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 September 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 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 October 31, 2005, shares of common stock outstanding for each registrant were as listed:

Registrant	Description	Shares
Cinergy Corp.	Par value $.01 per share	199,435,602
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 and Comprehensive 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					Year to Date
	September 30					September 30
	2005		2004			2005		2004
	(in thousands, except per share amounts)
	(unaudited)
Operating Revenues
Electric	$	1,134,494	$	952,406		$	2,975,129	$	2,681,078
Gas	84,073		65,298			476,767		524,226
Other	146,712		110,879			371,895		265,674
Total Operating Revenues	1,365,279		1,128,583			3,823,791		3,470,978
Operating Expenses
Fuel, emission allowances, and purchased power	459,964		341,218			1,077,641		933,864
Gas purchased	30,446		19,792			295,135		290,728
Costs of fuel resold	118,619		86,917			297,469		203,441
Operation and maintenance	342,221		325,787			1,025,131		968,981
Depreciation	129,597		114,668			386,537		333,856
Taxes other than income taxes	65,101		57,001			209,115		204,320
Total Operating Expenses	1,145,948		945,383			3,291,028		2,935,190
Operating Income	219,331		183,200			532,763		535,788
Equity in Earnings of Unconsolidated Subsidiaries	6,795		8,016			25,206		18,095
Miscellaneous Income (Expense) – Net	17,012		(944		)	33,886		(11,419		)
Interest Expense	76,932		71,775			209,644		209,446
Preferred Dividend Requirements of Subsidiaries	603		858			2,319		2,574
Income Before Taxes	165,603		117,639			379,892		330,444
Income Taxes	33,666		24,716			79,891		76,002
Net Income	$	131,937	$	92,923		$	300,001	$	254,442
Average Common Shares Outstanding – Basic	199,069		180,881			197,741		180,129
Earnings Per Common Share – Basic (Note 11)	$	0.67	$	0.51		$	1.52	$	1.41
Average Common Shares Outstanding – Diluted	200,167		183,478			198,777		182,564
Earnings Per Common Share – Diluted (Note 11)	$	0.66	$	0.50		$	1.51	$	1.39
Cash Dividends Declared Per Common Share (Note 2)	$	0.96	$	0.47		$	1.92	$	1.41

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

	September 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	165,831	$	164,541
Notes receivable, current	81,622		214,513
Accounts receivable less accumulated provision for doubtful accounts of $4,489 at September 30, 2005, and $5,514 at December 31, 2004	1,482,068		1,061,140
Fuel, emission allowances, and supplies	607,925		444,750
Energy risk management current assets	1,260,255		381,146
Prepayments and other	567,113		174,624
Total Current Assets	4,164,814		2,440,714
Property, Plant, and Equipment – at Cost
Utility plant in service	10,642,931		10,076,468
Construction work in progress	398,130		333,687
Total Utility Plant	11,041,061		10,410,155
Non-regulated property, plant, and equipment	4,853,947		4,700,009
Accumulated depreciation	5,447,931		5,180,699
Net Property, Plant, and Equipment	10,447,077		9,929,465
Other Assets
Regulatory assets	1,021,277		1,030,333
Investments in unconsolidated subsidiaries	486,795		513,675
Energy risk management non-current assets	397,471		138,787
Notes receivable, non-current	177,127		193,857
Other investments	128,581		125,367
Restricted funds held in trust	277,400		358,006
Goodwill and other intangible assets	152,342		132,752
Other	213,323		119,361
Total Other Assets	2,854,316		2,612,138
Total Assets	$	17,466,207	$	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

	September 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	2,142,077		$	1,348,576
Accrued taxes	266,459			216,804
Accrued interest	69,504			54,473
Notes payable and other short-term obligations (Note 5)	1,198,670			958,910
Long-term debt due within one year	349,012			219,967
Energy risk management current liabilities	1,419,332			310,741
Other	141,448			171,188
Total Current Liabilities	5,586,502			3,280,659
Non-Current Liabilities
Long-term debt	4,022,076			4,227,741
Deferred income taxes	1,445,371			1,597,120
Unamortized investment tax credits	93,070			99,723
Accrued pension and other postretirement benefit costs	652,409			688,277
Regulatory liabilities	578,520			557,419
Energy risk management non-current liabilities	420,326			127,340
Other	195,230			225,298
Total Non-Current Liabilities	7,407,002			7,522,918
Commitments and Contingencies
Total Liabilities	12,993,504			10,803,577
Cumulative Preferred Stock of Subsidiaries
Not subject to mandatory redemption	31,743			62,818
Common Stock Equity
Common stock - $.01 par value; authorized shares – 600,000,000; issued shares – 199,280,386 at September 30, 2005, and 187,653,506 at December 31, 2004; outstanding shares – 199,139,968 at September 30, 2005, and 187,524,229 at December 31, 2004	1,993			1,877
Paid-in capital	2,969,103			2,559,715
Retained earnings	1,534,752			1,613,340
Treasury shares at cost – 140,418 shares at September 30, 2005, and 129,277 shares at December 31, 2004	(4,776		)	(4,336		)
Accumulated other comprehensive loss	(60,112		)	(54,674		)
Total Common Stock Equity	4,440,960			4,115,922
Total Liabilities and Shareholders’ Equity	$	17,466,207		$	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 September 30, 2005
Balance at July 1, 2005 (198,528,683 shares)	$	1,987	$	2,941,747	$	1,594,053		$	(4,766	)	$	(67,634	)	$	4,465,387
Comprehensive income:
Net income					131,937									131,937
Other comprehensive income (loss), net of tax effect of $(6,194)
Foreign currency translation adjustment											(285		)	(285		)
Unrealized gain on investment trusts											1,104			1,104
Minimum pension liability adjustment											(571		)	(571		)
Cash flow hedges											7,274			7,274
Total comprehensive income														139,459
Issuance of common stock – net (611,574 shares)	6		25,861											25,867
Treasury shares purchased (289 shares)								(10		)				(10		)
Dividends on common stock ($0.96 per share) (Note 2)					(191,120		)							(191,120		)
Other			1,495		(118		)							1,377
Ending balance at September 30, 2005 (199,139,968 shares)	$	1,993	$	2,969,103	$	1,534,752		$	(4,776	)	$	(60,112	)	$	4,440,960
Quarter Ended September 30, 2004
Balance at July 1, 2004 (180,323,246 shares)	$	1,804	$	2,248,084	$	1,543,883		$	(3,966	)	$	(39,804	)	$	3,750,001
Comprehensive income:
Net income					92,923									92,923
Other comprehensive loss, net of tax effect of $(1,162)
Foreign currency translation adjustment											(741		)	(741		)
Unrealized loss on investment trusts											(662		)	(662		)
Cash flow hedges											(138		)	(138		)
Total comprehensive income														91,382
Issuance of common stock – net (675,273 shares)	7		20,989											20,996
Treasury shares purchased (2,963 shares)								(60		)				(60		)
Dividends on common stock ($0.47 per share)					(84,873		)							(84,873		)
Other			3,578		(85		)							3,493
Ending balance at September 30, 2004 (180,995,556 shares)	$	1,811	$	2,272,651	$	1,551,848		$	(4,026	)	$	(41,345	)	$	3,780,939

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

8

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

(Continued)

											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 September 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					300,001									300,001
Other comprehensive income (loss), net of tax effect of $441
Foreign currency translation adjustment											(13,392		)	(13,392		)
Unrealized gain on investment trusts											150			150
Minimum pension liability adjustment											(571		)	(571		)
Cash flow hedges											8,375			8,375
Total comprehensive income														294,563
Issuance of common stock – net (11,626,880 shares)	116		403,374											403,490
Treasury shares purchased (11,141 shares)								(440		)				(440		)
Dividends on common stock ($1.92 per share) (Note 2)					(378,196		)							(378,196		)
Other			6,014		(393		)							5,621
Ending balance at September 30, 2005 (199,139,968 shares)	$	1,993	$	2,969,103	$	1,534,752		$	(4,776	)	$	(60,112	)	$	4,440,960
Year to Date September 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					254,442									254,442
Other comprehensive income (loss), net of tax effect of $(1,928)
Foreign currency translation adjustment											691			691
Unrealized gain on investment trusts											(166		)	(166		)
Cash flow hedges											2,965			2,965
Total comprehensive income														257,932
Issuance of common stock – net (2,683,696 shares)	27		67,200											67,227
Treasury shares purchased (24,994 shares)								(771		)				(771		)
Dividends on common stock ($1.41 per share)					(253,418		)							(253,418		)
Other			9,466		(179		)							9,287
Ending balance at September 30, 2004 (180,995,556 shares)	$	1,811	$	2,272,651	$	1,551,848		$	(4,026	)	$	(41,345	)	$	3,780,939

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
	September 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Cash Flows from Operations
Operating Activities
Net income	$	300,001		$	254,442
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	386,537			333,856
Loss on impairment or disposal of subsidiaries and investments, net	7,542			38,268
Change in net position of energy risk management activities	263,784			(35,463		)
Deferred income taxes and investment tax credits – net	(16,249		)	81,649
Equity in earnings of unconsolidated subsidiaries	(25,206		)	(18,095		)
Return on equity investments	25,081			—
Allowance for equity funds used during construction	(6,043		)	(1,122		)
Regulatory asset/liability deferrals	(145,233		)	(39,115		)
Regulatory assets amortization	102,603			74,176
Accrued pension and other postretirement benefit costs	(35,868		)	(60,136		)
Cost of removal	(17,499		)	(13,037		)
Changes in current assets and current liabilities:
Accounts and notes receivable	(290,569		)	358,465
Fuel, emission allowances, and supplies	(262,408		)	(78,502		)
Prepayments	(381,515		)	(70,124		)
Accounts payable	698,363			(161,574		)
Accrued taxes and interest	(13,630		)	(88,347		)
Other assets	(36,224		)	(7,295		)
Other liabilities	(56,363		)	68,087
Net cash provided by operating activities	497,104			636,133
Financing Activities
Change in short-term debt	239,760			783,258
Issuance of long-term debt	54,183			—
Redemption of long-term debt	(144,799		)	(824,411		)
Retirement of preferred stock of subsidiaries	(31,075		)	—
Issuance of common stock	403,490			67,227
Dividends on common stock	(282,541		)	(253,418		)
Net cash provided by (used in) financing activities	239,018			(227,344		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(777,382		)	(473,354		)
Proceeds from notes receivable	14,848			12,966
Withdrawal of restricted cash held in trust	104,473			14,861
Acquisitions and other investments	(107,147		)	(9,734		)
Proceeds from distributions by investments and sale of investments and subsidiaries	30,376			29,726
Net cash used in investing activities	(734,832		)	(425,535		)
Net increase (decrease) in cash and cash equivalents	1,290			(16,746		)
Cash and cash equivalents at beginning of period	164,541			169,120
Cash and cash equivalents at end of period	$	165,831		$	152,374
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	204,893		$	219,100
Income taxes	$	81,259		$	46,272

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					Year to Date
	September 30					September 30
	2005		2004			2005		2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	547,990	$	452,074		$	1,472,211	$	1,303,235
Gas	69,147		60,055			475,970		478,358
Other	61,481		41,668			174,257		83,390
Total Operating Revenues	678,618		553,797			2,122,438		1,864,983
Operating Expenses
Fuel, emission allowances, and purchased power	211,968		140,307			512,125		389,462
Gas purchased	31,264		19,721			295,135		290,656
Costs of fuel resold	47,310		28,953			137,528		66,327
Operation and maintenance	176,088		153,292			509,712		453,213
Depreciation	45,747		45,943			136,117		135,806
Taxes other than income taxes	51,573		45,316			163,448		158,816
Total Operating Expenses	563,950		433,532			1,754,065		1,494,280
Operating Income	114,668		120,265			368,373		370,703
Miscellaneous Income – Net	4,434		7,204			11,587		13,247
Interest Expense	26,830		24,083			73,632		68,934
Income Before Taxes	92,272		103,386			306,328		315,016
Income Taxes	29,588		39,313			105,354		118,179
Net Income	$	62,684	$	64,073		$	200,974	$	196,837
Preferred Dividend Requirement	211		211			634		634
Net Income Applicable to Common Stock	$	62,473	$	63,862		$	200,340	$	196,203
Net Income	$	62,684	$	64,073		$	200,974	$	196,837
Other Comprehensive Income (Loss), Net of Tax	1,772		(2		)	3,501		2,881
Comprehensive Income	$	64,456	$	64,071		$	204,475	$	199,718

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

	September 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	8,353	$	4,154
Notes receivable from affiliated companies	32,748		121,559
Accounts receivable less accumulated provision for doubtful accounts	545,981		145,105
Accounts receivable from affiliated companies	81,982		30,916
Fuel, emission allowances, and supplies	222,571		199,769
Energy risk management current assets	669,897		148,866
Prepayments and other	263,541		54,650
Total Current Assets	1,825,073		705,019
Property, Plant, and Equipment – at Cost
Utility plant in service
Electric	2,305,398		2,249,352
Gas	1,236,671		1,179,764
Common	254,138		249,576
Total Utility Plant In Service	3,796,207		3,678,692
Construction work in progress	81,306		45,762
Total Utility Plant	3,877,513		3,724,454
Non-regulated property, plant, and equipment	3,792,749		3,660,226
Accumulated depreciation	2,799,014		2,694,708
Net Property, Plant, and Equipment	4,871,248		4,689,972
Other Assets
Regulatory assets	506,063		609,550
Energy risk management non-current assets	207,759		47,276
Restricted funds held in trust	72,094		93,671
Other	136,857		86,871
Total Other Assets	922,773		837,368
Total Assets	$	7,619,094	$	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

	September 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	873,633		$	332,316
Accounts payable to affiliated companies	119,164			85,127
Accrued taxes	292,459			149,010
Accrued interest	26,173			19,408
Notes payable and other short-term obligations (Note 5)	112,100			112,100
Notes payable to affiliated companies (Note 5)	204,519			180,116
Long-term debt due within one year	—			150,000
Energy risk management current liabilities	740,692			120,204
Other	33,191			33,712
Total Current Liabilities	2,401,931			1,181,993
Non-Current Liabilities
Long-term debt	1,594,617			1,443,668
Deferred income taxes	972,421			1,090,897
Unamortized investment tax credits	68,702			73,120
Accrued pension and other postretirement benefit costs	226,858			228,058
Regulatory liabilities	186,228			164,846
Energy risk management non-current liabilities	216,727			40,184
Other	58,870			70,395
Total Non-Current Liabilities	3,324,423			3,111,168
Commitments and Contingencies
Total Liabilities	5,726,354			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 September 30, 2005, and December 31, 2004	762,136			762,136
Paid-in capital	584,176			584,176
Retained earnings	560,274			610,232
Accumulated other comprehensive loss	(34,331		)	(37,831		)
Total Common Stock Equity	1,872,255			1,918,713
Total Liabilities and Shareholders’ Equity	$	7,619,094		$	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
	September 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	200,974		$	196,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	136,117			135,806
Deferred income taxes and investment tax credits – net	(32,449		)	47,546
Change in net position of energy risk management activities	115,518			(32,032		)
Allowance for equity funds used during construction	(804		)	(699		)
Regulatory asset/liability deferrals	(1,342		)	(11,469		)
Regulatory assets amortization	69,501			41,688
Accrued pension and other postretirement benefit costs	(1,200		)	(20,287		)
Cost of removal	(4,969		)	(5,490		)
Changes in current assets and current liabilities:
Accounts and notes receivable	(363,131		)	(20,238		)
Fuel, emission allowances, and supplies	(76,742		)	(49,786		)
Prepayments	(208,887		)	(36,751		)
Accounts payable	494,516			11,201
Accrued taxes and interest	110,459			31,839
Other assets	586			(14,009		)
Other liabilities	(2,083		)	5,973
Net cash provided by operating activities	436,064			280,129
Financing Activities
Change in short-term debt, including net affiliate notes	24,403			196,383
Redemption of long-term debt	—			(110,000		)
Dividends on preferred stock	(634		)	(634		)
Dividends on common stock	(169,459		)	(168,509		)
Net cash used in financing activities	(145,690		)	(82,760		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(309,385		)	(219,307		)
Withdrawal of restricted funds held in trust	23,153			—
Other investments	57			15,321
Net cash used in investing activities	(286,175		)	(203,986		)
Net increase (decrease) in cash and cash equivalents	4,199			(6,617		)
Cash and cash equivalents at beginning of period	4,154			15,842
Cash and cash equivalents at end of period	$	8,353		$	9,225
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	69,717		$	65,629
Income taxes	$	12,370		$	16,646

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
	September 30					September 30
	2005		2004			2005		2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	572,930	$	480,089		$	1,426,795	$	1,310,812
Operating Expenses
Fuel, emission allowances, and purchased power	234,552		183,644			500,668		493,689
Operation and maintenance	113,006		118,914			356,045		350,467
Depreciation	65,860		54,675			199,155		158,565
Taxes other than income taxes	12,126		10,481			38,059		41,014
Total Operating Expenses	425,544		367,714			1,093,927		1,043,735
Operating Income	147,386		112,375			332,868		267,077
Miscellaneous Income – Net	5,481		2,213			15,973		5,777
Interest Expense	29,360		24,864			81,037		66,489
Income Before Taxes	123,507		89,724			267,804		206,365
Income Taxes	57,500		41,237			116,723		91,626
Net Income	$	66,007	$	48,487		$	151,081	$	114,739
Preferred Dividend Requirement	391		647			1,685		1,940
Net Income Applicable to Common Stock	$	65,616	$	47,840		$	149,396	$	112,799
Net Income	$	66,007	$	48,487		$	151,081	$	114,739
Other Comprehensive Income (Loss), Net of Tax	6,676		(614		)	4,946		(248		)
Comprehensive Income	$	72,683	$	47,873		$	156,027	$	114,491

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

	September 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	30,540	$	10,794
Restricted deposits	28,926		22,063
Notes receivable from affiliated companies	26,996		72,958
Accounts receivable less accumulated provision for doubtful accounts	90,499		31,177
Accounts receivable from affiliated companies	9,777		437
Fuel, emission allowances, and supplies	173,836		108,793
Prepayments and other	19,445		11,804
Total Current Assets	380,019		258,026
Property, Plant, and Equipment – at Cost
Utility plant in service	6,846,723		6,397,776
Construction work in progress	316,401		287,925
Total Utility Plant	7,163,124		6,685,701
Accumulated depreciation	2,415,964		2,284,932
Net Property, Plant, and Equipment	4,747,160		4,400,769
Other Assets
Regulatory assets	515,215		420,783
Other investments	74,604		73,396
Restricted funds held in trust	193,628		264,335
Other	84,667		32,587
Total Other Assets	868,114		791,101
Total Assets	$	5,995,293	$	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

	September 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	126,725		$	65,151
Accounts payable to affiliated companies	81,547			38,292
Accrued taxes	157,400			65,871
Accrued interest	30,912			27,532
Notes payable and other short-term obligations (Note 5)	135,500			135,500
Notes payable to affiliated companies (Note 5)	373,682			130,580
Long-term debt due within one year	326,166			50,000
Other	56,034			33,326
Total Current Liabilities	1,287,966			546,252
Non-Current Liabilities
Long-term debt	1,468,641			1,824,219
Deferred income taxes	622,950			638,061
Unamortized investment tax credits	24,368			26,603
Accrued pension and other postretirement benefit costs	206,449			209,992
Regulatory liabilities	392,292			392,573
Other	72,364			88,665
Total Non-Current Liabilities	2,787,064			3,180,113
Commitments and Contingencies
Total Liabilities	4,075,030			3,726,365
Cumulative Preferred Stock
Not subject to mandatory redemption	11,258			42,333
Common Stock Equity
Common stock – without par value; $.01 stated value; authorized shares – 60,000,000; outstanding shares – 53,913,701 at September 30, 2005, and December 31, 2004	539			539
Paid-in capital	826,019			626,019
Retained earnings	1,101,479			1,078,617
Accumulated other comprehensive loss	(19,032		)	(23,977		)
Total Common Stock Equity	1,909,005			1,681,198
Total Liabilities and Shareholders’ Equity	$	5,995,293		$	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
	September 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	151,081		$	114,739
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	199,155			158,565
Deferred income taxes and investment tax credits – net	13,225			48,045
Allowance for equity funds used during construction	(5,238		)	(423		)
Regulatory asset/liability deferrals	(143,891		)	(27,646		)
Regulatory assets amortization	33,102			32,488
Accrued pension and other postretirement benefit costs	(3,543		)	(7,493		)
Cost of removal	(12,530		)	(7,547		)
Changes in current assets and current liabilities:
Accounts and notes receivable	(22,700		)	25,120
Fuel, emission allowances, and supplies	(110,059		)	21,300
Prepayments	253			(820		)
Accounts payable	89,716			(3,147		)
Accrued taxes and interest	56,346			2,855
Other assets	(38,164		)	2,856
Other liabilities	18,733			(7,228		)
Net cash provided by operating activities	225,486			351,664
Financing Activities
Change in short-term debt, including net affiliate notes	243,102			(34,857		)
Issuance of long-term debt	48,656			—
Redemption of long-term debt	(130,000		)	—
Contribution from parent	200,000			—
Retirement of preferred stock	(31,075		)	—
Dividends on preferred stock	(1,862		)	(1,940		)
Dividends on common stock	(111,245		)	(84,709		)
Net cash provided by (used in) financing activities	217,576			(121,506		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(397,655		)	(217,413		)
Withdrawal of restricted funds held in trust	74,800			14,861
Acquisitions and other investments	(100,461		)	(2,063		)
Net cash used in investing activities	(423,316		)	(204,615		)
Net increase in cash and cash equivalents	19,746			25,543
Cash and cash equivalents at beginning of period	10,794			6,565
Cash and cash equivalents at end of period	$	30,540		$	32,108
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	85,455		$	74,245
Income taxes	$	40,450		$	28,302

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 AND COMPREHENSIVE INCOME

	Quarter Ended						Year to Date
	September 30						September 30
	2005			2004			2005			2004
	(dollars in thousands)
	(unaudited)
Operating Revenues
Electric	$	71,994		$	63,751		$	183,002		$	176,698
Gas	13,439			11,119			89,887			85,243
Total Operating Revenues	85,433			74,870			272,889			261,941
Operating Expenses
Electricity purchased from parent company for resale	49,028			45,461			128,464			124,768
Gas purchased	6,573			5,214			57,397			53,528
Operation and maintenance	16,978			14,893			50,182			42,448
Depreciation	5,260			4,992			15,547			14,944
Taxes other than income taxes	534			(567		)	3,618			2,110
Total Operating Expenses	78,373			69,993			255,208			237,798
Operating Income	7,060			4,877			17,681			24,143
Miscellaneous Income – Net	656			294			2,219			1,035
Interest Expense	1,703			1,263			5,150			3,760
Income Before Taxes	6,013			3,908			14,750			21,418
Income Taxes	2,379			1,608			5,409			8,139
Net Income	$	3,634		$	2,300		$	9,341		$	13,279
Other Comprehensive Loss, Net of Tax	(17		)	—			(17		)	—
Comprehensive Income	$	3,617		$	2,300		$	9,324		$	13,279

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

	September 30		December 31
	2005		2004
	(dollars in thousands)
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	7,888	$	4,197
Notes receivable from affiliated companies	4,800		20,675
Accounts receivable less accumulated provision for doubtful accounts	1,388		1,451
Accounts receivable from affiliated companies	537		5,671
Inventory and supplies	11,132		8,500
Prepayments and other	883		285
Total Current Assets	26,628		40,779
Property, Plant, and Equipment – at Cost
Utility plant in service
Electric	293,347		285,828
Gas	270,895		256,667
Common	42,071		42,176
Total Utility Plant In Service	606,313		584,671
Construction work in progress	14,275		6,070
Total Utility Plant	620,588		590,741
Accumulated depreciation	186,471		176,726
Net Property, Plant, and Equipment	434,117		414,015
Other Assets
Regulatory assets	6,786		10,070
Other	2,628		2,801
Total Other Assets	9,414		12,871
Total Assets	$	470,159	$	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

	September 30			December 31
	2005			2004
	(dollars in thousands)
	(unaudited)
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	5,441		$	16,028
Accounts payable to affiliated companies	19,537			22,236
Accrued interest	1,644			1,370
Notes payable to affiliated companies (Note 5)	9,563			11,246
Other	10,094			7,009
Total Current Liabilities	46,279			57,889
Non-Current Liabilities
Long-term debt	94,392			94,340
Deferred income taxes	60,592			58,422
Unamortized investment tax credits	2,436			2,626
Accrued pension and other postretirement benefit costs	17,535			17,762
Regulatory liabilities	34,392			29,979
Other	12,696			14,136
Total Non-Current Liabilities	222,043			217,265
Commitments and Contingencies
Total Liabilities	268,322			275,154
Common Stock Equity
Common stock – $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333 at September 30, 2005, and December 31, 2004	8,780			8,780
Paid-in capital	23,455			23,455
Retained earnings	170,904			161,562
Accumulated other comprehensive loss	(1,302		)	(1,286		)
Total Common Stock Equity	201,837			192,511
Total Liabilities and Shareholder’s Equity	$	470,159		$	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
	September 30
	2005			2004
	(dollars in thousands)
	(unaudited)
Operating Activities
Net income	$	9,341		$	13,279
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	15,547			14,944
Deferred income taxes and investment tax credits – net	4,296			3,865
Allowance for equity funds used during construction	(445		)	12
Regulatory asset/liability deferrals	944			2,851
Regulatory assets amortization	2,697			1,046
Accrued pension and other postretirement benefit costs	(227		)	(2,124		)
Cost of removal	(858		)	(1,267		)
Changes in current assets and current liabilities:
Accounts and notes receivable	21,072			17,364
Inventory and supplies	(2,632		)	(2,853		)
Prepayments	(598		)	(148		)
Accounts payable	(13,286		)	(12,716		)
Accrued taxes and interest	3,398			5,273
Other assets	596			409
Other liabilities	(2,221		)	(1,178		)
Net cash provided by operating activities	37,624			38,757
Financing Activities
Change in short-term debt, including net affiliate notes	(1,683		)	(8,338		)
Net cash used in financing activities	(1,683		)	(8,338		)
Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(32,250		)	(24,619		)
Net cash used in investing activities	(32,250		)	(24,619		)
Net increase in cash and cash equivalents	3,691			5,800
Cash and cash equivalents at beginning of period	4,197			1,899
Cash and cash equivalents at end of period	$	7,888		$	7,699
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	4,638		$	3,814
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
14	Subsequent Event

26

NOTES TO CONDENSED FINANCIAL STATEMENTS

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 common stock 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 pending 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 September 30, 2005 and 2004, were as follows:

	2005		2004
	(in millions)
Cinergy	$	152	$	137
CG&E and subsidiaries	80		68
PSI	72		69
ULH&P	13		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 (Statement 133).  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 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)Derivatives

Cinergy designates derivatives as fair value hedges for certain volumes of our natural gas held in storage.  Under this accounting election, changes in the fair value of both the derivative as well as the hedged item (the specified gas held in storage) are included in Gas Operating Revenues in Cinergy’s Condensed Consolidated Statements of Income.  We assess the effectiveness of the derivatives in offsetting the change in fair value of the gas held in storage on a quarterly basis.  Selected information on Cinergy’s hedge accounting activities for the quarter and year to date ended September 30, 2005 and 2004 were as follows:

	Quarter						Year to Date
	2005			2004			2005			2004
	(in millions)
Portion of loss on hedging instruments determined to be ineffective	$	(25	)	$	(3	)	$	(24	)	$	—
Portion of gain (loss) on hedging instruments related to changes in time value excluded from assessment of ineffectiveness	28			(6		)	24			(8		)
Total included in Gas Operating Revenues	$	3		$	(9	)	$	—		$	(8	)

(e)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

28

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 continue to evaluate 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.

(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 types of stock-based compensation other than stock options.  We are in the process of evaluating the impact of this new standard on our 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, repatriation pursuant to this provision will not 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 nine months ended September 30, 2005, Cinergy issued 2.5 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.

Cash dividends declared for the quarter ended September 30, 2005 include dividends of $0.48 per share which were declared by the board of directors on July 21 and dividends of $0.48 per share which were declared on September 30.

3.     Cumulative Preferred Stock

In August 2005, PSI redeemed all of its $31.075 million notional amount 6.875% Cumulative Preferred Stock.

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4.Long-Term Debt

In August 2005, PSI redeemed all of its $50 million 6.50% Synthetic Putable Yield Securities due August 1, 2026 through the exercise of call provisions within the securities.

In August 2005, PSI redeemed all of its $50 million principal amount Series ZZ First Mortgage secured 5 ¾% Series 1993B Environmental Revenue Refunding Bonds, due February 15, 2028.  PSI redeemed 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 September 2005, PSI redeemed all of its $30 million principal amount 7.125% Series AAA First Mortgage Bonds, due 2024.

In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005C, due October 1, 2040.  The initial interest rate for Series 2005C Bonds was 2.75%. This rate will initially reset on December 2, 2005 and then every 35 days by auction thereafter.  Because the holders cannot tender the Series 2005C Bonds for purchase by the issuer while the Series 2005C Bonds are in the auction rate mode, these debt obligations are classified as Long-term debt.  PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.

Also in October 2005, PSI issued $350 million principal amount of its 6.12% Debentures due October 15, 2035. Proceeds from this issuance were used for general corporate purposes and the repayment of outstanding short-term indebtedness.

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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 revolving credit facility and 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:

	September 30, 2005						December 31, 2004
					Weighted						Weighted
	Established				Average		Established				Average
	Lines		Outstanding		Rate		Lines		Outstanding		Rate
	(dollars in millions)
Cinergy
Cinergy Corp.
Revolving line(1)	$	2,000	$	—	—	%	$	2,000	$	—	—	%
Uncommitted lines	40		—		—		40		—		—
Commercial paper(2)			874		3.88				676		2.45
Utility operating companies
Uncommitted lines	75		—		—		75		—		—
Pollution control notes			248		3.20				248		2.43
Non-regulated subsidiaries
Revolving lines(3)	162		45		4.29		158		8		5.67
Short-term debt			7		9.39				2		4.50
Pollution control notes			25		3.10				25		2.30
Cinergy Total			$	1,199	3.77	%			$	959	2.47	%
CG&E and subsidiaries
Uncommitted lines	$	15	$	—	—	%	$	15	$	—	—	%
Pollution control notes			112		3.11				112		2.34
Money pool			205		3.87				180		2.38
CG&E Total			$	317	3.60	%			$	292	2.36	%
PSI
Uncommitted lines	$	60	$	—	—	%	$	60	$	—	—	%
Pollution control notes			136		3.28				136		2.49
Money pool			373		3.87				130		2.38
PSI Total			$	509	3.71	%			$	266	2.44	%
ULH&P
Money pool			$	10	3.87	%			$	11	2.38	%
ULH&P Total			$	10	3.87	%			$	11	2.38	%

(1)Consists of a five-year facility which was entered into in September 2005, matures in September 2010, and contains $500 million sublimits each for CG&E and PSI, and a $65 million sublimit for ULH&P (which may be increased to $100 million upon 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.  See Note 12(a) for further information regarding this transaction.)

(2)Cinergy Corp.’s commercial paper program limit is $1.5 billion.  The commercial paper program is supported by Cinergy Corp.’s revolving line 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 that matures in December 2007.

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Short-term Notes

In September 2005, Cinergy Corp., CG&E, PSI, and ULH&P entered into a five-year revolving credit facility with a termination date of  September 2010 which can be extended twice, each extension for an additional one-year period.  The new credit agreement replaces two existing credit agreements, one dated April 2004 and one dated December 2004.

The new credit agreement provides that the pending merger between Duke and Cinergy Corp. will not be considered a fundamental change or a “Change of Control” for purposes of the credit agreement.

For purposes of making borrowings the new credit agreement does not require certain environmental, litigation or material adverse change representations and warranties that were in the credit agreements it replaced.

At September 30, 2005, Cinergy Corp. had $898 million remaining unused and available capacity relating to its $2 billion revolving credit facility.  The revolving credit facility includes the following:

Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available
		(in millions)
Five-year senior revolving	September 2010
Commercial paper support				$	874
Letter of credit support				228
Total(1)		$	2,000	1,102		$	898

(1)In September 2005, Cinergy Corp. successfully placed a $2 billion senior unsecured revolving credit facility which replaced the $1 billion five-year facility, set to expire in December 2009, and the $1 billion three-year facility, set to expire in April 2007.  CG&E and PSI each have $500 million borrowing sublimits on this facility, and ULH&P has a $65 million borrowing sublimit on this facility (which may be increased to $100 million upon 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.  See Note 12(a) for further information regarding this transaction.)

In our credit facility, 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 $2 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 $2 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.

As part of ULH&P’s $65 million sublimit under the $2 billion five-year credit facility, ULH&P has covenanted to maintain:

•a consolidated net worth of $150 million, provided that in the event that the sublimit has been increased to $100 million the consolidated net worth would be $200 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 facility 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 September 30, 2005, Cinergy, CG&E, PSI, and ULH&P are in compliance with all of their debt covenants.

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Variable Rate Pollution Control Notes

In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005B, due October 1, 2040. Holders of the Series 2005B Bonds are entitled to credit enhancement in the form of a standby letter of credit, which if drawn upon, provides for the payment of both interest and principal on the Series 2005B Bonds.  The initial interest rate for the Series 2005B Bonds was 2.75% and is reset weekly. Because the holders have the right to have their Bonds redeemed on a weekly basis, they are classified as Notes payable and other short-term obligations.  PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.

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 September 30, 2005, 92 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 eight percent represents credit exposure of $99 million with counterparties rated non-investment grade.

As of September 30, 2005, CG&E had a concentration of trading credit exposure of $54 million with one counterparty accounting for greater than ten percent of CG&E’s total trading credit exposure.  This counterparty is 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.  When appropriate, we 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

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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.

Qualified pension benefit contributions for the first nine months of 2005 were $102 million, 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.  No additional contributions are expected for the remainder of 2005.

Our benefit plans’ costs for the quarter and year to date ended September 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 September 30
Service cost	$	9.6		$	8.8		$	1.4	$	1.2	$	1.6		$	1.2
Interest cost	24.1			22.1			1.8		1.7		5.7			5.4
Expected return on plans’ assets	(22.0		)	(20.1		)	—		—		—			—
Amortization of transition (asset) obligation	(0.1		)	(0.1		)	—		—		0.1			0.1
Amortization of prior service cost	1.1			1.1			0.5		0.5		(0.1		)	—
Recognized actuarial (gain) loss	2.0			0.5			0.6		0.7		2.7			1.9
Net periodic benefit cost	$	14.7		$	12.3		$	4.3	$	4.1	$	10.0		$	8.6
Year to Date September 30
Service cost	$	28.8		$	26.4		$	4.2	$	3.6	$	4.8		$	3.8
Interest cost	72.2			66.3			5.4		5.1		17.1			16.8
Expected return on plans’ assets	(66.1		)	(60.3		)	—		—		—			—
Amortization of transition (asset) obligation	(0.2		)	(0.3		)	—		—		0.3			1.0
Amortization of prior service cost	3.4			3.3			1.5		1.5		(0.5		)	—
Recognized actuarial (gain) loss	5.9			1.5			1.8		2.1		8.2			5.9
Net periodic benefit cost	$	44.0		$	36.9		$	12.9	$	12.3	$	29.9		$	27.5

The net periodic benefit costs by registrant for the quarter and year to date ended September 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 September 30
Cinergy(1)	$	14.7	$	12.3	$	4.3	$	4.1	$	10.0	$	8.6
CG&E and subsidiaries	4.4		3.7		0.1		0.2		2.6		2.0
PSI	3.8		3.2		0.3		0.2		4.8		4.7
ULH&P	0.4		0.4		—		—		0.3		0.2
Year to Date September 30
Cinergy(1)	$	44.0	$	36.9	$	12.9	$	12.3	$	29.9	$	27.5
CG&E and subsidiaries	13.1		11.1		0.5		0.6		7.8		6.6
PSI	11.3		9.6		0.6		0.6		14.7		14.7
ULH&P	1.2		1.2		—		—		0.8		0.6

(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 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 $4 million in addition to $820 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 beginning in 2010.  The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018.  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 phase 1 of CAIR for the state by 2009 and 2010 for NO_X and SO₂, respectively.  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.  On October 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR and the determination not to regulate mercury under Section 112 of the CAA.  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

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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 electric generating units to adhere to best available retrofit technology 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.  In August 2005, the district court issued a ruling regarding the emissions test that it will apply to Cinergy at the trial of the case.  Contrary to Cinergy’s argument, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant.  However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to accept or not accept the appeal at this time.  There are a number of other legal issues currently before the district court judge, and the case is currently 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

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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.  This case is currently in discovery.

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.  In September 2005, the district court granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals.  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.

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(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.  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.  One lawsuit was dismissed on procedural grounds and the remaining two have been consolidated.  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.  We intend to defend this lawsuit vigorously in court.

(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.  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.  The IDEM oversees investigation and cleanup of all of these 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 130 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,

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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 and October 2005, PSI received notices 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.

(x)         Ontario, Canada Lawsuit

We understand through newspaper reports that a class action lawsuit was filed in Superior Court in Ontario, Canada against us and approximately 20 other utility and power generation companies alleging various claims relating to environmental emissions from coal-fired power generation facilities in the United States and Canada and damages of approximately $50 billion, with continuing damages in the amount of approximately $4 billion annually.  We understand that the lawsuit also claims entitlement to punitive and exemplary damages in the amount of $1 billion.  We have not yet been served in this lawsuit, however, if served, we intend to defend this lawsuit vigorously in court.  We are not able to predict whether resolution of this matter would have a material effect on our financial position or results of operations.

(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 fourth 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 is avoidable by certain customers who switch to an alternative generation supplier and provide notice to CG&E that they will remain switched through December 31, 2008.  Therefore, these estimates are subject to change, depending on the level of switching that occurs in future periods.  CG&E has filed an application for approval of its SRT (2005 actual and 2006 estimated) with the PUCO.  In October, a settlement agreement unopposed by any party to the case was filed with the PUCO providing for implementation of the 2006 SRT at a 15 percent reserve margin and approval of the 2005 SRT price.  A Commission decision is expected on this matter in the fourth quarter of 2005.  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. 

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•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.  The fuel clause recovery mechanism was recently audited by the PUCO’s auditor.  The audit recommended alternate methodologies for administration of the fuel clause recovery mechanism that vary from CG&E’s current practice.  A hearing before PUCO hearing examinerswas held in early November at which the PUCO staff took positions contrary to CG&E's current practice.  CG&E officials also testified at the hearing concerning our current practices.  An order from the PUCO on these matters is expected in the fourth quarter of this year.  While we cannot predict the outcome of these proceedings, an outcome resulting in administrative methodologies substantially different from those being employed by CG&E could have a material impact on CG&E and Cinergy’s results of operations.

•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:  A transmission cost recovery mechanism was established beginning January 1, 2005 for non-residential customers and will be established beginning January 1, 2006 for residential customers.  The transmission cost recovery mechanism is 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 and, in February 2005, CG&E filed a new distribution base rate case with rates to become effective January 1, 2006.  The originally requested amount of the increase was $78 million, which was subsequently updated to $69.5 million.  On September 9, 2005, the PUCO issued its Staff Report recommending a revenue increase range between approximately $43 million and $49 million.  The hearing for this case is set to begin December 12, 2005. 

In March 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Court to overturn the RSP.  We expect the court to decide the case in 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 approval allowed the costs to be recovered through a tracking mechanism for an initial three year period expiring on September 30, 2005, with the possibility of renewal up to ten years.  The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets.  As of September 30, 2005 we have capitalized $60 million in costs associated with the accelerated gas main replacement program through this tracking mechanism of which ULH&P has recovered $8.6 million.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the tracking mechanism rates.  In October 2005, both the Company and the KPSC filed with the Franklin Circuit Court, requesting dismissal of the case for failure to prosecute by the Attorney General.  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 requesting approval to continue the tracking mechanism in addition to its request for a $14 million increase in base rates.  The KPSC did not rule on this request by October 1, 2005 causing the initial tracking mechanism to expire.  In accordance with Kentucky law, ULH&P implemented the full amount of the requested rate increase on October 1, 2005.  Any revenue collected pursuant to the rate increase will be subject to refund if the KPSC does not approve the full requested amount.  ULH&P expects that the KPSC will issue its decision during the fourth quarter of 2005.

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(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 intend to defend this lawsuit vigorously in court.

Cinergy continues to provide various Assistant United States Attorneys with information with respect to their investigations into energy market practices.

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.

(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 $306 million in tax credits through September 30, 2005 of which $27 million related to the new facility purchased in the second quarter of 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.  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 $306 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 Cinergy’s new facility pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit.  Cinergy is evaluating transactions 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 and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the tax credits could be reduced.  If oil prices are high enough, we may idle the plants, as the value of the credits would not

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exceed the net costs to produce the synthetic fuel.  Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million.  The net book value of our plants at September 30, 2005 was approximately $50 million.

(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.  Both parties have filed motions for summary judgment.  Cinergy intends to defend this lawsuit vigorously in court.  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.

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 September 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

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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 September 30, 2005, and September 30, 2004, are as indicated below.

	Cinergy Business Units
	Regulated		Commercial		Power Technology and Infrastructure			Total		Reconciling Eliminations(1)			Consolidated
	(in millions)
Quarter ended September 30, 2005
Operating revenues
External customers	$	853	$	512	$	—		$	1,365	$	—		$	1,365
Intersegment revenues	10		54		—			64		(64		)	—
Gross margins
Electric	512		163		—			675		—			675		(2)
Gas	37		17		—			54		—			54		(3)
Segment profit (loss)	92		41		(1		)	132		—			132
Quarter ended September 30, 2004
Operating revenues
External customers	$	727	$	402	$	—		$	1,129	$	—		$	1,129
Intersegment revenues	18		63		—			81		(81		)	—
Gross margins
Electric	441		170		—			611		—			611		(2)
Gas	40		6		—			46		—			46		(3)
Segment profit (loss)	59		45		(11		)	93		—			93

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

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

(3)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 September 30, 2005, and September 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 September 30, 2005
Operating revenues
External customers	$	2,471	$	1,353	$	—		$	3,824	$	—		$	3,824
Intersegment revenues	24		137		—			161		(161		)	—
Gross margins
Electric	1,388		509		—			1,897		—			1,897		(2)
Gas	179		3		—			182		—			182		(3)
Segment profit (loss)	217		90		(7		)	300		—			300
Year to Date September 30, 2004
Operating revenues
External customers	$	2,327	$	1,144	$	—		$	3,471	$	—		$	3,471
Intersegment revenues	49		165		—			214		(214		)	—
Gross margins
Electric	1,243		504		—			1,747		—			1,747		(2)
Gas	188		45		—			233		—			233		(3)
Segment profit (loss)	173		121		(40		)	254		—			254

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

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

(3)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 September 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 September 30, 2005	$	9,503	$	7,830	$	133	$	17,466	$	17,466
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 September 30, 2005 and 2004:

	Income		Shares	EPS
	(in thousands, except per share amounts)
Quarter Ended September 30, 2005
EPS – basic:	$	131,937	199,069	$	0.67
Effect of dilutive securities:
Common stock options			828
Directors’ compensation plans			150
Contingently issuable common stock			120
EPS – diluted:	$	131,937	200,167	$	0.66
Quarter Ended September 30, 2004
EPS – basic:	$	92,923	180,881	$	0.51
Effect of dilutive securities:
Common stock options			616
Directors’ compensation plans			148
Contingently issuable common stock			710
Stock purchase contracts			1,123
EPS – diluted:	$	92,923	183,478	$	0.50

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 0.7 million and 0.9 million were excluded from the EPS – diluted calculation for the quarters ended September 30, 2005 and 2004, respectively.

Also excluded from the EPS – diluted calculation for the quarter ended September 30, 2004 are 9.7 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 September 30, 2005 and 2004:

	Income		Shares	EPS
	(in thousands, except per share amounts)
Year to Date September 30, 2005
EPS – basic:	$	300,001	197,741	$	1.52
Effect of dilutive securities:
Common stock options			706
Directors’ compensation plans			149
Contingently issuable common stock			84
Stock purchase contracts			97
EPS – diluted:	$	300,001	198,777	$	1.51
Year to Date September 30, 2004
EPS – basic:	$	254,442	180,129	$	1.41
Effect of dilutive securities:
Common stock options			675
Directors’ compensation plans			148
Contingently issuable common stock			585
Stock purchase contracts			1,027
EPS – diluted:	$	254,442	182,564	$	1.39

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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 0.8 million and 0.9 million were excluded from the EPS – diluted calculation for the year to date September 30, 2005 and 2004, respectively.

Also excluded from the EPS – diluted calculation for the year to date September 30, 2004 are 9.8 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 first quarter of 2006.

(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.  In August 2005, PSI acquired 100 percent of the Wheatland facility.  Its output will be used to bolster the reserve margins on the PSI system.

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 (Duke Energy Holding).

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 CEO and Chairman of the Board, will become the President and CEO 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 the first half of 2006.  However, the actual timing is contingent on the receipt of several approvals including:  FERC, Federal Communications Commission (FCC), Nuclear Regulatory Commission (NRC), state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company.  The status of these matters is as follows:

•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 fourth quarter of 2005.  The PUCO issued a procedural order on October 26, 2005 ordering the Staff to issue recommendations no later than November 14, 2005.  A final order is expected in January 2006.

•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.  An evidentiary hearing is scheduled for December 2005.

•In August 2005, Duke and Cinergy filed an application with the KPSC seeking approval of a transfer and acquisition of control of ULH&P.  In October 2005, Duke and Cinergy reached a settlement with the parties to the case, the Kentucky Attorney General and The Kroger Company.  The settlement was filed with the KPSC and a hearing was held before the KPSC in October 2005.  A final order is expected by December 2005.

•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.  A final order is expected in January 2006.

•In July 2005, Duke filed an application with the state utility regulatory agency in North Carolina.  The application requests both the authorization to enter into a business combination transaction and the approval of various affiliate agreements.  A hearing is scheduled for December 2005.

•In July 2005, Duke filed an application with the state utility regulatory agency in South Carolina.  The application requested authorization to enter into a business combination.  In November 2005, the Public Servie Commission of South Carolina approved the application.

•On August 11, 2005, the United States Department of Justice and the Federal Trade Commission granted early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

•In light of the repeal of the Public Utility Holding Company Act, as amended (PUHCA), effective February 2006, the merger will no longer require SEC authorization under PUHCA.

•The FCC merger filings were filed in October 2005 and a decision by the FCC is expected by December 2005.

•Duke filed for NRC merger approval in the third quarter of 2005 and a final order is expected in January 2006.

•A special meeting of shareholders for the purpose of voting on the merger is expected to be held in the first quarter of 2006.

The 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 the IURC.  There can be no guarantee that such approvals 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 over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E owning and operating the assets.  At this time, we cannot predict the outcome of this matter.

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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.  Any termination fee would be reduced by the amount of any fees and expenses previously reimbursed by the party required to pay the termination fee.

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 the outcome of this matter, including whether resolution of this matter will impact our pending merger.

Although Management believes that the merger should close in the first half of 2006, the actual timing of the transaction could be delayed or the merger could be abandoned by the parties in the event of the inability to obtain one or more of the required regulatory approvals on acceptable terms.

14.Subsequent Event

In October 2005, Cinergy entered into a definitive agreement to sell a wholly-owned subsidiary in Europe engaged in the generation and sale of heat and electricity.  We anticipate recognizing a gain on sale of approximately $15 million and expect the sale to close in December 2005, subject to certain regulatory approvals.  As of September 30, 2005, this subsidiary had approximately $5 million of current assets and $105 million of plant, property, and equipment.

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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 (MD&A)

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 (Duke Energy Holding).

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 CEO and Chairman of the Board, will become the President and CEO 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.

The merger is expected to close in the first half of 2006.  However, the actual timing is contingent on the receipt of several approvals including:  Federal Energy Regulatory Commission (FERC), Federal Communications Commission (FCC), Nuclear Regulatory Commission (NRC), state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company.  The status of these matters is as follows:

•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 fourth quarter of 2005.  The PUCO issued a procedural order on October 26, 2005 ordering the Staff to issue recommendations no later than November 14, 2005.  A final order is expected in January 2006.

•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.  An evidentiary hearing is scheduled for December 2005.

•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.  In October 2005, Duke and Cinergy reached a settlement with the parties to the case, the Kentucky Attorney General and The

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Kroger Company.  The settlement was filed with the KPSC and a hearing was held before the KPSC in October 2005.  A final order is expected by December 2005.

•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.  A final order is expected in January 2006.

•In July 2005, Duke filed an application with the state utility regulatory agency in North Carolina.  The application requests both the authorization to enter into a business combination transaction and the approval of various affiliate agreements.  A hearing is scheduled for December 2005.

•In July 2005, Duke filed an application with the state utility regulatory agency in South Carolina.  The application requested authorization to enter into a business combination.  In November 2005, the Public Servie Commission of South Carolina approved the application.

•On August 11, 2005, the United States Department of Justice and the Federal Trade Commission granted early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

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

•The FCC merger filings were filed in October 2005 and a decision by the FCC is expected by December 2005.

•Duke filed for NRC merger approval in the third quarter of 2005 and a final order is expected in January 2006.

•A special meeting of shareholders for the purpose of voting on the merger is expected to be held in the first quarter of 2006.

The 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 the IURC.  There can be no guarantee that such approvals 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 over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E 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.  Any termination fee would be reduced by the amount of any fees and expenses previously reimbursed by the party required to pay the termination fee.

Although Management believes that the merger should close in the first half of 2006, the actual timing of the transaction could be delayed or the merger could be abandoned by the parties in the event of the inability to obtain one or more of the required regulatory approvals on acceptable terms.

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MD&A - EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

In 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 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 “Kentucky” in “Future Expectations/Trends” 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 (Marketing & Trading), one of its subsidiaries).

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Financial Highlights

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

	Cinergy
	2005		2004		Change		% Change
	(in millions)
Quarter ended September 30	$	132	$	93	$	39	42	%
Nine months ended September 30	$	300	$	254	$	46	18	%

Quarterly Highlights

The increase in net income was primarily due to an increase in electric gross margins as a result of warmer weather in the third quarter of 2005, as compared to 2004.

These increases were partially offset by the following factors:

•A decrease in Commercial Business Unit (Commercial) electric gross margins due to timing differences in revenue recognition between certain components of our generation portfolio partially offset by sales of emission allowances; and

•Increased fuel, emission allowances, and purchased power costs attributable to CG&E’s fixed price residential customers.

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:

•Increased gross margins resulting from PSI’s 2004 base retail electric rate increase and the implementation of CG&E’s rate stabilization plan (RSP) in January 2005; and

•Increased gross margins due to warmer weather in the third quarter of 2005, as compared to 2004.

These increases were partially offset by the following factors:

•Increased fuel, emission allowances, and purchased power costs attributable to CG&E’s fixed price residential customers;

•Decreases in Commercial gas gross margins from trading results in the second quarter of 2005;

•Increased Operation and maintenance expense primarily due to regulatory asset amortization, synthetic fuel costs, and expenses associated with the pending Duke-Cinergy merger; and

•Increased Depreciation expense due to increased depreciation rates and the addition of depreciable plant.

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 and combining each of the

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unregulated wholesale power generation businesses.  All of these businesses are complex, and some of the business units are dispersed.  Such efforts could also divert management’s 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.  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 are taking steps to reduce any adverse effects, 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 to seek to change their existing business relationships with us.

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.

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”.

Synthetic Fuel

Cinergy produces 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 currently faces two major uncertainties that could impact our ability to continue to recognize the previous and/or future credits.  The Internal Revenue Service (IRS) has recently challenged certain other taxpayers’ Section 29 tax credits and could challenge Cinergy’s.  If the IRS were to successfully challenge our credits, this could result in the disallowance of up to all previously claimed and future Section 29 tax credits for Cinergy’s facilities.  We believe that we operate in conformity with all the necessary requirements to qualify for tax credits under Section 29.

Section 29 also provides for a phase-out of the tax credits 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 and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the

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tax credits could be reduced.  If oil prices are high enough, we may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel. Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million.  The net book value of our plants at September 30, 2005 was approximately $50 million.  See “Synthetic Fuel Production” in “Future Expectations/Trends” for further information.

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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 September 30, 2005, and 2004 were as follows:

	Cinergy
	Regulated									Commercial
	2005		2004		Change			% Change		2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	512	$	441	$	71		16	%	$	163	$	170	$	(7	)	(4	)%
Gas gross margin(2)	37		40		(3		)	(8	)	17		6		11			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/M Not 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 September 30, 2005, and 2004 were as follows:

	Cinergy
	2005	2004	Change	% Change
Cooling degree days(1)	916	544	372	68	%
Heating degree days(2)(3)	6	5	1	20

(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.

Regulated

Gross Margins

The 16 percent increase in Regulated’s electric gross margins was primarily due to the following factors:

•A $45 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004;

•A $6 million increase resulting from growth in non-weather related demand; and

•A $5 million increase in PSI’s non-retail margins, primarily attributable to margins realized from wholesale sales from generation available after serving regulated retail customers.

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Commercial

Gross Margins

The four percent decrease in Commercial’s electric gross margins was primarily due to:

•A $32 million decline in non-retail margins.  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.  Margins declined due to:

•During the third quarter of 2005, we recognized margins of $69 million less than the comparable period in 2004 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 $72 million of unrealized losses in 2005 and $3 million of unrealized losses in 2004 (representing a $69 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.

•Higher fuel costs during the quarter.

Partially offsetting these declines were margins of $37 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 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.

•A $22 million increase in margins from power marketing and trading contracts.

•Higher retail margins of $3 million reflecting:

•A $14 million increase resulting from implementation of CG&E’s RSP in January 2005; and

•A $12 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004.

Partially offsetting these increases was a $23 million increase in fuel, emission allowance, and purchased power costs attributable to CG&E’s fixed price residential customers.

The increase in Commercial’s gas gross margins was primarily due to the following factors:

•A $14 million increase in physical trading margins resulting from favorable price movements in the third quarter of 2005; and

•A $7 million increase 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 $8 million of

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unrealized losses in 2005 and $15 million of unrealized losses in 2004 (representing a $7 million change quarter on quarter) as a result of derivative contracts and the use of MTM accounting.

Partially offsetting these increases was an $8 million decline in financial trading margins.

Other Operating Revenues and Costs of Fuel Resold

The 32 percent increase in Other Operating Revenues was primarily due to the following factors:

•A $21 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and tons of coal sold; and

•A $16 million increase in Commercial’s revenues from the sale of synthetic fuel, due in part to revenues from a new facility purchased in the second quarter of 2005.

Costs of fuel resold include 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	$	342	$	326	$	16	5	%
Depreciation	130		115		15		13
Taxes other than income taxes	65		57		8		14

Operation and Maintenance

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

•Increased regulatory asset amortization of $15 million related to CG&E’s Regulatory Transition Charge (RTC).  This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;

•An increase of $11 million in costs at our synthetic fuel facilities primarily related to production costs at a new facility purchased in the second quarter of 2005; and

•Increased costs of $5 million associated with the sales of accounts receivable to an unconsolidated affiliate, primarily due to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.

These increases were partially offset by the following factors:

•A decrease of $6 million in power supply expense primarily related to decreases in brokerage and Midwest Independent System Operator, Inc. (Midwest ISO) administrative fees; and

•Costs relating to an information technology system replacement project that occurred in 2004.

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Depreciation

The 13 percent increase in Depreciation expense was primarily due to the addition of depreciable plant for pollution control equipment which is recovered from ratepayers.

Taxes other than Income Taxes

The 14 percent increase in Taxes other than income taxes was primarily due to an increase in real estate and personal property taxes.

Miscellaneous Income (Expense) – Net

The increase in Miscellaneous Income (Expense) – Net was primarily due to $15 million in impairment and disposal charges recognized in the third quarter of 2004 on certain investments in the Power Technology and Infrastructure Services Business Unit (Power Technology and Infrastructure).

Interest Expense

The seven percent increase in Interest Expense was primarily due to an increase in amount and in interest rates for our variable rate debt.  This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income (Expense) – Net associated with the additional debt outstanding.

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MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS – CG&E

2005 QUARTERLY RESULTS OF OPERATIONS - CG&E

Summary of Results

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

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Net income	$	63	$	64	$	(1	)	(2	)%

Net income for CG&E was relatively flat for the third quarter of 2005, as compared to 2004.  The increased electric gross margins due to warmer weather in the third quarter of 2005, as compared to 2004, and rate tariff adjustments resulting from the implementation of the RSP in January 2005 were offset by decreased non-retail margins and increased Operation and maintenance expenses.

Gross Margins

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

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	336	$	312	$	24		8	%
Gas gross margin(2)	38		40		(2		)	(5	)

(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 September 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005	2004	Change	% Change
Cooling degree days(1)	954	552	402	73	%
Heating degree days(2)(3)	5	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.

Electric Gross Margins

The eight percent increase in CG&E’s electric gross margins was primarily due to:

•Higher retail margins of $36 million reflecting:

•A $33 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004; and

•A $19 million increase in rate tariff adjustments resulting from implementation of the RSP in January 2005.

Partially offsetting these increases was a $23 million increase in fuel, emission allowance, and purchased power costs attributable to fixed price residential customers.

•A $22 million increase in margins from power marketing and trading contracts.

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•A decline of $34 million in non-retail margins.  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.  Margins declined due to:

•During the third quarter of 2005, we recognized margins of $69 million less than the comparable period in 2004 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 $72 million of unrealized losses in 2005 and $3 million of unrealized losses in 2004 (representing a $69 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.

•Higher fuel costs during the quarter.

Partially offsetting these declines were margins of $37 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 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.

Other Operating Revenues and Costs of Fuel Resold

The 48 percent increase in Other Operating Revenues was due to a $20 million increase in revenues from coal origination resulting from increases in coal prices and tons of coal sold.

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	$	176	$	153	$	23	15	%
Depreciation	46		46		—		—
Taxes other than income taxes	52		45		7		16

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Operation and Maintenance

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

•Increased regulatory asset amortization of $15 million related to CG&E’s RTC.  This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;

•Increased costs of $4 million primarily associated with the sales of accounts receivable to an unconsolidated affiliate due to increased fees charged by the buyer of the receivables and an increase in the volume in receivables sold; and

•An increase of $4 million of labor expenses primarily resulting from employee incentives was partially offset by a decrease in severance payments.

Taxes other than Income Taxes

The 16 percent increase in Taxes other than income taxes was primarily due to increases in property taxes and increases in gross receipts taxes.

Income Taxes

The effective income tax rate decreased for the quarter ended September 30, 2005, as compared to 2004.  The decrease was primarily a result of finalizing the 2004 tax return and other reconciliation adjustments.

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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 September 30, 2005, and 2004 was as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Net income	$	66	$	48	$	18	38	%

The increase in net income was primarily due to warmer weather in the third quarter of 2005, as compared to 2004.  This increase was partially offset by an increase in depreciation primarily due to the addition of pollution control equipment.

Electric Gross Margins

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

	PSI
	2005		2004		Change		% Change
	(in millions)
Electric gross margin(1)	$	338	$	296	$	42	14	%

(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 September 30, 2005, and 2004 were as follows:

	PSI
	2005	2004	Change	% Change
Cooling degree days(1)	877	536	341	64	%
Heating degree days(2)(3)	6	4	2	50

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

•A $24 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004;

•A $6 million increase resulting from growth in non-weather related demand; and

•A $5 million increase in non-retail margins, primarily attributable to margins realized from wholesale sales from generation available after serving regulated retail customers.

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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	$	113	$	119	$	(6	)	(5	)%
Depreciation	66		55		11			20
Taxes other than income taxes	12		10		2			20

Operation and Maintenance

The five percent decrease in Operation and maintenance expense was primarily due to the following factors:

•Decreased labor expenses of $5 million related to decreased severance payments and employee incentive costs; and

•A decrease of outside services costs of $4 million primarily related to decreased litigation and other consulting costs.

These decreases are partially offset by increased costs associated with the sales of accounts receivable to an unconsolidated affiliate primarily related to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.

Depreciation

The 20 percent increase in Depreciation expense was primarily due to the addition of depreciable plant for pollution control equipment which is recovered from ratepayers.

Interest Expense

The 18 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt.  This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income – Net associated with the additional debt outstanding.

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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 nine months ended September 30, 2005, and 2004 were as follows:

	Cinergy
	Regulated									Commercial
	2005		2004		Change			% Change		2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	1,388	$	1,243	$	145		12	%	$	509	$	504	$	5		1	%
Gas gross margin(2)	179		188		(9		)	(5	)	3		45		(42		)	(93	)

(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 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 nine months ended September 30, 2005, and 2004 were as follows:

	Cinergy
	2005	2004	Change		% Change
Cooling degree days(1)	1,252	880	372		42	%
Heating degree days(2)(3)	2,325	2,450	(125	)	(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.

Regulated

Gross Margins

The 12 percent increase in Regulated’s electric gross margins was primarily due to the following factors:

•A $68 million increase resulting from a higher price received per megawatt hour (MWh) in the first half of 2005 due primarily to PSI’s 2004 base retail electric rate increase;

•A $42 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004;

•A $16 million increase in PSI’s non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel; and

•A $9 million increase due to growth in non-weather related demand.

These increases were partially offset by a decline of $15 million reflecting rate reductions associated with a property tax adjustment for PSI.

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

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Commercial

Gross Margins

The one percent increase in Commercial’s electric gross margins was primarily due to:

•A $29 million increase in margins from power marketing and trading contracts.

•Higher retail margins of $7 million reflecting:

•A $31 million increase resulting from implementation of CG&E’s RSP in January 2005; and

•A $9 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004.

Also contributing to retail margins were increased volumes, due in part to the return of certain CG&E retail customers to full electric service.  Partially offsetting these increases was a $40 million increase in fuel, emission allowance, and purchased power costs attributable to CG&E’s fixed price residential customers.

•A $31 million decline in non-retail margins, caused primarily by higher fuel costs.  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 $107 million less than the comparable period in 2004 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 $104 million of unrealized losses in 2005 and $3 million of unrealized gains in 2004 (representing a $107 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.

Largely offsetting these declines were margins of $103 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 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.

The 93 percent decrease in Commercial’s gas gross margins was primarily due to the following factors:

•A $35 million decrease in financial trading margins primarily from trading results in the second quarter of 2005; and

•An $11 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 year-to-date gross margins reflect $25 million of unrealized losses in 2005 and $14 million of unrealized losses in 2004 (representing an $11 million change period to period) as a result of derivative contracts and the use of MTM accounting.

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Partially offsetting these decreases was a $13 million increase in physical trading margins primarily resulting from favorable price movements in the third quarter of 2005.

Other Operating Revenues and Costs of Fuel Resold

The 40 percent increase in Other Operating Revenues was primarily due to the following factors:

•A $79 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and tons of coal sold; and

•A $42 million increase in Commercial’s revenues from the sale of synthetic fuel primarily reflecting revenues from a new facility purchased in the second quarter of 2005.

Partially offsetting these increases was a $15 million decrease in revenues from non-regulated energy service subsidiaries.

Costs of fuel resold include 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	$	1,025	$	969	$	56	6	%
Depreciation	387		334		53		16
Taxes other than income taxes	209		204		5		2

Operation and Maintenance

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

•Increased regulatory asset amortization of $27 million related to CG&E’s RTC.  This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;

•An increase of $13 million in costs at our synthetic fuel facilities primarily related to production costs at a new facility purchased in the second quarter of 2005;

•Expenses of $13 million related to outside services costs for the pending Duke-Cinergy merger;

•Increased costs of $10 million associated with the sales of accounts receivable to an unconsolidated affiliate primarily due to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold; and

•Increased labor costs due to severance payments of $9 million.

These increases were partially offset by decreased employee incentive costs of $12 million and a decrease in outside service costs of $10 million related to our continuous improvement initiative in 2004.

Depreciation

The 16 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

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depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.

Equity in Earnings of Unconsolidated Subsidiaries

The 39 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 $49 million in impairment and disposal charges recognized in the first nine months of 2004 on certain investments in Power Technology and Infrastructure.  The increase was partially offset by $8 million in gains on the sale of other investments during 2004.

Income Taxes

The effective income tax rate decreased for the nine months ended September 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 22 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 nine months ended September 30, 2005, and 2004 was as follows:

	CG&E and subsidiaries
	2005		2004		Change		% Change
	(in millions)
Net income	$	201	$	197	$	4	2	%

Net income for CG&E was relatively flat for the first nine months of 2005, as compared to 2004.  Net income increased due to increased rate tariff adjustments resulting from implementation of the RSP in January 2005 and increased margins due to warmer weather in the third quarter of 2005, as compared to 2004.

These increases were partially offset by increased fuel, emission allowances, and purchased power costs attributable to fixed price residential customers and increased Operation and maintenance expense due primarily to increased regulatory asset amortization and increased expenses related to the pending Duke-Cinergy merger.

Gross Margins

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

	CG&E and subsidiaries
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	960	$	914	$	46		5	%
Gas gross margin(2)	181		188		(7		)	(4	)

(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 nine months ended September 30, 2005, and 2004 were as follows:

	CG&E and subsidiaries
	2005	2004	Change		% Change
Cooling degree days(1)	1,294	879	415		47	%
Heating degree days(2)(3)	2,218	2,391	(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.

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Electric Gross Margins

The five percent increase in CG&E’s electric gross margins was primarily due to:

•Higher retail margins of $48 million reflecting:

•A $39 million increase in rate tariff adjustments resulting from implementation of the RSP in January 2005; and

•A $30 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004.

Also contributing to retail margins were increased volumes, due in part to the return of certain retail customers to full electric service.  Partially offsetting these increases was a $40 million increase in fuel, emission allowance, and purchased power costs attributable to fixed price residential customers.

•A $29 million increase in margins from power marketing and trading contracts.

•A $31 million decline in non-retail margins, caused primarily by higher fuel costs.  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 $107 million less than the comparable period in 2004 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 $104 million of unrealized losses in 2005 and $3 million of unrealized gains in 2004 (representing a $107 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.

Largely offsetting these declines were margins of $103 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 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.

Gas Gross Margins

The four percent decrease in CG&E’s gas gross margins was due, in part, 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 $91 million increase in revenues from coal origination resulting from increases in coal prices and tons of coal sold.

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.

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Other Operating Expenses

	CG&E and subsidiaries
	2005		2004		Change		% Change
	(in millions)
Operation and maintenance	$	510	$	453	$	57	13	%
Depreciation	136		136		—		—
Taxes other than income taxes	163		159		4		3

Operation and Maintenance

The 13 percent increase in Operation and maintenance expense was primarily due to the following factors:

•Increased regulatory asset amortization of $27 million related to CG&E’s RTC.  This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;

•Expenses of $11 million related to outside service costs for the pending Duke-Cinergy merger;

•Increased labor expenses of $7 million primarily resulting from employee incentive costs and severance payments; and

•Increased costs of $7 million primarily associated with the sales of accounts receivable to an unconsolidated affiliate primarily related to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.

These increases were partially offset by a decrease in outside service costs of $5 million related to our continuous improvement initiative in 2004.

Taxes other than Income Taxes

The three percent increase in Taxes other than income taxes was primarily due to increases in gross receipts taxes.

Interest Expense

The seven percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt.

Income Taxes

The effective income tax rate decreased for the nine months ended September 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 and finalizing the 2004 tax return.  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 nine months ended September 30, 2005, and 2004 was as follows:

	PSI
	2005		2004		Change		% Change
	(in millions)
Net income	$	151	$	115	$	36	31	%

The increase in net income was primarily due to the impact of PSI’s 2004 base retail electric rate increase and warmer weather in the third quarter of 2005, as compared to 2004.

These increases were partially offset by an increase in depreciation due to increased depreciation rates and the addition of depreciable plant.

Electric Gross Margins

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

	PSI
	2005		2004		Change		% Change
	(in millions)
Electric gross margin(1)	$	926	$	817	$	109	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 nine months ended September 30, 2005, and 2004 were as follows:

	PSI
	2005	2004	Change		% Change
Cooling degree days(1)	1,210	880	330		38	%
Heating degree days(2)(3)	2,432	2,509	(77	)	(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 13 percent increase in PSI’s electric gross margins was primarily due to the following factors:

•A $68 million increase resulting from a higher price received per MWh in the first half of 2005 due primarily to PSI’s 2004base retail electric rate increase;

•A $21 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004;

•A $16 million increase in non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel; and

•A $9 million increase due to growth in non-weather related demand.

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These increases were partially offset by a decline of $15 million reflecting rate reductions associated with a property tax adjustment.

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	$	356	$	350	$	6		2	%
Depreciation	199		159		40			25
Taxes other than income taxes	38		41		(3		)	(7	)

Operation and Maintenance

The two percent increase in Operation and maintenance expense was primarily due to various increases in operating costs and increased distribution system maintenance cost.  These increases were partially offset by decreased regulatory commission expenses and decreased labor costs primarily related to employee incentives.

Depreciation

The 25 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 – Net

The increase in Miscellaneous Income – Net was primarily due to an increase in the rate for allowance for funds used during construction and interest income on restricted deposits.

Interest Expense

The 22 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt.  This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income – Net associated with the additional debt outstanding.

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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 nine months ended September 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 nine months ended September 30, 2005, and 2004 were as follows:

	ULH&P
	2005		2004		Change			% Change
	(in millions)
Electric gross margin(1)	$	55	$	52	$	3		6	%
Gas gross margin(2)	32		32		—			—
Net income	9		13		(4		)	(31	)

(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 increase in electric gross margins was primarily due to increased demand caused by warmer weather in the third quarter of 2005, as compared to 2004.  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 31 percent decrease in net income was partially due to higher operation and maintenance costs associated with the transmission of electricity.  Operation and maintenance cost also increased due to increased expense related to the pending Duke-Cinergy merger and increased costs associated with sales of accounts receivables to an unconsolidated affiliate.  Also contributing to the decrease in net income were increased property taxes.  There were also increases in Interest Expense related to an increase in average long-term debt outstanding.  These decreases were partially offset by the increase in electric gross margins as previously discussed.

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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 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 beginning in 2010.  The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018.  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 phase 1 of CAIR for the state by 2009 and 2010 for NO_X and SO₂, respectively.  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.  On October 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR and the determination not to regulate mercury under Section 112 of the Clean Air Act (CAA).  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 “PSI Environmental Compliance Case” in “Future Expectations/Trends” 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 RSP.  See “CG&E Electric Rate Filing” in “Future Expectations/Trends” 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

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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 technology 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 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 in July 2005 and was signed by President Bush on August 8, 2005.  The bill, among other things:

•Repeals PUHCA effective six months after the bill’s enactment (i.e., February 9, 2006);

•Amends certain provisions of the Federal Power Act, including new provisions related to consumer protection and enforcement and expands FERC’s authority to impose civil and criminal penalties for, among other things, reliability infractions and power trading irregularities;

•Revises the Public Utility Regulatory Policies Act of 1978, including the removal of restrictions on ownership by electric utilities of qualifying facilities and the removal of the utility’s requirement to purchase power from facilities under certain circumstances;

•Provides FERC with expanded authority in the electric industry to review mergers, acquisitions and asset dispositions, effective six months after the bill’s enactment;

•Provides FERC with authority to oversee and enforce, through the creation of a new Electric Reliability Organization, reliability standards, and promotes rules that provide incentives to enhance transmission facilities;

•Includes tax incentives for the development of wind and other renewable technologies;

•Includes tax incentives for integrated coal gasification combined cycle (IGCC) facilities; and

•Accelerates the tax depreciation rates for pollution control equipment on power plants built after 1975.

Under terms of the bill, Cinergy’s pending merger with Duke is grandfathered under existing FERC authority.  In addition, the bill authorizes a significant number of programs and grants that may be of help in, among other things, lowering the cost of adding IGCC facilities and furthering carbon sequestration activities.  However, those authorizations must be appropriated next year by Congress.  It is too early to determine if any of the programs will be appropriated dollars in order to carry them out, or if Cinergy will be a direct beneficiary of those programs.  At this time, it is too early to predict the overall impact this new legislation will have on our financial position or results of operations.

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 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 actuarially on an ERISA basis and the fair value of plan assets, 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 zero.  Actual discretionary contributions for the nine months ended September 30, 2005 were $102 million, 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.  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.  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.  These investment restrictions will terminate upon the repeal of PUHCA.  For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”  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:

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

An EWG is an entity, certified by the 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 September 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 September 30, 2005, we had invested and/or guaranteed $1.3billion 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 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 September 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;

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•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 September 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 PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”  As of September 30, 2005, we had $1.2 billion outstanding under the guarantees issued, of which 81 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 (FASB) 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 September 30, 2005 trading portfolio, if such an event were to occur, Cinergy would be required, based on contractual provisions, to post up to $551 million in additional collateral related to its gas and power trading operations, of which $108 million is related to CG&E. 

As a consequence of rising commodity prices, as of September 30, 2005, Cinergy has posted $481 million in total cash collateral, of which $240 million is related to CG&E, and received total cash collateral of $387 million, of which $260 million is related to CG&E.  Also, Cinergy has posted non-cash collateral in the form of letters of credit totaling $232 million, of which $225 million is related to CG&E, and received letters of credit totaling $482 million, of which $136 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).

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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 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 PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”

	Short-term Regulatory Authority September 30, 2005
	(in millions)
	Authority			Outstanding
Cinergy Corp.	$	4,000	(1)	$	874
CG&E and subsidiaries	665		(2)	205
PSI	600			373
ULH&P	65		(2)	10

(1)In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to increase itstotal 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 revolving credit facility and 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
	September 30, 2005
									Available
									Revolving
	Established						Standby		Lines of
	Lines		Outstanding		Unused		Liquidity(1)		Credit
	(in millions)
Cinergy
Cinergy Corp.
Revolving line(2)	$	2,000	$	—	$	2,000	$	1,102	$	898
Uncommitted lines	40		—		40
Commercial paper(3)			874
Utility operating companies
Uncommitted lines	75		—		75
Pollution control notes			248
Non-regulated subsidiaries
Revolving lines(4)	162		45		117		—		117
Short-term debt			7
Pollution control notes			25
Cinergy Total			$	1,199					$	1,015
CG&E and subsidiaries
Uncommitted lines	$	15	$	—	$	15
Pollution control notes			112
Money pool			205
CG&E Total			$	317
PSI
Uncommitted lines	$	60	$	—	$	60
Pollution control notes			136
Money pool			373
PSI Total			$	509
ULH&P
Money pool			$	10
ULH&P Total			$	10

(1)Standby liquidity is reserved against the revolving line of credit to support the commercial paper program and outstanding letters of credit (currently $874 million and $228 million, respectively).

(2)Consists of a five-year facility which was entered into in September 2005, matures in September 2010, and contains $500 million sublimits each for CG&E and PSI, and a $65 million sublimit for ULH&P (which may be increased to $100 million upon 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.  See “Regulatory Outlook – Kentucky” in “Future Expectations/Trends” for further information regarding this transaction.).

(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 that matures in December 2007.

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Short-term Notes

In September 2005, Cinergy Corp., CG&E, PSI, and ULH&P entered into a five-year revolving credit facility with a termination date of  September 2010 which can be extended twice, each extension for an additional one-year period.  The new credit agreement replaces two existing credit agreements, one dated April 2004 and one dated December 2004.

The new credit agreement provides that the pending merger between Duke and Cinergy Corp. will not be considered a fundamental change or a “Change of Control” for purposes of the credit agreement.

For purposes of making borrowings the new credit agreement does not require certain environmental, litigation or material adverse change representations and warranties that were in the credit agreements it replaced.

At September 30, 2005, Cinergy Corp. had $898 million remaining unused and available capacity relating to its $2 billion revolving credit facility.  The revolving credit facility includes the following:

Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available
		(in millions)
Five-year senior revolving	September 2010
Commercial paper support				$	874
Letter of credit support				228
Total(1)		$	2,000	1,102		$	898

(1)In September 2005, Cinergy Corp. successfully placed a $2 billion senior unsecured revolving credit facility which replaced the $1 billion five-year facility, set to expire in December 2009, and the $1 billion three-year facility, set to expire in April 2007.  CG&E and PSI each have $500 million borrowing sublimits on this facility, and ULH&P has a $65 million borrowing sublimit on this facility (which may be increased to $100 million upon 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.  See Note 12(a) for further information regarding this transaction.)

In our credit facility, 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 $2 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 $2 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.

As part of ULH&P’s $65 million sublimit under the $2 billion five-year credit facility, ULH&P has covenanted to maintain:

•a consolidated net worth of $150 million, provided that in the event that the sublimit has been increased to $100 million the consolidated net worth would be $200 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 facility 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 September 30, 2005, Cinergy, CG&E, PSI, and ULH&P are in compliance with all of their debt covenants.

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Variable Rate Pollution Control Notes

In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005B, due October 1, 2040. Holders of the Series 2005B Bonds are entitled to credit enhancement in the form of a standby letter of credit, which if drawn upon, provides for the payment of both interest and principal on the Series 2005B Bonds.  The initial interest rate for the Series 2005B Bonds was 2.75% and is reset weekly. Because the holders have the right to have their Bonds redeemed on a weekly basis, they are classified as Notes payable and other short-term obligations.  PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.

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 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.

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

	Authorized		Used		Available
	(in millions)
Cinergy Corp.
PUHCA total capitalization(1)	$	4,000	$	657	$	3,343
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(3)	$	500	$	—	$	500
State Public Utility Commission - Tax-Exempt(4)	250		50		200
ULH&P
State Public Utility Commission(5)	$	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 October 2005, PSI issued $350 million principal amount of its 6.12% Debentures due October 15, 2035.

(4)In June 2005, the 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.  In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of its $100 million principal amount of its Environmental Revenue Bonds.

(5)In April 2005, the 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 completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations.  See “Regulatory Outlook – Kentucky” in “Future Expectations/Trends” for further information regarding this transaction.

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

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effective shelf registration statement with the SEC for the issuance of up to $125 million in any combination of unsecured and secured debt securities.

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.  Since the stock purchase contracts were detachable and classified in equity, the change in their fair value was not recorded in equity or earnings and therefore the stock purchase contracts were considered off-balance sheet arrangements.  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.

Securities Ratings

As of September 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.

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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 nine months ended September 30, 2005, Cinergy issued 2.5 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.

Cash dividends declared for the quarter ended September 30, 2005 include dividends of $0.48 per share which were declared by the board of directors on July 21 and dividends of $0.48 per share which were declared on September 30.

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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

Transfer of Duke Generating Assets

The merger agreement 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 the IURC.  There can be no guarantee that such approvals 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 over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E owning and operating the assets.  At this time, we cannot predict the outcome of this matter.

CG&E Electric Rate Filing

In response to the 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 is avoidable by certain customers who switch to an alternative generation supplier and provide notice to CG&E that they will remain switched through December 31, 2008.  Therefore, these estimates are subject to change, depending on the level of switching that occurs in future periods.  CG&E has filed an application for approval of its SRT (2005 actual and 2006 estimated) with the PUCO.  In October, a settlement agreement unopposed by any party to the case was filed with the PUCO providing for implementation of the 2006 SRT at a 15 percent reserve margin and approval of the 2005 SRT price.  A Commission decision is expected on this matter in the fourth quarter of 2005.  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.  The fuel clause recovery mechanism was recently audited by the PUCO’s auditor.  The audit recommended alternate methodologies for administration of the fuel clause recovery mechanism that vary from CG&E’s current practice.  A hearing before PUCO hearing examinerswas held in early November at which the PUCO staff took positions contrary to CG&E's current practice.  CG&E officials also testified at the hearing concerning our current practices.  An order from the PUCO on these matters is expected in the fourth quarter of this year.  While we cannot predict the outcome of these proceedings, an outcome resulting in administrative methodologies substantially different from those being employed by CG&E could have a material impact on CG&E and Cinergy’s results of operations.

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•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:  A transmission cost recovery mechanism was established beginning January 1, 2005 for non-residential customers and will be established beginning January 1, 2006 for residential customers.  The transmission cost recovery mechanism is designed to permit CG&E to recover Midwest ISO charges, all 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 and, in February 2005, CG&E filed a new distribution base rate case with rates to become effective January 1, 2006.  The originally requested amount of the increase was $78 million, which was subsequently updated to $69.5 million.  On September 9, 2005, the PUCO issued its Staff Report recommending a revenue increase range between approximately $43 million and $49 million.  The hearing for this case is set to begin December 12, 2005. 

In March 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Court to overturn the RSP.  We expect the court to decide the case in 2006; however, 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 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 first quarter of 2006.

Indiana

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.  In August 2005, PSI acquired 100 percent of the Wheatland facility.  Its output will be used to bolster the reserve margins on the PSI system.

Integrated Coal Gasification Combined Cycle

Cinergy is studying the feasibility of constructing a commercial IGCC generating station to help meet increased demand over the next decade.  PSI would be a majority owner of the facility and operate it.  Cinergy will partner with Bechtel Corporation and General Electric Company to complete this study.  An IGCC plant turns coal to gas, removing most of the SO₂ and other emissions before the gas is used to fuel a combustion turbine generator.  The technology uses less water and has fewer emissions than a conventional coal-fired plant with currently required

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pollution control equipment.  Another benefit is the potential to remove mercury and CO₂ upstream of the combustion process at a lower cost than conventional plants.  In August 2005, PSI and Vectren Energy Delivery of Indiana, Inc. (Vectren) filed a joint petition at the IURC seeking cost recovery of the feasibility study as well as engineering and preconstruction costs associated with the consideration and exploration of constructing an IGCC plant.  If a decision is reached to move forward with constructing such a plant, PSI would seek approval from the IURC to begin construction.  If approved, we would anticipate the IURC’s subsequent approval to include the assets in PSI’s rate base.

PSI Environmental Compliance Case

In November 2004,PSI filed a compliance plan case with the IURC seeking approval of PSI’s plan for complying with SO₂, NO_X, and mercury emission reduction requirements discussed previously in “Environmental Protection Agency Regulations” in “Liquidity and Capital Resources”, 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 fourth quarter of 2005.

FERC and Midwest ISO

FERC

The FERC has issued several notices of proposed rulemaking and inquiry on a variety of matters to implement provisions of the Energy Bill, among other things.  At this time, we cannot predict the outcome of these proposals.

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) (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 megawatt (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 are seeking recovery of 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.

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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 to operate 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.

Cinergy is also studying the feasibility of constructing a commercial IGCC generating station which would be “carbon capture ready” or have the potential to capture CO₂ and then potentially sequester it underground.    See “Integrated Coal Gasification Combined Cycle” discussed previously for more information.

Gas Industry

Significant Rate Developments

ULH&P Gas Rate Case

In 2002, the 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 approval allowed the costs to be recovered through a tracking mechanism for an initial three year period expiring on September 30, 2005, with the possibility of renewal up to ten years.  The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets.  As of September 30, 2005 we have capitalized $60 million in costs associated with the accelerated gas main replacement program through this tracking mechanism of which ULH&P has recovered $8.6 million.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the tracking mechanism rates.  In October 2005, both the Company and the KPSC filed with the Franklin Circuit Court, requesting dismissal of the case for failure to prosecute by the Attorney General.  At the present time, ULH&P cannot predict the timing or outcome of this litigation.

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In February 2005, ULH&P filed a gas base rate case with the KPSC requesting approval to continue the tracking mechanism in addition to its request for a $14 million increase in base rates.  The KPSC did not rule on this request by October 1, 2005 causing the initial tracking mechanism to expire.  In accordance with Kentucky law, ULH&P implemented the full amount of the requested rate increase on October 1, 2005.  Any revenue collected pursuant to the rate increase will be subject to refund if the KPSC does not approve the full requested amount.  ULH&P expects that the KPSC will issue its decision during the fourth quarter of 2005.

Gas Prices and Supply

Natural gas prices remained in the $8 - $9 per thousand cubic feet (Mcf) range through most of the summer due primarily to the warmer than normal summer and the increased use of gas to fire electric generation peaking units.  Extensive damage to the natural gas infrastructure along the Gulf Coast caused by Hurricanes Katrina and Rita pushed the price of natural gas into the $12 - $14 per Mcf range by late September.  Winter delivery prices for 2005 and early 2006 assuming normal winter weather, are expected to range from $11 to $13 per Mcf in the Midwest or about 50 percent greater than last winter.  Price movement is usually driven by the effects of weather conditions, availability of supply, and changes in demand and storage inventories.  Currently, neither CG&E’s nor ULH&P’s gas delivery operations profit from changes in the cost of natural gas since natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

ULH&P utilizes a price mitigation program designed to mitigate the effects of gas price volatility on customers, which the KPSC has approved through April 2008.  The program allows the pre-arranging of between 20-75 percent of winter heating season base load gas requirements and up to 50 percent of summer season base load gas requirements.  CG&E similarly mitigates its gas procurement costs; however, CG&E’s gas price mitigation program has not been pre-approved by the PUCO but rather it is subject to PUCO review as part of the normal gas cost recovery process.

CG&E and ULH&P use primarily long-term fixed price contracts and contracts with a ceiling and floor on the price.  These contracts employ the normal purchases and sales scope exception, and do not involve hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133).

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 IRC if certain requirements are satisfied.

Cinergy’s sale of synthetic fuel has generated $306 million in tax credits through September 30, 2005 of which $27 million related to the new facility purchased in the second quarter of 2005.  The IRS is currently auditing Cinergy for the 2002 and 2003 tax years and has recently challenged certain other taxpayers’ 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 $306 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 Cinergy’s new facility pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit.  Cinergy is evaluating transactions 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

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prices and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the tax credits could be reduced.  If oil prices are high enough, we may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel.  Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million.  The net book value of our plants at September 30, 2005 was approximately $50 million.

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 during the period.  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 nine months ended September 30, 2005 and 2004 are presented in the table below.

	Change in Fair Value
	September 30, 2005						September 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)	(122		)	(36		)	129			60
Option premiums paid/(received)	15			14			1			4
Contracts settled	(154		)	(91		)	(93		)	(32		)
Fair value of contracts outstanding at end of period	$	(182	)	$	(80	)	$	78		$	52

(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 September 30, 2005 and 2004 of our energy risk management assets and liabilities:

	September 30, 2005						September 30, 2004
	Cinergy(1)			CG&E			Cinergy(1)		CG&E
	(in millions)
Energy risk management assets - current	$	1,260		$	670		$	470	$	178
Energy risk management assets - non-current	397			208			137		48
Energy risk management liabilities - current	1,419			741			396		126
Energy risk management liabilities - non-current	420			217			133		48
	$	(182	)	$	(80	)	$	78	$	52

(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 September 30, 2005 for Cinergy and CG&E:

	Fair Value of Contracts at September 30, 2005
	Maturing
Source of Fair Value(1)	Within 12 months			12-36 months			36-60 months		Thereafter			Total Fair Value
	(in millions)
Cinergy(2)
Prices actively quoted	$	(190	)	$	(23	)	$	—	$	—		$	(213	)
Prices based on models and other valuation methods(3)	31			(4		)	7		(3		)	31
Total	$	(159	)	$	(27	)	$	7	$	(3	)	$	(182	)
CG&E
Prices actively quoted	$	(82	)	$	(8	)	$	—	$	—		$	(90	)
Prices based on models and other valuation methods(3)	11			(2		)	2		(1		)	10
Total	$	(71	)	$	(10	)	$	2	$	(1	)	$	(80	)

(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 $6.7 million as of September 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 September 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)

Rating	Total Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Percentage of Total Net Exposure		Number of Counterparties Greater than 10% of Total Net Exposure	Net Exposure of Counterparties Greater than 10% of Total Net Exposure(4)
	(in millions)
Investment Grade(2)	$	1,360	$	358	$	1,002	81	%	—	$	—
Internally Rated-Investment Grade(3)	326		194		132		11		—	—
Non-Investment Grade	134		95		39		3		—	—
Internally Rated-Non-Investment Grade	170		110		60		5		—	—
Total	$	1,990	$	757	$	1,233	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

Rating	Total Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Percentage of Total Net Exposure		Number of Counterparties Greater than 10% of Total Net Exposure	Net Exposure of Counterparties Greater than 10% of Total Net Exposure(3)
	(in millions)
Investment Grade(1)	$	384	$	160	$	224	85	%	1	$	54
Internally Rated-Investment Grade(2)	151		138		13		5		—	—
Non-Investment Grade	47		37		10		4		—	—
Internally Rated-Non-Investment Grade	30		14		16		6		—	—
Total	$	612	$	349	$	263	100	%	1	$	54

(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 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 continue to evaluate 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 types of stock-based compensation other than stock options.  We are in the process of evaluating the impact of this new standard on our 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, repatriation pursuant to this provision will not 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 September 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.

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 September 30, 2005 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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.  In August 2005, the district court issued a ruling regarding the emissions test that it will apply to Cinergy at the trial of the case.  Contrary to Cinergy’s argument, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant.  However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to accept the appeal at this time.  There are a number of other legal issues currently before the district court judge, and the case is currently 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.  This case is currently in discovery.

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

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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.  In September 2005, the district court granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals.  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 GENERATING STATION (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.  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.  One lawsuit was dismissed on procedural grounds and the remaining two have been consolidated.  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.  We intend to defend this lawsuit vigorously in court.

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

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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.

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 130 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 the outcome of this matter, including whether resolution of this matter will impact our pending merger.

DUNAVAN WASTE SUPERFUND SITE

In July and October 2005, PSI received notices 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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OHIO EPA PENALTY ON CINERGY POWER GENERATION SERVICES

In October 2005, the Ohio EPA proposed a civil penalty of $102,000 on Cinergy Power Generation Services to settle multiple, unrelated alleged violations occurring at multiple CG&E generating stations over the past several years.  CG&E is currently reviewing the settlement proposal.

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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
July 1 – July 31	10,997	$	45.45	—	—
August 1 – August 31	10,692	$	43.23	—	—
September 1 – September 30	2	$	43.19	—	—

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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.	Amendment No. 2 Agreement and Plan of Merger, dated October 3, 2005, by and among Duke Energy Corporation, Cinergy Corp., Deer Holding Corp., Deer Acquisition Corp. and Cougar Acquisition Corp.	Cinergy Corp. Form 8-K, filed October 7, 2005
10-a	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-b	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-c	Cinergy Corp.	Form of incentive stock option grant agreement.
10-d	Cinergy Corp.	Form of non-qualified stock option grant agreement.
10-e	Cinergy Corp.	Form of restricted stock grant agreement.
10-f	Cinergy Corp.	Form of performance share grant agreement.
10-g	Cinergy Corp.	Form of phantom stock grant agreement.
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 Lynn J. Good 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 Lynn J. Good 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: November 4, 2005	/s/	David L. Wozny
		David L. Wozny
		(duly authorized officer
		and
		principal accounting officer)

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