10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005

or

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

For the transition period from           to          

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

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

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

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.

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 with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

As of July 31, 2005, shares of common stock outstanding for each registrant were as listed:

Registrant	Description	Shares
Cinergy Corp.	Par value $.01 per share	198,881,451
The Cincinnati Gas & Electric Company	Par value $8.50 per share	89,663,086
PSI Energy, Inc.	Without par value, stated value $.01 per share	53,913,701
The Union Light, Heat and Power Company	Par value $15.00 per share	585,333

2

TABLE OF CONTENTS

Item Number
	PART I. FINANCIAL INFORMATION
1	Financial Statements
	Cinergy Corp. and Subsidiary Companies
	Condensed Consolidated Statements of Income
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Changes in Common Stock Equity
	Condensed Consolidated Statements of Cash Flows
	The Cincinnati Gas & Electric Company and Subsidiary Companies
	Condensed Consolidated Statements of Income and Comprehensive Income
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Cash Flows
	PSI Energy, Inc. and Subsidiary Company
	Condensed Consolidated Statements of Income and Comprehensive Income
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Cash Flows
	The Union Light, Heat and Power Company
	Condensed Statements of Income
	Condensed Balance Sheets
	Condensed Statements of Cash Flows
	Notes to Condensed Financial Statements
	Cautionary Statements Regarding Forward-Looking Information
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Pending Merger
	Executive Summary
	2005 Quarterly Results of Operations - Cinergy
	2005 Quarterly Results of Operations - CG&E
	2005 Quarterly Results of Operations - PSI
	2005 Year-to-date Results of Operations - Cinergy
	2005 Year-to-date Results of Operations - CG&E
	2005 Year-to-date Results of Operations - PSI
	2005 Year-to-date Results of Operations - ULH&P
	Liquidity and Capital Resources
	Future Expectations/Trends
	Market Risk Sensitive Instruments
	Accounting Matters
3	Quantitative and Qualitative Disclosures About Market Risk
4	Controls and Procedures
	PART II. OTHER INFORMATION
1	Legal Proceedings
2	Unregistered Sales of Equity Securities and Use of Proceeds
6	Exhibits
	Signatures

3

CINERGY CORP.

AND SUBSIDIARY COMPANIES

4

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Quarter Ended June 30				Year to Date June 30
	2005		2004		2005		2004
	(in thousands, except per share amounts)
	(unaudited)
Operating Revenues
Electric	$	914,338	$	870,236	$	1,840,635	$	1,728,672
Gas	79,598		108,082		392,694		458,928
Other	120,327		75,419		225,183		154,795
Total Operating Revenues	1,114,263		1,053,737		2,458,512		2,342,395
Operating Expenses
Fuel, emission allowances, and purchased power	312,714		298,756		617,677		592,646
Gas purchased	56,089		47,420		264,689		270,936
Costs of fuel resold	93,087		59,062		178,849		116,524
Operation and maintenance	351,121		332,358		682,910		643,194
Depreciation	130,455		114,331		256,941		219,188
Taxes other than income taxes	65,083		65,072		144,015		147,319
Total Operating Expenses	1,008,549		916,999		2,145,081		1,989,807
Operating Income	105,714		136,738		313,431		352,588
Equity in Earnings of Unconsolidated Subsidiaries	13,576		7,331		18,411		10,079
Miscellaneous Income (Expense) – Net	14,535		5,033		16,875		(10,475		)
Interest Expense	68,649		70,276		132,712		137,671
Preferred Dividend Requirements of Subsidiaries	858		858		1,716		1,716
Income Before Taxes	64,318		77,968		214,289		212,805
Income Taxes	13,610		19,464		46,225		51,286
Net Income	$	50,708	$	58,504	$	168,064	$	161,519
Average Common Shares Outstanding – Basic	198,492		180,236		197,066		179,749
Earnings Per Common Share – Basic (Note 11)	$	0.25	$	0.33	$	0.85	$	0.90
Average Common Shares Outstanding – Diluted	199,441		182,277		198,075		182,106
Earnings Per Common Share – Diluted (Note 11)	$	0.25	$	0.32	$	0.85	$	0.89
Cash Dividends Declared Per Common Share	$	0.48	$	0.47	$	0.96	$	0.94

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

5

CINERGY CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30 2005		December 31 2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	148,178	$	164,541
Notes receivable, current	122,976		214,513
Accounts receivable less accumulated provision for doubtful accounts of $5,455 at June 30, 2005, and $5,514 at December 31, 2004	939,715		1,061,140
Fuel, emission allowances, and supplies	502,482		444,750
Energy risk management current assets	352,397		381,146
Prepayments and other	279,138		174,624
Total Current Assets	2,344,886		2,440,714
Property, Plant, and Equipment – at Cost
Utility plant in service	10,386,087		10,076,468
Construction work in progress	377,517		333,687
Total Utility Plant	10,763,604		10,410,155
Non-regulated property, plant, and equipment	4,798,284		4,700,009
Accumulated depreciation	5,355,813		5,180,699
Net Property, Plant, and Equipment	10,206,075		9,929,465
Other Assets
Regulatory assets	988,308		1,030,333
Investments in unconsolidated subsidiaries	488,411		513,675
Energy risk management non-current assets	306,495		138,787
Notes receivable, non-current	182,815		193,857
Other investments	125,192		125,367
Restricted funds held in trust	313,692		358,006
Goodwill and other intangible assets	154,047		132,752
Other	147,685		119,361
Total Other Assets	2,706,645		2,612,138
Total Assets	$	15,257,606	$	14,982,317

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

6

CINERGY CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30 2005			December 31 2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	1,255,484		$	1,348,576
Accrued taxes	128,713			216,804
Accrued interest	59,016			54,473
Notes payable and other short-term obligations (Note 5)	865,257			958,910
Long-term debt due within one year	478,046			219,967
Energy risk management current liabilities	370,960			310,741
Other	134,525			171,188
Total Current Liabilities	3,292,001			3,280,659
Non-Current Liabilities
Long-term debt	3,975,072			4,227,741
Deferred income taxes	1,554,037			1,597,120
Unamortized investment tax credits	95,413			99,723
Accrued pension and other postretirement benefit costs	732,361			688,277
Regulatory liabilities	575,729			557,419
Energy risk management non-current liabilities	299,541			127,340
Other	205,247			225,298
Total Non-Current Liabilities	7,437,400			7,522,918
Commitments and Contingencies
Total Liabilities	10,729,401			10,803,577
Cumulative Preferred Stock of Subsidiaries
Not subject to mandatory redemption	62,818			62,818
Common Stock Equity
Common stock - $.01 par value; authorized shares – 600,000,000; issued shares – 198,668,812 at June 30, 2005, and 187,653,506 at December 31, 2004; outstanding shares – 198,528,683 at June 30, 2005, and 187,524,229 at December 31, 2004	1,987			1,877
Paid-in capital	2,941,747			2,559,715
Retained earnings	1,594,053			1,613,340
Treasury shares at cost – 140,129 shares at June 30, 2005, and 129,277 shares at December 31, 2004	(4,766		)	(4,336		)
Accumulated other comprehensive loss	(67,634		)	(54,674		)
Total Common Stock Equity	4,465,387			4,115,922
Total Liabilities and Shareholders’ Equity	$	15,257,606		$	14,982,317

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

7

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

												Accumulated			Total
												Other			Common
	Common		Paid-in			Retained			Treasury			Comprehensive			Stock
	Stock		Capital			Earnings			Stock			Income (Loss)			Equity
	(dollars in thousands, except per share amounts)
	(unaudited)
Quarter Ended June 30, 2005
Balance at April 1, 2005 (197,989,654 shares)	$	1,981	$	2,919,758		$	1,638,704		$	(4,635	)	$	(59,831	)	$	4,495,977
Comprehensive income:
Net income						50,708									50,708
Other comprehensive income (loss), net of tax effect of $4,204
Foreign currency translation adjustment												(7,269		)	(7,269		)
Unrealized gain on investment trusts												221			221
Cash flow hedges												(755		)	(755		)
Total comprehensive income															42,905
Issuance of common stock – net (540,296 shares)	6		23,760												23,766
Treasury shares purchased (1,267 shares)									(131		)				(131		)
Dividends on common stock ($0.48 per share)						(95,197		)							(95,197		)
Other			(1,771		)	(162		)							(1,933		)
Ending balance at June 30, 2005 (198,528,683 shares)	$	1,987	$	2,941,747		$	1,594,053		$	(4,766	)	$	(67,634	)	$	4,465,387
Quarter Ended June 30, 2004
Balance at April 1, 2004 (179,544,917 shares)	$	1,797	$	2,220,748		$	1,569,995		$	(3,862	)	$	(43,369	)	$	3,745,309
Comprehensive income:
Net income						58,504									58,504
Other comprehensive income (loss), net of tax effect of $(2,176)
Foreign currency translation adjustment												446			446
Unrealized gain (loss) on investment trusts												(259		)	(259		)
Cash flow hedges												3,378			3,378
Total comprehensive income															62,069
Issuance of common stock – net (781,507 shares)	7		25,129												25,136
Treasury shares purchased (3,178 shares)									(104		)				(104		)
Dividends on common stock ($0.47 per share)						(84,558		)							(84,558		)
Other			2,207			(58		)							2,149
Ending balance at June 30, 2004 (180,323,246 shares)	$	1,804	$	2,248,084		$	1,543,883		$	(3,966	)	$	(39,804	)	$	3,750,001

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

8

											Accumulated			Total
											Other			Common
	Common		Paid-in		Retained			Treasury			Comprehensive			Stock
	Stock		Capital		Earnings			Stock			Income (Loss)			Equity
	(dollars in thousands, except per share amounts)
	(unaudited)
Year to Date June 30, 2005
Balance at January 1, 2005 (187,524,229 shares)	$	1,877	$	2,559,715	$	1,613,340		$	(4,336	)	$	(54,674	)	$	4,115,922
Comprehensive income:
Net income					168,064									168,064
Other comprehensive income (loss), net of tax effect of $6,635
Foreign currency translation adjustment											(13,107		)	(13,107		)
Unrealized loss on investment trusts											(954		)	(954		)
Cash flow hedges											1,101			1,101
Total comprehensive income														155,104
Issuance of common stock – net (11,015,306 shares)	110		377,513											377,623
Treasury shares purchased (10,852 shares)								(430		)				(430		)
Dividends on common stock ($0.96 per share)					(187,076		)							(187,076		)
Other			4,519		(275		)							4,244
Ending balance at June 30, 2005 (198,528,683 shares)	$	1,987	$	2,941,747	$	1,594,053		$	(4,766	)	$	(67,634	)	$	4,465,387
Year to Date June 30, 2004
Balance at January 1, 2004 (178,336,854 shares)	$	1,784	$	2,195,985	$	1,551,003		$	(3,255	)	$	(44,835	)	$	3,700,682
Comprehensive income:
Net income					161,519									161,519
Other comprehensive income, net of tax effect of $(3,090)
Foreign currency translation adjustment											1,432			1,432
Unrealized gain on investment trusts											496			496
Cash flow hedges											3,103			3,103
Total comprehensive income														166,550
Issuance of common stock – net (2,008,423 shares)	20		46,211											46,231
Treasury shares purchased (22,031 shares)								(711		)				(711		)
Dividends on common stock ($0.94 per share)					(168,545		)							(168,545		)
Other			5,888		(94		)							5,794
Ending balance at June 30, 2004 (180,323,246 shares)	$	1,804	$	2,248,084	$	1,543,883		$	(3,966	)	$	(39,804	)	$	3,750,001

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

9

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year to Date June 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Cash Flows from Operations
Operating Activities
Net income	$	168,064		$	161,519
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	256,941			219,188
Loss on impairment or disposal of subsidiaries and investments, net	7,542			29,362
Change in net position of energy risk management activities	93,461			(23,669		)
Deferred income taxes and investment tax credits – net	11,094			41,938
Equity in earnings of unconsolidated subsidiaries	(18,411		)	(10,079		)
Allowance for equity funds used during construction	(4,402		)	(976		)
Regulatory asset/liability deferrals	(62,480		)	(14,894		)
Regulatory assets amortization	61,435			48,302
Accrued pension and other postretirement benefit costs	44,084			35,426
Cost of removal	(13,722		)	(9,118		)
Changes in current assets and current liabilities:
Accounts and notes receivable	209,790			420,693
Fuel, emission allowances, and supplies	(91,642		)	(44,545		)
Prepayments	(107,064		)	(31,762		)
Accounts payable	(92,575		)	(213,787		)
Accrued taxes and interest	(83,548		)	(44,933		)
Other assets	(13,255		)	4,910
Other liabilities	(66,459		)	28,788
Net cash provided by operating activities	298,853			596,363
Financing Activities
Change in short-term debt	(93,653		)	137,832
Issuance of long-term debt	4,612			-
Redemption of long-term debt	(9,487		)	(319,511		)
Issuance of common stock	377,623			46,231
Dividends on common stock	(187,076		)	(168,545		)
Net cash provided by (used in) financing activities	92,019			(303,993		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(523,979		)	(309,699		)
Proceeds from notes receivable	9,800			8,559
Withdrawal of restricted cash held in trust	65,380			10,413
Acquisitions and other investments	(6,415		)	(11,350		)
Proceeds from distributions by investments and sale of investments and subsidiaries	47,979			14,405
Net cash used in investing activities	(407,235		)	(287,672		)
Net increase (decrease) in cash and cash equivalents	(16,363		)	4,698
Cash and cash equivalents at beginning of period	164,541			169,120
Cash and cash equivalents at end of period	$	148,178		$	173,818
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	134,900		$	139,868
Income taxes	$	66,089		$	32,123

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

10

THE CINCINNATI GAS & ELECTRIC COMPANY

AND SUBSIDIARY COMPANIES

11

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended June 30				Year to Date June 30
	2005		2004		2005		2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	459,890	$	433,246	$	924,221	$	851,161
Gas	100,468		90,651		406,822		418,303
Other	60,105		22,030		112,776		41,722
Total Operating Revenues	620,463		545,927		1,443,819		1,311,186
Operating Expenses
Fuel, emission allowances, and purchased power	154,456		127,497		300,158		249,155
Gas purchased	56,089		47,418		263,871		270,935
Costs of fuel resold	49,232		19,628		90,218		37,374
Operation and maintenance	171,476		150,158		333,624		299,921
Depreciation	45,206		45,477		90,370		89,863
Taxes other than income taxes	52,441		49,305		111,875		113,500
Total Operating Expenses	528,900		439,483		1,190,116		1,060,748
Operating Income	91,563		106,444		253,703		250,438
Miscellaneous Income – Net	3,633		3,189		7,156		6,043
Interest Expense	23,853		22,415		46,803		44,851
Income Before Taxes	71,343		87,218		214,056		211,630
Income Taxes	17,720		31,909		75,767		78,866
Net Income	$	53,623	$	55,309	$	138,289	$	132,764
Preferred Dividend Requirement	211		212		423		423
Net Income Applicable to Common Stock	$	53,412	$	55,097	$	137,866	$	132,341
Net Income	$	53,623	$	55,309	$	138,289	$	132,764
Other Comprehensive Income, Net of Tax	11		3,207		1,729		2,883
Comprehensive Income	$	53,634	$	58,516	$	140,018	$	135,647

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

12

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30 2005		December 31 2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	6,262	$	4,154
Notes receivable from affiliated companies	55,859		121,559
Accounts receivable less accumulated provision for doubtful accounts	196,872		145,105
Accounts receivable from affiliated companies	37,142		30,916
Fuel, emission allowances, and supplies	215,564		199,769
Energy risk management current assets	227,848		148,866
Prepayments and other	133,334		54,650
Total Current Assets	872,881		705,019
Property, Plant, and Equipment – at Cost
Utility plant in service
Electric	2,283,947		2,249,352
Gas	1,206,528		1,179,764
Common	250,962		249,576
Total Utility Plant In Service	3,741,437		3,678,692
Construction work in progress	73,838		45,762
Total Utility Plant	3,815,275		3,724,454
Non-regulated property, plant, and equipment	3,755,293		3,660,226
Accumulated depreciation	2,763,863		2,694,708
Net Property, Plant, and Equipment	4,806,705		4,689,972
Other Assets
Regulatory assets	542,121		609,550
Energy risk management non-current assets	134,868		47,276
Restricted funds held in trust	79,035		93,671
Other	113,651		86,871
Total Other Assets	869,675		837,368
Total Assets	$	6,549,261	$	6,232,359

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

13

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30 2005			December 31 2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	392,103		$	332,316
Accounts payable to affiliated companies	40,696			85,127
Accrued taxes	172,016			149,010
Accrued interest	20,263			19,408
Notes payable and other short-term obligations (Note 5)	112,100			112,100
Notes payable to affiliated companies (Note 5)	231,940			180,116
Long-term debt due within one year	—			150,000
Energy risk management current liabilities	219,430			120,204
Other	32,772			33,712
Total Current Liabilities	1,221,320			1,181,993
Non-Current Liabilities
Long-term debt	1,594,300			1,443,668
Deferred income taxes	1,066,857			1,090,897
Unamortized investment tax credits	70,299			73,120
Accrued pension and other postretirement benefit costs	238,967			228,058
Regulatory liabilities	184,203			164,846
Energy risk management non-current liabilities	133,273			40,184
Other	65,309			70,395
Total Non-Current Liabilities	3,353,208			3,111,168
Commitments and Contingencies
Total Liabilities	4,574,528			4,293,161
Cumulative Preferred Stock
Not subject to mandatory redemption	20,485			20,485
Common Stock Equity
Common stock – $8.50 par value; authorized shares – 120,000,000; outstanding shares – 89,663,086 at June 30, 2005, and December 31, 2004	762,136			762,136
Paid-in capital	584,176			584,176
Retained earnings	644,038			610,232
Accumulated other comprehensive loss	(36,102		)	(37,831		)
Total Common Stock Equity	1,954,248			1,918,713
Total Liabilities and Shareholders’ Equity	$	6,549,261		$	6,232,359

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

14

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year to Date June 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	138,289		$	132,764
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	90,370			89,863
Deferred income taxes and investment tax credits – net	8,666			16,294
Change in net position of energy risk management activities	25,741			(23,280		)
Allowance for equity funds used during construction	(684		)	(719		)
Regulatory asset/liability deferrals	1,682			7,558
Regulatory assets amortization	39,646			27,022
Accrued pension and other postretirement benefit costs	10,909			6,638
Cost of removal	(3,301		)	(3,774		)
Changes in current assets and current liabilities:
Accounts and notes receivable	7,707			88,007
Fuel, emission allowances, and supplies	(44,829		)	(30,965		)
Prepayments	(78,503		)	(7,544		)
Accounts payable	15,356			(55,176		)
Accrued taxes and interest	23,861			22,994
Other assets	(2,766		)	1,858
Other liabilities	8,676			10,081
Net cash provided by operating activities	240,820			281,621
Financing Activities
Change in short-term debt, including net affiliate notes	51,824			81,112
Redemption of long-term debt	—			(110,000		)
Dividends on preferred stock	(423		)	(423		)
Dividends on common stock	(104,061		)	(110,538		)
Net cash used in financing activities	(52,660		)	(139,849		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(201,733		)	(148,762		)
Withdrawal of restricted funds held in trust	15,635			—
Other investments	46			(2		)
Net cash used in investing activities	(186,052		)	(148,764		)
Net increase (decrease) in cash and cash equivalents	2,108			(6,992		)
Cash and cash equivalents at beginning of period	4,154			15,842
Cash and cash equivalents at end of period	$	6,262		$	8,850
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	47,835		$	45,345
Income taxes	$	11,201		$	11,264

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

15

PSI ENERGY, INC.

AND SUBSIDIARY COMPANY

16

PSI ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended						Year to Date
	June 30						June 30
	2005			2004			2005			2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	428,457		$	414,444		$	853,864		$	830,723
Operating Expenses
Fuel, emission allowances, and purchased power	134,080			155,139			266,117			310,045
Operation and maintenance	122,468			122,752			243,039			231,553
Depreciation	66,448			55,059			133,295			103,890
Taxes other than income taxes	10,272			14,121			25,933			30,533
Total Operating Expenses	333,268			347,071			668,384			676,021
Operating Income	95,189			67,373			185,480			154,702
Miscellaneous Income – Net	7,114			3,017			10,493			3,564
Interest Expense	26,912			21,701			51,677			41,625
Income Before Taxes	75,391			48,689			144,296			116,641
Income Taxes	32,661			23,243			59,222			50,389
Net Income	$	42,730		$	25,446		$	85,074		$	66,252
Preferred Dividend Requirement	647			646			1,293			1,293
Net Income Applicable to Common Stock	$	42,083		$	24,800		$	83,781		$	64,959
Net Income	$	42,730		$	25,446		$	85,074		$	66,252
Other Comprehensive Income (Loss), Net of Tax	(535		)	(118		)	(1,730		)	366
Comprehensive Income	$	42,195		$	25,328		$	83,344		$	66,618

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

17

PSI ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	15,715	$		10,794
Restricted deposits	25,890		22,063
Notes receivable from affiliated companies	45,880		72,958
Accounts receivable less accumulated provision for doubtful accounts	38,010		31,177
Accounts receivable from affiliated companies	437		437
Fuel, emission allowances, and supplies	147,888		108,793
Prepayments and other	12,856		11,804
Total Current Assets	286,676		258,026
Property, Plant, and Equipment – at Cost
Utility plant in service	6,644,650		6,397,776
Construction work in progress	303,243		287,925
Total Utility Plant	6,947,893		6,685,701
Accumulated depreciation	2,375,789		2,284,932
Net Property, Plant, and Equipment	4,572,104		4,400,769
Other Assets
Regulatory assets	446,187		420,783
Other investments	72,503		73,396
Restricted funds held in trust	221,676		264,335
Other	45,264		32,587
Total Other Assets	785,630		791,101
Total Assets	$	5,644,410	$	5,449,896

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

18

PSI ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	90,555		$	65,151
Accounts payable to affiliated companies	32,100			38,292
Accrued taxes	56,485			65,871
Accrued interest	31,365			27,532
Notes payable and other short-term obligations (Note 5)	135,500			135,500
Notes payable to affiliated companies (Note 5)	78,425			130,580
Long-term debt due within one year	456,166			50,000
Other	50,366			33,326
Total Current Liabilities	930,962			546,252
Non-Current Liabilities
Long-term debt	1,418,354			1,824,219
Deferred income taxes	660,883			638,061
Unamortized investment tax credits	25,113			26,603
Accrued pension and other postretirement benefit costs	221,674			209,992
Regulatory liabilities	391,525			392,573
Other	71,585			88,665
Total Non-Current Liabilities	2,789,134			3,180,113
Commitments and Contingencies
Total Liabilities	3,720,096			3,726,365
Cumulative Preferred Stock
Not subject to mandatory redemption	42,333			42,333
Common Stock Equity
Common stock – without par value; $.01 stated value; authorized shares – 60,000,000; outstanding shares – 53,913,701 at June 30, 2005, and December 31, 2004	539			539
Paid-in capital	826,019			626,019
Retained earnings	1,081,131			1,078,617
Accumulated other comprehensive loss	(25,708		)	(23,977		)
Total Common Stock Equity	1,881,981			1,681,198
Total Liabilities and Shareholders’ Equity	$	5,644,410		$	5,449,896

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

19

PSI ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year to Date
	June 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	85,074		$	66,252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	133,295			103,890
Deferred income taxes and investment tax credits – net	17,776			35,052
Allowance for equity funds used during construction	(3,719		)	(257		)
Regulatory asset/liability deferrals	(64,162		)	(22,452		)
Regulatory assets amortization	21,789			21,280
Accrued pension and other postretirement benefit costs	11,682			10,260
Cost of removal	(10,421		)	(5,344		)
Changes in current assets and current liabilities:
Accounts and notes receivable	20,245			7,118
Fuel, emission allowances, and supplies	(43,693		)	3,863
Prepayments	(778		)	(32		)
Accounts payable	19,212			(41,508		)
Accrued taxes and interest	(5,553		)	(2,679		)
Other assets	(18,239		)	(783		)
Other liabilities	1,942			3,835
Net cash provided by operating activities	164,450			178,495
Financing Activities
Change in short-term debt, including net affiliate notes	(52,155		)	30,337
Contribution from parent	200,000			—
Dividends on preferred stock	(1,293		)	(1,293		)
Dividends on common stock	(81,268		)	(57,870		)
Net cash provided by (used in) financing activities	65,284			(28,826		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(269,341		)	(140,606		)
Withdrawal of restricted funds held in trust	45,227			10,413
Other investments	(699		)	(1,346		)
Net cash used in investing activities	(224,813		)	(131,539		)
Net increase in cash and cash equivalents	4,921			18,130
Cash and cash equivalents at beginning of period	10,794			6,565
Cash and cash equivalents at end of period	$	15,715		$	24,695
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	53,100		$	43,894
Income taxes	$	34,650		$	19,502

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

20

THE UNION LIGHT, HEAT AND POWER COMPANY

21

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME

	Quarter Ended					Year to Date
	June 30					June 30
	2005			2004		2005		2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	56,424		$	56,732	$	111,008	$	112,947
Gas	18,672			15,985		76,447		74,124
Total Operating Revenues	75,096			72,717		187,455		187,071
Operating Expenses
Electricity purchased from parent company for resale	39,936			39,854		79,436		79,307
Gas purchased	10,625			7,481		50,824		48,314
Operation and maintenance	17,489			13,795		33,204		27,555
Depreciation	5,177			5,027		10,287		9,952
Taxes other than income taxes	1,600			1,239		3,084		2,677
Total Operating Expenses	74,827			67,396		176,835		167,805
Operating Income	269			5,321		10,620		19,266
Miscellaneous Income – Net	715			242		1,565		741
Interest Expense	1,703			1,270		3,448		2,497
Income (Loss) Before Taxes	(719		)	4,293		8,737		17,510
Income Taxes	(232		)	1,202		3,030		6,531
Net Income (Loss)	$	(487	)	$	3,091	$	5,707	$	10,979

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

22

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

	June 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	6,486	$	4,197
Notes receivable from affiliated companies	8,099		20,675
Accounts receivable less accumulated provision for doubtful accounts	927		1,451
Accounts receivable from affiliated companies	1,016		5,671
Inventory and supplies	7,311		8,500
Prepayments and other	1,176		285
Total Current Assets	25,015		40,779
Property, Plant, and Equipment – at Cost
Utility plant in service
Electric	291,473		285,828
Gas	263,260		256,667
Common	42,018		42,176
Total Utility Plant In Service	596,751		584,671
Construction work in progress	13,257		6,070
Total Utility Plant	610,008		590,741
Accumulated depreciation	183,139		176,726
Net Property, Plant, and Equipment	426,869		414,015
Other Assets
Regulatory assets	7,111		10,070
Other	2,492		2,801
Total Other Assets	9,603		12,871
Total Assets	$	461,487	$	467,665

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

23

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

	June 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	5,056		$	16,028
Accounts payable to affiliated companies	7,319			22,236
Accrued interest	1,460			1,370
Notes payable to affiliated companies (Note 5)	18,867			11,246
Other	8,863			7,009
Total Current Liabilities	41,565			57,889
Non-Current Liabilities
Long-term debt	94,375			94,340
Deferred income taxes	59,417			58,422
Unamortized investment tax credits	2,499			2,626
Accrued pension and other postretirement benefit costs	18,876			17,762
Regulatory liabilities	33,453			29,979
Other	13,083			14,136
Total Non-Current Liabilities	221,703			217,265
Commitments and Contingencies
Total Liabilities	263,268			275,154
Common Stock Equity
Common stock – $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333 at June 30, 2005, and December 31, 2004	8,780			8,780
Paid-in capital	23,455			23,455
Retained earnings	167,270			161,562
Accumulated other comprehensive loss	(1,286		)	(1,286		)
Total Common Stock Equity	198,219			192,511
Total Liabilities and Shareholder’s Equity	$	461,487		$	467,665

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

24

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

	Year to Date
	June 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	5,707		$	10,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	10,287			9,952
Deferred income taxes and investment tax credits – net	2,561			393
Allowance for equity funds used during construction	(308		)	9
Regulatory asset/liability deferrals	1,446			2,370
Regulatory assets amortization	1,968			617
Accrued pension and other postretirement benefit costs	1,114			756
Cost of removal	(523		)	(852		)
Changes in current assets and current liabilities:
Accounts and notes receivable	17,755			14,134
Inventory and supplies	1,189			142
Prepayments	(891		)	279
Accounts payable	(25,889		)	(9,207		)
Accrued taxes and interest	2,088			8,273
Other assets	680			301
Other liabilities	(1,640		)	(769		)
Net cash provided by operating activities	15,544			37,377
Financing Activities
Change in short-term debt, including net affiliate notes	7,621			(16,135		)
Net cash provided by (used in) financing activities	7,621			(16,135		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(20,876		)	(16,147		)
Net cash used in investing activities	(20,876		)	(16,147		)
Net increase in cash and cash equivalents	2,289			5,095
Cash and cash equivalents at beginning of period	4,197			1,899
Cash and cash equivalents at end of period	$	6,486		$	6,994
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	3,198		$	2,295
Income taxes	$	—		$	4

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

25

INDEX

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note
Number
1	Organization and Summary of Significant Accounting Policies
2	Common Stock
3	Cumulative Preferred Stock
4	Long-Term Debt
5	Notes Payable and Other Short-term Obligations
6	Energy Trading Credit Risk
7	Financial Instruments
8	Pension and Other Postretirement Benefits
9	Commitments and Contingencies
10	Financial Information by Business Segment
11	Earnings Per Common Share
12	Transfer and Acquisition of Generating Assets
13	Pending Merger

26

NOTES TO CONDENSED FINANCIAL STATEMENTS

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.”  In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P) and all of Cinergy’s other consolidated subsidiaries.  When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.

1.Organization and Summary of Significant Accounting Policies

(a)Pending Merger

On May 8, 2005, Cinergy Corp. entered into an agreement and plan of merger with Duke Energy Corporation (Duke), a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke.  Under the merger agreement, each share of Cinergy Corp. Common Stock will be converted into 1.56 shares of the newly formed company, Duke Energy Holding Corp.

The merger agreement has been approved by both companies’ Boards of Directors.  Consummation of the merger is subject to customary conditions, including, among others, the approval of the shareholders of both companies and the approvals of various regulatory authorities.  See Note 13 for further information regarding the merger.

(b)Presentation

Our Condensed Financial Statements reflect all adjustments (which include normal, recurring adjustments) necessary in the opinion of the registrants for a fair presentation of the interim results.  These results are not necessarily indicative of results for a full year.  These statements should be read in conjunction with the Financial Statements and the notes thereto included in the registrants’ combined Form 10-K for the year ended December 31, 2004 (2004 10-K).  Certain amounts in the 2004 Condensed Financial Statements have been reclassified to conform to the 2005 presentation.

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles.  Key estimates and judgments include:

•Valuing derivative contracts used in our energy marketing and trading activities;

•Evaluating the regulatory recoverability of various costs;

•Providing reserves for contingencies, including legal, environmental, and income taxes; and

•Evaluating various non-regulated fixed assets and investments for impairment.

These estimates and judgments are discussed more fully in “Critical Accounting Estimates” in our 2004 10-K.  Actual results could differ, as these estimates and assumptions involve judgment about future events or performance.

(c)Revenue Recognition

(i)Utility Revenues

CG&E, PSI, and ULH&P (collectively, our utility operating companies) record 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 revenues” and is a widely recognized and accepted practice for utilities.  In making our estimates of unbilled revenues, we use 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 these amounts are subsequently billed.

27

Unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of June 30, 2005 and 2004, were as follows:

	2005		2004
	(in millions)
Cinergy	$	148	$	135
CG&E and subsidiaries	77		70
PSI	71		65
ULH&P	12		12

(ii)Energy Marketing and Trading Revenues

We market and trade electricity, natural gas, and other energy-related products.  Many of the contracts associated with these products qualify as derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.  We designate derivative transactions as either trading or non-trading at the time they are originated in accordance with Emerging Issues Task Force Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.  Trading contracts are reported on a net basis and non-trading contracts are reported on a gross basis.  Net reporting requires presentation of realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues.  Gross reporting requires presentation of sales contracts in Operating Revenues and purchase contracts in Fuel, emission allowances, and purchased power expense or Gas purchased expense.

(iii)Other Operating Revenues

Cinergy and CG&E recognize revenue from coal origination, which represents contract structuring and marketing of physical coal.  These revenues are included in Other Operating Revenues on the Condensed Consolidated Statements of Income.  Other Operating Revenues for Cinergy also includes sales of synthetic fuel.

(d)Accounting Changes

(i)Asset Retirement Obligations

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (Interpretation 47), an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143).  Statement 143 requires recognition of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred.  Interpretation 47 clarifies that a conditional asset retirement obligation (which occurs when the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity) is a legal obligation within the scope of Statement 143.  As such, the fair value of a conditional asset retirement obligation must be recognized as a liability when incurred if the liability’s fair value can be reasonably estimated.  Interpretation 47 also clarifies when sufficient information exists to reasonably estimate the fair value of an asset retirement obligation.

Cinergy will adopt Interpretation 47 on December 31, 2005.  Upon adoption of Interpretation 47 Cinergy will recognize the impact, if any, of additional liabilities for conditional asset retirement obligations as a cumulative effect of a change in accounting principle.  We have begun evaluating the impact of adopting this new interpretation and are currently unable to predict whether the implementation of this accounting standard will be material to our financial position or results of operations.

28

(ii)Share-Based Payment

In December 2004, the FASB issued a replacement of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R).  This standard will require, among other things, accounting for all stock-based compensation arrangements under the fair value method.

In 2003, we prospectively adopted accounting for our stock-based compensation plans using the fair value recognition provisions of Statement 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, for all employee awards granted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation of Statement 123R on stock options within our stock-based compensation plans is not expected to be material.  Statement 123R contains certain provisions that will modify the accounting for various stock-based compensation plans other than stock options.  We are in the process of evaluating the impact of this new standard on these plans.  Cinergy will adopt Statement 123R on January 1, 2006.

(iii)Income Taxes

In October 2004, the American Jobs Creation Act (AJCA) was signed into law.  The AJCA includes a one-time deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA.  Based on our analysis, we do not believe that repatriation pursuant to this provision will have a material impact on our financial position or results of operations.

2.Common Stock

As discussed in the 2004 10-K, in January and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock pursuant to certain stock purchase contracts that were issued as a component of combined securities in December 2001.  Net proceeds from the transaction of $316 million were used to reduce short-term debt.

Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30, 2005, Cinergy issued 1.9 million shares under these plans.

In June 2005, Cinergy Corp. contributed $200 million in capital to PSI.  The capital contribution was used to repay short-term indebtedness and is consistent with supporting PSI’s current credit ratings.

3.Cumulative Preferred Stock

In July 2005, PSI notified holders of its $31.075 million notional amount 6.875% Cumulative Preferred Stock that it intends to redeem all outstanding shares on August 17, 2005 at a price of $103.09 per share plus accrued and unpaid dividends.

4.Long-Term Debt

In July 2005, PSI notified holders of its $50 million principal amount Series ZZ First Mortgage secured 5 ¾% Series 1993B Environmental Revenue Refunding Bonds, due February 15, 2028, of its intention to redeem all outstanding bonds in August 2005.  PSI will redeem these bonds with the proceeds from the issuance by the Indiana Finance Authority of $50 million principal amount of its Environmental Revenue Refunding Bonds, Series 2005A, due July 1, 2035.  The bonds bear a fixed rate of interest through 2035 of 4.50 percent.

In August 2005, PSI notified holders of its $30 million principal amount 7.125% Series AAA First Mortgage Bonds, due 2024, of its intention to redeem all outstanding bonds on September 2, 2005.  In anticipation of these bonds being redeemed, they have been classified as Long-term debt due within one year on the Condensed Consolidated Balance Sheets.

29

Also in August 2005, PSI redeemed the $50 million 6.50% Synthetic Putable Yield Securities due August 1, 2026 through the exercise of call provisions of the securities.  Because these securities would have been subject to mandatory redemption if the call provision had not been exercised, they have been classified as Long-term debt due within one year on the Condensed Consolidated Balance Sheets.

5.Notes Payable and Other Short-term Obligations

Cinergy Corp.’s short-term borrowings consist primarily of unsecured revolving lines of credit and the sale of commercial paper.  Cinergy Corp.’s $2 billion revolving credit facilities and $1.5 billion commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ULH&P.  In addition, Cinergy Corp., CG&E, and PSI maintain uncommitted lines of credit.  These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance.  The following table summarizes our Notes payable and other short-term obligations and Notes payable to affiliated companies:

	June 30, 2005						December 31, 2004
					Weighted						Weighted
	Established				Average		Established				Average
	Lines		Outstanding		Rate		Lines		Outstanding		Rate
	(dollars in millions)
Cinergy
Cinergy Corp.
Revolving lines(1)	$	2,000	$	—	—	%	$	2,000	$	—	—	%
Uncommitted lines	40		—		—		40		—		—
Commercial paper(2)			547		3.35				676		2.45
Utility operating companies
Uncommitted lines	75		—		—		75		—		—
Pollution control notes			248		2.81				248		2.43
Non-regulated subsidiaries
Revolving lines(3)	162		40		3.85		158		8		5.67
Short-term debt			5		8.61				2		4.50
Pollution control notes			25		2.62				25		2.30
Cinergy Total			$	865	3.23	%			$	959	2.47	%
CG&E and subsidiaries
Uncommitted lines	$	15	$	—	—	%	$	15	—		—	%
Pollution control notes			112		2.73				112		2.34
Money pool			232		3.31				180		2.38
CG&E Total			$	344	3.12	%			$	292	2.36	%
PSI
Uncommitted lines	$	60	$	—	—	%	$	60	$	—	—	%
Pollution control notes			136		2.87				136		2.49
Money pool			78		3.31				130		2.38
PSI Total			$	214	3.03	%			$	266	2.44	%
ULH&P
Money pool			$	19	3.31	%			$	11	2.38	%
ULH&P Total			$	19	3.31	%			$	11	2.38	%

(1)Consists of a three-year $1 billion facility and a five-year $1 billion facility.  The three-year facility was entered into in April 2004 and matures in April 2007.  The five-year facility was entered into in December 2004, matures in December 2009, and contains $500 million sublimits each for CG&E and PSI.

(2)Cinergy Corp.’s commercial paper program limit is $1.5 billion.  The commercial paper program is supported by Cinergy Corp.’s revolving lines of credit.

(3)Of the $162 million and $158 million, in 2005 and 2004, respectively, $150 million relates to a three-year senior revolving credit facility that Cinergy Canada, Inc. entered into in December 2004 and matures in December 2007.

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At June 30, 2005, Cinergy Corp. had $1.4 billion remaining unused and available capacity relating to its $2 billion revolving credit facilities.  These revolving credit facilities include the following:

Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available
				(in millions)
Five-year senior revolving	December 2009
Direct borrowing				$	—
Commercial paper support				—
Total five-year facility(1)		$	1,000	—		$	1,000
Three-year senior revolving	April 2007
Direct borrowing				—
Commercial paper support				547
Letter of credit support				11
Total three-year facility		1,000		558		442
Total Credit Facilities		$	2,000	$	558	$	1,442

(1)CG&E and PSI each have $500 million borrowing sublimits on this facility.

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

•a consolidated net worth of $2 billion; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

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

•a consolidated net worth of $1 billion; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

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

•a consolidated net worth of $900 million; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

A breach of these covenants 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

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

The latter two events, however, are subject to dollar-based materiality thresholds.  As of June 30, 2005, Cinergy, CG&E, and PSI are in compliance with all of their debt covenants.

6.Energy Trading Credit Risk

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations.  As of June 30, 2005, 95

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percent of the credit exposure, net of credit collateral, related to energy trading and marketing activity was with counterparties rated investment grade or the counterparties’ obligations were guaranteed or secured by an investment grade entity.  The majority of these investment grade counterparties are externally rated.  If a counterparty has an external rating, the lower of Standard & Poor’s Ratings Services or Moody’s Investors Service is used; otherwise, Cinergy’s internal rating of the counterparty is used.  The remaining five percent represents credit exposure of $33 million with counterparties rated non-investment grade.

As of June 30, 2005, CG&E had a concentration of trading credit exposure of $48 million with two counterparties accounting for greater than ten percent of CG&E’s total trading credit exposure.  These counterparties are rated investment grade.

Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

We continually review and monitor our credit exposure to all counterparties and secondary counterparties.  If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the 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.

7.Financial Instruments

We enter into financial derivative contracts for the purpose of managing financial instrument risk.  Forward starting swaps are a type of financial derivative that mitigates volatility associated with fluctuations in interest rates between the time of execution of the swap and the date of an expected debt issuance.

In June 2005, PSI executed two forward starting swaps with a combined notional amount of $325 million.  The forward starting swaps effectively fix the benchmark interest rate of an anticipated issuance of fixed-rate debt from June 2005 through June 2006, the expected date of issuance of the debt securities.  Both forward starting swaps have been designated as cash flow hedges under the provisions of Statement 133.  As the terms of these swap agreements mirror the terms of the forecasted debt issuance, we anticipate they will be highly effective hedges.  Changes in the fair value of these swaps are recorded in Accumulated other comprehensive income (loss).

8.Pension and Other Postretirement Benefits

As discussed in the 2004 10-K, Cinergy Corp. sponsors both pension and other postretirement benefits plans.  Our qualified defined benefit pension plans cover substantially all United States employees meeting certain minimum age and service requirements.  Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for income tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended.  The pension plans’ assets consist of investments in equity and debt securities.  In addition, we sponsor non-qualified pension plans that cover officers, certain other key employees, and non-employee directors.  We provide certain health care and life insurance benefits to retired United States employees and their eligible dependents.  These benefits are subject to minimum age and service requirements.  The health care benefits include medical coverage, dental coverage, and prescription drug coverage and are subject to certain limitations, such as deductibles and co-payments.

Based on preliminary estimates, we expect 2005 contributions of $102 million for qualified pension benefits, which is an increase from the $72 million disclosed in the 2004 10-K.  This $30 million increase is primarily the result of a change in the retirement age assumption which increased the near-term funding estimates.  Actual contributions for the first six months of 2005 were zero.

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Our benefit plans’ costs for the quarter and year to date ended June 30, 2005 and 2004, included the following components:

	Qualified Pension Benefits						Non-Qualified Pension Benefits				Other Postretirement Benefits
	2005			2004			2005		2004		2005			2004
	(in millions)
Quarter Ended June 30
Service cost	$	9.6		$	8.8		$	1.4	$	1.2	$	1.6		$	1.2
Interest cost	24.0			22.1			1.8		1.7		5.7			5.4
Expected return on plans’ assets	(22.1		)	(20.1		)	—		—		—			—
Amortization of transition (asset) obligation	(0.1		)	(0.1		)	—		—		0.1			0.1
Amortization of prior service cost	1.2			1.1			0.5		0.5		(0.3		)	—
Recognized actuarial (gain) loss	2.0			0.5			0.6		0.7		2.8			1.9
Net periodic benefit cost	$	14.6		$	12.3		$	4.3	$	4.1	$	9.9		$	8.6
Year to Date June 30
Service cost	$	19.2		$	17.6		$	2.8	$	2.4	$	3.2		$	2.6
Interest cost	48.1			44.2			3.6		3.4		11.4			11.4
Expected return on plans’ assets	(44.1		)	(40.2		)	—		—		—			—
Amortization of transition (asset) obligation	(0.1		)	(0.2		)	—		—		0.2			0.9
Amortization of prior service cost	2.3			2.2			1.0		1.0		(0.4		)	—
Recognized actuarial (gain) loss	3.9			1.0			1.2		1.4		5.5			4.0
Net periodic benefit cost	$	29.3		$	24.6		$	8.6	$	8.2	$	19.9		$	18.9

The net periodic benefit costs by registrant for the quarter and year to date ended June 30, 2005 and 2004, were as follows:

	Qualified Pension Benefits				Non-Qualified Pension Benefits				Other Postretirement Benefits
	2005		2004		2005		2004		2005		2004
	(in millions)
Quarter Ended June 30
Cinergy(1)	$	14.6	$	12.3	$	4.3	$	4.1	$	9.9	$	8.6
CG&E and subsidiaries	4.3		3.7		0.2		0.2		2.6		2.0
PSI	3.7		3.2		0.1		0.2		5.0		4.7
ULH&P	0.4		0.4		—		—		0.2		0.2
Year to Date June 30
Cinergy(1)	$	29.3	$	24.6	$	8.6	$	8.2	$	19.9	$	18.9
CG&E and subsidiaries	8.7		7.4		0.4		0.4		5.2		4.6
PSI	7.5		6.4		0.3		0.4		9.9		10.0
ULH&P	0.8		0.8		—		—		0.5		0.4

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

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9.Commitments and Contingencies

(a)Environmental

(i)Emission Reduction Rulemakings

In October 1998, the Environmental Protection Agency (EPA) finalized its ozone transport rule, also known as the nitrogen oxides (NO_X) State Implementation Plan (SIP) Call, which addresses wind-blown ozone and ozone precursors that impact air quality in downwind states.  The EPA’s final rule, which applies to 22 states in the eastern United States including the three states in which our electric utilities operate, required states to develop rules to reduce NO_X emissions from utility and industrial sources.  In a related matter, in response to petitions filed by several states alleging air quality impacts from upwind sources located in other states, the EPA issued a rule pursuant to Section 126 of the Clean Air Act (CAA) that required reductions similar to those required under the NO_X SIP Call.  Various states and industry groups challenged the final rules in the Court of Appeals for the District of Columbia Circuit, but the court upheld the key provisions of the rules.

The EPA has proposed withdrawal of the Section 126 rule in states with approved rules under the final NO_X SIP Call, which includes Indiana, Kentucky, and Ohio.All three states have adopted a cap and trade program as the mechanism to achieve the required reductions.  Cinergy, CG&E, and PSI have installed selective catalytic reduction units (SCR) and other pollution controls and implemented certain combustion turbine improvements at various generating stations to comply with the NO_X SIP Call.  Cinergy also utilizes the NO_X emission allowance market to buy or sell NO_X emission allowances as appropriate.  We currently estimate that we will incur capital costs of approximately $8 million in addition to $816 million already incurred to comply with this program.

In March 2005, the EPA issued the Clean Air Interstate Rule (CAIR) which would require states to revise their SIP by September 2006 to address alleged contributions to downwind non-attainment with the revised National Ambient Air Quality Standards for ozone and fine particulate matter.  The rule established a two-phase, regional cap and trade program for sulfur dioxide (SO₂) and NO_X, affecting 28 states, including Ohio, Indiana, and Kentucky, and requires SO₂ and NO_X emissions to be cut 70 percent and 65 percent, respectively, by 2015.  At the same time, the EPA issued the Clean Air Mercury Rule (CAMR) which requires reductions in mercury emissions from coal-fired power plants.  The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018.  State SIPs must comply with the prescribed reduction levels under CAIR and CAMR; however, the states have the ability to introduce more stringent requirements if desired.  Under both CAIR and CAMR, companies have flexible compliance options including installation of pollution controls on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective.  In August 2005, the EPA proposed a Federal Implementation Plan (FIP) to act as a backstop to ensure that states implement the CAIR in a timely manner.  If a state fails to develop a CAIR SIP, the EPA intends to finalize the FIP in time to implement CAIR for the state by the CAIR deadline.  Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of both rules.  Those challenges are currently pending in the Federal Circuit Court for the District of Columbia.  At this time we cannot predict the outcome of these matters.

Over the 2005-2009 time period, we expect to spend approximately $1.8 billion to reduce mercury, SO₂, and NO_X emissions.  These estimates include estimated costs to comply at plants that we own but do not operate and could change when taking into consideration compliance plans of co-owners or operators involved.  Moreover, as market conditions change, additional compliance options may become available and our plans will be adjusted accordingly.  Approximately 60 percent of these estimated environmental costs would be incurred at PSI’s coal-fired plants, for which recovery would be pursued in accordance with regulatory statutes governing environmental cost recovery.  See (b)(i) for more details.  CG&E would receive partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its recently approved rate stabilization plan (RSP).  See (b)(ii) for more details.

The EPA made final state non-attainment area designations to implement the revised ozone standard and to implement the new fine particulate standard in June 2004 and April 2005, respectively.  Several counties in which we operate have been designated as being in non-attainment with the new ozone standard and/or fine

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particulate standard.  States with counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of compliance by June 2007 and April 2008, respectively.  Industrial sources in or near those counties are potentially subject to requirements for installation of additional pollution controls.  In March 2005, various states, local governments, environmental groups, and industry groups, including some of which Cinergy is a member, filed petitions for review in the United States Court of Appeals for the D.C. Circuit to challenge the EPA’s particulate matter non-attainment designations.  Although the EPA has attempted to structure CAIR to resolve purported utility contributions to ozone and fine particulate non-attainment, at this time, Cinergy cannot predict the effect of current or future non-attainment designations on its financial position or results of operations.

In July 2005, the EPA issued its final regional haze rules and implementing guidelines in response to a 2002 judicial ruling overturning key provisions of the original program.  The regional haze program is aimed at reducing certain emissions impacting visibility in national parks and wilderness areas.  The EPA has announced that it can foresee no circumstances where the requirements of the regional haze rule would require utility controls beyond those required under CAIR.  The EPA also found that states participating in the CAIR cap and trade program need not require electric generating units to adhere to best available retrofit requirements.  The states have until December 2007 to finalize their SIPs addressing compliance with EPA regulations.  The states may choose to implement more stringent guidelines than promulgated by the EPA, and therefore it is not possible to predict whether the regional haze rule will have a material effect on our financial position or results of operations.

(ii)Section 126 Petitions

In March 2004, the state of North Carolina filed a petition under Section 126 of the CAA in which it alleges that sources in 13 upwind states including Ohio, Indiana, and Kentucky, significantly contribute to North Carolina’s non-attainment with certain ambient air quality standards.  In August 2005, the EPA issued a proposed response to the petition.  The EPA proposed to deny the ozone portion of the petition based upon a lack of contribution to air quality by the named states.  The EPA also proposed to deny the particulate matter portion of the petition based upon the CAIR FIP, described earlier, that would address the air quality concerns from neighboring states.  We expect a final FIP and ruling from the EPA on this matter by March 2006.  It is unclear at this time whether any additional reductions would be necessary beyond those required under the CAIR.

(iii)Clean Air Act Lawsuit

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana against Cinergy, CG&E, and PSI alleging various violations of the CAA.  Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana SIP permits for various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Station.  The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s W.C. Beckjord and Miami Fort Stations, and PSI’s Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and two environmental groups have intervened in the case.  The case is currently in discovery and is set for trial by jury commencing in February 2006.

In March 2000, the United States also filed in the United States District Court for the Southern District of Ohio an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by Columbus Southern Power Company (CSP) and jointly-owned by CSP, The Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the United States District Court for the Southern District of Ohio in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.  This matter was heard in trial in July 2005.  A decision is expected by the end of 2005.

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

We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.  We intend to vigorously defend against these allegations.

(iv)Carbon Dioxide (CO₂) Lawsuit

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed in the United States District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO₂ from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO₂.  The plaintiffs are seeking an injunction requiring each defendant to cap its CO₂ emissions and then reduce them by a specified percentage each year for at least a decade.  Cinergy intends to defend these lawsuits vigorously in court and filed motions to dismiss with the other defendants in September 2004.  We are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

(v)Selective Catalytic Reduction Units at Gibson Station

In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the NO_X SIP Call.  In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern that portions of the plume from those units’ stacks appeared to break apart and descend to ground level, at certain times, under certain weather conditions.  As a result, and, working with the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department of Environmental Management (IDEM), EPA, and the State of Illinois, we developed a protocol regarding the use of the SCRs while we explored alternatives to address this issue.  After the protocol was finalized, the Illinois Attorney General brought an action in Wabash County Circuit Court against PSI seeking a preliminary injunction to enforce the protocol.  In August 2004, the court granted that preliminary injunction.  PSI is appealing that decision to the Fifth District Appellate Court, but we cannot predict the ultimate outcome of that appeal or of the underlying action by the Illinois Attorney General.

In April 2005, we completed the installation of a permanent control system to address this issue.  The new control system will support all five Gibson generating units.  We will seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process.  We do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.

(vi)Zimmer Station Lawsuit

In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&E’s Zimmer Station, brought a purported class action in the United States District Court for the Southern District of Ohio seeking monetary damages and injunctive relief against CG&E for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisance and common law nuisance.  CG&E filed a motion to dismiss the lawsuit on primarily procedural grounds and we intend to defend against these claims vigorously.  The plaintiffs have filed a number of additional notices of intent to sue and two lawsuits raising claims similar to those in the original claim.  At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or results of operations.

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(vii)Manufactured Gas Plant (MGP) Sites

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

In April 1998, PSI filed suit in Hendricks County 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 and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense.  PSI settled, in principle, its claims with all but one of the insurance carriers in January 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, a jury returned a verdict against PSI in February 2005.  PSI has appealed this decision.  At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeal.

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan.  As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

CG&E and ULH&P have performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment.  At the present time, CG&E and ULH&P cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

(viii)Asbestos Claims Litigation

CG&E and PSI have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations.  Currently, there are approximately 120 pending lawsuits.  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.  A majority of the lawsuits to date have been brought against PSI.  The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

Of these lawsuits, one case filed against PSI has been tried to verdict.  The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and a verdict for PSI on punitive damages.  PSI appealed this decision up to the Indiana Supreme Court.  In July 2005, the Indiana Supreme Court upheld the jury’s verdict.  In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations.  We are currently evaluating the effect of the Indiana Supreme Court’s ruling on our existing docket of cases.

At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.

(ix)Dunavan Waste Superfund Site

In July 2005, PSI received notice from the EPA that it has been identified as a de minimus potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act at the Dunavan Waste Oil

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Site in Oakwood, Vermilion County, Illinois.  At this time, PSI does not have any further information regarding the scope of potential liability associated with this matter.

(b)Regulatory

(i)PSI Environmental Compliance Case

In November 2004,PSI filed a compliance plan case with the Indiana Utility Regulatory Commission (IURC) seeking approval of PSI’s plan for complying with SO₂, NO_X, and mercury emission reduction requirements discussed previously in (a)(i), including approval of cost recovery and an overall rate of return of eight percent related to certain projects.  PSI requested approval to recover the financing, depreciation, and operation and maintenance costs, among others, related to $1.08 billion in capital projects designed to reduce emissions of SO₂, NO_X, and mercury at PSI’s coal-burning generating stations.  An evidentiary hearing was held in May 2005 and a final IURC Order is expected in the third quarter of 2005.

(ii)CG&E Electric Rate Filings

In response to the Public Utilities Commission of Ohio (PUCO’s) request that CG&E propose a RSP to mitigate the potential for significant rate increases when the market development period comes to an end, CG&E filed a proposed RSP which was approved by the PUCO in November 2004.  The major features of the RSP are as follows:

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

•Generation Rates and Fuel Recovery:  A new rate has been established for generation service after the market development period ends.  In addition, a fuel cost recovery mechanism that is adjusted quarterly has been established to recover costs for fuel, emission allowances, and certain purchased power costs, that exceed the amount originally included in the rates frozen in the CG&E transition plan.  These new rates were applied to non-residential customers beginning January 1, 2005 and will be applied to residential customers beginning January 1, 2006.

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

•Transmission Cost Recovery:  Transmission cost recovery mechanisms were established beginning January 1, 2005 for non-residential customers and will be established beginning January 1, 2006 for residential customers.  The transmission cost recovery mechanisms are designed to permit CG&E to recover Midwest Independent Transmission System Operator, Inc. charges, all Federal Energy Regulatory Commission (FERC) approved transmission costs, and all congestion costs allocable to retail ratepayers that are provided service by CG&E.

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

CG&E had also filed an electric distribution base rate case for residential and non-residential customers to be effective January 1, 2005.  Under the terms of the RSP described previously, CG&E withdrew this base rate case

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and, in February 2005, CG&E filed a new distribution base rate case with rates to become effective January 1, 2006.  The requested amount of the increase is $78 million.

In March 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Court to overturn the RSP.  We expect the court to decide the case before January 1, 2006; however, at this time we cannot predict the outcome of this matter.

(iii)ULH&P Gas Rate Case

In 2002, the Kentucky Public Service Commission (KPSC) approved ULH&P’s gas base rate case requesting, among other things, recovery of costs associated with an accelerated gas main replacement program of up to $112 million over ten years.  The costs would be recovered through a tracking mechanism for an initial three year period, with the possibility of renewal up to ten years.  To date, we have capitalized $56 million in costs associated with the accelerated gas main replacement program through this tracking mechanism.The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets.  Through June 30, 2005, ULH&P has recovered $7.5 million under this tracking mechanism.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the new tracking mechanism rates.  At the present time, ULH&P cannot predict the timing or outcome of this litigation.

In February 2005, ULH&P filed a gas base rate case with the KPSC.  ULH&P is requesting approval to continue the tracking mechanism in addition to its request for a $14 million increase in base rates, which is a seven percent increase in current retail gas rates.  ULH&P expects that the KPSC will issue its decision by the fourth quarter of 2005.

(iv)Gas Distribution Plant

In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO Staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system.  The amended settlement agreement required CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system.  CG&E filed a comprehensive plan with the PUCO in December 2004 providing for replacement of approximately 5,000 risers in 2005 with continued monitoring thereafter.  CG&E estimates the replacement cost of these risers will not be material.  In April 2005, the PUCO issued an order closing this case.  The PUCO issued a separate order opening a statewide investigation into riser leaks in gas pipeline systems throughout Ohio.  At this time, Cinergy and CG&E cannot predict the outcome or the impact of the statewide investigation.

(c)Other

(i)Energy Market Investigations

In August 2003, Cinergy, along with Cinergy Marketing & Trading, LP (Marketing & Trading) and 37 other companies, were named as defendants in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000, and December 31, 2002.  The complaint alleges that improper price reporting caused damages to the class.  Two similar lawsuits have subsequently been filed, and these three lawsuits have been consolidated for pretrial purposes.  The plaintiffs filed a consolidated class action complaint in January 2004.  Cinergy’s motion to dismiss was granted in September 2004 leaving only Marketing & Trading in the lawsuit.  We believe this action against Marketing & Trading is without merit and intend to defend this lawsuit vigorously.

Cinergy continues to provide various Assistant United States Attorneys with information with respect to their investigations into energy market practices.  We understand that we are neither a target nor are we under investigation by the Department of Justice in relation to any of these communications.

At this time, we do not believe the outcome of these investigations and litigation will have a material impact on Cinergy’s financial position or results of operations.

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(ii)Synthetic Fuel Production

Cinergy produces from two facilities synthetic fuel that qualifies for tax credits (through 2007) in accordance with Section 29 of the Internal Revenue Code (IRC) if certain requirements are satisfied.

Cinergy’s sale of synthetic fuel has generated $271 million in tax credits through June 30, 2005.  The Internal Revenue Service (IRS) is currently auditing Cinergy for the 2002 and 2003 tax years and has recently challenged certain other taxpayers’ Section 29 tax credits.  While we cannot predict whether the IRS will challenge our Section 29 tax credits, we expect the IRS will evaluate the various key requirements for claiming our Section 29 credits related to synthetic fuel.  If the IRS challenges our Section 29 tax credits related to synthetic fuel, and such challenges were successful, this could result in the disallowance of up to all $271 million in previously claimed Section 29 tax credits for synthetic fuel produced by the applicable Cinergy facilities and a loss of our ability to claim future Section 29 tax credits for synthetic fuel produced by such facilities.  We believe that we operate in conformity with all the necessary requirements to be allowed such tax credits under Section 29.  Upon consummation of the pending merger of Duke and Cinergy, the synthetic fuel produced by one of Cinergy’s facilities pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit.  Cinergy is evaluating a transaction for the disposition of a portion of the affected facility that Cinergy believes would enable the fuel produced by the facility to continue to qualify for credit under IRC Section 29. In the event a suitable transaction is not achieved, Cinergy anticipates that its production of synthetic fuel at the affected facility would be suspended upon consummation of the pending merger with Duke.

Section 29 also provides for a phase-out of the credit based on the average price of crude oil during a calendar year.  The phase-out is based on a prescribed calculation and definition of crude oil prices.  Based on current crude oil prices, we do not currently expect amaterial negative impact on our ability to recognize the projected benefit of Section 29 tax credits in 2005.

(iii)FirstEnergy Lawsuit

FirstEnergy has filed a lawsuit in the Court of Common Pleas in Summit County, Ohio against Cinergy with respect to a transaction between Cinergy and a subsidiary of FirstEnergy, relating to a joint venture company, Avon Energy Partners Holdings (Avon).  In 1999, the FirstEnergy subsidiary acquired Cinergy’s share of Avon which it subsequently sold to a third party.  The original transaction documents included an indemnity by Cinergy with respect to a certain investment owned by Avon.  FirstEnergy claims that this indemnity was triggered by its sale of Avon to a third party, and is seeking to recover $15 million from Cinergy.  The case is currently in discovery.  Cinergy intends to defend this lawsuit vigorously.  At this time, we cannot predict the outcome of this matter.

(iv)Guarantees

In the ordinary course of business, Cinergy enters into various agreements providing financial or performance assurances to third parties on behalf of certain unconsolidated subsidiaries and joint ventures.  These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to these entitieson a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish their intended commercial purposes.  The guarantees have various termination dates, from short-term (less than one year) to open-ended.

In many cases, the maximum potential amount of an outstanding guarantee is an express term, set forth in the guarantee agreement, representing the maximum potential obligation of Cinergy under that guarantee (excluding, at times, certain legal fees to which a guaranty beneficiary may be entitled).  In those cases where there is no maximum potential amount expressly set forth in the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.

Cinergy had guaranteed borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program.  Under these guarantees, Cinergy would have been obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation by certain directors, officers, and key employees.  This program terminated pursuant to its terms during the first quarter of 2005 and as of March 31, 2005, all borrowings had been repaid by the participants.

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Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures.  These guarantees support performance under various agreements and instruments (such as construction contracts, operation and maintenance agreements, and energy service agreements).  Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary.  Cinergy Corp. has estimated its maximum potential liability to be $52 million under these guarantees as of June 30, 2005.  Cinergy Corp. may also have recourse to third parties for claims required to be paid under certain of these guarantees.  The majority of these guarantees expire at the completion of the underlying performance agreement, the majority of which expire from 2016 to 2019.

Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities.  Examples of thesecontracts include purchase and sale agreements and operating agreements.  In general, these provisions indemnify the counterparty for matters such as breaches of representations and warranties and covenants contained in the contract.  In some cases, particularly with respect to purchase and sale agreements, the potential liability for certain indemnification obligations is capped, in whole or in part (generally at an aggregate amount not exceeding the sale price), and subject to a deductible amount beforeany payments would become due.In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential liability is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred.  Cinergy has estimated the maximum potential liability, where estimable, to be $103 million under these indemnification provisions.  The termination period for the majority of matters provided by indemnification provisions in these types of agreements generally ranges from 2005 to 2009.

We believe the likelihood that Cinergy would be required to perform or otherwise incur any significant losses associated with any or all of the guarantees described in the preceding paragraphs is remote.

10.Financial Information by Business Segment

As discussed in the 2004 10-K, we conduct operations through our subsidiaries, and manage through the following three reportable segments:

•Regulated Business Unit (Regulated);

•Commercial Business Unit (Commercial); and

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

Regulated consists of PSI’s regulated generation and transmission and distribution operations, and CG&E and its subsidiaries’ regulated electric and gas transmission and distribution systems.  Regulated plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers.  Regulated also earns revenues from wholesale customers primarily by these customers transmitting electric power through Cinergy’s transmission system.  These businesses are subject to cost of service rate making where rates to be charged to customers are based on prudently incurred costs over a test period plus a reasonable rate of return.

Commercial manages our wholesale generation and energy marketing and trading activities.  Commercial also performs energy risk management activities, provides customized energy solutions and is responsible for all of our international operations.

Power Technology and Infrastructure primarily manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary.  Ventures identifies, invests in, and integrates new energy technologies into Cinergy’s existing businesses, focused primarily on operational efficiencies and clean energy technologies.  In addition, Power Technology and Infrastructure manages our investments in other energy infrastructure and telecommunication service providers.

Following are the financial results by business unit.  Certain prior year amounts have been reclassified to conform to the current presentation.

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Financial results by business unit for the quarters ended June 30, 2005, and June 30, 2004, are as indicated below.

	Cinergy Business Units
	Regulated		Commercial			Power Technology and Infrastructure			Total		Reconciling Eliminations(1)			Consolidated
	(in millions)
Quarter ended June 30, 2005
Operating revenues
External customers	$	706	$	408		$	—		$	1,114	$	—		$	1,114
Intersegment revenues	2		38			—			40		(40		)	—
Gross margins
Electric	434		168			—			602		—			602		(3)
Gas	44		(20		)	—			24		—			24		(4)
Segment profit (loss)(2)	50		3			(2		)	51		—			51
Quarter ended June 30, 2004
Operating revenues
External customers	$	688	$	366		$	—		$	1,054	$	—		$	1,054
Intersegment revenues	7		52			—			59		(59		)	—
Gross margins
Electric	396		175			—			571		—			571		(3)
Gas	44		17			—			61		—			61		(4)
Segment profit (loss)(2)	35		31			(7		)	59		—			59

(1)The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and Regulated.

(2)Management utilizes segment profit (loss), after taxes, to evaluate segment performance.

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

(4)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

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Financial results by business unit for year to date June 30, 2005, and June 30, 2004, are as indicated below.

	Cinergy Business Units
	Regulated		Commercial			Power Technology and Infrastructure			Total		Reconciling Eliminations(1)			Consolidated
	(in millions)
Year to Date June 30, 2005
Operating revenues
External customers	$	1,618	$	841		$	—		$	2,459	$	—		$	2,459
Intersegment revenues	14		83			—			97		(97		)	—
Gross margins
Electric	876		347			—			1,223		—			1,223		(3)
Gas	142		(14		)	—			128		—			128		(4)
Segment profit (loss)(2)	125		49			(6		)	168		—			168
Year to Date June 30, 2004
Operating revenues
External customers	$	1,600	$	742		$	—		$	2,342	$	—		$	2,342
Intersegment revenues	31		102			—			133		(133		)	—
Gross margins
Electric	802		334			—			1,136		—			1,136		(3)
Gas	148		40			—			188		—			188		(4)
Segment profit (loss)(2)	115		76			(29		)	162		—			162

(1)The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and Regulated.

(2) Management utilizes segment profit (loss), after taxes, to evaluate segment performance.

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

(4)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

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Total segment assets at June 30, 2005, and December 31, 2004, are as indicated below:

	Cinergy Business Units
	Regulated		Commercial		Power Technology and Infrastructure		Total		Consolidated
	(in millions)
Total segment assets at June 30, 2005	$	9,137	$	5,990	$	131	$	15,258	$	15,258
Total segment assets at December 31, 2004	$	9,097	$	5,746	$	139	$	14,982	$	14,982

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11.Earnings Per Common Share (EPS)

A reconciliation of EPS – basic to EPS – diluted is presented below for the quarters ended June 30, 2005 and 2004:

	Income		Shares	EPS
	(in thousands, except per share amounts)
Quarter Ended June 30, 2005
EPS – basic:	$	50,708	198,492	$	0.25
Effect of dilutive securities:
Common stock options			671
Directors’ compensation plans			146
Contingently issuable common stock			132
EPS – diluted:	$	50,708	199,441	$	0.25
Quarter Ended June 30, 2004
EPS – basic:	$	58,504	180,236	$	0.33
Effect of dilutive securities:
Common stock options			574
Directors’ compensation plans			155
Contingently issuable common stock			471
Stock purchase contracts			841
EPS – diluted:	$	58,504	182,277	$	0.32

Options to purchase shares of common stock are excluded from the calculation of EPS – diluted, if they are considered to be anti-dilutive.  Share amounts of 1.4 million and 1.2 million were excluded from the EPS – diluted calculation for the quarters ended June 30, 2005 and 2004, respectively.

Also excluded from the EPS – diluted calculation for the quarter ended June 30, 2004 are 10.0 million shares, issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction.  As discussed in the 2004 10-K, in January and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock associated with these preferred stock securities.

A reconciliation of EPS – basic to EPS – diluted is presented below for the year to date June 30, 2005 and 2004:

	Income		Shares	EPS
	(in thousands, except per share amounts)
Year to Date June 30, 2005
EPS – basic:	$	168,064	197,066	$	0.85
Effect of dilutive securities:
Common stock options			652
Directors’ compensation plans			146
Contingently issuable common stock			66
Stock purchase contracts			145
EPS – diluted:	$	168,064	198,075	$	0.85
Year to Date June 30, 2004
EPS – basic:	$	161,519	179,749	$	0.90
Effect of dilutive securities:
Common stock options			702
Directors’ compensation plans			155
Contingently issuable common stock			523
Stock purchase contracts			977
EPS – diluted:	$	161,519	182,106	$	0.89

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Options to purchase shares of common stock are excluded from the calculation of EPS – diluted, if they are considered to be anti-dilutive.  Share amounts of 1.4 million and 1.2 million were excluded from the EPS – diluted calculation for the year to date June 30, 2005 and 2004, respectively.

Also excluded from the EPS – diluted calculation for the year to date June 30, 2004 are 9.9 million shares issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction.  As discussed in the 2004 10-K, in January and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock associated with these preferred stock securities.

12.Transfer and Acquisition of Generating Assets

(a)Transfer of Generating Assets to ULH&P

The KPSC and the FERC have approved ULH&P’s planned acquisition of CG&E’s approximately 69 percent ownership interest in the East Bend Station, located in Boone County, Kentucky, the Woodsdale Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Station located in Hamilton County, Ohio, and associated transactions.  ULH&P is currently seeking approval of the transaction in a proceeding before the Securities and Exchange Commission (SEC), wherein the Ohio Consumers’ Counsel has intervened in opposition.  The transfer, which will be at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through December 31, 2006.  Assuming receipt of SEC approval, we would anticipate the transfer to take place in the third quarter of 2005.

(b)Wheatland Generating Facility Acquisition

On May 6, 2005, we signed a definitive agreement with subsidiaries of Allegheny Energy, Inc. whereby, subject to the terms and upon satisfaction of the conditions to closing provided in the purchase agreement, PSI and/or CG&E had the right to acquire the 512-megawatt Wheatland generating facility for approximately $100 million.  The Wheatland facility, located in Knox County, Indiana, has four natural gas-fired simple cycle combustion turbines and is directly connected to the Cinergy transmission system.  In June and August 2005, respectively, the FERC and IURC approved the acquisition and the Department of Justice and Federal Trade Commission completed their review of the transaction pursuant to the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act.  We have determined that PSI will acquire 100% of the Wheatland facility.  Its output will be used to bolster the reserve margins on the PSI system.  Cinergy expects to close the acquisition in August 2005.

13.Pending Merger

On May 8, 2005, Cinergy Corp. entered into an agreement and plan of merger with Duke, a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke.  Under the merger agreement, each share of Cinergy Corp. Common Stock will be converted into 1.56 shares of the newly formed company, Duke Energy Holding Corp.

The merger agreement has been approved by both companies’ Boards of Directors.  Consummation of the merger is subject to customary conditions, including, among others, the approval of the shareholders of both companies and the approvals of various regulatory authorities.

Immediately following consummation of the merger, former Cinergy shareholders will own approximately 24 percent of Duke Energy Holding’s common stock.  Paul Anderson, Duke’s CEO and Chairman of the Board will remain Chairman of the combined company and Jim Rogers, Cinergy’s President, CEO and Chairman of the Board, will become the President and Chief Executive Officer of the combined company.  The new Duke Energy Holding board will be comprised of 10 members appointed by Duke and five members appointed by Cinergy.

The merger will be recorded using the purchase method of accounting whereby the total purchase price of approximately $9 billion will be allocated to Cinergy’s identifiable tangible and intangible assets acquired and liabilities assumed based on their fair values as of the closing of the merger.

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The merger is expected to close in 2006, however the actual timing is contingent on several approvals including:  FERC, state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company.  The following regulatory filings have been made in June and July of 2005:

•In June 2005, Duke and Cinergy filed an application with the PUCO for approval of a change in control with respect to CG&E and to modify certain accounting procedures to defer certain merger-related costs.  We expect that the PUCO will set a procedural schedule in the third quarter of 2005.

•In June 2005, PSI filed a petition with the IURC concerning, among other things, certain merger-related affiliate agreements, the sharing of merger-related benefits with customers, and deferred accounting of certain merger-related costs.  A pre-hearing conference has been scheduled for August 2005 and a procedural schedule will be set at that time.

•In August 2005, Duke and Cinergy filed an application with the KPSC seeking approval of a transfer and acquisition of control of ULH&P.  A procedural schedule has not yet been set.

•In July 2005, Duke and Cinergy filed an application with the FERC requesting approval of the merger and the subsequent internal restructuring and consolidation of the merged company to establish a more efficient corporate structure.

•In July 2005, Duke filed applications with the respective state utility regulatory agencies in both North and South Carolina.  The application filed with the North Carolina Utility Commission requests both the authorization to enter into a business combination transaction and the approval of various affiliate agreements.  The application filed with the Public Service Commission of South Carolina requests authorization to enter into a business combination.

The pending merger agreement also provides that Duke and Cinergy will use their reasonable best efforts to transfer five generating stations located in the Midwest from Duke to CG&E.  This transfer will require regulatory approval by the FERC and there can be no guarantee that such approval will be obtained or will be obtained on terms or with conditions acceptable to Duke, Cinergy, and Duke Energy Holding.  Duke intends to effectuate the transfer as an equity infusion into CG&E at book value.  In conjunction with the transfer, Duke and CG&E intend to enter into a financial arrangement to eliminate any potential cash shortfalls that may result from owning and operating the assets.  At this time, we cannot predict the outcome of this matter.

The merger agreement contains certain termination rights for both Duke and Cinergy, and further provides that, upon termination of the merger agreement under specified circumstances, a party would be required to pay the other party’s fees and expenses in an amount not to exceed $35 million and/or a termination fee of $300 million in the case of a fee payable by Cinergy to Duke or a termination fee of $500 million in the case of a fee payable by Duke to Cinergy; provided that any termination fee payable will be reduced by any amount of any fees and expenses previously reimbursed by such party.

In May, a purported shareholder class action was filed in the Court of Common Pleas in Hamilton County, Ohio against Cinergy and each of the members of the Board of Directors. The lawsuit alleges that the defendants breached their duties of due care and loyalty to shareholders by agreeing to the merger agreement between Duke and Cinergy and is seeking to either enjoin or amend the terms of the merger.  Cinergy and the individual defendants filed a motion to dismiss this lawsuit in July.  We believe this lawsuit is without merit and Cinergy intends to defend this lawsuit vigorously in court.  We are unable to predict whether resolution of this matter will impact our pending merger.

Although Management believes that this merger should close in 2006, the actual timing of this transaction could be delayed or the merger could be terminated by the inability to obtain one or more of the required approvals.

In light of the impending repeal of the Public Utility Holding Company Act, as amended (PUHCA), effective February 2006, the merger will no longer require SEC authorization under PUHCA. For further details, see “Energy Bill” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

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CAUTIONARY STATEMENTS

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.”

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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

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

•Factors affecting operations, such as:

(1)unanticipated weather conditions;

(2)unscheduled generation outages;

(3)unusual maintenance or repairs;

(4)unanticipated changes in costs, including costs of coal and emission allowances;

(5)environmental incidents; and

(6)electric transmission or gas pipeline system constraints.

•Legislative and regulatory initiatives and legal developments.

•Additional competition in electric or gas markets and continued industry consolidation.

•Financial or regulatory accounting principles including costs of compliance with existing and future environmental requirements.

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

•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.

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

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

•The Regulatory approval process for the Duke Energy Corporation and Cinergy pending merger could delay the consummation of the pending merger or impose conditions that could materially impact the combined company.

•Business uncertainties, contractual restrictions, and the potential inability to attract and retain key personnel due to the pending merger.

We undertake no obligation to update the information contained herein

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MD&A - PENDING MERGER

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2004 (2004 10-K).  We have reclassified certain prior-year amounts in the financial statements of Cinergy, The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P) to conform to current presentation.  The following discussions of results are not necessarily indicative of the results to be expected in any future period.

PENDING MERGER

On May 8, 2005, Cinergy Corp. entered into an agreement and plan of merger with Duke Energy Corporation (Duke), a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke.  Under the merger agreement, each share of Cinergy Corp. Common Stock will be converted into 1.56 shares of the newly formed company, Duke Energy Holding Corp.

The merger agreement has been approved by both companies’ Boards of Directors.  Consummation of the merger is subject to customary conditions, including, among others, the approval of the shareholders of both companies and the approvals of various regulatory authorities.

Immediately following consummation of the merger, former Cinergy shareholders will own approximately 24 percent of Duke Energy Holding’s common stock.  Paul Anderson, Duke’s CEO and Chairman of the Board will remain Chairman of the combined company and Jim Rogers, Cinergy’s President, CEO and Chairman of the Board, will become the President and Chief Executive Officer of the combined company.  The new Duke Energy Holding board will be comprised of 10 members appointed by Duke and five members appointed by Cinergy.

The merger is expected to close in 2006, however the actual timing is contingent on several approvals including:  Federal Energy Regulatory Commission (FERC), state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company.  The following regulatory filings have been made in June and July of 2005:

•In June 2005, Duke and Cinergy filed an application with the Public Utilities Commission of Ohio (PUCO) for approval of a change in control with respect to CG&E and to modify certain accounting procedures to defer certain merger-related costs.  We expect that the PUCO will set a procedural schedule in the third quarter of 2005.

•In June 2005, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) concerning, among other things, certain merger-related affiliate agreements, the sharing of merger-related benefits with customers, and deferred accounting of certain merger-related costs.  A pre-hearing conference has been scheduled for August 2005 and a procedural schedule will be set at that time.

•In August 2005, Duke and Cinergy filed an application with the Kentucky Public Service Commission (KPSC) seeking approval of a transfer and acquisition of control of ULH&P.  A procedural schedule has not yet been set.

•In July 2005, Duke and Cinergy filed an application with the FERC requesting approval of the merger and the subsequent internal restructuring and consolidation of the merged company to establish a more efficient corporate structure.

•In July 2005, Duke filed applications with the respective state utility regulatory agencies in both North and South Carolina.  The application filed with the North Carolina Utility Commission requests both the

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authorization to enter into a business combination transaction and the approval of various affiliate agreements.  The application filed with the Public Service Commission of South Carolina requests authorization to enter into a business combination.

The pending merger agreement also provides that Duke and Cinergy will use their reasonable best efforts to transfer five generating stations located in the Midwest from Duke to CG&E.  This transfer will require regulatory approval by the FERC and there can be no guarantee that such approval will be obtained or will be obtained on terms or with conditions acceptable to Duke, Cinergy, and Duke Energy Holding.  Duke intends to effectuate the transfer as an equity infusion into CG&E at book value.  In conjunction with the transfer, Duke and CG&E intend to enter into a financial arrangement to eliminate any potential cash shortfalls that may result from owning and operating the assets.  At this time, we cannot predict the outcome of this matter.

The merger agreement contains certain termination rights for both Duke and Cinergy, and further provides that, upon termination of the merger agreement under specified circumstances, a party would be required to pay the other party’s fees and expenses in an amount not to exceed $35 million and/or a termination fee of $300 million in the case of a fee payable by Cinergy to Duke or a termination fee of $500 million in the case of a fee payable by Duke to Cinergy; provided that any termination fee payable will be reduced by any amount of any fees and expenses previously reimbursed by such party.

Although Management believes that this merger should close in 2006, the actual timing of this transaction could be delayed or the merger could be terminated by the inability to obtain one or more of the required approvals.

In light of the impending repeal of the Public Utility Holding Company Act, as amended (PUHCA), effective February 2006, the merger will no longer require The Securities and Exchange Commission (SEC) authorization under PUHCA. For further details, see “Energy Bill” in “Liquidity and Capital Resources.”

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MD&A - EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

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

•factors affecting current and future operations;

•why results changed from period to period;

•potential sources of cash for future capital expenditures; and

•how these items affect our overall financial condition.

Organization

Cinergy Corp., a Delaware corporation organized in 1993, owns all outstanding common stock of CG&E and PSI, both of which are public utilities.  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 PUHCA.  For a discussion of the pending PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”  Our other principal subsidiaries are Cinergy Services, Inc. (Services) and Cinergy Investments, Inc. (Investments).

CG&E, an Ohio corporation organized in 1837, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through ULH&P, in nearby areas of Kentucky.  CG&E is responsible for the majority of our power marketing and trading activity.  CG&E’s principal subsidiary, ULH&P, a Kentucky corporation organized in 1901, provides electric and gas service in northern Kentucky.

PSI, an Indiana corporation organized in 1942, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

The following table presents further information related to the operations of our domestic utility companies CG&E, PSI, and ULH&P (our utility operating companies):

Principal Line(s) of Business
CG&E and subsidiaries	•	Generation, transmission, distribution, and sale of electricity
	•	Sale and/or transportation of natural gas
	•	Electric commodity marketing and trading operations
PSI	•	Generation, transmission, distribution, and sale of electricity
ULH&P(1)	•	Transmission, distribution, and sale of electricity
	•	Sale and transportation of natural gas

(1)See Note 12 of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” for further discussion of the possible transfer of generation assets.

Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services.  Investments holds most of our non-regulated, energy-related businesses and investments, including natural gas marketing and trading operations (which are primarily conducted through Cinergy Marketing & Trading, LP, one of its subsidiaries).

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Financial Highlights

Net income for Cinergy for the quarter and six months ended June 30, 2005, and 2004 was as follows:

	Cinergy
	2005		2004		Change			% Change
	(in millions)
Quarter ended June 30	$	51	$	59	$	(8	)	(14	)%
Six months ended June 30	$	168	$	162	$	6		4	%

Quarterly Highlights

The decrease in net income was primarily due to the following factors:

•A decrease in the Commercial Business Unit’s (Commercial) gas gross margins which reflects trading strategies employed in the second quarter of 2005 that resulted in negative margins;

•Increases in Operation and maintenance expenses including costs related to the pending Duke-Cinergy merger and labor expenses; and

•A decrease in gross margins on power marketing, trading, and origination contracts.

These decreases were partially offset by increases in rate tariff adjustments resulting from PSI’s 2004 base retail electric rate increase and the implementation of CG&E’s rate stabilization plan (RSP) in January 2005.

For further information, see “2005 Quarterly Results of Operations – Cinergy”.

Year to Date Highlights

The increase in net income was primarily due to the following factors:

•Increases in rate tariff adjustments resulting from PSI’s 2004 base retail electric rate increase and the implementation of CG&E’s RSP in January 2005; and

•An increase in electric gross margins relating to certain activities in our asset optimization business.  This increase was comprised of increases in margins from the sale of emission allowances partially offset by unrealized losses on forward coal and power contracts.

These increases were partially offset by:

•A decrease in Commercial’s gas gross margins which primarily reflects trading strategies employed in the second quarter of 2005 that resulted in negative margins; and

•Increases in Operation and maintenance expense primarily due to regulatory asset amortization, expenses associated with the pending Duke-Cinergy merger, and increased operating expenses for non-regulated subsidiaries.

For further information, see “2005 Year to Date Results of Operations – Cinergy”.

Forward-looking Challenges and Risks

Merger Challenges and Risks

The pending merger between Duke and Cinergy presents significant challenges.  The integration of the two companies will be complex and time-consuming, due to the size and complexity of each organization.  The principal challenges will be integrating the combined regulated electric utility operations, combining each of the unregulated wholesale power generation businesses and combining the energy marketing and trading businesses.  All of these businesses are complex, and some of the business units are dispersed.  Such efforts could also divert management’s

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focus and resources from other strategic opportunities during the integration process.   The pending merger is subject to approvals of numerous governmental agencies and approval of the shareholders of both companies, all of which are discussed in more detail in “Pending Merger.”  The approval process could delay consummation of the pending merger, impose conditions that could materially impact the combined company, or cause the merger to be abandoned.  Both companies will incur significant transaction and merger-related integration costs in connection with the merger.  Additionally, we will be subject to business uncertainties and contractual restrictions while the merger is pending which could adversely affect our businesses.  Although both companies intend to take steps to reduce any adverse affects, these uncertainties may impair our ability to attract and retain key personnel until the merger is consummated and for a period of time thereafter, and could cause customers, suppliers and others that deal with us to seek to change existing business relationships.

Environmental Challenges

Cinergy faces many uncertainties with regard to future environmental legislation and the impact of this legislation on our generating assets and our decisions to construct new assets.  In March 2005, the Environmental Protection Agency (EPA) finalized two rulemakings that will require significant reductions in sulfur dioxide (SO₂), nitrogen oxides (NO_X), and mercury emissions from power plants.  Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of both rules.  Additionally, multi-emissions reductions legislation is still being discussed in the Senate, although the outcome of these discussions is still highly uncertain at this time.  Presently, greenhouse gas (GHG) emissions, which principally consist of carbon dioxide (CO₂), are not regulated, and while several legislative proposals have been introduced in Congress to reduce utility GHG emissions, none have been passed.  Nevertheless, we anticipate a mandatory program to reduce GHG emissions will exist in the future.  In 2004, Cinergy’s utility operating companies began an environmental construction program to reduce overall plant emissions that is estimated to cost approximately $1.8 billion over the next five years.  We believe that our construction program optimally balances these uncertainties and provides a level of emission reduction that will be required and/or economical to Cinergy under a variety of possible regulatory outcomes.  See “Environmental Issues” in “Liquidity and Capital Resources” for further information.

Midwest Independent Transmission System Operator, Inc. (Midwest ISO) Energy Markets

Effective April 1, 2005 the Midwest ISO began operating under the Energy Markets Tariff (sometimes referred to as a Locational Marginal Pricing (LMP) market or MISO Day 2 market).  The implementation of an LMP market introduced new scheduling requirements, new products for mitigating transmission congestion risks, and new pricing points for the purchase and sale of power.  We have been operating under the Energy Markets Tariff since April 2005 and continue to work with the Midwest ISO to monitor the implementation of the new market.  See “Midwest ISO Energy Markets” in “Future Expectations/Trends” for further details regarding these new markets.

Rising Coal and Emission Allowance Prices

The prices of coal and SO₂ emission allowances increased dramatically in 2004, as compared to 2003, and have continued to increase in 2005.  Contributing to the increases in coal and SO₂ prices have been (1) increases in demand for electricity, (2) environmental regulation, and (3) decreases in the number of suppliers of coal from prior years.  CG&E’s RSP allows for recovery of fuel and emission allowance expenses effective January 1, 2005 for retail non-residential customers in Ohio.  As part of the RSP, we will begin recovering these costs from residential customers in Ohio effective January 1, 2006.  We continue to recover these costs from PSI retail customers through previously established rate recovery mechanisms.  To the extent that these increased fuel and SO₂ prices are not offset by regulatory recovery or increases in the market price of power for wholesale transactions, they will negatively impact ongoing earnings.  The impact of these price increases on earnings in 2005 is discussed in more detail in “2005 Quarterly Results of Operations” and “2005 Year to Date Results of Operations”.

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MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS - CINERGY

2005 QUARTERLY RESULTS OF OPERATIONS – CINERGY

Given the dynamics of our business, which include regulatory revenues with directly offsetting expenses and commodity trading operations for which results are primarily reported on a net basis, we have concluded that a discussion of our results on a gross margin basis is most appropriate.  Electric gross margins represent electric operating revenues less the related direct costs of fuel, emission allowances, and purchased power.  Gas gross margins represent gas operating revenues less the related direct cost of gas purchased.  Within each of these areas, we will discuss the key drivers of our results.  Gross margins for Cinergy for the Regulated Business Unit (Regulated) and Commercial for the quarters ended June 30, 2005, and 2004 were as follows:

	Cinergy
	Regulated								Commercial
	2005		2004		Change		% Change		2005			2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	434	$	396	$	38	10	%	$	168		$	175	$	(7	)	(4	)%
Gas gross margin(2)	44		44		—		—		(20		)	17		(37		)	N/M

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

(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

N/MNot meaningful to an understanding of the change.

Cooling degree days and heating degree days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations.  Cooling degree days and heating degree days in Cinergy’s service territory for the quarters ended June 30, 2005, and 2004 were as follows:

	Cinergy
	2005	2004	Change	% Change
Cooling degree days(1)	337	335	2	1	%
Heating degree days(2)(3)	239	236	3	1

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

(2)  Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

The change in cooling degree days and heating degree days did not have a material effect on Cinergy’s gross margins for the period.

Regulated

Gross Margins

The 10 percent increase in Regulated’s electric gross margins was primarily due to the following factors:

•A $30 million increase resulting primarily from a higher price received per megawatt hour (MWh) due to PSI’s 2004 base retail electric rate increase; and

•A $17 million increase in PSI’s non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel.

Partially offsetting these increases was a decline of $11 million reflecting rate reductions associated with a property tax adjustment for PSI.

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Commercial

Gross Margins

The four percent decrease in Commercial’s electric gross margins was due, in part, to a $6 million decrease in gross margins on power marketing, trading, and origination contracts.

Commercial’s retail margins were relatively flat for the quarter ended June 30, 2005, as compared to 2004.  Rate increases from the RSP provided a $13 million increase in margins.  However, this was offset by fuel, emission allowance and purchased power cost increases related to fixed price residential customers of approximately $11 million.

Commercial’s other non-retail margins were relatively flat for the quarter.  We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances.  When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery.  The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity.  In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.

During the second quarter of 2005, we recognized margins of $35 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments.  This gain reflects significant increases in prices of SO₂ emission allowances throughout much of 2004 and into early 2005.  Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.

Gains from the sale of emission allowances were largely offset by the following:

•A $4 million decline due to timing differences in revenue recognition between certain components of our generation portfolio.  Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, generally accepted accounting principles (GAAP) requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the mark-to-market (MTM) method of accounting.  This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results.  Our gross margins reflect $8 million of unrealized losses in the second quarter of 2005 and $4 million of unrealized losses in the comparable period in 2004 (representing a $4 million change quarter on quarter) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.

•Lower margins from non-retail power sales caused by a decline in volumes and lower margins per MWh, which reflects higher fuel costs.

Commercial’s gas gross margins decreased, as compared to the same period last year due to the following factors:

•A $35 million decrease which reflects trading strategies employed in the second quarter of 2005 that resulted in negative margins; and

•A $5 million decrease due to timing differences in revenue recognition between physical storage activities and the associated derivative contracts that hedge the physical storage. These agreements with pipelines to store natural gas and deliver in a future period with higher prices (typically winter) follow the accrual method of accounting.  However, the derivative contracts hedging the gas are required under GAAP to be accounted for under the MTM method of accounting.  The differing accounting treatments can lead to volatility in reported results.  Our quarter-to-date gross margins reflect $6 million of unrealized losses in 2005 and $1 million of unrealized losses in 2004 (representing a $5 million change quarter on quarter) as a result of derivative contracts and the use of MTM accounting.

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Other Operating Revenues and Costs of Fuel Resold

The 60 percent increase in Other Operating Revenues was primarily due to the following factors:

•A $32 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and the number of coal origination contracts.  Coal origination includes contract structuring and marketing of physical coal; and

•A $15 million increase in Commercial’s revenues from the sale of synthetic fuel.

Costs of fuel resold includes Commercial’s costs of coal origination activities and the production of synthetic fuel.  These costs have increased in 2005, which is consistent with the increases in the associated revenues as previously discussed.

The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for Cinergy.  However, only the line items that varied significantly from prior periods are discussed.

Other Operating Expenses

	Cinergy
	2005		2004		Change		% Change
	(in millions)
Operation and maintenance	$	351	$	332	$	19	6	%
Depreciation	131		114		17		15
Taxes other than income taxes	65		65		—		—

Operation and Maintenance

The six percent increase in Operation and maintenance expense was primarily due to the following factors:

•Increased labor expenses of $13 million primarily resulting from severance payments partially offset by a decrease of $5 million in employee incentive costs;

•Expenses of $11 million related to the pending Duke-Cinergy merger;

•An increase of $6 million in costs associated with environmental litigation; and

•Increased regulatory asset amortization of $4 million related to CG&E’s Regulatory Transition Charge (RTC).

These increases were partially offset by $12 million of costs incurred in 2004 associated with the continuous improvement initiative and a $5 million decrease in maintenance expenses, primarily generation and distribution related.

Depreciation

The 15 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.

Miscellaneous Income (Expense) – Net

The increase in Miscellaneous Income (Expense) – Net was primarily due to $7 million in impairment charges recognized in the second quarter of 2004 related to investments in Power Technology and Infrastructure.

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Income Taxes

The effective income tax rate decreased for the quarter ended June 30, 2005, as compared to 2004.  The decrease was primarily a result of an increase in the amount of estimated annual tax credits associated with the production and sale of synthetic fuel.  Cinergy’s 2005 effective tax rate is expected to be approximately 23 percent.

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2005 QUARTERLY RESULTS OF OPERATIONS - CG&E

Summary of Results

Net income for CG&E for the quarters ended June 30, 2005, and 2004 was as follows:

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Net income	$	53	$	56	$	(3	)	(5	)%

The decrease in net income was primarily due to the following factors:

•Increases in Operation and maintenance expenses including costs related to the pending Duke-Cinergy merger; and

•A decrease in margins on power marketing, trading, and origination contracts.

These decreases were partially offset by an increase in rate tariff adjustments resulting from the implementation of CG&E’s RSP in January 2005.

Gross Margins

Gross margins for CG&E for the quarters ended June 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	305	$	306	$	(1	)	—	%
Gas gross margin(2)	44		43		1			2

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

(2)  Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

Cooling degree days and heating degree days in CG&E’s service territory for the quarters ended June 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005	2004	Change		% Change
Cooling degree days(1)	340	327	13		4	%
Heating degree days(2)(3)	224	243	(19	)	(8	)

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

(2)  Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

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

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Electric Gross Margins

CG&E’s electric gross margins were relatively flat for the quarter ended June 30, 2005, as compared to 2004.

CG&E’s gross margins on power marketing, trading, and origination contracts decreased $6 million in the quarter.

CG&E’s retail margins were relatively flat for the quarter ended June 30, 2005, as compared to 2004.  Rate increases from the RSP provided a $13 million increase in margins.  However, this was offset by fuel, emission allowance and purchased power cost increases related to fixed price residential customers of approximately $11 million.

CG&E’s other non-retail margins were up slightly during the quarter.  We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances.  When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery.  The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity.  In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.

During the second quarter of 2005, we recognized margins of $35 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments.  This gain reflects significant increases in prices of SO₂ emission allowances throughout much of 2004 and into early 2005.  Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.

Gains from the sale of emission allowances were largely offset by the following:

•A $4 million decline due to timing differences in revenue recognition between certain components of our generation portfolio.  Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting.  This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results.  Our gross margins reflect $8 million of unrealized losses in the second quarter of 2005 and $4 million of unrealized losses in the comparable period in 2004 (representing a $4 million change quarter on quarter) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.

•Lower margins from non-retail power sales caused by a decline in volumes and lower margins per MWh, which reflects higher fuel costs.

Other Operating Revenues and Costs of Fuel Resold

The increase in Other Operating Revenues was due to a $38 million increase in revenues from coal origination resulting from increases in coal prices and the number of coal origination contracts.  This increase includes $12 million of sales to non-regulated affiliates.

Costs of fuel resold represents the costs of coal origination activities.  These costs have increased in 2005, which is consistent with the increase in the associated revenues as previously discussed.

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The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for CG&E.  However, only the line items that varied significantly from prior periods are discussed.

Other Operating Expenses

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Operation and maintenance	$	172	$	150	$	22		15	%
Depreciation	45		46		(1		)	(2	)
Taxes other than income taxes	53		50		3			6

Operation and Maintenance

The 15 percent increase in Operation and maintenance expense was primarily due to the following factors:

•Increased expenses of $8 million related to the pending Duke-Cinergy merger;

•Increased regulatory asset amortization of $4 million related to CG&E’s RTC; and

•Increased labor expenses of $3 million primarily resulting from severance payments partially offset by a decrease in employee incentive costs.

Income Taxes

The effective income tax rate decreased for the quarter ended June 30, 2005, as compared to 2004.  The decrease was primarily a result of a change in Ohio law to phase-out the Ohio franchise tax.  The phase-out of the Ohio franchise tax resulted in the elimination of state income tax deferrals under GAAP thus reducing the effective income tax rate during the period.  See “Ohio Taxes” in “Future Expectation/Trends” for additional information.

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MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS - PSI

2005 QUARTERLY RESULTS OF OPERATIONS - PSI

Summary of Results

Net income for PSI for the quarters ended June 30, 2005, and 2004 was as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Net income	$	43	$	25	$	18	72	%

The increase in net income was primarily due to the impact of PSI’s 2004 base retail electric rate increase.

Electric Gross Margins

Gross margins for PSI for the quarters ended June 30, 2005, and 2004 were as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Electric gross margin(1)	$	295	$	260	$	35	13	%

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

Cooling degree days and heating degree days in PSI’s service territory for the quarters ended June 30, 2005, and 2004 were as follows:

	PSI
	2005	2004	Change		% Change
Cooling degree days(1)	333	342	(9	)	(3	)%
Heating degree days(2)(3)	254	228	26		11

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

(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

The change in cooling degree days and heating degree days did not have a material effect on PSI’s gross margins for the period.

The 13 percent increase in PSI’s electric gross margins was primarily due to the following factors:

•A $30 million increase resulting primarily from a higher price received per MWh due to PSI’s 2004 base retail electric rate increase; and

•A $17 million increase in non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel.

Partially offsetting these increases was a decline of $11 million reflecting rate reductions associated with a property tax adjustment.  This decline is partially offset by a reduction in property tax expense, as discussed further below.

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

Other Operating Expenses

	PSI
	2005		2004		Change			% Change
	(in millions)
Operation and maintenance	$	122	$	123	$	(1	)	(1	)%
Depreciation	66		55		11			20
Taxes other than income taxes	10		15		(5		)	(33	)

Depreciation

The 20 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.

Taxes other than Income Taxes

The 33 percent decrease in Taxes other than income taxes expense was primarily due to the settlement of various property tax matters.

Miscellaneous Income - Net

The increase in Miscellaneous Income – Net was primarily due to an increase in the rate for allowance for equity funds used during construction and reimbursements from PSI’s insurance carriers for costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites.

Interest Expense

The 24 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and increases in variable interest rates.  This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which is recorded in Miscellaneous Income – Net, associated with the additional long-term debt outstanding.

Income Taxes

The effective income tax rate decreased for the quarter ended June 30, 2005, as compared to June 30, 2004, primarily as a result of an adjustment in the second quarter of 2004 to reflect an increase in the Indiana state income tax provision.

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MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS - CINERGY

2005 YEAR TO DATE RESULTS OF OPERATIONS – CINERGY

Given the dynamics of our business, which include regulatory revenues with directly offsetting expenses and commodity trading operations for which results are primarily reported on a net basis, we have concluded that a discussion of our results on a gross margin basis is most appropriate.  Electric gross margins represent electric operating revenues less the related direct costs of fuel, emission allowances, and purchased power.  Gas gross margins represent gas operating revenues less the related direct cost of gas purchased.  Within each of these areas, we will discuss the key drivers of our results.  Gross margins for Cinergy for Regulated and Commercial for the six months ended June 30, 2005, and 2004 were as follows:

	Cinergy
	Regulated									Commercial
	2005		2004		Change			% Change		2005			2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	876	$	802	$	74		9	%	$	347		$	334	$	13		4	%
Gas gross margin(2)	142		148		(6		)	(4	)	(14		)	40		(54		)	N/M

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

(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

N/MNot meaningful to an understanding of the change.

Cooling degree days and heating degree days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations.  Cooling degree days and heating degree days in Cinergy’s service territory for the six months ended June 30, 2005, and 2004 were as follows:

	Cinergy
	2005	2004	Change		% Change
Cooling degree days(1)	337	336	1		—	%
Heating degree days(2)(3)	2,320	2,446	(126	)	(5	)

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

(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

The change in cooling degree days and heating degree days did not have a material effect on Cinergy’s gross margins for the period.

Regulated

Gross Margins

The nine percent increase in Regulated’s electric gross margins was primarily due to the following factors:

•A $68 million increase resulting primarily from a higher price received per MWh due to PSI’s 2004 base retail electric rate increase; and

•A $14 million increase in PSI’s non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel.

These increases were partially offset by a decline of $11 million reflecting rate reductions associated with a property tax adjustment for PSI.

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The four percent decrease in Regulated’s gas gross margins was primarily due to a decline in non-weather related demand.

Commercial

Gross Margins

The four percent increase in Commercial’s electric gross margins was driven primarily by the following factors:

•Retail rate increases from the RSP provided a $25 million increase in margins.  This increase was partially offset by fuel, emission allowance and purchased power cost increases of approximately $17 million attributable to our fixed price residential customers.  Margins attributable to retail volumes were up slightly during the period, due in part to the return of certain CG&E retail customers to full electric service.

•Margins from Commercial’s power marketing, trading, and origination contracts increased $6 million during the period.

•Commercial’s other non-retail margins were up slightly during 2005, as compared to 2004.  We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances.  When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery.  The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity.  In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.

During 2005, we recognized margins of $66 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments.  This gain reflects significant increases in prices of SO₂ emission allowances throughout much of 2004 and into early 2005.  Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.

This gain was offset by the following factors:

•A $38 million decline due to timing differences in revenue recognition between certain components of our generation portfolio.  Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting.  This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results.  Our gross margins reflect $32 million of unrealized losses in 2005 and $6 million of unrealized gains in 2004 (representing a $38 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.

•Lower margins from non-retail power sales caused by a decline in volumes and lower margins per MWh, which reflects higher fuel costs.

Commercial’s gas gross margins decreased, as compared to the same period last year due to the following factors:

•A $34 million decrease which primarily reflects trading strategies employed in the second quarter of 2005 that resulted in negative margins; and

•An $18 million decrease due to timing differences in revenue recognition between physical storage activities and the associated derivative contracts that hedge the physical storage. These agreements with pipelines to store natural gas and deliver in a future period with higher prices (typically winter) follow the accrual method of accounting.  However, the derivative contracts hedging the gas are required under

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GAAP to be accounted for under the MTM method of accounting.  The differing accounting treatments can lead to volatility in reported results.  Our year-to-date gross margins reflect $17 million of unrealized losses in 2005 and $1 million of unrealized gains in 2004 (representing an $18 million change period to period) as a result of derivative contracts and the use of MTM accounting.

Other Operating Revenues and Costs of Fuel Resold

The 45 percent increase in Other Operating Revenues was primarily due to the following factors:

•A $58 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and the number of coal origination contracts; and

•A $26 million increase in Commercial’s revenues from the sale of synthetic fuel.

Partially offsetting these increases was a $13 million decrease in revenues from non-regulated energy service subsidiaries.

Costs of fuel resold includes Commercial’s costs of coal origination activities and the production of synthetic fuel.  These costs have increased in 2005, which is consistent with the increases in the associated revenues as previously discussed.

The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for Cinergy.  However, only the line items that varied significantly from prior periods are discussed.

Other Operating Expenses

	Cinergy
	2005		2004		Change			% Change
	(in millions)
Operation and maintenance	$	683	$	643	$	40		6	%
Depreciation	257		219		38			17
Taxes other than income taxes	144		147		(3		)	(2	)

Operation and Maintenance

The six percent increase in Operation and maintenance expense was primarily due to the following factors:

•Increased labor expenses of $16 million primarily resulting from severance payments partially offset by a decrease of $10 million in employee incentive costs;

•Increased regulatory asset amortization of $12 million related to CG&E’s RTC;

•Expenses of $11 million related to the pending Duke-Cinergy merger;

•A $6 million increase in operation expenses for non-regulated service subsidiaries, including those that started operations, or became fully consolidated, during or after the second quarter of 2004; and

•Increased expenses of $6 million related to environmental litigation.

These increases were partially offset by expenses of $12 million incurred in 2004 associated with the continuous improvement initiative.

Depreciation

The 17 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.

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Equity in Earnings of Unconsolidated Subsidiaries

The 83 percent increase in Equity in Earnings of Unconsolidated Subsidiaries is primarily due to $5 million in equity in earnings of a cogeneration project that became fully operational in April of 2004.

Miscellaneous Income (Expense) – Net

The increase in Miscellaneous Income (Expense) – Net was due to $34 million in impairment charges recognized in the first half of 2004 primarily related to technology investments in Power Technology and Infrastructure.

Income Taxes

The effective income tax rate decreased for the six months ended June 30, 2005, as compared to 2004.  The decrease was primarily a result of an increase in the amount of estimated annual tax credits associated with the production and sale of synthetic fuel and the resolution of certain tax matters.  Cinergy’s 2005 effective tax rate is expected to be approximately 23 percent.

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MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – CG&E

2005 YEAR TO DATE RESULTS OF OPERATIONS - CG&E

Summary of Results

Net income for CG&E for the six months ended June 30, 2005, and 2004 was as follows:

	CG&E and subsidiaries
	2005		2004		Change		% Change
	(in millions)
Net income	$	138	$	133	$	5	4	%

The increase in net income was primarily due to the following factors:

•An increase in electric gross margins relating to certain activities in our asset optimization business.  This increase was comprised of increases in margins from the sale of emission allowances partially offset by unrealized losses on forward coal and power contracts; and

•An increase in rate tariff adjustments resulting from the implementation of CG&E’s RSP in January 2005.

These increases were partially offset by the increases in Operation and maintenance primarily due to increased regulatory asset amortization and expenses associated with the pending Duke-Cinergy merger.

Gross Margins

Gross margins for CG&E for the six months ended June 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	624	$	602	$	22		4	%
Gas gross margin(2)	143		147		(4		)	(3	)

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

(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

Cooling degree days and heating degree days in CG&E’s service territory for the six months ended June 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005	2004	Change		% Change
Cooling degree days(1)	340	327	13		4	%
Heating degree days(2)(3)	2,213	2,386	(173	)	(7	)

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

(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

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

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Electric Gross Margins

The four percent increase in CG&E’s electric gross margins was driven primarily by the following factors:

•Retail rate increases from the RSP provided a $25 million increase in margins.  This increase was partially offset by fuel, emission allowance and purchased power cost increases of approximately $17 million attributable to our fixed price residential customers.  Margins attributable to retail volumes were up slightly during the period, due in part to the return of certain retail customers to full electric service.

•Margins from CG&E’s power marketing, trading, and origination contracts increased $4 million during the period.

•CG&E’s other non-retail margins were up slightly during 2005, as compared to 2004.  We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances.  When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery.  The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity.  In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.

During 2005, we recognized margins of $66 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments.  This gain reflects significant increases in prices of SO₂ emission allowances throughout much of 2004 and into early 2005.  Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.

This gain was offset by the following factors:

•A $38 million decline due to timing differences in revenue recognition between certain components of our generation portfolio.  Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting.  This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results.  Our gross margins reflect $32 million of unrealized losses in 2005 and $6 million of unrealized gains in 2004 (representing a $38 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.

•Lower margins from non-retail power sales caused by a decline in volumes and lower margins per MWh, which reflects higher fuel costs.

Gas Gross Margins

The three percent decrease in CG&E’s gas gross margins was primarily due to a decline in non-weather related demand.

Other Operating Revenues and Costs of Fuel Resold

The increase in Other Operating Revenues was due to a $71 million increase in revenues from coal origination resulting from increases in coal prices and the number of coal origination contracts.  This increase includes $23 million of sales to non-regulated affiliates.

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Costs of fuel resold represents the costs of coal origination activities.  These costs have increased in 2005, which is consistent with the increase in the associated revenues as previously discussed.

The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for CG&E.  However, only the line items that varied significantly from prior periods are discussed.

Other Operating Expenses

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Operation and maintenance	$	334	$	300	$	34		11	%
Depreciation	90		90		—			—
Taxes other than income taxes	112		114		(2		)	(2	)

Operation and Maintenance

The 11 percent increase in Operation and maintenance expense was primarily due to increased regulatory asset amortization of $12 million related to CG&E’s RTC and increased expenses of $8 million related to the pending Duke-Cinergy merger.

Income Taxes

The effective income tax rate decreased for the six months ended June 30, 2005, as compared to 2004.  The decrease was primarily a result of a change in Ohio law to phase-out the Ohio franchise tax.  The phase-out of the Ohio franchise tax resulted in the elimination of state income tax deferrals under GAAP thus reducing the effective income tax rate during the period.  See “Ohio Taxes” in “Future Expectation/Trends” for additional information.

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MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – PSI

2005 YEAR TO DATE RESULTS OF OPERATIONS - PSI

Summary of Results

Net income for PSI for the six months ended June 30, 2005, and 2004 was as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Net income	$	85	$	66	$	19	29	%

The increase in net income was primarily due to the impact of PSI’s 2004 base retail electric rate increase.

Electric Gross Margins

Gross margins for PSI for the six months ended June 30, 2005, and 2004 were as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Electric gross margin(1)	$	588	$	521	$	67	13	%

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

Cooling degree days and heating degree days in PSI’s service territory for the six months ended June 30, 2005, and 2004 were as follows:

	PSI
	2005	2004	Change		% Change
Cooling degree days(1)	333	344	(11	)	(3	)%
Heating degree days(2)(3)	2,426	2,505	(79	)	(3	)

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

(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.

(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated to reflect this change.

The change in cooling degree days and heating degree days did not have a material effect on PSI’s gross margins for the period.

The 13 percent increase in PSI’s electric gross margins was primarily due to the following factors:

•A $68 million increase resulting primarily from a higher price received per MWh due to PSI’s 2004base retail electric rate increase; and

•A $14 million increase in non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel.

These increases were partially offset by a decline of $11 million reflecting rate reductions associated with a property tax adjustment.  This decline is partially offset by a reduction in property tax expense, as discussed further below.

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

Other Operating Expenses

	PSI
	2005		2004		Change			% Change
	(in millions)
Operation and maintenance	$	243	$	232	$	11		5	%
Depreciation	133		104		29			28
Taxes other than income taxes	26		31		(5		)	(16	)

Operation and Maintenance

The five percent increase in Operation and maintenance expense was primarily due to increased expenses of $4 million related to additional amortization of regulatory assets, which were approved for recovery through PSI’s base retail electric rate case and increased expense of $2 million related to environmental litigation.

Depreciation

The 28 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.

Taxes other than Income Taxes

The 16 percent decrease in Taxes other than income taxes expense was primarily due to the settlement of various property tax matters.

Miscellaneous Income – Net

The increase in Miscellaneous Income – Net was primarily due to an increase in the rate for allowance for equity funds used during construction and reimbursements from PSI’s insurance carriers for costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites.

Interest Expense

The 24 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and increases in variable interest rates.  This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which is recorded in Miscellaneous Income – Net, associated with the additional long-term debt outstanding.   Also contributing to this increase was a decrease in post-in-service carrying costs deferred for recovery due to PSI’s 2004 base retail electric rate increase.

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MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – ULH&P

2005 YEAR TO DATE RESULTS OF OPERATIONS - ULH&P

Summary of Results

The Results of Operations discussion for ULH&P is presented only for the six months ended June 30, 2005, in accordance with General Instruction H(2)(a) of Form 10-Q.

Electric and gas gross margins and net income for ULH&P for the six months ended June 30, 2005, and 2004 were as follows:

	ULH&P
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	32	$	34	$	(2	)	(6	)%
Gas gross margin(2)	26		26		—			—
Net income	6		11		(5		)	(45	)

(1)Electric gross margin is calculated as Electric operating revenues less Electricity purchased from parent company for resale expense from the Condensed Statements of Income.

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

The six percent decrease in electric gross margins was due, in part, to milder weather during 2005.  Gas gross margins remained flat as an increase in rate tariff adjustments associated with the gas main replacement program and the demand-side management program, which encourages efficient customer gas usage, was partially offset by a decline in non-weather related demand.

The 45 percent decrease in net income for the quarter was partially due to the decreased electric gross margins as previously discussed.  Also contributing to the decrease were higher operation and maintenance costs associated with transmission of electricity and the demand-side management program.  Partially offsetting this decrease was a decline in income taxes primarily as a result of a reduction of the Kentucky corporate tax rate from 8.25 percent to seven percent and the resolution of certain tax matters.  The Kentucky corporate tax rate is expected to decrease to six percent effective January 1, 2007.

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MD&A – LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY AND CAPITAL RESOURCES

Capital Requirements

Environmental Issues

Environmental Protection Agency Regulations

In March 2005, the EPA issued the Clean Air Interstate Rule (CAIR) which would require states to revise their State Implementation Plan (SIP) by September 2006 to address alleged contributions to downwind non-attainment with the revised National Ambient Air Quality Standards for ozone and fine particulate matter.  The rule established a two-phase, regional cap and trade program for SO₂and NO_X, affecting 28 states, including Ohio, Indiana, and Kentucky, and requires SO₂ and NO_X emissions to be cut 70 percent and 65 percent, respectively, by 2015.  At the same time, the EPA issued the Clean Air Mercury Rule (CAMR) which requires reductions in mercury emissions from coal-fired power plants.  The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018.  State SIPs must comply with the prescribed reduction levels under CAIR and CAMR; however, the states have the ability to introduce more stringent requirements if desired.  Under both CAIR and CAMR, companies have flexible compliance options including installation of pollution controls on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective.  In August 2005, the EPA proposed a Federal Implementation Plan (FIP) to act as a backstop to ensure that states implement the CAIR in a timely manner.  If a state fails to develop a CAIR SIP, the EPA intends to finalize the FIP in time to implement CAIR for the state by the CAIR deadlines.  Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of both rules.  Those challenges are currently pending in the Federal Circuit Court for the District of Columbia.  At this time we cannot predict the outcome of these matters.

Over the 2005-2009 time period, we expect to spend approximately $1.8 billion to reduce mercury, SO₂, and NO_X emissions.  These estimates include estimated costs to comply at plants that we own but do not operate and could change when taking into consideration compliance plans of co-owners or operators involved.  Moreover, as market conditions change, additional compliance options may become available and our plans will be adjusted accordingly.  Approximately 60 percent of these estimated environmental costs would be incurred at PSI’s coal-fired plants, for which recovery would be pursued in accordance with regulatory statutes governing environmental cost recovery.  See (b)(i) for more details.  CG&E would receive partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its recently approved rate stabilization plan (RSP).  See (b)(ii) for more details.

The EPA made final state non-attainment area designations to implement the revised ozone standard and to implement the new fine particulate standard in June 2004 and April 2005, respectively.  Several counties in which we operate have been designated as being in non-attainment with the new ozone standard and/or fine particulate standard.  States with counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of compliance by June 2007 and April 2008, respectively.  Industrial sources in or near those counties are potentially subject to requirements for installation of additional pollution controls.  In March 2005, various states, local governments, environmental groups, and industry groups, including some of which Cinergy is a member, filed petitions for review in the United States Court of Appeals for the D.C. Circuit to challenge the EPA’s particulate matter non-attainment designations.  Although the EPA has attempted to structure CAIR to resolve purported utility contributions to ozone and fine particulate non-attainment, at this time, Cinergy cannot predict the effect of current or future non-attainment designations on its financial position or results of operations.

In July 2005, the EPA issued its final regional haze rules and implementing guidelines in response to a 2002 judicial ruling overturning key provisions of the original program.  The regional haze program is aimed at reducing certain emissions impacting visibility in national parks and wilderness areas.  The EPA has announced that it can foresee no circumstances where the requirements of the regional haze rule would require utility controls beyond those required under CAIR.  The EPA also found that states participating in the CAIR cap and trade program need not require

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electric generating units to adhere to best available retrofit requirements.  The states have until December 2007 to finalize their SIPs addressing compliance with EPA regulations.  The states may choose to implement more stringent guidelines than promulgated by the EPA, and therefore it is not possible to predict whether the regional haze rule will have a material effect on our financial position or results of operations.

Clear Skies Legislation

President Bush has proposed environmental legislation that would combine a series of Clean Air Act (CAA) requirements, including the recent mercury, SO₂, and NO_X reduction regulations for coal-fired power plants with a legislative solution that includes trading and specific emissions reductions and timelines to meet those reductions.  The President’s “Clear Skies Initiative” would seek an overall 70 percent reduction in emissions from power plants over a phased-in reduction schedule beginning in 2010 and continuing through 2018.  When the Clear Skies Initiative was stalled in Congress, the EPA finalized the CAIR and CAMR regulations to accomplish Clear Skies’ goals within the existing framework of the CAA.  Clear Skies has been reintroduced in the Senate in 2005, but its prospects for passage are uncertain in the current session.  At this time we cannot predict whether this or any multi-emissions bill will be passed.

Energy Bill

A comprehensive energy bill (the Energy Policy Act of 2005) passed Congress July 22, 2005 and has been sent to President Bush for signature, which is expected on August 8, 2005.  The bill, among other things,  repeals PUHCA effective six months after the bill’s enactment (i.e., February 2006), amends certain provisions of the Federal Power Act and the Public Utility Regulatory Policies Act of 1978, and expands FERC’s authority to review mergers and acquisitions.  Pursuant to the terms of the bill, Cinergy’s pending merger with Duke would be grandfathered under FERC’s existing authority. At this time, we are still analyzing the bill to determine its impact on our financial position or results of operations.

Environmental Lawsuits

We are currently involved in the following lawsuits which are discussed in more detail in Note 9(a) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements.”  An unfavorable outcome of any of these lawsuits could have a material impact on our liquidity and capital resources.

•CAA Lawsuit

•CO₂ Lawsuit

•Selective Catalytic Reduction Units at Gibson Station

•Zimmer Station Lawsuit

•Manufactured Gas Plant Sites

•Asbestos Claims Litigation

Pension and Other Postretirement Benefits

Cinergy maintains qualified defined benefit pension plans covering substantially all United States employees meeting certain minimum age and service requirements.  Plan assets consist of investments in equity and debt securities.  Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended (ERISA).  Although mitigated by strong performance in 2003 and 2004, ongoing retiree payments and the decline in market value of the investment portfolio in 2002 reduced the assets held in trust to satisfy plan obligations.  Additionally, continuing low long-term interest rates have increased the liability for funding purposes.  As a result of these events, our near term funding targets have increased substantially.  Cinergy has adopted a five-year plan to reduce, or eliminate, the unfunded pension obligation initially measured as of January 1, 2003.  This unfunded obligation will be recalculated as of January 1 of each year in the five-year plan.  Because this unfunded obligation is the difference between the liability determined

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actuarially on an ERISA basis and the fair value of plan assets as of January 1, 2003, the liability determined by this calculation is different than the pension liability calculated for accounting purposes reported on Cinergy’s Condensed Consolidated Balance Sheets.

Cinergy’s minimum required contributions in calendar year 2004 totaled $16 million.  Actual contributions in 2004 were $117 million, reflecting additional discretionary contributions of $101 million under the aforementioned five-year plan.  Due to the significant 2004 and previous calendar year contributions, Cinergy’s minimum required contributions in calendar year 2005 are expected to be zero.  Should Cinergy continue funding under the five-year plan, discretionary contributions are expected to be $102 million in 2005, which is an increase from the $72 million disclosed in the 2004 10-K.  This $30 million increase is primarily the result of a change in the retirement age assumption which increased the near-term funding estimates.  Actual contributions for the six months ended June 30, 2005 were zero.  Cinergy may consider making discretionary contributions in 2006 and future periods; however, at this time, we are unable to determine the amount of those contributions.  Estimated contributions fluctuate based on changes in market performance of plan assets and actuarial assumptions.  Absent the occurrence of interim events that could materially impact these targets, we will update our expected target contributions annually as the actuarial funding valuations are completed and make decisions about future contributions at that time.

Other Investing Activities

Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including the PUHCA.  For a discussion of the pending PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”    The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under the PUHCA can invest as well as the amount of capital that can be invested in permissible non-utility businesses.  Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities.  Under the PUHCA restrictions, we are allowed to invest, or commit to invest, in certain non-utility businesses, including:

•Exempt Wholesale Generators (EWG) and Foreign Utility Companies (FUCO)

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

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

In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion through the earlier of (a) the closing of the pending Duke-Cinergy merger or (b) June 23, 2006.  As of June 30, 2005, we had invested or committed to invest $0.7 billion in EWGs and FUCOs, leaving available investment capacity under the order of $2.9 billion.

•Qualifying Facilities and Energy-Related Non-utility Entities

SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations, Long-term debt (including amounts due within one year), CumulativePreferred Stock of Subsidiaries, and Total Common Stock Equity) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities.  At June 30,

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2005, we had invested and/or guaranteed $1.0billion of the $1.5 billion available.  In August 2004, Cinergy filed an application with the SEC requesting authority under the PUHCA to increase its investment and/or guarantee authority by $2 billion above the current authorized amount.  In light of our existing unused capacity, together with the pending repeal of PUHCA and the pending merger with Duke, Cinergy withdrew this application in the third quarter of 2005.

•Energy-Related Assets

Cinergy has been granted SEC authority under the PUHCA to invest up to $1 billion in non-utility Energy-Related Assets within the United States, Canada, and Mexico.  Energy-Related Assets include natural gas exploration, development, production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated assets, facilities and equipment, but would exclude any assets, facilities, or equipment that would cause the owner or operator thereof to be deemed a public utility company.  As of June 30, 2005, we did not have any investments in these Energy-Related Assets.

•Infrastructure Services Companies

In July 2005, the SEC issued an order under the PUHCA authorizing Cinergy to invest up to $100 million (including existing investments and guarantees) through June 30, 2008 in companies that derive or will derive substantially all of their operating revenues from the sale of Infrastructure Services including:

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

•Installation and maintenance of natural gas pipelines, water and sewer pipelines, and underground and overhead telecommunications networks; and

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

At June 30, 2005, we had invested $30 million in Infrastructure Services companies.

Guarantees

On June 23, 2005, the SEC issued an order under the PUHCA authorizing Cinergy Corp. to provide guarantees in an aggregate amount not to exceed $3.0 billion.  For a discussion of the pending PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”  As of June 30, 2005, we had $756 million outstanding under the guarantees issued, of which 97 percent represents guarantees of obligations reflected on Cinergy’s Condensed Consolidated Balance Sheets.  The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures.

See Note 9(c)(iv) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” for a discussion of guarantees in accordance with Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45).  Interpretation 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts.  The Interpretation 45 disclosure differs from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued on behalf of consolidated subsidiaries; and it includes potential liabilities under indemnification clauses.

Marketing & Trading Liquidity Risks

Cinergy has 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 June 30, 2005 trading portfolio,

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if such an event were to occur, Cinergy would be required to issue up to $403 million in collateral related to its gas and power trading operations, of which $157 million is related to CG&E.

Capital Resources

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

Sale of Accounts Receivable

CG&E, PSI, and ULH&P have an agreement with Cinergy Receivables Company, LLC (Cinergy Receivables), an affiliate, to sell, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E, PSI, and ULH&P.  Cinergy Receivables funds its purchases with borrowings from commercial paper conduits that obtain a security interest in the receivables.  This program accelerates the collection of cash for CG&E, PSI, and ULH&P related to these retail receivables.  Cinergy Corp. does not consolidate Cinergy Receivables because it meets the requirements to be accounted for as a qualifying special purpose entity (SPE).

Notes Payable and Other Short-term Obligations

We are required to secure authority to issue short-term debt from the SEC under the PUHCA and from the Public Utilities Commission of Ohio (PUCO).  The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp., PSI, and ULH&P.  The PUCO has regulatory jurisdiction over the issuance of short-term debt by CG&E. For a discussion of the pending PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”

	Short-term Regulatory Authority June 30, 2005
	Authority			Outstanding
	(in millions)
Cinergy Corp.	$	4,000	(1)	$	547
CG&E and subsidiaries	665		(2)	232
PSI	600			78
ULH&P	65		(2)	19

(1)In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to increase its total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $4 billion over the September 30, 2004 levels.  Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

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

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

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Cinergy Corp.’s short-term borrowings consist primarily of unsecured revolving lines of credit and the sale of commercial paper.  Cinergy Corp.’s $2 billion revolving credit facilities and $1.5 billion commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ULH&P.  In addition, Cinergy Corp., CG&E, and PSI maintain uncommitted lines of credit.  These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance.  The following table summarizes our Notes payable and other short-term obligations and Notes payable to affiliated companies:

	Short-term Borrowings
	June 30, 2005
									Available
									Revolving
	Established						Standby		Lines of
	Lines		Outstanding		Unused		Liquidity(1)		Credit
	(in millions)
Cinergy
Cinergy Corp.
Revolving lines(2)	$	2,000	$	—	$	2,000	$	558	$	1,442
Uncommitted lines	40		—		40
Commercial paper(3)			547
Utility operating companies
Uncommitted lines	75		—		75
Pollution control notes			248
Non-regulated subsidiaries
Revolving lines(4)	162		40		122		—		122
Short-term debt			5
Pollution control notes			25
Cinergy Total			$	865					$	1,564
CG&E and subsidiaries
Uncommitted lines	$	15	$	—	$	15
Pollution control notes			112
Money pool			232
CG&E Total			$	344
PSI
Uncommitted lines	$	60	$	—	$	60
Pollution control notes			136
Money pool			78
PSI Total			$	214
ULH&P
Money pool			$	19
ULH&P Total			$	19

(1)Standby liquidity is reserved against the revolving lines of credit to support the commercial paper program and outstanding letters of credit (currently $547 million and $11 million, respectively).

(2)Consists of a three-year $1 billion facility and a five-year $1 billion facility.  The three-year facility was entered into in April 2004 and matures in April 2007.  The five-year facility was entered into in December 2004, matures in December 2009, and contains $500 million sublimits each for CG&E and PSI.

(3)Cinergy Corp.’s commercial paper program limit is $1.5 billion.  The commercial paper program is supported by Cinergy Corp.’s revolving lines of credit.

(4)Of the $162 million, $150 million relates to a three-year senior revolving credit facility that Cinergy Canada, Inc. entered into in December 2004 and matures in December 2007.

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At June 30, 2005, Cinergy Corp. had $1.4 billion remaining unused and available capacity relating to its $2 billion revolving credit facilities.  These revolving credit facilities include the following:

Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available
				(in millions)
Five-year senior revolving	December 2009
Direct borrowing				$	—
Commercial paper support				—
Total five-year facility(1)		$	1,000	—		$	1,000
Three-year senior revolving	April 2007
Direct borrowing				—
Commercial paper support				547
Letter of credit support				11
Total three-year facility		1,000		558		442
Total Credit Facilities		$	2,000	$	558	$	1,442

(1)        CG&E and PSI each have $500 million borrowing sublimits on this facility.

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

•a consolidated net worth of $2 billion; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

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

•a consolidated net worth of $1 billion; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

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

•a consolidated net worth of $900 million; and

•a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

A breach of these covenants 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

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

The latter two events, however, are subject to dollar-based materiality thresholds.  As of June 30, 2005, Cinergy, CG&E, and PSI are in compliance with all of their debt covenants.

Long-term Debt

We are 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.  For a discussion of the pending PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”  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 utility operating companies.

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A current summary of our long-term debt authorizations at June 30, 2005, was as follows:

	Authorized		Used		Available
	(in millions)
Cinergy Corp.
PUHCA total capitalization(1)	$	4,000	$	305	$	3,695
CG&E and subsidiaries(2)
State Public Utility Commissions	$	575	$	—	$	575
State Public Utility Commission - Tax-Exempt	250		94		156
PSI
State Public Utility Commission	$	500	$	—	$	500
State Public Utility Commission - Tax-Exempt(3)	250		—		250
ULH&P
State Public Utility Commission(4)	$	75	$	—	$	75

(1)In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to increase its total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $4 billion over the September 30, 2004 levels. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

(2)Includes amounts for ULH&P.

(3)In June 2005, the Indiana Utility Regulatory Commission (IURC) granted PSI financing authority to borrow the proceeds from the issuance and sale of up to $250 million principal amount of tax exempt securities through December 31, 2005.

(4)In April 2005, the Kentucky Public Service Commission (KPSC) granted ULH&P financing authority to issue and sell up to $500 million principal amount of secured and unsecured debt; enter into inter-company promissory notes up to an aggregate principal amount of $200 million; and borrow up to a maximum of $200 million aggregate principal amount of tax-exempt debt through December 31, 2006. This authority is contingent upon the pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations.

Cinergy Corp. has an effective shelf registration statement with the SEC relating to the issuance of up to $750 million in any combination of common stock, preferred stock, stock purchase contracts or unsecured debt securities, of which $323 million remains available for issuance.  CG&E has an effective shelf registration statement with the SEC relating to the issuance of up to $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance.  PSI has an effective shelf registration statement with the SEC relating to the issuance of up to $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance.  ULH&P has an effective shelf registration statement with the SEC for the issuance of up to $75 million in unsecured debt securities, $35 million of which remains available for issuance.  ULH&P also has an effective shelf registration statement with the SEC relating to the issuance of up to $40 million in first mortgage bonds, of which $20 million remains available for issuance.

Off-Balance Sheet Arrangements

As discussed in the 2004 10-K, Cinergy uses off-balance sheet arrangements from time to time to facilitate financing of various projects.  Cinergy’s primary off-balance sheet arrangement involves the sale of accounts receivable to a qualifying SPE.

In 2001, Cinergy Corp. issued $316 million notional amount of combined securities, a component of which was stock purchase contracts.  These contracts obligated the holder to purchase common shares of Cinergy Corp. stock by February 2005.  In January and February 2005, the stock purchase contracts were settled, resulting in the issuance of common stock that is recorded on Cinergy’s Condensed Consolidated Balance Sheets as Common Stock Equity.

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Securities Ratings

As of June 30, 2005, the major credit rating agencies rated our securities as follows:

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

(1)Fitch Ratings (Fitch)

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

(3)   Standard & Poor’s Ratings Services (S&P)

The highest investment grade credit rating for Fitch is AAA, Moody’s is Aaa1, and S&P is AAA.

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

On May 10, 2005, S&P placed its ratings of Cinergy Corp. and its subsidiaries, on CreditWatch with negative implications.  This action was in response to the announcement of the pending merger of Duke and Cinergy and the uncertainty around the final details of the transaction.  Fitch has affirmed its existing ratings, noting that it anticipates the combined entity to achieve a credit profile similar to that of Cinergy.  Moody’s has also affirmed its ratings, anticipating that no incremental debt will be issued as a result of the merger.  See “Pending Merger” for a further discussion of the transaction.

A security rating is not a recommendation to buy, sell, or hold securities.  These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.

Equity

As discussed in the 2004 10-K, in January and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock pursuant to certain stock purchase contracts that were issued as a component of combined securities in December 2001.  Net proceeds from the transaction of $316 million were used to reduce short-term debt.

Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30, 2005, Cinergy issued 1.9 million shares under these plans.

In June 2005, Cinergy Corp. contributed $200 million in capital to PSI.  The capital contribution was used to repay short-term indebtedness and is consistent with supporting PSI’s current credit ratings.

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MD&A - FUTURE EXPECTATIONS/TRENDS

FUTURE EXPECTATIONS/TRENDS

In the “Future Expectations/Trends” section, we discuss developments in the electric and gas industry and other matters.  Each of these discussions will address the current status and potential future impact on our financial position or results of operations.

Electric Industry

Regulatory Outlook

Ohio

The pending merger agreement between Duke and Cinergy provides that both Duke and Cinergy will use their reasonable best efforts to transfer five generating stations located in the Midwest from Duke to CG&E.  This transfer will require regulatory approval by the FERC and there can be no guarantee that such approval will be obtained or will be obtained on terms or with conditions acceptable to Duke, Cinergy, and Duke Energy Holding.  Duke intends to effectuate the transfer as an equity infusion into CG&E at book value.  In conjunction with the transfer, Duke and CG&E intend to enter into a financial arrangement to eliminate any potential cash shortfalls that may result from owning and operating the assets.  At this time, we cannot predict the outcome of this matter.

Kentucky

The KPSC and the FERC have approved ULH&P’s planned acquisition of CG&E’s approximately 69 percent ownership interest in the East Bend Station, located in Boone County, Kentucky, the Woodsdale Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Station located in Hamilton County, Ohio, and associated transactions.  ULH&P is currently seeking approval of the transaction in a proceeding before the Securities and Exchange Commission (SEC), wherein the Ohio Consumers’ Counsel has intervened in opposition.  The transfer, which will be at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through December 31, 2006.  Assuming receipt of SEC approval, we would anticipate the transfer to take place in the third quarter of 2005.

Indiana

On May 6, 2005, we signed a definitive agreement with subsidiaries of Allegheny Energy, Inc. whereby, subject to the terms and upon satisfaction of the conditions to closing provided in the purchase agreement, PSI and/or CG&E had the right to acquire the 512-megawatt Wheatland generating facility for approximately $100 million.  The Wheatland facility, located in Knox County, Indiana, has four natural gas-fired simple cycle combustion turbines and is directly connected to the Cinergy transmission system.  In June and August 2005, respectively, the FERC and IURC approved the acquisition and the Department of Justice and Federal Trade Commission completed their review of the transaction pursuant to the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act.  We have determined that PSI will acquire 100% of the Wheatland facility.  Its output will be used to bolster the reserve margins on the PSI system.  Cinergy expects to close the acquisition in August 2005.

FERC and Midwest ISO

Midwest ISO Energy Markets

The Midwest ISO is a regional transmission organization established in 1998 as a non-profit organization which maintains functional control over the combined transmission systems of its members, including Cinergy.  In March 2004, the Midwest ISO filed with the FERC proposed changes to its existing transmission tariff to add terms and conditions to implement a centralized economic dispatch platform supported by a Day-Ahead and Real-Time Energy Market design, including Locational Marginal Pricing (LMP) and Financial Transmission Rights (FTRs)

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(Energy Markets Tariff).  The FERC has issued orders that, among other things, conditionally approve the start-up of the Energy Markets Tariff which occurred April 1, 2005.  The FERC issued orders in response to requests for rehearing on certain matters in the FERC’s original orders.  Cinergyhas appealedthe FERC orders to a federal appeals court.

Specifically, the Energy Markets Tariff manages system reliability through the use of a market-based congestion management system and includes a centralized dispatch platform, the intent of which is to dispatch the most economic resources to meet load requirements reliably and efficiently in the Midwest ISO region, which covers a large portion of 15 Midwestern states and one Canadian province.  The Energy Markets Tariff uses LMP (i.e., the energy price for the next MW may vary throughout the Midwest ISO market based on transmission congestion and energy losses), and the allocation or auction of FTRs, which are instruments that hedge against congestion costs occurring in the Day-Ahead market.  The Energy Markets Tariff also includes market monitoring and mitigation measures as well as a resource adequacy proposal, that proposes both an interim solution for participants providing and having access to adequate generation resources and a proposal to develop a long-term solution to resource adequacy concerns.  The Midwest ISO performs a day-ahead unit commitment and dispatch forecast for all resources in its market and also performs the real-time resource dispatch for resources under its control on a five minute basis.  The Cinergy utility operating companies will seek to recover costs that they incur related to the Energy Markets Tariff.  We have been operating under the Energy Markets Tariff sinceApril 2005.  We continue to work with the Midwest ISO to monitor the implementation of the new market and at this time we do not believe it will have a material impact on our results of operations or financial position.

Global Climate Change

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

•Increased capital expenditures associated with investments to improve plant efficiency or install CO₂ emission reduction technology (to the extent that such technology exists) or construction of alternatives to coal generation;

•Increased operation and maintenance expense;

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

•Increased expenses associated with the purchase of CO₂ emission allowances, should such an emission allowances market be created.

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

In September 2003, Cinergy announced a voluntary GHG management commitment to reduce its GHG emissions during the period from 2010 through 2012 by five percent below our 2000 level, maintaining those levels through 2012.  Cinergy expects to spend $21 million between 2004 and 2010 on projects to reduce or offset its GHG emissions.  Cinergy is committed to supporting the President’s voluntary initiative, addressing shareholder interest in the issue, and building internal expertise in GHG management and GHG markets.  Our voluntary commitment includes the following:

•Measuring and inventorying company-related sources of GHG emissions;

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

•Funding research of more efficient and alternative electric generating technologies;

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

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

•Participating in discussions to help shape the policy debate.

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Cinergy is also studying the feasibility of constructing a commercial integrated coal gasification combined cycle (IGCC) generating station.  The IGCC plant would be expected to run more efficiently than traditionally constructed coal-fired generation and would thus contribute fewer CO₂ tons per megawatt of electricity produced.

Other Matters

Synthetic Fuel Production

Cinergy produces from two facilities synthetic fuel that qualifies for tax credits (through 2007) in accordance with Section 29 of the Internal Revenue Code (IRC) if certain requirements are satisfied.

Cinergy’s sale of synthetic fuel has generated $271 million in tax credits through June 30, 2005.  The Internal Revenue Service (IRS) is currently auditing Cinergy for the 2002 and 2003 tax years and has recently challenged certain other taxpayers’ Section 29 tax credits.  While we cannot predict whether the IRS will challenge our Section 29 tax credits, we expect the IRS will evaluate the various key requirements for claiming our Section 29 credits related to synthetic fuel.  If the IRS challenges our Section 29 tax credits related to synthetic fuel, and such challenges were successful, this could result in the disallowance of up to all $271 million in previously claimed Section 29 tax credits for synthetic fuel produced by the applicable Cinergy facilities and a loss of our ability to claim future Section 29 tax credits for synthetic fuel produced by such facilities.  We believe that we operate in conformity with all the necessary requirements to be allowed such tax credits under Section 29.   Upon consummation of the pending merger of Duke and Cinergy, the synthetic fuel produced by one of Cinergy’s facilities pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit.  Cinergy is evaluating a transaction for the disposition of a portion of the affected facility that Cinergy believes would enable the fuel produced by the facility to continue to qualify for credit under IRC Section 29. In the event a suitable transaction is not achieved, Cinergy anticipates that its production of synthetic fuel at the affected facility would be suspended upon consummation of the pending merger with Duke.

Section 29 also provides for a phase-out of the credit based on the average price of crude oil during a calendar year.  The phase-out is based on a prescribed calculation and definition of crude oil prices.  Based on current crude oil prices, we do not currently expect amaterial negative impact on our ability to recognize the projected benefit of Section 29 tax credits in 2005.

Ohio Taxes

The Ohio legislature has approved sweeping changes to Ohio’s tax law which will phase out the Ohio corporate franchise tax over five years. The franchise tax will be replaced by a  “Commercial Activity Tax”, a tax imposed on gross receipts.  We do not expect the tax law changes to have a material impact on our cash flows.  The phase-out of the Ohio franchise tax resulted in the elimination of state income tax deferrals under GAAP thus reducing the effective income tax rate for the current quarter.  However, we do not expect these changes to have a material impact on our results of operations or financial position going forward over the remainder of the phase-out period.

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MD&A - MARKET RISK SENSITIVE INSTRUMENTS

MARKET RISK SENSITIVE INSTRUMENTS

Energy Commodities Sensitivity

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

As discussed in the 2004 10-K, Commercial’s energy marketing and trading activities principally consist of Marketing & Trading’s natural gas marketing and trading operations and CG&E’s power marketing and trading operations.

Changes in Fair Value

The changes in fair value of the energy risk management assets and liabilities for Cinergy and CG&E for the six months ended June 30, 2005 and 2004 are presented in the table below.

	Change in Fair Value
	June 30, 2005						June 30, 2004
	Cinergy(1)			CG&E			Cinergy(1)			CG&E
	(in millions)
Fair value of contracts outstanding at the beginning of the year	$	82		$	36		$	41		$	20
Changes in fair value attributable to changes in valuation techniques and assumptions(2)	(3		)	(3		)	—			—
Other changes in fair value(3)	(31		)	5			103			49
Option premiums paid/(received)	14			11			(3		)	2
Contracts settled	(74		)	(39		)	(76		)	(28		)
Fair value of contracts outstanding at end of period	$	(12	)	$	10		$	65		$	43

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

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

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

The following are the balances at June 30, 2005 and 2004 of our energy risk management assets and liabilities:

	June 30, 2005					June 30, 2004
	Cinergy(1)			CG&E		Cinergy(1)		CG&E
	(in millions)
Energy risk management assets - current	$	352		$	228	$	425	$	156
Energy risk management assets - non-current	307			135		138		58
Energy risk management liabilities - current	371			219		384		134
Energy risk management liabilities - non-current	300			134		114		37
	$	(12	)	$	10	$	65	$	43

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

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The following table presents the expected maturity of the energy risk management assets and liabilities as of June 30, 2005 for Cinergy and CG&E:

	Fair Value of Contracts at June 30, 2005
	Maturing
	Within 12			12-36			36-60					Total
Source of Fair Value(1)	months			months			months		Thereafter			Fair Value
	(in millions)
Cinergy(2)
Prices actively quoted	$	(27	)	$	4		$	—	$	—		$	(23	)
Prices based on models and other valuation methods(3)	9			(2		)	5		(1		)	11
Total	$	(18	)	$	2		$	5	$	(1	)	$	(12	)
CG&E
Prices actively quoted	$	6		$	(1	)	$	—	$	—		$	5
Prices based on models and other valuation methods(3)	2			(3		)	4		2			5
Total	$	8		$	(4	)	$	4	$	2		$	10

(1)   While liquidity varies by trading regions, active quotes are generally available for two years for standard electricity transactions and three years for standard gas transactions.  Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value.  Long-term transactions can have portions in both categories depending on the length.

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

(3)   A substantial portion of these amounts include option values.

Generation Portfolio Risks

Cinergy optimizes the value of its non-regulated portfolio.  The portfolio includes generation assets (power and capacity), fuel, and emission allowances and we manage all of these components as a portfolio.  We use models that forecast future generation output, fuel requirements, and emission allowance requirements based on forward power, fuel and emission allowance markets.  The component pieces of the portfolio are bought and sold based on this model in order to manage the economic value of the portfolio.  With the issuance of Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149), most forward power transactions from management of the portfolio are accounted for at fair value. The other component pieces of the portfolio are typically not subject to Statement 149 and are accounted for using the accrual method, where changes in fair value are not recognized.  As a result, we are subject to earnings volatility via MTM gains or losses from changes in the value of the contracts accounted for using fair value.  A hypothetical $1.00 per MWh increase or decrease consistently applied to all forward power prices would have resulted in an increase or decrease in fair value of these contracts of approximately $5.2 million as of June 30, 2005.  See “2005 Quarterly Results of Operations” and “2005 Year to Date Results of Operations” for further discussion of the impact on current quarter and year to date results.

Energy Trading Credit Risk

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Cinergy analyzes net credit exposure and establishes credit reserves based on the counterparties’ credit rating, payment history, and length of the outstanding obligation.  Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations.  Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

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The following tables provide information regarding Cinergy’s and CG&E’s exposure on energy trading contracts as of June 30, 2005.  The tables include accounts receivable and energy risk management assets, which are net of accounts payable and energy risk management liabilities with the same counterparties when we have the right of offset.  The credit collateral shown in the following tables includes cash and letters of credit.

Cinergy(1)

									Number of
									Counterparties	Net Exposure of
	Total Exposure						Percentage of		Greater than 10% of	Counterparties Greater than
Rating	Before Credit Collateral		Credit Collateral		Net Exposure		Total Net Exposure		Total Net Exposure	10% of Total Net Exposure(4)
	(in millions)
Investment Grade(2)	$	713	$	126	$	587	83	%	—	$	—
Internally Rated-Investment Grade(3)	127		42		85		12		—	—
Non-Investment Grade	44		30		14		2		—	—
Internally Rated-Non-Investment Grade	49		30		19		3		—	—
Total	$	933	$	228	$	705	100	%	—	$	—

(1)Includes amounts related to non-registrants.

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

(3)Counterparties include a variety of entities, including investor-owned utilities, privately held companies, cities and municipalities.  Cinergy assigns internal credit ratings to all counterparties within our credit risk portfolio, applying fundamental analytical tools.  Included in this analysis is a review of (but not limited to) counterparty financial statements with consideration given to off-balance sheet obligations and assets, specific business environment, access to capital, and indicators from debt and equity capital markets.

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

CG&E

										Number of
										Counterparties		Net Exposure of
	Total Exposure						Percentage of			Greater than 10% of		Counterparties Greater than
Rating	Before Credit Collateral		Credit Collateral		Net Exposure		Total Net Exposure			Total Net Exposure		10% of Total Net Exposure(3)
	(in millions)
Investment Grade(1)	$	223	$	73	$	150		79	%		2		$	48
Internally Rated-Investment Grade(2)	30		—		30			16			—		—
Non-Investment Grade	12		9		3			2			—		—
Internally Rated-Non-Investment Grade	18		12		6			3			—		—
Total	$	283	$	94	$	189		100	%		2		$	48

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

(2)Counterparties include various cities and municipalities.

(3)Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit is extended and evaluated on a separate basis.

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MD&A - ACCOUNTING MATTERS

ACCOUNTING MATTERS

Critical Accounting Estimates

Preparation of financial statements and related disclosures in compliance with GAAP requires the use of assumptions and estimates regarding future events, including the likelihood of success of particular investments or initiatives, estimates of future prices or rates, legal and regulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions.  We consider an accounting estimate to be critical if:  1) the accounting estimate requires us to make assumptions about matters that were reasonably uncertain at the time the accounting estimate was made, and 2) changes in the estimate are reasonably likely to occur from period to period.

Cinergy’s 2004 10-K includes a discussion of accounting policies that are critical to the presentation of Cinergy’s financial position and results of operations.  These include:

•Fair Value Accounting for Energy Marketing and Trading;

•Regulatory Accounting;

•Income Taxes;

•Contingencies;

•Impairment of Long-Lived Assets; and

•Impairment of Unconsolidated Investments.

Accounting Changes

Asset Retirement Obligations

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (Interpretation 47), an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143).  Statement 143 requires recognition of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred.  Interpretation 47 clarifies that a conditional asset retirement obligation (which occurs when the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity) is a legal obligation within the scope of Statement 143.  As such, the fair value of a conditional asset retirement obligation must be recognized as a liability when incurred if the liability’s fair value can be reasonably estimated.  Interpretation 47 also clarifies when sufficient information exists to reasonably estimate the fair value of an asset retirement obligation.

Cinergy will adopt Interpretation 47 on December 31, 2005.  Upon adoption of Interpretation 47 Cinergy will recognize the impact, if any, of additional liabilities for conditional asset retirement obligations as a cumulative effect of a change in accounting principle.  We have begun evaluating the impact of adopting this new interpretation and are currently unable to predict whether the implementation of this accounting standard will be material to our financial position or results of operations.

Share-Based Payment

In December 2004, the FASB issued a replacement of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R).  This standard will require, among other things, accounting for all stock-based compensation arrangements under the fair value method.

In 2003, we prospectively adopted accounting for our stock-based compensation plans using the fair value recognition provisions of Statement 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, for all employee awards granted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation of Statement 123R on stock options within our stock-based compensation plans is not expected to be material.  Statement 123R contains certain

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provisions that will modify the accounting for various stock-based compensation plans other than stock options.  We are in the process of evaluating the impact of this new standard on these plans.  Cinergy will adopt Statement 123R on January 1, 2006.

Income Taxes

In October 2004, the American Jobs Creation Act (AJCA) was signed into law.  The AJCA includes a one-time deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA.  Based on our analysis, we do not believe that repatriation pursuant to this provision will have a material impact on our financial position or results of operations.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is provided in, and incorporated by reference from, the “Market Risk Sensitive Instruments” section in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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CONTROLS AND PROCEDURES

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commission’s (SEC) rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2005, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective in providing reasonable assurance that information requiring disclosure is recorded, processed, summarized, and reported within the timeframe specified by the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2005.

On April 1, 2005, the Midwest Independent Transmission System Operation, Inc. (Midwest ISO), as ordered by the Federal Energy Regulatory Commission, implemented the Day-Ahead and Real-time Energy Markets design including Locational Marginal Pricing and Financial Transmission Rights (Energy Markets Tariff).  As a result, Cinergy acquired and implemented changes to software systems and processes to facilitate implementation of the Midwest ISO Energy Markets Tariff, which included software designed to communicate commercial bids and offers with the Midwest ISO on an hourly basis and which is connected to Cinergy’s market transaction system.  The information communicated between the Midwest ISO and Cinergy is utilized by the Midwest ISO to produce and reconcile daily settlement statements submitted to Cinergy.  Cinergy also modified other systems and processes to accommodate changes emanating from the Energy Markets Tariff implementation.

Effective April 1, 2005, Cinergy transitioned to a new finance and accounting system which contains new processes and tools that are designed to create more efficiency in gathering and reporting Cinergy financial data, provide greater transparency of financial data for reporting and compliance, and improve the consistency of how data is reported, thus aiding financial analysis and decision-making.

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PART II. OTHER INFORMATION

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

CLEAN AIR ACT (CAA) LAWSUIT

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana against Cinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) alleging various violations of the CAA.  Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana State Implementation Plan (SIP) permits for various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the Environmental Protection Agency (EPA) and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Station.  The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s W.C. Beckjord and Miami Fort Stations, and PSI’s Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and two environmental groups have intervened in the case.  The case is currently in discovery and is set for trial by jury commencing in February 2006.

In March 2000, the United States also filed in the United States District Court for the Southern District of Ohio an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by Columbus Southern Power Company (CSP) and jointly-owned by CSP, The Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the United States District Court for the Southern District of Ohio in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.  This matter was heard in trial in July 2005.  A decision is expected by the end of 2005.

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

We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.  We intend to vigorously defend against these allegations.

CARBON DIOXIDE (CO₂) LAWSUIT

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed in the United States District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO₂ from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO₂.  The plaintiffs are seeking an injunction requiring each defendant to cap its CO₂ emissions and then reduce them by a specified percentage each year for at least a decade.  Cinergy intends to defend these lawsuits vigorously in court

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and filed motions to dismiss with the other defendants in September 2004.  We are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

SELECTIVE CATALYTIC REDUCTION UNITS (SCR) AT GIBSON STATION

In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the nitrogen oxide SIP Call.  In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern that portions of the plume from those units’ stacks appeared to break apart and descend to ground level, at certain times, under certain weather conditions.  As a result, and, working with the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department of Environmental Management (IDEM), EPA, and the State of Illinois, we developed a protocol regarding the use of the SCRs while we explored alternatives to address this issue.  After the protocol was finalized, the Illinois Attorney General brought an action in Wabash County Circuit Court against PSI seeking a preliminary injunction to enforce the protocol.  In August 2004, the court granted that preliminary injunction.  PSI is appealing that decision to the Fifth District Appellate Court, but we cannot predict the ultimate outcome of that appeal or of the underlying action by the Illinois Attorney General.

In April 2005, we completed the installation of a permanent control system to address this issue.  The new control system will support all five Gibson generating units.  We will seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process.  We do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.

ZIMMER STATION LAWSUIT

In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&E’s Zimmer Station, brought a purported class action in the United States District Court for the Southern District of Ohio seeking monetary damages and injunctive relief against CG&E for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisance and common law nuisance.  CG&E filed a motion to dismiss the lawsuit on primarily procedural grounds and we intend to defend against these claims vigorously.  The plaintiffs have filed a number of additional notices of intent to sue and two lawsuits raising claims similar to those in the original claim.  At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or results of operations.

MANUFACTURED GAS PLANT (MGP) SITES

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

In April 1998, PSI filed suit in Hendricks County 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 and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense.  PSI settled, in principle, its claims with all but one of the insurance carriers in January 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, a jury returned a verdict against PSI in February 2005.  PSI has appealed this decision.  At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeal.

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan.  As additional facts become known and investigation is completed, we

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will assess whether the likelihood of incurring additional costs becomes probable.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

CG&E and ULH&P have performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment.  At the present time, CG&E and ULH&P cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

ASBESTOS CLAIMS LITIGATION

CG&E and PSI have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations.  Currently, there are approximately 120 pending lawsuits.  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.  A majority of the lawsuits to date have been brought against PSI.  The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

Of these lawsuits, one case filed against PSI has been tried to verdict.  The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and a verdict for PSI on punitive damages.  PSI appealed this decision up to the Indiana Supreme Court.  In July 2005, the Indiana Supreme Court upheld the jury’s verdict.  In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations.  We are currently evaluating the effect of the Indiana Supreme Court’s ruling on our existing docket of cases.

At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.

MERGER LAWSUIT

In May, a purported shareholder class action was filed in the Court of Common Pleas in Hamilton County, Ohio against Cinergy and each of the members of the Board of Directors. The lawsuit alleges that the defendants breached their duties of due care and loyalty to shareholders by agreeing to the merger agreement between Duke and Cinergy and is seeking to either enjoin or amend the terms of the merger.  Cinergy and the individual defendants filed a motion to dismiss this lawsuit in July.  We believe this lawsuit is without merit and Cinergy intends to defend this lawsuit vigorously in court.  We are unable to predict whether resolution of this matter will impact our pending merger.

DUNAVAN WASTE SUPERFUND SITE

In July 2005, PSI received notice from the EPA that it has been identified as a de minimus potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act at the Dunavan Waste Oil Site in Oakwood, Vermilion County, Illinois.  At this time, PSI does not have any further information regarding the scope of potential liability associated with this matter.

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 – April 30	—	$	—	—	—
May 1 – May 31	49,118	$	41.59	—	—
June 1 – June 30	5,721	$	44.16	—	—

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ITEM 6.  EXHIBITS

The documents listed below are being furnished or filed on behalf of Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P).  Exhibits not identified as previously furnished or filed are furnished or filed herewith:

Exhibit Designation	Registrant	Nature of Exhibit	Previously Filed as Exhibit to:
Additional Exhibits
2-a	Cinergy Corp.	Agreement and Plan of Merger by and among Duke Energy Corporation, Cinergy Corp., Deer Holding Corp., Deer Acquisition Corp. and Cougar Acquisition Corp., dated May 8, 2005	Cinergy Corp. Form 8-K, filed May 10, 2005
2-b	Cinergy Corp.	Amendment No. 1 to the Agreement and Plan of Merger
10-ffff	Cinergy Corp.	Retirement and Consulting Agreement and Waiver and Release Agreement, dated May 5, 2005, between Cinergy Corp. and William J. Grealis	Cinergy Corp. March 31, 2005 Form 10-Q
10-gggg	Cinergy Corp.	Employment Agreement Term Sheet, James E. Rogers, dated May 8, 2005, by Duke Energy Corporation, Cinergy Corp., Deer Holding Corp., and James E. Rogers	Cinergy Corp. Form 8-K, filed May 10, 2005
10-hhhh	Cinergy Corp.	Form of Amendment to Employment Agreement	Cinergy Corp. Form 8-K, filed May 10, 2005
10-iiiii	Cinergy Corp.	Separation Agreement and Waiver and Release Agreement, dated July 8, 2005, between Cinergy Services, Inc. and R. Foster Duncan	Cinergy Corp. Form 8-K, filed July 8, 2005
10-jjjj	Cinergy Corp.	Amendment to Employment Agreement, effective May 24, 2005, between Cinergy Services, Inc. and Michael J. Cyrus	Cinergy Corp. Form 8-K, filed July 8, 2005
10-kkkk	CG&E PSI	Asset Purchase Agreement by and among PSI Energy, Inc. and The Cincinnati Gas & Electric Company and Allegheny Energy Supply Company, LLC, Allegheny Energy Supply Wheatland Generating Facility, LLC and Lake Acquisition Company, L.L.C., dated as of May 6, 2005
Certificates
31-a	Cinergy Corp. CG&E PSI ULH&P	Certification by James E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31-b	Cinergy Corp. CG&E PSI ULH&P	Certification by James L. Turner pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32-a	Cinergy Corp. CG&E PSI ULH&P	Certification by James E. Rogers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32-b	Cinergy Corp. CG&E PSI ULH&P	Certification by James L. Turner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the Registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CINERGY CORP.

THE CINCINNATI GAS & ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT AND POWER COMPANY

Registrants

Date: August 4, 2005	/s/	Lynn J. Good
		Lynn J. Good
		(duly authorized officer
		and
		principal accounting officer)

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EX-2.B

Exhibit 2.b

EXECUTION COPY

AMENDMENT NO. 1

TO THE

AGREEMENT AND PLAN OF MERGER

This AMENDMENT NO. 1 (this “Amendment”), dated as of July 11, 2005, to the Agreement and Plan of Merger, dated as of May 8, 2005 (the “Merger Agreement”), by and among Duke Energy Corporation, a North Carolina corporation (“Duke”), Cinergy Corp., a Delaware corporation (“Cinergy”), Duke Energy Holding Corp., a Delaware corporation (formerly Deer Holding Corp.) (the “Company”), Deer Acquisition Corp., a North Carolina corporation (“Merger Sub A”), and Cougar Acquisition Corp., a Delaware corporation (“Merger Sub B”).

WHEREAS, Section 7.03 of the Merger Agreement provides for the amendment of the Merger Agreement in accordance with the terms set forth therein; and

WHEREAS, the parties hereto desire to amend the Merger Agreement as set forth below;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto do hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1Definitions; References.  Unless otherwise specifically defined herein, each term used herein shall have the meaning assigned to such term in the Merger Agreement.  Each reference to “hereof,” “herein,” “hereunder,” “hereby” and “this Agreement” shall, from and after the date hereof, refer to the Merger Agreement as amended by this Amendment.

ARTICLE II

AMENDMENTS TO MERGER AGREEMENT

Section 2.1Amendments to Merger Agreement.  The Merger Agreement shall be amended as follows:

(a)Section 2.02(b) of the Agreement is hereby amended by inserting the following sentence as the final sentence of the section:

“Notwithstanding anything to the contrary hereinbefore, subject to applicable law, the parties intend that the Company will implement a direct registration system at Closing, and if such direct registration system

is implemented by the Company at such time, all shares of Company Common Stock shall be in uncertificated book-entry form unless a physical certificate is requested by such holder.”

(b)Section 2.02(e)(i) of the Agreement is hereby amended by inserting the following sentences as the final sentences of the section:

“Notwithstanding the foregoing, Duke and Cinergy shall use reasonable best efforts to cause the Duke Energy InvestorDirect Choice Plan (the “Duke DRIP”) and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan (the “Cinergy DRIP”) to be rolled over into a dividend reinvestment plan to be established and implemented by the Company on or prior to the Closing Date.  In connection with such roll-over, fractional shares of Company Common Stock will be issued to the participants in each of the Duke DRIP and the Cinergy DRIP in accordance with Section 2.01.”

(c)Section 2.02(l) of the Agreement is hereby amending by inserting the following to the end of such section:

“provided, however, that Duke and Cinergy shall use reasonable best efforts so that uncertificated shares of Duke Common Stock held in the Duke DRIP and uncertificated shares of Cinergy Common Stock held in the Cinergy DRIP shall be exchanged for uncertificated shares of Company Common Stock in accordance with Section 2.01 and shall be held in a dividend reinvestment plan to be established and implemented by the Company on or prior to the Closing Date, in accordance with Section 2.02(e)(i).”

ARTICLE III

MISCELLANEOUS

Section 3.1No Further Amendment.  Except as expressly amended hereby, the Merger Agreement is in all respects ratified and confirmed and all the terms, conditions, and provisions thereof shall remain in full force and effect.  This Amendment is limited precisely as written and shall not be deemed to be an amendment to any other term or condition of the Merger Agreement or any of the documents referred to therein.

Section 3.2Effect of Amendment.  This Amendment shall form a part of the Merger Agreement for all purposes, and each party thereto and hereto shall be bound hereby.  From and after the execution of this Amendment by the parties hereto, any reference to the Merger Agreement shall be deemed a reference to the Merger Agreement as amended hereby.

Section 3.3Governing Law.  This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflict of laws.

2

Section 3.4Separability Clause.  In case any one or more of the provisions contained in this Amendment should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected, impaired, prejudiced or disturbed thereby.

Section 3.5Counterparts.  This Amendment may be simultaneously executed in several counterparts, and all such counterparts executed and delivered, each as an original, shall constitute one and the same instrument.

Section 3.6Headings.  The descriptive headings of the several Articles of this Amendment were formulated, used and inserted in this Amendment for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

[Signature Page Follows]

3

IN WITNESS WHEREOF, Duke, Cinergy, the Company, Merger Sub A and Merger Sub B have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above.

DUKE ENERGY CORPORATION
By:
	Name:
	Title:
CINERGY CORP.
By:
	Name:
	Title:
DUKE ENERGY HOLDING CORP.
By:
	Name:
	Title:
DEER ACQUISITION CORP.
By:
	Name:
	Title:
COUGAR ACQUISITION CORP.
By:
	Name:
	Title:

4

EX-10.KKKK

Exhibit 10.kkkk

EXECUTION COPY

ASSET PURCHASE AGREEMENT

BY AND AMONG

PSI ENERGY, INC.

AND

THE CINCINNATI GAS & ELECTRIC COMPANY

(AS BUYERS)

AND

ALLEGHENY ENERGY SUPPLY COMPANY, LLC,

ALLEGHENY ENERGY SUPPLY WHEATLAND

GENERATING FACILITY, LLC

AND

LAKE ACQUISITION COMPANY, L.L.C.

(AS SELLER PARTIES)

DATED AS OF MAY 6, 2005

TABLE OF CONTENTS

ARTICLE I DEFINITIONS
1.1.	Definitions
ARTICLE II PURCHASE AND SALE
2.1.	Purchase and Sale
2.2.	Excluded Assets
2.3.	Assumed Liabilities
2.4.	Excluded Liabilities
2.5.	Procedures for Acquired Assets Not Transferable
ARTICLE III PURCHASE PRICE
3.1.	Purchase Price
3.2.	Possible Purchase Price Adjustment
3.3.	Allocation of Purchase Price
3.4.	Proration
ARTICLE IV THE CLOSING
4.1.	Time and Place of Closing
4.2.	Payment of Purchase Price
4.3.	Deliveries by the Sellers
4.4.	Deliveries by the Buyers
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES
5.1.	Organization; Qualification
5.2.	Authority Relative to this Agreement
5.3.	Capitalization and Other Matters
5.4.	Consents and Approvals; No Violation
5.5.	Reports
5.6.	Absence of Certain Changes or Events; No Undisclosed Liabilities
5.7.	Indebtedness of the Sellers
5.8.	Real Property and Related Matters
5.9.	Insurance
5.10.	Environmental Matters
5.11.	Labor and Employment Matters
5.12.	ERISA; Employee Benefit Plans
5.13.	Contracts
5.14.	Legal Proceedings
5.15.	Compliance with Permits and Laws

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5.16.	Regulation; Sole Purpose
5.17.	Tax Matters
5.18.	Related Party Matters
5.19.	Assets Other than Real Property Interests
5.20.	Intellectual Property
5.21.	Due Diligence Materials
5.22.	No Knowledge of Certain Conditions
5.23.	Disclaimer of Other Representations and Warranties
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYERS
6.1.	Organization
6.2.	Authority Relative to this Agreement
6.3.	Consents and Approvals; No Violation
6.4.	Availability of Funds
6.5.	Litigation
6.6.	No Knowledge of Certain Conditions
6.7.	Due Diligence Investigation and Other Acknowledgements
6.8.	Disclaimer of Other Representations and Warranties
ARTICLE VII COVENANTS OF THE PARTIES
7.1.	Conduct of Business
7.2.	Access to Information
7.3.	Expenses
7.4.	Further Assurances
7.5.	Public Statements
7.6.	Consents and Approvals; Other Obligations
7.7.	Regulatory Approvals
7.8.	Fees and Commissions
7.9.	Tax Matters
7.10.	Employees
7.11.	Risk of Loss
7.12.	Tax Clearance Certificates
7.13.	Non-Use of Allegheny Marks After the Closing
7.14.	Insurance
7.15.	No Solicitation
7.16.	Notifications
7.17.	Notice of Allocation of Acquired Assets
7.18.	Post-Closing Start-Up
7.19.	Waiver of Indiana Responsible Transfer Property Law
7.20.	Certain Transmission Matters
ARTICLE VIII CONDITIONS
8.1.	Conditions to Each Party’s Obligations to Effect the Transaction
8.2.	Conditions to Obligation of the Buyers

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8.3.	Conditions to Obligation of the Seller Parties
ARTICLE IX INDEMNIFICATION
9.1.	Indemnification
9.2.	Defense of Claims
ARTICLE X TERMINATION AND ABANDONMENT
10.1.	Termination
10.2.	Procedure and Effect of Termination
ARTICLE XI MISCELLANEOUS PROVISIONS
11.1.	Amendment and Modification
11.2.	Waiver of Compliance
11.3.	Survival
11.4.	Notices
11.5.	Assignment; No Third-Party Beneficiaries
11.6.	Governing Law
11.7.	Counterparts
11.8.	Interpretation
11.9.	Schedules and Exhibits
11.10.	Entire Agreement
11.11.	Bulk Sales or Transfer Laws
11.12.	Consent to Jurisdiction
11.13.	Waiver of Jury Trial
11.14.	Waiver of Consequential, Etc. Damages
11.15.	Specific Performance
11.16.	Change of Structure
11.17.	Certain Approvals

EXHIBITS
EXHIBIT A	Form of Assignment and Assumption Agreement
EXHIBIT B	Form of Bill of Sale
EXHIBIT C	Form of Deeds
EXHIBIT D	Form of FIRPTA Affidavit
EXHIBIT E	Indiana Settlement Agreement

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SCHEDULES

1.1(a)(37)(A)	Seller Parties’ Knowledge Persons
1.1(a)(37)(B)	Buyers’ Knowledge Persons
2.1(a)(i)	AESC Contracts and Leases
2.1(a)(ii)	AESC Vehicles
2.1(b)(ii)	Personal Property
2.1(b)(iii)	Permits and Environmental Permits
2.1(b)(iv)	Assumed Contracts
2.1(b)(viii)	Emission Allowances
2.2(f)	Excluded Contracts and Leases
2.4(i)	Excluded Liabilities
5.4(a)	Consents and Approvals
5.5	Reports
5.6(a)	Absence of Certain Changes
5.8	Lake Owned Real Property, Wheatland Owned Real Property and Other Real Property Interests
5.8(a)	Exceptions to Title
5.8(d)	Title Policies
5.8(f)	Leases
5.10(a)	Environmental Matters
5.10(b)	Environmental Permits
5.10(c)	Emission Allowances
5.11	Employees who Provide Services for Wheatland Facility
5.12(a)	Benefit Plans
5.12(f)	Benefit Plan Claims
5.13(a)	Material Contracts
5.13(c)	Transferability of Material Contracts
5.15(a)	Compliance with Permits
5.15(b)	Sellers’ Permits
5.17	Taxes
5.18	Related Party Matters
5.19(a)	Title to Acquired Assets
5.20	Intellectual Property
7.1(a)	Sellers’ Conduct of Business
7.1(a)(xiii)	Maintenance Expenditures
7.1(b)	AESC’s Conduct of Business
7.6(d)	Guarantees

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ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of May 6, 2005, by and among PSI Energy, Inc., an Indiana corporation (“PSI Energy”), and The Cincinnati Gas & Electric Company, an Ohio corporation (“CG&E” and, together with PSI Energy, collectively, the “Buyers”), and Allegheny Energy Supply Wheatland Generating Facility, LLC, a Delaware limited liability company and a wholly owned subsidiary of AESC (“Wheatland LLC”), Lake Acquisition Company, L.L.C., a Delaware limited liability company and a wholly owned subsidiary of AESC (“Lake LLC” and, together with Wheatland LLC, each, individually, a “Seller” and, collectively, the “Sellers”), and Allegheny Energy Supply Company, LLC, a Delaware limited liability company (“AESC” and, together with the Sellers, the “Seller Parties”).

W I T N E S S E T H

WHEREAS, Wheatland LLC owns, among other things, a 508-MW (nominal rating) natural gas-fired generating facility located in Wheatland, Indiana (the “Wheatland Facility”) and certain other assets associated therewith, and Lake LLC owns certain real property relating to the Wheatland Facility; and

WHEREAS, the Buyers desire to purchase and assume, and the Sellers desire to sell and convey, certain assets and liabilities relating to the Wheatland Facility, upon the terms and subject to the conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, representations, warranties and agreements hereinafter set forth, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

1.1.          Definitions.

(a)As used in this Agreement, the following terms have the meanings specified in this Section 1.1(a).  For capitalized terms used in this Agreement but not defined in this subsection (a), see subsection (b).

(1)“Affiliate” has the meaning set forth in Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act.

(2)“Allegheny Marks” means the names and marks “Allegheny Energy” and “Allegheny” together with all derivations and variations thereof, and the Allegheny Energy, Inc. corporate logo, together with all derivations or variations thereof.

(3)“Ancillary Agreements” means the Deeds, the Bill of Sale, the Assignment and Assumption Agreement, the Sellers Confidentiality Agreement and any other instruments of sale, transfer, conveyance, assignment or assumption as may be required to convey the Acquired Assets in accordance with this Agreement.

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(4)“Assignment and Assumption Agreement” means the agreement between the Buyers and the Seller Parties pursuant to which, among other things, the Seller Parties shall assign, and the Buyers shall assume, the Assumed Contracts, in substantially the form attached hereto as Exhibit A.

(5)“Bill of Sale” means the bill of sale by which the title to the personal property included in the Acquired Assets shall be conveyed by the Sellers to the Buyers, in substantially the form attached hereto as Exhibit B.

(6)“Business Day” means any day other than Saturday, Sunday and any day that is a legal holiday or a day on which banking institutions in New York City are authorized by Law or other governmental action to close.

(7)“Buyers’ Representatives” means the accountants, employees, officers, directors, counsel, environmental consultants, financial advisors and other authorized representatives of the Buyers and their Affiliates.

(8)“COBRA” means the Consolidated Omnibus Reconciliation Act of 1985, as amended, and any similar applicable state Law.

(9)“Code” means the Internal Revenue Code of 1986, as amended.

(10)“Commercially Reasonable Efforts” means efforts that are reasonable for a prudent business enterprise in circumstances similar to those of the performing party, but that do not require the performing party to expend funds other than expenditures that are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing party to satisfy its obligations under this Agreement.

(11)“Confidentiality Agreement” means that certain Confidentiality Agreement dated as of October 6, 2004, between Cinergy Corp. and AESC, including any amendments or waivers thereto.

(12)“Credit Agreement” means that certain Amended and Restated Credit Agreement dated as of October 28, 2004, among AESC, the Lenders and Loan Parties referred to therein, Citicorp North America, Inc., as Administrative Agent, and Citibank, N.A., as Collateral Agent and Intercreditor Agent.

(13)“Deeds” means special warranty deeds, duly executed by Wheatland LLC and Lake LLC and duly acknowledged, which convey to the Buyers (i) fee simple title to the Owned Real Property and (ii) all of the right, title and interest of the Sellers in and to the Other Real Property Interests, subject, in each case, only to the Permitted Encumbrances, and which shall be in substantially the form attached hereto as Exhibit C and otherwise in a form suitable for recording.

(14)“Due Diligence Materials” means (i) all due diligence materials provided for review or distributed in written or digital form by the Seller Parties or the Seller Parties’ Representatives to the Buyers or the Buyers’ Representatives, (ii) all written, oral or electronic answers to questions provided by the Seller Parties or the Seller Parties’ Representatives to the

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Buyers or the Buyers’ Representatives, and (iii) all materials contained in data rooms or privately-accessible internet sites established by the Seller Parties for purposes of providing due diligence materials to the Buyers or the Buyers’ Representatives.

(15)“Emission Allowances” means (i) “Allowance,” as that term is defined in 40 CFR § 72.2, and (ii) “NO_x Allowance,” as that term is defined in 326 Indiana Administrative Code § 10-4-2(37), in each case, as such terms are defined as of the date hereof.

(16)“Encumbrances” means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, charges, restrictions on transfer, proxies and voting or other similar agreements, claims and other legal and equitable encumbrances, limitations, title or survey matters and restrictions of any nature whatsoever.

(17)“Environmental Laws” means all Laws that relate to pollution or protection of the environment (including, without limitation, ambient air, surface water, groundwater, land, surface and subsurface strata) or human health and safety relating to Hazardous Substance exposure including, without limitation, Laws which relate to Releases or threatened Releases of Hazardous Substances or otherwise relate to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Hazardous Substances.

(18)“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

(19)“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

(20)“Existing Debt Documents” means, collectively, (i) the Credit Agreement dated as of March 8, 2004, among Allegheny Energy, Inc., the Lenders and the Lender Parties referred to therein, and Citicorp North America, Inc., as Administrative Agent, (ii) the Credit Agreement, (iii) the Amendment Agreement dated as of October 28, 2004, among AESC, the other Grantors referred to therein, Citibank, N.A., as Collateral Agent, Intercreditor Agent and Depository Bank, and Citicorp North America, Inc., as Administrative Agent, (iv) the Amendment Agreement dated as of March 8, 2004, among AESC, the other Grantors referred to therein, Citibank, N.A., as Collateral Agent, Intercreditor Agent and Depository Bank, and Citicorp North America, Inc., as Administrative Agent, (v) the Security and Intercreditor Agreement, (vi) the Refinancing Indenture referred to in the Security and Intercreditor Agreement, and (vii) other documents, instruments and agreements executed and delivered in connection with or otherwise relating to the foregoing agreements, including any mortgages, deeds of trust, security agreements, financing statements, pledge agreements and other documents creating or evidencing Encumbrances securing the indebtedness or other obligations under the foregoing.

(21)“Extraordinary Capital Expenditures” means the aggregate amount of all funds actually expended or Liabilities actually incurred (other than such as constitute Assumed Liabilities) by the Seller Parties on capital expenditures associated with the Wheatland Facility or the Site during the period beginning on the date hereof and ending on the Closing Date, but only to the extent such funds were expended, in whole or in part, as required by any change in

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Law or as required by any Governmental Entity or quasi regulatory agency, including, without limitation, any independent system operator.

(22)“FERC” means the Federal Energy Regulatory Commission.

(23)“Federal Power Act” means the Federal Power Act, as amended, and the rules and regulations promulgated thereunder.

(24)“Final Order” shall mean action by the relevant Governmental Entity which has not been reversed, stayed, enjoined, set aside, annulled or suspended (without regard to any waiting period prescribed by Law other than waiting periods under the HSR Act).

(25)“FIRPTA Affidavit” means the Foreign Investment in Real Property Tax Act Certification and Affidavit, in substantially the form attached hereto as Exhibit D.

(26)“Good Utility Practice” means any of the practices, methods and acts engaged in and approved by a significant portion of the independent electric power generation industry during the relevant time period that, in the exercise of reasonable judgment in light of the applicable manufacturer’s recommendations and the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition.  Good Utility Practice is intended to consist of practices, methods or acts generally accepted in the region where the Wheatland Facility is located, and is not intended to be limited to optimum practices, methods or acts to the exclusion of all others.

(27)“Governmental Entity” means any federal, state or local court, governmental or regulatory authority, agency, commission, body or other governmental entity.

(28)“Hazardous Substances” means any chemicals, materials or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “restricted hazardous materials,” “extremely hazardous substances,” “toxic substances,” “contaminants” or “pollutants” or words of similar meaning or substance found in any Environmental Law, or any petroleum and all derivatives thereof or synthetic substitutes therefor, and any asbestos or asbestos-containing material.

(29)“Holding Company Act” means the Public Utility Holding Company Act of 1935, as amended, and the rules and regulations promulgated thereunder.

(30)“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.

(31)“Improvements” means all buildings, structures (including all step-up transformers, transmission facilities and lines and gas handling and storage facilities), improvements, machinery, equipment, fixtures and construction in progress, including all piping, cables and similar equipment forming part of the mechanical, electrical, plumbing or HVAC infrastructure of any building, structure or equipment, located on the Site, including all generating units located on and affixed to the Wheatland Facility.

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(32)“Income Tax Return” means a Tax Return for any Tax based upon or calculated in whole or in part with respect to net income, gain or profits.

(33)“Indebtedness” means (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade Liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (ii) any other indebtedness that is evidenced by a note, bond, debenture or similar instrument, (iii) all obligations under financing leases, (iv) all obligations in respect of acceptances issued or created, (v) all Liabilities secured by any lien on any property, and (vi) all guarantee obligations.

(34)“Independent Accounting Firm” means an independent accounting firm (which may not be the auditors of any party hereto or any of their Affiliates) of national or regional reputation mutually appointed by the Seller Parties and the Buyers.

(35)“Information Memorandum” means that certain Information Memorandum regarding the Facility, dated September, 2004, and any supplements or amendments thereto to the extent provided to the Buyers or the Buyers’ Representatives.

(36)“Inventories” means any fuel inventories, materials, spare parts, consumable supplies and chemical and gas inventories located at the Wheatland Facility, in transit to the Wheatland Facility, owned by the Sellers or held by the Sellers.

(37)“Knowledge” means, with respect to an individual, that, with respect to a particular fact or other matter, such individual is actually aware of such fact or other matter.  With respect to the Seller Parties, “Knowledge” means the Knowledge of any of the Persons listed on Schedule 1.1(a)(37)(A) (and any individual who, after the date hereof, replaces any such person’s employment position).  With respect to the Buyers, “Knowledge” means the Knowledge of any of the Persons listed on Schedule 1.1(a)(37)(B) (and any individuals who, after the date hereof, replaces any such person’s employment position).

(38)“Lake Owned Real Property” means the real property described in Schedule 5.8 and designated therein as the “Lake Real Property”, together with all rights, privileges, interests, easements and appurtenances now or hereafter belonging or in any way pertaining to such real property (including, without limitation, any mineral rights) and any Improvements located thereon.

(39)“Laws” means any applicable federal, state or local law, common law, statute, code, ordinance, rule, regulation, judgment, order, injunction, decree, arbitration award, agency requirement, license or permit of any Governmental Entity.

(40)“Liabilities” means any debts, liabilities, commitments or obligations of any kind, character or nature whatsoever.

(41)“Maintenance Expenditures” means those maintenance expenditures that are identified on Schedule 7.1(a)(xiii).

(42)“Material Adverse Effect” means (i) any change or changes in, or effect on, the Wheatland Facility (excluding the Excluded Assets and the Excluded Liabilities) that is,

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or in the aggregate are, materially adverse to the business, assets, operations or conditions (financial or otherwise) of the Wheatland Facility, or (ii) any change or changes in, or effect on, the Sellers (excluding the Excluded Assets and the Excluded Liabilities), taken as a whole, that is, or in the aggregate are, reasonably likely to prevent, materially delay or impair any of the Seller Parties’ ability to consummate the transactions contemplated by this Agreement.  “Material Adverse Effect”, however, does not include any effect that is attributable to any of the following: (a) any change or effect generally affecting the international, national or regional electric generating, transmission or distribution industry as a whole, (b) any change or effect resulting from changes in the international, national or regional wholesale or retail markets for electric power, (c) any change or effect resulting from changes in the national or regional markets for the type of fuel used at the Wheatland Facility, (d) any change or effect resulting from changes in the international, national or regional electric transmission or distribution systems, (e) any change or effect resulting from changes in the general national or regional economic or financial conditions, (f) any change or effect resulting from changes in Laws or in industry standards, or (g) any change or effect that is cured to the reasonable satisfaction of the Buyers before the earlier of the Closing or the termination of this Agreement pursuant to Section 10.1; except, in the cases of clauses (a) through (f) above, for such changes or events which materially disproportionately impact the Sellers or the Acquired Assets.

(43)“Off-Site Location” means any location other than the Owned Real Property.

(44)“Other Real Property Interests” means the easements, rights-of-way and other interests in real property identified in Schedule 5.8 and designated therein as the “Other Real Property Interests.”

(45)“Owned Real Property” means, collectively, the Wheatland Owned Real Property and the Lake Owned Real Property.

(46)“Permitted Encumbrances” means (i) those exceptions to title listed in Schedule 5.8 as of the date hereof, (ii) liens for Taxes or other governmental charges or assessments not yet due and delinquent or the validity of which is being contested in good faith by appropriate proceedings, (iii) mechanics’, carriers’, workers’, repairers’ and other similar liens and rights arising or incurred in the ordinary course of business for amounts not yet due and payable or the validity of which is being contested in good faith by appropriate proceedings, (iv) zoning, entitlement, conservation restrictions and other land use and environmental regulations by any Governmental Entities, and (v) such other Encumbrances which would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.

(47)“Person” means an individual, a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated organization, an association, a joint stock company, any other business entity, and a Governmental Entity or a department or agency thereof.

(48)“Release” means a release, spill, leak, discharge, disposal of, pumping, pouring, emitting, emptying, injecting, leaching, dumping or escape into or through the environment.

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(49)“Response Actions” means those activities defined in section 101(25) of the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. § 9601(25).

(50)“Retained Environmental Liabilities” means the following Liabilities: (i) Liabilities for Response Actions to the extent required to address the Release of Hazardous Substances occurring at or from the Owned Real Property on or before the Closing Date; (ii) Liabilities for loss of life, injury to persons or property, or damage to natural resources to the extent arising in connection with the Release of Hazardous Substances on, at or from the Owned Real Property on or before the Closing Date; (iii) Liabilities arising in connection with any Hazardous Substances that were disposed of at, or transported by or on behalf of either of the Sellers to, any Off-Site Location on or before the Closing Date; or (iv) Liabilities for any violation or alleged violation of or noncompliance with any Environmental Law by the Sellers or their Affiliates or predecessor owners of the Wheatland Facility or the Owned Real Property on or prior to the Closing Date, including any fines and penalties and the costs of correcting such violations or non-compliance with applicable Environmental Law.  “Retained Environmental Liabilities” shall not include any of the following Liabilities: (a) Liabilities for Response Actions arising in connection with Releases of Hazardous Substances at or from the Wheatland Facility or the Owned Real Property specifically authorized by, and in compliance with, any Environmental Permits; (b) any costs for decommissioning of any equipment or facilities; (c) costs for upgrades to pollution control or other equipment required by changes in applicable Environmental Laws that impose compliance deadlines after the Closing Date; (d) Liabilities arising in connection with any Releases of Hazardous Substances, or the disposal of Hazardous Substances, on, at or from the Owned Real Property, initially occurring after the Closing Date; (e) Liabilities arising in connection with any transportation or disposal of Hazardous Substances from the Wheatland Facility or the Owned Real Property to any Off-Site Location which occurs after the Closing Date; or (f) Liabilities for any violation or alleged violation of or noncompliance with any Environmental Law by the Buyers or their Affiliates, in connection with the ownership or operation of the Acquired Assets, which occurs after the Closing Date.

(51)“SEC” means the Securities and Exchange Commission.

(52)“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

(53)“Security and Intercreditor Agreement” means that certain Amended and Restated Security and Intercreditor Agreement among AESC, the other Grantors referred to therein, Citibank, N.A., as Collateral Agent, Intercreditor Agent and Depository Bank, Citicorp North America, Inc., as Administrative Agent, and Law Debenture Trust Company of New York, as Indenture Trustee, dated February 21, 2003, as amended and restated in its entirety on March 8, 2004, and as further amended and restated in its entirety on October 28, 2004.

(54)“Seller Parties’ Representatives” means the accountants, employees, officers, directors, counsel, environmental consultants, financial advisors and other authorized representatives of any of the Seller Parties and their Affiliates.

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(55)“Site” means, collectively, the Owned Real Property and the Other Real Property Interests.

(56)“Subsidiary” means any corporation, partnership, limited liability company or other entity in which any Person has direct or indirect equity or ownership interest that represents fifty percent (50%) or more of the aggregate equity or ownership interest in such entity, or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors or governors.

(57)“Taxes” means all taxes, charges, fees, levies, duties, customs, tariffs, imports, penalties, assessments or other obligations of the same or of a similar nature to any of the foregoing imposed by any federal, state or local or foreign taxing authority, including, without limitation, income or profits, excise, property, sales, transfer, franchise, payroll, withholding, unemployment, severance, use, ad valorem, gross receipts, business license, occupation, stamp, environmental, workers’ compensation, social security or other taxes, including any interest, penalties or additions attributable thereto, whether disputed or not.

(58)“Tax Return” means any return, declaration, claim for refund, report, information return or other document (including any related or supporting information) supplied to or required to be filed with any taxing authority with respect to Taxes.

(59)“Transferring Employee Records” means all personnel files related to the Sellers’ Employees that pertain to (i) seniority histories and (ii) salary and benefit information, but only to the extent disclosure of such information is permitted by Law.

(60)“Wheatland Owned Real Property” means the real property described in Schedule 5.8 and designated therein as the “Wheatland Real Property”, together with all rights, privileges, interests, easements and appurtenances now or hereafter belonging or in any way pertaining to such real property (including, without limitation, any mineral rights) and any Improvements located thereon.

(b)Each of the following terms has the meaning specified in the Section set forth opposite such term:

Term	Section
Acquired Assets	2.1	(b)
AESC Transferred Assets	2.1	(a)
Assumed Contracts	2.1	(b)(iv)
Assumed Liabilities	2.3
Bankruptcy and Equity Exception	5.2
Benefit Plans	5.12	(a)
Buyers’ Benefit Plans	7.10	(c)
Buyers Indemnified Party	9.1	(a)
Buyers-Initiated Start-Up	7.18	(a)
Buyers Required Regulatory Approvals	6.3	(b)
Capital Expenditures Statement	3.2	(b)

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Term	Section
Closing	4.1
Closing Date	4.1
CPCN	6.3	(b)
Direct Claim	9.2	(c)
Environmental Permits	5.10	(a)(i)
ERISA Affiliate	5.12	(a)
Excluded Assets	2.2
Excluded Liabilities	2.4
FERC	5.5
FERC Approvals	6.3	(b)
Final Extraordinary Capital Expenditures Amount	3.2	(c)
GAAP	3.2	(a)
Indemnifiable Loss	9.1	(a)
Indemnifying Party	9.1	(d)
Indemnitee	9.1	(c)
Indiana Settlement Agreement	6.3	(c)
Intellectual Property	5.20
IRS	5.12	(a)
IURC	5.4	(b)
Leases	5.8	(f)
Material Contracts	5.13	(a)
Notice of Disagreement	3.2	(c)
Permits	5.15	(a)
Prior Welfare Plans	7.10	(b)
Proposed Acquisition Transaction	7.15
Property Taxes	3.4	(a)(i)
Purchase Price	3.1
Replacement Welfare Plans	7.10	(b)
Reviewing Parties	7.16	(f)
Sellers Confidentiality Agreement	7.2	(b)
Sellers’ Employees	5.11
Sellers Indemnified Party	9.1	(b)
Sellers-Initiated Start-Up	7.18	(b)
Sellers Required Regulatory Approvals	5.4	(b)
Support Obligations	7.6	(d)
Survey	4.3	(o)
Termination Date	10.1	(b)
Third Party Claim	9.2	(a)
Title Company	4.3	(n)
Title Policy	4.3	(n)
Transfer Taxes	7.9	(a)
Wheatland Facility	Recitals

(c)Unless otherwise specified, any period measured in days shall be measured in calendar days rather than Business Days.

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ARTICLE II
PURCHASE AND SALE

2.1.Purchase and Sale.

(a)Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, AESC will sell, transfer, convey, assign and deliver to the Buyers, and the Buyers will purchase, acquire and assume from AESC, (i) all of the rights of AESC under the contracts and Leases identified in Schedule 2.1(a)(i) to the extent they pertain to the Wheatland Facility, including, without limitation, any right to receive payment, any right to receive goods and services and any right to assert claims and take other rightful actions in respect of breaches, defaults and other violations of such contracts and Leases, and (ii) the vehicles identified on Schedule 2.1(a)(ii) (collectively, the “AESC Transferred Assets”).

(b)Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, the Sellers will sell, transfer, convey, assign and deliver to the Buyers, and the Buyers will purchase, acquire and assume from the Sellers, all of the Sellers’ right, title and interest in and to the properties and assets that are owned by the Sellers (tangible or intangible, including goodwill), wherever located, including, without limitation, the Sellers’ right, title and interest in and to the following assets (collectively, together with the AESC Transferred Assets, the “Acquired Assets”):

(i)the Site and the Wheatland Facility;

(ii)the machinery, equipment, Inventories, furniture, boats, vehicles and other personal property owned by the Sellers and located at or in transit to the Wheatland Facility (including, without limitation, the step-up transformers and the items of personal property described in Schedule 2.1(b)(ii) and all applicable warranties against manufacturers or vendors, to the extent that such warranties are transferable without further action by the Sellers, and all items of personal property due under applicable warranties), in each case as in existence on the Closing Date;

(iii)to the extent transferable, all Permits and Environmental Permits set forth in Schedule 2.1(b)(iii);

(iv)all of the rights of the Sellers under the Material Contracts and Leases set forth in Schedule 2.1(b)(iv) and any similar contracts or leases entered into, in accordance with Section 7.1(a), after the date hereof and prior to the Closing Date (collectively, together with the contracts and Leases included within the definition of AESC Transferred Assets, the “Assumed Contracts”), including, without limitation, any right to receive payment, any right to receive goods and services and any right to assert claims and take other rightful actions in respect of breaches, defaults and other violations of the Assumed Contracts;

(v)all books, records, manuals, regulatory documents, real estate documents, engineering designs, blueprints, as-built plans, specifications, procedures, studies, reports and equipment repair, safety, maintenance or service records, lists of present and former

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suppliers, lists of present and former customers, and other such materials (in any form or medium) of the Sellers, including the Transferring Employee Records;

(vi)all rights in and to any causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by or on behalf of the Sellers, whether arising by way of counterclaim or otherwise;

(vii)except for prepaid expenses and deposits of the Sellers attributable to any Excluded Assets or Excluded Liabilities, all prepaid expenses, progress payments and deposits of or by the Sellers, rights to receive a prepaid expense, deposit or progress payment, and cash in transit that constitutes a prepaid expense, progress payment or deposit, relating to any Acquired Asset or Assumed Liability;

(viii)subject to Section 7.1(a)(xvi), all Emission Allowances set forth on Schedule 2.1(b)(viii), all Emissions Allowances specifically issued or allocated to the Wheatland Facility by environmental agencies of the United States of America or the State of Indiana with a vintage year of 2005 or later (to the extent not already identified on Schedule 2.1(b)(viii)), and any Emissions Allowance purchased by the Sellers specifically for the Wheatland Facility on or before the date hereof;

(ix)all Intellectual Property and associated licenses, including rights to sue for and remedies against past, present and future infringements thereof, and rights of priority and protection of interests therein under the laws of any jurisdiction worldwide and all tangible embodiments thereof; and

(x)all other assets, rights and interests of the Sellers;

provided, however, that the Acquired Assets shall not include the Excluded Assets.

2.2.Excluded Assets.  Notwithstanding any provision herein to the contrary, the Acquired Assets shall exclude the following assets (collectively, the “Excluded Assets”):

(a)all cash, cash equivalents, bank deposits, accounts receivable of the Sellers or with respect to the Wheatland Facility as of the Closing and any Tax receivables of the Sellers;

(b)any refund or credit of Taxes paid by the Seller Parties in respect of the Sellers or the Acquired Assets or for which the Seller Parties are required to reimburse the Buyers, whether such payment is actually received as a refund or as a credit against Taxes payable;

(c)all interests in and to the Allegheny Marks, and the Maximo software license (it being understood that the database information, including historical information, related to the Wheatland Facility used with the Maximo software shall be an Acquired Asset);

(d)all personnel, medical and benefits records of the Seller Parties or their Affiliates, other than Transferring Employee Records;

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(e)any amount received after the Closing Date for electricity sold and delivered on or prior to the Closing Date;

(f)those contracts and Leases listed on Schedule 2.2(f);

(g)any asset sold, transferred or otherwise disposed of in accordance with Section 7.1(a)(v); and

(h)all properties and assets of AESC other than the AESC Transferred Assets.

2.3.Assumed Liabilities.  On the terms and subject to the conditions set forth herein, from and after the Closing, the Buyers shall assume and satisfy or perform all of the Liabilities of the Seller Parties that relate directly or indirectly to, in respect of, or otherwise arising from the ownership, use or operation of the Acquired Assets (collectively, the “Assumed Liabilities”), including, without limitation, the following Liabilities:

(a)all Liabilities of the Seller Parties arising under the Assumed Contracts in accordance with the terms thereof (other than Liabilities attributable to any failure by any of the Seller Parties prior to or on the Closing Date to comply with the terms thereof);

(b)all Liabilities relating to any Environmental Law other than Retained Environmental Liabilities; and

(c)all Liabilities in respect of Taxes attributable to the Acquired Assets for taxable periods, or portions thereof, beginning after the Closing Date (as prorated under Section 3.4(a)(i) for Taxes described therein), and all Liabilities for Transfer Taxes pursuant to Section 7.9(a);

provided, however, that the Assumed Liabilities shall not include the Excluded Liabilities.

2.4.Excluded Liabilities.  Notwithstanding the provisions of Section 2.3, the Buyers shall not assume the following Liabilities (collectively, the “Excluded Liabilities”), which shall remain the exclusive responsibility of the Seller Parties or their Affiliates:

(a)the Retained Environmental Liabilities;

(b)any Liability of the Seller Parties or their Affiliates and predecessors in respect of or otherwise arising from the Excluded Assets, except to the extent caused by the acts or omissions of the Buyers or the Buyers’ Representatives or by the Buyers’ ownership, lease, maintenance or operation of the Acquired Assets;

(c)any Liability of the Seller Parties or their Affiliates and predecessors arising from the execution, delivery or performance of this Agreement or any Ancillary Agreement or the transactions contemplated hereby or thereby;

(d)any Liability of the Seller Parties or their Affiliates and predecessors under contracts or Leases which are not Assumed Contracts, except to the extent caused by the

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acts or omissions of the Buyer or the Buyers’ Representatives or by the Buyers’ ownership, lease, maintenance or operation of the Acquired Assets;

(e)any Liability of the Seller Parties or their Affiliates and predecessors for any fines or penalties imposed by a Governmental Entity resulting from any (i) investigation or proceeding by a Governmental Entity pending on or prior to the Closing Date or (ii) acts or omissions of the Seller Parties or their Affiliates and predecessors on or prior to the Closing Date;

(f)any Liability in respect of Taxes attributable to the Acquired Assets for taxable periods, or portions thereof, ending on or before the Closing Date (as prorated under Section 3.4(a)(i) for Taxes described therein), except for Transfer Taxes pursuant to Section 7.9(a);

(g)any Liability of the Seller Parties or their Affiliates arising from the breach or default by the Seller Parties or their Affiliates, prior to the Closing Date, of any Assumed Contracts or any other contract, license, agreement or personal property lease entered into by any of the Seller Parties or their Affiliates with respect to the Purchased Assets;

(h)any Liability of the Seller Parties or their Affiliates and predecessors relating to any cause of action pending, or threatened in writing, prior to the Closing Date against the Seller Parties or their Affiliates and predecessors or their assets;

(i)any Liabilities relating to any matters identified on Schedule 2.4(i); and

(j)all Liabilities of the Seller Parties for Indebtedness incurred on or prior to the Closing.

2.5.Procedures for Acquired Assets Not Transferable.  If any consent required to transfer or assign any of the Assumed Contracts, Permits, Environmental Permits or any other property or rights included in the Acquired Assets cannot be obtained prior to the Closing Date and the Closing occurs, or, if an attempted assignment thereof would be ineffective or would adversely affect the rights of any of the Seller Parties thereunder so that the Buyers would not in fact receive all such rights, this Agreement and the related instruments of transfer shall not constitute an assignment or transfer thereof and the Buyers shall not assume the Seller Parties’ obligations with respect thereto.  In the event any such consent is not obtained on or prior to the Closing Date, the Seller Parties shall continue to use Commercially Reasonable Efforts to obtain any such consent after the Closing Date until such consent has been obtained.  If such efforts are unsuccessful, the Seller Parties and the Buyers will cooperate to achieve a mutually agreeable arrangement under which the Buyers would obtain the benefits and assume the obligations from and after the Closing Date in accordance with this Agreement, including subcontracting, sublicensing or subleasing to the Buyers, or under which the Seller Parties would enforce for the benefit of the Buyers any and all rights of the Seller Parties against a third party thereto, in any case with the Buyers assuming the Seller Parties’ obligations to the extent such obligations would have constituted an Assumed Liability if such assignment had occurred on the Closing Date.  Each Seller will pay promptly to the Buyers when received all monies received by such Seller after the Closing Date under any such contracts for any claim or right or any benefit

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arising thereunder to the extent that the Buyers would be entitled thereto pursuant hereto.  Nothing in this Section 2.5 shall be deemed to (a) constitute an agreement to exclude from the Acquired Assets any assets described in Section 2.1 or (b) alter the rights or obligations of the Buyers pursuant to Section 7.6 or Section 8.1(c).

ARTICLE III
PURCHASE PRICE

3.1.Purchase Price.  Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, in exchange for the Acquired Assets, the Buyers shall pay to the Sellers an amount equal to One Hundred Million Dollars ($100,000,000) (the “Purchase Price”) and shall assume the Assumed Liabilities.  The parties acknowledge that the Final Extraordinary Capital Expenditures Amount, if any, shall be treated as a post-Closing adjustment to the Purchase Price.

3.2.Possible Purchase Price Adjustment.

(a)Before expending any funds for an Extraordinary Capital Expenditure, (i) the Seller Parties shall give the Buyers written notice of such proposed Extraordinary Capital Expenditure, including supplementary materials explaining the proposed Extraordinary Capital Expenditure and, if applicable, diagrams or technical drawings, and, if requested by the Buyers, reasonable supporting materials supporting the Seller Parties’ conclusion that the Extraordinary Capital Expenditure is required by a change in Law or by any Governmental Entity or quasi regulatory agency, at least 10 Business Days prior to the date of the proposed Extraordinary Capital Expenditure, (ii) the Sellers shall consider in good faith the Buyers’ reasonable comments on the proposed Extraordinary Capital Expenditure, and (iii) the parties shall have attempted in good faith to agree on the appropriate response to the circumstance that requires the Extraordinary Capital Expenditure.  The amount of Extraordinary Capital Expenditures, if any, to be included in the Capital Expenditures Statement and the Final Extraordinary Capital Expenditures Amount shall be reduced, in an amount to be mutually agreed upon by the parties in good faith, to account for the ownership and usage of any project or addition funded by an Extraordinary Capital Expenditure (including, if appropriate, the fair depreciation of such project or addition under United States generally accepted accounting principles (“GAAP”) allocable to the period in which the Seller Parties owned the project) by the Seller Parties prior to the Closing Date.

(b)In the event the Seller Parties have incurred an Extraordinary Capital Expenditure in accordance with Section 3.2(a), then within 30 days after the Closing, the Seller Parties will prepare and deliver to the Buyers a statement (the “Capital Expenditures Statement”) setting forth the Extraordinary Capital Expenditures, if any, including detailed supporting material.  The Buyers agree to cooperate with the Seller Parties in connection with the preparation of the Capital Expenditures Statement and related information, and shall provide to the Seller Parties such books, records and information as may be reasonably requested from time to time.

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(c)During the 30-day period following the delivery by the Seller Parties of the Capital Expenditures Statement, the Buyers and the Buyers’ Representatives may review such statement.  The Seller Parties agree to cooperate with the Buyers in such review and to provide the Buyers with the information used to prepare the Capital Expenditures Statement and any other related information as reasonably requested by the Buyers.  The Buyers shall provide any comments or objections they have with respect to the Capital Expenditures Statement to the Seller Parties in writing within such 30-day period (the “Notice of Disagreement”).  The Buyers and the Seller Parties shall attempt in good faith to resolve any differences and issues as set forth in the Notice of Disagreement.  If no Notice of Disagreement is delivered or the matters set forth in the Notice of Disagreement are so resolved, then the Capital Expenditures Statement, as adjusted for any changes as are agreed upon by the Buyers and the Seller Parties, shall be final and binding upon the Buyers and the Seller Parties and shall constitute the “Final Extraordinary Capital Expenditures Amount.”  If the matters raised by the Buyers in the Notice of Disagreement cannot be resolved between the Buyers and the Seller Parties within 15 days following delivery by the Buyers of the Notice of Disagreement, the question or questions in dispute shall be promptly submitted to the Independent Accounting Firm, which shall be instructed to determine and report to the parties, within 30 days after receiving such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed.  Any amount (i) mutually agreed to in writing by the Seller Parties and the Buyers with respect to an amount that was disputed by the Buyers or (ii) finally determined by the Independent Accounting Firm shall be the “Final Extraordinary Capital Expenditures Amount.”  The fees and disbursements of the Independent Accounting Firm shall be borne equally by the Buyers and the Seller Parties.  Notwithstanding any other provision of this Agreement, in no event shall the Final Extraordinary Capital Expenditures Amount exceed $2,000,000.

(d)Within five Business Days after the final determination of the Final Extraordinary Capital Expenditures Amount, if any, the Buyers shall pay to the Seller Parties an amount equal to the Final Extraordinary Capital Expenditures Amount.  Any amount paid under this Section 3.2(d) shall be paid with interest for the period commencing on the Closing Date through the date of payment, calculated at the 90-day U.S. treasury bill rate as published in The Wall Street Journal in the “Money Rates” section on the Closing Date, and in cash by federal or other wire transfer of immediately available funds to the bank account or accounts designated by the Seller Parties in writing.

3.3.Allocation of Purchase Price.  The Buyers and the Seller Parties shall use Commercially Reasonable Efforts to agree upon an allocation among the Acquired Assets of the portion of the Purchase Price set forth in Section 3.1, together with Assumed Liabilities, consistent with section 1060 of the Code and the treasury regulations thereunder within 180 days of the date of this Agreement but in no event less than 30 days prior to the Closing.  Any post-Closing adjustments with respect to the Purchase Price for purchase price allocation purposes shall be jointly made and agreed to within 30 days following the determination of the Final Extraordinary Capital Expenditures Amount in a manner consistent with the allocation determined pursuant to this Section 3.3.  In the event the parties are unable to agree upon such an allocation, then the matter shall be resolved in accordance with Section 7.9(f).  Each of the Buyers and the Seller

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Parties agree to file IRS Form 8594, and all federal, state, local and foreign Tax Returns, in accordance with such agreed allocation.  Each of the Buyers and the Seller Parties shall report the transactions contemplated by this Agreement for Tax purposes in a manner consistent with the allocation determined pursuant to this Section 3.3.  Each of the Buyers and the Seller Parties agrees to provide each other promptly with any other information reasonably required to complete Form 8594.  Each of the Buyers and the Seller Parties shall notify each other in the event of an examination, audit or other proceeding regarding the agreed upon allocation of the Purchase Price.

3.4.Proration.

(a)The Buyers and the Seller Parties agree that those items listed below, to the extent they relate to the Acquired Assets, will be prorated as of the Closing Date, with the Seller Parties liable to the extent such items relate to any time period through the Closing Date, and the Buyers liable to the extent such items relate to periods subsequent to the Closing Date:

(i)any ad valorem taxes imposed on tangible or intangible property (“Property Taxes”) shall be prorated based on the number of days in such taxable period up to and including the Closing Date, and on the number of days in such taxable period after the Closing Date, provided that, for purposes of this Agreement, the taxable period of any Property Tax shall be the calendar year during which the statutory assessment date falls (for the avoidance of doubt, the items listed in this Section 3.4(a)(i) include, without limitation, any Property Taxes with respect to the taxable period including the Closing Date, and all prior taxable periods, for which the Seller Parties have not (A) received from the county treasurer a statement of current and delinquent taxes and special assessments, or (B) paid the amount shown as due on such statement);

(ii)any permit, license, registration, or compliance assurance fees with respect to any Permit;

(iii)sewer rents and charges for water, telephone, electricity and other utilities and similar charges of the Sellers; and

(iv)any payment obligations for goods purchased or delivered, or services rendered, including rent under any Leases or leases of personal property that are Assumed Contracts by which either Seller is bound.

(b)In connection with the prorations referred to in (a) above, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be reprorated upon request of either the Seller Parties or the Buyers made within 30 days of the date that the actual amounts become available.  The Buyers shall cooperate with the Seller Parties in the prosecution of tax proceedings which have not been completed by the Closing Date.  The Seller Parties and the Buyers agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.4.

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ARTICLE IV
THE CLOSING

4.1.Time and Place of Closing.  Upon the terms and subject to the satisfaction of the conditions contained in Article VIII of this Agreement, the closing of the purchase and sale of the Acquired Assets contemplated by this Agreement (the “Closing”) will take place at Skadden, Arps, Slate, Meagher & Flom LLP, 1440 New York Avenue, N.W., Washington, D.C., at 10:00 A.M. (local time) on such date as the parties may agree, which date is as soon as practicable, but no later than five Business Days following the date on which all of the conditions contained in Article VIII have been satisfied or waived (except for those conditions which by their nature can only be satisfied at the Closing); or at such other place or time as the parties may agree.  The date and time at which the Closing actually occurs is hereinafter referred to as the “Closing Date.”

4.2.Payment of Purchase Price.  The Buyers shall pay to the Sellers at the Closing an amount in United States dollars in the aggregate equal to the Purchase Price, by wire transfer of immediately available funds to the bank account or accounts designated by the Sellers, in writing, on or prior to the 2^nd Business Day immediately preceding the Closing Date.

4.3.Deliveries by the Sellers.  At the Closing, the Seller Parties will deliver the following to the Buyers:

(a)the Deeds;

(b)the Bill of Sale, duly executed by the applicable Seller Parties;

(c)the Assignment and Assumption Agreement, duly executed by the applicable Seller Parties, in recordable form if necessary;

(d)each other Ancillary Agreement required to be delivered under this Agreement, duly executed by the applicable Seller Parties;

(e)the FIRPTA Affidavit, duly executed by AESC;

(f)certificates of title for the vehicles and boats which are part of the Acquired Assets, duly executed by the applicable Seller Parties;

(g)all attornment agreements, notices and other documents and instruments required for the assignment or other transfer of any of the Assumed Contracts from the applicable Seller Parties to the Buyers, duly executed by the applicable Seller Parties and, in the case of any leases, upon the reasonable request of the Buyers, in recordable form;

(h)Uniform Commercial Code and other Encumbrance searches with respect to the Acquired Assets, and such duly executed UCC-3 Termination or Partial Release Statements and other releases as may be required to convey the Acquired Assets free and clear of all Encumbrances (except for Permitted Encumbrances) in accordance with this Agreement;

(i)copies of all consents, waivers or approvals obtained by the Sellers with respect to the transfer of the Acquired Assets or the consummation of the transactions

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contemplated by this Agreement and the Ancillary Agreements, to the extent required under this Agreement or the Ancillary Agreements;

(j)all of the books, records and other materials of the Sellers set forth in Section 2.1(b)(v);

(k)a certificate from an authorized officer of each of the Seller Parties in accordance with Section 8.2(e);

(l)any amounts for which the Seller Parties are liable pursuant to Section 3.4;

(m)any disclosure document required to be delivered in accordance with the Indiana Responsible Transfer Property Law (Ind. Code § 13-251-3-1 et seq.);

(n)an ALTA (Form B-1992) Owner Policy of Title Insurance, with an endorsement providing “extended coverage” over the standard exceptions contained in such form of Owner Policy of Title Insurance and such other endorsements as are reasonably requested by the Buyers (the “Title Policy”), issued by Chicago Title Insurance Company (the “Title Company”), in the amount of $100,000,000, and insuring that (i) good and marketable title to the Owned Real Property and (ii) valid easement interests in the Other Real Property Interests are vested in the Buyers, subject to no exceptions to title other than the Permitted Encumbrances;

(o)a survey of the Site (the “Survey”) prepared by a surveyor licensed in the State of Indiana, (i) certified to the Seller Parties, the Buyers and the Title Company in accordance with a form of certification which is reasonably acceptable to the Buyers, such certification to include a statement that the survey has been prepared in accordance with “Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys” jointly adopted by ALTA, ACSM and NSPS in 1999 and including Items 1, 4, 6, 7(a), 7(b)(1), 7(c), 8-10, 11(b) and 13-16, (ii) showing no gaps, gores, encroachments or other matters which are not Permitted Encumbrances, (iii) showing that the easements created by (A) that certain Easement Agreement, dated March 10, 2000, between West Fork Land Development Company, L.L.C. and Larry B. Murray and (B) that certain Easement Agreement, dated March 10, 2000, between West Fork Land Development Company, L.L.C. and Charles L. Murray and Barbara Nell Murray, constitute a continuous easement corridor between the fee parcels owned by Wheatland LLC and the fee parcels owned by Lake LLC and (iv) plotting the location of the water pipeline, gas transmission pipeline and electrical transmission poles and lines serving the Wheatland Facility and confirming that such pipelines, poles and lines lie wholly within the Owned Real Property or the Other Real Property Interests; and

(p)such real estate transfer declarations, disclosures or forms and such other documents, instruments or agreements, if any, as shall have been reasonably requested by the Title Company in order to issue the Title Policy to the Buyers and to consummate the Closing.

4.4.Deliveries by the Buyers.  At the Closing, the Buyers will deliver the following to the Seller Parties:

(a)the Purchase Price by wire transfer of immediately available funds, together with any amounts for which the Buyers are liable pursuant to Section 3.4;

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(b)the Assignment and Assumption Agreement, duly executed by the Buyers and in recordable form if necessary;

(c)each other Ancillary Agreement required to be delivered under this Agreement, duly executed by the Buyers as applicable;

(d)a certificate from an authorized officer of each of the Buyers referred to in Section 8.3(d); and

(e)such other agreements, documents, instruments and writings as are required to be delivered by the Buyers at or prior to the Closing Date pursuant to this Agreement or otherwise required in connection herewith.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES

The Seller Parties jointly and severally represent and warrant to the Buyers, except as set forth on the corresponding sections of the Seller Parties’ Schedules, as follows:

5.1.Organization; Qualification.  Each of the Seller Parties is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware.  Each of the Sellers has all requisite limited liability company power and authority to own, lease and operate its respective properties and to carry out its respective business as is now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary (including Indiana, as applicable), except where the failure to have such power and authority, or to be so qualified or in good standing, would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.  The Sellers have made available to the Buyers complete and correct copies of the Sellers’ respective Certificates of Formation and Limited Liability Company Agreements, each as currently in effect.

5.2.Authority Relative to this Agreement.  Each of the Seller Parties has full limited liability company power and authority to execute and deliver this Agreement and, as of the Closing, will have full limited liability company power and authority to execute and deliver the Ancillary Agreements, as applicable, and to consummate the transactions contemplated hereby and thereby.  The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been, and, as of the Closing, the execution and delivery of the Ancillary Agreements and the consummation of the transactions contemplated thereby will have been, duly and validly authorized by the Boards of Managers of each of the Seller Parties, and no other limited liability company proceedings on the part of the Seller Parties are necessary to authorize this Agreement or, as of the Closing, the Ancillary Agreements, as applicable, or to consummate the transactions contemplated hereby and thereby.  This Agreement has been, and, as of the Closing, the Ancillary Agreements, as applicable, will be, duly and validly executed and delivered by the Seller Parties, as applicable.  Assuming that this Agreement and, as of the Closing, the Ancillary Agreements constitute valid and binding agreements of the respective Buyers, subject to receipt of the Sellers Required Regulatory Approvals and the Buyers Regulatory Required Approvals, this Agreement constitutes, and the Ancillary Agreements will

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constitute, valid and binding agreements of the Seller Parties, enforceable against the Seller Parties in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (the “Bankruptcy and Equity Exception”).

5.3.Capitalization and Other Matters.  AESC owns, beneficially and of record, all of the issued and outstanding limited liability company interests in the Sellers, free and clear of all Encumbrances, other than Encumbrances pursuant to the Existing Debt Documents.  Neither of the Sellers has any equity or other investment interest in any other Person.

5.4.Consents and Approvals; No Violation.

(a)Other than obtaining the Sellers Required Regulatory Approvals and the Buyers Required Regulatory Approvals, and except as set forth on Schedule 5.4(a), neither the execution and delivery of this Agreement and, on the Closing Date, the Ancillary Agreements, as applicable, by the Seller Parties nor the sale by the Sellers of the Acquired Assets pursuant to this Agreement or performance by the Seller Parties under this Agreement or the Ancillary Agreements, as applicable, will (i) conflict with or result in any breach of any provision of the respective Certificates of Formation or Limited Liability Company Agreements of the Seller Parties; (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (A) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect or (B) for those requirements which become applicable to the Sellers as a result of the specific regulatory status of the Buyers (or any of their Affiliates) or as a result of any other facts that specifically relate to the business or the activities in which either of the Buyers (or any of their Affiliates) is or proposes to be engaged; (iii) require any consent, approval or notice, or result in a default (with or without notice or lapse of time or both) (or give rise to any right of termination, cancellation or acceleration), under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which any of the Seller Parties is a party, other than the Existing Debt Documents, or by which any of the Seller Parties may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect; or (iv) violate any Law or Permit applicable to any of the Seller Parties, or their respective assets, which violation would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect; and without limiting the generality of the foregoing, the transactions contemplated by this Agreement comply with the provisions of the Existing Debt Documents and the Seller Parties have obtained the board approval and the appraisal required under Section 5.02(e)(v) of the Credit Agreement.

(b)Except for (i) any filings or approvals required under the Federal Power Act, (ii) the filings by the Seller Parties required by the HSR Act and the expiration or earlier termination of all waiting periods under the HSR Act, and (iii) the required approvals from the Indiana Utility Regulatory Commission (the “IURC”) (the filings and approvals referred to in clauses (i) through (iii) are collectively referred to as the “Sellers Required Regulatory Approvals”), no declaration, filing or registration with, or notice to, or authorization, consent or

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approval of any Governmental Entity is necessary for the consummation by the Seller Parties of the transactions contemplated hereby or by the Ancillary Agreements, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not obtained or made, would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.

5.5.Reports.  Except as set forth in Schedule 5.5, since January 1, 2004, each of the Seller Parties has filed or caused to be timely filed with the SEC (limited to filings on Form 10-K and Form 10-Q, and any amendments thereof, with respect to filings under the Exchange Act) and the Federal Energy Regulatory Commission (the “FERC”), as the case may be, all material forms, statements, reports and documents (including all exhibits, amendments and supplements required to be filed by them) with respect to the business and operations of the Sellers under each of the Federal Power Act and the Holding Company Act and the respective rules and regulations thereunder, all of which complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder in effect on the date each such report was filed, and there are no material misstatements or omissions in respect of such reports.

5.6.Absence of Certain Changes or Events; No Undisclosed Liabilities.

(a)Except as disclosed in Schedule 5.6(a), since December 31, 2004, each of the Sellers has conducted its business only in the ordinary course of business consistent with past practice and Good Utility Practice and there has not been:  (i) any Material Adverse Effect; (ii) any damage, destruction or casualty loss with respect to the Acquired Assets, whether covered by insurance or not, which would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect; (iii) any entry into any agreement, commitment or transaction (including, without limitation, any Indebtedness, capital expenditure or capital financing) by any of the Seller Parties, which is material to the business or operations of the Sellers; (iv) any change in financial or Tax accounting methods, principles or practices, of the Sellers, or with respect to any of the Acquired Assets, except as required under GAAP; (v) any election, revocation, or amendment of any Tax election of the Sellers or with respect to any of the Acquired Assets; (vi) any filing of any amended Tax Return of the Sellers or with respect to any of the Acquired Assets; (vii) an entry into any closing agreement affecting any Tax liability or refund of the Sellers or with respect to any of the Acquired Assets; or (viii) a settlement or compromise of any Tax liability or refund of the Sellers or with respect to any of the Acquired Assets.

(b)There are no Liabilities of the Seller Parties relating to the Wheatland Facility or the Site of a nature that would be required to be accrued in accordance with GAAP on a balance sheet of any Seller Party if such Seller Party had prepared such a balance sheet.

5.7.Indebtedness of the Sellers.  Except for Indebtedness pursuant to the Existing Debt Documents, neither Seller has any Indebtedness.

5.8.Real Property and Related Matters.

(a)Except as set forth in Schedule 5.8(a) and except for Permitted Encumbrances, (i) Wheatland LLC holds (A) good, valid and marketable title in fee simple to

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each parcel included in the Wheatland Owned Real Property and (B) a valid perpetual easement to each parcel subject to the Other Real Property Interests that are appurtenant to the Wheatland Owned Real Property and (ii) Lake LLC holds (A) good, valid and marketable title in fee simple to each parcel included in the Lake Owned Real Property and (B) a valid perpetual easement to each parcel subject to the Other Real Property Interests that are appurtenant to the Lake Owned Real Property.  The Other Real Property Interests are in full force and effect.  The Owned Real Property is the only real property owned by the Sellers, and the Other Real Property Interests constitute all easements, rights-of-way or other rights of the Sellers to use real property owned by Persons other than the Sellers.  The Site is the only real property necessary for the use and operation of the Wheatland Facility as currently used and operated.  No other Person has, directly or indirectly, any interest in the Site (whether legal or equitable), except for Permitted Encumbrances, and no other Person has any contract, option, right of first refusal or other agreement to purchase the Site or any part thereof.

(b)To the Seller Parties’ Knowledge, each of the Wheatland Owned Real Property and the Lake Owned Real Property is an independent property that does not rely on any facilities, Improvements or easements (other than public facilities and public roads) located on any property other than the Site to fulfill any requirement of any Governmental Entity, for the furnishing to the Wheatland Owned Real Property or the Lake Owned Real Property of any access, essential building systems or utilities or for the use or operation of the Wheatland Facility.

(c)Each of the Wheatland Owned Real Property and the Lake Owned Real Property is a separate real estate tax parcel, separate and apart from any property other than the Owned Real Property.  The Seller Parties have not received any notice of any real property special tax assessments or reassessment of the Site.  There are no unpaid charges, debts, Liabilities or claims arising from the construction, occupancy, use or operation of the Site which could give rise to any mechanic’s or materialman’s or other statutory lien against the Site other than charges incurred in the ordinary course of business and which shall be timely paid.

(d)To the Seller Parties’ Knowledge, true and accurate copies of the existing owner’s title insurance policy with respect to the Site issued to Wheatland LLC and Lake LLC and the lender’s title insurance policy issued to Citibank, N.A., as Collateral Agent, are attached hereto as Schedule 5.8(d).

(e)There are no tax proceedings pending in respect of the Site.

(f)Schedule 5.8(f) describes all of the leases, licenses and occupancy agreements affecting the Site and to which either of the Seller Parties is a party, whether as lessor or lessee (the “Leases”).  No third party has any occupancy or use rights with respect to the Owned Real Property except pursuant to the Leases.  All Leases are in full force and effect.  All material obligations of the Seller Parties under the Leases and, to the Seller Parties’ Knowledge, all material obligations of the other parties to the Leases under such Leases, in each case, to be performed through the date hereof have been performed in full.  The Seller Parties have not received any notice of default by either of the Sellers under any of the Leases.

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(g)There are no surface conditions, and to the Seller Parties’ Knowledge, there are no subsurface conditions, upon the Site which constitute, or which with the passing of time may constitute, a public nuisance.  To the Seller Parties’ Knowledge, the Site does not contain any archeological artifacts, human remains or other historical or archeological materials which are regulated under any Laws.

(h)To the Seller Parties’ Knowledge, there are no public improvements pending, contemplated or proposed relating to the Site.  None of the Seller Parties have commenced any improvements upon the Owned Real Property, nor to the Seller Parties’ Knowledge, are any such improvements contemplated or proposed to be commenced upon the Owned Real Property.

(i)The Site is served by public electric, telephone and utility services which are made available to the Site from public utility easements, appurtenant insured easements or public rights-of-way.  All such utilities are adequate and have sufficient capacity for operation and use of the Wheatland Facility as currently operated and used and for compliance with the Assumed Contracts.

(j)(i) The obligations of the Sellers with regard to all applicable covenants, easements and restrictions affecting the Site have been and are being performed in a proper and timely manner by the Sellers, except for such matters which would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, (ii) the Sellers are not currently in default under any agreement, order, judgment or decree relating to the Site, and no conditions or circumstances exist which, with the giving of notice or passage of time, would constitute a default or breach with respect to any such agreement, order, judgment or decree, except for such default or breach which would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, (iii) the Sellers have received no notice of, and are not otherwise aware of, any claims, causes of action, lawsuits or legal proceedings pending or threatened regarding the ownership, use or possession of the Site including, without limitation, condemnation or similar proceedings and (iv) the Sellers have received no notice of any violation of any zoning, subdivision, platting, building, fire, insurance, safety, health, environmental or other applicable laws, ordinances or regulations (whether related to the Site or the occupancy thereof).

(k)The Wheatland Facility is located entirely on the Owned Real Property (other than improvements required to connect the Wheatland Facility with the electric transmission grid, natural gas pipelines and water reserves, which are properly located on real property subject to the Other Real Property Interests).

5.9.Insurance.  All material policies of fire, liability, worker’s compensation and other forms of insurance owned or held by the Seller Parties or their Affiliates that insure any of the Acquired Assets are in full force and effect, subject to the terms of each policy, all premiums with respect thereto have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and worker’s compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation.  During the past 12 months, the Seller Parties or their Affiliates have not been refused any insurance with

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respect to the Acquired Assets nor has such coverage been limited by any insurance carrier to which Seller Parties or their Affiliates has applied for any such insurance or with which it has carried insurance.

5.10.Environmental Matters.

(a)Except as set forth in Schedule 5.10(a), and except for such matters that would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect:

(i)The Sellers have obtained all permits, licenses, registrations, exemptions and other authorizations which are required under the Environmental Laws for the ownership, use and operation of the Wheatland Facility and the Owned Real Property as presently operated (“Environmental Permits”).  All such Environmental Permits are in effect, and, to the Seller Parties’ Knowledge, no appeal or any other action is pending to revoke any such Environmental Permits.  The Sellers have filed (or will have filed by the Closing Date) all applications necessary to renew any necessary Environmental Permits in a timely fashion.

(ii)The Sellers have been and are in compliance with applicable Environmental Laws and Environmental Permits.  To the Seller Parties’ Knowledge, predecessor owners and operators of the Wheatland Facility and the Owned Real Property were in compliance with applicable Environmental Laws and Environmental Permits.

(iii)The Sellers have made available to the Buyers complete copies of all the environmental studies on the Wheatland Facility or the Owned Real Property in their possession, including, without limitation, environmental audit reports and Phase I or Phase II environmental assessments, if any.

(iv)There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter existing or pending that has not been resolved with no further obligations on the part of the Sellers or, to the Seller Parties’ Knowledge, threatened, relating to the Wheatland Facility or the Site pursuant to any Environmental Laws or relating Hazardous Substances, including, without limitation, claims for personal or bodily injury with respect to exposure to Hazardous Substances.

(v)The Sellers have not, and, to the Seller Parties’ Knowledge, no other Person has Released any Hazardous Substances on, beneath or adjacent to the Site, except for Releases of Hazardous Substances that are not likely to result in a claim against the Sellers.  To the Seller Parties’ Knowledge, there are no Hazardous Substances present on, beneath or adjacent to the Site, except for such Hazardous Substances that are not likely to result in a claim against the Sellers.

(vi)To the Seller Parties’ Knowledge, no Release or Response Action has occurred at the Site that could reasonably be expected to result in the assertion or creation of an Encumbrance on the Site by any Governmental Entity with respect thereto, nor has

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any such assertion of an Encumbrance been made by any Governmental Entity with respect thereto.

(vii)Neither of the Sellers has entered into or agreed to any outstanding consent decree or order, or is subject to any outstanding judgment, judicial or administrative decree or judicial or administrative order relating to compliance with any Environmental Law or to Response Actions to address a Release or threatened Release of Hazardous Substances under any Environmental Law.

(b)The Seller Parties have listed the current Environmental Permits in Schedule 5.10(b), and have made available to the Buyers a complete copy of each Environmental Permit.

(c)Schedule 5.10(c) lists all Emission Allowances for 2005 and future years that have been (i) issued or allocated by the U.S. Environmental Protection Agency or the Indiana Department of Environmental Management specifically for the Wheatland Facility or (ii) purchased by the Sellers specifically for the Wheatland Facility on or before the date hereof.

(d)The representations and warranties made in this Section 5.10 are the exclusive representations and warranties of the Seller Parties relating to Environmental Laws, Environmental Permits or other environmental matters, and no other provision of this Agreement shall be deemed to constitute, directly or indirectly, a representation or warranty with respect to such matters.

5.11.Labor and Employment Matters.  With respect to the business or operations of the Sellers, except for such matters that would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect:  (a) each of the Seller Parties is in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety, and wages and hours; (b) none of the Seller Parties has received notice of any charge or complaint against it pending before the Equal Employment Opportunity Commission, the National Labor Relations Board or any other Governmental Entity regarding an unlawful employment practice; (c) there is no labor strike, slowdown or work stoppage actually pending or, to the Seller Parties’ Knowledge, threatened against or affecting the Seller Parties and none of the Seller Parties has experienced any strike, slowdown or work stoppage in the past 5 years; (d) none of the Seller Parties has received notice that any representation petition respecting the employees of the Seller Parties has been filed with the National Labor Relations Board, no union claims to represent any of the employees of the Seller Parties, and there has been no labor union, prior to the date hereof, organizing or attempting to organize any employees of the Seller Parties into one or more collective bargaining units; (e) there are no complaints, lawsuits, arbitrations or other proceedings pending or, to the Seller Parties’ Knowledge, threatened by or on behalf of any present or former employee of the Seller Parties arising out of or relating in any way to any present or former employee’s hiring by, employment with or separation from the Seller Parties, specifically including, without limitation, any claim for breach of any express or implied contract of employment, wrongful termination or infliction of emotional distress, or any claim under any applicable Law respecting employment, employment practices, terms and conditions of employment, health and safety, and wages and hours; and (f) to the Seller Parties’ Knowledge, no Sellers’ Employee, during the course of and

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as part of his or her employment with the Sellers or their Affiliates, has been exposed to Hazardous Substances exceeding permissible exposure limits established by applicable Law.  Schedule 5.11 lists the three employees of the Seller Parties or their Affiliates who provide services on a full time basis for the Wheatland Facility as of the date hereof (collectively, the “Sellers’ Employees”) and identifies the employer of each such Sellers’ Employee.

5.12.ERISA; Employee Benefit Plans.

(a)Schedule 5.12(a) lists all deferred compensation, incentive compensation, bonus, vacation, equity compensation and equity based or ownership plans, policies, programs, agreements and arrangements, all other “employee benefit plans,” within the meaning of section 3(3) of ERISA and all employment, retention, consulting, change in control, termination or severance agreements, programs, plans, policies or arrangements, covering the Sellers’ Employees, including such policies of any Person that is considered a single employer with any of the Seller Parties under section 4001 of ERISA or section 414 of the Code (each, an “ERISA Affiliate”) (collectively, the “Benefit Plans”).  True and complete copies of all Benefit Plans (or if the Benefit Plan is not a written plan, a description thereof), any related trust or other funding vehicle, the latest version of any reports or summaries required under ERISA or the Code including, without limitation, summary plan descriptions and summary material modifications, a copy of the three most recent annual reports and actuarial reports, to the extent required by ERISA or the Code, and the most recent determination letter received from the Internal Revenue Service (the “IRS”) with respect to each Benefit Plan intended to qualify under section 401 of the Code have been provided or made available to the Buyers.  The Sellers have had no employees and do not sponsor, maintain or contribute to Benefit Plans on behalf of the Sellers’ Employees.

(b)All Benefit Plans that are subject to ERISA, other than “multiemployer plans” within the meaning of sections 3(37) or 4001(a)(3) of ERISA, are in compliance with their terms, and in material compliance with all applicable Laws, including, without limitation, the Code and ERISA.  Each Benefit Plan intended to be qualified within the meaning of section 401(a) of the Code has received a current favorable IRS determination letter with respect to such qualifications.  None of the Seller Parties or, to the Seller Parties’ Knowledge, any ERISA Affiliate has engaged in a transaction with respect to any Benefit Plan that could subject any of the Seller Parties to a tax or penalty imposed by either sections 4975 or 4976 of the Code or section 409 or 502(i) of ERISA in an amount that would be material.

(c)There has been no amendment to, or announcement or other communication by the Seller Parties or, to the Seller Parties’ Knowledge, any ERISA Affiliate regarding any change in employee participation or coverage under, any Benefit Plan which would increase materially the benefits provided to the Sellers’ Employees under such plan above the level of the benefits provided thereunder for the most recent fiscal year.  Neither the execution of this Agreement nor the consummation of any of the transactions contemplated hereby or the termination of employment after the date hereof will entitle any Sellers’ Employees to severance pay or other payments (but not including any payments made pursuant to any tax-qualified retirement plan), any increase in severance pay or other payments, or any acceleration of vesting of any payment or benefit, or would result in any funding of any payment or benefit by the Seller Parties.

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(d)Neither the Seller Parties nor any ERISA Affiliate (i) has failed to fulfill its obligations under the minimum funding requirements of section 302 of ERISA, to the extent applicable; or (ii) has any actual or potential withdrawal liability resulting from a complete or partial withdrawal (as defined in sections 4203 and 4205 of ERISA) from any multiemployer plan (as defined in sections 3(37) and 4001(a)(3) of ERISA).  No Liability under Title IV of ERISA has been incurred by the Seller Parties or any ERISA Affiliate that has not been satisfied in full as of the date of this Agreement.  No event has occurred in connection with any of the employee benefit plan of the Seller Parties or any ERISA Affiliate that has, will or may result in any Liability for which any transferee of assets of the Sellers may be responsible, whether by operation of Law, by contract or otherwise.  The transactions contemplated by this Agreement will not, either alone or in combination with any other event or events, cause the Buyers to incur any Liabilities under Title IV of ERISA or section 4980B of the Code.

(e)To the Seller Parties’ Knowledge, none of the Seller Parties nor any ERISA Affiliate has used the services of workers provided by third party contract labor suppliers, temporary employees, “leased employees” (as that term is defined in section 414(n) of the Code), or independent contractors to an extent that would reasonably be expected to result in the disqualification of any of the Benefit Plans or the imposition of penalties or excise taxes with respect to the Benefit Plans by the IRS, the Department of Labor, or the Pension Benefit Guaranty Corporation.

(f)Except as set forth in Schedule 5.12(f), there are no pending or threatened claims by or on behalf of any Benefit Plan, by any employee, beneficiary or alternate payee against any such Benefit Plan, or otherwise involving any such Benefit Plan (other than routine claims for benefits) against the Seller Parties or any ERISA Affiliate.

5.13.Contracts.

(a)Schedule 5.13(a) lists the following agreements and contracts to which any of the Seller Parties (limited in the case of AESC, to the extent such agreements or contracts are included in the definition of AESC Transferred Assets) is a party or by which either of the Sellers or the Wheatland Facility is bound (the “Material Contracts”):

(i)gas pipeline interconnection agreements, gas supply agreements, gas purchase and sale agreements, and gas transportation agreements;

(ii)power purchase agreements, electricity transmission agreements, and electricity interconnection agreements;

(iii)swap, exchange, commodity option or hedging agreements;

(iv)material operating and maintenance agreements;

(v)material equipment lease, purchase and sale contracts;

(vi)any contract (i) requiring known or liquidated expenditures or payments by any of the Seller Parties in excess of $100,000 in any calendar year or (ii) that cannot

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be terminated without penalty by the Seller Party that is a party to such contract upon 90 days’ notice or less;

(vii)any pending sale or lease of real property of either Seller or any pending sale or lease of personal property of either Seller (other than sales of electric energy in the ordinary course of business) in excess of $100,000;

(viii)any contract that contains a covenant not to compete applicable to any Seller Party;

(ix)any other agreement material to either Seller, the Acquired Assets or the Wheatland Facility; and

(x)any amendment relating to any of the foregoing.

(b)The Seller Parties have provided or made available to the Buyers true, correct and complete copies of all the Material Contracts.

(c)Each of the Material Contracts (i) constitutes a valid and binding obligation of the respective Seller Parties and, to the Seller Parties’ Knowledge, constitutes a valid and binding obligation of the other parties thereto, (ii) is in full force and effect, and (iii) except as set forth in Schedule 5.13(c), may be transferred to the Buyers pursuant to this Agreement, without the consent of, or notice to, any third party.

(d)No Seller Party and, to the Seller Parties’ Knowledge, no other party to any of the Material Contracts, is in breach or default under, and, to the Seller Parties’ Knowledge, no event has occurred that, with notice or lapse of time, would constitute a breach or default or permit termination, modification or acceleration of, any of the Material Contracts, except for such breaches, defaults or events as to which requisite waivers have been, or prior to the Closing will have been, obtained or that would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.

5.14.Legal Proceedings.  Since December 31, 2004, there have been no claims, actions, proceedings or investigations pending or, to the Seller Parties’ Knowledge, threatened in writing against any Seller before any Governmental Entity, which (a) involve in the aggregate an amount greater than $100,000 or (b) if adversely determined would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.  Neither the Sellers, the Acquired Assets nor the Assumed Liabilities are subject to any outstanding judgments, rules, orders, writs, injunctions or decrees of any Governmental Authority relating specifically to the Sellers, the Acquired Assets or the Assumed Liabilities that would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.

5.15.Compliance with Permits and Laws.

(a)Each of the Sellers has all material permits, subdivision approvals, variances, licenses, franchises and other governmental authorizations, consents and approvals (other than with respect to Environmental Laws which are addressed in Section 5.10) (collectively, “Permits”) necessary to operate its respective businesses as presently conducted.

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Except as set forth in Schedule 5.15(a), no Seller has received any notification that it or the Site is in material violation of any Permits or Laws applicable to it or the Acquired Assets.  Each Seller and the Site is in material compliance with all Permits and Laws applicable to it or the Acquired Assets.

(b)Schedule 5.15(b) lists all Permits obtained by the Sellers in connection with the ownership or operation of the Wheatland Facility and the Site and all consent orders to which any Seller is subject.  The Seller Parties have provided or made available to the Buyers true, correct and complete copies of all Permits and consent orders.  All such Permits have become final and nonappealable and, except as would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, are valid and in full force and effect.

5.16.Regulation; Sole Purpose.

(a)Wheatland LLC is an “exempt wholesale generator” as defined by the Holding Company Act and is authorized by the FERC to sell electric energy at market-based rates pursuant to an approved rate schedule on file with the FERC.  The Wheatland Facility is an “eligible facility” as defined in the Holding Company Act.  Neither Seller is subject to regulation as a public utility, public service company or an electric company or similar entity subject to regulation by a Governmental Authority.

(b)Wheatland LLC has not conducted, and is not conducting, any business or operations, other than the development, construction, ownership, operation and maintenance of the Wheatland Facility, including the generation and sale of electric energy at wholesale from the Wheatland Facility, and the ownership of the Wheatland Owned Real Property.

5.17.Tax Matters.

(a)Except as set forth in Schedule 5.17, (i) all material Tax Returns required to be filed on or before the Closing Date, by or with respect to any Seller or any of the Acquired Assets, have been or will be timely filed on or before the Closing Date in all jurisdictions in which such Tax Returns are required to be filed; (ii) such Tax Returns are or will be true, correct, and complete in all material respects; and (iii) all Taxes shown to be due on such Tax Returns have been or will be timely paid in full.

(b)No statute of limitations of any jurisdiction regarding the assessment or collection of any Tax of either Seller or with respect to any of the Acquired Assets has been extended or waived, which extension or waiver remains in effect.

(c)There are no audits, claims, assessments, levies, administrative proceedings, or lawsuits pending, or to the Seller Parties’ Knowledge, threatened against either Seller or with respect to any of the Acquired Assets by any taxing authority.

(d)The Sellers have each qualified as, and been treated as, an entity disregarded as separate from its owner for federal, state and local income Tax purposes at all times since the date of its formation.

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(e)There are no Encumbrances for Taxes on any of the Acquired Assets, except for Permitted Encumbrances.

(f)To the Seller Parties’ Knowledge, no claim has ever been made by an authority in a jurisdiction where a Tax Return is not filed by, or with respect to, either Seller or any of the Acquired Assets, that either Seller or any of the Acquired Assets are or may be subject to taxation in that jurisdiction.

(g)The Sellers have each withheld and paid all material Taxes required to have been paid in connection with amounts paid or owing to any employee, independent contractor, creditor, member or other third party.

(h)True and complete copies of all Income Tax Returns filed by either Seller, or any Tax Returns (other than Income Tax Returns) filed with respect to any of the Acquired Assets, and all written communications to or from any taxing authority since January 1, 2003 have been made available to the Buyers for inspection.

(i)None of the assets of the Sellers (i) is required to be treated as “tax-exempt use property” within the meaning of section 168(h) of the Code, (ii) is subject to the provisions of section 168(f) of the Code, or (iii) directly or indirectly secures any debt the interest on which is tax exempt under section 103(a) of the Code.

5.18.Related Party Matters.  Except as set forth in Schedule 5.18, neither Seller is party to any agreement, contract, commitment, transaction or proposed transaction with any of its Affiliates.

5.19.Assets Other than Real Property Interests.

(a)Except as set forth in Schedule 5.19(a), each of the Seller Parties has good and valid title to all of its respective properties and assets constituting the Acquired Assets other than the Site (it being understood that the Site is covered by Section 5.8), in each case free and clear of all Encumbrances except any Permitted Encumbrances.

(b)All the material tangible personal property of the Sellers has been maintained in all material respects in accordance with the past practice of the Sellers and Good Utility Practice.  Each item of material tangible personal property of the Sellers is in all material respects in good working order, ordinary wear and tear excepted.  All leased personal property of the Sellers is in all material respects in the condition required of such property by the terms of the lease applicable thereto during the term of the lease and upon the expiration thereof.

(c)Other than the Acquired Assets and the Excluded Assets listed in clauses (a) through (g) of Section 2.2, none of the Seller Parties or their Affiliates owns any material assets relating to the Site or the Wheatland Facility.

5.20.Intellectual Property.  The Sellers own, or possess licenses or other valid rights to use, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, service mark rights, trade secrets, applications to register, and registrations for, the foregoing trademarks, service marks, know-how and other proprietary rights

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and information (collectively, the “Intellectual Property”) necessary in connection with the business of the Sellers as currently conducted, except where the failure to possess such rights or licenses or valid rights to use would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.  The conduct of the businesses of the Sellers as currently conducted does not infringe upon any Intellectual Property of any third party, except where such infringement would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.  No person is infringing upon any Intellectual Property of the Sellers, except where such infringement would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.  Except as set forth in Schedule 5.20, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the loss of, or any Encumbrance on, the rights of the Sellers with respect to the Intellectual Property owned or used by them, except where such loss or encumbrance would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect.

5.21.Due Diligence Materials.  All of the Due Diligence Materials that are photostatic, facsimile or electronic copies conform in all material respects with the original documents.

5.22.No Knowledge of Certain Conditions.  To the Seller Parties’ Knowledge, and assuming the accuracy of the Buyers’ representations and warranties in this Agreement, the parties’ compliance with their obligations under this Agreement, and the making or obtaining, as applicable, of the Buyers Required Regulatory Approvals, the Sellers Required Regulatory Approvals and any other third party consents contemplated herein, no condition or circumstance exists as of the date of this Agreement that will excuse the Seller Parties from their timely performance of their obligations under this Agreement.

5.23.Disclaimer of Other Representations and Warranties.

(a)EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V OR ELSEWHERE IN THIS AGREEMENT OR THE ANCILLARY AGREEMENTS, THE SELLER PARTIES MAKE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO THE ACQUIRED ASSETS, INCLUDING, WITHOUT LIMITATION, THE SITE OR THE WHEATLAND FACILITY, THE OPERATIONS OF THE WHEATLAND FACILITY, OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE WHEATLAND FACILITY OR THE ACQUIRED ASSETS, INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO THE ACTUAL OR RATED GENERATING CAPABILITY OF THE WHEATLAND FACILITY OR THE ABILITY OF THE BUYERS TO GENERATE OR SELL ELECTRICAL ENERGY.

(b)WITHOUT LIMITING THE FOREGOING, AND EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V OR ELSEWHERE IN THIS AGREEMENT OR THE ANCILLARY AGREEMENTS, THE SELLER PARTIES MAKE NO REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY, USAGE OR SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ACQUIRED ASSETS OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE OF SUCH PROPERTIES OR ASSETS WITH ANY LAWS, INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LAWS, OR AS TO THE CONDITION OF THE ACQUIRED ASSETS OR ANY PART THEREOF, OR AS TO THE ABSENCE OF

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HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ACQUIRED ASSETS.  ANY SUCH OTHER REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED.

(c)EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V OR ELSEWHERE IN THIS AGREEMENT OR THE ANCILLARY AGREEMENTS, THE ACQUIRED ASSETS ARE SOLD “AS IS, WHERE IS” ON THE CLOSING DATE, AND IN THEIR CONDITION ON THE CLOSING DATE “WITH ALL FAULTS.”

(d)WITHOUT LIMITING THE FOREGOING, EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT OR THE ANCILLARY AGREEMENTS, NO MATERIAL OR INFORMATION PROVIDED BY OR COMMUNICATIONS MADE BY THE SELLER PARTIES OR THE SELLER PARTIES’ REPRESENTATIVES, INCLUDING, WITHOUT LIMITATION, ANY INFORMATION OR MATERIAL CONTAINED IN THE DUE DILIGENCE MATERIALS OR IN THE INFORMATION MEMORANDUM, WILL CAUSE OR CREATE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE ACQUIRED ASSETS.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF THE BUYERS

The Buyers jointly and severally represent and warrant to the Seller Parties, except as set forth on the corresponding sections of the Buyers’ Schedules, as follows:

6.1.Organization.  PSI Energy is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana.  CG&E is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio.  Each of PSI Energy and CG&E has all requisite corporate power and authority to own, lease and operate its properties and to carry out its respective business as is now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary, except where the failure to have such power and authority, or to be so qualified or in good standing, would not individually or in the aggregate, be reasonably likely to prevent or materially delay or impair such Buyer’s ability to consummate the transactions contemplated by this Agreement.  The Buyers have made available to the Seller Parties complete and correct copies of their respective Articles of Incorporation and By-Laws, each as currently in effect.

6.2.Authority Relative to this Agreement.  Each of the Buyers has full corporate power and authority to execute and deliver this Agreement and, as of the Closing Date, will have full corporate power and authority to execute and deliver the Ancillary Agreements, as applicable, and to consummate the transactions contemplated hereby and thereby.  The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been, and, as of the Closing, the execution and delivery of the Ancillary Agreements and the consummation of the transactions contemplated thereby will have been, duly and validly authorized by the Boards of Directors of each of the Buyers, and no other corporate proceedings on the part of the Buyers are necessary to authorize this Agreement and, as of the Closing, the Ancillary Agreements, as applicable, or to consummate the transactions contemplated hereby or

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thereby.  This Agreement has been, and, as of the Closing, the Ancillary Agreements, as applicable, will have been, duly and validly executed and delivered by the Buyers, as applicable.  Assuming that this Agreement and, as of the Closing, the Ancillary Agreements constitute valid and binding agreements of the respective Seller Parties, subject to receipt of the Sellers Required Regulatory Approvals and the Buyers Required Regulatory Approvals, this Agreement constitutes, and the Ancillary Agreements will constitute, valid and binding agreements of the Buyers, enforceable against the Buyers in accordance with their respective terms, subject to the Bankruptcy and Equity Exception.

6.3.Consents and Approvals; No Violation.

(a)Other than obtaining the Sellers Required Regulatory Approvals and the Buyers Required Regulatory Approvals, neither the execution and delivery of this Agreement and, on the Closing Date, the Ancillary Agreements, as applicable, by the Buyers nor the purchase by the Buyers of the Acquired Assets pursuant to this Agreement or performance by the Buyers under this Agreement or the Ancillary Agreements, as applicable, will (i) conflict with or result in any breach of any provision of the respective Articles of Incorporation or By-Laws of the Buyers, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not, individually or in the aggregate, be reasonably likely to prevent or materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement, (iii) require any consent, approval or notice, or result in a default (with or without notice or lapse of time or both) (or give rise to any right of termination, cancellation or acceleration), under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which any of the Buyers or their respective Subsidiaries is a party or by which any of the Buyers or their respective Subsidiaries may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which, individually or in the aggregate, are not reasonably likely to prevent or materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement, or (iv) violate any Law or permit applicable to any of the Buyers, or their respective assets, which violation would, individually or in the aggregate, be reasonably likely to prevent or materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement.

(b)Except for (i) any filings or approvals under section 203 and section 205 the Federal Power Act (the “FERC Approvals”); (ii) the filings by the Buyers required by the HSR Act and the expiration or earlier termination of all waiting periods under the HSR Act; and (iii) subject to Section 11.16, (A) IURC approval of a certificate of public convenience and necessity (“CPCN”) and deferred ratemaking treatment for transaction costs, capital improvement costs, carrying costs and depreciation costs (i.e., return on and return of) associated with the Acquired Assets consistent with the Indiana Settlement Agreement and (B) any required approvals from the SEC under the Holding Company Act (the filings and approvals referred to in clauses (i) through (iii), collectively, the “Buyers Required Regulatory Approvals”), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any Governmental Entity is necessary for the consummation by the Buyers of the transactions contemplated hereby or by the Ancillary Agreements, other than such declarations, filings,

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registrations, notices, authorizations, consents or approvals which, if not obtained or made, are not reasonably likely to prevent or materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement.

(c)On or prior to the date hereof, the Buyers executed a settlement agreement with the IURC staff and the Indiana Office of Utility Consumer Counselor concerning both CPCN authority and ratemaking treatment regarding the Wheatland Facility, a copy of which is attached hereto as Exhibit E (the “Indiana Settlement Agreement”).

6.4.Availability of Funds.  Each Buyer has access to, and at the Closing will have available, sufficient funds to enable it to pay its portion of the Purchase Price on the terms and conditions of this Agreement.  The Buyers’ obligations hereunder are not subject to any conditions regarding the Buyers’ ability to obtain financing for the consummation of the transactions contemplated hereby.

6.5.Litigation.  There are no claims, actions, proceedings or investigations pending or, to the Buyers’ Knowledge, threatened against or relating to either Buyer before any Governmental Entity, which question, challenge the validity of, or are reasonably likely to have the effect of preventing, delaying, making illegal or otherwise interfering with, this Agreement or the Ancillary Agreements, the transactions contemplated herein or therein or any action taken or proposed to be taken by the Buyers pursuant hereto or thereto or in connection with the transactions contemplated herein or therein.

6.6.No Knowledge of Certain Conditions.  To the Buyers’ Knowledge, and assuming the accuracy of the Seller Parties’ representations and warranties in this Agreement, the parties’ compliance with their obligations under this Agreement, and the making or obtaining, as applicable, of the Buyers Required Regulatory Approvals, the Sellers Required Regulatory Approvals and any other third party consents contemplated herein, no condition or circumstance exists as of the date of this Agreement that will excuse the Buyers from their timely performance of their obligations under this Agreement.

6.7.         Due Diligence Investigation and Other Acknowledgements.

(a)Each of the Buyers acknowledges and agrees that it has conducted and is relying exclusively upon the Seller Parties’ representations and warranties in this Agreement and any Ancillary Agreement and its own inspections and investigation in order to satisfy itself as to the condition and suitability of the business, Inventories, assets, real and personal properties, Liabilities, results of operations, condition (financial or otherwise) and prospects of the Wheatland Facility and of the Acquired Assets.

(b)Each of the Buyers acknowledges and agrees that, except as provided in this Agreement and any Ancillary Agreement, the Seller Parties make no representations or warranties (express, implied, at common law, statutory or otherwise) with respect to the accuracy or completeness of the Information Memorandum or the Due Diligence Materials now, previously or hereafter made available to the Buyers in connection with this Agreement (including any description of the Wheatland Facility, revenue, price and expense assumptions, electricity demand forecasts or environmental information), or of any other information

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furnished to the Buyers or the Buyers’ Representatives by the Seller Parties or the Seller Parties’ Representatives.

6.8.Disclaimer of Other Representations and Warranties.  EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE VI OR THE ANCILLARY AGREEMENTS, THE BUYERS MAKE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED.

ARTICLE VII
COVENANTS OF THE PARTIES

7.1.Conduct of Business.

(a)Except as specifically contemplated in this Agreement, except as described in Schedule 7.1(a), except as required as a result of any change in Law, except with respect to the Excluded Assets, and except as necessitated by Good Utility Practices in circumstances where time does not permit the Seller Parties to obtain the prior written consent of the Buyers (in which case the Seller Parties shall notify the Buyers promptly after any such circumstance), during the period from the date of this Agreement to the Closing Date, each of the Sellers shall, and AESC shall cause each Seller to, operate its respective business in the usual, regular and ordinary course consistent with Good Utility Practice and shall use Commercially Reasonable Efforts to preserve intact its respective business and the goodwill and relationships with customers, suppliers, Governmental Entities, local communities and others having dealings with it.  Without limiting the generality of the foregoing, and, except as specifically contemplated in this Agreement, except as described in Schedule 7.1(a), except as required as a result of any change in Law, except with respect to the Excluded Assets, and except as necessitated by Good Utility Practices in circumstances where time does not permit the Seller Parties to obtain the prior written consent of the Buyers (in which case the Seller Parties shall notify the Buyers promptly after any such circumstance), prior to the Closing Date, without the prior written consent of the Buyers, which will not be unreasonably withheld or delayed, the Sellers shall not, and AESC shall not permit the Sellers to, directly or indirectly:

(i)amend their respective certificates of formation or limited liability company agreements;

(ii)(A) issue any new limited liability company interests in the Sellers; (B) grant any stock option, warrant or other right to purchase limited liability company interests in the Sellers; or (C) issue any security convertible into limited liability company interests in the Sellers;

(iii)(A) except for Permitted Encumbrances, create, incur, assume or suffer to exist any Indebtedness secured by, or any Encumbrances on, the Acquired Assets; or (B) assume, guarantee, endorse or otherwise become liable or responsible (whether directly or indirectly, contingently or otherwise) for the obligations of any Person;

(iv)make any material change in the levels of Inventory customarily maintained by the Sellers, other than consistent with Good Utility Practice;

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(v)sell, lease (as lessor), transfer or otherwise dispose of, any asset, other than assets used, consumed or replaced in the ordinary course of business consistent with past practice and Good Utility Practice;

(vi)terminate, extend, request or grant a waiver under, or otherwise amend, in any material respect, any Material Contract or Lease, or enter into any contract, agreement, commitment or arrangement which, had it been in effect as of the date hereof, would have constituted a Material Contract;

(vii)execute, enter into, terminate or otherwise amend, in any material respect, (A) any of the Permits or Environmental Permits, other than routine renewals or (B) any other agreement, order, decree or judgment relating to any current or new Permits or Environmental Permits;

(viii)enter into any power sales commitments other than those on customary terms and market pricing and that have terms that expire on or before November 20, 2005 or such other date that the parties mutually agree to be the date on which the Closing is expected to occur;

(ix)permit the Seller Parties or their Affiliates to (A) amend or cancel any liability or casualty insurance policies related to the Acquired Assets or (B) fail to maintain, by self insurance or with financially responsible insurance companies, insurance in such amounts and against such risks and losses as was in place as of the date of this Agreement and as is consistent with Good Utility Practice for the Acquired Assets;

(x)enter into any commitment or contract not addressed in clauses (i) through (ix) above that will be delivered or performed after the Closing, in an amount greater than $100,000;

(xi)acquire (including by merger, consolidation or acquisition of stock or assets) any Person or any division thereof or material portion of the assets thereof;

(xii)liquidate, dissolve or wind up either of the Sellers or commence a voluntary bankruptcy or similar proceeding in respect of either of the Sellers or appoint a custodian, receiver, liquidator or similar official or make an assignment for the benefit of creditors or admit in writing of its inability to pay its debts;

(xiii)make less than 100% of its Maintenance Expenditures, unless the projects associated with such expenditures are duly completed at a price below the cost indicated on Schedule 7.1(a)(xiii), or fail to make any capital expenditures required in accordance with Good Utility Practice;

(xiv)enter into any agreement or arrangement with any Affiliates other than such agreements and arrangements as are entered into in the ordinary course of business and which have been negotiated on an arm’s-length basis and are no less favorable to the Sellers than the Sellers would have obtained from an unaffiliated third party, and provided that the Sellers shall have notified the Buyers in writing prior to entering into

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any such Affiliate transactions and, further, that the termination date of any such agreement or arrangement shall be not later than the Closing Date;

(xv)take any action that alters the regulatory status of the Sellers, the Site or the Wheatland Facility;

(xvi)sell, lease, dispose of, transfer or otherwise convey Emission Allowances issued with respect to the Wheatland Facility, including the transfer of Emission Allowances to other accounts maintained by the Sellers or their Affiliates, except to the extent that such transfers do not result in a breach of the provisions of this Agreement with respect to the Emission Allowances to be transferred to the Buyers; provided that, in any event, if the Closing occurs prior to November 30, 2005, the Sellers shall transfer to the Buyers, in addition to the Emission Allowances to be transferred to the Buyers as set forth in Section 2.1(b)(viii), additional Emission Allowances sufficient for the Wheatland Facility to comply with the Indiana NOx Budget Program for NOx emissions occurring in 2005 up to and including the Closing Date; provided further, that if the Closing occurs on or after November 30, 2005, the Sellers shall not be obligated to transfer Emissions Allowances with a vintage year of 2005 to the Buyers to the extent necessary for the Sellers to comply with the Indiana NOx Budget Program with respect to the emissions from the Wheatland Facility; or

(xvii)enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the transactions set forth in the foregoing paragraphs (i) through (xvi).

(b)Except as specifically contemplated in this Agreement, except as described in Schedule 7.1(b), except as required as a result of any change in Law, except with respect to the Excluded Assets, and except as necessitated by Good Utility Practices in circumstances where time does not permit the Seller Parties to obtain the prior written consent of the Buyers (in which case the Seller Parties shall notify the Buyers promptly after any such circumstance), during the period from the date of this Agreement to the Closing Date, AESC shall, with respect to the Sellers and the Wheatland Facility only, operate its business in the usual, regular and ordinary course consistent with Good Utility Practice and shall, with respect to the Sellers and the Wheatland Facility only, use Commercially Reasonable Efforts to preserve intact its respective business and the goodwill and relationships with customers, suppliers, Governmental Entities, local communities and others having dealings with it.  Without limiting the generality of the foregoing, and, except as specifically contemplated in this Agreement, except as described in Schedule 7.1(b), except as required as a result of any change in Law, except with respect to the Excluded Assets, and except as necessitated by Good Utility Practices in circumstances where time does not permit the Seller Parties to obtain the prior written consent of the Buyers (in which case the Seller Parties shall notify the Buyers promptly after any such circumstance), prior to the Closing Date, without the prior written consent of the Buyers, which will not be unreasonably withheld or delayed, AESC shall not, and shall not permit the Sellers or any of their Affiliates to, directly or indirectly:

(i)make any change in the compensation payable or to become payable to any of the Sellers’ Employees (other than normal recurring adjustments of salaries and

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wages payable to the Sellers’ Employees, which adjustments are in the ordinary course of business consistent with past practice);

(ii)enter into or amend any employment, severance, change in control, retention, consulting, termination or other compensation-related agreement or arrangement with or with respect to, or make any loan or advance to, any of the Sellers’ Employees, except for loans permitted under any 401(k) plan sponsored by any ERISA Affiliate in which the Sellers’ Employees participate;

(iii)(A) pay or make any accrual or arrangement for payment of any pension, profit-sharing, retirement allowance or other employee benefit pursuant to any existing plan, agreement, policy or arrangement to any of the Sellers’ Employees, except to the extent AESC or the Sellers are obligated to do so on the date hereof, (B) adopt or pay, grant, issue, accelerate or accrue salary or other payments or benefits pursuant to any pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, termination, severance pay, retention, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any of the Sellers’ Employees, except to the extent AESC or the Sellers are obligated to do so on the date hereof, or (C) amend in any material respect any existing employee benefit plan, agreement or arrangement in a manner inconsistent with the foregoing, except as required by applicable Law;

(iv)hire any new employee to provide services in connection with the businesses of the Sellers with an annual salary in excess of $50,000 or terminate the employment of any such employee other than for cause, or engage any additional consultants or independent contractors or enter into or extend the term of any consulting or independent contractor relationship;

(v)encumber, mortgage, pledge, lease, transfer or otherwise dispose of the AESC Transferred Assets;

(vi)take any action which alters the regulatory status of the Sellers;

(vii)(A) change any financial or Tax accounting methods, policies or practices of either Seller or with respect to any of the Acquired Assets, except as required under GAAP, (B) make, revoke or amend any Tax election of either Seller or with respect to any of the Acquired Assets, (C) file any amended Tax Return of either Seller or with respect to any of the Acquired Assets, (D) enter into any closing agreement affecting any material Tax liability or refund of either Seller or with respect to any of the Acquired Assets, (E) settle or compromise any material Tax liability or refund of either Seller or with respect to any of the Acquired Assets, or (F) extend or waive the application of any statute of limitations regarding the assessment or collection of any Tax of either Seller or with respect to any of the Acquired Assets;

(viii)terminate, extend, request or grant a waiver under, or otherwise amend, in any material respect, any Material Contract or Lease, or enter into any contract,

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agreement, commitment or arrangement which, had it been in effect as of the date hereof, would have constituted a Material Contract; or

(ix)enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the transactions set forth in the foregoing paragraphs (i) through (viii).

7.2.Access to Information.

(a)Between the date of this Agreement and the Closing Date, the Seller Parties will, during ordinary business hours and upon reasonable notice, (i) give the Buyers and the Buyers’ Representatives reasonable access to all books, records, personnel, plants, offices and other facilities and properties of the Seller Parties (limited, in the case of AESC, to the extent they pertain to the Sellers or otherwise relate directly to this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby), (ii) permit the Buyers and the Buyers’ Representatives to make such reasonable inspections thereof as the Buyers may reasonably request, (iii) furnish the Buyers and the Buyers’ Representatives with such financial and operating data and other information regarding the Wheatland Facility as the Buyers may from time to time reasonably request; provided, however, that the Seller Parties will not be required to create special reports or perform any studies, and (iv) furnish the Buyers a copy of each material report, schedule or other document filed or received by it with or from the SEC, FERC or any other Governmental Entity with respect to the Wheatland Facility; provided, however, that (A) any such investigation shall be conducted in such manner as not to unduly interfere with the operation of the Seller Parties’ respective businesses and operations, (B) none of the Seller Parties shall be required to take any action which would constitute a waiver of the attorney-client privilege, and (C) none of the Seller Parties need supply the Buyers with any information which such Person is under a legal obligation not to supply.  Notwithstanding anything in this Section 7.2 to the contrary, (x) the Seller Parties will only furnish copies of or provide such access to Transferring Employee Records and any other personnel, medical and benefits records to the extent allowed by Law, and (y) the Buyers shall not have the right to perform or conduct any environmental sampling or testing at, in, on or underneath any property or facility or real estate owned by any of the Seller Parties.

(b)Until the Closing Date, all information furnished to or obtained by the Buyers and the Buyers’ Representatives pursuant to this Section 7.2 or the Ancillary Agreements shall be subject to the provisions of the Confidentiality Agreement.  At the Closing, the Seller Parties shall execute a confidentiality and non-use agreement (the “Sellers Confidentiality Agreement”) on substantially similar terms to the Confidentiality Agreement which shall require the Seller Parties to maintain the confidentiality of all information related to the Acquired Assets and the Assumed Liabilities for a period of five years from the Closing Date.  Promptly following the date hereof, the Seller Parties shall request, if they have not previously done so, the return or destruction of all non-public information provided by the Seller Parties or their Affiliates or the Seller Parties’ Representatives prior to the date hereof to other potential purchasers of the Acquired Assets in connection with a confidentiality agreement executed in connection with such a potential sale of the Acquired Assets.

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(c)For a period of seven years after the Closing Date, each of the parties hereto shall have reasonable access to all of the books and records of the other parties (limited, in the case of AESC, to the extent they pertain to the Sellers or the Acquired Assets and, in the case of the Buyers, to the extent they pertain to the Acquired Assets, or, in either case, to the extent otherwise related to this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby), including all Transferring Employee Records, to the extent that such access may reasonably be required by such party.  Such access shall be afforded by the party or parties in possession of such books and records upon receipt of reasonable advance notice and during normal business hours.  The party or parties exercising this right of access shall be solely responsible for any costs or expenses incurred by it or them pursuant to this Section 7.2(c).  If the party or parties in possession of such books and records shall desire to dispose of any such books and records upon or prior to the expiration of such seven-year period, such party or parties shall, prior to such disposition, give the other party or parties a reasonable opportunity, at such other party’s or parties’ expense, to segregate and remove such books and records as such other party or parties may select.

(d)AESC agrees not to release any Person (other than the Buyers) from any confidentiality agreement now existing with respect to the Sellers or the transactions contemplated hereby, or waive or amend any provision thereof.  From and after the Closing, AESC shall assign to the Buyers (or, if assignment is not permitted, enforce for the benefit of the Buyers) any such existing confidentiality agreements with other potential purchasers in connection with a potential sale of, or other transaction relating to, the Sellers; provided, however, that AESC will not be obligated to assign any existing confidentiality agreement if such confidentiality agreement contemplates, in addition to a transaction relating to the Sellers, the consummation of other potential transactions with AESC or any of its Affiliates and instead AESC will enforce such confidentiality agreement for the benefit of the Buyers to the extent it relates to a potential sale of, or other transaction relating to, the Sellers or the Acquired Assets.

7.3.Expenses.  Except as set forth in Section 7.9 and as otherwise specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such costs and expenses, except that (i) the fee payable in connection with the filing required by the HSR Act shall be shared one-half by the Seller Parties and one-half by the Buyers and (ii) the premium for the Title Policy, including the costs of any endorsements, and the cost of the Survey shall be paid solely by the Seller Parties.

7.4.Further Assurances.  Subject to the terms and conditions of this Agreement, each of the parties hereto will use Commercially Reasonable Efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the sale of the Acquired Assets pursuant to this Agreement, including, without limitation, using Commercially Reasonable Efforts to ensure satisfaction of the conditions precedent to each party’s obligations hereunder.  None of the parties hereto will, without prior written consent of the other parties, except as contemplated by this Agreement, take or fail to take any action, which would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement.  From time to time after the date hereof, without further consideration, each party shall, at its own expense, execute and deliver such and take such further actions as may reasonably be requested

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by the other party in order to consummate the transactions contemplated by this Agreement in accordance with the terms hereof.

7.5.Public Statements.  Prior to the Closing, the parties shall consult with each other prior to issuing any public announcement, statement or other disclosure with respect to this Agreement or the Ancillary Agreements or the transactions contemplated hereby or thereby and shall not issue any such public announcement, statement or other disclosure prior to such consultation, except as may be required by Law or by any securities exchange and except that the parties may make public announcements, statements or other disclosures with respect to this Agreement and the transactions contemplated hereby to the extent and under the circumstances in which the parties are expressly permitted by the Confidentiality Agreement to make disclosures.

7.6.Consents and Approvals; Other Obligations.

(a)The Seller Parties and the Buyers shall cooperate and consult with each other and keep each other informed of the status and (i) prepare and file all necessary documentation and (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, in each case, to obtain as promptly as practicable all necessary consents, approvals and authorizations of all Persons (other than any Governmental Entity) necessary or advisable to consummate the transactions contemplated by this Agreement or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which any of the Seller Parties or the Buyers are a party or by which any of them is bound.

(b)As promptly as practicable after the date hereof, the Seller Parties or their Affiliates and the Buyers (or the ultimate parent entity of the Buyers, if necessary) shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby.  The parties shall consult with each other as to the appropriate time of filing such notifications and shall use Commercially Reasonable Efforts to make such filings at the agreed upon time, to respond promptly to, and consult with each other with respect to, any requests for additional information made by either of such agencies, and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing.

(c)The Seller Parties and the Buyers shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in jurisdictions in which a portion of the Purchase Price may be required to be withheld pursuant to such state and local Tax Law.

(d)The Seller Parties, at their sole expense, will use all Commercially Reasonable Efforts to cause the transactions contemplated by this Agreement to be permitted, as of the Closing, under the Existing Debt Documents.  In addition, the Seller Parties, at their sole expense, will timely seek, and will use all Commercially Reasonable Efforts to obtain, the release of Allegheny Energy, Inc. or its Affiliates from the guarantees and other security obligations with respect to the Wheatland Facility set forth on Schedule 7.6(d) (the “Support

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Obligations”).  The Buyers will use Commercially Reasonable Efforts to arrange for the Seller Parties and their Affiliates to be released, as of the Closing, from their obligations under the Support Obligations, including by providing any substitute guarantee or other security in like amount, if necessary.  If the Buyers and the Seller Parties are not successful in obtaining such releases of the Support Obligations prior to the Closing, then the Buyers shall indemnify and hold the Seller Parties and their Affiliates harmless from any claims made against the Seller Parties or their Affiliates with respect to the Wheatland Facility that are attributable to the period on or after the Closing Date or are otherwise in respect of Assumed Liabilities.

7.7.Regulatory Approvals.

(a)The Seller Parties and the Buyers shall cooperate and consult with each other and keep each other informed of the status and (i) prepare and file all necessary documentation and (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, in each case, to obtain as promptly as practicable all necessary consents, approvals and authorizations of all Governmental Entities (including, without limitation, the Sellers Required Regulatory Approvals and the Buyers Required Regulatory Approvals) or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which any of the Seller Parties or the Buyers are a party or by which any of them is bound.  The parties hereto have exchanged, and agreed to, drafts of the joint application to be filed with the FERC under section 203 of the Federal Power Act related to this Agreement and the transactions contemplated hereby, and of the application to be filed by the Buyers with the FERC under section 205 of the Federal Power Act related to this Agreement and the transactions contemplated hereby, and such agreed drafts will be filed with the FERC on or about May 6, 2005.  Each of the Seller Parties and the Buyers shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this Agreement which appear in any filing made in connection with the transactions contemplated hereby.

(b)The Buyers have retained and will use, at their expense, a qualified economist to prepare any analyses necessary to support such application.

(c)The Buyers will use Commercially Reasonable Efforts to obtain SEC approval pursuant to the Holding Company Act in parallel with all required FERC and state regulatory approvals.

7.8.Fees and Commissions.  The Seller Parties and the Buyers each represent and warrant to the other that except for Banc of America Securities LLC, which is acting for and at the expense of the Seller Parties, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder’s fees in connection with the transactions contemplated hereby.  The Seller Parties shall be solely responsible for paying all fees or commissions of Banc of America Securities LLC.

7.9.Tax Matters.

(a)Notwithstanding any other provision of this Agreement, all applicable sales, transfer, use, stamp, conveyance, value added, recording, excise, and other similar Taxes,

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if any, together with all recording or filing fees, notarial fees and other similar costs of Closing, that may be imposed upon, or payable, collectible or incurred in connection with the transfer of the Acquired Assets to the Buyers or otherwise as a result of the transfer of the Acquired Assets (“Transfer Taxes”) shall be borne solely by the Buyers.  The Buyers, at their own expense, will file, to the extent required by applicable Law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and if required by applicable Law, the Seller Parties will join in the execution of any such Tax Returns or other documentation.

(b)With respect to Taxes to be prorated in accordance with Section 3.4, the Buyers shall prepare and timely file all Tax Returns required to be filed after the Closing with respect to the Acquired Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns.  The Buyers’ preparation of any such Tax Returns that are material shall be subject to the Seller Parties’ approval, which shall not be unreasonably withheld, conditioned or delayed.  The Buyers shall make such Tax Returns available for the Seller Parties’ review and approval not later than 15 Business Days prior to the due date for filing such Tax Return and shall make such changes as are reasonably requested by the Seller Parties.  Within 10 Business Days after the Buyers’ payment of such Taxes, the Seller Parties shall pay to the Buyers, or the Buyers shall pay to the Seller Parties, as appropriate, the difference between (i) the Seller Parties’ proportionate share of the amount shown as due on such Tax Return determined in accordance with Section 3.4 and (ii) the amount paid by the Seller Parties at the Closing Date pursuant to Section 4.3(l).

(c)Each of the Buyers and the Seller Parties shall provide the other with such assistance as may reasonably be requested in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to Liability for Taxes, and each will retain and provide the requesting parties with any records or information that may be relevant to such return, audit, or examination, proceedings or determination.  Any information obtained pursuant to this Section 7.9(c) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other schedule relating to Taxes shall be kept confidential by the parties hereto.

(d)The Buyers shall remit to the Seller Parties any refund or credit of Taxes, if and when actually received by the Buyers, to the extent such Taxes are attributable to any taxable period, or portion thereof, ending on or before the Closing Date.

(e)Any payment by the Buyers or the Seller Parties to the other pursuant to this Section 7.9 shall be treated for all purposes by both parties as an adjustment to the Purchase Price, to the maximum extent permitted by Law.

(f)In the event that the Buyers and the Seller Parties disagree as to the amount or calculation of any payment to be made under this Agreement relating to Taxes, or the interpretation or application of any provision under this Agreement relating to Taxes, the parties shall attempt in good faith to resolve such dispute.  If such dispute is not resolved within 60 days following the commencement of the dispute, the Buyers and the Sellers shall jointly retain the Independent Accounting Firm to resolve the dispute; provided, however, that neither party shall be entitled to dispute any individual Tax item that involves an amount of less than $25,000.  The

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Independent Accounting Firm shall act as an arbitrator to resolve all points of disagreement and its decision shall be final and binding upon all parties involved.  Following the decision of the Independent Accounting Firm, the Buyers and the Seller Parties shall each take or cause to be taken any action necessary to implement the decision of the Independent Accounting Firm.  The fees and expenses relating to the Independent Accounting Firm shall be borne fifty percent (50%) by the Buyers and fifty percent (50%) by the Seller Parties.

7.10.Employees.

(a)Not later than 15 days prior to the Closing Date, the Buyers will offer employment to each of the Sellers’ Employees that is actively employed with any of the Seller Parties or their Affiliates immediately prior to the Closing Date, on such terms and conditions as the Buyers may determine in their sole discretion.  Each such offer of employment shall be made contingent upon the Sellers’ Employees passing the Buyers’ standard screening procedures, which include drug screening and background checks.  The Seller Parties shall cooperate with the Buyers’ reasonable requests for access to the Sellers’ Employees for purposes of making employment offers.  Each of the Sellers’ Employees who passes the Buyers’ standard screening procedures, accepts the Buyers’ offer of employment and actually commences work with the Buyers or their Affiliates shall be a “Buyers’ Employee” for purposes of this Agreement upon the later of the Closing Date or the commencement of such Sellers’ Employee’s active employment with the Buyers.  Except as required by Law, neither the Buyers nor their Affiliates shall be required to continue the employment of any Buyers’ Employee for any period of time, each such employee shall be an at-will employee, and the employment of any Buyers’ Employee may be terminated in the Buyers’ sole discretion at any time in accordance with applicable Law.

(b)With respect to each Buyers’ Employee, effective as of 12:01 a.m. on the date such employee becomes a Buyers’ Employee, such Buyers’ Employee shall cease to participate in the employee welfare benefit plans (as such term is defined in ERISA) maintained or sponsored by the Sellers or their Affiliates (the “Prior Welfare Plans”), except as may be required under COBRA, and shall, if applicable, commence to participate in welfare benefit plans of the Buyers or their Affiliates (the “Replacement Welfare Plans”).  The Buyers shall use reasonable efforts (i) to waive all limitations as to pre-existing condition exclusions and waiting periods with respect to the Buyers’ Employees under the Replacement Welfare Plans, other than, but only to the extent of, limitations or waiting period that were in effect with respect to such employee under the Prior Welfare Plans and that have not been satisfied as of the Closing Date, and (ii) to provide the Buyers’ Employees with credit for any co-payments and deductibles paid prior to the Closing Date in satisfying any deductible or out of pocket requirements under the Replacement Welfare Plan (on a pro rata basis in the event of a difference in plan years).  With respect to each Buyers’ Employee (including any beneficiary or the dependant thereof), the Seller Parties shall retain all liabilities and obligations arising under any Prior Welfare Plan whether arising on, prior to or following the Closing Date.

(c)Effective not later than the date a Sellers’ Employee becomes a Buyers’ Employee, the Seller Parties shall cause such Buyers’ Employee to cease to participate in the Benefit Plans, except as may be required under COBRA, and the Buyers shall cause such employee if applicable and to the extent that such employee satisfies any applicable conditions and requirements, to commence participation in certain of the employee benefit plans, programs

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and fringe benefit plans, programs and fringe benefit arrangements of the Buyers (“Buyers Benefit Plans”).  The Buyers’ Employees shall be given years of service credit, solely for purposes of eligibility for vacation allotment and not for (i) eligibility for any other purpose, (ii) vesting, (iii) benefit accrual, (iv) service related to benefit level or (v) any other purpose, for all service with the Sellers under the Buyers Benefit Plans, if any, in which they become participants to the same extent such employees were credited with service under comparable Benefit Plans.  Neither the Buyers nor their Affiliates shall assume any Benefit Plan, including, without limitation, any severance plan, policy, program, agreement or arrangement of the Seller Parties or any of their Affiliates, nor, except to the extent otherwise provided in subsection (d) below, shall there be any transfer of assets or Liabilities of any Benefit Plan to any Buyers Benefit Plans.  No provision of this Agreement shall be construed to limit the authority of the Buyers or their Affiliates to discontinue, suspend or modify any particular benefit or compensation plan or program provided to the Buyers’ Employees at any time, or to terminate employment of any Buyers Employees at any time after the Closing Date.

(d)The Buyers will, with respect to any 401(k) plan of the Seller Parties or their ERISA Affiliate in which any of the Sellers’ Employees participates, take all necessary action to cause the trustee of any defined contribution plan of the Buyers or any of the Buyers’ ERISA Affiliates in which a Sellers’ Employee becomes a participant to, if elected by the Sellers’ Employee, accept a direct “rollover” of the employee’s “eligible rollover distribution,” as such terms are defined in Code section 401(a)(31), in cash, but solely to the extent such distribution is allowable by applicable Law and satisfies the requirements for such a rollover pursuant to applicable Law.

(e)The Seller Parties or their Affiliates (and not the Buyers or their Affiliates) shall be responsible for any and all Liabilities attributable to the Sellers’ Employees, including without limitation, any and all Liabilities arising out of or resulting from any claim by any Sellers’ Employee which arises under any Law (including, without limitation, any claims for wrongful discharge or otherwise), or under any policy, agreement, understanding or promise, written or oral, formal or informal, between the Seller Parties or any of their Affiliates and the Sellers’ Employee, whether arising out of actions, events or omissions that occurred (or, in the case of omissions, failed to occur) before, on or after, the Closing Date), other than Liabilities attributable to any Buyers’ Employees in respect of the period after the Closing Date (or such later date as the individual becomes a Buyers’ Employee).  Without limiting the generality of the preceding sentence, the Seller Parties shall be responsible for satisfying continuation coverage provisions under section 4980B of the Code and sections 601-608 of ERISA with respect to any Sellers’ Employee (including any Sellers’ Employee that becomes a Buyers’ Employee) and any eligible spouse or dependent who experiences a “qualifying event,” as defined in Code section 4980B(f)(3), on or before the Closing Date.  The Seller Parties shall pay to each Buyers’ Employee on or before the Closing Date (or such later date as the individual becomes a Buyers’ Employee) all sums such Buyers’ Employee is due as of such date for any accrued but unpaid salary and wages, including, without limitation, accrued but unpaid vacation days, personal days, and expense reimbursements.  In addition, the Seller Parties shall be solely responsible for any and all severance payments or benefits arising under any Benefit Plan, or otherwise with respect to the transactions contemplated by this Agreement, and the Buyers shall have no Liabilities with respect thereto.

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(f)Nothing contained in this Section 7.10, whether express or implied, is intended to confer upon any Sellers’ Employee or former employee of any of the Seller Parties or their Affiliates or any Buyers’ Employee any right or remedy, including, without limitation, any right as a third-party beneficiary.

(g)Effective as of the Closing Date, the Sellers shall pay to each Buyer’s Employee who was a participant in the Annual Incentive Plan of any of the Seller Parties the annual bonus that such employee would have received had such employee remained employed with any of the Seller Parties until the last day of the plan year, prorated to reflect a partial plan year ending as of the Closing Date and based on such other assumptions as the Seller Parties reasonably need to make to calculate such bonuses.

7.11.Risk of Loss.

(a)From the date hereof through the Closing Date, all risk of loss or damage to the Acquired Assets shall be borne by the Seller Parties, except that loss or damage caused by the acts or omissions of the Buyers or the Buyers’ Representatives will be the responsibility of the Buyers.

(b)If, before the Closing Date, all or any portion of the Acquired Assets is (i) condemned or taken by eminent domain or is the subject of a pending or, to the Seller Parties’ Knowledge, contemplated taking which has not been consummated, or (ii) materially damaged or destroyed by fire or other casualty, then the Seller Parties shall notify the Buyers promptly in writing of such fact.  If that condemnation, taking, damage, or destruction results in the failure of any condition in Sections 8.1 or 8.2 to be met or results in a Material Adverse Effect, then the Buyers may terminate this Agreement.  Unless the Buyers terminate this Agreement pursuant to the foregoing sentence, (x) in the case of a condemnation or taking, the Seller Parties shall assign or pay, as the case may be, any net proceeds thereof to the Buyers at the Closing, and (y) in the case of a fire or other casualty, the Seller Parties shall either restore such damage or assign the insurance proceeds therefor to the Buyers at the Closing.

7.12.Tax Clearance Certificates.  The parties hereto shall use Commercially Reasonable Efforts to obtain from any taxing authority any certificate, permit, license, or other document necessary to mitigate, reduce or eliminate any Taxes (including additions thereto or interest and penalties thereon) that otherwise would be imposed with respect to the transactions contemplated in this Agreement.

7.13.Non-Use of Allegheny Marks After the Closing.

(a)The Allegheny Marks appear on some of the Acquired Assets, including on signage at the Wheatland Facility, and on supplies, materials, stationery, brochures, advertising materials, manuals and similar consumable items.  The Buyers acknowledge and agree that they do not have and, upon consummation of the transactions contemplated by this Agreement, will not have, any right, title, interest, license or other right to use the Allegheny Marks.

(b)The Buyers will (i) within 60 days after the Closing Date, remove the Allegheny Marks from, or cover or conceal the Allegheny Marks on, the Acquired Assets,

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including signage at the Wheatland Facility, and provide written verification thereof to the Seller Parties promptly after completing such removal, (ii) within 14 days after the Closing Date, return or destroy (with proof of destruction) all other Acquired Assets that contain any Allegheny Marks that are not removable, and (iii) within 30 days after the Closing Date, submit notifications or amendments with respect to any Permits or Environmental Permits that use any Allegheny Marks.

(c)Each Buyer agrees never to challenge Allegheny Energy, Inc.’s or its Affiliates’ ownership of the Allegheny Marks or any application for registration thereof or any registration thereof or any rights of the Seller Parties or their Affiliates therein as a result, directly or indirectly, of its ownership of the Acquired Assets.

(d)The Buyers will not will conduct any business or offer any goods or services under any Allegheny Marks, except as expressly permitted during the transaction period pursuant to Section 7.13(b) or as permitted pursuant to Allegheny Energy, Inc.’s written consent.

(e)No Buyer will send, or cause to be sent, any correspondence or other materials to any Person on any stationery that contains any Allegheny Marks or otherwise operate Wheatland Facility in any manner that would or might reasonably be expected to confuse any Person into believing that such Buyer has any right, title, interest or license to use any Allegheny Marks.

7.14.Insurance.  The Buyers acknowledge that, after the Closing, the Acquired Assets shall not be covered by any insurance policy in respect of fire, liability, worker’s compensation or otherwise maintained by the Seller Parties or any of their Affiliates.  Accordingly, the parties agree that the Buyers shall be responsible for procuring insurance in respect of the Acquired Assets after the Closing Date.

7.15.No Solicitation.  From the date hereof through the Closing, none of the Seller Parties, their Affiliates nor the Sellers’ Representatives (including, without limitation, investment bankers, attorneys and accountants) shall, directly or indirectly, enter into, solicit, initiate or continue any discussions or negotiations with, or encourage or respond to any inquiries or proposals by, or participate in any negotiations with, or provide any information to, or otherwise cooperate in any other way with, any Person or group, concerning any sale of all or a portion of the Acquired Assets, the Sellers or any equity interest therein, or any merger, consolidation, liquidation, dissolution or similar transaction involving the Sellers (each such transaction being referred to herein as a “Proposed Acquisition Transaction”) other than with the Buyers, their Affiliates and the Buyers’ Representatives.  None of the Seller Parties shall, directly or indirectly, through any Affiliate, officer, director, employee, Sellers’ Representative or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person (including, without limitation, a “person” as defined in Section 13(d)(3) of the Exchange Act) relating to any Proposed Acquisition Transaction.  The Seller Parties represent that they are not now engaged in discussions or negotiations with any Person other than the Buyers with respect to a Proposed Acquisition Transaction.

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7.16.Notifications.

(a)Subject to the terms and conditions of this Agreement, each of the parties will use Commercially Reasonable Efforts to (i) promptly notify the other parties of (A) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate as so qualified in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect, (B) the failure by it to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, and (C) any change or event which, individually or in the aggregate, has had a material adverse effect on the Buyers or a Material Adverse Effect; and (ii) promptly provide the other party with copies of all filings made by such party or any Affiliates thereof with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby.

(b)The Seller Parties will, from time to time prior to the Closing (but no more than once in any 30-day period), promptly supplement or amend any of the Seller Parties’ Schedules relating to Article V with respect to any matter that existed as of the date of this Agreement and should have been set forth or described in such Schedule.  If the matters disclosed on such supplemented or amended Schedules would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, then the Buyers may elect to terminate this Agreement within 15 days after receipt of the supplemented or amended Schedule, by providing written notice thereof to the Seller Parties.  If the Buyers elect to terminate this Agreement pursuant to this Section 7.16(b), then the Seller Parties will have a 20-day period to cure the event causing the amended or supplemented Schedule, provided that, if so cured within such 20-day period, this Agreement shall not be terminated.  No disclosure by the Seller Parties pursuant to this Section 7.16(b), however, will be deemed to amend or supplement any of the Seller Parties’ Schedules, to have qualified the representations and warranties contained in this Agreement or to have reduced or limited in any way the indemnification obligations of the Seller Parties pursuant to Article IX, unless the Buyers expressly consent to such supplement in writing.

(c)The Seller Parties will, from time to time prior to the Closing (but no more than once in any 30-day period), promptly supplement or amend any of the Seller Parties’ Schedules relating to Article V with respect to any matter arising after the date of this Agreement, which, if existing as of the date of this Agreement, would have been required to be set forth or described in such Schedule in order to make any representation or warranty set forth in this Agreement true and correct as of such date.  If the matters disclosed on such supplemented or amended Schedules would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, then the Buyers may elect to terminate this Agreement, within 15 days after receipt of the supplemented or amended Schedules, by providing written notice thereof to the Seller Parties; provided, however, that if the Buyers do not exercise such right to terminate this Agreement within such 15-day period, then (i) the Buyers will be deemed to have forever waived any right to terminate this Agreement based upon such supplement or amendment, except when considered in the aggregate with subsequent supplements or amendments, (ii) the Buyers will be deemed to have accepted such supplement or amendment, subject to (and in no way limiting) the Buyers’ right to receive the indemnity set forth in the last

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sentence of this Section 7.16(c), and (iii) such supplement or amendment will be deemed to supplement or amend the Sellers’ Schedules, subject to (and in no way limiting) the Buyers’ right to receive the indemnity set forth in the last sentence of this Section 7.16(c).  If the Buyers elect to terminate this Agreement pursuant to this Section 7.16(c), then the Seller Parties will have a 20-day period to cure the event causing the amended or supplemented Schedule, provided that, if so cured within such 20-day period, this Agreement shall not be terminated.  In the event the Closing occurs, the Seller Parties shall indemnify the Buyers for all Liabilities associated with or arising out of the matters disclosed in any supplemented or amended Schedules delivered pursuant to this Section 7.16(c) in accordance with Article IX.

(d)The Buyers will, from time to time prior to the Closing (but no more than once in any 30-day period), promptly supplement or amend any of the Buyers’ Schedules relating to Article VI with respect to any matter that existed as of the date of this Agreement and should have been set forth or described in such Schedule.  If the matters disclosed on such supplemented or amended Schedule would, individually or in the aggregate, be reasonably likely to prevent, materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement, then the Seller Parties may elect to terminate this Agreement within 15 days after receipt of the supplemented or amended Schedule, by providing written notice thereof to the Buyers.  If the Seller Parties elect to terminate this Agreement pursuant to this Section 7.16(d), then the Buyers will have a 20 day period to cure the event causing the amended or supplemented Schedule, provided that, if so cured within such 20-day period, this Agreement shall not be terminated.  No disclosure by the Buyers pursuant to this Section 7.16(d), however, will be deemed to amend or supplement any of the Buyers’ Schedules, to have qualified the representations and warranties contained in this Agreement or to have reduced or limited in any way the indemnification obligations of the Buyers pursuant to Article IX, unless the Seller Parties expressly consent to such supplement in writing.

(e)The Buyers will, from time to time prior to the Closing (but no more than once in any 30-day period), promptly supplement or amend any of the Buyers’ Schedules relating to Article VI with respect to any matter arising after the date of this Agreement, which, if existing as of the date of this Agreement, would have been required to be set forth or described in such Schedule in order to make any representation or warranty set forth in this Agreement true and correct as of such date.  If the matters disclosed on such supplemented or amended Schedule would, individually or in the aggregate, be reasonably likely to prevent, materially delay or impair the Buyers’ ability to consummate the transactions contemplated by this Agreement, then the Seller Parties may elect to terminate this Agreement, within 15 days after receipt of the supplemented or amended Schedule, by providing written notice thereof to the Buyers; provided, however, that if the Seller Parties do not exercise such right to terminate this Agreement within such 15-day period, then (i) the Seller Parties will be deemed to have forever waived any right to terminate this Agreement based upon such supplement or amendment, except when considered in the aggregate with subsequent supplements or amendments, (ii) the Seller Parties will be deemed to have accepted such supplement or amendment, and (iii) such supplement or amendment will be deemed to supplement or amend the Buyers’ Schedules.  If the Seller Parties elect to terminate this Agreement pursuant to this Section 7.16(e), then the Buyers will have a 20-day period to cure the event causing the amended or supplemented Schedule, provided that, if so cured within such 20-day period, this Agreement shall not be terminated.

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(f)Together with any supplement or amendment to the Schedules pursuant to this Section 7.16, the party delivering such supplement or amendment shall also deliver supplementary material, and any other explanatory material with respect to such amendment or supplement as reasonably requested by any other party, to the other parties (the “Reviewing Parties”).  Notwithstanding any other provision in this Agreement, and regardless of whether the conditions to the Closing in Article VIII have been satisfied or waived, in no event shall the Closing occur during the 15-day review period granted to the Reviewing Parties as provided in this Section 7.16 without the written consent of the Reviewing Parties.

7.17.Notice of Allocation of Acquired Assets.  The Buyers shall deliver to the Seller Parties, no later than four Business Days prior to the expected Closing Date, a written notice indicating the respective ownership percentage of each of PSI Energy and CG&E with respect to the Acquired Assets and Assumed Liabilities as of the Closing.  The parties hereto agree to use Commercially Reasonable Efforts to prepare the Ancillary Agreements to reflect the ownership percentages contained in such notice.

7.18.Post-Closing Start-Up.

(a)In the event that the Buyers conduct a start-up (other than a Sellers-Initiated Start-Up) of the Wheatland Facility (a “Buyers-Initiated Start-Up”) within three months after the Closing Date, the Buyers shall give the Seller Parties written notice at least three days, or such shorter period as may be reasonably be required under the circumstances, prior to the planned date of the first Buyers-Initiated Start-Up, and the Buyers shall allow up to two individuals who are Seller Parties’ Representatives to attend the first Buyers-Initiated Start-Up in order to observe the operation of the Wheatland Facility.  The Seller Parties shall solely be observers of the Buyers-Initiated Start-Up and shall have no authority with respect to the operational parameters of any Buyers-Initiated Start-Up.  The Buyers shall be solely responsible for all costs related to any Buyers-Initiated Start-Up.

(b)Within 30 days after the Closing Date, the Seller Parties may deliver a written notice to the Buyers requesting that the Buyers initiate one start-up of the Wheatland Facility (a “Sellers-Initiated Start-Up”).  In the event such a notice is delivered, the Buyers shall use Commercially Reasonable Efforts to conduct such Sellers-Initiated Start-Up within 30 days of the delivery of such notice to the Buyers, subject to reasonable delay for weather conditions, fuel availability and other reasonable factors that might delay such Sellers-Initiated Start-Up.  The Buyers shall allow up to two individuals who are Seller Parties’ Representatives to attend the Sellers-Initiated Start-Up in order to observe the operation of the Wheatland Facility.  The Seller Parties shall solely be observers of the Sellers-Initiated Start-Up and shall have no authority with respect to the operational parameters of the Sellers-Initiated Start-Up.  The Seller Parties shall pay to the Buyers the difference between the market price of the electricity sold during the Sellers-Initiated Start-Up and the price of the natural gas used to generate such electricity, also known as the spark spread.

(c)Notwithstanding Sections 7.18(a) and (b), in no event shall the Buyers be obligated to (i) conduct a Sellers-Initiated Start-Up if the Buyers have already conducted a Buyers-Initiated Start-Up in compliance with Section 7.18(a) or (ii) allow the Seller Parties’

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Representatives to observe more than one start-up of the Wheatland Facility, regardless of whether such observed start-up was a Buyers-Initiated Start-Up or a Sellers-Initiated Start-Up.

(d)For the avoidance of doubt, the occurrence of a Buyers-Initiated Start-Up or a Sellers-Initiated Start-Up shall in no way limit or modify (i) the representations and warranties of the Seller Parties, including those contained in Section 5.19(b), (ii) the indemnification obligations of the Seller Partiers pursuant to Article IX or (iii) the survival periods of any of the provisions of this Agreement as set forth in Section 11.3.

7.19.Waiver of Indiana Responsible Transfer Property Law.  The Sellers shall comply with the provisions of section 2(b) of the Indiana Responsible Transfer Property Law (Ind. Code § 13-25-3), to the extent applicable, in connection with the conveyance of the Owned Real Property to the Buyers; provided, however, that each of the Buyers hereby (a) waives the 30 day advance delivery requirement set forth in section 13-25-3-2(a) of the Indiana Responsible Transfer Property Law, and (b) acknowledges its awareness of the purpose and intent of the disclosure document referred to therein

7.20.Certain Transmission Matters.  On or prior to the Closing Date, the Seller Parties shall, and shall cause their Affiliates to, take all necessary actions required to delist all of the units at the Wheatland Facility as capacity resources for PJM.  From and after the Closing Date, the Seller Parties shall not, and shall cause their Affiliates not to, use any of the units at the Wheatland Facility for any capacity obligations of the Seller Parties or their Affiliates.  No later than May 31, 2006, the Seller Parties shall, and shall cause their Affiliates to, cease utilizing any of the units at the Wheatland Facility as a source for the purposes of transmission service or transmission service reservations.  If any of the Seller Parties or any of their Affiliates have an existing transmission service reservation from the Wheatland Facility on June 1, 2006, such Seller Parties shall, or shall cause their Affiliates to, either terminate such transmission service reservation or, if reasonably acceptable to both the Seller Parties and the Buyers, assign such transmission service agreement to the Buyers.

ARTICLE VIII
CONDITIONS

8.1.Conditions to Each Party’s Obligations to Effect the Transaction.  The respective obligations of each party to effect the sale and purchase of the Acquired Assets shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, except as may be waived in writing pursuant to Section 11.2 by the joint action of the parties hereto:

(a)The waiting period under the HSR Act applicable to the consummation of the sale of the Acquired Assets contemplated hereby shall have expired or been terminated;

(b)No preliminary or permanent injunction or other order or decree by any federal or state court which prevents the consummation of the sale of the Acquired Assets contemplated hereby shall have been issued and remain in effect (each party agreeing to use Commercially Reasonable Efforts to have any such injunction, order or decree lifted); and no Law shall have been enacted by any Governmental Entity which prohibits the consummation of the sale of the Acquired Assets;

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(c)All consents and approvals for the consummation of the sale of the Acquired Assets required under the terms of any note, bond, mortgage, indenture, contract, Permit or other agreement to which the Seller Parties or the Buyers, or any of their Subsidiaries, are a party shall have been obtained, other than those which if not obtained, would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect; and

(d)Subject to Section 11.16, the Sellers Required Regulatory Approvals and the Buyers Required Regulatory Approvals shall have been obtained by a Final Order.

8.2.Conditions to Obligation of the Buyers.  The obligation of the Buyers to effect the purchase of the Acquired Assets contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions, except as may be waived by the Buyers in writing pursuant to Section 11.2:

(a)There shall not have occurred since the date of this Agreement and be continuing a Material Adverse Effect or any events or conditions which are reasonably likely to have a Material Adverse Effect;

(b)The Seller Parties shall have performed and complied with in all material respects the covenants and agreements contained in this Agreement that are required to be performed and complied with by the Seller Parties on or prior to the Closing Date;

(c)Each of the representations and warranties of the Seller Parties set forth in this Agreement that are not qualified by materiality or Material Adverse Effect shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date, except that such representations and warranties that are made as of a specific date need only be true and correct as of such date;

(d)Each of the representations and warranties of the Seller Parties that are qualified by materiality or Material Adverse Effect shall be true and correct as of the date of this Agreement and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date, except that such representations and warranties that are made as of a specific date need only be true and correct as of such date;

(e)Each of the Buyers shall have received a certificate from an authorized officer of each of the Seller Parties, dated the Closing Date, to the effect that the conditions set forth in Sections 8.2(a), 8.2(b), 8.2(c) and 8.2(d) have been satisfied;

(f)The Seller Parties shall have complied with the delivery requirements of Section 4.3;

(g)All Permits and material Environmental Permits shall have been transferred to the Buyers or, if such Permits and Environmental Permits are not transferable, shall have been modified or reissued to the Buyers, except to the extent that applicable Laws (including, without limitation, applicable Environmental Laws) would allow the Buyers to lawfully own and operate the Wheatland Facility and the Site after the Closing Date in the manner in which they are currently operated without such conditions having been satisfied;

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(h)           Subject to Section 11.16, the Final Orders of any Governmental Entity having authority over the transactions contemplated by this Agreement shall have been received, and such Final Orders shall not impose terms or conditions which would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect or a material adverse effect on the business, assets, operations or conditions of either of the Buyers, in the context of the transaction contemplated hereby and as determined by the board of directors of either of the Buyers based on the advice of the Buyers’ Representatives; and

(i)            The Seller Parties shall have delivered evidence, reasonably satisfactory in form and substance to the Buyers, of the full and irrevocable release of all Encumbrances on the Acquired Assets arising under or relating to the Existing Debt Documents.

8.3.         Conditions to Obligation of the Seller Parties.  The obligation of the Seller Parties to effect the sale of the Acquired Assets contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions, except as may be waived by the Seller Parties in writing pursuant to Section 11.2:

(a)           The Buyers shall have performed and complied with in all material respects the covenants and agreements contained in this Agreement that are required to be performed and complied with by the Buyers on or prior to the Closing Date;

(b)           Each of the representations and warranties of the Buyers set forth in this Agreement that are not qualified by materiality shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date, except that such representations and warranties that are made as of a specific date need only be true and correct as of such date;

(c)           Each of the representations and warranties of the Buyers that are qualified by materiality shall be true and correct as of the date of this Agreement and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date, except that such representations and warranties that are made as of a specific date need only be true and correct as of such date;

(d)           The Seller Parties shall have received a certificate from an authorized officer of each of the Buyers, dated the Closing Date, to the effect that the conditions set forth in Sections 8.3(a), 8.3(b) and 8.3(c) have been satisfied;

(e)           The Buyers shall have complied with the delivery requirements of Section 4.4; and

(f)            Subject to Section 11.16, the Final Orders of any Governmental Entity having authority over the transactions contemplated by this Agreement shall have been received, and such Final Orders shall not impose terms or conditions which would, individually or in the aggregate, be reasonably likely to have a material adverse effect on the business, assets, operations or conditions of any of the Seller Parties, in the context of the transactions contemplated hereby and as determined by the board of directors of AESC based on the advice of the Seller Parties’ Representatives.

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ARTICLE IX
INDEMNIFICATION

9.1.Indemnification.

(a)From and after the Closing Date, subject to the limitations set forth in this Section 9.1(a), and provided that the Buyers Indemnified Party makes a written claim for indemnification against the Seller Parties pursuant to Section 11.4 within the survival period set forth in Section 11.3, the Seller Parties shall, jointly and severally, indemnify, defend and hold harmless each of the Buyers and their Affiliates, and their respective directors, officers, employees, shareholders and agents (each, a “Buyers Indemnified Party”) from and against any and all claims, demands or suits (by any Person), losses, Liabilities, damages, obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys’ fees and reasonable disbursements in connection therewith) (each, an “Indemnifiable Loss”) asserted against or suffered by the Buyers Indemnified Parties relating to, resulting from or arising out of (i) any breach by any of the Seller Parties of any of the representations and warranties of the Seller Parties contained in this Agreement, or any inaccurate statement in the certificate delivered pursuant to Section 8.2(e), (ii) any breach by any of the Seller Parties of any covenant or agreement of the Seller Parties contained in this Agreement, (iii) any Excluded Liabilities, (iv) any failure of the Seller Parties to comply with applicable bulk sales Laws or (v) the matters disclosed on any supplemented or amended Schedules provided by the Seller Parties pursuant to Section 7.16(c).  Notwithstanding the foregoing, (A) the Seller Parties shall have no Liability under Sections 9.1(a)(i) or 9.1(a)(v) for Indemnifiable Losses (other than Indemnifiable Losses pursuant to Section 7.8), unless and until the aggregate Indemnifiable Losses incurred by the Buyers Indemnified Parties exceed $750,000 in which case the Seller Parties shall be jointly and severally liable for all losses in excess of $750,000, (B) in no event shall the Seller Parties’ aggregate Liability under Sections 9.1(a)(i) and 9.1(a)(v) exceed $50,000,000 in the aggregate; (C) in no event shall the Seller Parties’ aggregate Liability under Section 9.1(a)(ii) exceed the amount of the Purchase Price; and (D) for purposes of calculating the amount of Indemnifiable Losses, all references to materiality or similar qualifiers or Material Adverse Effect shall be disregarded.

(b)From and after the Closing Date, subject to the limitations set forth in this Section 9.1(b), and provided that the Sellers Indemnified Party makes a written claim for indemnification against the Buyers pursuant to Section 11.4 within the survival period set forth in Section 11.3, the Buyers shall, jointly and severally, indemnify, defend and hold harmless each of the Seller Parties and their Affiliates, and their respective directors, officers, employees, shareholders and agents (each, a “Sellers Indemnified Party”) from and against all Indemnifiable Losses asserted against or suffered by the Sellers Indemnified Parties relating to, resulting from or arising out of (i) any breach by either of the Buyers of any of the representations and warranties of the Buyers contained in this Agreement, or any inaccurate statement in the certificate delivered pursuant to Section 8.3(d), (ii) any breach by either of the Buyers of any covenant or agreement of the Buyers contained in this Agreement, or (iii) the Assumed Liabilities.  Notwithstanding the foregoing, (A) the Buyers shall have no Liability under Section 9.1(b)(i) for Indemnifiable Losses (other than Indemnifiable Losses pursuant to Section 7.8), unless and until the aggregate Indemnifiable Losses incurred by the Sellers Indemnified Parties

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exceed $750,000 in which case the Buyers shall be jointly and severally liable for all losses in excess of $750,000; (B) in no event shall the Buyers’ aggregate Liability under Section 9.1(b)(i) exceed $50,000,000; (C) in no event shall the Buyers’ aggregate Liability under Section 9.1(b)(ii) exceed the amount of the Purchase Price; and (D) for purposes of calculating the amount of Indemnifiable Losses, all references to materiality, material adverse effect or similar qualifiers shall be disregarded.

(c)Any Person entitled to receive indemnification under this Agreement (an “Indemnitee”) having a claim under these indemnification provisions shall make a good faith effort to recover all Indemnifiable Losses from insurers of such Indemnitee under applicable insurance policies so as to reduce the amount of any Indemnifiable Loss hereunder; provided that in no event shall an Indemnitee be required to initiate litigation or arbitration against an insurance provider before receiving payment for any Indemnifiable Loss pursuant to this Article IX.  The amount of Indemnifiable Loss will be (i) reduced to the extent that Indemnitee receives any insurance proceeds with respect to an Indemnifiable Loss and (ii) reduced or increased to take into account any net Tax benefit or burden recognized by the Indemnitee arising from the recognition of the Indemnifiable Loss and any payment actually received with respect to an Indemnifiable Loss.

(d)The expiration, termination or extinguishment of any representation, warranty, covenant or agreement pursuant to Section 11.3 shall not affect the parties’ obligations under this Section 9.1 if the Indemnitee provided the Person required to provide indemnification under this Agreement (the “Indemnifying Party”) with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment.

(e)Following the Closing and except with respect to intentional breaches of this Agreement, willful misconduct or fraud, the remedies set forth in this Article IX will be the sole and exclusive remedies for any and all claims, damages, complaints, demands, causes of action, investigations, hearings, actions, suits or other proceedings in connection with, arising from or relating to this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby and are in lieu of any and all other rights and remedies which the Seller Parties or the Buyers may have under this Agreement or otherwise for relief (monetary or otherwise) with respect to any breach of or failure to perform under this Agreement and the Ancillary Agreements or otherwise with respect to the transactions contemplated hereby and thereby, including with respect to the Assumed Liabilities or Excluded Liabilities.  Each party waives any provision of Law to the extent that it would limit or restrict the agreements contained in this Article IX.  Nothing herein shall prevent either party from terminating this Agreement in accordance with Article X.

(f)Any indemnity payment under this Agreement shall be treated as an adjustment to the Purchase Price for Tax purposes, to the maximum extent permitted by applicable Law.

9.2.Defense of Claims.

(a)If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a

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party to this Agreement or an Affiliate of a party to this Agreement (a “Third Party Claim”) with respect to which indemnification is to be sought from the Indemnifying Party, the Indemnitee will give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than 15 days after the Indemnitee’s receipt of written notice of such Third Party Claim.  Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee.  The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at the Indemnifying Party’s own expense and by the Indemnifying Party’s own counsel (reasonably acceptable to the Indemnitee), and the Indemnitee will cooperate in good faith in such defense at such Indemnitee’s own expense.

(b)If within 10 days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claim the Indemnitee receives written notice from the Indemnifying Party that the Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in the last sentence of Section 9.2(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if at any time the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Third Party Claim within 10 days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense, and the Indemnifying Party will be liable for all reasonable expenses thereof; provided further, that if, under applicable standards of professional conduct, a conflict with respect to any significant issue between any Indemnitee and the Indemnifying Party exists in respect of such Third Party Claim, the Indemnifying Party shall pay reasonable fees and expenses of one additional counsel as may be required to be retained in order to resolve such conflict.  The Indemnifying Party shall be liable for the fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnifying Party has not assumed the defense of any such Third Party Claim (other than during any period in which the Indemnitee has failed to give notice of the Third Party Claim as provided above).  If the Indemnifying Party assumes such defense, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Party, it being understood that the Indemnifying Party shall control such defense.  If the Indemnifying Party chooses to defend or bring any Third Party Claim, the Indemnitee shall agree to any settlement, compromise or discharge of such Third Party Claim that the Indemnifying Party may recommend and that, by its terms, discharges the Indemnitee and its Affiliates from the full amount of Liability in connection with such Third Party Claim; provided, however, that, without the consent of the Indemnitee, the Indemnifying Party shall not consent to, and the Indemnitee shall not be required to agree to, the entry of any judgment or entry into any settlement that (i) provides for injunctive or other non-monetary relief affecting the Indemnitee or any of its Affiliates or (ii) does not include as an unconditional term thereof the giving of a release from all Liability with respect to such claim by each claimant or plaintiff to each Indemnitee that is the subject of such Third Party Claim.

(c)Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a “Direct Claim”) will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, and the Indemnifying Party

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will have a period of 30 days within which to respond to such Direct Claim.  If the Indemnifying Party does not respond within such 30-day period, the Indemnifying Party will be deemed to have accepted such claim.  If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement.

(d)If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other Person, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith will promptly be repaid by the Indemnitee to the Indemnifying Party, but in any event not later than 30 days after receipt of such reduction by the Indemnitee.  Upon making any indemnity payment, the Indemnifying Party will, to the extent of such indemnity payment, be subrogated to, and the Indemnitee shall provide the Indemnifying Party a written assignment of, all rights of the Indemnitee against any third party (including any insurer) in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party will then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against any such third party on account of said indemnity payment is hereby made expressly subordinated and subject in right of payment to the Indemnitee’s rights against such third party.  Without limiting the generality or effect of any other provision hereof, each such Indemnitee and the Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights, and otherwise cooperate in the prosecution of such claims at the direction of the Indemnifying Party.  Nothing in this Section 9.2(d) shall be construed to require any party hereto to obtain or maintain any insurance coverage.

(e)A failure to give timely notice as provided in this Section 9.2 will not affect the rights or obligations of any party hereunder except if, and only to the extent that, as a result of such failure, the party which was entitled to receive such notice was actually prejudiced as a result of such failure.

ARTICLE X
TERMINATION AND ABANDONMENT

10.1.Termination.

(a)This Agreement may be terminated at any time prior to the Closing Date by mutual written consent of the Seller Parties and the Buyers.

(b)This Agreement may be terminated by the Seller Parties or the Buyers if the Closing contemplated hereby shall have not occurred on or before December 31, 2005 (the “Termination Date”); provided, however, that the right to terminate this Agreement under this Section 10.1(b) will not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date.

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(c)This Agreement may be terminated by the Seller Parties or the Buyers if (i) one or more courts of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable or (ii) any Law shall have been enacted by any Governmental Entity which prohibits the consummation of the Closing.

(d)This Agreement may be terminated by the Buyers if there shall have been a material breach of any representation or warranty, or a material breach of any covenant or agreement of the Seller Parties hereunder, which breach would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect and such breach has not been cured by the Seller Parties within 30 Business Days after the Seller Parties have Knowledge of such breach.

(e)This Agreement may be terminated by the Seller Parties if there shall have been a material breach of any representation or warranty, or a material breach of any covenant or agreement of the Buyers hereunder, which breach would prevent, materially delay or materially impair the Buyers’ ability to consummate the transactions contemplated by this Agreement and such breach has not been cured by the Buyers within 30 Business Days after the Buyers have Knowledge of such breach.

(f)This Agreement may be terminated by the Buyers as contemplated in Section 7.11(b).

(g)This Agreement may be terminated by the Seller Parties or the Buyers in accordance with the provisions of Section 7.16.

10.2.Procedure and Effect of Termination.  In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by either the Seller Parties or the Buyers pursuant to Section 10.1, written notice thereof shall forthwith be given by the terminating party to the other parties and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto.  If this Agreement is terminated as provided herein:

(a)None of the parties hereto nor any of their respective trustees, directors, officers, Affiliates, as the case may be, shall have any Liability or further obligation to the other parties or any of their respective trustees, directors, officers or Affiliates, as the case may be, pursuant to this Agreement, except (i) that nothing herein shall relieve any party from Liability for any material breach of any representation, warranty, covenant, or agreement of such party contained in this Agreement and (ii) that Sections 7.2(b), 7.3, 7.8, 10.2, 11.1, 11.2, 11.4 through 11.6, and 11.8 through 11.10 and 11.12 through 11.15 shall survive such termination; and

(b)All filings, applications and other submissions made pursuant to this Agreement, to the extent practicable, shall be withdrawn from the Governmental Entity or other Person to which they were made.

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ARTICLE XI
MISCELLANEOUS PROVISIONS

11.1.Amendment and Modification.  Subject to applicable Law, this Agreement may be amended, modified or supplemented only by written agreement of the Seller Parties and the Buyers.

11.2.Waiver of Compliance.  Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party expressly granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any other failure.

11.3.Survival.

(a)The representations and warranties of the Seller Parties contained herein or in any certificates or documents delivered pursuant to this Agreement on the Closing Date shall survive the Closing for a period of 24 months following the Closing Date; provided, however, that (i) the representations and warranties set forth in Section 5.10 shall survive for a period of five years following the Closing Date, (ii) the representations and warranties set forth in Section 5.19(b) shall survive for a period of three months following the Closing Date, and (iii) the representations and warranties set forth in Sections 5.2, 5.3, 5.8, 5.17, 5.19(a), 5.22 and 5.23 shall survive until 90 days after the expiration of the applicable statute of limitations (giving effect to extensions or waivers thereof; provided, however, that nothing contained in this Agreement shall be deemed to require any of the parties to agree to any such extension or waiver).

(b)The representations and warranties of the Buyers contained herein or in any certificates or documents delivered pursuant to this Agreement on the Closing Date shall survive the Closing for a period of 24 months following the Closing Date; provided, however, that the representations and warranties set forth in Sections 6.2, 6.6, 6.7 and 6.8 shall survive until 90 days after the expiration of the applicable statute of limitations (giving effect to extensions or waivers thereof; provided, however, that nothing contained in this Agreement shall be deemed to require any of the parties to agree to any such extension or waiver).

(c)The covenants and agreements in Article IX shall survive the Closing and shall remain in full force and effect for such period as is necessary to resolve any claim made with respect to any representation, warranty, covenant or agreement contained herein during the survival period thereof, and the covenants and agreements of the parties contained in Articles II, III, VII and XI of this Agreement shall survive the Closing for (i) the time period(s) set forth in the respective Sections contained in such Articles, or (ii) if no time period is so specified, until 90 days after the expiration of the applicable statute of limitations.

11.4.Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission, telexed or mailed by overnight courier or registered or certified mail (return receipt requested), postage prepaid, to the

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parties at the following address (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof):

(a)If to the Seller Parties, to:

Allegheny Energy Supply Company, LLC

4350 Northern Pike – 4 North

Monroeville, PA  15146-2841

Facsimile:  (412) 856-2789

Attention:  Deputy General Counsel

with a copy to:

Allegheny Energy, Inc.

800 Cabin Hill Drive

Greensburg, PA  15601-1689

Facsimile:  (724) 830-5151

Attention:  President

and

Gray, Plant, Mooty, Mooty & Bennett, P.A.

500 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

Facsimile:  (612) 632-4388

Attention:  Joseph T. Kinning, Esq.

(b)If to PSI Energy, to:

PSI Energy, Inc.

1000 East Main Street

Plainfield, IN  46168

Facsimile:  (317) 838-2111

Attention:  Kay E. Pashos, President

with a copy to:

Cinergy Corp.

139 East Fourth Street

Cincinnati, OH  45202

Facsimile:  (513) 287-4090

Attention:  Douglas C. Taylor, Vice President, Corporate Development

and

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Skadden, Arps, Slate, Meagher & Flom LLP

1440 New York Avenue, N.W.

Washington, DC  20005

Facsimile:  (202) 393-5760

Attention:  Pankaj K. Sinha, Esq.

(c)If to CG&E, to:

The Cincinnati Gas & Electric Company

139 East Fourth Street

Cincinnati, OH  45202

Facsimile:  (513) 287-4031

Attention:  Gregory C. Ficke, President

with a copy to:

Cinergy Corp.

139 East Fourth Street

Cincinnati, OH  45202

Facsimile:  (513) 287-4090

Attention:  Douglas C. Taylor, Vice President, Corporate Development

and

Skadden, Arps, Slate, Meagher & Flom LLP

1440 New York Avenue, N.W.

Washington, DC  20005

Facsimile:  (202) 393-5760

Attention:  Pankaj K. Sinha, Esq.

11.5.Assignment; No Third-Party Beneficiaries.  This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party hereto, including by operation of Law without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person except the parties hereto any rights or remedies hereunder.  Without limiting the generality of the foregoing, no provision of this Agreement will create any third-party beneficiary rights in any employee or former employee of the Seller Parties or any of their Affiliates (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Agreement will create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement except as expressly provided for thereunder.

11.6.Governing Law.This Agreement shall be governed by and construed in accordance with the Laws of the State of Indiana (regardless of the Laws that might otherwise govern under applicable Indiana principles of conflicts of law) as to all matters, including,

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without limitation, matters of validity, construction, effect, performance and remedies, except where Indiana Law is preempted by federal Law, in which event federal Law shall govern.

11.7.Counterparts.  This Agreement may be executed and delivered (including via facsimile) in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

11.8.Interpretation.  The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement.

11.9.Schedules and Exhibits.  All Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement.

11.10.Entire Agreement.  This Agreement, the Confidentiality Agreement and the Ancillary Agreements including the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement.  There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein.  This Agreement and the Ancillary Agreements supersede all prior agreements and understandings, whether written or oral, between the parties with respect to such transactions other than the Confidentiality Agreement.

11.11.Bulk Sales or Transfer Laws.  The Buyers acknowledge that the Seller Parties will not comply with the provision of any bulk sales or transfer Laws of any jurisdiction in connection with the transactions contemplated by this Agreement.  The Buyers hereby waive compliance by the Sellers with the provisions of the bulk sales or transfer Laws of all applicable jurisdictions.

11.12.Consent to Jurisdiction.  Each party hereby irrevocably submits to the exclusive jurisdiction of the federal or state courts located in the State of Indiana in any action, suit or proceeding arising out of or relating to this Agreement or the Ancillary Agreements or any of the transactions contemplated hereby or thereby, provided, however, that such consent to jurisdiction is solely for the purpose referred to in this Section and shall not be deemed to be a general submission to the jurisdiction of said courts or in the State of Indiana other than for such purpose.  Each party hereby irrevocably waives, to the fullest extent permitted by Law, any objection that it may now or hereafter have to the laying of the venue of any such action, suit or proceeding brought in such a court and any claim that any such action, suit or proceeding brought in such a court has been brought in an inconvenient forum.

11.13.Waiver of Jury Trial.  THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ANCILLARY AGREEMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

11.14.Waiver of Consequential, Etc. Damages.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, EXCEPT TO THE EXTENT RESULTING FROM ANY THIRD PARTY CLAIM OR FROM FRAUD OR WILLFUL MISCONDUCT, THE BUYERS SHALL NOT BE LIABLE

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TO THE SELLER PARTIES, NOR SHALL THE SELLER PARTIES BE LIABLE TO THE BUYERS, FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST PROFITS OR OPPORTUNITIES) RESULTING FROM OR ARISING OUT OF THIS AGREEMENT OR THE ANCILLARY AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

11.15.Specific Performance.  The parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not to be performed in accordance with the terms hereof and that prior to the Closing, the parties will be entitled to specific performance of the terms hereof in addition to any other remedies at law or in equity.

11.16.Change of Structure.  Notwithstanding anything in this Agreement to the contrary, (a) if, with respect to Buyers Required Regulatory Approvals, all required IURC approvals with respect to PSI Energy have not been obtained by November 20, 2005, and all required FERC and SEC approvals have been obtained by November 30, 2005, then, subject to the satisfaction of the other conditions contained in Article VIII, CG&E alone will acquire the Wheatland Facility pursuant to this Agreement and all references in this Agreement to “Buyers” shall be deemed to refer to CG&E only (and not PSI Energy) and PSI Energy shall have no further rights or obligations under this Agreement, or (b) if, with respect to Buyers Required Regulatory Approvals, all required IURC approvals and FERC Approvals have been obtained, but all required SEC approvals under the Holding Company Act for CG&E have not been obtained by November 30, 2005, then, subject to the satisfaction of the other conditions contained in Article VIII, PSI Energy alone will acquire the Wheatland Facility pursuant to this Agreement and all references in this Agreement to “Buyers” shall be deemed to refer to PSI Energy only (and not CG&E) and CG&E shall have no further rights or obligations under this Agreement.  Notwithstanding the foregoing, the Seller Parties acknowledge that, prior to November 20, 2005, the Buyers shall have sole discretion to allocate the ownership of the Acquired Assets and the Assumed Liabilities between the Buyers (including by allocating 100% of the Acquired Assets and Assumed Liabilities to one Buyer) provided the Buyer Required Regulatory Approvals necessary for Closing the transaction with the selected allocation have been received by November 20, 2005.  In the event the Buyers determine, and give written notice pursuant to Section 7.17, that either PSI Energy or CG&E shall acquire 100% of the Acquired Assets and Assumed Liabilities, all references in this Agreement to “Buyers” shall be deemed to refer to the one applicable Buyer (and not the other Buyer) and the other Buyer shall have no further rights or obligations under this Agreement.  The parties hereto agree to use their Commercially Reasonable Efforts to amend this Agreement and the Ancillary Agreements if necessary to reflect any revised transaction structure discussed in this Section 11.16.

11.17.Certain Approvals.  The parties hereto agree that in the event FERC approval under section 203 of the Federal Power Act, in form and substance sufficient to satisfy the requirements of Section 8.2(h), is received on or before December 20, 2005, and FERC approval under section 205 of the Federal Power Act is not received by the Buyers on or before December 29, 2005, then FERC approval under section 205 of the Federal Power Act shall no longer be deemed to be a Buyers Required Regulatory Approval (and thus shall no longer be deemed to constitute a condition to the Closing) and, subject to the satisfaction of the other conditions contained in Article VIII, the Closing shall occur on December 30, 2005; provided that, in no

63

event shall the Closing occur if, prior to December 30, 2005, the FERC has issued an adverse order with respect to the filing made by the Buyers under section 205 of the Federal Power Act.

[Remainder of this page is blank. Signature page follows.]

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IN WITNESS WHEREOF, the Seller Parties and the Buyers have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written.

BUYERS:		SELLER PARTIES:
PSI ENERGY, INC.		ALLEGHENY ENERGY SUPPLY COMPANY, LLC
By:	/s/ Kay Pashos
	Name: Kay Pashos	By:	/s/John P. Campbell
	Title: President		Name: John P. Campbell
			Title:  Vice President
THE CINCINNATI GAS & ELECTRIC COMPANY		ALLEGHENY ENERGY SUPPLY WHEATLAND GENERATING FACILITY, LLC
By:	/s/ Gregory C. Ficke	By:	/s/ John P. Campbell
	Name: Gregory C. Ficke		Name: John P. Campbell
	Title: President		Title: Vice President
		LAKE ACQUISITION COMPANY, L.L.C.
		By:	/s/ John P. Campbell
			Name: John P. Campbell
			Title: Vice President

EXHIBIT A

ASSIGNMENT AND ASSUMPTION AGREEMENT

This ASSIGNMENT AND ASSUMPTION AGREEMENT (this “Agreement”) is made effective as of the      day of             , 2005, by and among PSI Energy, Inc., an Indiana corporation (“PSI Energy”), and The Cincinnati Gas & Electric Company, an Ohio corporation (“CG&E” and, together with PSI Energy, collectively, the “Buyers”), and Allegheny Energy Supply Wheatland Generating Facility, LLC, a Delaware limited liability company and a wholly owned subsidiary of AESC (“Wheatland LLC”), Lake Acquisition Company, L.L.C., a Delaware limited liability company and a wholly owned subsidiary of AESC (“Lake LLC”), and Allegheny Energy Supply Company, LLC, a Delaware limited liability company (“AESC” and, together with Wheatland LLC and Lake LLC, the “Seller Parties”).

WHEREAS, the Seller Parties and the Buyers have entered into an Asset Purchase Agreement dated as of May 5, 2005 (the “Asset Purchase Agreement”; capitalized terms used herein but not otherwise defined herein having the meanings given to such terms in the Asset Purchase Agreement), pursuant to which, subject to the terms and conditions set forth therein, the Seller Parties have agreed to assign to the Buyers all of the Seller Parties’ right, title and interest in and to the Assumed Contracts and the Leases, and the Buyers have agreed to assume the Assumed Liabilities, in the proportions set forth on Schedule A.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the Seller Parties and the Buyers hereby agree as follows:

1.Assignment of Contracts.  Subject to the terms and conditions of the Asset Purchase Agreement, the Seller Parties hereby assign and transfer to the Buyers (in the percentages set forth on Schedule A), and the Buyers (in the percentages set forth on Schedule A) hereby take assignment of and assume from the Seller Parties, all of the Seller Parties’ right, title and interest in and to the Assumed Contracts and any other agreements or contracts included in the Acquired Assets.  Notwithstanding the foregoing, the Seller Parties do not assign or transfer any agreement or contract or any claim or right or any benefit or obligation thereunder or resulting therefrom if an assignment or transfer thereof, without the consent of a third party thereto, would constitute a breach or violation thereof or impose any obligation or liability on the Seller Parties unless and until such a consent has been obtained.

2.Assumption of Liabilities.  The Buyers (in the percentages set forth on Schedule A) hereby assume and satisfy, and agree to pay, perform, fulfill and discharge when due, the Assumed Liabilities.

3.Asset Purchase Agreement.  This Agreement is being executed and delivered pursuant and subject to the Asset Purchase Agreement.  Nothing in this Agreement shall, or shall be deemed to, defeat, limit, alter or impair, enhance or enlarge

any right, obligation, claim or remedy created by the Asset Purchase Agreement.  In the event of any conflict between this Agreement and the Asset Purchase Agreement, the Asset Purchase Agreement shall control.

4.Successor and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

5.Applicable Law.  This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Indiana without giving effect to the principles of conflicts of law thereof.

6.Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

2

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed and delivered as of this          day of                , 2005.

PSI ENERGY, INC.

By:

Name:

Title:

THE CINCINNATI GAS & ELECTRIC
COMPANY

By:

Name:

Title:

ALLEGHENY ENERGY SUPPLY COMPANY,
LLC

By:

Name:

Title:

ALLEGHENY ENERGY SUPPLY WHEATLAND
GENERATING FACILITY, LLC

By:

Name:

Title:

LAKE ACQUISITION COMPANY, L.L.C.

By:

Name:

Title:

3

SCHEDULE A

Allocation of Contracts and Assumed Liabilities Between the Buyers

Buyer	Percent Allocation
PSI Energy	[     ]	%(1)
CG&E	[     ]	%

(1) To be determined prior to Closing pursuant to the Asset Purchase Agreement.

EXHIBIT B

BILL OF SALE

This BILL OF SALE (this “Bill of Sale”) is made effective as of the      day of             , 2005, by Allegheny Energy Supply Wheatland Generating Facility, LLC, a Delaware limited liability company (“Wheatland LLC”), Lake Acquisition Company, L.L.C., a Delaware limited liability company (“Lake LLC”), and Allegheny Energy Supply Company, LLC, a Delaware limited liability company (“AESC” and, together with Wheatland LLC and Lake LLC, the “Seller Parties”), to PSI Energy, Inc., an Indiana Corporation (“PSI Energy”), and The Cincinnati Gas & Electric Company, an Ohio corporation (“CG&E” and, together with PSI Energy, the “Buyers”).(1)

WHEREAS, the Seller Parties and the Buyers have entered into an Asset Purchase Agreement dated as of May 5, 2005 (the “Asset Purchase Agreement”; capitalized terms used herein but not otherwise defined herein having the meanings given to such terms in the Asset Purchase Agreement) providing for, subject to the terms and conditions set forth therein, the sale, assignment, conveyance, transfer and delivery by the Seller Parties to the Buyers of the Acquired Assets.

NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Sellers hereby sell, assign, convey, transfer and deliver (or cause to be sold, assigned, conveyed, transferred and delivered) to the Buyers (in the percentages set forth on Schedule A) all of the Seller Parties’ respective rights, title and interests in and to the Acquired Assets other than the Assumed Contracts, which are being assigned and transferred to the Buyers pursuant to the Assignment and Assumption Agreement of even date herewith between the Seller Parties and the Buyers.

This Bill of Sale is being executed and delivered pursuant and subject to the Asset Purchase Agreement.  Nothing in this Bill of Sale shall, or shall be deemed to, defeat, limit, alter, impair, enhance or enlarge any right, obligation, claim or remedy created by the Asset Purchase Agreement.  In the event of any conflict between this Bill of Sale and the Asset Purchase Agreement, the Asset Purchase Agreement shall control.

This Bill of Sale shall be binding upon the Seller Parties and their successors and permitted assigns and shall inure to the benefit of the Buyers and their respective successors and permitted assigns.

This Bill of Sale shall be governed by and construed and enforced in accordance with the laws of the State of Indiana without giving effect to the principles of conflicts of law thereof.

(1) Note that if PSI Energy or CG&E acquires 100% of the Acquired Assets, then this Bill of Sale will be revised to remove the entity that is not acquiring any of the Acquired Assets.

This Bill of Sale may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the undersigned have caused this Bill of Sale to be executed and delivered as of this       day of               , 2005.

ALLEGHENY ENERGY SUPPLY COMPANY,
LLC

By:

Name:

Title:

ALLEGHENY ENERGY SUPPLY WHEATLAND GENERATING FACILITY, LLC

By:

Name:

Title:

LAKE ACQUISITION COMPANY, L.L.C.

By:

Name:

Title:

Acknowledged and accepted as of this

     day of              , 2005.

PSI ENERGY, INC.

By:

Name:

Title:

THE CINCINNATI GAS & ELECTRIC COMPANY

By:

Name:

Title:

2

SCHEDULE A

Allocation of Assets Between the Buyers

Buyer	Percent Allocation
PSI Energy	[     ]	%(2)
CG&E	[     ]	%

(2) To be determined prior to Closing pursuant to the Asset Purchase Agreement.

EXHIBIT C

FORM OF DEEDS

This Instrument Was Prepared By:

Gray Plant Mooty

500 IDS Center, 80 South 8^th St.

Minneapolis, Minnesota  55402-3796

Attention:  John D. Giudicessi, Esq.

After Recording, Mail To:

Cinergy/PSI

1000 East Main Street

Plainfield, Indiana  46168

Attention:  John B. Scheidler, Esq.

Send Subsequent Tax Bills To:

Cinergy/PSI

1000 East Main Street

Plainfield, Indiana  46168

Attention:  Tax Department

[SUBJECT TO FORMATTING REVISIONS TO CONFORM

WITH LOCAL RECORDING REQUIREMENTS]

SPECIAL WARRANTY DEED

THIS INDENTURE is made as of this [    ] day of [          ], 2005 from [ALLEGHENY ENERGY SUPPLY WHEATLAND GENERATING FACILITY, LLC/LAKE ACQUISITION COMPANY, L.L.C.], a Delaware limited liability company having its principal place of business at 4530 Northern Pike – 4 North, Monroeville, Pennsylvania 15146-2841 (“Grantor”), to PSI ENERGY, INC., an Indiana corporation having its principal place of business at 1000 East Main Street, Plainfield, Indiana 46168 (“PSI”), and THE CINCINNATI GAS & ELECTRIC COMPANY, an Ohio corporation having its principal place of business at 139 East Fourth Street, Cincinnati, Ohio 45202 (“CG&E” and collectively with PSI, “Grantee”), as tenants in common as more particularly set forth below.   [Grantor is formerly known as West Fork Land Development Company, LLC, a Delaware limited liability company.]

WITNESSETH, that Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration in hand paid by Grantee, the receipt whereof is hereby acknowledged, by these presents does DEMISE, RELEASE, ALIEN AND CONVEY FOREVER unto (i) PSI and its successors and assigns, an undivided fifty percent (50%) interest as tenant in common and not as joint tenant with rights of survivorship and (ii) CG&E and its successors and assigns, an undivided fifty percent (50%) interest as tenant in common and not as joint tenant with rights of survivorship, in and to all of that certain real estate, situated in the County of Knox and State of Indiana, which real estate is more particularly described on Exhibit A attached hereto, together with, all and singular, all the estate, right, title, interest, claim or demand whatsoever of Grantor, either in law or equity, of, in and to (i) the easements, rights of way, servitudes and other hereditaments and appurtenances thereunto belonging, or in anyway appertaining, and the reversion and reversions, remainder and remainders, rents, issues and profits thereof, (ii) all buildings, structures, fixtures and other improvements located thereon and (iii) the streets adjacent thereto (collectively, the “Property”), subject to the matters set forth in Exhibit B

attached hereto (the “Permitted Encumbrances”): TO HAVE AND TO HOLD the Property, unto Grantee, and each of their respective successors and assigns forever.

And Grantor, for itself, and its successors, does covenant, promise and agree, to and with Grantee and each of their respective successors and assigns, that, except for Permitted Encumbrances, it has not done or suffered to be done, anything whereby the Property is, or may be, in any manner encumbered or charged, except as herein recited; and that Grantor WILL WARRANT AND DEFEND the title to the Property to said Grantee and their respective successors and assigns, against the lawful claims and demands of all persons claiming through or under the said Grantor or its predecessor corporations by merger, consolidation, change of name, etc., except for the Permitted Encumbrances.

[Signature Page Follows]

2

IN WITNESS WHEREOF, Grantor has caused its name to be signed to these presents by the undersigned authorized signatory as of the day and year first above written.

	Grantor:	[ALLEGHENY ENERGY SUPPLY WHEATLAND GENERATING FACILITY, LLC/LAKE ACQUISITION COMPANY, L.L.C.], a Delaware limited liability company
		By:
		Name:
		Title:
STATE OF
SS
COUNTY OF

I, the undersigned, a Notary Public in and for the County and State Aforesaid, do hereby certify that                                                personally known to me to be                           of [ALLEGHENY ENERGY SUPPLY WHEATLAND GENERATING FACILITY, LLC/LAKE ACQUISITION COMPANY, L.L.C.], a Delaware limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that he signed and delivered such instrument, in his capacity as                 of such limited liability company, as his free and voluntary act and as the free and voluntary act and deed of such limited liability company, for the uses and purposes therein set forth.

Given under my hand and official seal this           day of                , 2005.

	Notary Public
	Printed Name:
My County of Residence:
My Commission Expires:

EXHIBIT A

LEGAL DESCRIPTION OF THE PROPERTY

[TO BE ADDED FROM FINAL TITLE COMMITMENT]

Tax Indentification Numbers:  [            ]

EXHIBIT B

PERMITTED EXCEPTIONS

[To Be Reasonably Agreed Upon by the Parties Prior to Closing]

EXHIBIT D

CERTIFICATION OF NON-FOREIGN STATUS

Section 1445 of the Internal Revenue Code of 1986, as amended, provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person.  For U.S. tax purposes (including section 1445), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity.  To inform the transferee that such withholding of tax is not required upon the disposition of a U.S. real property interest by Allegheny Energy Supply Company, LLC, a Delaware limited liability company (“Transferor”), the undersigned hereby certifies the following on behalf of Transferor:

1.Transferor is not a foreign corporation, foreign partnership, foreign trust,  or foreign estate (as those terms are defined in the Internal Revenue Code of 1986, as amended, and the Income Tax Regulations thereunder);

2.Transferor is not a disregarded entity as defined in Treasury Regulation §1.1445-2(b)(2)(iii);

3.Transferor’s U.S. employer identification number is              ; and

4.Transferor’s office address is                                  .

Transferor understands that this certification may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Transferor.

	By:
	Name:
	Title:
Dated:                             , 2005

EX-31.A

Exhibit 31-a

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James E. Rogers, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;

4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Cinergy Corp. and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

Date:  August 4, 2005

/s/ James E. Rogers

James E. Rogers

Chief Executive Officer

EX-31.B

Exhibit 31-b

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James L. Turner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;

4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Cinergy Corp. and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

Date:  August 4, 2005

/s/ James L. Turner

James L. Turner

Chief Financial Officer

EX-32.A

Exhibit 32-a

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc. and The Union Light, Heat and Power Company (the “Companies”) on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Rogers, Chief Executive Officer of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Companies.

Date:  August 4, 2005

/s/ James E. Rogers

James E. Rogers

Chief Executive Officer

EX-32.B

Exhibit 32-b

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc. and The Union Light, Heat and Power Company (the “Companies”) on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Turner, Chief Financial Officer of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Companies.

Date:  August 4, 2005

/s/ James L. Turner

James L. Turner

Chief Financial Officer