Mortgage Bonds Series EEE~~Energy, 6Inc.~~65%~~ ~~with~~are aan ~~maturity~~integral ~~date~~part of ~~June~~these ~~15,~~consolidated ~~2006.~~financial ~~The net proceeds of the offering were used to repay short-term indebtedness~~statements.

On September 12, 2001, Cinergy Corp. issued $500 million principal amount of 6.25% debentures with a maturity date of September 1, 2004. The net proceeds of the offering were used to repay short-term indebtedness. In October 2001, Cinergy Corp. executed three receive-fixed, pay-floating interest rate swaps with a combined notional amount of $250 million. These swaps are designated as fair value hedges of 50% of Cinergy Corp.‘s $500 million debentures issue. 16

3. ~~Notes~~ ~~Payable~~ PSI ~~and~~ENERGY, INC. CONSOLIDATED ~~Other~~STATEMENTS ~~Short-term~~OF ~~Obligations~~CASH FLOWS

On August 21, 2001, The Cincinnati Gas & Electric Company (CG&E) issued $12.1 million of Ohio Air Quality Development Authority Air Quality Development Revenue Bonds 2001, Series A with a final maturity date of August 1, 2033, and initial interest of 3.7%. The interest rate will reset annually on August 1, as negotiated, based on the Municipal Market Data Index as a benchmark. The net proceeds will be used to finance a portion of the costs of air quality and solid waste disposal facilities used at the William H. Zimmer Generating Station.

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	135,440		$	132,103
	Items providing or (using) cash currently:
		Depreciation				115,954			111,487
		Deferred income taxes and investment tax credits—net				46,376			25,100
		Change in net position of energy risk management activities				8,443			(22,586	)
		Allowance for equity funds used during construction				(9,063	)		(3,637	)
		Regulatory assets deferrals				(24,916	)		(18,116	)
		Regulatory assets amortization				55,139			47,632
		Accrued pension and other postretirement benefit costs				4,972			8,229
		Changes in current assets and current liabilities:
			Restricted deposits			(34	)		(679	)
			Accounts and notes receivable			222,369			(250,537	)
			Materials, supplies, and fuel			(35,243	)		(30,059	)
			Prepayments			(3,857	)		(1,733	)
			Accounts payable			(147,681	)		204,634
			Accrued taxes and interest			875			24,177
		Other items—net				(3,826	)		(17,117	)

				Net cash provided by (used in) operating activities		364,948			208,898
Financing Activities
	Change in short-term debt, including net affiliate notes					37,287			(182,980	)
	Issuance of long-term debt					47,600			322,471
	Redemption of long-term debt					(23,000	)		(19,825	)
	Funds on deposit from issuance of debt securities					(47,600	)		—
	Retirement of preferred stock					(2	)		(1	)
	Dividends on preferred stock					(1,940	)		(1,941	)
	Dividends on common stock					(83,448	)		—

				Net cash provided by (used in) financing activities		(71,103	)		117,724
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(286,610	)		(289,916	)
	Other investments					(3,098	)		(6,982	)

				Net cash provided by (used in) investing activities		(289,708	)		(296,898	)
Net increase (decrease) in cash and cash equivalents						4,137			29,724
Cash and cash equivalents at beginning of period						1,587			1,311

Cash and cash equivalents at end of period					$	5,724		$	31,035

Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	75,807		$	69,180
		Income taxes			$	13,590		$	40,452

4The accompanying notes as they relate to PSI Energy, Inc. ~~Commitments~~are ~~and~~an ~~Contingencies~~integral part of these consolidated financial statements.

~~Ozone Transport Rulemaking~~ 17

In ~~June 1997, the Ozone~~ ~~Transport~~ ~~Assessment Group, which consisted of 37 states, made a wide range of~~ ~~recommendations~~THE toUNION the United States (U.S.) Environmental Protection Agency (EPA) to address the impact of ozone transport on serious non-attainment areas (geographic areas defined by the EPA as non-compliant with ozone standards) in the NortheastLIGHT, ~~Midwest,~~HEAT ~~and~~AND ~~South.~~POWER Ozone transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries. In late 1997, the EPA published a proposed call for revisions to State Implementation Plans (SIPs) for achieving emissions reductions to address air quality concerns. The EPA must approve all SIPs. COMPANY

~~Nitrogen Oxide (NOX) SIP Call~~ 18

In ~~October 1998, the EPA~~ ~~finalized~~ ~~its ozone transport rule, also known as the NOX SIP Call.~~ ItTHE ~~applied~~UNION ~~to 22 states in the eastern half of the U.S.~~LIGHT, ~~including~~HEAT ~~the~~AND ~~three states~~POWER inCOMPANY STATEMENTS ~~which~~OF our electric utilities operate, and proposed a model NOX emission allowance-trading program. This rule recommended states reduce NOX emissions primarily from industrial and utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate NOX reductions and, at the discretion of the state, a NOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent NOX reductions by May 1, 2003, if states failed to revise their SIPs. INCOME

Ohio, Indiana, a number of other states, and various industry groups (some of which we are a member), filed legal challenges to the NOX SIP Call with the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals).

			Quarter Ended September 30					Year to Date September 30
			2002		2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues
	Electric		$	68,353	$	63,899		$	175,346		$	180,761
	Gas			7,364		10,008			53,584			82,778

		Total Operating Revenues		75,717		73,907			228,930			263,539
Operating Expenses
	Electricity purchased from parent company for resale			48,445		48,230			123,091			119,597
	Gas purchased			2,732		4,802			30,932			56,038
	Operation and maintenance			14,819		10,781			38,199			28,982
	Depreciation			4,277		4,285			13,009			12,689
	Taxes other than income taxes			1,167		1,126			3,535			3,388

		Total Operating Expenses		71,440		69,224			208,766			220,694
Operating Income				4,277		4,683			20,164			42,845
Miscellaneous—Net				1,690		(87	)		(2,516	)		(700	)
Interest				1,431		1,496			4,388			4,739
Income Before Taxes				4,536		3,100			13,260			37,406
Income Taxes				1,302		1,112			4,150			10,552

Net Income			$	3,234	$	1,988		$	9,110		$	26,854

~~Following a number of~~The ~~rulings~~accompanying ~~and~~notes ~~appeals,~~as inthey ~~August~~relate ~~2000, the Court of Appeals extended the deadline for NOX reductions~~ to ~~May~~The 31Union Light, ~~2004.~~Heat ~~The states~~ and ~~other~~Power ~~groups sought~~Company ~~review~~are ofan ~~the~~integral ~~Court~~part of ~~Appeals~~these ~~ruling~~financial ~~by the U~~statements.S. ~~Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to grant that review.~~

In June 2001, the Court of Appeals remanded portions of the NOX SIP Call to the EPA for reconsideration of how growth was factored into the state NOX budgets. It is unclear whether this decision will result in an increase or decrease in the size of the NOX reduction requirement. On August 3, 2001, the EPA published in the Federal Register a notice of data availability for justification of the state NOX budgets. Comments on the justification were filed prior to the September 19~~, 2001 deadline by various industry groups (some of which we are members) and states.~~

~~The~~ ~~states of Indiana and~~ ~~Kentucky~~ ~~developed final NOX SIP rules in response to the~~ ~~NOX~~THE ~~SIP~~UNION ~~Call~~LIGHT, ~~through~~HEAT ~~cap~~AND ~~and~~POWER ~~trade~~COMPANY BALANCE programs, in June and July of 2001, respectively. The EPA is expected to approve the state rules by the end of 2001. The state of Ohio is still in the process of developing its NOX SIP rules in response to the NOX SIP Call. SHEETS

On September 25, 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control equipment and other methods to reduce NOX emissions. The current estimate of costs for this expected investment is approximately $800 million (in nominal dollars) from 2001-2005, and includes the following:

					September 30 2002		December 31 2001
					(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents				$	3,792	$	4,099
	Notes receivable from affiliate companies (Note 5)					6,303		—
	Accounts receivable less accumulated provision for doubtful accounts of $56 at September 30, 2002, and $1,196 at December 31, 2001 (Note 5)					847		16,785
	Accounts receivable from affiliated companies					416		2,401
	Materials, supplies, and fuel—at average cost					12,506		10,835
	Prepayments and other					474		300

				Total Current Assets		24,338		34,420
Property, Plant, and Equipment—at Cost
	Utility plant in service
		Electric				256,139		248,223
		Gas				204,459		197,301
		Common				30,482		50,289

			Total Utility Plant In Service			491,080		495,813
	Construction work in progress					18,595		11,004

			Total Utility Plant			509,675		506,817
	Accumulated depreciation					186,232		178,567

				Net Property, Plant, and Equipment		323,443		328,250
Other Assets
	Regulatory assets					4,582		7,838
	Other investments					73		2
	Other					16,514		6,580

				Total Other Assets		21,169		14,420
Total Assets					$	368,950	$	377,090

~~install selective~~The ~~catalytic~~accompanying ~~reduction~~notes ~~units~~as ~~(SCRs)~~they atrelate ~~several~~to ~~different~~The ~~generating~~Union ~~stations;~~Light, ~~o install~~Heat ~~other~~and ~~pollution~~Power ~~control~~Company ~~technologies,~~are ~~including~~an ~~new~~integral ~~computer~~part ~~software, at~~of ~~all~~these ~~generating~~financial ~~stations;~~ statements.

~~make combustion improvements; and~~ 20

~~utilize~~ ~~market~~ ~~opportunities~~ THE toUNION ~~buy~~LIGHT, ~~and~~HEAT ~~sell~~AND ~~NOX~~POWER ~~allowances.~~ COMPANY BALANCE SHEETS

SCRs are the most proven technology currently available for reducing NOX emissions produced in coal-fired generating stations.

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	4,547		$	7,960
	Accounts payable to affiliated companies			17,950			16,156
	Accrued taxes			9,267			7,051
	Accrued interest			621			643
	Notes payable to affiliated companies (Note 4)			1,851			26,432
	Other			6,014			5,322

		Total Current Liabilities		40,250			63,564
Non-Current Liabilities
	Long-term debt			74,645			74,621
	Deferred income taxes			29,924			28,323
	Unamortized investment tax credits			3,205			3,411
	Accrued pension and other postretirement benefit costs			14,615			13,198
	Amounts due to customers—income taxes			7,148			7,148
	Other			20,525			14,622

		Total Non-Current Liabilities		150,062			141,323
Total Liabilities				190,312			204,887
Common Stock Equity
	Common stock—$15.00 par value; authorized shares—1,000,000; outstanding shares—585,333 at September 30, 2002, and December 31, 2001			8,780			8,780
	Paid-in capital			21,111			21,111
	Retained earnings			148,755			142,320
	Accumulated other comprehensive income (loss)			(8	)		(8	)

		Total Common Stock Equity		178,638			172,203
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	368,950		$	377,090

~~Section~~The accompanying ~~126~~notes ~~Petitions~~ as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.

In February 1998, several northeast states filed petitions seeking the EPA’s assistance in reducing ozone in the Eastern U.S. under Section 126 of the Clean Air Act (CAA). The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions. 21

In ~~December 1999, the EPA~~ ~~granted~~ ~~four Section 126 petitions relating to NOX emissions. This~~ ~~ruling~~THE ~~affected~~UNION ~~all of our Ohio and Kentucky facilities~~LIGHT, asHEAT ~~well~~AND asPOWER ~~some~~COMPANY STATEMENTS ofOF ~~our Indiana~~CASH facilities, and requires us to reduce our NOX emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge to the Section 126 requirements, and remanded portions of the rule to the EPA for reconsideration of how growth was factored into the emission limitations. On August 24, 2001, the Court of Appeals temporarily suspended the Section 126 compliance deadline pending the EPA’s reconsideration of growth factors. The Court of Appeals’ ruling will defer the Section 126 deadline until late summer 2003, and possibly until May 2004 based upon the timing of the EPA’s reconsideration of growth factors. The May 2004 deadline would essentially be consistent with the NOX SIP Call compliance deadline. FLOWS

State Ozone Plans

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	9,110		$	26,854
	Items providing or (using) cash currently:
		Depreciation				13,009			12,689
		Deferred income taxes and investment tax credits—net				1,395			897
		Allowance for equity funds used during construction				(523	)		(123	)
		Regulatory assets deferrals				4,168			1,393
		Regulatory assets amortization				(1,064	)		103
		Accrued pension and other postretirement benefit costs				1,417			122
		Changes in current assets and current liabilities:
			Accounts and notes receivable			17,142			18,558
			Materials, supplies, and fuel			(1,671	)		(5,961	)
			Prepayment			(174	)		(176	)
			Accounts payable			(1,619	)		(25,955	)
			Accrued taxes and interest			2,194			10,000
		Other items—net				9,903			(8,147	)

				Net cash provided by (used in) operating activities		53,287			30,254
Financing Activities
	Change in short-term debt, including net affiliate notes					(24,581	)		(5,968	)
	Dividends on common stock					(2,675	)		(4,829	)

				Net cash provided by (used in) financing activities		(27,256	)		(10,797	)
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(26,268	)		(19,608	)
	Other investments					(70	)		—

				Net cash provided by (used in) investing activities		(26,338	)		(19,608	)
Net increase (decrease) in cash and cash equivalents						(307	)		(151	)
Cash and cash equivalents at beginning of period						4,099			6,460

Cash and cash equivalents at end of period					$	3,792		$	6,309

Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	4,194		$	4,493
		Income taxes			$	2,398		$	7,461

~~On November 15, 1999, the~~The ~~states~~accompanying ofnotes ~~Indiana~~as ~~and Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment demonstration on how~~ they ~~intend~~relate to ~~bring the Greater Louisville Area, (including Floyd and Clark Counties in Indiana), into attainment with the one-hour ozone standard.~~ The ~~Greater~~Union ~~Louisville Area has since attained the one-hour ozone standard~~Light, ~~and~~Heat on October 23, 2001, the EPA re-designated the area as being in attainment with that standard. Previous SIP amendments called for, among other things, statewide NOX reductions from utilities in Indiana, Kentucky, and ~~surrounding~~Power ~~states~~Company ~~which~~ are ~~less stringent~~an ~~than~~integral ~~the~~part EPA’s NOX SIP Call. Indiana and Kentucky committed to adopt utility NOX control rules by December 2000, that would require controls be installed by May 2003. However, Indiana halted the rulemaking for NOX controls at this level, but completed NOX SIP Call level reduction regulations. Kentucky has completed its rulemaking, and issued a final rule that changed the compliance deadline to mirror the NOX SIP Call of ~~May~~these ~~31,~~financial ~~2004~~statements. ~~However, on November 1, 2001, the intent to withdraw the regulation was noted in the Kentucky Administrative Register.~~

~~See Note 4(d) below for a discussion of the tentative EPA Agreement, the implementation of which will affect our strategy for compliance with the final NOX SIP Call.~~ 22

~~(b)~~ ~~New~~ ~~Source~~ NOTES ~~Review~~TO ~~(NSR)~~FINANCIAL STATEMENTS

~~The CAA’s NSR~~ In ~~provisions~~this ~~require~~report ~~that~~Cinergy a(which ~~company~~includes ~~obtain~~Cinergy aCorp. ~~pre-construction~~and ~~permit~~all ~~if it plans to build a new stationary source~~ of ~~pollution~~our orregulated ~~make a major modification to an~~and ~~existing~~non-regulated ~~facility~~subsidiaries) ~~unless~~is, ~~the~~at ~~changes are exempt. In July 1998~~times, ~~the~~referred ~~EPA requested comments on proposed revisions~~ to ~~the NSR rules that would change NSR applicability by eliminating exemptions contained~~ in the ~~current~~first ~~regulation. On~~person ~~June~~as 22"we", ~~2001~~"our", ~~the~~or ~~EPA issued a NSR 90-Day Review Paper and scheduled four public forums across the U~~"us".S. ~~to gather more information on the impacts of NSR. Cinergy provided oral testimony at an EPA public forum held in Cincinnati, Ohio on July 10, 2001, and submitted written comments as well.~~

Since July 1999, CG&E and PSI have received requests from the EPA (Region 5), under Section 114 of the CAA, seeking documents and information regarding capital and maintenance expenditures at several of their respective generating stations1. Summary ~~These requests were part~~ of anSignificant ~~industry-wide~~Accounting ~~investigation assessing compliance with the NSR and the New Source Performance Standards (NSPS) of the CAA at electric generating stations.~~ Policies

On September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying Cinergy and CG&E of their intent to sue under the citizens’ suit provisions of the CAA. These states allege violations of the CAA by constructing and continuing to operate a major modification of CG&E’s W.C. Beckjord Generating Station (~~Beckjord Station~~a) ~~without obtaining the required NSR pre-construction permits.~~ Presentation

~~On November 3, 1999, the~~ Our ~~EPA~~Financial ~~sued~~Statements areflect ~~number~~all ofadjustments ~~holding~~(which ~~companies~~include ~~and electric utilities~~normal, ~~including Cinergy,~~recurring ~~CG&E,~~adjustments) ~~and~~necessary ~~PSI,~~ in ~~various~~the ~~U.S.~~opinion ~~District~~of ~~Courts (District~~the ~~Court).~~registrants ~~The~~for ~~Cinergy,~~a ~~CG&E,~~fair ~~and~~presentation ~~PSI suit alleged violations~~ of the ~~CAA~~interim atresults. These ~~two~~statements ofshould ~~our~~be ~~generating~~read ~~stations~~in ~~relating~~conjunction towith ~~NSR and~~the ~~NSPS~~Financial ~~requirements.~~Statements ~~The~~and ~~suit~~the ~~sought~~notes ~~(1)~~thereto ~~injunctive~~included ~~relief~~in tothe ~~require installation~~combined of2001 ~~pollution~~Form 10-K ~~control technology on each~~ of the ~~generating~~registrants. ~~units~~Certain ~~at Beckjord~~amounts ~~Station~~in ~~and at PSI’s Cayuga Generating Station (Cayuga~~the ~~Station),~~2001 ~~and~~Financial ~~(2)~~Statements ~~civil~~have ~~penalties~~been inreclassified ~~amounts~~to ofconform up to ~~$27,500~~the ~~per~~2002 ~~day for each violation~~presentation.

On March 1, 2000, the EPA filed an amended complaint against Cinergy, CG&E, and PSI. The amended complaint added alleged violations of the NSR requirements of the CAA at two of our generating stations contained in a notice of violation (~~NOV~~b) Financial filed by the EPA on November 3, 1999. It also added claims for relief of alleged violations of nonattainment NSR, Indiana and Ohio SIPs, and particulate matter emission limits (as discussed below in the “Beckjord Station NOV” section.) Derivatives

~~The amended complaint~~ We ~~sought~~use ~~(1)~~derivative ~~injunctive~~financial ~~relief~~instruments to ~~require~~manage: installation of pollution control technology on each of the generating units at Beckjord Station, Cayuga Station, and PSI’s Wabash River Generating Station and Gallagher Generating Station, and such other measures as necessary, and (2) civil penalties in amounts of up to $27,500 per day for each violation.

•: funding costs;
•: exposure to fluctuations in interest rates; and
•: exposure to foreign currency exchange rates.

~~On March 1, 2000, the EPA~~ We ~~also~~account ~~filed~~for anderivatives ~~amended~~under ~~complaint~~Statement ~~in a separate lawsuit alleging violations~~ of ~~the CAA~~Financial ~~relating~~Accounting toStandards ~~NSR~~No. 133, ~~Prevention~~Accounting offor ~~Significant~~Derivative ~~Deterioration~~Instruments ~~(PSD),~~ and ~~Ohio SIP~~Hedging ~~requirements~~Activities ~~regarding~~(Statement ~~various generating stations~~133), ~~including~~which arequires ~~generating station~~all ~~operated~~derivatives bythat ~~the~~are ~~Columbus~~not ~~Southern~~exempted ~~Power~~to ~~Company~~be ~~(CSP)~~accounted ~~and~~for ~~jointly-owned by~~at ~~CSP,~~fair ~~the~~value. ~~Dayton~~Changes ~~Power~~in ~~and~~the ~~Light~~derivative's ~~Company~~fair ~~(DP&L),~~value ~~and~~must ~~CG&E.~~be ~~The~~recognized ~~EPA~~currently isin ~~seeking~~earnings ~~injunctive~~unless ~~relief~~specific ~~and~~hedge ~~civil~~accounting ~~penalties~~criteria ofare ~~up to $27,500 per day for each violation~~met. ~~This~~Gains ~~suit~~and islosses ~~being~~on ~~defended~~derivatives bythat ~~CSP.~~qualify Onas ~~April~~hedges 4,can ~~2001,~~(a) offset ~~the District~~related ~~Court~~fair invalue ~~that~~changes ~~case~~on ~~ruled that neither~~ the ~~Government~~hedged ~~nor~~item ~~the~~in ~~intervening~~the ~~plaintiff~~income ~~environmental~~statement ~~groups~~for ~~could~~fair ~~obtain~~value ~~civil~~hedges; ~~penalties~~or ~~for~~(b) be ~~any alleged~~recorded ~~violations~~in ~~that~~other ~~occurred~~comprehensive ~~more~~income ~~than~~for ~~five~~cash ~~years~~flow ~~prior~~hedges. toTo ~~the~~qualify ~~filing~~for ofhedge ~~the complaint~~accounting, ~~but~~financial ~~that~~instruments ~~both~~must ~~parties~~be ~~could~~designated ~~seek~~as ~~injunctive~~a hedge ~~relief~~ (for ~~alleged violations~~example, ~~that~~an ~~occurred~~offset ~~more~~of ~~than~~foreign ~~five~~exchange ~~years~~or ~~before~~interest ~~the~~rate ~~filing~~risks) ofat the ~~complaint.~~ ~~Thus,~~inception ifof the ~~plaintiffs~~contract ~~prevail~~and inmust ~~their~~be ~~claims,~~effective ~~any~~at ~~calculation~~reducing ~~for penalties~~the ~~will~~risk ~~not~~associated ~~start~~with on the ~~date~~hedged ofitem. ~~the~~Accordingly, changes ~~alleged~~in ~~violations~~the ~~unless~~fair ~~those alleged~~values ~~violations~~or ~~occurred~~cash ~~after~~flows ~~November~~of 3,instruments ~~1994,~~designated ~~but~~as ~~CSP~~hedges ~~would~~must be ~~forced~~highly ~~to install~~correlated with changes in the ~~controls~~fair ~~required~~values ~~under~~or ~~the~~cash ~~CAA.~~flows ~~Neither~~of ~~party~~the ~~appealed~~related ~~that decision~~hedged items.

On From time ~~June~~to 28time, ~~2000,~~we ~~the~~may ~~EPA issued~~use anforeign ~~NOV~~currency tocontracts ~~Cinergy,~~(for ~~CG&E~~example, ~~and~~a ~~PSI~~contract ~~for~~obligating ~~alleged violations~~one ofparty ~~NSR,~~to ~~PSD~~buy, and ~~SIP~~the ~~requirements~~other atto ~~CG&E’s~~sell, ~~Miami Fort~~a ~~Generating~~specified ~~Station~~quantity ~~and~~of ~~PSI’s~~a ~~Gibson~~foreign ~~Generating~~currency ~~Station.~~for Ina ~~addition,~~fixed ~~Cinergy~~price ~~and~~at ~~CG&E~~a ~~have~~future ~~been~~date) ~~informed~~and bycurrency ~~DP&L,~~swaps ~~the operator~~(for ofexample, ~~J.M.~~a ~~Stuart~~contract ~~Generating~~whereby ~~Station~~two ~~(Stuart~~parties ~~Station),~~exchange ~~that~~principal onand ~~June~~interest ~~30, 2000,~~cash ~~the~~flows ~~EPA~~denominated ~~issued~~in andifferent ~~NOV~~currencies) ~~for~~to ~~alleged~~hedge ~~violations~~foreign ofcurrency denominated ~~NSR,~~purchase ~~PSD,~~ and ~~SIP requirements~~sale atcommitments ~~this~~(cash ~~station.~~flow ~~CG&E~~hedges) ~~owns~~and ~~39%~~certain of ~~Stuart~~our ~~Station.~~net ~~The NOVs~~investments ~~indicated~~in ~~that~~foreign ~~the~~operations ~~EPA~~(net ~~may~~investment (1hedges) ~~issue~~against ancurrency ~~order~~exchange ~~requiring~~rate ~~compliance with the~~fluctuations. ~~requirements~~Reclassification of ~~the~~unrealized ~~SIP,~~gains or ~~(2)~~losses ~~bring~~on aforeign ~~civil~~currency ~~action~~cash ~~seeking~~flow ~~injunctive~~hedges ~~relief and~~from ~~civil~~other ~~penalties~~comprehensive ofincome upoccurs towhen ~~$27,500~~the ~~per~~underlying ~~day~~hedged ~~for~~item ~~each~~is ~~violation~~recorded in income.

On We also ~~August~~use 2,interest ~~2001,~~rate ~~the states~~swaps of(an ~~New~~agreement ~~York,~~by ~~New~~two ~~Jersey,~~parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows) and ~~Connecticut~~treasury ~~filed~~locks (an ~~Assented~~agreement to exchange ~~Motion~~cash ~~to Intervene~~flows based on the movement in ~~this~~the ~~litigation~~underlying treasury benchmark over a specified period of time). ~~Their~~Effective ~~motion~~with ~~was~~our ~~granted~~adoption byof Statement 133 in the ~~District~~first ~~Court~~quarter ~~on August~~of 32001, ~~2001.~~we ~~The~~began accounting ~~states’~~for ~~proposed~~all ~~complaint~~derivatives is(including aninterest ~~exhibit~~rate toswaps ~~the~~and ~~motion to~~treasury ~~intervene.~~locks) ~~Cinergy~~using fair value accounting, ~~CG&E~~and we assess the effectiveness of any interest rate swaps and/or ~~PSI~~treasury ~~are~~locks used in hedging activities. At September 30, 2002, the ~~process~~ ineffectiveness of ~~evaluating~~instruments ~~the~~that ~~states’~~we ~~complaint~~have ~~but,~~classified atas ~~this~~cash ~~time,~~flow ~~are~~hedges ~~unable~~of ~~to determine~~variable-rate ~~the~~debt ~~effect,~~instruments ifwas ~~any,~~not ~~this~~material. Reclassification ~~filing~~of ~~will~~unrealized ~~have~~gains or losses on ~~the~~cash ~~issues~~flow ~~affecting~~hedges ~~us regarding~~of ~~NSR,~~debt instruments from Accumulated other comprehensive income occurs as ~~framed~~interest inis accrued on the ~~EPA’s~~debt ~~Amended Complaint~~instrument. We currently estimate that on an after-tax basis, $4 million of

~~See Note 4(d) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.~~23

unrealized losses will be reclassified as a charge to Interest during the twelve-month period ending September 30, 2003. See Note 1(cd)(iv) ~~Beckjord~~below ~~Station~~for ~~NOV~~further discussion of Statement 133.

On November 30, 1999, the EPA filed an NOV against Cinergy and CG&E alleging that emissions of particulate matter at the Beckjord Station exceeded the allowable limit. The NOV indicated that the EPA may (1c) Energy ~~issue~~Marketing ~~an administrative penalty order, or (2) file a civil action seeking injunctive relief~~ and civil penalties of up to $27,500 per day for each violation. The allegations contained in this NOV were incorporated within the March 1, 2000 amended complaint, as discussed in Note 4(b) above. On June 22, 2000, the EPA issued an NOV and a finding of violation (FOV) alleging additional particulate emission violations at Beckjord Station and offered us an opportunity to meet and discuss the allegations and corrective measures. The NOV/FOV indicated the EPA may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action. Trading

~~See~~ We market ~~Note~~and 4trade electricity, natural gas, coal, and other energy-related products. We designate transactions as accrual or trading at the time they are originated. Contracts are classified as accrual only when we (da) have ~~below~~the intent and projected ability to fulfill substantially all obligations from company-owned assets, and (b) meet the requirements to consider the contract a normal purchase or sale under Statement 133 (if a derivative), or meet the requirements to consider the contract non-trading under Emerging Issues Task Force (EITF) 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10) (if not a ~~discussion~~derivative under ofStatement 133). Such classification is generally limited to the ~~tentative~~sale ~~EPA~~of ~~Agreement~~generation to third parties when it is not required to meet native load requirements (end-use customers within our public utility companies' franchise service territory). All other energy contracts (excluding electric, coal, and gas purchase contracts for use in serving our native load requirements) are classified as trading. Gas trading is comprised of transactions for which ~~relates~~gas is physically delivered to ~~matters~~a ~~discussed~~customer ~~within~~(physical gas trading), as well as transactions that are financial in nature for ~~this~~which ~~note~~delivery rarely occurs (financial gas trading). Since Cinergy owns no gas production and has limited transmission capabilities, all gas transactions (other than procurement and sale of gas to The Cincinnati Gas & Electric Company (CG&E) and The Union Light, Heat and Power Company (ULH&P) retail customers) are considered trading whether physical or financial.

We account for accrual transactions by recognizing revenues and costs when the underlying commodity is delivered and trading transactions using the fair value method of accounting. Under the fair value method of accounting, unrealized trading transactions are shown at fair value in our Balance Sheets as Energy risk management assets and Energy risk management liabilities. In October 2002, the EITF reached a consensus in EITF Issue 02-3 Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3) to rescind EITF 98-10. This decision will require that non-derivative contracts currently accounted for at fair value be accounted for on an accrual basis in the future. See Note 1(d)(i) ~~EPA~~below ~~Agreement~~for further discussion.

On We reflect ~~December~~unrealized 21gains and losses, ~~2000~~resulting from changes in fair value, on a net basis in Operating Revenues. For physical gas ~~Cinergy,~~trading ~~CG&E~~and for all power trading, we recognize both revenues and ~~PSI~~costs ~~reached~~on ana ~~agreement~~gross basis in Operating Revenues and in Fuel and ~~principle~~purchased ~~with~~and ~~the~~exchanged ~~EPA~~power and Gas purchased, ~~the~~respectively, ~~U.S.~~when ~~Department~~transactions ofare ~~Justice,~~settled. ~~three~~For ~~northeast~~financial ~~states~~gas trading, ~~and~~realized ~~two~~gains ~~environmental~~and ~~groups~~losses ~~that~~are ~~could~~recorded ~~serve~~on asa ~~the~~net basis ~~for~~in aOperating ~~negotiated resolution~~Revenues ofwhen ~~CAA~~transactions ~~claims~~are settled. ~~and~~In ~~other~~June 2002, ~~related~~the ~~matters~~EITF ~~brought~~reached ~~against~~a ~~coal-fired power~~consensus ~~plants~~requiring ~~owned~~realized and ~~operated~~unrealized bygains ~~Cinergy’s~~and ~~operating~~losses ~~subsidiaries. The~~on ~~complete~~all ~~resolution~~energy oftrading ~~these~~contracts ~~issues~~to isbe presented ~~contingent~~net ~~upon~~in ~~establishing~~Operating aRevenues, ~~final agreement~~beginning with the ~~EPA~~third ~~and~~quarter ~~other~~of ~~parties.~~2002, Ifand areclassification ~~final~~of ~~agreement~~all isperiods ~~reached~~presented. ~~with~~However, this conclusion ~~these~~was ~~parties~~rescinded in October 2002, itand ~~would~~was ~~resolve~~replaced ~~past~~with ~~claims~~a ofnew ~~NSR~~requirement ~~violations~~to aspresent ~~well~~all asgains ~~the Beckjord~~and ~~Station~~losses ~~NOVs/FOV~~on ~~discussed~~energy ~~above~~trading ~~under~~derivatives ~~Notes~~net ~~4(b)~~beginning ~~and~~in 42003. See Note 1(cd)(i) below for further discussion.

~~Under~~ Although we ~~the~~intend ~~terms~~to ofsettle ~~the tentative~~accrual ~~agreement~~contracts with company-owned assets, ~~the~~occasionally ~~EPA~~we ~~and~~settle these contracts with purchases on the ~~other~~open ~~plaintiffs~~trading ~~have~~markets. ~~agreed~~The tocost ~~drop~~of ~~all~~these purchases ~~challenges~~could be in excess of ~~past~~the ~~maintenance~~associated ~~and~~revenues. ~~repair~~We ~~activities~~recognize atthe ~~our~~gains ~~coal-fired generation~~or ~~plants~~losses on these transactions as delivery occurs. InDue ~~addition,~~to the ~~intent~~infrequency of ~~the~~such ~~tentative~~settlements, ~~agreement~~both ishistorical ~~that~~and weprojected, and ~~would~~the befact ~~allowed~~that physical settlement to ~~continue~~the ~~on-going~~customer ~~activities~~still occurs, we continue to ~~maintain~~apply ~~reliability~~the ~~and availability~~normal ~~without~~purchases ~~subjecting~~and ~~the~~sales ~~plants~~exemption to ~~future~~such ~~litigation~~physical ~~regarding federal~~contracts ~~permitting~~that ~~requirements~~constitute derivatives. Open market purchases may occur for the following reasons:

•: generating station outages;
•: least-cost alternative;

~~In return for resolution of past claims, future operational certainty, and protection of system wide demand growth, we have tentatively agreed to:~~24

•: native load requirements; and
•: extreme weather.

~~shut~~ We anticipate ~~down~~that orsome ~~repower~~of ~~with~~the ~~natural~~electricity ~~gas~~obligations, ~~nine~~even ~~small~~though ~~coal~~considered trading contracts, will ultimately be settled using company-~~fired~~owned ~~boilers~~generation. The cost of this generation is usually below the market price at ~~three~~which ~~power~~the ~~plants~~trading ~~beginning~~portfolio inhas been valued. The potential for earnings volatility from period to period is increased due to the risks associated with marketing ~~2004;~~ and trading electricity, natural gas, and other energy-related products.

~~build~~ We value ~~four~~contracts ~~additional~~in ~~sulfur~~the ~~dioxide~~trading ~~(SO2)~~portfolio ~~scrubbers,~~using end-of-the-period ~~first~~fair ofvalues, ~~which~~utilizing ~~must~~the befollowing ~~operational~~factors by(as ~~December 31,~~applicable): ~~2007;~~

•: closing exchange prices (that is, closing prices for standardized electricity and natural gas products traded on an organized exchange, such as the New York Mercantile Exchange);
•: broker-dealer and over-the-counter price quotations; and
•: model pricing (which considers time value and historical volatility factors of electricity and natural gas).

~~upgrade~~(d) Accounting ~~existing pollution control systems;~~ Changes

(i) Energy ~~phase in the operation of NOX reduction technology year-round starting in 2004;~~ Trading

The EITF ~~retire~~has 50been discussing several issues related to the accounting and disclosure of energy trading activities under EITF 98-10. In June 2002,~~000~~ the EITF reached a ~~tons~~consensus ofin ~~SO2~~EITF ~~allowances~~02-3 ~~between~~requiring ~~2001~~all realized and ~~2005~~unrealized gains and ~~reduce~~losses on energy trading contracts be presented net in the income statement, whether or not settled physically. However, the EITF rescinded this consensus in October 2002 and replaced it with a requirement to present all gains and losses on energy trading derivatives on a net basis beginning in 2003. In addition, certain non-derivative contracts used in our trading activities would have been required to be presented net under the June 2002 consensus. Under the new consensus, these ~~SO2~~contracts ~~cap~~will bylikely ~~35%~~continue to be presented gross. Since most of our energy trading activities involve derivatives, we believe this new consensus will not have a substantially different impact than the June 2002 consensus, other than deferring the ultimate implementation date. We continue to expect substantial reductions in ~~2013;~~Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense as a result of adopting net reporting. However, Operating Income and Net Income will not be affected by this change. Operating Revenues for Cinergy, CG&E, and PSI Energy, Inc. (PSI), under the EITF's June 2002 consensus regarding net presentation, would have been as follows:

pay a civil penalty of $8.5 million to the U.S. government; and

	September 30, 2002
	Quarter Ended		Year to Date
	*(in millions)*
Cinergy(1)	$	1,098	$	2,986
CG&E and subsidiaries		526		1,566
PSI		472		1,222

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

In October 2002, ~~implement~~the ~~$21~~EITF reached a consensus to rescind EITF 98-10.5 ~~million~~All inenergy ~~environmental~~trading ~~mitigation~~contracts that do not qualify as a derivative will no longer be accounted for ~~projects~~at fair value. Instead, accrual accounting will be used. The consensus is immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect adjustment to income after tax in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The magnitude of this adjustment will depend on the fair value as of January 1, 2003, of energy trading contracts meeting the criteria

The estimated cost for these capital expenditures is expected to be approximately $700 million. These capital expenditures are in addition to our previously announced commitment to install NOX controls over the next five years at an estimated cost of approximately $800 million as previously discussed in “Ozone Transport Rulemaking.” 25

~~In reaching the tentative~~ ~~agreement,~~outlined ~~we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as implement future projects for improved reliability~~above. IfCinergy ~~the~~has ~~settlement~~begun isreviewing ~~not completed, we intend to defend against~~ the ~~allegations,~~ ~~discussed~~various incontracts ~~Notes 4(b) and 4(c) above, vigorously in court. In such an event, it is not possible~~ to determine the ~~likelihood~~effect ~~that the plaintiffs would prevail on their claims or whether resolution~~ of ~~these~~this ~~matters would have a material effect on our financial condition or results of operations~~change.

~~(e)~~ During the ~~Manufactured~~October 2002 ~~Gas~~meeting, ~~Plant~~the ~~(MGP)~~EITF ~~Sites~~also rescinded a prior consensus reached in the June 2002 meeting regarding new disclosures for energy trading activities. In addition, the EITF elected not to provide guidance at this time on the recognition of inception gains on energy trading transactions. However, the decision to rescind EITF 98-10 will eliminate the recognition of inception gains on contracts that do not meet the definition of a derivative since such contracts will be accounted for on an accrual basis.

~~General~~ (ii) Business Combinations and Intangible Assets

~~Prior~~ In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the ~~1950s~~purchase method. With the adoption of Statement 142, ~~gas~~goodwill ~~was~~and other intangibles with indefinite lives ~~produced~~will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption and at ~~MGP~~least ~~sites~~annually ~~through~~thereafter by applying a ~~process~~fair-value-based test, ~~that~~as ~~involved~~opposed to the ~~heating~~undiscounted cash flow test applied under prior accounting standards. This test must be applied at the "reporting unit" level, which is not permitted to be broader than the current business segments discussed in Note 9. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of ~~coal~~the ~~and/~~intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We began applying Statement 141 in ~~oil~~the third quarter of 2001 and Statement 142 in the first quarter of 2002. The ~~gas~~discontinuance ~~produced~~of ~~from~~amortization ~~this~~of ~~process~~goodwill, ~~was~~which ~~sold~~began in the first quarter of 2002, is not material to our financial position or results of operations. We have identified the reporting units for ~~residential~~Cinergy and finalized the initial transition impairment test. Based on the result of this test, ~~commercial~~the transition impact of applying Statement 142 is not material to our financial position or results of operations. We will continue to perform goodwill impairment tests annually, ~~and~~as ~~industrial~~required ~~uses~~by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.

~~PSI~~ (iii) Asset Retirement Obligations

~~Coal~~ In July 2001, ~~tar~~the ~~residues~~FASB issued Statement of Financial Accounting Standards No. 143, ~~related~~Accounting for Asset Retirement ~~hydrocarbons,~~Obligations ~~and~~(Statement ~~various~~143). ~~metals~~Statement ~~associated~~143 ~~with~~requires ~~MGP~~fair ~~sites~~value ~~have~~recognition ~~been~~of ~~found~~legal obligations to retire long-lived assets at the time the obligations are ~~former~~incurred. ~~MGP~~The ~~sites~~initial recognition of this liability will be accompanied by a corresponding increase in ~~Indiana~~property, ~~including~~plant, atand ~~least~~equipment. 21Subsequent ~~sites~~to ~~which~~the ~~PSI~~initial orrecognition, ~~its~~the liability will be ~~predecessors~~adjusted ~~previously~~for ~~owned.~~any ~~PSI~~revisions ~~acquired~~to ~~four~~the expected cash flows of the ~~sites~~retirement ~~from Northern~~obligation ~~Indiana~~(with ~~Public~~corresponding ~~Service~~adjustments ~~Company~~to ~~(NIPSCO~~property, plant, and equipment), inand ~~1931.~~for Ataccretion of the ~~same~~liability due to the passage of time, (recognized as an operation expense). ~~PSI~~Additional ~~sold~~depreciation ~~NIPSCO~~expense ~~the~~will ~~sites~~be ~~located~~recorded inprospectively ~~Goshen~~for ~~and~~any ~~Warsaw~~property, ~~Indiana~~plant, and equipment increases. InWe ~~1945~~currently accrue costs of removal on many regulated, long-lived assets ~~PSI~~through ~~sold~~depreciation 19expense, ofwith ~~these~~a ~~sites~~corresponding ~~(including~~charge ~~the~~to ~~four~~accumulated ~~sites~~depreciation, itas ~~acquired~~allowed ~~from~~by each regulatory jurisdiction. For assets that we conclude have a retirement obligation under ~~NIPSCO)~~Statement to143, the ~~predecessor~~accounting ofwe ~~the~~currently ~~Indiana~~use ~~Gas~~will ~~Company,~~be ~~Inc~~modified to comply with this standard. ~~(IGC)~~We will adopt Statement 143 in the first quarter of 2003. ~~IGC~~We ~~later~~have formed an implementation team and are ~~sold~~continuing to analyze the ~~site~~impact ~~located~~of inthis ~~Rochester~~statement. However, ~~Indiana~~at this time, we have not determined whether its implementation will be material to ~~NIPSCO~~our financial position or results of operations.

~~IGC~~ (~~in 1994~~iv) and NIPSCO (in 1995) both made claims against PSI. The basis of these claims was that PSI is a Potentially Responsible Party with respect to the 21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The claims further asserted that PSI was legally responsible for the costs of investigating and remediating the sites. In August 1997, NIPSCO filed suit against PSI in federal court claiming recovery (pursuant to CERCLA) of NIPSCO’s past and future costs of investigating and remediating MGP-related contamination at the Goshen MGP site. Derivatives

~~In November~~ During 1998, ~~NIPSCO, IGC,~~the ~~and~~FASB ~~PSI~~issued ~~entered~~Statement ~~into a Site Participation and Cost Sharing Agreement (Agreement)~~133. This ~~Agreement~~standard ~~allocated~~was ~~CERCLA~~effective ~~liability~~ for ~~past~~Cinergy ~~and~~beginning ~~future costs at seven MGP sites~~ in ~~Indiana among the three companies. As a result of the Agreement~~2001, ~~NIPSCO’s lawsuit against PSI was dismissed. The parties have assigned lead responsibility for managing further investigation~~ and ~~remediation~~ ~~activities~~requires atus ~~each of the sites~~ to ~~one of the parties. Similar~~record ~~agreements~~derivative ~~were~~instruments, ~~reached between IGC and PSI that allocate CERCLA liability at 14 MGP sites with~~ which ~~NIPSCO~~are ~~was~~ not ~~involved.~~exempt ~~These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate~~ under ~~the~~certain ~~agreements~~provisions ~~and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.~~

PSI notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSI filed suit in Hendricks County Circuit Court in the State of Indiana (Court) against its general liability insurance carriers. Subsequently, PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. Discovery closed in the case at the end of August 2001. PSI and its insurance carriers are now filing briefs on various issues for decision by the Court in hearings to be held in November 2001, which will determine the scope of the trial. The Court has scheduled the trial of this case to begin at the end of January 2002. At the present time, PSI cannot predict the outcome of this litigation. 26

~~PSI has accrued~~ ~~costs~~of ~~for~~Statement ~~the~~133, ~~sites~~as ~~related~~assets toor ~~investigation~~liabilities, ~~remediation,~~measured ~~and~~at ~~groundwater monitoring~~fair tovalue ~~the extent such costs are probable and can be reasonably estimated~~(i. ~~PSI does not believe it can provide an estimate of the reasonably possible total remediation costs for any site before a remedial investigation/feasibility study has been completed~~e. ~~To the extent remediation is necessary~~, ~~the~~mark-to-market). ~~timing~~Our offinancial ~~the~~statements ~~remediation~~reflect ~~activities impacts~~ the ~~cost~~adoption of ~~remediation.~~ ~~Therefore,~~Statement ~~PSI~~133 ~~currently~~in ~~cannot determine~~ the ~~total~~first ~~costs~~quarter ~~that~~of ~~may~~2001. beSince ~~incurred~~many ~~in connection with the remediation~~ of ~~all~~our ~~sites,~~derivatives towere ~~the extent~~previously ~~that remediation is~~ required. ~~According~~ to ~~current~~use ~~information,~~fair ~~these future~~value ~~costs~~accounting, at the 21effects ~~Indiana~~of ~~MGP~~implementation ~~sites~~were ~~are~~ not material ~~to our financial condition or results of operations~~. As further investigation and remediation activities are performed at these sites, the potential liability for the 21 Indiana MGP sites could be material to our financial position or results of operations.

~~CG&E~~ Our adoption did not reflect the potential impact of applying fair value accounting to selected electricity options and capacity contracts. We had not historically accounted for these instruments at fair value because they were intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While many of the criteria in this guidance are consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material to our financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

~~CG&E~~ In December 2001, ~~and~~the ~~its~~FASB ~~utility~~staff ~~subsidiaries~~revised ~~are~~the ~~aware~~current guidance to make the evaluation of ~~potential~~whether ~~sites~~electricity ~~where~~contracts ~~MGP~~qualify ~~activities~~as ~~have~~normal ~~occurred~~purchases atand ~~some~~sales ~~time~~more ~~in the~~qualitative ~~past~~than quantitative. ~~None~~ ofThis ~~these~~new ~~sites~~guidance isuses ~~known~~several factors to ~~present~~distinguish abetween ~~risk~~capacity tocontracts, which qualify for the ~~environment. CG&E~~normal purchases and ~~its~~sales ~~utility~~exemption, ~~subsidiaries~~and options, which do not. These factors ~~have~~include ~~begun~~deal ~~preliminary~~tenor, ~~site~~pricing ~~assessments~~structure, tospecification ~~obtain~~of ~~information~~the ~~about~~source ~~some~~of power, and various other factors. We adopted this guidance in the third quarter of ~~these~~2002, ~~MGP~~and ~~sites~~its impact was not material to our financial position or results of operations.

In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (fa forward component) ~~Gas~~and flexibility ~~Customer~~to ~~Choice~~take additional quantity at a fixed price (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it applies to all derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal purchases and sales exemption due to the existence of optionality in the contract. We adopted this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergy has certain contracts that contain fixed-price optionality, primarily coal contracts, which we reviewed to determine the impact of this new guidance. Due to a lack of liquidity with respect to coal markets in our region, we determined that our coal contracts do not meet the net settlement criteria of Statement 133 and thus do not qualify as derivatives. Given these conclusions, the results of applying this new guidance were not material to our financial position or results of operations.

In ~~January 2000, Cinergy~~ ~~Investments~~May 2002, ~~Inc.~~the ~~(Investments)~~FASB ~~sold~~issued ~~Cinergy~~an ~~Resources,~~exposure ~~Inc.~~draft ~~(CRI),~~that awould ~~former subsidiary,~~amend toStatement ~~Licking~~133 ~~Rural Electrification, Inc. doing business as The Energy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and CRI were named as defendants in three class action lawsuits relating~~ to ~~Energy~~incorporate ~~Cooperative’s~~certain ~~removal~~implementation ~~from~~conclusions ~~the~~reached ~~Ohio~~by ~~Gas Customer Choice program and~~ the ~~failure~~FASB ~~to deliver gas to customers~~staff. ~~Subsequently,~~The ~~these~~proposed ~~class~~effective ~~action~~date ~~suits~~would ~~were~~be ~~amended~~the ~~and~~first ~~consolidated~~quarter ~~into~~of ~~one suit~~2003. ~~CG&E~~We ~~has been~~do ~~dismissed~~not asbelieve ~~a defendant in~~ the ~~consolidated~~amendment ~~suit.~~as Oncurrently ~~March 30~~drafted, ~~2001, Cinergy,~~will ~~CG&E,~~have ~~and Investments were named as defendants in~~ a ~~lawsuit~~ ~~filed~~material byeffect ~~both~~on ~~Energy~~our ~~Cooperative~~financial ~~and~~position ~~CRI. This lawsuit concerns any obligations~~ or ~~liabilities~~results ~~Investments may have to Energy Cooperative following its sale~~ of ~~CRI~~operations. ~~We intend to vigorously defend these lawsuits. At the present time, Cinergy cannot predict the outcome of these suits.~~

(gv) Asset ~~PSI Fuel Adjustment Charge~~Impairment

~~As discussed in the 2000 Form 10-K, PSI defers fuel costs that are recoverable in future periods~~ In ~~subject to Indiana Utility Regulatory Commission (IURC) approval under a fuel recovery mechanism. On June 6,~~ August 2001, the ~~IURC~~FASB issued anStatement ~~order~~of inFinancial aAccounting ~~PSI fuel~~Standards ~~recovery proceeding~~No. 144, ~~disallowing~~Accounting ~~approximately~~for ~~$14~~the ~~million~~Impairment of ~~deferred~~Long-Lived ~~costs.~~Assets On(Statement ~~June~~144). ~~26,~~Statement ~~2001,~~144 ~~PSI~~addresses ~~formally~~accounting ~~requested~~and ~~that~~reporting ~~the~~for ~~IURC reconsider its disallowance decision. On August 24, 2001,~~ the ~~IURC~~impairment ~~indicated~~or ~~that~~disposal itof ~~will reconsider~~long-lived ~~its decision~~assets. ~~PSI~~Statement ~~believes~~144 itwas ~~has~~effective ~~strong legal and~~beginning ~~factual~~with ~~arguments~~the infirst ~~its~~quarter ~~favor~~of ~~and~~2002. ~~that~~The itimpact ~~will~~of ~~ultimately~~implementation beon ~~permitted~~our ~~to recover~~financial ~~these~~position ~~costs.~~or ~~However,~~results ~~PSI~~of ~~cannot~~operations ~~definitively~~was ~~predict~~not ~~the ultimate outcome of this matter~~material.

PSI recently filed a petition with the IURC requesting authority to recover $16 million in under billed fuel costs incurred from March 2001 through May 2001. The IURC approved recovery subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed fuel costs. A hearing is scheduled for April 2002.27

(hvi) Exit ~~Other~~Activities

In ~~May 2001~~ August 2002, the ~~Kentucky~~FASB ~~Public~~issued ~~Service~~Statement ~~Commission (KPSC) approved an offer~~ of ~~settlement~~Financial byAccounting ~~The~~Standards ~~Union Light~~No. 146, ~~Heat~~Accounting ~~and~~for ~~Power~~Costs ~~Company~~Associated ~~(ULH&P)~~with ~~which~~Exit ~~allows~~or ~~ULH&P~~Disposal toActivities ~~maintain~~(Statement ~~its~~146). ~~existing~~Statement ~~retail~~146 ~~electric~~addresses ~~base~~accounting ~~rates~~ and ~~fuel~~reporting ~~adjustment~~for ~~clause at~~the ~~current~~recognition ~~levels~~of ~~through~~exit ~~December~~costs, ~~2003~~including, ~~and~~but ~~limits~~not ~~electric~~limited ~~rate~~to, ~~increases~~one-time ~~for~~employee ~~three~~benefit ~~years thereafter~~terminations, ~~resolving~~contract ~~all~~cancellations, ~~related~~and ~~matters~~facility ~~previously~~consolidations. ~~pending~~This ~~before the~~statement ~~KPSC.~~requires ~~The~~that ~~settlement~~such ~~also~~costs ~~approved~~be ~~the~~recognized ~~proposed~~only ~~wholesale~~when ~~power~~they ~~supply contract~~meet ~~between~~the ~~ULH&P~~definition ~~and~~of ~~CG&E,~~a ~~beginning~~liability ~~January~~under 1,generally ~~2002,~~accepted ~~and~~accounting ~~made~~principles. Certain of the ~~necessary~~costs ~~determinations~~discussed ~~under~~in ~~the~~Note 8 ~~Public~~were ~~Utility~~accrued ~~Holding Company~~under ~~Act~~previous ofaccounting ~~1935,~~standards asthat ~~amended~~Statement ~~(PUHCA),~~146 ~~for~~will ~~CG&E~~supersede towhen ~~transfer~~it ~~its~~becomes effective. However, ~~generating~~Statement ~~assets~~146 ~~and~~applies ~~liabilities~~only to anexit ~~exempt~~activities ~~wholesale~~initiated ~~generator~~in 2003 and after. ~~In connection~~All ~~with~~costs ~~this~~recorded ~~settlement~~through September 30, ~~ULH&P~~2002, ~~recognized~~are ~~revenues~~unaffected by this pronouncement. The impact of implementation on ~~approximately~~our ~~$10~~financial ~~million,~~position ~~which~~or ~~had~~results ~~been~~of ~~previously~~operations ~~deferred~~is ~~subject~~not expected to ~~refund~~be material.

5. (vii) Accounting ~~Financial~~for ~~Information~~Stock-Based ~~by Business Segment~~Compensation

As discussed in the ~~2000~~2001 Form 10-K, inwe ~~early~~have ~~2001~~historically accounted for our stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In July 2002, Cinergy announced that ~~certain~~it ~~organizational~~will ~~changes~~adopt ~~which~~Statement ~~further~~of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123) effective with ~~aligned~~the next grant cycle (January 2003), and will begin measuring the ~~business~~compensation ~~units~~cost of stock-based awards under the fair value method. On October 4, 2002, the FASB issued an Exposure Draft of a Proposed Statement of Financial Accounting Standards, Accounting for Stock-Based Compensation-Transition and Disclosure that would amend Statement 123 and APB Opinion No. 28, Interim Financial Reporting. This proposed statement provides alternative methods of transition to Statement ~~reflect~~123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Cinergy's ~~strategic~~intends ~~vision~~to adopt the transition provisions that require expensing options prospectively in the year of adoption consistent with the original pronouncement. Existing awards will continue to follow the intrinsic value method prescribed by APB 25. The ~~revised~~anticipated ~~structure~~impact ~~has~~of ~~three~~adoption ~~business~~on our financial position and results of ~~units~~operations, asassuming ~~follows:~~award levels and fair values similar to past years, is not expected to be material. This change will primarily impact the accounting for stock options related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan, Cinergy Corp. Stock Option Plan, and Cinergy Corp. Employee Stock Purchase and Savings Plan.

~~Energy Merchant Business Unit~~ (~~Energy Merchant~~e); Operating Revenues

~~Regulated~~ Our operating ~~Businesses~~companies ~~Business~~record ~~Unit~~Operating revenues for electric and gas service when delivered to customers. Customers are billed throughout the month as both gas and electric meters are read. We recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed. This is termed "unbilled revenue" and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. The amount of unbilled revenues for Cinergy, CG&E, and PSI were $124 million, $63 million (~~Regulated~~including ~~Businesses~~$11 million for ULH&P);, and $61 million, respectively, at September 30, 2002.

~~Power Technology and Infrastructure Services Business Unit~~ (~~PTIS~~f). Related Party Transactions

~~Energy~~ To supplement ~~Merchant~~native ~~manages~~load ~~wholesale~~requirements ~~generation~~for 2002, CG&E and ~~the~~PSI ~~buying~~have ~~and~~agreed ~~selling~~to ofpurchase peaking ~~energy~~power ~~commodities~~from Cinergy Capital & Trading, Inc. ~~Energy Merchant~~(Capital & ~~earns~~Trading), ~~revenues~~an ~~from~~indirect ~~the~~wholly-owned ~~electric~~subsidiary ~~generation~~of ~~and~~Cinergy Corp., pursuant to the ~~operation~~terms of ~~power plants;~~a wholesale ~~energy~~market-based ~~trading~~tariff. For the nine months ended September 30, ~~marketing~~2002, ~~and~~payments ~~risk~~under ~~management;~~these ~~and~~contracts ~~customized~~totaled approximately $20 million for CG&E and ~~energy~~$28 million ~~solutions~~for PSI.

Regulated Businesses consists of a regulated, integrated utility, and regulated electric and gas transmission and distribution services. Regulated Businesses plans, constructs, operates, and maintains the Cinergy operating companies’ transmission and distribution systems and delivers gas and electric energy to consumers. Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy’s transmission system. 28

~~PTIS primarily manages the development, marketing and sales of our non-regulated retail energy and energy-related businesses. PTIS also manages Cinergy Ventures, LLC~~ (~~Ventures~~g)~~, Cinergy’s~~ Foreign ~~venture capital subsidiary. Ventures invests in emerging energy technologies with promising commercial applications that can benefit future Cinergy business development activities.~~ Currency

~~Financial~~ We translate ~~results~~the byassets ~~business~~and ~~unit~~liabilities ~~are~~of asforeign ~~indicated~~subsidiaries, ~~below.~~whose ~~Amounts~~functional ~~for~~currency (generally, the ~~prior~~local ~~year~~currency ~~have~~of ~~been~~the country in which the subsidiary is located) is not the ~~restated~~United toStates ~~reflect~~(U.S.) ~~segment~~dollar, ~~restructuring~~using ~~which~~the ~~includes~~appropriate exchange rate as of the ~~consolidation~~end of the ~~former~~month. ~~International~~We ~~Business~~translate ~~Unit~~income ~~into~~and expense items using the ~~Energy~~average ~~Merchant~~exchange ~~and~~rate ~~Regulated~~prevailing during the month the ~~Businesses~~respective ~~business~~transaction ~~units~~occurs. ~~This~~We ~~restructuring~~record ~~became~~translation ~~effective~~gains ~~January~~and 1losses in Accumulated other comprehensive income (loss), ~~2001~~which is a component of common stock equity.

~~Financial~~2. Common ~~results by business unit for the quarters ended September 30, 2001 and September 30, 2000:~~Stock

~~------------------------------------------------------------------------------------------------------------------------------------ Business~~ In Units ------------------------------------------------------------------------------------------------------------------------------------ Cinergy Business Units ------------------------------------------------------------------ Energy Regulated Reconciling Merchant(5) Businesses(5) PTIS Total Eliminations(1) Consolidated ------------------------------------------------------------------------------------------------------ (in thousands) Quarter ended 9/30/01 Operating revenues- External customers $2February 2002,~~549,663 (3) $ 764,140 $ 9,811 $~~ ~~3,323,614 $ - $~~Cinergy 3,323,614 Intersegment revenues 50,209 (4) - - 50,209 (50,209) - Segment profit (loss)(2) 58,354 77,277 (7,160) 128,471 - 128,471 ------------------------------------------------------------------------------------------------------------------------------------ Quarter ended 9/30/00 Operating revenues- External customers $1,334,918 (3) $ 947,894 $ 16,973 $ 2,299,785 $ - $ 2,299,785 Intersegment revenues 287,963 (4) - - 287,963 (287,963) - Segment profit (loss)(2) 35,753 61,933 (3,872) 93,814 - 93,814 ------------------------------------------------------------------------------------------------------------------------------------ (1) The Reconciling Eliminations category eliminates the intersegment revenues of Energy MerchantCorp. ~~(2) Management~~ ~~utilizes~~sold ~~segment profit (loss) to evaluate segment performance~~6. ~~(3) The~~5 million ~~increase~~shares inof ~~2001~~its ascommon ~~compared~~stock ~~to 2000 is primarily due to the increase in volumes and average price realized on wholesale commodity transactions. (4) In connection~~ with ~~deregulation~~net inproceeds ~~Ohio, beginning in 2001, certain revenues which were previously recorded through~~of ~~intersegment~~approximately ~~transfer pricing, are now directly recorded to the business segment~~$200 million. ~~(5) Effective~~ ~~January~~The ~~2001,~~net ~~electric~~proceeds ~~customer~~from ~~choice legislation was implemented in Ohio. For comparative purposes,~~ the ~~estimated~~ ~~pro~~transaction ~~forma~~were ~~adjustment~~used to ~~reflect~~repay ~~this~~a ~~effect~~portion onof ~~third quarter 2000 results would be as follows: Energy Regulated Merchant Businesses~~ short-~~------- ---------- Operating~~term ~~revenues $~~debt ~~(33,492) $ 33,492 Segment~~of ~~profit~~Cinergy ~~(loss) $ (12,518) $ 12,518 ------------------------------------------------------------------------------------------------------------------------------------~~ Corp.

~~Financial~~ As discussed ~~results~~in bythe ~~business~~2001 ~~unit~~Form 10-K, ~~for~~it ~~the~~is ~~nine~~currently ~~months~~Cinergy's ~~ended~~policy ~~September~~to ~~30,~~issue ~~2001~~new Cinergy Corp. common shares to satisfy obligations under its various employee stock plans and ~~September~~the ~~30,~~Cinergy ~~2000:~~Corp. Direct Stock Purchase and Dividend Reinvestment Plan. Cinergy has issued 2.4 million shares under these plans in 2002.

------------------------------------------------------------------------------------------------------------------------------------ Business Units ------------------------------------------------------------------------------------------------------------------------------------ Cinergy Business Units ---------------------- Energy Regulated Reconciling Merchant(5) Businesses(5) PTIS Total Eliminations(1) Consolidated -------------------------------------------------------------------------------------------------------- (in thousands) Nine months ended 9/30/01 Operating revenues- External customers $8,469,220 (3~~) $ 2,168,179 $ 34,836 $10,672,235 $~~ . Long- ~~$10,672,235 Intersegment~~term revenues 114,482 (4) - - 114,482 (114,482) - Segment profit (loss)(2) 127,959 218,923 (15,197) 331,685 - 331,685 ------------------------------------------------------------------------------------------------------------------------------------ Nine months ended 9/30/00 Operating revenues- External customers $3,043,353 (3) $ 2,556,212 $Debt 52,811 $ 5,652,376 $ - $5,652,376 Intersegment revenues 770,821 (4) - - 770,821 (770,821) - Segment profit (loss)(2) 125,465 188,940 (7,037) 307,368 - 307,368 ------------------------------------------------------------------------------------------------------------------------------------ (1) The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant. (2) Management utilizes segment profit (loss) to evaluate segment performance. (3) The increase in 2001 as compared to 2000 is primarily due to the increase in volumes and average price realized on wholesale commodity transactions. (4) In connection with deregulation in Ohio, beginning in 2001, certain revenues which were previously recorded through intersegment transfer pricing, are now directly recorded to the business segment. (5) Effective January 2001, electric customer choice legislation was implemented in Ohio. For comparative purposes, the estimated pro forma adjustment to reflect this effect on the nine months ended September 30, 2000 results would be as follows: Energy Regulated Merchant Businesses Operating revenues $ (93,693) $ 93,693 Segment profit (loss) $ (33,144) $ 33,144 ------------------------------------------------------------------------------------------------------------------------------------

~~Total~~ In ~~segment~~January 2002, ~~assets~~PSI paid at ~~September~~maturity ~~30,~~$23 million ~~2001~~principal ~~and~~amount ~~December~~of 31Medium-Term Notes, Series A. ~~2000~~The ~~are~~securities aswere ~~follows:~~not replaced by new issues of long-term debt.

~~------------------------------------------------------------------------------------------------------------------------------------~~ In ~~Business~~May 2002, ~~Units~~ an indirect, wholly-~~-----------------------------------------------------------------------------------------------------------------------------------~~ owned subsidiary of Cinergy ~~Business~~Global Units ---------------------- Regulated EnergyResources, Inc. ~~Merchant Businesses PTIS Total All~~entered Other Consolidated ---------------------------------------------------------------------------------------- (ininto ~~thousands)~~ a ~~Total~~senior ~~segment~~term ~~assets~~loan atand ~~September~~a 30junior term loan, ~~2001~~ borrowing $~~5,417,415~~ 13.1 million and $7 million,~~142~~ respectively. Each of the loans have periodic principal reduction payments,~~911 $202~~ with the senior loan having a final maturity of March 15,~~83 $12~~ 2019,~~763~~ and the junior loan having a final maturity of March 15,~~156 $49~~ 2012. In July 2002,~~462~~ borrowings under the senior and junior loans were increased to $1213.8 and $7.1 million,~~812~~ respectively. At that time,~~618~~ the annual interest ~~Total~~rate ~~segment~~on ~~assets~~the senior loan was fixed at ~~December~~6.97% ~~31,~~and ~~2000 5,948,550~~ the junior loan was fixed at 6.35%. Previously,~~162,243 176,44 12,287,240 42,488 12,329,728 ------------------------------------------------------------------------------------------------------------------------------------~~ interest on the loans was at a variable rate.

6. On September 1, ~~Earnings~~2002, ~~Per~~CG&E ~~Common~~paid ~~Share~~at ~~(EPS)~~maturity $100 million principal amount of First Mortgage Bonds, 71/4% Series.

On September 10, 2002, CG&E borrowed the proceeds from the issuance by the Ohio Air Quality Development Authority of $84 million principal amount of its State of Ohio Air Quality Development Revenue Refunding Bonds 2002 Series A, ~~reconciliation~~due September 1, 2037. The issuance consists of ~~EPS~~two $42 million totranches, ~~earnings~~with ~~per~~the ~~common~~interest ~~share~~rate ~~assuming~~on ~~dilution~~one ~~(diluted~~tranche ~~EPS)~~being isreset ~~presented~~every ~~below~~35 days ~~for~~by auction and the interest rate on the other tranche being reset every 7 days by auction. The initial interest rates for the ~~quarters~~35-day ~~ended~~and ~~September~~7-day ~~30,~~tranches ~~2001~~were 1.40% and ~~September~~1.35%, 30respectively. Proceeds from the borrowing were used on October 7, ~~2000:~~2002 to redeem, at par, two $42 million Series 1985 A&B Air Quality Development Authority State of Ohio Customized Purchase Revenue Bonds, due December 1, 2015. The redeemed bonds had been classified in Notes payable and other short-term obligations.

~~-------------------------------------------------------------------------------~~ On ~~Income Shares EPS ------------------------------------------ (in~~September 12, ~~thousands~~2002, ~~except~~PSI ~~per~~borrowed ~~share~~the ~~amounts)~~proceeds from the issuance by the Indiana Development Finance Authority of ~~Quarter~~$23 million ~~ended~~principal ~~September~~amount 30of its Environmental Refunding Revenue Bonds Series 2002A, ~~2001 EPS: Net~~due ~~Income $ 128~~March 1,~~471 159,097 $ 0~~ 2031.~~81 Effect~~ ofThe ~~dilutive~~initial ~~securities: Common~~interest ~~stock~~rate ~~options 948 Directors'~~for ~~compensation~~the ~~plans 144 Contingently~~bonds ~~issuable~~was ~~common~~1.40%. ~~stock 491~~The interest rate ~~-------------------~~ resets ~~EPS~~every -35 days ~~assuming~~by ~~dilution: Net~~auction. ~~income~~Proceeds ~~plus~~from ~~assumed~~the ~~conversions $ 128~~borrowing were used on October 1,~~471 160,680 $ 0.80 -------------------------------------------------------------------------------- Quarter~~ ~~ended~~2002 ~~September~~to 30redeem, ~~2000 EPS: Net~~at ~~Income $ 93~~par,~~814 158,938~~ the $ ~~0.59 Effect~~23 million principal amount of ~~dilutive~~Indiana ~~securities:~~Development Finance ~~Common~~Authority ~~stock~~Environmental ~~options 667 Employee~~Refunding ~~Stock~~Revenue ~~Purchase~~Bonds ~~and~~Series 1998, ~~Savings~~due ~~Plan 11 Contingently~~August 1, ~~issuable~~2028. ~~common~~The ~~stock 426 -------------------~~ redeemed ~~EPS~~bonds -had ~~assuming~~been ~~dilution: Net~~classified ~~income~~in ~~plus~~Notes ~~assumed~~payable ~~conversions $ 93,814 160,042 $ 0.58~~and other short-~~-------------------------------------------------------------------------------~~ term obligations.

Options to purchase shares of common stock are excluded from the calculation of diluted EPS when the exercise prices of these options are greater than the average market price of the common shares during the period. For the quarters ended September 30, 2001 and 2000, approximately 2.1 million and 1.7 million shares, respectively, were excluded from the diluted EPS calculation. 29

A On September 12, ~~reconciliation~~2002, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $24.6 million ~~EPS~~principal toamount ~~diluted~~of ~~EPS~~its isEnvironmental ~~presented~~Refunding ~~below~~Revenue Bonds Series 2002B, due March 1, 2019. The initial interest rate for the ~~nine~~bonds ~~months~~was ~~ended~~1.35%. ~~September~~The 30interest rate resets every 7 days by auction. Proceeds from the issuance were used on October 1, ~~2001~~2002 ~~and~~to redeem, at par, the $24.6 million principal amount of City of Princeton, Indiana ~~September~~Pollution 30Control Revenue Refunding Bonds 1996 Series, ~~2000:~~due March 1, 2019. The redeemed bonds had been classified in Notes payable and other short-term obligations.

~~-------------------------------------------------------------------------------~~ The ~~Income Shares EPS ----------------------------------------- (in~~holders ~~thousands,~~of ~~except~~the ~~per~~newly ~~share~~issued ~~amounts) Nine~~Ohio ~~months~~Air ~~ended~~Quality ~~September~~Development ~~30,~~Authority ~~2001 EPS: Net~~and ~~Income $~~Indiana ~~331,685 159,049 $ 2.08 Effect~~Development ofFinance ~~dilutive~~Authority ~~securities: Common~~bonds ~~stock~~mentioned ~~options 1,023 Directors'~~above ~~compensation~~have ~~plans 144 Contingently~~the ~~issuable~~benefit ~~common~~of ~~stock 498 --------------------~~ a ~~EPS~~financial -guaranty ~~assuming dilution:~~insurance ~~Net~~policy ~~income~~that ~~plus~~insures ~~assumed~~the ~~conversions $~~payment ~~331,685 160,714 $ 2.06 ------------------------------------------------------------------------------- Nine~~of ~~months~~principal ~~ended~~of, ~~September~~and 30interest on, ~~2000 EPS: Net~~the ~~Income $~~bonds ~~307,368 158,928 $ 1~~when due.~~93 Effect~~ ofCG&E ~~dilutive~~and ~~securities:~~PSI have ~~Common~~each ~~stock~~entered ~~options 309 Employee~~into ~~Stock~~an ~~Purchase~~insurance agreement with the bond insurer and ~~Savings~~have ~~Plan 4 Contingently~~pledged ~~issuable~~first ~~common~~mortgage ~~stock 354 --------------------~~ bonds ~~EPS~~to -secure ~~assuming~~their ~~dilution: Net~~respective ~~income~~reimbursement ~~plus~~obligations ~~assumed~~under ~~conversions $~~such ~~307,368 159,595 $ 1~~agreements.~~92 -------------------------------------------------------------------------------~~

~~Options~~ On September 23, to2002, ~~purchase~~CG&E ~~shares~~issued $500 million principal amount senior unsecured debentures due September 15, 2012, ofwith ~~common~~an ~~stock~~interest ~~are~~rate ~~excluded~~of 5.70%. Proceeds from the ~~calculation~~offering were used to repay short-term indebtedness incurred in connection with general corporate purposes including capital expenditures related to environmental compliance construction, and the repayment at maturity of ~~diluted~~$100 million ~~EPS~~principal ~~when~~amount of CG&E First Mortgage Bonds, 71/4% Series. In July 2002, CG&E executed a treasury lock with a notional amount of $250 million, which was designated as a cash flow hedge of 50 percent of the forecasted interest payments on this debt offering. The treasury ~~exercise~~lock ~~prices~~effectively fixed the benchmark interest rate (i.e., the treasury component of ~~these~~the ~~options~~interest ~~are~~rate, ~~greater~~but ~~than~~not the ~~average~~credit ~~market~~spread) ~~price~~for 50 percent of the offering from July 2002 through the ~~common~~issuance ~~shares~~date ~~during~~in order to reduce the ~~period~~exposure associated with treasury rate volatility. ~~For~~With the ~~nine~~issuance ~~months~~of ~~ended~~the ~~September 30~~debt, ~~2001~~ ~~and~~the ~~2000,~~treasury ~~approximately~~lock 2was settled.1 ~~million~~Given ~~and~~the ~~1.9~~use ~~million~~of ~~shares~~hedge accounting, ~~respectively~~this settlement is reflected in Accumulated other comprehensive income (loss) on an after-tax basis in the amount of $13 million, rather ~~were~~than ~~excluded~~a ~~from~~charge to net income. This amount will be reclassified to Interest expense over the ~~diluted~~10-year ~~EPS~~life ~~calculation~~of the related debt as interest is accrued.

74. Notes ~~Ohio~~Payable ~~Deregulation~~and Other Short-term Obligations

As In ~~discussed in the 2000 Form 10-K~~February 2002, onCinergy ~~July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No~~Corp. 3placed ~~(Electric~~a ~~Restructuring Bill)~~$600 million, ~~beginning~~364-day ~~the~~senior ~~transition~~revolving tocredit ~~electric~~facility. ~~deregulation~~This ~~and~~facility ~~customer~~replaces ~~choice~~a ~~for~~$400 million, ~~the~~364-day ~~State~~senior ofrevolving ~~Ohio.~~credit ~~The~~facility ~~Electric Restructuring~~that ~~Bill~~expired ~~created~~in February 2002; a ~~competitive~~$225 million, ~~electric~~364-day ~~retail service market~~senior ~~effective~~revolving ~~January~~credit 1,facility ~~2001.~~that ~~The~~expired ~~legislation~~in ~~provided~~March 2002; ~~for~~and a ~~market development period that began January 1~~$150 million, ~~2001,~~three-year ~~and~~senior ~~ends~~revolving nocredit ~~later~~facility ~~than~~that ~~December~~expired ~~31,~~in ~~2005~~June 2002.

~~On May 8~~ In October 2002, ~~2000,~~ CG&E ~~reached~~and aPSI ~~stipulated~~caused ~~agreement~~the ~~with~~redemption ~~the~~of ~~Public~~certain ~~Utilities Commission~~series of ~~Ohio~~variable rate pollution control notes (~~PUCO)~~tax-exempt ~~staff~~notes ~~and~~obtained ~~various~~to ~~other~~finance ~~interested~~equipment ~~parties~~or ~~with respect~~land todevelopment ~~its~~for ~~proposal~~pollution tocontrol ~~implement~~purposes) ~~electric~~with ~~customer~~a ~~choice~~principal inamount ~~Ohio~~of ~~effective January~~$84 million 1and $47.6 million, ~~2001~~respectively. OnHolders ~~August~~of ~~31,~~the ~~2000,~~notes had the ~~PUCO~~option ~~approved~~of ~~CG&E’s stipulation~~having ~~agreement.~~their ~~Two~~notes ~~parties~~redeemed ~~filed~~at ~~applications~~various ~~for~~times ~~rehearing~~ranging ~~with~~from ~~the PUCO.~~any Onbusiness ~~October~~day ~~18,~~to ~~2000,~~annually. Because the ~~PUCO~~optional ~~denied~~redemption features ~~these~~were ~~applications.~~one ~~One~~year ofor less, the ~~parties~~ ~~appealed~~notes toare ~~the~~reflected ~~Ohio~~in ~~Supreme~~Notes ~~Court~~payable and other short-term obligations in the ~~fourth~~Balance ~~quarter~~Sheets offor Cinergy, ~~2000 and~~ CG&E, ~~subsequently~~and ~~intervened~~PSI. inThe ~~that~~notes ~~case.~~were Onredeemed ~~April~~with proceeds 6,from ~~2001, CG&E~~the ~~filed~~issuance ~~for~~of ~~dismissal~~new series of ~~this~~variable ~~appeal.~~rate Onpollution ~~July~~control ~~25,~~notes ~~2001,~~that do not have the ~~Ohio Supreme~~redemption ~~Court~~features ~~denied~~mentioned ~~CG&E’s~~above, ~~motion~~and toare ~~dismiss.~~therefore ~~CG&E is~~classified ~~unable~~as Long-term todebt ~~predict~~obligations. See ~~the~~Note 3 ~~outcome~~for further discussion of ~~this~~variable ~~proceeding~~rate pollution control notes.

The August 31, 2000 order authorizes CG&E to transfer its generation assets to one or more non-regulated corporate subsidiary(ies). In addition to the regulatory approvals received from the PUCO, the IURC, and the KPSC, this transfer requires the approval of the Federal Energy Regulatory Commission (FERC). As the transfer is contingent upon CG&E receiving FERC approval and various third party consents, the timing and receipt of which are unknown, the completion date of the transfer of generation assets to non-regulated subsidiary(ies) is uncertain. 30

8. The ~~Power~~following ~~Trading~~table summarizes our Notes payable and other short-term obligations, and Notes payable to affiliated companies.

Contracts within the trading portfolio of the power marketing and trading operations are primarily with power marketers and other investor-owned utilities. The majority of these contracts are for terms of one year or less. Electric power prices can be extremely volatile, and the market can, at times, lack liquidity. Because of these issues, credit risk is generally greater than with other commodity trading, especially when dealing with new market entrants. Credit discounts are included in the determination of fair value for all open positions in the power-trading portfolio.

		September 30, 2002				December 31, 2001
		Established Lines		Outstanding		Established Lines		Outstanding
				(in millions)
Cinergy Corp.
	Revolving lines	$	1,000	$	50	$	1,175	$	599
	Uncommitted lines(1)		65		20		40		—
	Commercial paper(2)		800		311		800		125
Operating companies
	Uncommitted lines(1)		75		—		75		66
	Pollution control notes		N/A		279		N/A		279
Non-regulated subsidiaries
	Revolving lines		15		9		46		38
	Short-term debt		45		45		49		49

Cinergy Total				$	714			$	1,156
CG&E and subsidiaries
	Uncommitted lines(1)	$	15	$	—	$	15	$	—
	Pollution control notes(3)		N/A		196		N/A		196
	Money pool		N/A		3		N/A		445

CG&E Total				$	199			$	641
PSI
	Uncommitted lines(1)	$	60	$	—	$	60	$	66
	Pollution control notes(3)		N/A		83		N/A		83
	Money pool		N/A		80		N/A		422

PSI Total				$	163			$	571

(1): Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.
(2): The commercial paper program is supported by Cinergy Corp.'s revolving lines.
(3): Includes $84 million and $47.6 million for CG&E and PSI, respectively, which were redeemed in October 2002.

~~As stated in~~ In our ~~2000~~credit ~~Form 10-K~~facilities, inCinergy ~~2000 the Western U~~Corp.~~S.,~~ primarily California, began experiencing unprecedented price levels and volatility for wholesale electricity. Because of the nature of deregulation in California, California’s two largest utilities accumulated significant unpaid obligations. One of these utilities declared bankruptcy in the second quarter of 2001 and the other has ~~been~~covenanted ~~working with the state~~ to ~~finance its unpaid obligations. We continue to~~ maintain: a balanced Western U.S. portfolio and have no unrealized gain positions directly with these utilities. A portion of our Energy risk management assets and Energy risk management liabilities are with counterparties in the Western U.S. However, prices have dropped significantly in the second and third quarters of 2001. As a result of these price decreases and a declining level of outstanding contracts, our potential exposure in the Western U.S. has diminished.

•: a consolidated net worth of $2 billion; and
•: a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

~~CAUTIONARY~~ A breach ~~STATEMENTS~~of ~~REGARDING~~these ~~FORWARD-LOOKING~~covenants ~~INFORMATION~~could result in the termination of the credit 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 credit and acceleration of the related indebtedness include:

•: bankruptcy;
•: defaults in the payment of other indebtedness; and

In this report we discuss various matters that may make management’s corporate vision of the future clearer for you. This report outlines management’s goals and projections for the future. These goals and projections are considered forward-looking statements and are based on management’s beliefs and assumptions. 31

•: judgments against the company that are not paid or insured.

~~Forward-looking statements~~ The ~~involve~~latter ~~risks~~two ~~and~~events, ~~uncertainties~~however, ~~that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ~~ are ~~often~~subject ~~presented with forward-looking statements. In addition, other factors could cause actual results~~ to ~~differ materially from those indicated in any forward~~dollar-~~looking~~based ~~statement~~materiality thresholds. ~~These include:~~

~~Factors~~5. Sales ~~affecting~~of ~~operations,~~Accounts such as: unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages; unusual maintenance or repairs; unanticipated changes in fossil fuel costs, gas supply costs, or availability constraints; environmental incidents; and electric transmission or gas pipeline system constraints. Receivable

~~Legislative~~ In February 2002, CG&E, PSI, and ULH&P ~~regulatory~~replaced ~~initiatives~~their ~~regarding~~existing ~~deregulation~~agreement to sell certain of their accounts receivable and related collections. Cinergy Corp. formed Cinergy Receivables Company, LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of the ~~industry~~retail oraccounts receivable and related collections of CG&E, PSI, and ULH&P. Cinergy ~~potential~~Corp. ~~national~~does ~~deregulation~~not ~~legislation~~consolidate Cinergy Receivables since it meets the requirements to be accounted for as a qualifying special-purpose entity. The sales of receivables are accounted for under Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Statement 140).

The proceeds ~~timing~~obtained ~~and~~from ~~extent~~the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the ~~entry~~purchase price (typically approximates 25 percent of ~~additional~~the ~~competition~~total proceeds). The note is subordinate to senior loans that Cinergy Receivables obtains from commercial paper conduits controlled by unrelated financial institutions. Cinergy Receivables provides credit enhancement related to senior loans in ~~electric~~the orform ~~gas~~of over-collateralization of the purchased receivables. However, the ~~markets~~over-collateralization is calculated monthly and does not extend to the ~~effects~~entire pool of ~~continued~~receivables ~~industry~~held ~~consolidation~~by ~~through~~Cinergy ~~the~~Receivables ~~pursuit~~at any point in time. As such, these senior loans do not have recourse to all assets of ~~mergers,~~Cinergy ~~acquisitions~~Receivables. These loans provide the cash portion of the proceeds paid to CG&E, PSI, and ~~strategic alliances~~ULH&P.

This ~~Regulatory~~subordinated ~~factors~~note ~~such~~is asa ~~changes~~retained interest (right to receive a specified portion of cash flows from the sold assets) under Statement 140 and is classified within Notes receivable from affiliated companies in the ~~policies~~accompanying orBalance ~~procedures~~Sheets ~~that~~of ~~set~~CG&E, PSI, ~~rates;~~and ULH&P and is classified within Notes receivable ~~changes~~on Cinergy Corp.'s Balance Sheets. In addition, Cinergy Corp.'s investment in Cinergy Receivables constitutes a purchased beneficial interest (purchased right to receive specified cash flows, in our ~~ability~~case residual cash flows), which is subordinate to ~~recover~~the ~~capital~~retained ~~expenditures~~interests ~~for~~held ~~environmental~~by CG&E, ~~compliance~~PSI, ~~purchased~~and ~~power~~ULH&P. ~~costs~~The carrying values of the retained interests are determined by allocating the carrying value of the receivables between the assets sold and ~~investments~~the ~~made~~interests ~~under~~retained ~~traditional~~based on relative fair value. The key assumptions in estimating ~~regulation~~fair ~~through~~value ~~rates;~~are credit losses and ~~changes~~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 customer base and lack of significant concentration, and (c) the ~~frequency~~purchased beneficial interest is subordinate to all retained interests and ~~timing~~thus would absorb losses first, the allocated basis of the subordinated notes are not materially different than their face value. Interest accrues to CG&E, PSI, and ULH&P on the retained interests using the accretable yield method, which generally approximates the stated rate on the notes since the allocated basis and the face value are nearly equivalent. Cinergy Corp. records income from Cinergy Receivables ~~increases~~in a similar manner. We record an impairment charge against the carrying value of both the retained interests and purchased beneficial interest whenever we determine that an other-than-temporary impairment has occurred (which is unlikely unless credit losses on the receivables far exceed the anticipated level).

~~Financial or regulatory accounting principles or policies imposed by governing bodies.~~ 32

The ~~Political,~~key ~~legal,~~assumptions ~~and~~used ~~economic conditions and developments~~ in ~~the~~measuring ~~United States (U.S.) and~~ the ~~foreign~~retained ~~countries~~interests infor ~~which~~sales wesince ~~have~~the ainception ~~presence.~~of ~~This~~the ~~would~~new ~~include inflation~~agreement ~~rates~~are ~~and~~as ~~monetary~~follows: ~~fluctuations.~~

Changing market conditions and other factors related to physical energy and financial trading activities. These would include price, basis, credit, liquidity, volatility, capacity, transmission, currency exchange rates, interest rates, and warranty risks.

	Cinergy		CG&E and subsidiaries		PSI		ULH&P
Anticipated credit loss rate	0.6	%	0.6	%	0.5	%	1.0	%
Discount rate on expected cash flows	5.0	%	5.0	%	5.0	%	5.0	%
Receivables turnover rate(1)	13.2	%	13.6	%	12.7	%	14.2	%

(1): Receivables at period end divided by annualized sales for period.

The hypothetical ~~performance~~effect on the fair value of ~~projects~~the ~~undertaken~~retained byinterests ~~our~~assuming ~~non-regulated~~both ~~businesses~~a 10 percent and ~~the~~20 percent unfavorable variation in credit losses or discount rates is ~~success~~not ofmaterial ~~efforts~~due to ~~invest~~the inshort turnover of receivables and ~~develop~~historically ~~new~~low ~~opportunities~~credit loss history.

~~Availability~~ CG&E retains servicing responsibilities for its role as a collection agent on the amounts due on the sold receivables. However, Cinergy Receivables assumes the risk of collection on the purchased receivables without recourse to CG&E, orPSI, and ~~cost~~ULH&P in the event of a loss. While no direct recourse to CG&E, PSI, ~~capital~~and ULH&P exists, these entities do risk loss in the event collections are not sufficient to allow for full recovery of their retained interests. No servicing asset or liability is recorded since the servicing fee paid to CG&E approximates a market rate.

The ~~Employee~~following ~~workforce~~table ~~factors,~~shows ~~including~~the ~~changes~~gross inand ~~key~~net ~~executives~~receivables sold, ~~collective bargaining~~retained ~~agreements~~interest, ~~with~~and ~~union~~purchased ~~employees,~~beneficial ~~and~~interest ~~work~~as ~~stoppages~~of September 30, 2002.

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

		Cinergy		CG&E and subsidiaries		PSI		ULH&P
				(in millions)
Receivables sold as of period end		$	438	$	252	$	186	$	36
Less: Retained Interest			76		42		34		6

	Net receivables sold as of period end	$	362	$	210	$	152	$	30
Purchased beneficial interest		$	9	$	—	$	—	$	—

~~Costs~~ A decline ~~and~~in ~~effects~~the oflong-term ~~legal~~senior ~~and~~unsecured ~~administrative~~credit ~~proceedings,~~ratings ~~settlements~~of CG&E, ~~investigations~~PSI, ~~and~~or ULH&P ~~claims.~~below investment ~~Examples~~grade ~~can~~would beresult ~~found~~ in ~~Note~~a 4termination of the ~~"Notes~~sale toprogram ~~Financial~~and ~~Statements"~~discontinuance inof ~~"Part~~future ~~I. Financial~~sales of receivables, and could prevent ~~Information~~Cinergy Receivables from borrowing additional funds from commercial paper conduits."

~~Changes~~6. Energy inTrading ~~international,~~Credit ~~federal, state, or local legislative requirements, such as changes in tax laws, tax rates, and environmental laws and regulations.~~ Risk

~~Unless~~ Cinergy's weextension ~~otherwise~~of ~~have~~credit for energy marketing and trading is governed by a Corporate Credit Policy. Written ~~duty~~guidelines todocument dothe somanagement approval levels for credit limits, ~~the~~evaluation ~~Securities~~of creditworthiness, and ~~Exchange~~credit ~~Commission’s~~risk ~~(SEC)~~mitigation ~~rules~~procedures. doExposures ~~not require~~to ~~forward-looking~~credit ~~statements~~risks toare bemonitored ~~revised~~daily orby ~~updated~~the Corporate ~~(whether~~Credit asRisk afunction. ~~result~~ As of ~~changes~~September 30, in2002, ~~actual~~approximately ~~results,~~98 percent ~~changes~~of inthe ~~assumptions,~~credit orexposure ~~other~~related ~~factors~~to ~~affecting~~energy trading and marketing activity was with counterparties rated ~~the~~Investment ~~statements)~~Grade. ~~Our~~Energy ~~forward-looking~~commodity ~~statements~~prices ~~reflect~~can ~~our~~be ~~best~~extremely ~~beliefs~~volatile asand of the ~~time~~market ~~they~~can, ~~are~~at ~~made~~times, ~~and~~lack ~~may~~liquidity. ~~not~~Because beof ~~updated~~these issues, credit risk for ~~subsequent~~energy ~~developments~~commodities is generally greater than with other commodity trading.

~~Item~~ In December 2001, 2Enron Corp. ~~Management's~~(Enron) ~~Discussion~~filed ~~and~~for ~~Analysis~~protection under Chapter 11 of ~~Financial~~the ~~Condition~~U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and ~~Results~~the applicable provisions of the ~~Operations~~U.S. Bankruptcy Code, as approved by the court. While we cannot predict the court's resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact on our financial

~~In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,” or “us.”~~ 33

~~INTRODUCTION~~ position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for utilizing the normal exemption under Statement 133 (see Note 1(d)(iv)). These contracts were recognized at fair value when the contracts were terminated in the fourth quarter of 2001.

~~In Management’s~~ We ~~Discussion~~continually review and ~~Analysis~~monitor ~~(MD&A),~~our wecredit ~~explain~~exposure ~~our~~to ~~general~~all ~~operating environment~~counterparties and secondary counterparties. If appropriate, aswe ~~well~~may asadjust our ~~liquidity,~~credit ~~capital~~reserves ~~resources,~~to ~~and~~attempt ~~results~~to ofcompensate for ~~operations.~~increased ~~Specifically,~~credit werisk ~~discuss~~within the ~~following:~~industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty's financial status or public debt ratings.

~~factors~~7. Commitments ~~affecting current~~ and ~~future operations;~~ Contingencies

~~why revenues and expenses changed from period to period; and~~ (a) Guarantees

~~how~~ Cinergy ~~the~~Corp. ~~above~~has ~~items~~made ~~affect~~separate guarantees to certain counterparties regarding performance of commitments by our ~~overall~~consolidated subsidiaries, ~~financial~~unconsolidated ~~condition~~subsidiaries, and joint ventures. We are subject to a Securities and Exchange Commission order under the Public Utility Holding Company Act of 1935, as amended, which limits the amount we can have outstanding under guarantees at any one time to $2 billion. As of September 30, 2002, we had $547 million outstanding under the guarantees issued, of which approximately 75 percent represents guarantees of obligations reflected on Cinergy's Consolidated Balance Sheets. These outstanding guarantees relate to subsidiary and joint venture indebtedness and performance commitments.

~~ORGANIZATION~~(b) Ozone Transport Rulemakings

~~Cinergy Corp.~~ In June 1997, ~~a Delaware~~the ~~corporation~~Ozone ~~created~~Transport inAssessment ~~October~~Group, ~~1994~~which consisted of 37 states, ~~owns~~made ~~all~~a ~~outstanding~~wide ~~common~~range ~~stock~~ of ~~The~~recommendations ~~Cincinnati~~to ~~Gas~~the &U.S. ~~Electric~~Environmental ~~Company~~Protection Agency (~~CG&E~~EPA) ~~and~~to ~~PSI Energy,~~address ~~Inc.~~the ~~(PSI),~~impact ~~both~~ of ~~which~~ozone ~~are~~transport ~~public~~on ~~utility~~serious ~~subsidiaries~~non-attainment areas (~~operating companies).~~geographic Asareas adefined ~~result~~by ofthe ~~this~~EPA ~~ownership,~~as wenon-compliant ~~are~~with ~~considered~~ozone astandards) ~~utility~~in ~~holding company.~~the ~~Because~~Northeast, weMidwest, ~~are~~and aSouth. Ozone ~~holding~~transport ~~company~~refers ~~whose~~to ~~utility~~wind-blown ~~subsidiaries~~movement ~~operate~~of ~~in multiple~~ozone ~~states,~~and weozone-causing ~~are~~materials ~~registered~~across ~~with~~city and ~~are~~state ~~subject~~boundaries. toIn ~~regulation~~late by1997, the ~~SEC under~~EPA ~~the~~published ~~Public~~a ~~Utility~~proposed ~~Holding~~call ~~Company~~for ~~Act~~revisions ofto ~~1935~~State Implementation Plans (~~PUHCA~~SIP), asfor ~~amended~~achieving emissions reductions to address air quality concerns. ~~Our other~~The ~~principal~~EPA ~~subsidiaries~~must ~~are:~~approve all SIPs.

~~Cinergy~~ (i) Nitrogen ~~Services,~~Oxide ~~Inc.~~ (~~Services~~NOX ) -SIP ~~is a service company that provides our regulated and non-regulated subsidiaries with a variety of centralized administrative, management, and support services;~~ Call

~~Cinergy~~ In October 1998, ~~Investments~~the EPA finalized its ozone transport rule, ~~Inc~~also known as the NOX SIP Call. ~~(Investments)~~It -applied ~~holds~~to ~~most~~22 states in the Eastern half of the U.S., including the three states in which our ~~domestic~~electric ~~non-regulated~~utilities operate, ~~energy~~and proposed a model NOX emission allowance-~~related~~trading program. This rule recommended states reduce NOX emissions primarily ~~businesses~~from industrial and ~~investments;~~utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate NOX reductions and, at the discretion of the state, a NOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent NOX reductions by May 1, 2003, if states failed to revise their SIPs.

~~Cinergy~~ Ohio, Indiana, ~~Global~~a ~~Resources~~number of other states, ~~Inc.~~and -various ~~holds~~industry ~~our~~groups ~~international~~(some ~~businesses~~of ~~and~~which ~~investments~~we ~~and~~are ~~directs~~a ~~our renewable~~member), ~~energy~~filed ~~investing~~legal ~~activities~~challenges (to the NOX SIP Call with the U.S. Circuit Court of Appeals for ~~example,~~the ~~wind~~District ~~farms~~of Columbia (Court of Appeals); .

~~Cinergy~~ Following a ~~Technologies,~~number ~~Inc.~~of -rulings ~~primarily~~and ~~holds~~appeals, ~~our~~in ~~portfolio~~August 2000, the Court of ~~technology~~Appeals ~~related~~extended ~~investments;~~the deadline for NOX reductions to May 31, 2004. The states and other groups sought review of the Court of Appeals ruling by the U.S. Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to grant that review.

~~Cinergy~~ In June 2001, ~~Wholesale~~the ~~Energy,~~Court ~~Inc.~~of -Appeals ~~was~~remanded ~~formed~~portions toof ~~act~~the asNOX aSIP ~~holding~~Call ~~company~~to the EPA for ~~our~~reconsideration ~~energy~~of ~~merchant~~how growth was factored into the state NOX ~~businesses~~budgets. On May 1, ~~including~~2002, ~~production~~the EPA published, asin the ~~generation~~Federal ~~assets~~Register, ~~eventually~~a ~~become~~final ~~unbundled~~rule ~~from~~reaffirming ~~the utility~~its ~~subsidiaries.~~ growth factors and state NOX budgets,

CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana. It has three wholly-owned utility subsidiaries and two wholly-owned non-utility subsidiaries. CG&E’s principal utility subsidiary, The Union Light, Heat and Power Company (ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky. CG&E’s other subsidiaries are insignificant to its results of operations. 34

~~PSI~~ with additional explanation. The states of West Virginia and Illinois, analong ~~Indiana corporation~~with various industry groups (some of which we are a member), ishave challenged the growth factors and state NOX budgets in an ~~electric~~action ~~utility~~filed ~~that~~in ~~provides~~the ~~service~~Court of Appeals. It is unclear when the Court of Appeals will reach a decision in ~~north~~this ~~central~~case, or whether this decision will result in an increase or decrease in the ~~central~~size of the NOX reduction requirement, ~~and~~or ~~southern~~a ~~Indiana~~deferral of the May 31, 2004 compliance deadline.

The states ~~majority~~of Indiana and Kentucky developed final NOX SIP rules in response to the NOX SIP Call, through cap and trade programs, in June and July of ~~our~~2001, respectively. ~~operating~~On ~~revenues~~November 8, ~~are~~2001, ~~derived~~the ~~from~~EPA approved Indiana's SIP rules, which became effective December 10, 2001. On April 11, 2002, the ~~sale~~EPA proposed direct final approval of Kentucky's ~~electricity~~rules and they became effective on June 10, 2002. The state of Ohio completed its NOX SIP rules in response to the ~~sale~~NOX ~~and/or~~SIP Call on July 8, 2002, with ~~transportation~~an effective date of ~~natural~~July 18, ~~gas~~2002, and the EPA's approval is expected later this year. Cinergy's current plans for compliance with the EPA's NOX SIP Call would also satisfy compliance with Indiana's and Kentucky's SIP rules and Ohio's proposed rules.

In On September 25, ~~early 2001~~2000, weCinergy announced ~~certain~~ ~~organizational~~a ~~changes~~plan ~~which~~for ~~further~~its ~~aligned~~subsidiaries, ~~the~~CG&E ~~business~~and PSI, ~~units~~ to invest in ~~reflect~~pollution ~~Cinergy’s~~control ~~strategic~~equipment ~~vision~~and other methods to reduce NOX emissions. The ~~revised~~current ~~structure~~estimate ~~reflects~~of additional expenditures for ~~three~~this ~~business~~investment ~~units,~~is asapproximately ~~follows~~$350 million (in nominal dollars) and includes the following:

•: install selective catalytic reduction units (SCR) at several different generating stations;
•: install other pollution control technologies, including new computer software, at all generating stations;
•: make combustion improvements; and
•: utilize market opportunities to buy and sell NO_X allowances.

SCRs ~~Energy~~are ~~Merchant~~the ~~Business~~most ~~Unit~~proven ~~(Energy~~technology ~~Merchant)~~currently –available ~~operates~~for ~~power plants,~~reducing ~~both~~NOX ~~domestically~~emissions ~~and~~produced ~~abroad,~~in ~~and~~coal-fired ~~conducts~~generating ~~all~~stations. ~~wholesale energy marketing, trading, origination and risk management services;~~

~~Regulated Businesses Business Unit~~ (~~Regulated Businesses~~ii) Section 126 – operates all gas and electric transmission and distribution services, both domestically and abroad, and is responsible for all regulatory planning for the regulated utility businesses of CG&E, PSI, and ULH&P; and Petitions

In ~~Power~~February 1998, ~~Technology~~several ~~and~~northeast ~~Infrastructure~~states ~~Services~~filed ~~Business~~petitions ~~Unit~~seeking the EPA's assistance in reducing ozone in the Eastern U.S. under Section 126 of the Clean Air Act (~~PTIS~~CAA) –. ~~originates~~The ~~and~~EPA ~~manages~~believes that Section 126 petitions allow a ~~portfolio~~state ofto ~~emerging~~claim ~~energy~~that ~~businesses.~~sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions.

~~See~~ In December 1999, ~~Note~~the 5EPA granted four Section 126 petitions relating to NOX emissions. This ruling affected all of ~~the~~our ~~"Notes~~Ohio and Kentucky facilities, as well as some of our Indiana facilities, and requires us to ~~Financial~~reduce ~~Statements"~~our inNOX ~~"Part~~emissions Ito a certain level by May 2003. ~~Financial~~ ~~Information~~In May 2001," the Court of Appeals substantially upheld a challenge to the Section 126 requirements, and remanded portions of the rule to the EPA for ~~financial~~reconsideration ~~information~~of how growth was factored into the emission limitations. On August 24, 2001, the Court byof ~~business~~Appeals ~~unit~~temporarily suspended the Section 126 compliance deadline, pending the EPA's reconsideration of growth factors. On May 1, 2002, the EPA issued a final rule extending the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NOX SIP Call.

~~LIQUIDITY~~ (iii) State Ozone Plans

In On November 15, 1999, the ~~“Liquidity”~~ ~~section~~states of Indiana and Kentucky (along with Jefferson County, weKentucky) ~~discuss~~jointly ~~environmental~~filed ~~issues~~an asamendment to their attainment demonstration on how they ~~relate~~intend to ~~our~~bring ~~current~~the Greater Louisville Area (including Floyd and ~~future~~Clark ~~cash~~Counties ~~needs~~in Indiana) into attainment with the one-hour ozone standard. InThe Greater Louisville Area has since attained the one-hour ~~“Capital~~ozone ~~Resources”~~standard, ~~section~~and on October 23, we ~~discuss~~2001, ~~how~~the weEPA ~~intend~~re-designated tothe ~~meet~~area ~~these~~as ~~capital~~being ~~requirements~~in attainment with that standard. Previous SIP amendments called for, among other things, statewide NOX reductions from utilities in

~~Environmental Issues~~35

~~Ambient~~ Indiana, ~~Air~~Kentucky, ~~Standards~~and surrounding states which are less stringent than the EPA's NOX SIP Call. Indiana and Kentucky committed to adopt utility NOX control rules by December 2000 that would require controls be installed by May 2003. However, Indiana halted the rulemaking for NOX controls at this level, but completed NOX SIP Call level reduction regulations. Kentucky has completed its rulemaking, and issued a final rule that changed the compliance deadline to mirror the NOX SIP Call of May 31, 2004. However, on March 18, 2002, Kentucky completed the withdrawal of this regulation in favor of its completed and more restrictive regulations in response to the NOX SIP Call.

~~As discussed in the 2000~~ See ~~Form 10-K, in 1997 the U.S. Environmental Protection Agency~~ (~~EPA~~e) below ~~revised the National Ambient Air Quality Standards~~ for ~~ozone~~a ~~and~~discussion ~~fine~~of ~~particulate~~the ~~matter. The~~tentative EPA has estimated that it will take up to five years to collect sufficient ambient air monitoring data to determine fine particulate matter non-attainment areas. A fine particulate monitoring network was put in place during 1999 and 2000. Following identification of non-attainment areasAgreement, the ~~states~~implementation ~~will identify the sources~~ of ~~particulate~~which ~~emissions~~could ~~and~~affect ~~develop~~our ~~emission~~strategy ~~reduction~~for ~~plans.~~compliance ~~These plans~~with ~~may be state-specific or regional. We currently cannot predict~~ the ~~exact amount~~final ~~and~~NOX ~~timing~~SIP ~~of required reductions~~Call.

~~On May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia~~ (~~Court of Appeals~~c) New ~~ruled that~~Source ~~the~~Review EPA’s final rule establishing the new eight-hour ozone standard and the fine particulate matter standard constituted an invalid delegation of legislative authority. In June 1999, the EPA appealed the decision. On October 29, 1999, the full Court of Appeals rejected the EPA’s request for reconsideration. In January 2000, the EPA appealed to the U.S. Supreme Court (~~Supreme Court~~NSR) and on February 27, 2001, the Supreme Court reversed the Court of Appeals’ ruling. However, the Supreme Court invalidated the EPA’s implementation procedure for the portion of the case dealing with the eight-hour ozone standard. The EPA currently is evaluating approaches for implementing the eight-hour ozone standard in accordance with the Supreme Court’s opinion. Meanwhile, the Court of Appeals continues to consider the validity of the eight-hour ozone standard and the fine particulate matter standard, as a number of issues that were raised by the parties were not addressed in its original opinion, invalidating those standards. The parties will file supplemental briefs on these issues, and further oral argument may be held. We currently cannot determine the outcome of this litigation or of future EPA actions in response to the litigation and the effects on future emissions reduction requirements.

~~See~~ The CAA's ~~Notes~~NSR 4(provisions require that a), ~~(b),~~company ~~(c), (d),~~obtain ~~and~~a ~~(e),~~pre-construction ~~respectively,~~permit ofif ~~the~~it ~~“Notes~~plans to ~~Financial~~build ~~Statements”~~a ~~in “Part~~new I.stationary ~~Financial~~source ~~Information”~~of ~~for~~pollution or make a ~~discussion~~major ofmodification ~~other~~to an ~~environmental~~existing ~~issues~~facility, unless the changes are exempt.

~~Other~~ On September 15, ~~Investing~~1999, ~~Activities~~November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying Cinergy and CG&E of their intent to sue under the citizens' suit provisions of the CAA. These states alleged violations of the CAA by constructing and continuing to operate a major modification of CG&E's W.C. Beckjord Generating Station (Beckjord Station) without obtaining the required NSR pre-construction permits.

~~Foreign~~ On November 3, ~~Utility~~1999, ~~Companies~~the EPA sued a number of holding companies and electric utilities, including Cinergy, CG&E, and PSI, in various U.S. District Courts (~~FUCOs~~District Court)~~/Exempt~~. ~~Wholesale~~The Cinergy, ~~Generators~~CG&E, and PSI suit alleged violations of the CAA at two of our generating stations relating to NSR and New Source Performance Standards requirements. The suit sought (~~EWGs~~1) injunctive ~~Investment~~relief ~~Limitations~~to require installation of pollution control technology on each of the generating units at Beckjord Station and at PSI's Cayuga Generating Station (Cayuga Station), and (2) civil penalties in amounts of up to $27,500 per day for each violation.

As On March 1, ~~discussed~~2000, in the ~~2000 Form~~EPA ~~10-K,~~filed ~~our~~an ~~ability~~amended tocomplaint ~~invest~~against inCinergy, ~~growth initiatives~~CG&E, ~~such as EWGs~~ and PSI. ~~FUCOs,~~The amended iscomplaint ~~limited~~added byalleged ~~certain~~violations ~~legal~~of ~~and~~the ~~regulatory~~NSR requirements, ~~including~~of the ~~PUHCA.~~CAA ~~In March~~at ~~1998,~~two ~~the~~of ~~SEC~~our ~~granted~~generating usstations ~~authority~~contained ~~under PUHCA to invest~~ in ~~EWGs~~a ~~and~~notice ~~FUCOs~~of inviolation an(NOV) ~~aggregate~~filed ~~amount~~by ~~equal~~the toEPA ~~our~~on ~~consolidated retained earnings~~November 3, ~~as determined from time to time~~1999. ~~Following~~It ~~our~~also ~~request~~added claims for anrelief ~~increase~~of ~~in investment~~alleged ~~authority,~~violations inof ~~May~~nonattainment ~~2001~~NSR, ~~the~~Indiana ~~SEC~~and ~~issued~~Ohio ~~a supplemental order~~SIPs, ~~authorizing~~ usand toparticulate ~~invest~~matter anemission ~~additional~~limits (as $2discussed ~~billion~~below in ~~EWGs and FUCOs, in addition to an amount equal to our consolidated retained earnings~~(d)).

~~CAPITAL~~ The amended ~~RESOURCES~~complaint sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station and PSI's Cayuga Station, Wabash River Generating Station, and Gallagher Generating Station, and such other measures as necessary, and (2) civil penalties in amounts of up to $27,500 per day for each violation.

We On March 1, ~~meet~~2000, ~~our~~the ~~capital~~EPA ~~requirements~~also ~~through~~filed an amended complaint in a ~~combination~~separate lawsuit alleging violations of ~~internally~~the ~~generated~~CAA ~~funds~~relating to NSR, Prevention of Significant Deterioration (PSD), and Ohio ~~debt~~SIP ~~issuances.~~requirements Weregarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light ~~expect~~Company (DP&L), and CG&E. The EPA is seeking injunctive relief and civil penalties of up to ~~meet~~$27,500 ~~our~~per ~~future~~day ~~capital~~for ~~needs~~each ~~through~~violation. aThis ~~combination~~suit is being defended by CSP. On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that occurred more than five years prior to the filing of ~~internally~~the ~~and~~complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years ~~externally~~before ~~generated~~the ~~funds~~filing of the complaint. Thus, ~~including~~if the ~~issuance~~plaintiffs prevail in their claims, any calculation for penalties will not start on the date of ~~debt~~the ~~and/or~~alleged ~~equity~~violations, unless those alleged violations ~~securities~~occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

In November 2001, Cinergy Corp. chose to reinstitute the practice of issuing new Cinergy Corp. common shares to meet its obligations under the various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. This replaces the previous practice of purchasing open market shares to fulfill plan obligations.36

~~Debt~~ On June 28, 2000, the EPA issued an NOV to Cinergy, CG&E, and PSI for alleged violations of NSR, PSD, and SIP requirements at CG&E's Miami Fort Generating Station and PSI's Gibson Generating Station. In addition, Cinergy and CG&E have been informed by DP&L, the operator of J.M. Stuart Generating Station (Stuart Station), that on June 30, 2000, the EPA issued an NOV to DP&L for alleged violations of NSR, PSD, and SIP requirements at this station. CG&E owns 39 percent of the Stuart Station. The NOVs indicated the EPA may (1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

~~Cinergy~~ On August 2, ~~Corp.~~2001, ~~has current~~the ~~authorization~~states ~~from~~of ~~the~~New ~~SEC~~York, ~~under~~New ~~the~~Jersey, ~~PUHCA~~and Connecticut filed an assented to ~~increase~~motion ~~its~~to ~~total capitalization~~intervene atin ~~December~~this ~~31,~~litigation. ~~1999~~Their ~~(excluding~~motion ~~retained~~was ~~earnings~~granted ~~and~~by ~~accumulated~~the District Court ~~other~~on ~~comprehensive~~August 3, ~~income)~~2001. byThe states' proposed complaint is an ~~additional~~exhibit $5to ~~billion~~the motion to intervene. Cinergy, CG&E, ~~through~~and ~~issuance~~PSI ofare ~~any combination~~in the process of ~~equity~~evaluating ~~and~~the ~~debt~~states' ~~securities.~~complaint, ~~This~~and ~~increased~~their ~~authorization~~answer is ~~subject~~ due to ~~certain~~be filed ~~conditions,~~by ~~including~~November 30, ~~among~~2002. ~~others,~~At ~~that~~this ~~common~~time, ~~equity comprises~~Cinergy, atCG&E, ~~least~~and PSI ~~30%~~are ofunable ~~Cinergy~~to ~~Corp.‘s~~determine ~~consolidated~~the ~~capital~~effect, ~~structure~~ ~~and~~if ~~that~~any, ~~Cinergy~~this ~~Corp.,~~filing ~~under~~will ~~certain~~have ~~circumstances,~~on ~~maintains an~~the ~~investment~~issues ~~grade~~affecting ~~rating~~us onregarding ~~its~~NSR, ~~senior~~as ~~debt~~framed ~~obligations~~in the EPA's amended complaint.

~~Short-term~~ On January 17, ~~Debt~~2002, the Hoosier Environmental Council and the Ohio Environmental Council (Environmental Groups) filed an unopposed motion to intervene as plaintiffs in this litigation. The motion was granted by the District Court on March 19, 2002, and the complaint of the Environmental Groups' was filed on May 1, 2002. Cinergy, CG&E, and PSI are in the process of evaluating the Environmental Groups' complaint, and their answer is due to be filed by November 30, 2002. At this time, Cinergy, CG&E, and PSI are unable to determine the effect, if any, this filing will have upon the issues affecting us regarding NSR, as framed in the EPA's amended complaint.

In On July 18, ~~connection~~2002, ~~with~~the U.S. District Court for the ~~current~~ ~~SEC~~Southern ~~authorization~~District of Indiana (Indiana District Court), ~~Cinergy~~issued ~~Corp.~~an ~~has~~order ~~$1.5~~on ~~billion~~a motion for partial summary judgment in ~~established~~a similar case ~~lines~~involving ofthe ~~credit~~Southern Indiana Gas and Electric Company (SIGECO). AsThe narrow issue presented by SIGECO's motion was at what point does an owner or operator of ~~September~~facilities 30have to determine whether a pre-construction permit is required under the CAA. The Indiana District Court, ~~2001~~relying in part upon a decision issued by the Environmental Appeals Board in a similar case involving the Tennessee Valley Authority, ~~$633~~ruled ~~million~~that ~~was~~the ~~unused~~owner or operator must review evidence of the projected post-project emissions increases to determine if the pre-construction permit is required, and ~~available~~may not rely upon evidence of actual post-project emissions. The Indiana District Court is the same court in which Cinergy's case is pending, so it could be expected that this order would influence a decision upon any similar motion filed by Cinergy. No such motion is pending at this date. At this time Cinergy cannot predict the impact any such ruling might have on ~~these~~its ~~lines~~financial position or results of operations.

On ~~March 21~~ July 26, ~~2001~~2002, ~~Cinergy~~ ~~Corp.~~the ~~placed~~Indiana District Court also issued an order on a ~~$500~~motion ~~million,~~for ~~364~~partial summary judgment in the SIGECO case. The issue presented by SIGECO's motion was whether the general federal five-~~day~~year ~~senior~~statute ~~revolving~~of ~~credit~~limitations bars an action for civil penalties for allegedly unlawful construction projects that were completed more than five years prior to the ~~facility~~filing of suit. ~~Also,~~The Indiana District Court held that an NSR preconstruction violation accrues on ~~May~~the 4,first ~~2001,~~day ~~Cinergy~~of ~~Corp.~~construction ~~placed~~without a ~~$400 million~~permit, and continues only through the end of construction. ~~three-year~~Accordingly, ~~senior~~the ~~revolving~~government ~~credit~~may ~~facility~~not collect civil penalties for allegedly unlawful projects for which ~~replaced~~construction ended more than five years before the filing of an enforcement action. Cinergy is not ~~Corp.‘s~~aware ~~$400~~that ~~million,~~any ~~five-year~~notice ~~revolving~~of ~~credit~~appeal ~~facility~~has been filed regarding that ~~expired~~order. Cinergy will file a similar motion if the parties fail to enter into a consent decree to settle all issues. At this time Cinergy cannot predict the impact on ~~May~~our 6,financial ~~2001,~~position ~~and~~or aresults ~~$200~~of ~~million~~operations, ~~three-year~~although ~~revolving~~the ~~credit~~amount ~~facility~~of penalties, if any, that could ~~expired~~potentially onbe ~~July~~awarded 20by the Indiana District Court if the ruling is not reversed, ~~2001.~~would be significantly smaller than the amount claimed by the EPA in its amended complaint against Cinergy.

Our non-regulated subsidiaries have the ability to borrow funds from Cinergy Corp. if the need arises. Certain of our non-regulated subsidiaries also have $13 million of established lines of credit, of which $4 million remained unused and available. 37

~~Our~~ On October 25, ~~operating~~2002, ~~companies~~the Indiana District Court also issued an order on a motion for summary judgment in the SIGECO case. The issue presented by SIGECO's motion was whether or not the Government violated the Congressional Review of Agency Rule Making Act, 5 U.S.C. Section 801, et seq. (CRA) by establishing a new agency rule ~~CG&E~~without ~~and~~submitting ~~PSI~~a report to Congress about the rule as required by the CRA. SIGECO had argued that, ~~have~~at ~~established~~least ~~uncommitted~~since ~~lines~~the filing of ~~credit~~the NSR lawsuit against it in November 1999, the EPA was interpreting more strictly the NSR routine maintenance exemption that had been validated by the Seventh Circuit Court of Appeals in Wisconsin Electric Power Co. v. ~~$15~~Reilly, ~~million~~893 F.2d 901 (7th Cir. 1990), and ~~$60~~that ~~million~~this new, ~~respectively~~stricter interpretation in effect established a new agency rule. In denying SIGECO's motion, the Indiana District Court held that SIGECO had failed to demonstrate that the EPA had changed its longstanding interpretation of the NSR routine maintenance exemption. As the Indiana District Court is the same court in which ~~$15~~Cinergy's ~~million~~case ~~for~~is pending, it could be expected that this order would influence a decision upon any similar motion filed by Cinergy. However, ~~CG&E~~ ~~and~~no ~~$14~~such ~~million~~motion ~~for~~is ~~PSI~~pending ~~remained~~at ~~unused~~this ~~and~~date. ~~available~~Cinergy cannot predict the impact any such ruling might have on its financial position or results of operations.

In On October 4, ~~May 2001~~2002, ~~CG&E~~ ~~filed an application with~~ the ~~Public~~Indiana ~~Utilities~~District ~~Commission~~Court ~~of Ohio~~issued ~~(PUCO)~~a toRevised ~~increase~~Case ~~its~~Management ~~short-term~~Plan ~~debt~~in ~~authority~~Cinergy's tocase ~~$600~~that ~~million~~sets ~~and~~forth ~~on June 28, 2001,~~ the ~~PUCO~~dates ~~granted this request. On April 6, 2001, Cinergy~~by ~~Corp.~~which ~~filed~~various anevents ~~application~~in ~~with~~ the ~~SEC~~litigation, tosuch ~~increase~~as ~~PSI’s~~discovery and ~~ULH&P’s~~ ~~short-term~~the ~~debt~~filing ~~authority~~of todispositive ~~$600~~motions, ~~million~~must ~~and~~be ~~$65 million, respectively~~completed. OnConsistent ~~August~~with 2,the ~~2001~~plan, ~~the~~on ~~SEC granted our request effective immediately. As of September 30~~October 9, ~~2001~~2002, ~~our~~the ~~operating~~Indiana ~~companies~~District ~~had~~Court ~~regulatory~~set ~~authority~~the tocase ~~borrow up to a total of $1.27 billion in short-term debt ($671 million~~ for ~~CG&E~~trial ~~and~~by ~~its~~jury ~~subsidiaries,~~commencing ~~including~~on ~~$65 million for ULH&P~~October 4, ~~and $600 million for PSI~~2004.)

~~Commercial~~ See (e) below ~~Paper~~for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.

~~Long-term~~(d) Beckjord ~~Debt~~Station NOV

~~Under the PUHCA~~ On ~~authorization~~November 30, ~~mentioned above~~1999, ~~we are able to issue and sell long-term debt at~~ the ~~parent~~EPA ~~holding~~filed ~~company~~an ~~level.~~NOV Inagainst ~~May~~Cinergy ~~2001,~~and CG&E, ~~filed~~alleging anthat ~~application~~emissions ~~with~~of ~~the~~particulate ~~PUCO~~matter toat ~~increase~~the ~~its~~Beckjord ~~long-term~~Station ~~debt~~exceeded ~~authority~~the toallowable ~~$400 million~~limit. ~~and~~The onNOV ~~June~~indicated ~~28,~~the ~~2001,~~EPA ~~the~~may ~~PUCO~~(1) issue ~~granted~~an ~~this~~administrative ~~request.~~penalty Asorder, ofor ~~September~~(2) file a ~~30,~~civil ~~2001,~~action ~~Cinergy~~seeking ~~Corp.~~injunctive ~~had~~relief ~~$900~~and ~~million~~civil penalties of ~~long-term~~up ~~debt~~to ~~outstanding.~~$27,500 Asper ~~of September~~day ~~30,~~for ~~2001,~~each ~~CG&E,~~violation. ~~PSI,~~The ~~and~~allegations ~~ULH&P~~contained ~~have remaining~~in ~~state~~this ~~regulatory~~NOV ~~authority~~were ~~for~~incorporated ~~long-term~~within ~~debt~~the ~~issuances~~March 1, of2000 ~~$400~~amended ~~million~~complaint, ~~$21~~as ~~million,~~discussed ~~and~~in ~~$30~~(c) above. ~~million~~On June 22, ~~respectively.~~2000, ~~PSI~~the ~~intends~~EPA toissued ~~file~~ an ~~application~~NOV ~~with~~and ~~the~~a ~~Indiana~~finding ~~Utility~~of ~~Regulatory~~violation ~~Commission~~ (~~IURC~~FOV) ~~requesting an~~alleging ~~increase~~additional inparticulate ~~long-term~~emission ~~debt~~violations ~~issuance~~at ~~authority~~Beckjord upStation ~~to $400 million. In July~~and ~~2001,~~offered ~~Cinergy~~us ~~Corp.~~an ~~filed~~opportunity ato ~~registration~~meet ~~statement~~and ~~with~~discuss the ~~SEC requesting~~allegations ~~authority~~and tocorrective ~~issue~~measures. upThe toNOV/FOV ~~$500~~indicated ~~million~~the inEPA ~~unsecured~~may ~~debt~~issue ~~and~~an inadministrative ~~August 2001~~compliance order, issue ~~the~~an ~~SEC~~administrative ~~approved~~penalty ~~the~~order, ~~registration~~or ~~statement~~bring ~~and~~a ~~deemed~~civil itor ~~effective.~~criminal ~~On September 12, 2001, Cinergy Corp~~action. ~~issued~~See ~~$500~~(e) below ~~million~~for ~~principal~~a ~~amount~~discussion of ~~debentures~~ ~~under~~ the ~~previously~~tentative ~~approved~~EPA ~~registration statement. We may~~Agreement, atwhich ~~any time,~~relates ~~request~~to ~~additional~~matters ~~long-term~~discussed ~~debt~~within ~~authorization,~~this ~~which is subject to regulatory approval~~note.

~~Variable~~(e) EPA ~~Rate Pollution Control Notes~~Agreement

On December 21, 2000, Cinergy, CG&E, and PSI ~~have~~reached ~~issued~~an ~~variable~~agreement ~~rate~~in ~~pollution~~principle ~~control~~with ~~notes~~the ~~(tax-exempt~~EPA, ~~notes~~the U.S. ~~obtained~~Department toof ~~finance~~Justice ~~equipment~~(Justice orDepartment), ~~land~~three ~~development~~northeast ~~for~~states, ~~pollution~~and ~~control~~two environmental ~~purposes).~~groups ~~Because~~that could serve as the ~~holders~~basis offor a ~~majority~~negotiated resolution of ~~these~~CAA ~~notes~~claims ~~have~~and ~~the~~other ~~right~~related tomatters brought against coal-fired power plants owned and operated by Cinergy's operating subsidiaries. ~~redeem~~The ~~their~~complete ~~notes~~resolution onof ~~any~~these ~~business~~issues ~~day,~~is contingent upon establishing a final agreement with the ~~remainder~~EPA ~~being~~and ~~redeemable~~other ~~annually~~parties. If a final agreement is reached with these parties, ~~they~~it ~~are~~would ~~reflected~~resolve inpast ~~Notes~~claims ~~payable~~of ~~and~~alleged ~~other~~NSR ~~short-term obligations~~violations inas well as the ~~Consolidated~~Beckjord ~~Balance~~Station ~~Sheets~~NOVs/FOV ~~for~~discussed ~~Cinergy, CG&E,~~previously ~~and~~under ~~PSI~~(c) and (d).

~~On August 21, 2001,~~ In ~~CG&E issued $12.1 million of Ohio Air Quality Development Authority Air Quality Development Revenue Bonds 2001~~addition, ~~Series~~the Aintent ~~with a final maturity date~~ of ~~August 1, 2033, and initial interest of 3.7%. The interest rate will reset annually on August 1, as negotiated, based on~~ the ~~Municipal~~tentative ~~Market~~agreement ~~Data~~is ~~Index~~that ~~as a~~we ~~benchmark.~~would ~~The net proceeds will~~ be ~~used~~allowed to ~~finance~~continue aon-going ~~portion~~activities ofto ~~the~~maintain ~~costs~~reliability ~~of air quality~~ and ~~solid~~availability ~~waste~~without ~~disposal~~subjecting ~~facilities used at~~ the ~~William H. Zimmer~~ ~~Generating~~plants ~~Station.~~to Atfuture ~~September~~litigation ~~30,~~regarding ~~2001,~~federal ~~CG&E~~NSR ~~and~~permitting ~~PSI had $196 million and $83 million, respectively, outstanding in pollution control notes, classified as short-term debt~~requirements.

~~Money Pool~~38

~~Cinergy Corp.,~~ In ~~Services,~~return ~~and~~for ~~our~~resolution ~~operating~~of ~~companies~~claims ~~and~~regarding ~~their~~past ~~subsidiaries~~maintenance ~~participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement~~activities, ~~those~~as ~~companies~~well ~~with surplus short-term funds provide short-term loans to others. This surplus cash may be from internal or external sources. The amounts outstanding under this money pool arrangement are shown~~ as ~~Notes~~ ~~receivable~~future ~~from~~operational ~~affiliated~~certainty, ~~companies~~we orhave ~~Notes~~tentatively ~~payable~~agreed to ~~affiliated~~: ~~companies on the Consolidated Balance Sheets for CG&E and PSI and on the Balance Sheets for ULH&P.~~

•: shut down or repower with natural gas, nine small coal-fired boilers at three power plants beginning in 2004;
•: build four additional sulfur dioxide (SO₂) scrubbers, the first of which must be operational by December 31, 2007;
•: upgrade existing particulate control systems;
•: phase in the operation of NO_X reduction technology year-round starting in 2004;
•: reduce our existing Title IV SO₂ cap by 35 percent in 2013;
•: pay a civil penalty of $8.5 million to the U.S. government; and
•: implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO₂ allowances by 2005.

~~Securities~~ The estimated ~~Ratings~~cost for these capital expenditures is expected to be approximately $700 million through 2013. These capital expenditures are in addition to our previously announced commitment to install NOX controls as discussed in (b) above, but includes capital costs that Cinergy would otherwise expect to spend due to new environmental requirements expected in the second half of this decade.

As Cinergy, CG&E, and PSI have accrued costs related to certain aspects of ~~October~~the ~~31,~~tentative ~~2001,~~agreement. In reaching the ~~major~~tentative ~~credit~~agreement, ~~ratings~~we ~~agencies~~did ~~rated~~not admit any wrongdoing and remain free to continue our ~~securities~~current maintenance practices, as ~~follows:~~well as implement future projects for improved reliability.

~~-------------------------------------------------------------------------------~~ In ~~Fitch~~January 2002, ~~(1) Moody's~~the ~~(2) S&P~~Justice ~~(3) Cinergy~~Department ~~Corp. Corporate~~completed ~~Credit BBB+ Baa2 BBB+/A-2 Senior~~its ~~Unsecured~~review ~~Debt BBB+ Baa2 BBB+ Commercial~~of ~~Paper F-2 P-2 A-2~~NSR, after considering dismissal of the lawsuits, and decided to pursue the pending lawsuits, including the suit against Cinergy, CG&E ~~Senior~~, ~~Secured~~and ~~Debt A- A3 A- Senior~~PSI. ~~Unsecured~~We ~~Debt BBB+ Baa1 BBB+ Junior~~will ~~Unsecured~~continue ~~Debt BBB Baa2 BBB~~to ~~Preferred~~pursue ~~Stock BBB Baa3 BBB Commercial~~a ~~Paper F-2 P-2 Not~~negotiated ~~Rated PSI Senior~~settlement ~~Secured~~of ~~Debt A- A3 A- Senior~~these ~~Unsecured~~lawsuits ~~Debt BBB+ Baa1 BBB+ Junior~~if ~~Unsecured~~that ~~Debt BBB Baa2 BBB Preferred~~continues ~~Stock BBB Baa3 BBB Commercial~~to ~~Paper F-2 P-2 Not~~be ~~Rated ULH&P Not Senior~~in ~~Unsecured~~the ~~Debt Rated Baa1 BBB+~~best interests of the company. At this time, it is not possible to predict whether a final agreement implementing the ~~(1) During~~agreement ~~2000~~in principle can be reached. If the settlement is not completed, ~~Fitch~~ ~~IBCA~~we intend to defend against the allegations, ~~Inc.~~ discussed in (c) and ~~Duff~~(d) above, ~~& Phelps Credit Rating~~vigorously Coin court. In such an ~~merged~~event, ~~and~~ ~~are~~it ~~now~~is ~~known~~not aspossible ~~Fitch, thereby~~to ~~combining~~ determine the likelihood that the plaintiffs would prevail on their ~~ratings~~ claims or whether resolution of ~~Cinergy~~ ~~Corp.~~these ~~and~~matters ~~its~~would ~~affiliates. (2) Moody's~~have ~~Investors~~a ~~Service~~material ~~(Moody's) (3) Standard~~effect &on ~~Poor's~~our ~~Ratings~~financial ~~Services~~position ~~(S&P)~~or ~~-------------------------------------------------------------------------------~~ results of operations.

As discussed in the 2000 Form 10-K, on December 12, 2000, S&P placed its ratings of Cinergy Corp. and its operating affiliates, CG&E and PSI, on CreditWatch with negative implications. On January 22, 2001, Moody’s announced it had assigned negative outlooks to the debt and preferred stock securities of Cinergy Corp. and all of its subsidiaries. These actions were primarily in response to Cinergy’s announcement regarding one of its non-regulated subsidiaries entering into a definitive agreement to acquire two natural gas-fired merchant electric generating facilities from Enron North America. Other items of concern included (1f) Manufactured ~~the~~Gas ~~announcement~~Plant ~~that Cinergy Corp., CG&E, and PSI have reached an agreement in principle with the EPA;~~ (2MGP) the continuing uncertainty surrounding CG&E’s post-deregulation corporate and financial structure; (3) the absence of restructuring legislation and stranded investment resolution in Indiana; and (4) Cinergy’s emphasis on higher-risk non-regulated activities. Sites

Effective July 27, 2001, Moody’s changed its assignment of ratings to different classes of securities issued by the same company, which was prompted by Moody’s research published in November 2000. The refinements are of a technical nature and are not indicative of changes in fundamental credit quality. CG&E’s and PSI’s preferred stock were affected by these changes. The new ratings are noted in the table above. (i) General

On Prior to ~~September~~the 41950s, ~~2001,~~gas ~~Moody’s~~was ~~placed~~produced ~~the~~at ~~debt~~MGP ~~ratings~~sites ofthrough ~~Cinergy~~a ~~Corp.~~process onthat ~~review~~involved ~~for~~the ~~possible~~heating ~~downgrade.~~of ~~These actions~~coal ~~are~~and/or ~~primarily~~oil. inThe ~~response~~gas toproduced ~~Cinergy~~from ~~Corp.'s~~this ~~increased~~process ~~debt~~was ~~associated~~sold ~~with~~for ~~its~~residential, ~~growing portfolio of~~commercial, ~~peaking~~and ~~generation~~industrial uses.

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

~~Guarantees~~ Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 sites which PSI or its predecessors previously owned. PSI acquired four of the sites from Northern Indiana Public Service Company (NIPSCO) in 1931. At the same time, PSI sold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945, PSI sold 19 of these sites (including the four sites it acquired from NIPSCO) to the predecessor of the Indiana Gas Company, Inc. (IGC). IGC later sold the site located in Rochester, Indiana to NIPSCO.

We are subject to an SEC order under the PUHCA, which limits the amounts Cinergy Corp. can have outstanding under guarantees at any one time to $2 billion. As of September 30, 2001, we had $631 million outstanding under the guarantees issued. This amount represents Cinergy Corp.‘s guarantees of liabilities and commitments of our consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. 39

~~2001~~ IGC ~~QUARTERLY~~(in ~~RESULTS~~1994) OFand ~~OPERATIONS~~NIPSCO (in 1995) both made claims against PSI. The basis of these claims was that PSI is a Potentially Responsible Party with respect to the 21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The claims further asserted that PSI was legally responsible for the costs of investigating and remediating the sites. In August 1997, NIPSCO filed suit against PSI in federal court, claiming recovery (pursuant to CERCLA) of NIPSCO's past and future costs of investigating and remediating MGP-related ~~HISTORICAL~~contamination at the Goshen, Indiana MGP site.

~~Summary~~ In November 1998, NIPSCO, IGC, and PSI entered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement allocated CERCLA liability for past and future costs at seven MGP sites in Indiana among the three companies. As a result of ~~Results~~the Agreement, NIPSCO's lawsuit against PSI was dismissed. The parties have assigned lead responsibility for managing further investigation and remediation activities at each of the sites to one of the parties. Similar agreements were reached between IGC and PSI that allocate CERCLA liability at 14 MGP sites with which NIPSCO was not involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate, under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.

~~Electric~~ PSI ~~and~~notified ~~gas~~its ~~gross~~insurance ~~margins~~carriers of the claims related to MGP sites raised by IGC, NIPSCO, and ~~net~~IDEM. ~~income~~In April 1998, PSI filed suit in Hendricks County Circuit Court in the State of Indiana against its general liability insurance carriers. PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) pay PSI's costs of defense and compensate PSI for ~~Cinergy~~its costs of investigating, ~~CG&E~~preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was moved to the Hendricks County Superior Court (Superior Court) in July 1998. PSI and its insurance carriers filed briefs on various issues for decision by the ~~quarters~~Superior ~~ended~~Court ~~September~~in 30hearings held in November 2001. On February 1, 2002, the Superior Court issued rulings on motions for summary judgment. The Superior Court granted the ~~2001~~motions ~~and~~of ~~2000~~several insurance carriers that claimed there was insufficient evidence concerning the terms of their insurance policies. The insurance policies in question were between 1950-1958 and 1961-1964. The Superior Court entered a final judgment with respect to these "lost policies" on March 25, 2002. With respect to the remaining policies (between 1958-1961 and 1964-1984), the Superior Court denied all of the insurance carriers' motions. This included motions on the issues of Trigger of Coverage, Expected or Intended Damage, Late Notice, and Voluntary Payments. The Superior Court found triable issues of fact for the jury to decide as ~~follows:~~to the former two issues, and ruled in PSI's favor, as a matter of law, on the latter two issues. On February 15, 2002, PSI requested rulings on certain remaining summary judgment issues and a clarification of certain of the Superior Court's summary judgment rulings. That request was denied on April 1, 2002. On March 15, 2002, one of the insurance carriers filed a motion for partial summary judgment asserting a Lack of Justiciability. That motion was heard on April 26, 2002, and denied by the Superior Court on April 30, 2002.

~~----------------------------------------------------------------------------------~~ On ~~Cinergy~~April 23, ~~(1) CG&E~~2002, ~~and subsidiaries~~ PSI ----------- --------------------- --- 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- (in ~~thousands)~~filed a notice of appeal with the Indiana Court of Appeals with respect to the Superior Court's ~~Electric~~March 25, ~~gross~~2002 ~~margin $650~~order granting final judgment with respect to certain "lost policies." On June 21,~~671 $551~~ 2002,~~279 $345,546~~ the Superior Court granted the motions of ~~$268,697 $268,122 $217,754~~PSI and the insurance carriers and certified ~~Gas~~four ~~gross~~orders ~~margin 25,020 43,000 28,488 27,199 - -~~for interlocutory review by the Indiana Court of Appeals. Unlike the "lost policies" appeal ~~Net~~that ~~income 128~~is an appeal of right,~~471 93~~ the appeal of these four certified orders is discretionary and the Indiana Court of Appeals can accept or reject any or all of the issues certified. At the present time,~~814 89,390 39,096 56,454 30,613 (1)~~ ~~The~~PSI cannot ~~results~~predict the outcome of ~~Cinergy~~this ~~also~~litigation, ~~include~~including ~~amounts~~the ~~related~~outcome of the appeals to ~~non-registrants~~the Indiana Court of Appeals. ~~----------------------------------------------------------------------------------~~

Diluted earnings per share for the third quarter of 2001 was $.80 per share as compared to $.58 per share for the same period last year. Results were attributable to Energy Merchant’s origination, marketing and trading segment and increased gross margins in Regulated Businesses, primarily due to customer growth and increased customer usage. 40

~~The explanations below follow the line items on the Consolidated Statements of Income for Cinergy,~~ (iii) CG&E~~, and PSI. However, only the line items that varied significantly from prior periods are discussed.~~

~~Electric~~ CG&E ~~Operating~~and ~~Revenues~~its utility subsidiaries are aware of potential sites where MGP activities have occurred at some time in the past. None of these sites is known to present a risk to the environment. CG&E and its utility subsidiaries have begun preliminary site assessments to obtain information about some of these MGP sites.

~~----------------------------------------------------------------------------------------------------------------------------------- Cinergy~~ PSI ~~(1)~~ and CG&E, ~~and~~including its utility subsidiaries ~~PSI ----------- ------------------------- --- 2001 2000 %~~, ~~Change 2001 2000 %~~have ~~Change 2001 2000 %~~accrued ~~Change~~costs for the sites related ~~---- ---- -------- ---- ---- -------- ---- ---- -------- (in~~to ~~millions)~~investigation, remediation, and groundwater monitoring to the extent such costs are probable and can be reasonably estimated. PSI and CG&E, ~~Retail $ 772 $ 714 8 $ 422 $ 402 5 $ 350 $ 312 12 Wholesale 1~~including its utility subsidiaries,~~685 788 114 831 383 117 901 478 88~~ do not believe they can provide an estimate of the reasonably possible total remediation costs for any site Transportation 1 - - 1 - - - - - Other 58 97 (40) 13 7 86 7 14 (50) ------- -------- -------- ------- ------- ------- Total $before 2a remedial investigation/feasibility study has been completed. To the extent remediation is necessary,~~516 $ 1~~ the timing of the remediation activities impacts the cost of remediation. Therefore,~~599 57 $~~ PSI 1and CG&E,~~267 $ 792 60 $~~ 1including its utility subsidiaries,~~258 $ 804 56~~ currently cannot determine the total costs that may be ~~(1) The~~incurred ~~results~~in ofconnection ~~Cinergy~~with ~~also~~remediation ~~include~~of ~~amounts~~all ~~related~~sites, to ~~non-registrants~~the extent that remediation is required. Until investigation and remediation activities have been completed on these sites, we are unable to ~~-----------------------------------------------------------------------------------------------------------------------------------~~ reasonably estimate the total costs and impact on our financial position or results of operations.

~~Electric~~(g) Asbestos ~~operating revenues~~Claims for Cinergy, CG&E, and PSI increased for the quarter ended September 30, 2001, as compared to 2000, mainly due to an increase in volumes on non-firm wholesale transactions related to energy marketing and trading activity. Non-firm power is power without a guaranteed commitment for physical delivery. Litigation

~~Gas~~ CG&E ~~Operating~~and ~~Revenues~~PSI have been named in lawsuits related to Asbestos at their electric generating stations. In these lawsuits, plaintiffs claim to have been exposed to Asbestos 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 the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any Asbestos exposure. The impact on CG&E's and PSI's financial position or results of operations of these cases to date has not been material.

~~-------------------------------------------------------------------------------~~ One ~~Cinergy~~specific ~~(1) CG&E~~case ~~and~~filed ~~subsidiaries ----------- ------------------------- 2001 2000 %~~against ~~Change 2001 2000~~PSI %has ~~Change ---- ---- -------- ---- ------------- (in~~been ~~millions) Non-regulated $~~tried ~~733 $~~to ~~629 17 $~~verdict. Following a ten week trial of the case entitled ~~- $ - -~~William Lee Roberts, Jr. and Beverly Roberts v. AC&S, Inc., et ~~Retail 45 40 13 45 40 13 Transportation 6 8 (25) 6 8 (25) Other~~ al., PSI Energy, Inc., Marion Superior Court 2 ~~1 - 2 1 -~~, on May 24, 2002, the ~~-------- ------- ------ ---- Total $~~jury ~~786 $~~returned ~~678 16 $~~a 53 verdict against PSI in the amount of $494,000 ~~49 8~~on a negligence claim and for PSI on ~~(1)~~ punitive damages. PSI is appealing the judgment in this case. The total damages were immaterial to PSI's financial position and results of ~~Cinergy~~operations. ~~also~~However, ~~include~~future ~~amounts~~verdicts ~~related~~in toany ~~non-registrants~~of the pending lawsuits could be material. At this time CG&E and PSI are ~~-------------------------------------------------------------------------------~~ not able to predict the ultimate outcome of these lawsuits or the impacts on CG&E's and PSI's financial position or results of operations.

Gas operating revenues for Cinergy increased in the third quarter of 2001 as compared to the same period last year. This increase was primarily the result of increased volumes sold by Cinergy Marketing and Trading, LLC (~~Marketing and Trading~~h). Gas Customer Choice

~~CG&E’s~~ In ~~retail~~January 2000, ~~gas~~Cinergy ~~revenues~~Investments, Inc. ~~increased~~(Investments) ~~primarily~~sold ~~due~~Cinergy toResources, Inc. (Resources), a ~~higher~~former ~~price~~subsidiary, ~~received~~to ~~per~~Licking Rural ~~thousand~~Electrification, Inc., ~~cubic~~doing ~~feet~~business as The Energy Cooperative (~~mcf~~Energy Cooperative). ~~sold~~In February 2001, Cinergy, CG&E, and anResources ~~increase~~were named as defendants in ~~retail~~three class action lawsuits brought by customers relating to Energy Cooperative's removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers. ~~Retail~~Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in ~~sales~~the ~~also~~consolidated ~~increased~~suit. In March 2001, Cinergy, CG&E, and ~~transportation~~Investments ~~sales~~were ~~decreased~~named as defendants in a ~~result~~lawsuit offiled ~~customers~~by both Energy Cooperative and ~~switching~~Resources. ~~back~~This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. Cinergy, CG&E and ~~gas~~Investments ~~service~~initiated litigation in October 2001 against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation. Trial is scheduled to occur in mid-2003. We intend to vigorously defend these lawsuits. At the present time, Cinergy cannot predict the outcome of these suits.

~~Operating Expenses~~41

~~----------------------------------------------------------------------------------------------------------------------------------- Cinergy~~ (1i) ~~CG&E and subsidiaries~~ PSI ~~----------- ------------------------- --- 2001 2000 %~~ Change 2001 2000 % Change 2001 2000 % Change ---- ---- -------- ---- ---- -------- ---- ---- -------- (in millions) Fuel ~~$ 210 $ 181 16 $ 88 $~~ ~~87 1 $ 124 $ 90 38 Purchased~~Adjustment and exchanged power 1,654 867 91 834 436 91 866 496 75 Gas purchased 762 635 20 25 22 14 - - - Operation and maintenance 265 267 (1) 117 118 (1) 106 104 2 Depreciation 97 87 11 47 46 2 37 36 3 Taxes other than income taxes 60 67 (10) 44 51 (14) 15 15 - ------- ------- ---------- -------- -------- -------- Total $ 3,048 $ 2,104 45 $1,155 $760 52 $ 1,148 $ 741 55 (1) The results of Cinergy also include amounts related to non-registrants. ----------------------------------------------------------------------------------------------------------------------------------- Charge

~~Fuel~~ As discussed in the 2001 Form 10-K, PSI defers fuel costs that are recoverable in future periods subject to Indiana Utility Regulatory Commission (IURC) approval under a fuel recovery mechanism. In June 2001, the IURC issued an order in a PSI fuel recovery proceeding, disallowing approximately $14 million of deferred costs. In June 2001, PSI formally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated that it would reconsider its decision and PSI continued the deferral of these costs. In August 2002, the IURC issued its final ruling allowing PSI to fully recover the $14 million.

~~Fuel~~ In June 2001, ~~represents~~PSI filed a petition with the ~~cost~~IURC ofrequesting ~~coal,~~authority ~~natural~~to ~~gas,~~recover ~~and~~$16 million ~~oil~~in ~~that~~under-billed isdeferred ~~used~~fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to ~~generate~~refund ~~electricity~~pending the findings of an investigative sub-docket. The sub-docket ~~following~~was ~~table~~opened ~~details~~to investigate the ~~changes~~reasonableness toof, ~~fuel~~and ~~expense~~underlying ~~from~~reasons for, the ~~quarter~~under-billed ~~ended~~deferred ~~September~~fuel costs. A hearing was held on July 30, ~~2000~~2002. toWe anticipate a decision in the fourth quarter ~~ended September~~of ~~30,~~2002. ~~2001:~~

~~------------------------------------------------------------------------------- Cinergy~~ (1j) ~~CG&E PSI ----------- -------- --- (in~~ Contract millions) Fuel expense - September 30, 2000 $ 181 $ 87 $ 90 Increase (decrease) due to changes in: Price of fuel 7 6 1 Deferred fuel cost 33 8 25 MWh generation(2) (5) (13) 8 Other (6) - - --------------------------- Fuel expense - September 30, 2001 $ 210 $ 88 $ 124 (1) The results of Cinergy also include amounts related to non-registrants. (2) Megawatt-hour (MWh) ------------------------------------------------------------------------------- Disputes

~~Purchased~~ Cinergy, through a subsidiary of Investments, is currently involved in negotiations to resolve a customer-billing dispute. The primary issue of contention between the parties relates to the determinants used in calculating the monthly charge for steam and ~~Exchanged~~electricity ~~Power~~billed. Cinergy has reserved for a portion of the amount billed based on our current estimate of net realizable value.

~~Purchased~~ Cinergy, ~~and~~through ~~exchanged power~~a ~~expense~~subsidiary ~~increased~~of ~~for~~Capital & ~~Cinergy~~Trading, ~~CG&E,~~is ~~and PSI~~involved ~~for~~in ~~the~~a ~~quarter~~billing ~~ended~~dispute ~~September~~with ~~30,~~respect ~~2001,~~to asbillings ~~compared~~for to the ~~same~~supply of ~~period~~wholesale ~~last~~natural ~~year,~~gas ~~primarily~~to ~~due~~a tocustomer. anThis ~~increase~~dispute, inif ~~purchases~~not ofsatisfactorily ~~non-firm wholesale~~resolved ~~power,~~by ~~reflecting~~the ~~higher~~parties, ~~sales~~is ~~volumes~~subject ~~and~~to ~~higher~~arbitration. ~~prices~~Cinergy ~~paid~~has ~~per~~reserved ~~MWh~~for a inportion of the ~~energy~~amount ~~marketing~~billed ~~and~~based ~~trading~~on ~~operations~~the current estimate of net realizable value.

~~Gas~~ Although we ~~Purchased~~cannot predict the outcome of these matters, we believe the ultimate impact on Cinergy's financial position and results of operations, beyond amounts reserved, will not be material.

~~Gas purchased expense increased for Cinergy and CG&E for the quarter ended September 30, 2001, as compared to the same period last year, primarily due to an increase in gas commodity trading volumes~~8. Employee ~~CG&E’s~~Severance ~~wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism.~~Programs

~~Depreciation~~ In March 2002, a Voluntary Early Retirement Program (VERP) offering was made to approximately 280 non-union employees. As a result of the 213 employees electing the VERP in the second quarter of 2002, Cinergy, CG&E, and PSI recorded expenses of approximately $35 million, $16 million (including $2 million related to ULH&P), and $18 million, respectively, relating to benefits provided to the VERP participants. In the second quarter of 2002, Cinergy, CG&E, and PSI incurred approximately $13 million, $2 million, and $4 million, respectively, in additional expenses related to other employee severance programs.

~~Cinergy’s~~ In ~~Depreciation~~June 2002, ~~expense~~a ~~increased~~VERP ~~for~~was ~~the~~also ~~quarter~~offered ~~ended~~to ~~September~~approximately ~~30,~~70 ~~2001, as~~Utility ~~compared~~Workers toof ~~the~~America ~~same~~/ ~~period~~Independent ~~last~~Utilities ~~year~~Union # 600 (IUU) employees. ~~This~~As ~~increase~~a ~~was~~result ~~primarily~~of the 41 employees electing ~~attributable~~the toVERP in the ~~acquisition~~third quarter of ~~additional~~2002, ~~depreciable~~Cinergy, ~~plant~~CG&E, ~~including~~and PSI recorded expenses of approximately ~~investments~~$4 million, $2 million (including $1 million related to ULH&P), and $1 million, respectively, in ~~non-regulated~~the ~~peaking~~third ~~generation.~~quarter of 2002 relating to benefits provided to IUU VERP participants.

~~Taxes~~9. Financial ~~Other~~Information ~~Than~~by ~~Income~~Business ~~Taxes~~Segment

~~Cinergy’s and~~ As ~~CG&E’s~~discussed ~~Taxes~~in ~~other than income taxes decreased for~~ the ~~quarter~~2001 ~~ended September 30~~Form 10-K, ~~2001,~~we asconduct ~~compared~~operations tothrough ~~the~~our ~~same~~subsidiaries, ~~period last year. This decrease was primarily attributable to reduced property tax expense~~ and ~~other~~ ~~tax~~manage ~~changes~~through ~~associated~~the ~~with~~following ~~deregulation~~three inbusiness ~~Ohio.~~units:

•: Energy Merchant Business Unit (Energy Merchant);
•: Regulated Businesses Business Unit (Regulated Businesses); and

~~Interest~~42

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

~~Cinergy’s and~~ The ~~PSI’s~~following ~~Interest~~section ~~expense~~describes ~~increased for~~ the ~~quarter~~activities ~~ended September 30, 2001, as compared to the same period last year. This increase was primarily due to debt issuances associated with the acquisition~~ of ~~additional peaking~~our ~~generation and general~~ business ~~purposes.~~units ~~Partially~~as ~~offsetting the affect~~ of ~~the~~September 30, ~~increase in debt issuances was a decrease in short-term interest rates~~2002.

~~Income~~ Energy Merchant ~~Taxes~~manages wholesale generation and energy marketing and trading of energy commodities. Energy Merchant operates and maintains our regulated and non-regulated electric generating plants including some of our jointly-owned plants. Energy Merchant is also responsible for all of our international operations. In addition, Energy Merchant also conducts the following activities:

•: energy risk management;
•: financial restructuring services;
•: proprietary arbitrage activities;
•: customized energy solutions; and
•: directs our renewable energy investing activities.

~~Cinergy’s,~~ Regulated ~~CG&E’s,~~Businesses ~~and~~consists of PSI’'s ~~Income~~regulated, ~~tax~~integrated ~~expense~~utility ~~increased for~~operations, ~~the~~and Cinergy's ~~quarter~~other ~~ended~~regulated ~~September~~electric ~~30,~~and ~~2001,~~gas astransmission ~~compared~~and todistribution systems. ~~the~~Regulated ~~same~~Businesses ~~period~~plans, ~~last~~constructs, ~~year.~~operates, ~~This~~and ~~increase~~maintains ~~was~~Cinergy's ~~primarily~~transmission ~~due~~and todistribution ~~the~~systems ~~increase~~and indelivers ~~taxable~~gas ~~income. Cinergy’s~~ and ~~CG&E’s~~electric ~~increase~~energy ~~also~~to ~~included~~consumers. ~~the~~Regulated Businesses also ~~impact~~earns ofrevenues ~~state~~from ~~income~~wholesale ~~tax~~customers ~~changes~~primarily ~~associated~~by ~~with~~transmitting ~~Ohio~~electric ~~deregulation~~power through Cinergy's transmission system.

~~2001~~ Power Technology ~~YEAR~~primarily TOmanages ~~DATE~~the ~~RESULTS~~development, OFmarketing, ~~OPERATIONS~~and sales of our non-regulated ~~HISTORICAL~~retail energy and energy-related businesses. This is accomplished through various subsidiaries and joint ventures. Power Technology also manages Cinergy Ventures, LLC (Ventures), Cinergy's venture capital subsidiary. Ventures invests in emerging energy technologies that can benefit future Cinergy business development activities.

~~Summary~~ Financial results by business unit are as indicated below. Certain amounts for the prior year have been restated to reflect segment restructuring which includes the consolidation of ~~Results~~all of our international operations into Energy Merchant. This restructuring became effective January 1, 2002.

~~Electric~~ Financial results ~~and~~by ~~gas~~business ~~gross~~unit ~~margins~~for ~~and~~the ~~net~~quarters ~~income~~ended ~~for Cinergy~~September 30, ~~CG&E,~~2002 and ~~PSI for the nine months ended~~ September 30, 2001 ~~and~~are ~~2000~~as ~~were~~indicated asbelow. ~~follows:~~

----------------------------------------------------------------------------------------------

                            Cinergy (1)        CG&E and subsidiaries             PSI
                            -----------        -------------------------         ---
                          2001         2000         2001        2000       2001        2000
                          ----         ----         ----        ----       ----        ----
                                                    (in thousands)
Electric gross margin  $1,707,077   $1,666,999    $899,791     $874,160  $712,080   $702,030
Gas gross margin         169,343      177,404      143,142      151,397         -          -
Net income               331,685      307,368      220,366      190,941   132,103     99,742

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

Business Units
		Cinergy Business Units
		Energy Merchant		Regulated Businesses		Power Technology			Total		Reconciling Eliminations(1)			Consolidated
		(in thousands)
*Quarter ended September 30, 2002*
Operating revenues—
	External customers	$	3,206,647	$	669,605	$	9,736		$	3,885,988	$	—		$	3,885,988
	Intersegment revenues		48,444		—		—			48,444		(48,444	)		—
Segment profit (loss)(2)			59,262		74,939		(3,633	)		130,568		—			130,568
Quarter ended September 30, 2001
Operating revenues—
	External customers	$	2,682,498	$	655,005	$	9,811		$	3,347,314	$	—		$	3,347,314
	Intersegment revenues		45,756		—		—			45,756		(45,756	)		—
Segment profit (loss)(2)			57,941		77,690		(7,160	)		128,471		—			128,471

(1): The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.
(2): Management utilizes segment profit (loss) to evaluate segment performance.

Diluted earnings per share for the nine months ended September 30, 2001 was $2.06 per share as compared to $1.92 per share for the same period ended September 30, 2000. Increased earnings were primarily attributable to Energy Merchant’s origination, marketing and trading segment and reduced operations and maintenance expenditures. Partially offsetting these improvements were increased coal costs and greater depreciation and interest expenses associated with the financing of additional investments, principally peaking generation. 43

~~The~~ Financial ~~explanations~~results ~~below follow~~by ~~the~~business ~~line~~unit ~~items~~for on the ~~Consolidated~~nine ~~Statements~~months ofended ~~Income for Cinergy~~September 30, ~~CG&E,~~2002 and ~~PSI. However~~September 30, ~~only~~2001 ~~the~~are ~~line~~as ~~items that~~indicated ~~varied significantly from prior periods are discussed~~below.

Electric Operating Revenues

Business Units
		Cinergy Business Units
		Energy Merchant		Regulated Businesses		Power Technology			Total		Reconciling Eliminations(1)			Consolidated
		(in thousands)
*Nine months ended September 30, 2002*
Operating revenues—
	External customers	$	6,599,040	$	1,942,789	$	27,945		$	8,569,774	$	—		$	8,569,774
	Intersegment revenues		123,091		—		—			123,091		(123,091	)		—
Segment profit (loss)(2)			115,158		176,877		(20,756	)		271,279		—			271,279
Nine months ended September 30, 2001
Operating revenues—
	External customers	$	8,642,396	$	2,059,722	$	34,836		$	10,736,954	$	—		$	10,736,954
	Intersegment revenues		114,482		—		—			114,482		(114,482	)		—
Segment profit (loss)(2)			131,322		215,560		(15,197	)		331,685		—			331,685

(1): The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.
(2): Management utilizes segment profit (loss) to evaluate segment performance.

~~----------------------------------------------------------------------------------------------------------------------------------- Cinergy~~ Total ~~(1) CG&E~~segment ~~and~~assets subsidiaries PSI ----------- ------------------------- --- 2001 2000 %at ~~Change 2001 2000 %~~September 30, ~~Change 2001 2000 %~~2002 Change ---- ---- -------- ---- ---- -------- ---- ---- -------- (inand millions) Retail $2,052 $ 2,015 2 $1,116 $ 1,114 - $ 936 $ 901 4 Wholesale 4,521 1,727 162 2,250 846 166 2,399 1,026 134 Transportation 2 - - 2 - - - - - Other 199 175 14 30 17 76 23 December 31 ~~(26) ------- -------- ------- ------- ------- -------- Total $6~~,~~774 $ 3~~ 2001,~~917 73 $3,398 $ 1,977 72 $ 3,358 $ 1,958 72 (1) The~~ ~~results~~were ofas ~~Cinergy~~follows: ~~also include amounts related to non-registrants. -----------------------------------------------------------------------------------------------------------------------------------~~

Electric operating revenues for Cinergy, CG&E, and PSI increased for the nine months ended September 30, 2001, as compared to the same period last year, mainly due to an increase in volumes on non-firm wholesale transactions related to energy marketing and trading activity.

	Cinergy Business Units
Business Units	Energy Merchant		Regulated Businesses		Power Technology		Total		All Other(1)		Consolidated
	(in thousands)
Total segment assets at September 30, 2002	$	5,483,625	$	7,432,558	$	228,549	$	13,144,732	$	60,808	$	13,205,540
Total segment assets at December 31, 2001		4,956,109		7,084,104		213,260		12,253,473		46,340		12,299,813

(1): The All Other category represents miscellaneous corporate items which are not allocated to business units for purposes of segment performance measurement.

~~Gas Operating Revenues~~44

~~--------------------------------------------------------------------------------------------------------- Cinergy~~10. Earnings ~~(1) CG&E~~Per ~~and~~Common ~~subsidiaries ----------- ------------------------- 2001 2000 %~~Share ~~Change 2001 2000 % Change ---- ---- -------- ---- ---- --------~~ (~~in millions~~EPS) ~~Non-regulated $ 3,380 $~~ 1,383 144 $ - $ - - Retail 421 241 75 421 241 75 Transportation 29 41 (29) 29 41 (29) Other 7 3 133 8 5 60 --------- --------- --------- --------- Total $ 3,837 $ 1,668 130 $ 458 $ 287 60 (1) The results of Cinergy also include amounts related to non-registrants. ----------------------------------------------------------------------------------------------------------

~~Gas~~ A ~~operating revenues~~reconciliation ~~for~~of ~~Cinergy~~EPS ~~increased for the nine months ended September 30, 2001, as compared~~ to ~~the~~EPS—assuming ~~same~~dilution ~~period~~is ~~last~~presented ~~year.~~below ~~This~~for ~~increase was primarily~~ the ~~result~~quarters ofended ~~increased~~September 30, ~~volumes~~2002 and aSeptember 30, ~~higher~~2001: ~~price received per mcf sold by Marketing and Trading.~~

CG&E’s retail gas revenues increased primarily due to a higher price received per mcf sold and an increase in retail gas sales resulting from colder weather during the first quarter of 2001. The higher price reflects a substantial increase in the wholesale gas commodity cost during the first six months, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism. Retail sales also increased and transportation sales decreased as a result of customers switching back to CG&E gas service.

		Income		Shares	EPS
		(in thousands, except per share amounts)
Quarter ended September 30, 2002
EPS:
	Net Income	$	130,568	167,967	$	0.78
Effect of dilutive securities:
	Common stock options			843
	Directors' compensation plans			160
	Contingently issuable common stock			1,118

EPS—assuming dilution:
	Net income plus assumed conversions	$	130,568	170,088	$	0.77
Quarter ended September 30, 2001
EPS:
	Net Income	$	128,471	159,097	$	0.81
Effect of dilutive securities:
	Common stock options			948
	Directors' compensation plans			144
	Contingently issuable common stock			491

EPS—assuming dilution:
	Net income plus assumed conversions	$	128,471	160,680	$	0.80

~~Operating~~ Options ~~Expenses~~to purchase shares of common stock are excluded from the calculation of EPS—assuming dilution when the exercise prices of these options are greater than the average market price of the common shares during the period. For the quarters ended September 30, 2002 and 2001, approximately 3.3 million and 2.1 million shares, respectively, were excluded from the EPS—assuming dilution calculation.

~~------------------------------------------------------------------------------------------------------------------------------------~~ Also excluded from the EPS—assuming dilution calculation for the quarter ended September 30, 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contracts associated with the preferred trust securities issued by Cinergy ~~(1) CG&E~~Corp. ~~and~~in ~~subsidiaries PSI ----------- ------------------------- ---~~ December 2001 ~~2000 %~~. ~~Change 2001 2000 %~~These ~~Change 2001 2000 %~~stock Change ---- ---- -------- ---- ---- -------- ---- ---- -------- (inpurchase ~~millions)~~contracts would ~~Fuel~~ impact EPS—assuming dilution only to the extent that Cinergy's average stock price were to exceed $ ~~606 $ 574 6 $ 268 $ 256 5 $ 332 $ 302 10 Purchased~~34.40 ~~and exchanged~~per ~~power 4~~share,~~460 1,676 166 2,231 847 163 2,314 954 143~~ which is the maximum ~~Gas~~price ~~purchased 3~~payable by the holders of the stock purchase contracts,~~668 1,491 146 315 135 133 - - - Operation~~ and maintenance 782 818 (4) 349 361 (3) 302 340 (11) Depreciation 278 255 9 139 135 3 111 105 6 Taxesduring ~~other~~any ~~than income~~period ~~taxes 176 201 (12) 136 155 (12) 38 43 (12)~~ for which earnings per share are presented. As discussed in the 2001 Form 10-~~------ ------- -------- ------- -------- -------- Total $9~~K,~~970 $5,015 99 $3,438 $1,889 82 $3,097 $1,744 78~~ the number of shares ~~(1) The~~issued ~~results~~pursuant to the stock purchase contracts is contingent upon the market price of Cinergy ~~also~~Corp. ~~include~~stock ~~amounts~~in ~~related~~February 2005 toand ~~non-registrants.~~could range ~~------------------------------------------------------------------------------------------------------------------------------------~~ between 9.2 and 10.8 million shares.

~~Fuel~~45

~~Fuel represents the~~ A ~~cost~~reconciliation of ~~coal,~~EPS ~~natural~~to ~~gas,~~EPS—assuming ~~and~~dilution ~~oil that~~ is ~~used~~presented tobelow ~~generate~~for ~~electricity. The following table details~~ the ~~changes to fuel expense from the~~ nine months ended ~~September~~ September 30, ~~2000,~~2002 toand ~~the nine months ended~~ September 30, 2001:

---------------------------------------------------------------------------------------

                                        Cinergy (1)      CG&E         PSI
                                        -----------      --------     ---
                                                     (in millions)
Fuel expense - September 30, 2000         $  574        $  256      $  302

Increase (decrease) due to changes in:
Price of fuel                                 47            30          17
Deferred fuel cost                            22             3          19
MWh generation                               (27)          (21)         (6)
Other                                        (10)            -           -
                                          -------       -------     -------
Fuel expense - September 30, 2001         $  606        $  268      $  332

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

---------------------------------------------------------------------------------------

		Income		Shares	EPS
		(in thousands, except per share amounts)
Nine months ended September 30, 2002
EPS:
	Net Income	$	271,279	166,544	$	1.63
Effect of dilutive securities:
	Common stock options			981
	Employee stock purchase and savings plan			5
	Directors' compensation plans			160
	Contingently issuable common stock			1,138

EPS—assuming dilution:
	Net income plus assumed conversions	$	271,279	168,828	$	1.61
Nine months ended September 30, 2001
EPS:
	Net Income	$	331,685	159,049	$	2.08
Effect of dilutive securities:
	Common stock options			1,023
	Directors' compensation plans			144
	Contingently issuable common stock			498

EPS—assuming dilution:
	Net income plus assumed conversions	$	331,685	160,714	$	2.06

~~Fuel expense for~~ Options ~~Cinergy,~~to ~~CG&E,~~purchase ~~and~~shares ~~PSI~~of ~~increased~~common ~~for~~stock ~~the~~are ~~nine~~excluded ~~months ended~~from ~~September~~the ~~30,~~calculation ~~2001,~~of asEPS—assuming ~~compared~~dilution towhen the ~~same~~exercise ~~period~~prices ~~last~~of ~~year,~~these ~~primarily due~~options toare ~~increases~~greater inthan the average market price of ~~coal~~the incommon shares during the ~~first~~period. ~~and~~For ~~second~~the ~~quarters~~nine of months ended September 30, 2002 and 2001, approximately 2.7 million ~~Partially~~and ~~offsetting~~2.1 million ~~this~~shares, ~~increase~~respectively, ~~was~~were excluded afrom ~~decrease~~the inEPS—assuming ~~generation~~dilution calculation.

~~Purchased~~ Also excluded from the EPS—assuming dilution calculation for the nine months ended September 30, 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contracts associated with the preferred trust securities issued by Cinergy Corp. in December 2001. These stock purchase contracts would impact EPS—assuming dilution only to the extent that Cinergy's average stock price were to exceed $34.40 per share, which is the maximum price payable by the holders of the stock purchase contracts, during any period for which earnings per share are presented. As discussed in the 2001 Form 10-K, the number of shares to be issued pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could ~~Exchanged~~range ~~Power~~between 9.2 and 10.8 million shares.

Purchased and exchanged power expense increased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2001, as compared to the same period last year, primarily due to an increase in purchases of non-firm wholesale power, reflecting higher sales volumes and higher prices paid per MWh in the energy marketing and trading operations11. Ohio Deregulation

~~Gas~~ As ~~Purchased~~discussed in the 2001 Form 10-K, in July 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation provides for a market development period that began January 1, 2001, and ends no later than December 31, 2005. During the market development period, electric rates to CG&E customers are frozen.

Gas purchased expense increased for Cinergy and CG&E for the nine months ended September 30, 2001, as compared to the same period last year, primarily due to an increase in gas commodity trading volumes and an increase in the average cost per mcf of gas purchased. CG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism. 46

~~Operation~~ In May 2000, CG&E reached a stipulated agreement with the Public Utilities Commission of Ohio (PUCO) staff and ~~Maintenance~~various other interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1, 2001. In August 2000, the PUCO approved CG&E's stipulation agreement. Subsequently, two parties filed applications for rehearing with the PUCO. In October 2000, the PUCO denied these applications. One of the parties appealed to the Ohio Supreme Court in the fourth quarter of 2000 and CG&E subsequently intervened in that case. In April 2002, the Ohio Supreme Court affirmed the PUCO's stipulated agreement with CG&E with respect to implementing electric customer choice. The Ohio Supreme Court ruling leaves CG&E's transition plan entirely intact.

~~Cinergy’s and~~ Under ~~PSI’~~CG&E's ~~Operation~~transition ~~and~~plan, ~~maintenance~~retail ~~expense~~customers ~~decreased~~continue ~~for~~to ~~the nine~~receive ~~months~~transportation ~~ended~~services ~~September 30~~from CG&E, ~~2001,~~but asmay ~~compared~~purchase toelectricity ~~the~~from ~~same~~another ~~period~~supplier. Retail ~~last~~customers ~~year, primarily~~that ~~due~~purchase toelectricity afrom ~~reduction~~another insupplier receive shopping credits from CG&E. The shopping credits generally reflect the ~~amortization~~costs of ~~demand-side~~electric ~~management~~generation included in CG&E's frozen ~~costs~~rates. However, ~~resulting~~shopping ~~from~~credits for the ~~expiration~~first 20 percent of ~~the~~electricity ~~agreement~~usage in ~~May~~each ~~2000.~~customer ~~Also contributing~~class to ~~this~~switch ~~decrease~~suppliers ~~were~~are ~~expenses~~higher ~~related~~than toCG&E's electric ~~the~~generation ~~Limited~~costs ~~Early Retirement~~in ~~Program~~order into ~~2000,~~stimulate asthe ~~discussed~~development inof the ~~2000~~competitive ~~Form~~electric ~~10-K~~retail service market.

~~Depreciation~~ A Federal Energy Regulatory Commission order, that was effective April 2002, allowed Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. The order also authorizes the transfer of the CG&E generating assets to a non-regulated affiliate. However, Cinergy has determined that it can realize the benefits of the new joint dispatch agreement without transferring CG&E's generation assets. Therefore, while CG&E will continue to pursue any remaining regulatory and other approvals already in process that are necessary for the transfer of CG&E's generation assets, Cinergy does not plan to transfer CG&E's generating assets to a non-regulated affiliate in the foreseeable future.

Cinergy’s Depreciation expense increased for the nine months ended September 30, 2001, as compared to the same period last year. This increase was primarily attributable to the acquisition of additional depreciable plant, including investments in non-regulated peaking generation. Also contributing to the increase were increases in depreciable plant of PSI and CG&E. 47

~~Taxes~~ ~~Other~~ ~~Than~~ CAUTIONARY ~~Income~~STATEMENTS ~~Taxes~~REGARDING FORWARD-LOOKING INFORMATION

~~Cinergy’s, CG&E’s,~~ In ~~and~~this ~~PSI’~~report we discuss various matters that may make management's ~~Taxes~~corporate ~~other~~vision ~~than~~of ~~income~~the ~~taxes~~future clearer for you. This report outlines management's goals and ~~decreased~~projections for the ~~nine~~future. ~~months~~These ~~ended~~goals ~~September~~and ~~30,~~projections ~~2001,~~are asconsidered ~~compared~~forward-looking tostatements ~~the same~~and ~~period~~are ~~last~~based ~~year.~~on ~~This~~management's ~~decrease~~beliefs ~~was~~and ~~primarily~~assumptions. ~~attributable~~These toforward-looking ~~reduced property~~statements ~~tax~~are ~~expense~~identified by terms and ~~other~~phrases ~~tax~~such ~~changes~~as ~~associated~~"anticipate", ~~with~~"believe", ~~deregulation~~"intend", in"estimate", ~~Ohio~~"expect", "continue", "should", "could", "may", "plan", "project", "predict", "will", and similar expressions.

~~Interest~~ Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These include:

•

Factors affecting operations, such as:

(1): unusual weather conditions;
(2): catastrophic weather-related damage;
(3): unscheduled generation outages;
(4): unusual maintenance or repairs;
(5): unanticipated changes in fossil fuel costs, gas supply costs, or availability constraints;
(6): environmental incidents; and
(7): electric transmission or gas pipeline system constraints.

•: State, federal and local legislative and regulatory initiatives.
•: The timing and extent of the entry of additional competition in electric or gas markets and the effects of continued industry consolidation through the pursuit of mergers, acquisitions, and strategic alliances.
•: Regulatory factors such as changes in the policies or procedures that set rates; changes in our ability to recover expenditures for environmental compliance, purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases.
•: Financial or regulatory accounting principles or policies imposed by governing bodies.
•: Political, legal, and economic conditions and developments in the United States (U.S.) and the foreign countries in which we have a presence. These would include inflation rates and monetary fluctuations.
•: Changing market conditions and other factors related to physical energy and financial trading activities. These would include price, basis, credit, liquidity, volatility, capacity, transmission, currency exchange rates, interest rates, and warranty risks.
•: The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.
•: Availability of, or cost of, capital.
•: Employee workforce factors, including changes in key executives, collective bargaining agreements with union employees, and work stoppages.
•: Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.

Cinergy’s Interest expense increased for the nine months ended September 30, 2001, as compared to the same period last year. This increase was primarily due to debt issuances principally associated with the acquisition of additional peaking generation and general business purposes. Partially offsetting the affect of the increase in debt issuances was a decrease in short-term interest rates. 48

•: Costs and effects of legal and administrative proceedings, settlements, investigations, and claims. Examples can be found in Note 7 of the "Notes to Financial Statements" in "Part I. Financial Information."
•: Changes in international, federal, state, or local legislative requirements, such as changes in tax laws, tax rates, and environmental laws and regulations.

~~Income~~ Unless we ~~Taxes~~otherwise have a duty to do so, the Securities and Exchange Commission's (SEC) rules do not require forward-looking statements to be revised or updated (whether as a result of changes in actual results, changes in assumptions, or other factors affecting the statements). Our forward-looking statements reflect our best beliefs as of the time they are made and may not be updated for subsequent developments.

CG&E’s and PSI’s Income tax expense increased for the nine months ended September 30, 2001, as compared to the same period last year. This increase was primarily due to the increase in taxable income. 49

~~ULH&P~~ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~The~~ In ~~Results~~this ofreport ~~Operations discussion~~Cinergy ~~for~~(which ~~ULH&P~~includes isCinergy ~~presented~~Corp. ~~only~~and ~~for~~all ~~the~~of our ~~nine~~regulated ~~months~~and ~~ended September~~non-regulated 30subsidiaries) is, ~~2001~~at times, referred to in ~~accordance~~the ~~with~~first ~~General~~person ~~Instruction~~as ~~H(2)(a)~~"we", of"our", ~~Form~~or ~~10-Q~~"us".

~~Electric~~ The following ~~and~~discussion ~~gas~~should ~~margins~~be read in conjunction with the accompanying financial statements and ~~net~~related ~~income~~notes ~~for~~included ~~ULH&P~~elsewhere ~~for~~in this report and the ~~nine~~2001 Form 10-K. ~~months~~The ~~ended~~results ~~September~~discussed ~~30,~~below ~~2001~~are ~~and~~not ~~2000,~~necessarily ~~were~~indicative ~~as follows:~~of the results that may occur in any future periods.

---------------------------------------------------- ULH&P ----- 2001 2000 ---- ---- (in thousands) Electric gross margin $ 61,164 $Introduction 43,526 Gas gross margin 26,740 26,961 Net income 26,854 13,108 ----------------------------------------------------

~~Electric~~ In ~~operating revenues~~Management's ~~for~~Discussion ~~the~~and ~~nine~~Analysis ~~months~~of ~~ended~~Financial ~~September~~Condition ~~30,~~and ~~2001,~~Results ~~as compared to the same period last year, increased primarily due to the recognition~~ of ~~revenues previously~~Operations ~~deferred subject to refund in connection with a retail rate filing with the Kentucky Public Service Company~~ (~~KPSC).~~ MD&A ~~settlement agreement~~), ~~which allowed~~we ~~the~~explain ~~retention~~our ofgeneral ~~such~~operating ~~revenues~~environment, ~~was~~as ~~approved~~well byas ~~the KPSC in May 2001.~~our ~~The~~liquidity ~~purchase~~and ~~price~~capital ~~paid~~resources ~~per~~and ~~MWh~~results ~~remained~~of ~~somewhat constant with the same period last year~~operations. ~~For~~Specifically, ~~further~~we ~~information~~discuss ~~see Note 4(h) in~~ the ~~“Notes~~following: ~~to Financial Statements” in “Part I. Financial Information.”~~

•: factors affecting current and future operations;
•: potential sources of cash for future capital expenditures;
•: why revenues and expenses changed from period to period; and
•: how the above items affect our overall financial condition.

The increase in Gas operating revenues for the nine months ended September 30, 2001, as compared to the same period last year, was mainly due to a higher price received per mcf sold. Gas purchased expense increased due to an increase in the average cost per mcf of gas purchased. The market price of natural gas has increased significantly since the same period last year, which has caused ULH&P to pay more for the gas it delivers to customers. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law. Organization

~~RESULTS~~ Cinergy OFCorp., ~~OPERATIONS~~a -Delaware ~~FUTURE~~corporation created in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are public utility subsidiaries. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the SEC under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other principal subsidiaries are:

•: Cinergy Wholesale Energy, Inc.;
•: Cinergy Services, Inc. (Services);
•: Cinergy Investments, Inc.;
•: Cinergy Global Resources, Inc.; and
•: Cinergy Technologies, Inc.

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

~~Wholesale~~ In 2001, ~~Market~~CG&E ~~Developments~~began a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio is in the development stage. CG&E is recovering its Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen during this market development period.

~~Supply-side~~ PSI, ~~Actions~~an Indiana corporation, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

~~As discussed in the 2000~~ The ~~Form~~majority ~~10-K,~~of onour ~~September~~operating ~~30,~~revenues ~~1999,~~are ~~Cinergy~~derived ~~Capital~~from ~~and Trading, Inc. (CC&T) formed a partnership (each party having a 50% ownership) with Duke Energy North America, LLC (Duke), to increase~~ the ~~available~~sale ~~generating~~of ~~capacity~~electricity ~~for~~and ~~use during peak demand periods. The partnership was formed for~~ the ~~purpose~~sale ~~of jointly constructing~~ and/or ~~owning~~transportation ~~three~~of ~~wholesale~~natural ~~generating facilities~~gas.

On March 9, 2000, the IURC issued an order, requiring the partnership to immediately suspend all construction activities at the site located near Cadiz, (Henry County) Indiana (a peaking plant with a total capacity of 129 megawatts (MW, the basic unit of electric energy equal to one million watts) of which we own 65 MW). In making this decision, the IURC found that it needed additional information related to the project before issuing a final decision. The issues raised were air quality, water supply, noise control, landscaping, plant abandonment, and emergency services training. The IURC held a hearing on this matter on November 17, 2000, and a favorable ruling was received on April 23, 2001. The plant consists of three gas turbine engines which began generating power commercially on July 31, August 11 and October 6, 2001, respectively. 50

OnLIQUIDITY ~~June~~AND 4,CAPITAL 2001, CC&T and Duke announced they would dissolve their partnership with respect to these three wholesale generating facilities and an exchange of these generating assets would occur. On September 13, 2001, the partnership was dissolved and CC&T obtained ownership of 100% of the 640 MW wholesale generating facility located in Madison County, Ohio and 100% of the 129 MW wholesale generating facility located near Cadiz, Indiana. In exchange for the Madison County, Ohio and Cadiz, Indiana generating facilities, Duke received 100% of the Vermillion County, Indiana generating facility, which will be operated by Cinergy for five years. The dissolution of the partnership increased Cinergy’s peaking capacity by 70 MW and further diversified our generation portfolio to 60% coal-fired base load and 40% gas-fired peaking. RESOURCES

~~During~~Environmental the second quarter 2001, CC&T obtained permits for possible future construction of additional natural gas-fired peaking plants in Ohio and Kentucky. These permits will allow us the flexibility to increase our portfolio of gas fired peaking plants and increase our overall capacity. Issues

AsAmbient ~~stated~~Air in the 2000 Form 10-K, Cinergy has 9,764 MW of coal-fired generation and we consume approximately 27 million tons of coal annually. Cinergy procures the majority of its coal through long-term supply contracts. The remainder is purchased in the open market, which recently has experienced significant price increases. These price increases will have a direct effect upon Cinergy’s cost to supply the electric commodity to our customers. With the implementation of electric deregulation in the State of Ohio and the associated termination of the fuel cost recovery mechanism, CG&E may not fully recover its retail related fuel costs. Standards

~~Demand~~ In 1997, the Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. Fine particulate matter refers to very small solid or liquid particles in the air. The EPA has estimated that it will take up to five years to collect sufficient ambient air monitoring data to determine fine particulate matter non-~~side~~attainment ~~Actions~~areas. A fine particulate monitoring network was put in place during 1999 and 2000. Following identification of non-attainment areas, the states will identify the sources of particulate emissions and develop emission reduction plans. These plans may be state-specific or regional in scope. We currently cannot predict the exact amount and timing of required reductions.

~~Cinergy~~ On May 14, ~~recorded~~1999, a the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) ruled that the EPA's final rule establishing the new ~~peak~~eight-hour ozone ~~demand~~standard onand ~~July~~the ~~23,~~fine ~~2001~~particulate matter standard constituted an invalid delegation of 10legislative authority,~~993~~ MWand also that the EPA had improperly failed to consider the beneficial health effects of ozone (shielding from Ultraviolet-B radiation) when it established the NAAQS ozone standards. ~~Subsequently~~In June 1999, ~~this~~the ~~peak~~EPA ~~demand~~appealed the conclusion that its standards constituted ~~was~~an ~~exceeded~~invalid ondelegation ~~August~~of 8legislative authority, ~~2001~~but ~~and~~did anot ~~new~~appeal ~~peak~~the ~~demand~~decision that it is required to consider the beneficial health effects of ~~11,083~~ozone MWwhen ~~was~~setting ~~recorded~~the NAAQS. On February 27, ~~Cinergy~~2001, ~~met~~the ~~customer~~U.S. ~~demands~~Supreme ~~for~~Court ~~both~~(Supreme ~~peaks~~Court) ~~with~~reversed ~~their~~the ~~own~~Court ~~supply~~of ~~and planned~~Appeals' ~~purchases~~ruling. ~~from~~However, ~~other~~the ~~regional~~Supreme ~~electric~~Court ~~suppliers~~invalidated the EPA's implementation procedure for the portion of the case dealing with the eight-hour ozone standard.

~~Federal~~ Following the ~~Energy~~Supreme ~~Regulatory~~Court's ~~Commission~~ruling, the Court of Appeals reconsidered the validity of the eight-hour ozone standard and the fine particulate matter standard, as a number of issues that were raised by the parties were not addressed in its original opinion invalidating those standards. On March 26, 2002, the Court of Appeals ruled in the EPA's favor on all remaining issues. Nonetheless, before the standards can be implemented, the EPA must conduct rulemaking to: (~~FERC~~1) assess ~~Notice~~the beneficial health effects of ~~Proposed~~ozone ~~Rulemaking~~in connection with the NAAQS ozone standards; and (2) develop an approach for implementing the ozone standard in accordance with the Supreme Court's opinion. At this time, the EPA predicts that emissions reductions will be required in the 2007-2019 timeframe, but we currently cannot predict the exact amount and timing of required reductions.

~~On September 27, 2001, the~~ See ~~FERC~~Note 7 ~~issued a Notice~~ of ~~Proposed~~the ~~Rulemaking,~~"Notes ~~proposing~~ to ~~promulgate~~Financial ~~new standards~~Statements" ofin ~~conduct~~"Part I. ~~regulations~~Financial ~~that~~Information" ~~would~~for ~~apply~~additional ~~uniformly~~Environmental toIssues ~~natural gas pipelines~~ and ~~transmitting~~other ~~public~~matters ~~utilities~~ that ~~are~~could ~~currently~~effect ~~subject~~our ~~to FERC’s standards of conduct~~liquidity. The FERC is proposing to adopt one set of standards of conduct to govern the relationships between regulated transmission providers and all their energy affiliates, broadening the definition of an affiliate covered by the standards of conduct, from the more narrow definition in the existing regulations. At this time, we are unable to predict either the outcome of this proceeding or its affect on Cinergy.

~~Retail~~Capital ~~Market Developments~~Resources

~~Federal~~ We ~~Update~~meet our current and future capital requirement needs through a combination of internally and externally generated funds, including the issuance of debt and/or equity securities.

~~President~~Notes ~~Bush~~Payable ~~has indicated~~and ~~that~~Other ~~legislation addressing the energy security needs of America deserves prompt consideration. He has appointed Vice President Cheney to head an interagency~~Short-~~task~~term force to recommend a course of action. In May 2001, the Vice President and the National Energy Policy Development Group released the National Energy Policy (Policy). Among other things, the Policy recommends increased conservation of energy and calls for the increase of supplies of electricity, oil, and natural gas consistent with environmentally sound principles. Many of these recommendations are being considered by Congress. Obligations

~~The~~Short-term President also recognized the need to balance the energy and environmental needs of the country and supported combining the multitude of environmental regulations facing electric utilities into one legislative package. The intent is to give the industry one clear set of environmental goals, along with an appropriate amount of time to meet necessary emission reductions, while providing environmental benefits to consumers. Cinergy has championed this approach within the industry, Congress and the Bush Administration and will strive to achieve an energy and environmental balance in any final legislative package. Borrowings

~~Ohio~~ At September 30, 2002, Cinergy Corp. had $630 million remaining unused and available capacity relating to its $1 billion revolving credit facilities. The revolving credit facilities are comprised of a $400 million, three-year senior revolving credit facility expiring in May 2004 and a $600 million, 364-day senior revolving credit facility expiring in February 2003. At September 30, 2002, certain of our non-regulated subsidiaries had $6 million of unused and available revolving credit lines.

As discussed in the 2000 Form 10-K, on July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation provided for a market development period that began January 1, 2001, and ends no later than December 31, 2005. 51

~~On May 8, 2000,~~ In ~~CG&E~~our ~~reached~~credit ~~a stipulated agreement with the PUCO staff and various other interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1~~facilities, ~~2001.~~Cinergy ~~On August 31, 2000, the PUCO approved CG&E’s stipulation agreement~~Corp. ~~Two~~has ~~parties~~covenanted ~~filed applications for rehearing with the PUCO. On October 18, 2000, the PUCO denied these applications. One of the parties appealed~~ to ~~the~~maintain: Ohio Supreme Court in the fourth quarter of 2000 and CG&E subsequently intervened in that case. On April 6, 2001, CG&E filed for dismissal of this appeal. On July 25, 2001, the Ohio Supreme Court denied CG&E’s motion to dismiss. CG&E is unable to predict the outcome of this proceeding.

•: a consolidated net worth of $2 billion; and
•: a ratio of consolidated indebtedness to consolidated total capitalization not to exceed 65 percent.

~~The August 31, 2000 order~~ A ~~authorizes~~breach ~~CG&E~~of tothese ~~transfer~~covenants ~~its~~could ~~generation~~result ~~assets~~in ~~to one or more non-regulated corporate subsidiary(ies). In addition to~~ the ~~regulatory~~termination ~~approvals received~~of ~~from~~ the ~~PUCO,~~credit ~~the~~facilities ~~IURC,~~ and the ~~KPSC,~~acceleration ~~this transfer requires the approval~~ of the ~~FERC~~related indebtedness. AsIn ~~the~~addition ~~transfer~~to isbreaches ~~contingent~~of ~~upon~~covenants, ~~CG&E~~certain other ~~receiving~~events ~~FERC~~that ~~approval~~could ~~and~~result ~~various~~in ~~third party consents,~~ the ~~timing~~termination ~~and receipt~~ of ~~which~~available ~~are~~credit ~~unknown,~~and ~~the~~acceleration ~~completion date~~ of the ~~transfer~~related ofindebtedness ~~generation~~include: ~~assets to non-regulated subsidiary(ies) is uncertain.~~

•: bankruptcy;
•: defaults in the payment of other indebtedness; and
•: judgments against the company that are not paid or insured.

~~Midwest~~ The latter ~~Independent~~two ~~Transmission~~events, ~~System Operator~~however, ~~Inc.~~are ~~(Midwest~~subject ~~ISO)~~to dollar-based materiality thresholds.

As ~~discussed in the 2000~~ ~~Form~~of ~~10-K~~September 30, in2002, ~~the~~our ~~fall~~operating ofcompanies ~~2000~~had ~~three~~regulatory ~~transmission~~authority ~~owners~~to ~~(Departing~~borrow ~~Companies) announced~~up ~~their intent~~ to ~~leave~~a ~~the~~total ~~Midwest~~of ~~ISO~~$1.27 billion ~~and~~in ~~join~~short-term ~~the~~debt ~~proposed~~($671 million ~~Alliance Regional~~for CG&E ~~Transmission~~and ~~Organization~~its ~~(Alliance)~~subsidiaries, including by$65 million ~~the~~for ~~end~~ULH&P, ofand ~~2001~~$600 million for PSI). OnAs ~~December 13~~of September 30, ~~2000~~2002, ~~six~~CG&E ~~additional~~and ~~transmission~~its ~~owners,~~subsidiaries ~~including~~had ~~Cinergy,~~$667 million (including ~~announced~~$63 million afor ~~plan~~ULH&P) ~~for~~unused ~~conditional~~and ~~withdrawal~~available ~~from~~and ~~the~~PSI ~~Midwest~~had ~~ISO~~$520 million ifunused ~~the~~and available ~~Departing~~under ~~Companies~~their ~~left~~respective ~~the~~regulatory ~~organization~~authority.

OnUncommitted January 24, 2001, the FERC issued an order providing 30 days of confidential settlement talks between the Alliance and the Midwest ISO and its stakeholders, in an effort to resolve issues related to such withdrawals. Cinergy actively participated in the settlement process. On February 23, 2001, the settlement judge reported to the FERC that settlement talks produced a unanimous comprehensive settlement between all related parties. The settlement includes three major components: Lines

a In ~~commitment~~addition to revolving credit facilities, Cinergy, CG&E, and PSI also maintain uncommitted lines of credit represented by written, enforceable agreements. However, the ~~Midwest~~lenders ~~ISO~~under such agreements are not obligated to make advances and, ~~the~~therefore, ~~Alliance~~we pay no fees for these lines of credit. The purpose of these agreements is to ~~establish~~provide ~~compatible/common~~the ~~operating~~framework ~~practices~~(including conditions to lending and events of default) ~~protocols~~for tomaking ~~promote~~borrowings at an interest rate and for a ~~seamless~~term ~~market~~that ~~within~~would be determined at the ~~Midwest;~~time that the borrower requests an advance. At September 30, 2002, Cinergy Corp. had uncommitted lines of $65 million, of which $45 million remained unused. CG&E and PSI have established uncommitted lines of $15 million and $60 million, respectively, all of which remained unused at September 30, 2002.

aCommercial ~~commitment by the three Departing Companies to pay the Midwest ISO $60 million as their share of the Midwest ISO’s startup costs as well as other commercial considerations; and~~ Paper

~~agreement~~ Cinergy ~~upon~~Corp. has a ~~methodology~~commercial topaper ~~establish~~program with a ~~single~~maximum ~~“within”~~outstanding ~~rate~~principal ~~for energy~~amount ~~transactions~~of ~~that~~$800 million. ~~take~~This ~~place~~program ~~entirely~~is ~~within~~supported by ~~the~~Cinergy ~~Midwest~~Corp.'s ~~ISO-Alliance Super~~$1 billion ~~Region,~~revolving ~~and~~credit afacilities. ~~commitment~~The bycommercial paper program at the ~~Midwest~~Cinergy Corp. ~~ISO~~level, ~~Alliance,~~in ~~and PJM Interconnection~~part, ~~L.L.C.~~supports tothe ~~establish~~short-term aborrowing ~~single~~needs ~~“through~~of CG&E and PSI. ~~out”~~At ~~rate for~~September 30, ~~transactions~~2002, ~~among~~Cinergy ~~the~~Corp. ~~three~~had ~~regional~~$311 million ~~transmission~~in ~~organizations.~~commercial paper outstanding.

~~The~~Variable ~~settlement,~~Rate ~~which~~Pollution ~~was signed~~Control by Cinergy, was approved by the FERC on May 8, 2001. Under terms of the settlement, the Departing Companies will be permitted to leave the Midwest ISO, and the other transmission owner members of the Midwest ISO, including Cinergy, will remain as members of the Midwest ISO until at least December 31, 2002. Also, as part of the settlement, both organizations have committed to begin operations by the end of 2001. Notes

On CG&E ~~June~~and 20PSI have issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to redeem their notes on a daily, ~~2001~~monthly, or annual basis, they are reflected in Notes payable and other short-term obligations in the Balance Sheets for Cinergy, CG&E, and ~~various~~PSI. ~~other~~At ~~Indiana~~September 30, ~~Midwest~~2002, CG&E ~~ISO~~and ~~transmission~~PSI ~~owners~~had $196 million ~~made~~and a$83 million outstanding in short-term ~~joint~~variable ~~filing~~rate ~~with~~pollution ~~the~~control ~~IURC~~notes, ~~seeking~~respectively. ~~permission~~In toOctober 2002, ~~transfer~~CG&E ~~functional~~and PSI redeemed $84 million and $47.6 million, respectively, of variable rate pollution control notes (see Notes 3 and 4 of ~~their~~ ~~transmission~~the ~~facilities~~"Notes to ~~the~~Financial ~~Midwest~~Statements" ~~ISO~~in "Part I. Financial Information" for additional information).

At a meeting of the FERC on July 10, 2001, a number of Regional Transmission Organization (RTO) related orders were approved, but in approving these orders the FERC suggested that they had an interest in limiting the number of RTO’s nationally. At the current time it is unclear if these suggestions will have any effect on the operations of the Midwest ISO.52

~~Repeal~~Money ~~of PUHCA~~Pool

~~Early~~ Cinergy ~~in 2001~~Corp., ~~S. 206~~Services, aand ~~bill~~our tooperating ~~repeal~~companies ~~the~~participate ~~PUHCA, was introduced~~ in ~~the~~a ~~U.S.~~money ~~Senate~~pool ~~(Senate). It~~arrangement ~~was referred~~ to ~~the~~better ~~Senate~~manage ~~Committee~~cash and onworking ~~Banking,~~capital ~~Housing~~requirements. ~~and~~Under ~~Urban~~this ~~Affairs for action. Consequently~~arrangement, athose ~~hearing~~companies ~~was~~with ~~held~~surplus ~~in the~~short-term ~~Subcommittee~~funds onprovide ~~Securities~~short-term ~~and~~loans ~~Investment~~ to ~~identify~~affiliates ~~support~~(other ~~and~~than Cinergy ~~opposition~~Corp.) toparticipating ~~this~~under ~~legislation~~this arrangement. S. ~~206~~This ~~was favorably~~surplus ~~reported~~cash ~~out~~may bybe afrom ~~19-1~~internal ~~vote~~or byexternal ~~the~~sources. ~~full~~The ~~Senate~~amounts ~~Committee~~outstanding onunder ~~Banking,~~this money ~~Housing~~pool ~~and~~arrangement ~~Urban~~are ~~Affairs~~shown inas ~~April 2001. This~~Notes ~~legislation~~receivable isfrom ~~now~~affiliated ~~awaiting~~companies ~~action~~or byNotes ~~the~~payable ~~full~~to ~~Senate. In~~affiliated companies ~~addition,~~on ~~PUHCA~~the ~~repeal~~Balance isSheets ~~part~~ of ~~Title VIII~~CG&E, ofPSI, Sand ULH&P. ~~388,~~Any amoney ~~bill~~pool borrowings ~~introduced~~outstanding inreduce the ~~Senate~~unused ~~that~~and ~~deals~~available ~~with~~short-term adebt ~~multitude~~regulatory ofauthority ~~issues concerning national energy~~of ~~security. S.~~CG&E, ~~388~~PSI, ~~is now pending before the Senate Committee on Energy~~ and ~~Natural Resources~~ULH&P.

InCapital ~~March 2001, H.R. 1101, a bill to repeal the PUHCA, was introduced in the U.S. House of Representatives as a companion piece of legislation to S. 206.~~Leases ~~It has been referred to the House Committee on Energy and Commerce for action.~~

~~President~~ Our ~~Bush~~operating ~~has identified~~companies ~~the~~are ~~need~~able ~~for~~to enter into capital leases subject to the ~~repeal~~authorization limitations of the ~~PUHCA~~applicable asstate autility ~~priority~~commissions. New financing authority is subject to the approval of ~~federal~~the ~~energy legislation~~respective commissions. ~~The~~On ~~Policy~~May 22, ~~recommends~~2002, ~~PUHCA~~ULH&P ~~repeal~~received asapproval ~~part~~from ofthe aKentucky ~~broader~~Public Service ~~restructuring~~Commission (KPSC) to enter into up to an additional $25 million of capital lease obligations for the ~~electricity~~period ~~industry~~ending December 31, 2004. WeOn ~~support~~June 26, ~~the~~2002, PSI ~~repeal~~received ofapproval ~~the~~from ~~PUHCA~~the ~~either~~Indiana asUtility ~~part~~Regulatory ofCommission ~~broader~~(IURC) ~~restructuring~~to ofenter ~~the~~into ~~electricity~~an ~~industry~~additional or$100 million asof capital lease obligations ~~separate~~for ~~legislation~~the period ending December 31, 2003.

~~Significant~~Long-term ~~Rate Developments~~Debt

~~Purchased~~ We ~~Power~~are ~~Tracker~~required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and Indiana. The SEC under the PUHCA regulates the issuance of long-term debt by Cinergy Corp. The respective state utility commissions regulate the issuance of long-term debt by our operating companies. In June 2000, the SEC issued an order under the PUHCA authorizing Cinergy Corp., over a five-year period expiring in June 2005, to increase its total capitalization based on a balance at December 31, 1999 (excluding retained earnings and accumulated other comprehensive income (loss)) by an additional $5 billion, through the issuance of any combination of equity and debt securities. This increased authorization is subject to certain conditions, including, among others, that common equity comprises at least 30 percent of Cinergy Corp.'s consolidated capital structure and that Cinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.

As In July 2002, ~~discussed~~CG&E infiled a shelf registration statement with the ~~2000~~SEC for the issuance of up to $700 million in any ~~Form~~combination ~~10-K~~of unsecured debt securities, infirst ~~May~~mortgage ~~1999~~bonds, ~~PSI~~or ~~filed~~preferred astock. ~~petition~~This ~~with~~shelf ~~the~~registration ~~IURC~~statement ~~seeking~~became effective in September 2002, and on September 23, 2002, CG&E ~~approval~~sold $500 million of asenior ~~purchased~~unsecured ~~power~~debentures ~~tracking~~thereby ~~mechanism~~reducing ~~(Tracker).~~the ~~This~~standby ~~request~~capacity ~~was designed~~of its shelf registration statement to $200 million. ~~provide~~PSI ~~for~~maintains shelf registration statements with the ~~recovery~~SEC ofwith ~~costs~~authority ~~related~~remaining to ~~purchases~~issue of$400 million ~~power~~in unsecured ~~necessary~~debentures, to$205 million ~~meet~~in ~~native~~first ~~load~~mortgage ~~requirements~~bonds, toand ~~the~~$40 million ~~extent~~in ~~such~~preferred ~~costs~~stock. ~~are~~ULH&P ~~not~~may issue up to $30 million in secured ~~sought~~or ~~through~~unsecured ~~the~~debt ~~existing~~securities ~~fuel~~and ~~adjustment~~up ~~clause~~to $20 million in first mortgage bonds.

In CG&E, ~~March 2001~~PSI, ~~the~~and ~~IURC~~ULH&P are also subject to ~~held~~the avarious ~~hearing~~state public utility commissions for authority to ~~review~~issue securities. At September 30, 2002, PSI’s ~~2000~~had ~~purchases~~authority ~~and~~to ~~rule~~issue onup ~~its~~to ~~associated~~$452 million ~~request~~in ~~for~~any ~~recovery~~combination of ~~costs.~~unsecured Ondebt ~~May~~securities ~~16,~~or ~~2001,~~first ~~the~~mortgage ~~IURC~~bonds, ~~issued~~and ~~an order~~ULH&P ~~approving~~had ~~the~~authority ~~recovery~~to ofissue ~~PSI’s~~up ~~summer~~to ~~2000~~$75 million in ~~purchased~~secured ~~power costs~~or ~~($18~~unsecured bonds.5 ~~million)~~As ~~via~~a result of the ~~Tracker~~issuance ~~(net~~of $500 million of aunsecured ~~mitigation~~debentures, ~~credit~~CG&E ~~and~~had ~~net~~no ofremaining authority for the ~~displaced~~issuance ~~energy~~of ~~amount~~securities. ~~recovered~~CG&E ~~through~~intends to file for additional authority from the ~~fuel~~PUCO ~~adjustment~~in ~~charge~~the ~~process)~~fourth quarter of 2002.

~~A hearing was held before~~ On ~~the~~October 18, ~~IURC on February 15~~2002, ~~2001 to determine whether it was appropriate for~~ PSI to ~~continue~~filed ~~the Tracker for future periods. On April 11, 2001,~~ a ~~favorable order~~petition ~~was~~with ~~received extending~~ the ~~Tracker~~IURC for ~~two years, through~~ the ~~summer~~purpose of ~~2002.~~ ~~PSI~~securing isauthorization ~~authorized~~and approval to ~~recover~~issue ~~90%~~promissory notes ofto ~~its~~Cinergy ~~purchased~~for ~~power expenses through~~ the ~~Tracker~~acquisition ~~(net~~ of the ~~displaced~~Butler ~~energy~~County, ~~portion~~Ohio ~~recovered through the fuel recovery process~~ and ~~net~~Henry ~~of the mitigation credit portions)~~County, ~~with~~Indiana ~~the remaining~~peaking ~~10%~~plants. ~~deferred~~These ~~for~~peaking ~~subsequent~~plants ~~recovery~~are incurrently ~~PSI’s~~owned ~~next general~~by ~~rate~~indirect ~~case~~wholly- ~~(subject to a showing of prudence).~~

~~Termination of Operating Agreement~~53

~~Upon~~ owned ~~consummation~~subsidiaries of ~~the merger~~Cinergy. ~~between~~In ~~CG&E~~the ~~and~~petition, PSI ~~Resources~~seeks ~~Inc~~the approval to issue two promissory notes to Cinergy. inOne ~~1994,~~promissory note will be for the principal amount of $200 million with an ~~operating~~annual interest rate of 6.302% and will mature on ~~agreement~~April 15, ~~entered~~2004. ~~into~~The ~~between~~second ~~CG&E~~promissory note will be for the remainder of the purchase price, ~~PSI~~which will be determined by the IURC, with an annual interest rate of 6.403% and ~~Services~~will ~~was~~mature on ~~filed~~September 1, ~~with~~2004. ~~and~~Each ~~approved~~promissory bynote will be pre-payable at the ~~FERC~~option of PSI, in whole or in part, at any time before its scheduled maturity, without penalty or premium. ~~This~~The ~~agreement~~promissory ~~was~~notes ~~established~~will be subordinated and subject in right of payment to ~~provide~~the full prior payment of all ~~for~~senior debt of PSI. At this time, PSI cannot predict the ~~coordinated~~outcome ~~planning~~of ~~and~~this ~~operation~~matter. For further discussion of the ~~two~~acquisition, ~~regulated~~see ~~entities’ generation~~"Transfer ~~and~~of ~~transmission~~Generating ~~systems~~Assets to PSI" in "Results of Operations—Future."

InOff-Balance ~~October~~Sheet 2000, CG&E, PSI, and Services filed a notice of termination of the operating agreement with the FERC. The reason for the termination filing was that, with the introduction of deregulation in the State of Ohio, the companies no longer share the common characteristics that formed the basis for the operating agreement. On December 22, 2000, the FERC ruled that the companies have the contractual right to terminate the operating agreement. Additionally, the FERC established a termination effective date of May 22, 2001, and set a May 1, 2001, hearing date on the issue of the reasonableness of termination. Financing

~~Certain~~ As ~~parties~~discussed ~~appealed~~ in the ~~FERC’s~~2001 ~~December 22~~Form 10-K, ~~2000~~Cinergy ~~decision~~uses special-purpose entities (SPE) to finance various projects. OnThe ~~March~~Financial ~~14,~~Accounting ~~2001,~~Standards ~~the~~Board ~~IURC initiated~~(FASB) issued an ~~investigation~~exposure ~~proceeding~~draft ~~into~~in ~~the~~July 2002 ~~termination~~on a proposed interpretation of ~~the~~consolidation ~~operating agreement.~~accounting Onstandards ~~May~~that 2,would significantly ~~2001,~~change the ~~parties~~consolidation torequirements ~~the~~for ~~FERC~~SPEs. ~~proceeding~~We ~~reached~~have ~~a settlement~~reviewed ~~resolving~~the ~~termination~~impact ~~issues~~of this proposal and, ~~certain~~if ~~compensation~~adopted ~~and~~in ~~damage issues.~~its ~~This~~current ~~settlement~~form, ~~which~~we ~~was~~believe ~~approved~~that byit would require consolidation of all the ~~FERC~~SPEs ondiscussed ~~June~~in ~~13,~~the 2001 Form 10-K, ~~delayed~~ except the ~~termination~~accounts receivable sale facility discussed in Note 5 of the ~~existing~~"Notes ~~operating~~to ~~agreement~~Financial ~~until~~Statements" ain ~~new~~"Part I. Financial ~~successor~~Information." ~~agreement~~The ~~has~~accounts ~~been~~receivable ~~allowed~~sale facility involves transfers of financial assets to ~~become~~a ~~effective~~qualifying SPE, which is exempted from consolidation by ~~the~~Statement ~~FERC.~~of ~~The~~Financial Accounting Standards ~~settlement~~No. 140, ~~also~~Accounting ~~provided~~for ~~that~~Transfers ~~the~~and ~~parties~~Servicing ~~would~~of ~~engage~~Financial inAssets ~~negotiations~~and Extinguishments of Liabilities and this proposal. This exposure draft ~~concerning~~proposes that SPEs not meeting the ~~terms~~required ~~and~~criteria ~~conditions~~be consolidated at fair value, effective in the second quarter of a2003 ~~successor~~for ~~agreement(s)~~Cinergy.

On As discussed ~~August~~in 9,the 2001 Form 10-K, ~~the parties~~Cinergy tohas ~~both~~an ~~the~~arrangement ~~IURC~~with ~~investigation~~an ~~proceeding~~SPE ~~and~~that ~~the~~has ~~previous~~contracted ~~FERC proceeding~~to ~~entered~~buy ~~into~~five ~~two~~combustion turbines ~~complementary settlement agreements~~(turbines). ~~Both~~In ~~agreements addressed, among other things,~~ the ~~terms~~second ~~and~~quarter ~~conditions~~ of a2002, ~~proposed~~Cinergy ~~new~~exercised ~~joint generation~~its ~~operating~~option ~~agreement~~to ~~and~~purchase ~~a proposed new joint transmission operating agreement. The IURC settlement agreement was approved by~~ the ~~IURC~~contractual onrights ~~September 11,~~to ~~2001.~~two ~~Both~~of the ~~IURC~~turbines and ~~the FERC settlement agreements are conditioned upon~~ ~~FERC~~subsequently ~~acceptance~~sold ofthose ~~the~~rights ~~proposed~~to ~~successor~~third ~~agreements~~parties. Cinergy ~~filed~~recognized ~~the successor~~a ~~agreements~~loss ~~with~~of ~~the~~$6.9 million ~~FERC~~ on ~~October~~these ~~29, 2001~~sales. AtThe ~~this~~rights ~~time,~~to ~~we cannot predict~~ the ~~outcome~~remaining ofturbines remain ~~the~~with ~~FERC proceedings regarding~~ the ~~proposed successor agreements~~SPE.

~~PSI Fuel Adjustment Charge~~54

AsSecurities discussed in the 2000 Form 10-K, PSI defers fuel costs that are recoverable in future periods subject to IURC approval under a fuel recovery mechanism. On June 6, 2001, the IURC issued an order in a PSI fuel recovery proceeding, disallowing approximately $14 million of deferred costs. On June 26, 2001, PSI formally requested that the IURC reconsider its disallowance decision. On August 24, 2001, the IURC indicated that it will reconsider its decision. PSI believes it has strong legal and factual arguments in its favor and that it will ultimately be permitted to recover these costs. However, PSI cannot definitively predict the ultimate outcome of this matter. Ratings

~~PSI~~ As ~~recently filed a petition with the IURC requesting authority to recover $16 million in under billed fuel costs incurred from March 2001 through May 2001. The IURC approved recovery~~ of ~~these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of~~September 30, ~~and underlying reasons for~~2002, the ~~under~~major ~~billed~~credit ~~fuel~~ratings ~~costs.~~agencies ~~A hearing~~rated isour ~~scheduled~~securities ~~for~~as ~~April~~follows: ~~2002.~~

Construction Work in Process (CWIP) Ratemaking Treatment for Nitrogen Oxide (NOX) Equipment.

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

(1): Fitch IBCA (Fitch)
(2): Moody's Investors Service (Moody's)
(3): Standard & Poor's Ratings Services (S&P)

~~During the third quarter of~~ The ~~2001,~~lowest ~~PSI~~investment ~~filed~~grade ancredit ~~application~~rating ~~requesting CWIP ratemaking treatment~~ for ~~costs~~Fitch ~~related~~is to NOX equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on the equipment during the construction period. PSI will file its caseBBB-~~in-chief~~, ~~during~~Moody's ~~the fourth quarter of 2001. A hearing~~ is ~~scheduled~~ ~~for the first quarter of 2002. At this time~~Baa3, weand ~~cannot~~S&P ~~predict~~is ~~the outcome of the hearing~~BBB-.

~~Market~~ In April 2002, ~~Risk~~Moody's ~~Sensitive~~affirmed ~~Instruments~~the credit ratings of Cinergy Corp. and ~~Positions~~its operating subsidiaries, CG&E and PSI. Moody's also removed Cinergy Corp. from review for possible downgrade, and assigned stable outlooks to the debt and preferred stock of Cinergy Corp. and all of its operating subsidiaries.

We In June 2002, ~~market~~S&P ~~and~~affirmed ~~trade electricity~~Cinergy Corp.'s corporate credit rating, ~~natural~~the ~~gas~~rating of the company's commercial paper program, and ~~other~~the secured ~~energy-related~~debt ~~products.~~ratings Weof ~~use over-~~CG&E and PSI, while lowering the~~-counter~~ ~~forward~~credit ~~and~~ratings ~~option~~on ~~contracts~~other ~~for~~issuances. S&P removed all of the ~~purchase~~Cinergy Corp., CG&E, and ~~sale~~PSI ofratings from ~~electricity~~CreditWatch ~~and~~with ~~also~~negative ~~trade~~implications ~~exchange-traded~~and ~~futures~~assigned ~~contracts~~a stable outlook.

~~As stated~~ Also in ~~our 2000 Form 10-K~~June 2002, inFitch ~~2000~~affirmed the ~~Western~~credit ~~U.S.,~~ratings ~~primarily California, began experiencing unprecedented price levels and volatility for wholesale electricity. Because~~ of ~~the~~ ~~nature~~Cinergy ~~of deregulation in California, California’s two largest utilities accumulated significant unpaid obligations~~Corp. ~~One~~Fitch ofalso ~~these~~changed ~~utilities declared bankruptcy in~~ the ~~second~~rating ~~quarter~~outlook ofon ~~2001~~these ~~and the other has been working~~securities ~~with~~from ~~the~~negative ~~state~~ to ~~finance~~stable ~~its unpaid obligations. We continue to maintain a balanced Western U.S. portfolio~~ and ~~have~~affirmed ~~no unrealized gain positions directly with these utilities. A portion of our Energy risk management assets and Energy risk management liabilities are with counterparties in~~ the ~~Western U.S.~~ratings ~~However, prices have dropped significantly in the second and third quarters~~ of ~~2001.~~CG&E ~~As a result of these price decreases~~ and ~~a declining level of outstanding contracts, our potential exposure in the Western U~~PSI.S. ~~has diminished.~~

~~Our natural gas trading~~ These ~~volumes~~securities ~~have~~ratings ~~increased~~may ~~substantially~~be ~~during~~revised ~~2001.~~or ~~Because~~withdrawn ofat ~~this~~any ~~volume~~time, ~~change~~ and ~~the~~each ~~increasing~~rating ~~volatility~~should ofbe ~~gas~~evaluated ~~prices,~~independently ~~our~~of ~~risk~~any ~~exposure to these markets has increased. However, we continue to employ value-at-risk analysis and~~ other ~~methodologies~~ ~~to mitigate our risks in all trading operations, including natural gas trading~~rating.

~~From~~Equity ~~time to time, we may utilize foreign exchange forward contracts and currency swaps to hedge certain of our net investments in foreign operations.~~Securities

~~Our~~ In ~~net~~February 2002, ~~exposure~~Cinergy toissued ~~changes in~~6.5 million ~~interest~~shares ~~rates primarily consists~~ of ~~debt~~common ~~instruments~~stock with ~~floating~~net ~~interest~~proceeds of ~~rates~~approximately ~~that are benchmarked to various market indices~~$200 million. ToAs ~~manage~~discussed ~~the exposure to fluctuations~~ in ~~interest~~the ~~rates~~2001 ~~and to lower funding costs~~Form 10-K, wein ~~evaluate the use of~~November 2001, ~~and~~Cinergy ~~have~~chose ~~entered~~to ~~into, interest rate swaps.~~

See Notes 1(b) and (c) of the “Notes to Financial Statements” in “Part I. Financial Information” for our accounting policies for certain derivative instruments. Our market risks have not changed materially from the market risks reported in the 2000 Form 10-K. 55

~~Gas~~ reinstitute ~~Industry~~the practice of issuing new Cinergy Corp. common shares to satisfy obligations under its various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. See Note 2 of the "Notes to Financial Statements" in "Part I. Financial Information" for additional information on issued shares.

~~ULH&P~~ In July 2002, ~~Gas~~Cinergy ~~Rate~~announced ~~Case~~that it is implementing a policy that will generally prohibit executive officers and directors from selling stock acquired by exercising options until 90 days after they leave the company or board.

On May 4, 2001, ULH&P filed a retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services by approximately $7 million annually, or 8% overall. A hearing in this matter is scheduled to begin November 28, 2001. We expect that any rate change as a result of this filing will be effective in the first quarter of 2002. Simultaneously, ULH&P requested recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $112 million over the next ten years. Guarantees

~~CG&E~~ Cinergy ~~Gas~~Corp. ~~Rate~~has ~~Case~~made separate guarantees to certain counterparties regarding performance of commitments by our consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. We are subject to a SEC order under the PUHCA, which limits the amount we can have outstanding under guarantees at any one time to $2 billion. As of September 30, 2002, we had $547 million outstanding under the guarantees issued, of which approximately 75 percent represents guarantees of obligations reflected on Cinergy's Consolidated Balance Sheets. These outstanding guarantees relate to subsidiary and joint venture indebtedness and performance commitments.

OnCollateral July 31, 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution services by approximately $26 million or 5% overall. We expect that any rate change as a result of this filing will be effective in the second quarter of 2002. Simultaneously, CG&E requested recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $716 million over the next ten years. Requirements

~~Gas~~ Cinergy ~~Customer~~has ~~Choice~~certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade. Based upon our September 30, 2002 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $48 million in collateral related to its gas and power trading operations in connection with a downgrade to anything below an investment grade rating.

In January 2000, Investments sold Cinergy Resources, Inc. (CRI), a former subsidiary, to Licking Rural Electrification, Inc. doing business as The Energy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and CRI were named as defendants in three class actions lawsuits. These lawsuits are in connection with Energy Cooperative’s removal from the Ohio Gas Customer 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. On March 30, 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and CRI. This lawsuit concerns any obligations or liability Investments may have to Energy Cooperative following its sale of CRI. We intend to vigorously defend these lawsuits. At the present time, Cinergy cannot predict the outcome of these suits. 56

~~Gas~~ 2002 ~~Prices~~QUARTERLY RESULTS OF OPERATIONS—HISTORICAL

AsSummary ~~the result~~ of the market price of natural gas increasing significantly in 2000, CG&E’s and ULH&P’s gas supply costs increased. These costs are passed directly through to the customer dollar-for-dollar under the gas cost recovery mechanisms that are applicable in Ohio and Kentucky. In January 2001, the KPSC ordered all gas distribution companies in Kentucky, including ULH&P, to begin filing and revising their gas cost recovery rate every month until further notice. During 2001, CG&E and ULH&P have lowered their rates in accordance with the downward trending gas prices and on July 17, 2001 the KPSC terminated the monthly filing requirement. Results

On Electric ~~May~~and ~~14, 2001, ULH&P filed an application with the KPSC requesting approval of a~~ gas ~~procurement-hedging~~ ~~program~~gross ~~designed~~margins toand ~~mitigate~~net ~~gas~~income ~~price~~for ~~volatility. On July 16~~Cinergy, ~~2001~~CG&E, and ~~the~~PSI ~~KPSC~~for ~~approved~~ the ~~pilot~~quarters ~~program~~ended ~~for~~September 30, ~~the 2001-~~2002 ~~heating~~and ~~season, subject~~2001 towere ~~certain~~as ~~restrictions.~~follows:

Accounting Changes

	Cinergy(1)				CG&E and subsidiaries				PSI
	2002		2001		2002		2001		2002		2001
					(in thousands)
Electric gross margin	$	683,322	$	650,671	$	356,158	$	345,546	$	302,089	$	268,122
Gas gross margin		37,904		25,020		28,858		28,488		—		—
Net income		130,568		128,471		71,769		89,390		67,643		56,454

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

~~Business~~ Net income ~~Combinations~~for ~~and~~the ~~Intangible~~third ~~Assets~~quarter of 2002 was $131 million ($.77 per share on a diluted basis) as compared to $128 million ($.80 per share on a diluted basis) for the same period last year. Income before taxes for the period was $176 million compared to $208 million for the same period a year ago. Increased gross margins were offset by higher operating costs. Cinergy's income also reflects a reduction in income taxes primarily related to tax credits associated with the production of synthetic fuel, beginning in July 2002.

OnElectric ~~July~~Operating 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the “reporting unit” level, which will be defined within Cinergy, after further review, and will be a level no broader than the current business segments discussed in Note 5. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. We began applying Statement 141 in the third quarter of 2001 and we will adopt Statement 142 in the first quarter of 2002. Until we adopt Statement 142, goodwill will continue to be amortized. We do not believe that the discontinuance of amortization of goodwill will be material to our 2002 results of operations. We are analyzing the impact of the initial impairment test, and are unable to predict, at this time, whether the implementation of these accounting standards will be material to our financial position or results of operations. Revenues

Asset Retirement Obligations

		Cinergy(1)						CG&E and subsidiaries					PSI
		2002		2001		% Change		2002		2001		% Change	2002		2001		% Change
		(in millions)
Retail		$	803	$	772	4		$	426	$	423	1	$	377	$	349	8
Wholesale			1,694		1,747	(3	)		1,278		839	52		386		910	(58	)
Transportation			4		1	—			4		1	—		—		—	—
Other			53		19	—			40		13	—		14		8	75

	Total	$	2,554	$	2,539	1		$	1,748	$	1,276	37	$	777	$	1,267	(39	)

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

In Electric ~~July~~operating ~~2001,~~revenues ~~the~~increased ~~FASB issued~~for ~~Statement~~Cinergy ofand CG&E ~~Financial~~and ~~Accounting~~decreased ~~Standards~~for ~~No.~~PSI ~~143,~~for ~~Accounting~~the ~~for Asset~~quarter ~~Retirement~~ended ~~Obligations~~September 30, ~~(Statement~~2002, ~~143).~~as ~~Statement~~compared ~~143~~to ~~requires~~2001. ~~fair~~Retail ~~value~~revenues ~~recognition~~increased offor ~~legal~~Cinergy ~~obligations~~and toPSI ~~retire~~primarily ~~long-lived~~due ~~assets~~to atincreased ~~the~~megawatt ~~time such~~hour ~~obligations~~(MWh) ~~are~~sales ~~incurred.~~as ~~The~~a ~~initial~~result of ~~recognition~~warmer ofthan ~~this~~normal ~~liability~~weather ~~will~~for ~~be accompanied~~the byquarter. aThe ~~corresponding~~revenue increase inalso ~~property,~~reflects ~~plant,~~higher realizations and ~~equipment (PP&E).~~changes ~~Subsequent~~in torate ~~the~~tariff ~~initial~~adjustments ~~recognition,~~associated ~~the~~with ~~liability~~demand-side ~~will~~management beprograms ~~adjusted~~and ~~for~~certain ~~revisions~~construction toprograms ~~the~~(see ~~expected~~"Construction ~~cash~~Work ~~flows~~in ofProgress" ~~the~~in ~~retirement~~"Results ~~obligation (with~~of ~~corresponding~~Operations-Future"). ~~adjustments to PP~~CG&E),'s ~~and~~retail ~~for~~revenues ~~accretion~~were ofrelatively ~~the liability~~flat ~~due~~for to the ~~passage~~quarter ofended ~~time~~September 30, ~~(recognized~~2002, as ancompared <

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