10-Q

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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, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                      to

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 the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        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, 2002, shares of common stock outstanding for each registrant were as listed:

Registrant	Description	Shares
Cinergy Corp.	Par value $.01 per share	168,326,377
The Cincinnati Gas & Electric Company	Par value $8.50 per share	89,663,086
PSI Energy, Inc.	Without par value, stated value $.01 per share	53,913,701
The Union Light, Heat and Power Company	Par value $15.00 per share	585,333

TABLE OF CONTENTS

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

i

CINERGY CORP.
AND SUBSIDIARY COMPANIES

1

CINERGY CORP.

CONSOLIDATED STATEMENTS OF INCOME

			Quarter Ended September 30					Year to Date September 30
			2002		2001			2002		2001
			(in thousands, except per share amounts) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	2,554,687	$	2,539,365		$	5,178,481	$	6,838,286
	Gas			1,281,411		786,345			3,301,625		3,836,946
	Other			49,890		21,604			89,668		61,722
		Total Operating Revenues		3,885,988		3,347,314			8,569,774		10,736,954
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			1,871,365		1,888,694			3,357,585		5,131,209
	Gas purchased (Note 1(d))			1,243,507		761,325			3,142,899		3,667,603
	Operation and maintenance			365,373		265,518			973,165		782,073
	Depreciation			103,565		97,109			303,996		277,876
	Taxes other than income taxes			64,890		59,325			201,559		175,826
		Total Operating Expenses		3,648,700		3,071,971			7,979,204		10,034,587
Operating Income				237,288		275,343			590,570		702,367
Equity in Earnings (Losses) of Unconsolidated Subsidiaries				3,248		(4,333	)		7,956		(3,500	)
Miscellaneous—Net				5,035		5,366			888		13,845
Interest				63,543		68,762			186,414		200,379
Preferred Dividend Requirement of Subsidiary Trust				5,966		—			17,847		—
Income Before Taxes				176,062		207,614			395,153		512,333
Income Taxes				44,635		78,284			121,299		178,073
Preferred Dividend Requirements of Subsidiaries				859		859			2,575		2,575
Net Income			$	130,568	$	128,471		$	271,279	$	331,685
Average Common Shares Outstanding				167,967		159,097			166,544		159,049
Earnings Per Common Share (Note 10)
	Net Income		$	0.78	$	0.81		$	1.63	$	2.08
Earnings Per Common Share—Assuming Dilution (Note 10)
	Net Income		$	0.77	$	0.80		$	1.61	$	2.06
Dividends Declared Per Common Share			$	0.45	$	0.45		$	1.35	$	1.35

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

2

CINERGY CORP.

CONSOLIDATED BALANCE SHEETS

				September 30 2002		December 31 2001
				(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents			$	119,267	$	111,067
	Restricted deposits				142,120		8,055
	Notes receivable (Note 5)				78,946		31,173
	Accounts receivable less accumulated provision for doubtful accounts of $17,943 at September 30, 2002, and $35,580 at December 31, 2001 (Note 5)				1,459,804		1,123,214
	Materials, supplies, and fuel—at average cost				308,438		240,812
	Energy risk management current assets (Note 1(c))				363,132		449,397
	Prepayments and other				133,505		110,311
			Total Current Assets		2,605,212		2,074,029
Property, Plant, and Equipment—at Cost
	Utility plant in service				8,547,851		8,089,961
	Construction work in progress				366,099		464,560
		Total Utility Plant			8,913,950		8,554,521
	Non-regulated property, plant, and equipment				4,702,486		4,527,994
	Accumulated depreciation				5,087,644		4,845,620
			Net Property, Plant, and Equipment		8,528,792		8,236,895
Other Assets
	Regulatory assets				1,049,266		1,015,863
	Investments in unconsolidated subsidiaries				383,942		339,059
	Energy risk management non-current assets (Note 1(c))				161,995		134,445
	Other investments				167,615		164,155
	Goodwill				55,163		53,587
	Other intangible assets				21,024		22,250
	Other				232,531		259,530
			Total Other Assets		2,071,536		1,988,889
Total Assets				$	13,205,540	$	12,299,813

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

3

CINERGY CORP.

CONSOLIDATED BALANCE SHEETS

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
	Accounts payable		$	1,448,647		$	1,029,173
	Accrued taxes			107,000			195,976
	Accrued interest			43,076			56,216
	Notes payable and other short-term obligations (Note 4)			714,125			1,155,786
	Long-term debt due within one year (Note 4)			22,387			148,431
	Energy risk management current liabilities (Note 1(c))			316,179			429,794
	Other			108,768			127,375
		Total Current Liabilities		2,760,182			3,142,751
Non-Current Liabilities
	Long-term debt (Note 3)			4,248,961			3,596,730
	Deferred income taxes			1,531,030			1,301,407
	Unamortized investment tax credits			120,416			127,385
	Accrued pension and other postretirement benefit costs			488,276			438,962
	Energy risk management non-current liabilities (Note 1(c))			115,212			135,619
	Other			315,918			246,340
		Total Non-Current Liabilities		6,819,813			5,846,443
Total Liabilities				9,579,995			8,989,194
Preferred Trust Securities
	Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company			307,752			306,327
Cumulative Preferred Stock of Subsidiaries
	Not subject to mandatory redemption			62,828			62,833
Common Stock Equity (Note 2)
	Common stock—$.01 par value; authorized shares—600,000,000; outstanding shares—168,267,726 at September 30, 2002, and 159,402,839 at December 31, 2001			1,683			1,594
	Paid-in capital			1,889,119			1,619,659
	Retained earnings			1,385,887			1,337,135
	Accumulated other comprehensive income (loss)			(21,724	)		(16,929	)
		Total Common Stock Equity		3,254,965			2,941,459
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholders' Equity			$	13,205,540		$	12,299,813

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

4

CINERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

			Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Common Stock Equity
			(dollars in thousands) (unaudited)
Quarter Ended September 30, 2002
Balance at July 1, 2002			$	1,675	$	1,861,689		$	1,330,780		$	(4,787	)	$	3,189,357
Comprehensive income:
	Net income								130,568						130,568
	Other comprehensive income (loss), net of tax effect of $12,501
		Foreign currency translation adjustment (Note 1(g))										4,810			4,810
		Unrealized gain (loss) on investment trusts										(3,003	)		(3,003	)
		Cash flow hedges (Note 1(b))										(18,744	)		(18,744	)
	Total comprehensive income														113,631
Issuance of 781,597 shares of common stock—net				8		22,888									22,896
Dividends on common stock ($.45 per share)									(75,469	)					(75,469	)
Other						4,542			8						4,550
Ending balance at September 30, 2002			$	1,683	$	1,889,119		$	1,385,887		$	(21,724	)	$	3,254,965
Quarter Ended September 30, 2001
Balance at July 1, 2001			$	1,591	$	1,623,458		$	1,240,761		$	(16,927	)	$	2,848,883
Comprehensive income:
	Net income								128,471						128,471
	Other comprehensive income (loss), net of tax effect of ($854)
		Foreign currency translation adjustment (Note 1(g))										7,664			7,664
		Unrealized gain (loss) on investment trusts										(1,191	)		(1,191	)
		Minimum pension liability adjustment										(4	)		(4	)
		Cash flow hedges (Note 1(b))										(4,085	)		(4,085	)
	Total comprehensive income														130,855
Issuance of 11,105 shares of common stock—net						587									587
Treasury shares reissued						(190	)								(190	)
Dividends on common stock ($.45 per share)									(71,593	)					(71,593	)
Other						1,488			9						1,497
Ending balance at September 30, 2001			$	1,591	$	1,625,343		$	1,297,648		$	(14,543	)	$	2,910,039

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

5

CINERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

(Continued)

			Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Common Stock Equity
			(dollars in thousands) (unaudited)
Nine Months Ended September 30, 2002
Balance at January 1, 2002			$	1,594	$	1,619,659		$	1,337,135		$	(16,929	)	$	2,941,459
Comprehensive income:
	Net income								271,279						271,279
	Other comprehensive income (loss), net of tax effect of $7,879
		Foreign currency translation adjustment (Note 1(g))										20,123			20,123
		Unrealized gain (loss) on investment trusts										(4,637	)		(4,637	)
		Minimum pension liability adjustment										136			136
		Cash flow hedges (Note 1(b))										(20,417	)		(20,417	)
	Total comprehensive income														266,484
Issuance of 8,864,887 shares of common stock—net				89		258,300									258,389
Dividends on common stock ($1.35 per share)									(222,551	)					(222,551	)
Other						11,160			24						11,184
Ending balance at September 30, 2002			$	1,683	$	1,889,119		$	1,385,887		$	(21,724	)	$	3,254,965
Nine Months Ended September 30, 2001
Balance at January 1, 2001			$	1,590	$	1,619,153		$	1,179,113		$	(10,895	)	$	2,788,961
Comprehensive income:
	Net income								331,685						331,685
	Other comprehensive income (loss), net of tax effect of $490
		Foreign currency translation adjustment (Note 1(g))										4,959			4,959
		Unrealized gain (loss) on investment trusts										(1,334	)		(1,334	)
		Cumulative effect of change in accounting principle										(2,500	)		(2,500	)
		Minimum pension liability adjustment										64			64
		Cash flow hedges (Note 1(b))										(4,837	)		(4,837	)
	Total comprehensive income														328,037
Issuance of 131,497 shares of common stock—net				1		4,278									4,279
Treasury shares purchased						(10,015	)								(10,015	)
Treasury shares reissued						5,810									5,810
Dividends on common stock ($1.35 per share)									(214,689	)					(214,689	)
Other						6,117			1,539						7,656
Ending balance at September 30, 2001			$	1,591	$	1,625,343		$	1,297,648		$	(14,543	)	$	2,910,039

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

6

CINERGY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	271,279		$	331,685
	Items providing or (using) cash currently:
		Depreciation				303,996			277,876
		Change in net position of energy risk management activities				(61,838	)		(79,070	)
		Deferred income taxes and investment tax credits—net				169,377			40,716
		Equity in earnings of unconsolidated subsidiaries				(7,956	)		3,500
		Allowance for equity funds used during construction				(8,802	)		(5,163	)
		Regulatory assets deferrals				(69,923	)		(99,985	)
		Regulatory assets amortization				93,163			93,978
		Accrued pension and other postretirement benefit costs				49,314			26,237
		Changes in current assets and current liabilities:
			Restricted deposits			(2,465	)		(4,281	)
			Accounts and notes receivable			(339,704	)		(114,127	)
			Materials, supplies, and fuel			(71,276	)		(68,785	)
			Prepayments			(31,247	)		(65,604	)
			Accounts payable			429,778			108,518
			Accrued taxes and interest			(102,116	)		51,475
		Other items—net				51,291			20,259
				Net cash provided by (used in) operating activities		672,871			517,229
Financing Activities
	Change in short-term debt					(441,661	)		82,313
	Issuance of long-term debt					649,020			870,661
	Redemption of long-term debt					(134,640	)		(42,403	)
	Funds on deposit from issuance of debt securities					(131,600	)		—
	Retirement of preferred stock of subsidiaries					(3	)		(1	)
	Issuance of common stock					258,389			4,279
	Dividends on common stock					(222,551	)		(214,689	)
				Net cash provided by (used in) financing activities		(23,046	)		700,160
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(593,682	)		(587,428	)
	Acquisitions and other investments					(47,943	)		(575,234	)
				Net cash provided by (used in) investing activities		(641,625	)		(1,162,662	)
Net increase (decrease) in cash and cash equivalents						8,200			54,727
Cash and cash equivalents at beginning of period						111,067			93,054
Cash and cash equivalents at end of period					$	119,267		$	147,781
Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	207,659		$	186,059
		Income taxes			$	30,900		$	84,860

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

7

THE CINCINNATI GAS & ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES

8

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

			Quarter Ended September 30						Year to Date September 30
			2002			2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	1,747,379		$	1,275,979		$	3,249,715		$	3,420,928
	Gas			41,452			53,217			277,069			457,717
		Total Operating Revenues		1,788,831			1,329,196			3,526,784			3,878,645
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			1,391,221			930,433			2,300,565			2,521,137
	Gas purchased			12,594			24,729			145,033			314,575
	Operation and maintenance			150,247			117,067			394,443			349,462
	Depreciation			49,005			47,135			146,057			139,398
	Taxes other than income taxes			50,304			43,617			149,509			135,585
		Total Operating Expenses		1,653,371			1,162,981			3,135,607			3,460,157
Operating Income				135,460			166,215			391,177			418,488
Miscellaneous—Net				4,140			336			4,002			(1,396	)
Interest				23,746			25,353			68,375			79,236
Income Before Taxes				115,854			141,198			326,804			337,856
Income Taxes				44,085			51,808			124,780			117,490
Net Income			$	71,769		$	89,390		$	202,024		$	220,366
Preferred Dividend Requirement				211			211			634			634
Net Income Applicable to Common Stock			$	71,558		$	89,179		$	201,390		$	219,732
Net Income			$	71,769		$	89,390		$	202,024		$	220,366
Other Comprehensive Income (Loss), Net of Tax Effect				(17,588	)		(4,608	)		(19,673	)		(7,268	)
Comprehensive Income			$	54,181		$	84,782		$	182,351		$	213,098

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

9

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED BALANCE SHEETS

					September 30 2002		December 31 2001
					(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents				$	8,526	$	9,074
	Restricted deposits					88,305		3,540
	Notes receivable from affiliated companies (Note 5)					51,772		—
	Accounts receivable less accumulated provision for doubtful accounts of $6,005 at September 30, 2002, and $25,874 at December 31, 2001 (Note 5)					536,406		332,970
	Accounts receivable from affiliated companies					2,012		12,112
	Materials, supplies, and fuel—at average cost					131,543		138,119
	Energy risk management current assets (Note 1(c))					35,583		44,360
	Prepayments and other					25,140		13,087
				Total Current Assets		879,287		553,262
Property, Plant, and Equipment—at Cost
	Utility plant in service
		Electric				2,067,341		2,000,595
		Gas				960,992		926,381
		Common				242,205		253,978
			Total Utility Plant In Service			3,270,538		3,180,954
	Construction work in progress					99,475		96,247
			Total Utility Plant			3,370,013		3,277,201
	Non-regulated property, plant, and equipment					3,407,761		3,314,285
	Accumulated depreciation					2,678,476		2,555,639
				Net Property, Plant, and Equipment		4,099,298		4,035,847
Other Assets
	Regulatory assets					597,001		592,491
	Energy risk management non-current assets (Note 1(c))					61,796		48,982
	Other investments					983		1,080
	Other					118,617		128,082
				Total Other Assets		778,397		770,635
Total Assets					$	5,756,982	$	5,359,744

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

10

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED BALANCE SHEETS

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	531,770		$	352,450
	Accounts payable to affiliated companies			65,802			30,419
	Accrued taxes			111,549			116,616
	Accrued interest			14,336			16,570
	Notes payable and other short-term obligations (Note 4)			196,100			196,100
	Notes payable to affiliated companies (Note 4)			2,915			444,801
	Long-term debt due within one year (Note 4)			—			100,000
	Energy risk management current liabilities (Note 1(c))			19,757			23,341
	Other			37,662			33,217
		Total Current Liabilities		979,891			1,313,514
Non-Current Liabilities
	Long-term debt (Note 3)			1,689,389			1,105,333
	Deferred income taxes			865,925			779,295
	Unamortized investment tax credits			86,709			91,246
	Accrued pension and other postretirement benefit costs			172,459			165,326
	Energy risk management non-current liabilities (Note 1(c))			23,063			41,773
	Other			138,966			105,681
		Total Non-Current Liabilities		2,976,511			2,288,654
Total Liabilities				3,956,402			3,602,168
Cumulative Preferred Stock
	Not subject to mandatory redemption			20,485			20,486
Common Stock Equity
	Common stock—$8.50 par value; authorized shares—120,000,000; outstanding shares—89,663,086 at September 30, 2002, and December 31, 2001			762,136			762,136
	Paid-in capital			571,926			571,926
	Retained earnings			471,384			408,706
	Accumulated other comprehensive income (loss)			(25,351	)		(5,678	)
		Total Common Stock Equity		1,780,095			1,737,090
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	5,756,982		$	5,359,744

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

11

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	202,024		$	220,366
	Items providing or (using) cash currently:
		Depreciation				146,057			139,398
		Deferred income taxes and investment tax credits—net				95,730			18,788
		Change in net position of energy risk management activities				(19,560	)		(22,587	)
		Allowance for equity funds used during construction				261			(1,526	)
		Regulatory assets deferrals				(45,007	)		(81,869	)
		Regulatory assets amortization				38,024			46,346
		Accrued pension and other postretirement benefit costs				7,133			537
		Changes in current assets and current liabilities:
			Restricted deposits			(765	)		(3,859	)
			Accounts and notes receivable			(199,985	)		(112,724	)
			Materials, supplies, and fuel			6,576			(36,473	)
			Prepayments			(14,830	)		9,250
			Accounts payable			214,900			125,173
			Accrued taxes and interest			(7,301	)		27,658
		Other items—net				(5,759	)		(16,137	)
				Net cash provided by (used in) operating activities		417,498			312,341
Financing Activities
	Change in short-term debt, including net affiliate notes					(451,627	)		138,531
	Issuance of long-term debt					580,570			—
	Redemption of long-term debt					(100,000	)		—
	Funds on deposit from issuance of debt securities					(84,000	)		—
	Retirement of preferred stock					(1	)		—
	Dividends on preferred stock					(634	)		(634	)
	Dividends on common stock					(138,712	)		(214,674	)
				Net cash provided by (used in) financing activities		(194,404	)		(76,777	)
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(223,740	)		(234,492	)
	Other Investments					98			265
				Net cash provided by (used in) investing activities		(223,642	)		(234,227	)
Net increase (decrease) in cash and cash equivalents						(548	)		1,337
Cash and cash equivalents at beginning of period						9,074			20,637
Cash and cash equivalents at end of period					$	8,526		$	21,974
Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	68,749		$	67,464
		Income taxes			$	16,121		$	55,520

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

12

PSI ENERGY, INC.
AND SUBSIDIARY COMPANY

13

PSI ENERGY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

			Quarter Ended September 30						Year to Date September 30
			2002			2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues (Note 1(d))
	Electric		$	776,837		$	1,266,683		$	1,874,109		$	3,380,809
Operating Expenses
	Fuel and purchased and exchanged power (Note 1(d))			474,748			998,561			1,078,596			2,668,729
	Operation and maintenance			128,931			105,844			386,559			301,984
	Depreciation			39,826			37,492			115,954			111,487
	Taxes other than income taxes			13,446			15,000			46,992			37,535
		Total Operating Expenses		656,951			1,156,897			1,628,101			3,119,735
Operating Income				119,886			109,786			246,008			261,074
Miscellaneous—Net				4,434			3,837			14,155			9,397
Interest				18,782			21,580			55,862			60,117
Income Before Taxes				105,538			92,043			204,301			210,354
Income Taxes				37,895			35,589			68,861			78,251
Net Income			$	67,643		$	56,454		$	135,440		$	132,103
Preferred Dividend Requirement				648			648			1,941			1,941
Net Income Applicable to Common Stock			$	66,995		$	55,806		$	133,499		$	130,162
Net Income			$	67,643		$	56,454		$	135,440		$	132,103
Other Comprehensive Income (Loss), Net of Tax Effect				(2,716	)		(965	)		(3,684	)		(1,092	)
Comprehensive Income			$	64,927		$	55,489		$	131,756		$	131,011

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

14

PSI ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

				September 30 2002		December 31 2001
				(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents			$	5,724	$	1,587
	Restricted deposits				48,153		519
	Notes receivable from affiliated companies (Note 5)				33,685		444,801
	Accounts receivable less accumulated provision for doubtful accounts of $5,788 at September 30, 2002, and $6,773 at December 31, 2001 (Note 5)				68,982		336,994
	Accounts receivable from affiliated companies				47,015		10,470
	Materials, supplies, and fuel—at average cost				122,904		87,661
	Energy risk management current assets (Note 1(c))				13,063		28,201
	Prepayments and other				39,932		41,041
			Total Current Assets		379,458		951,274
Property, Plant, and Equipment—at Cost
	Utility plant in service				5,277,313		4,909,007
	Construction work in progress				266,624		368,313
		Total Utility Plant			5,543,937		5,277,320
Accumulated depreciation					2,297,678		2,216,908
			Net Property, Plant, and Equipment		3,246,259		3,060,412
Other Assets
	Regulatory assets				452,265		423,372
	Energy risk management non-current assets (Note 1(c))				17,832		30,164
	Other investments				55,573		57,633
	Other				24,919		47,927
			Total Other Assets		550,589		559,096
Total Assets				$	4,176,306	$	4,570,782

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

15

PSI ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	161,568		$	312,707
	Accounts payable to affiliated companies			30,710			27,370
	Accrued taxes			110,977			102,317
	Accrued interest			15,975			23,760
	Notes payable and other short-term obligations (Note 4)			82,600			148,600
	Notes payable to affiliated companies (Note 4)			80,749			422,263
	Long-term debt due within one year (Note 4)			979			23,000
	Energy risk management current liabilities (Note 1(c))			11,634			23,185
	Other			37,741			41,695
		Total Current Liabilities		532,933			1,124,897
Non-Current Liabilities
	Long-term debt (Note 3)			1,371,916			1,325,089
	Deferred income taxes			595,007			486,694
	Unamortized investment tax credits			33,707			36,139
	Accrued pension and other postretirement benefit costs			159,771			154,799
	Energy risk management non-current liabilities (Note 1(c))			18,026			41,773
	Other			80,750			63,557
		Total Non-Current Liabilities		2,259,177			2,108,051
Total Liabilities				2,792,110			3,232,948
Cumulative Preferred Stock
	Not subject to mandatory redemption			42,343			42,347
Common Stock Equity
	Common stock—without par value; $.01 stated value; authorized shares—60,000,000; outstanding shares—53,913,701 at September 30, 2002, and December 31, 2001			539			539
	Paid-in capital			416,412			416,414
	Retained earnings			930,181			880,129
	Accumulated other comprehensive income (loss)			(5,279	)		(1,595	)
		Total Common Stock Equity		1,341,853			1,295,487
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	4,176,306		$	4,570,782

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

16

PSI ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	135,440		$	132,103
	Items providing or (using) cash currently:
		Depreciation				115,954			111,487
		Deferred income taxes and investment tax credits—net				46,376			25,100
		Change in net position of energy risk management activities				8,443			(22,586	)
		Allowance for equity funds used during construction				(9,063	)		(3,637	)
		Regulatory assets deferrals				(24,916	)		(18,116	)
		Regulatory assets amortization				55,139			47,632
		Accrued pension and other postretirement benefit costs				4,972			8,229
		Changes in current assets and current liabilities:
			Restricted deposits			(34	)		(679	)
			Accounts and notes receivable			222,369			(250,537	)
			Materials, supplies, and fuel			(35,243	)		(30,059	)
			Prepayments			(3,857	)		(1,733	)
			Accounts payable			(147,681	)		204,634
			Accrued taxes and interest			875			24,177
		Other items—net				(3,826	)		(17,117	)
				Net cash provided by (used in) operating activities		364,948			208,898
Financing Activities
	Change in short-term debt, including net affiliate notes					37,287			(182,980	)
	Issuance of long-term debt					47,600			322,471
	Redemption of long-term debt					(23,000	)		(19,825	)
	Funds on deposit from issuance of debt securities					(47,600	)		—
	Retirement of preferred stock					(2	)		(1	)
	Dividends on preferred stock					(1,940	)		(1,941	)
	Dividends on common stock					(83,448	)		—
				Net cash provided by (used in) financing activities		(71,103	)		117,724
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(286,610	)		(289,916	)
	Other investments					(3,098	)		(6,982	)
				Net cash provided by (used in) investing activities		(289,708	)		(296,898	)
Net increase (decrease) in cash and cash equivalents						4,137			29,724
Cash and cash equivalents at beginning of period						1,587			1,311
Cash and cash equivalents at end of period					$	5,724		$	31,035
Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	75,807		$	69,180
		Income taxes			$	13,590		$	40,452

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

17

THE UNION LIGHT, HEAT AND POWER COMPANY

18

THE UNION LIGHT, HEAT AND POWER COMPANY

STATEMENTS OF INCOME

			Quarter Ended September 30					Year to Date September 30
			2002		2001			2002			2001
			(dollars in thousands) (unaudited)
Operating Revenues
	Electric		$	68,353	$	63,899		$	175,346		$	180,761
	Gas			7,364		10,008			53,584			82,778
		Total Operating Revenues		75,717		73,907			228,930			263,539
Operating Expenses
	Electricity purchased from parent company for resale			48,445		48,230			123,091			119,597
	Gas purchased			2,732		4,802			30,932			56,038
	Operation and maintenance			14,819		10,781			38,199			28,982
	Depreciation			4,277		4,285			13,009			12,689
	Taxes other than income taxes			1,167		1,126			3,535			3,388
		Total Operating Expenses		71,440		69,224			208,766			220,694
Operating Income				4,277		4,683			20,164			42,845
Miscellaneous—Net				1,690		(87	)		(2,516	)		(700	)
Interest				1,431		1,496			4,388			4,739
Income Before Taxes				4,536		3,100			13,260			37,406
Income Taxes				1,302		1,112			4,150			10,552
Net Income			$	3,234	$	1,988		$	9,110		$	26,854

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

19

THE UNION LIGHT, HEAT AND POWER COMPANY

BALANCE SHEETS

					September 30 2002		December 31 2001
					(dollars in thousands) (unaudited)
ASSETS
Current Assets
	Cash and cash equivalents				$	3,792	$	4,099
	Notes receivable from affiliate companies (Note 5)					6,303		—
	Accounts receivable less accumulated provision for doubtful accounts of $56 at September 30, 2002, and $1,196 at December 31, 2001 (Note 5)					847		16,785
	Accounts receivable from affiliated companies					416		2,401
	Materials, supplies, and fuel—at average cost					12,506		10,835
	Prepayments and other					474		300
				Total Current Assets		24,338		34,420
Property, Plant, and Equipment—at Cost
	Utility plant in service
		Electric				256,139		248,223
		Gas				204,459		197,301
		Common				30,482		50,289
			Total Utility Plant In Service			491,080		495,813
	Construction work in progress					18,595		11,004
			Total Utility Plant			509,675		506,817
	Accumulated depreciation					186,232		178,567
				Net Property, Plant, and Equipment		323,443		328,250
Other Assets
	Regulatory assets					4,582		7,838
	Other investments					73		2
	Other					16,514		6,580
				Total Other Assets		21,169		14,420
Total Assets					$	368,950	$	377,090

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

20

THE UNION LIGHT, HEAT AND POWER COMPANY

BALANCE SHEETS

			September 30 2002			December 31 2001
			(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
	Accounts payable		$	4,547		$	7,960
	Accounts payable to affiliated companies			17,950			16,156
	Accrued taxes			9,267			7,051
	Accrued interest			621			643
	Notes payable to affiliated companies (Note 4)			1,851			26,432
	Other			6,014			5,322
		Total Current Liabilities		40,250			63,564
Non-Current Liabilities
	Long-term debt			74,645			74,621
	Deferred income taxes			29,924			28,323
	Unamortized investment tax credits			3,205			3,411
	Accrued pension and other postretirement benefit costs			14,615			13,198
	Amounts due to customers—income taxes			7,148			7,148
	Other			20,525			14,622
		Total Non-Current Liabilities		150,062			141,323
Total Liabilities				190,312			204,887
Common Stock Equity
	Common stock—$15.00 par value; authorized shares—1,000,000; outstanding shares—585,333 at September 30, 2002, and December 31, 2001			8,780			8,780
	Paid-in capital			21,111			21,111
	Retained earnings			148,755			142,320
	Accumulated other comprehensive income (loss)			(8	)		(8	)
		Total Common Stock Equity		178,638			172,203
Commitments and Contingencies (Note 7)
Total Liabilities and Shareholder's Equity			$	368,950		$	377,090

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

21

THE UNION LIGHT, HEAT AND POWER COMPANY

STATEMENTS OF CASH FLOWS

					Year to Date September 30
					2002			2001
					(dollars in thousands) (unaudited)
Operating Activities
	Net income				$	9,110		$	26,854
	Items providing or (using) cash currently:
		Depreciation				13,009			12,689
		Deferred income taxes and investment tax credits—net				1,395			897
		Allowance for equity funds used during construction				(523	)		(123	)
		Regulatory assets deferrals				4,168			1,393
		Regulatory assets amortization				(1,064	)		103
		Accrued pension and other postretirement benefit costs				1,417			122
		Changes in current assets and current liabilities:
			Accounts and notes receivable			17,142			18,558
			Materials, supplies, and fuel			(1,671	)		(5,961	)
			Prepayment			(174	)		(176	)
			Accounts payable			(1,619	)		(25,955	)
			Accrued taxes and interest			2,194			10,000
		Other items—net				9,903			(8,147	)
				Net cash provided by (used in) operating activities		53,287			30,254
Financing Activities
	Change in short-term debt, including net affiliate notes					(24,581	)		(5,968	)
	Dividends on common stock					(2,675	)		(4,829	)
				Net cash provided by (used in) financing activities		(27,256	)		(10,797	)
Investing Activities
	Construction expenditures (less allowance for equity funds used during construction)					(26,268	)		(19,608	)
	Other investments					(70	)		—
				Net cash provided by (used in) investing activities		(26,338	)		(19,608	)
Net increase (decrease) in cash and cash equivalents						(307	)		(151	)
Cash and cash equivalents at beginning of period						4,099			6,460
Cash and cash equivalents at end of period					$	3,792		$	6,309
Supplemental Disclosure of Cash Flow Information
	Cash paid during the period for:
		Interest (net of amount capitalized)			$	4,194		$	4,493
		Income taxes			$	2,398		$	7,461

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

22

NOTES TO 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".

1.    Summary of Significant Accounting Policies

(a)    Presentation

        Our 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 statements should be read in conjunction with the Financial Statements and the notes thereto included in the combined 2001 Form 10-K of the registrants. Certain amounts in the 2001 Financial Statements have been reclassified to conform to the 2002 presentation.

(b)    Financial Derivatives

        We use derivative financial instruments to manage:

•

funding costs;



•

exposure to fluctuations in interest rates; and



•

exposure to foreign currency exchange rates.

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

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

        We also use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows) and treasury locks (an agreement to exchange cash flows based on the movement in the underlying treasury benchmark over a specified period of time). Effective with our adoption of Statement 133 in the first quarter of 2001, we began accounting for all derivatives (including interest rate swaps and treasury locks) using fair value accounting, and we assess the effectiveness of any interest rate swaps and/or treasury locks used in hedging activities. At September 30, 2002, the ineffectiveness of instruments that we have classified as cash flow hedges of variable-rate debt instruments was not material. Reclassification of unrealized gains or losses on cash flow hedges of debt instruments from Accumulated other comprehensive income occurs as interest is accrued on the debt instrument. We currently estimate that on an after-tax basis, $4 million of

23

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

(c)    Energy Marketing and Trading

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

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

        We reflect unrealized gains and losses, resulting from changes in fair value, on a net basis in Operating Revenues. For physical gas trading and for all power trading, we recognize both revenues and costs on a gross basis in Operating Revenues and in Fuel and purchased and exchanged power and Gas purchased, respectively, when transactions are settled. For financial gas trading, realized gains and losses are recorded on a net basis in Operating Revenues when transactions are settled. In June 2002, the EITF reached a consensus requiring realized and unrealized gains and losses on all energy trading contracts to be presented net in Operating Revenues, beginning with the third quarter of 2002, and reclassification of all periods presented. However, this conclusion was rescinded in October 2002, and was replaced with a new requirement to present all gains and losses on energy trading derivatives net beginning in 2003. See Note 1(d)(i) below for further discussion.

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

•

generating station outages;



•

least-cost alternative;

24

•

native load requirements; and



•

extreme weather.

        We anticipate that some of the electricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation. The cost of this generation is usually below the market price at which the trading portfolio has been valued. The potential for earnings volatility from period to period is increased due to the risks associated with marketing and trading electricity, natural gas, and other energy-related products.

        We value contracts in the trading portfolio using end-of-the-period fair values, utilizing the following factors (as applicable):

•

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



•

broker-dealer and over-the-counter price quotations; and



•

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

(d)    Accounting Changes

(i)    Energy Trading

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

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

(1)

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

        In October 2002, the EITF reached a consensus to rescind EITF 98-10. All energy trading contracts that do not qualify as a derivative will no longer be accounted for at fair value. Instead, accrual accounting will be used. The consensus is immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect adjustment to income after tax in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The magnitude of this adjustment will depend on the fair value as of January 1, 2003, of energy trading contracts meeting the criteria

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outlined above. Cinergy has begun reviewing the various contracts to determine the effect of this change.

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

(ii)    Business Combinations and Intangible Assets

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

(iii)    Asset Retirement Obligations

        In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time the obligations are incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the passage of time (recognized as an operation expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of removal on many regulated, long-lived assets through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets that we conclude have a retirement obligation under Statement 143, the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of 2003. We have formed an implementation team and are continuing to analyze the impact of this statement. However, at this time, we have not determined whether its implementation will be material to our financial position or results of operations.

(iv)    Derivatives

        During 1998, the FASB issued Statement 133. This standard was effective for Cinergy beginning in 2001, and requires us to record derivative instruments, which are not exempt under certain provisions

26

of Statement 133, as assets or liabilities, measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use fair value accounting, the effects of implementation were not material.

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

        In December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our financial position or results of operations.

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

        In May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. The proposed effective date would be the first quarter of 2003. We do not believe the amendment as currently drafted, will have a material effect on our financial position or results of operations.

(v)    Asset Impairment

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets (Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 was effective beginning with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.

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(vi)    Exit Activities

        In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under generally accepted accounting principles. Certain of the costs discussed in Note 8 were accrued under previous accounting standards that Statement 146 will supersede when it becomes effective. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through September 30, 2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results of operations is not expected to be material.

(vii)    Accounting for Stock-Based Compensation

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

(e)    Operating Revenues

        Our 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 revenue" and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. The amount of unbilled revenues for Cinergy, CG&E, and PSI were $124 million, $63 million (including $11 million for ULH&P), and $61 million, respectively, at September 30, 2002.

(f)    Related Party Transactions

        To supplement native load requirements for 2002, CG&E and PSI have agreed to purchase peaking power from Cinergy Capital & Trading, Inc. (Capital & Trading), an indirect wholly-owned subsidiary of Cinergy Corp., pursuant to the terms of a wholesale market-based tariff. For the nine months ended September 30, 2002, payments under these contracts totaled approximately $20 million for CG&E and $28 million for PSI.

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(g)    Foreign Currency

        We translate the assets and liabilities of foreign subsidiaries, whose functional currency (generally, the local currency of the country in which the subsidiary is located) is not the United States (U.S.) dollar, using the appropriate exchange rate as of the end of the month. We translate income and expense items using the average exchange rate prevailing during the month the respective transaction occurs. We record translation gains and losses in Accumulated other comprehensive income (loss), which is a component of common stock equity.

2.    Common Stock

        In February 2002, Cinergy Corp. sold 6.5 million shares of its common stock with net proceeds of approximately $200 million. The net proceeds from the transaction were used to repay a portion of short-term debt of Cinergy Corp.

        As discussed in the 2001 Form 10-K, it is currently Cinergy's policy to issue new Cinergy Corp. common shares to satisfy obligations under its various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. Cinergy has issued 2.4 million shares under these plans in 2002.

3.    Long-term Debt

        In January 2002, PSI paid at maturity $23 million principal amount of Medium-Term Notes, Series A. The securities were not replaced by new issues of long-term debt.

        In May 2002, an indirect, wholly-owned subsidiary of Cinergy Global Resources, Inc. entered into a senior term loan and a junior term loan, borrowing $13.1 million and $7 million, respectively. Each of the loans have periodic principal reduction payments, with the senior loan having a final maturity of March 15, 2019, and the junior loan having a final maturity of March 15, 2012. In July 2002, borrowings under the senior and junior loans were increased to $13.8 and $7.1 million, respectively. At that time, the annual interest rate on the senior loan was fixed at 6.97% and the junior loan was fixed at 6.35%. Previously, interest on the loans was at a variable rate.

        On September 1, 2002, CG&E paid at maturity $100 million principal amount of First Mortgage Bonds, 7¹/4% Series.

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

        On September 12, 2002, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $23 million principal amount of its Environmental Refunding Revenue Bonds Series 2002A, due March 1, 2031. The initial interest rate for the bonds was 1.40%. The interest rate resets every 35 days by auction. Proceeds from the borrowing were used on October 1, 2002 to redeem, at par, the $23 million principal amount of Indiana Development Finance Authority Environmental Refunding Revenue Bonds Series 1998, due August 1, 2028. The redeemed bonds had been classified in Notes payable and other short-term obligations.

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

        The holders of the newly issued Ohio Air Quality Development Authority and Indiana Development Finance Authority bonds mentioned above have the benefit of a financial guaranty insurance policy that insures the payment of principal of, and interest on, the bonds when due. CG&E and PSI have each entered into an insurance agreement with the bond insurer and have pledged first mortgage bonds to secure their respective reimbursement obligations under such agreements.

        On September 23, 2002, CG&E issued $500 million principal amount senior unsecured debentures due September 15, 2012, with an interest rate of 5.70%. Proceeds from the offering were used to repay short-term indebtedness incurred in connection with general corporate purposes including capital expenditures related to environmental compliance construction, and the repayment at maturity of $100 million principal amount of CG&E First Mortgage Bonds, 7¹/4% Series. In July 2002, CG&E executed a treasury lock with a notional amount of $250 million, which was designated as a cash flow hedge of 50 percent of the forecasted interest payments on this debt offering. The treasury lock effectively fixed the benchmark interest rate (i.e., the treasury component of the interest rate, but not the credit spread) for 50 percent of the offering from July 2002 through the issuance date in order to reduce the exposure associated with treasury rate volatility. With the issuance of the debt, the treasury lock was settled. Given the use of hedge accounting, this settlement is reflected in Accumulated other comprehensive income (loss) on an after-tax basis in the amount of $13 million, rather than a charge to net income. This amount will be reclassified to Interest expense over the 10-year life of the related debt as interest is accrued.

4.    Notes Payable and Other Short-term Obligations

        In February 2002, Cinergy Corp. placed a $600 million, 364-day senior revolving credit facility. This facility replaces a $400 million, 364-day senior revolving credit facility that expired in February 2002; a $225 million, 364-day senior revolving credit facility that expired in March 2002; and a $150 million, three-year senior revolving credit facility that expired in June 2002.

        In October 2002, CG&E and PSI caused the redemption of certain series of variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes) with a principal amount of $84 million and $47.6 million, respectively. Holders of the notes had the option of having their notes redeemed at various times ranging from any business day to annually. Because the optional redemption features were one year or less, the notes are reflected in Notes payable and other short-term obligations in the Balance Sheets for Cinergy, CG&E, and PSI. The notes were redeemed with proceeds from the issuance of new series of variable rate pollution control notes that do not have the redemption features mentioned above, and are therefore classified as Long-term debt obligations. See Note 3 for further discussion of variable rate pollution control notes.

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

		September 30, 2002				December 31, 2001
		Established Lines		Outstanding		Established Lines		Outstanding
				(in millions)
Cinergy Corp.
	Revolving lines	$	1,000	$	50	$	1,175	$	599
	Uncommitted lines(1)		65		20		40		—
	Commercial paper(2)		800		311		800		125
Operating companies
	Uncommitted lines(1)		75		—		75		66
	Pollution control notes		N/A		279		N/A		279
Non-regulated subsidiaries
	Revolving lines		15		9		46		38
	Short-term debt		45		45		49		49
Cinergy Total				$	714			$	1,156
CG&E and subsidiaries
	Uncommitted lines(1)	$	15	$	—	$	15	$	—
	Pollution control notes(3)		N/A		196		N/A		196
	Money pool		N/A		3		N/A		445
CG&E Total				$	199			$	641
PSI
	Uncommitted lines(1)	$	60	$	—	$	60	$	66
	Pollution control notes(3)		N/A		83		N/A		83
	Money pool		N/A		80		N/A		422
PSI Total				$	163			$	571

(1)

Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.

(2)

The commercial paper program is supported by Cinergy Corp.'s revolving lines.

(3)

Includes $84 million and $47.6 million for CG&E and PSI, respectively, which were redeemed in October 2002.

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

•

a consolidated net worth of $2 billion; and



•

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

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

•

bankruptcy;



•

defaults in the payment of other indebtedness; and

31

•

judgments against the company that are not paid or insured.

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

5.    Sales of Accounts Receivable

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

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

        This subordinated note is a retained interest (right to receive a specified portion of cash flows from the sold assets) under Statement 140 and is classified within Notes receivable from affiliated companies in the accompanying Balance Sheets of CG&E, PSI, and ULH&P and is classified within Notes receivable on Cinergy Corp.'s Balance Sheets. In addition, Cinergy Corp.'s investment in Cinergy Receivables constitutes a purchased beneficial interest (purchased right to receive specified cash flows, in our case residual cash flows), which is subordinate to the retained interests held by CG&E, PSI, and ULH&P. The carrying values of the retained interests are determined by allocating the carrying value of the receivables between the assets sold and the interests retained based on relative fair value. The key assumptions in estimating fair value are credit losses and selection of discount rates. Because (a) the receivables generally turn in less than two months, (b) credit losses are reasonably predictable due to each company's broad customer base and lack of significant concentration, and (c) the purchased beneficial interest is subordinate to all retained interests and thus would absorb losses first, the allocated basis of the subordinated notes are not materially different than their face value. Interest accrues to CG&E, PSI, and ULH&P on the retained interests using the accretable yield method, which generally approximates the stated rate on the notes since the allocated basis and the face value are nearly equivalent. Cinergy Corp. records income from Cinergy Receivables in a similar manner. We record an impairment charge against the carrying value of both the retained interests and purchased beneficial interest whenever we determine that an other-than-temporary impairment has occurred (which is unlikely unless credit losses on the receivables far exceed the anticipated level).

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        The key assumptions used in measuring the retained interests for sales since the inception of the new agreement are as follows:

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

(1)

Receivables at period end divided by annualized sales for period.

        The hypothetical effect on the fair value of the retained interests assuming both a 10 percent and 20 percent unfavorable variation in credit losses or discount rates is not material due to the short turnover of receivables and historically low credit loss history.

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

        The following table shows the gross and net receivables sold, retained interest, and purchased beneficial interest as of September 30, 2002.

		Cinergy		CG&E and subsidiaries		PSI		ULH&P
				(in millions)
Receivables sold as of period end		$	438	$	252	$	186	$	36
Less: Retained Interest			76		42		34		6
	Net receivables sold as of period end	$	362	$	210	$	152	$	30
Purchased beneficial interest		$	9	$	—	$	—	$	—

        A decline in the long-term senior unsecured credit ratings of CG&E, PSI, or ULH&P below investment grade would result in a termination of the sale program and discontinuance of future sales of receivables, and could prevent Cinergy Receivables from borrowing additional funds from commercial paper conduits.

6.    Energy Trading Credit Risk

Cinergy's extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines 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. As of September 30, 2002, approximately 98 percent of the credit exposure related to energy trading and marketing activity was with counterparties 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.

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

33

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

        We continually review and monitor our credit exposure to all counterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty's financial status or public debt ratings.

7.    Commitments and Contingencies

(a)    Guarantees

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

(b)    Ozone Transport Rulemakings

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

(i)    Nitrogen Oxide (NO_X ) SIP Call

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

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

        Following a number of rulings and appeals, in August 2000, the Court of Appeals extended the deadline for NO_X reductions to May 31, 2004. The states and other groups sought review of the Court of Appeals ruling by the U.S. Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to grant that review.

        In June 2001, the Court of Appeals remanded portions of the NO_X SIP Call to the EPA for reconsideration of how growth was factored into the state NO_X budgets. On May 1, 2002, the EPA published, in the Federal Register, a final rule reaffirming its growth factors and state NO_X budgets,

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with additional explanation. The states of West Virginia and Illinois, along with various industry groups (some of which we are a member), have challenged the growth factors and state NO_X budgets in an action filed in the Court of Appeals. It is unclear when the Court of Appeals will reach a decision in this case, or whether this decision will result in an increase or decrease in the size of the NO_X reduction requirement, or a deferral of the May 31, 2004 compliance deadline.

        The states of Indiana and Kentucky developed final NO_X SIP rules in response to the NO_X SIP Call, through cap and trade programs, in June and July of 2001, respectively. On November 8, 2001, the EPA approved Indiana's SIP rules, which became effective December 10, 2001. On April 11, 2002, the EPA proposed direct final approval of Kentucky's rules and they became effective on June 10, 2002. The state of Ohio completed its NO_X SIP rules in response to the NO_X SIP Call on July 8, 2002, with an effective date of July 18, 2002, and the EPA's approval is expected later this year. Cinergy's current plans for compliance with the EPA's NO_X SIP Call would also satisfy compliance with Indiana's and Kentucky's SIP rules and Ohio's proposed rules.

        On September 25, 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control equipment and other methods to reduce NO_X emissions. The current estimate of additional expenditures for this investment is approximately $350 million (in nominal dollars) and includes the following:

•

install selective catalytic reduction units (SCR) at several different generating stations;



•

install other pollution control technologies, including new computer software, at all generating stations;



•

make combustion improvements; and



•

utilize market opportunities to buy and sell NO_X allowances.

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

(ii)    Section 126 Petitions

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

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

(iii)    State Ozone Plans

        On November 15, 1999, the states of Indiana and Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment demonstration on how they intend to bring the Greater Louisville Area (including Floyd and Clark Counties in Indiana) into attainment with the one-hour ozone standard. The Greater Louisville Area has since attained the one-hour ozone standard, and on October 23, 2001, the EPA re-designated the area as being in attainment with that standard. Previous SIP amendments called for, among other things, statewide NO_X reductions from utilities in

35

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

        See (e) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NO_X SIP Call.

(c)    New Source Review (NSR)

        The CAA's NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility, unless the changes are exempt.

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

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

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

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

        On March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light 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. On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

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

        On August 2, 2001, the states of New York, New Jersey, and Connecticut filed an assented to motion to intervene in this litigation. Their motion was granted by the District Court on August 3, 2001. The states' proposed complaint is an exhibit to the motion to intervene. Cinergy, CG&E, and PSI are in the process of evaluating the states' complaint, and their answer is due to be filed by November 30, 2002. At this time, Cinergy, CG&E, and PSI are unable to determine the effect, if any, this filing will have on the issues affecting us regarding NSR, as framed in the EPA's amended complaint.

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

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

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

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

        On October 4, 2002, the Indiana District Court issued a Revised Case Management Plan in Cinergy's case that sets forth the dates by which various events in the litigation, such as discovery and the filing of dispositive motions, must be completed. Consistent with the plan, on October 9, 2002, the Indiana District Court set the case for trial by jury commencing on October 4, 2004.

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

(d)    Beckjord Station NOV

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

(e)    EPA Agreement

        On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the EPA, the U.S. Department of Justice (Justice Department), three northeast states, and two environmental groups that could serve as the basis for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy's operating subsidiaries. The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties. If a final agreement is reached with these parties, it would resolve past claims of alleged NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (c) and (d).

        In addition, the intent of the tentative agreement is that we would be allowed to continue on-going activities to maintain reliability and availability without subjecting the plants to future litigation regarding federal NSR permitting requirements.

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        In return for resolution of claims regarding past maintenance activities, as well as future operational certainty, we have tentatively agreed to:

•

shut down or repower with natural gas, nine small coal-fired boilers at three power plants beginning in 2004;



•

build four additional sulfur dioxide (SO₂) scrubbers, the first of which must be operational by December 31, 2007;



•

upgrade existing particulate control systems;



•

phase in the operation of NO_X reduction technology year-round starting in 2004;



•

reduce our existing Title IV SO₂ cap by 35 percent in 2013;



•

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



•

implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO₂ allowances by 2005.

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

Cinergy, CG&E, and PSI have accrued costs related to certain aspects of the tentative agreement. In reaching the tentative agreement, we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as implement future projects for improved reliability.

        In January 2002, the Justice Department completed its review of NSR, after considering dismissal of the lawsuits, and decided to pursue the pending lawsuits, including the suit against Cinergy, CG&E, and PSI. We will continue to pursue a negotiated settlement of these lawsuits if that continues to be in the best interests of the company. At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. If the settlement is not completed, we intend to defend against the allegations, discussed in (c) and (d) above, vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail on their claims or whether resolution of these matters would have a material effect on our financial position or results of operations.

(f)    Manufactured Gas Plant (MGP) Sites

(i)    General

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

(ii)    PSI

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

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

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

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

        On April 23, 2002, PSI filed a notice of appeal with the Indiana Court of Appeals with respect to the Superior Court's March 25, 2002 order granting final judgment with respect to certain "lost policies." On June 21, 2002, the Superior Court granted the motions of PSI and the insurance carriers and certified four orders for interlocutory review by the Indiana Court of Appeals. Unlike the "lost policies" appeal that is an appeal of right, the appeal of these four certified orders is discretionary and the Indiana Court of Appeals can accept or reject any or all of the issues certified. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals to the Indiana Court of Appeals.

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(iii)    CG&E

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

PSI and CG&E, including its utility subsidiaries, have accrued costs for the sites related to investigation, remediation, and groundwater monitoring to the extent such costs are probable and can be reasonably estimated. PSI and CG&E, including its utility subsidiaries, do not believe they can provide an estimate of the reasonably possible total remediation costs for any site before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSI and CG&E, including its utility subsidiaries, currently cannot determine the total costs that may be incurred in connection with remediation of all sites, to the extent that remediation is required. Until investigation and remediation activities have been completed on these sites, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations.

(g)    Asbestos Claims Litigation

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

        One specific case filed against PSI has been tried to verdict. Following a ten week trial of the case entitled William Lee Roberts, Jr. and Beverly Roberts v. AC&S, Inc., et al., PSI Energy, Inc., Marion Superior Court 2, on May 24, 2002, the jury returned a verdict against PSI in the amount of $494,000 on a negligence claim and for PSI on punitive damages. PSI is appealing the judgment in this case. The total damages were immaterial to PSI's financial position and results of operations. However, future verdicts in any of the pending lawsuits could be material. At this time CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impacts on CG&E's and PSI's financial position or results of operations.

(h)    Gas Customer Choice

        In January 2000, Cinergy Investments, Inc. (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative's removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers. Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in the consolidated suit. In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. Cinergy, CG&E and Investments initiated litigation in October 2001 against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation. Trial is scheduled to occur in mid-2003. We intend to vigorously defend these lawsuits. At the present time, Cinergy cannot predict the outcome of these suits.

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(i)    PSI Fuel Adjustment Charge

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

        In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under-billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under-billed deferred fuel costs. A hearing was held on July 30, 2002. We anticipate a decision in the fourth quarter of 2002.

(j)    Contract Disputes

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

Cinergy, through a subsidiary of Capital & Trading, is involved in a billing dispute with respect to billings for the supply of wholesale natural gas to a customer. This dispute, if not satisfactorily resolved by the parties, is subject to arbitration. Cinergy has reserved for a portion of the amount billed based on the current estimate of net realizable value.

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

8.    Employee Severance Programs

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

        In June 2002, a VERP was also offered to approximately 70 Utility Workers of America / Independent Utilities Union # 600 (IUU) employees. As a result of the 41 employees electing the VERP in the third quarter of 2002, Cinergy, CG&E, and PSI recorded expenses of approximately $4 million, $2 million (including $1 million related to ULH&P), and $1 million, respectively, in the third quarter of 2002 relating to benefits provided to IUU VERP participants.

9.    Financial Information by Business Segment

        As discussed in the 2001 Form 10-K, we conduct operations through our subsidiaries, and manage through the following three business units:

•

Energy Merchant Business Unit (Energy Merchant);



•

Regulated Businesses Business Unit (Regulated Businesses); and

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•

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

        The following section describes the activities of our business units as of September 30, 2002.

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

•

energy risk management;



•

financial restructuring services;



•

proprietary arbitrage activities;



•

customized energy solutions; and



•

directs our renewable energy investing activities.

        Regulated Businesses consists of PSI's regulated, integrated utility operations, and Cinergy's other regulated electric and gas transmission and distribution systems. Regulated Businesses plans, constructs, operates, and maintains Cinergy's transmission and distribution systems and delivers gas and electric energy to consumers. Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy's transmission system.

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

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

        Financial results by business unit for the quarters ended September 30, 2002 and September 30, 2001 are as indicated below.

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

(1)

The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.

(2)

Management utilizes segment profit (loss) to evaluate segment performance.

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        Financial results by business unit for the nine months ended September 30, 2002 and September 30, 2001 are as indicated below.

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

(1)

The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.

(2)

Management utilizes segment profit (loss) to evaluate segment performance.   

        Total segment assets at September 30, 2002 and December 31, 2001, were as follows:

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

(1)

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

44

10.  Earnings Per Common Share (EPS)

        A reconciliation of EPS to EPS—assuming dilution is presented below for the quarters ended September 30, 2002 and September 30, 2001:

		Income		Shares	EPS
		(in thousands, except per share amounts)
Quarter ended September 30, 2002
EPS:
	Net Income	$	130,568	167,967	$	0.78
Effect of dilutive securities:
	Common stock options			843
	Directors' compensation plans			160
	Contingently issuable common stock			1,118
EPS—assuming dilution:
	Net income plus assumed conversions	$	130,568	170,088	$	0.77
Quarter ended September 30, 2001
EPS:
	Net Income	$	128,471	159,097	$	0.81
Effect of dilutive securities:
	Common stock options			948
	Directors' compensation plans			144
	Contingently issuable common stock			491
EPS—assuming dilution:
	Net income plus assumed conversions	$	128,471	160,680	$	0.80

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

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

45

        A reconciliation of EPS to EPS—assuming dilution is presented below for the nine months ended September 30, 2002 and September 30, 2001:

		Income		Shares	EPS
		(in thousands, except per share amounts)
Nine months ended September 30, 2002
EPS:
	Net Income	$	271,279	166,544	$	1.63
Effect of dilutive securities:
	Common stock options			981
	Employee stock purchase and savings plan			5
	Directors' compensation plans			160
	Contingently issuable common stock			1,138
EPS—assuming dilution:
	Net income plus assumed conversions	$	271,279	168,828	$	1.61
Nine months ended September 30, 2001
EPS:
	Net Income	$	331,685	159,049	$	2.08
Effect of dilutive securities:
	Common stock options			1,023
	Directors' compensation plans			144
	Contingently issuable common stock			498
EPS—assuming dilution:
	Net income plus assumed conversions	$	331,685	160,714	$	2.06

        Options to purchase shares of common stock are excluded from the calculation of EPS—assuming dilution when the exercise prices of these options are greater than the average market price of the common shares during the period. For the nine months ended September 30, 2002 and 2001, approximately 2.7 million and 2.1 million shares, respectively, were excluded from the EPS—assuming dilution calculation.

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

11.  Ohio Deregulation

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

46

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

        Under CG&E's transition plan, retail customers continue to receive transportation services from CG&E, but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from CG&E. The shopping credits generally reflect the costs of electric generation included in CG&E's frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than CG&E's electric generation costs in order to stimulate the development of the competitive electric retail service market.

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

47

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

        In this report we discuss various matters that may make management's corporate vision of the future clearer for you. This report outlines management's goals and projections for the future. These goals and projections are considered forward-looking statements and are based on management's beliefs and assumptions. 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 are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These include:

•

Factors affecting operations, such as:



(1)

unusual weather conditions;



(2)

catastrophic weather-related damage;



(3)

unscheduled generation outages;



(4)

unusual maintenance or repairs;



(5)

unanticipated changes in fossil fuel costs, gas supply costs, or availability constraints;



(6)

environmental incidents; and



(7)

electric transmission or gas pipeline system constraints.




•

State, federal and local legislative and regulatory initiatives.



•

The timing and extent of the entry of additional competition in electric or gas markets and the effects of continued industry consolidation through the pursuit of mergers, acquisitions, and strategic alliances.



•

Regulatory factors such as changes in the policies or procedures that set rates; changes in our ability to recover expenditures for environmental compliance, purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases.



•

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



•

Political, legal, and economic conditions and developments in the United States (U.S.) and the foreign countries in which we have a presence. These would include inflation rates and monetary fluctuations.



•

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



•

The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.



•

Availability of, or cost of, capital.



•

Employee workforce factors, including changes in key executives, collective bargaining agreements with union employees, and work stoppages.



•

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

48

•

Costs and effects of legal and administrative proceedings, settlements, investigations, and claims. Examples can be found in Note 7 of the "Notes to Financial Statements" in "Part I. Financial Information."



•

Changes in international, federal, state, or local legislative requirements, such as changes in tax laws, tax rates, and environmental laws and regulations.

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

49

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

        In this report Cinergy (which includes Cinergy Corp. and all of our 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 2001 Form 10-K. The results discussed below are not necessarily indicative of the results that may occur in any future periods.

Introduction

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

•

factors affecting current and future operations;



•

potential sources of cash for future capital expenditures;



•

why revenues and expenses changed from period to period; and



•

how the above items affect our overall financial condition.

Organization

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

•

Cinergy Wholesale Energy, Inc.;



•

Cinergy Services, Inc. (Services);



•

Cinergy Investments, Inc.;



•

Cinergy Global Resources, Inc.; and



•

Cinergy Technologies, Inc.

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

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

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

        The majority of our operating revenues are derived from the sale of electricity and the sale and/or transportation of natural gas.

50

LIQUIDITY AND CAPITAL RESOURCES

Environmental Issues

Ambient Air Standards

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

        On May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) ruled that the EPA's final rule establishing the new eight-hour ozone standard and the fine particulate matter standard constituted an invalid delegation of legislative authority, and also that the EPA had improperly failed to consider the beneficial health effects of ozone (shielding from Ultraviolet-B radiation) when it established the NAAQS ozone standards. In June 1999, the EPA appealed the conclusion that its standards constituted an invalid delegation of legislative authority, but did not appeal the decision that it is required to consider the beneficial health effects of ozone when setting the NAAQS. On February 27, 2001, the U.S. Supreme Court (Supreme Court) reversed the Court of Appeals' ruling. However, the Supreme Court invalidated the EPA's implementation procedure for the portion of the case dealing with the eight-hour ozone standard.

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

        See Note 7 of the "Notes to Financial Statements" in "Part I. Financial Information" for additional Environmental Issues and other matters that could effect our liquidity.

Capital Resources

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

Notes Payable and Other Short-term Obligations

Short-term Borrowings

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

51

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

•

a consolidated net worth of $2 billion; and



•

a ratio of consolidated indebtedness to consolidated total capitalization not to exceed 65 percent.

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

•

bankruptcy;



•

defaults in the payment of other indebtedness; and



•

judgments against the company that are not paid or insured.

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

        As of September 30, 2002, our operating companies had regulatory authority to borrow up to a total of $1.27 billion in short-term debt ($671 million for CG&E and its subsidiaries, including $65 million for ULH&P, and $600 million for PSI). As of September 30, 2002, CG&E and its subsidiaries had $667 million (including $63 million for ULH&P) unused and available and PSI had $520 million unused and available under their respective regulatory authority.

Uncommitted Lines

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

Commercial Paper

        Cinergy Corp. has a commercial paper program with a maximum outstanding principal amount of $800 million. This program is supported by Cinergy Corp.'s $1 billion revolving credit facilities. The commercial paper program at the Cinergy Corp. level, in part, supports the short-term borrowing needs of CG&E and PSI. At September 30, 2002, Cinergy Corp. had $311 million in commercial paper outstanding.

Variable Rate Pollution Control Notes

CG&E and PSI have issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to redeem their notes on a daily, monthly, or annual basis, they are reflected in Notes payable and other short-term obligations in the Balance Sheets for Cinergy, CG&E, and PSI. At September 30, 2002, CG&E and PSI had $196 million and $83 million outstanding in short-term variable rate pollution control notes, respectively. In October 2002, CG&E and PSI redeemed $84 million and $47.6 million, respectively, of variable rate pollution control notes (see Notes 3 and 4 of the "Notes to Financial Statements" in "Part I. Financial Information" for additional information).

52

Money Pool

Cinergy Corp., Services, and our operating companies participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates (other than Cinergy Corp.) participating under this arrangement. This surplus cash may be from internal or external sources. The amounts outstanding under this money pool arrangement are shown as Notes receivable from affiliated companies or Notes payable to affiliated companies on the Balance Sheets of CG&E, PSI, and ULH&P. Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P.

Capital Leases

        Our operating companies are able to enter into capital leases subject to the authorization limitations of the applicable state utility commissions. New financing authority is subject to the approval of the respective commissions. On May 22, 2002, ULH&P received approval from the Kentucky Public Service Commission (KPSC) to enter into up to an additional $25 million of capital lease obligations for the period ending December 31, 2004. On June 26, 2002, PSI received approval from the Indiana Utility Regulatory Commission (IURC) to enter into an additional $100 million of capital lease obligations for the period ending December 31, 2003.

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

        In July 2002, CG&E filed a shelf registration statement with the SEC for the issuance of up to $700 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock. This shelf registration statement became effective in September 2002, and on September 23, 2002, CG&E sold $500 million of senior unsecured debentures thereby reducing the standby capacity of its shelf registration statement to $200 million. PSI maintains shelf registration statements with the SEC with authority remaining to issue $400 million in unsecured debentures, $205 million in first mortgage bonds, and $40 million in preferred stock. ULH&P may issue up to $30 million in secured or unsecured debt securities and up to $20 million in first mortgage bonds.

CG&E, PSI, and ULH&P are also subject to the various state public utility commissions for authority to issue securities. At September 30, 2002, PSI had authority to issue up to $452 million in any combination of unsecured debt securities or first mortgage bonds, and ULH&P had authority to issue up to $75 million in secured or unsecured bonds. As a result of the issuance of $500 million of unsecured debentures, CG&E had no remaining authority for the issuance of securities. CG&E intends to file for additional authority from the PUCO in the fourth quarter of 2002.

        On October 18, 2002, PSI filed a petition with the IURC for the purpose of securing authorization and approval to issue promissory notes to Cinergy for the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants. These peaking plants are currently owned by indirect wholly-

53

owned subsidiaries of Cinergy. In the petition, PSI seeks the approval to issue two promissory notes to Cinergy. One promissory note will be for the principal amount of $200 million with an annual interest rate of 6.302% and will mature on April 15, 2004. The second promissory note will be for the remainder of the purchase price, which will be determined by the IURC, with an annual interest rate of 6.403% and will mature on September 1, 2004. Each promissory note will be pre-payable at the option of PSI, in whole or in part, at any time before its scheduled maturity, without penalty or premium. The promissory notes will be subordinated and subject in right of payment to the full prior payment of all senior debt of PSI. At this time, PSI cannot predict the outcome of this matter. For further discussion of the acquisition, see "Transfer of Generating Assets to PSI" in "Results of Operations—Future."

Off-Balance Sheet Financing

        As discussed in the 2001 Form 10-K, Cinergy uses special-purpose entities (SPE) to finance various projects. The Financial Accounting Standards Board (FASB) issued an exposure draft in July 2002 on a proposed interpretation of consolidation accounting standards that would significantly change the consolidation requirements for SPEs. We have reviewed the impact of this proposal and, if adopted in its current form, we believe that it would require consolidation of all the SPEs discussed in the 2001 Form 10-K, except the accounts receivable sale facility discussed in Note 5 of the "Notes to Financial Statements" in "Part I. Financial Information." The accounts receivable sale facility involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and this proposal. This exposure draft proposes that SPEs not meeting the required criteria be consolidated at fair value, effective in the second quarter of 2003 for Cinergy.

        As discussed in the 2001 Form 10-K, Cinergy has an arrangement with an SPE that has contracted to buy five combustion turbines (turbines). In the second quarter of 2002, Cinergy exercised its option to purchase the contractual rights to two of the turbines and subsequently sold those rights to third parties. Cinergy recognized a loss of $6.9 million on these sales. The rights to the remaining turbines remain with the SPE.

54

Securities Ratings

        As of September 30, 2002, the major credit ratings agencies rated our securities as follows:

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

(1)

Fitch IBCA (Fitch)

(2)

Moody's Investors Service (Moody's)

(3)

Standard & Poor's Ratings Services (S&P)

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

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

        In June 2002, S&P affirmed Cinergy Corp.'s corporate credit rating, the rating of the company's commercial paper program, and the secured debt ratings of CG&E and PSI, while lowering the credit ratings on other issuances. S&P removed all of the Cinergy Corp., CG&E, and PSI ratings from CreditWatch with negative implications and assigned a stable outlook.

        Also in June 2002, Fitch affirmed the credit ratings of Cinergy Corp. Fitch also changed the rating outlook on these securities from negative to stable and affirmed the ratings of CG&E and PSI.

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

Equity Securities

        In February 2002, Cinergy issued 6.5 million shares of common stock with net proceeds of approximately $200 million. As discussed in the 2001 Form 10-K, in November 2001, Cinergy chose to

55

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

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

Guarantees

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

Collateral Requirements

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, 2002 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $48 million in collateral related to its gas and power trading operations in connection with a downgrade to anything below an investment grade rating.

56

2002 QUARTERLY RESULTS OF OPERATIONS—HISTORICAL

Summary of Results

        Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the quarters ended September 30, 2002 and 2001 were as follows:

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

(1)

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

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

Electric Operating Revenues

		Cinergy(1)						CG&E and subsidiaries					PSI
		2002		2001		% Change		2002		2001		% Change	2002		2001		% Change
		(in millions)
Retail		$	803	$	772	4		$	426	$	423	1	$	377	$	349	8
Wholesale			1,694		1,747	(3	)		1,278		839	52		386		910	(58	)
Transportation			4		1	—			4		1	—		—		—	—
Other			53		19	—			40		13	—		14		8	75
	Total	$	2,554	$	2,539	1		$	1,748	$	1,276	37	$	777	$	1,267	(39	)

(1)

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

Electric operating revenues increased for Cinergy and CG&E and decreased for PSI for the quarter ended September 30, 2002, as compared to 2001. Retail revenues increased for Cinergy and PSI primarily due to increased megawatt hour (MWh) sales as a result of warmer than normal weather for the quarter. The revenue increase also reflects higher realizations and changes in rate tariff adjustments associated with demand-side management programs and certain construction programs (see "Construction Work in Progress" in "Results of Operations-Future"). CG&E's retail revenues were relatively flat for the quarter ended September 30, 2002, as compared to 2001. Increased residential sales, attributable to warmer than normal weather, were offset by decreases in revenue from commercial and industrial customers. This decrease reflects a sluggish economy and the migration of such customers to a transportation-only tariff in connection with the Ohio electric customer choice program.

        Wholesale revenues decreased slightly for Cinergy for the quarter ended September 30, 2002, as compared to 2001. A reduction in the average price received per MWh was partially offset by increases in MWh sold. In addition, PSI's and CG&E's wholesale revenues reflect the implementation of the new joint operating agreement effective April 2002 (see "Termination of Operating Agreement" in "Results of Operations-Future"). In connection with implementation of the new operating agreement, the

57

majority of new wholesale sales transactions entered into since April 2002 were originated on behalf of CG&E.

        Other Electric operating revenues increased for Cinergy and CG&E for the quarter ended September 30, 2002, as compared to 2001, due primarily to third party coal sales.

Gas Operating Revenues

		Cinergy(1)						CG&E and subsidiaries
		2002		2001		% Change		2002		2001		% Change
		(in millions)
Retail		$	34	$	46	(26	)	$	34	$	46	(26	)
Wholesale			1,241		733	69			—		—	—
Transportation			7		6	17			7		6	17
Other			—		1	—			—		1	—
	Total	$	1,282	$	786	63		$	41	$	53	(23	)

(1)

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

Gas operating revenues increased for Cinergy and decreased for CG&E for the quarter ended September 30, 2002, as compared to 2001. Wholesale gas revenues for Cinergy increased for the quarter ended September 30, 2002, as compared to 2001, mainly due to a higher price received per thousand cubic feet (mcf) sold by Cinergy Marketing & Trading, LP (Marketing & Trading). Wholesale natural gas commodity spot prices were approximately 15 percent higher on average than in the third quarter of 2001. Also contributing to Cinergy's wholesale revenues was an increase in the amount of mcf delivered.

Cinergy's and CG&E's retail gas revenues decreased primarily due to a reduction in retail mcf sales and lower prices received per mcf delivered. The lower price reflects a decrease in the wholesale gas commodity cost, which is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law. Partially offsetting the decrease in wholesale gas commodity costs was an increase in CG&E's base rates, as approved by the PUCO in May 2002 (See "CG&E Gas Rate Case" in "Results of Operations—Future").

Other Revenues

        Other revenues increased for the quarter ended September 30, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel, beginning in July 2002 (see "New Business Initiative" in "Results of Operations—Future").

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Operating Expenses

		Cinergy(1)						CG&E and subsidiaries						PSI
		2002		2001		% Change		2002		2001		% Change		2002		2001		% Change
		(in millions)
Fuel		$	250	$	210	19		$	114	$	88	30		$	136	$	124	10
Purchased and exchanged power			1,621		1,679	(3	)		1,278		843	52			339		875	(61	)
Gas purchased			1,244		762	63			12		25	(52	)		—		—	—
Operation and maintenance			365		265	38			150		117	28			129		106	22
Depreciation			103		97	6			49		47	4			40		37	8
Taxes other than income taxes			65		59	10			51		43	19			13		15	(13	)
	Total	$	3,648	$	3,072	19		$	1,654	$	1,163	42		$	657	$	1,157	(43	)

(1)

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

Fuel

Fuel primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the quarter ended September 30, 2001, to the quarter ended September 30, 2002:

	Cinergy(1)		CG&E			PSI
	(in millions)
Fuel expense—September 30, 2001	$	210	$	88		$	124
Increase (decrease) due to changes in:
Price of fuel		6		(5	)		11
Deferred fuel cost		3		—			3
MWh generation		7		9			(2	)
Other(2)		24		22			—
Fuel expense—September 30, 2002	$	250	$	114		$	136

(1)

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

(2)

Includes costs of third party coal sales.

Purchased and Exchanged Power

Purchased and exchanged power expense decreased slightly for Cinergy for the quarter ended September 30, 2002, as compared to 2001. A reduction in the average price paid per MWh was partially offset by increases in MWh volumes purchased. Wholesale electric on-peak commodity prices were nine percent lower on average than the quarter ended last year. As discussed above, CG&E's and PSI's purchased and exchanged power expense also reflects the effects of the implementation of the new joint operating agreement beginning in April 2002.

Gas Purchased

Gas purchased expense increased for Cinergy and decreased for CG&E for the quarter ended September 30, 2002, as compared to 2001. Cinergy's gas purchased expense increased primarily due to an increase in the average cost per mcf of gas purchased by Marketing & Trading. Wholesale natural gas commodity spot prices were approximately 15 percent higher on average for the quarter ended September 30, 2002, as compared to 2001. Also, contributing to Cinergy's increase was increased volumes purchased by Marketing & Trading. CG&E's gas purchased expense decrease reflects a

59

reduction in volumes purchased and a decrease in the average cost purchased per mcf. CG&E's wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

Operation and Maintenance

Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2002, as compared to 2001. Approximately 40 percent of Cinergy's increase reflects costs associated with the production of synthetic fuel, beginning in July 2002. Additionally, Cinergy's, CG&E's, and PSI's increase reflects the recognition of the remaining costs associated with employee severance programs, which began in the second quarter of 2002, increased costs of employee compensation and benefit programs, and higher transmission expenses. Cinergy's and PSI's increase also reflects increased amortization of demand-side management expenditures.

Depreciation

Depreciation expense increased for Cinergy, CG&E, and PSI for the quarter ended September 30, 2002, as compared to 2001, primarily attributable to the addition of depreciable plant, including Cinergy's acquisitions of non-regulated peaking generation in 2001.

Taxes Other Than Income Taxes

Taxes other than income taxes increased for Cinergy and CG&E for the quarter ended September 30, 2002, as compared to 2001. This increase is primarily attributable to increased property taxes.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries

Equity in earnings (losses) of unconsolidated subsidiaries increased for the quarter ended September 30, 2002, as compared to 2001, primarily due to changes in the market valuation of certain technology investments.

Interest

Interest expense decreased for Cinergy for the quarter ended September 30, 2002, as compared to 2001. This decrease was primarily the result of lower interest rates.

Preferred Dividend Requirement of Subsidiary Trust

Preferred dividend requirement of subsidiary trust expense relates to quarterly payments to be made to holders of Cinergy's preferred trust securities, which were issued in December 2001.

Income Taxes

Income tax expense decreased for Cinergy for the quarter ended September 30, 2002, as compared to 2001, primarily due to tax credits associated with the production of synthetic fuel, beginning in July 2002. CG&E's income tax expense decreased for the quarter ended September 30, 2002, as compared to 2001, primarily due to a decrease in taxable income.

60

2002 YEAR TO DATE RESULTS OF OPERATIONS—HISTORICAL

Summary of Results

        Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002 and 2001 were as follows:

	Cinergy(1)				CG&E and subsidiaries				PSI
	2002		2001		2002		2001		2002		2001
	(in thousands)
Electric gross margin	$	1,820,896	$	1,707,077	$	949,150	$	899,791	$	795,513	$	712,080
Gas gross margin		158,726		169,343		132,036		143,142		—		—
Net income		271,279		331,685		202,024		220,366		135,440		132,103

(1)

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

        Net income for the nine months ended September 30, 2002 was $271 million ($1.61 per share on a diluted basis) as compared to $332 million ($2.06 per share on a diluted basis) for the same period last year. Income before taxes for the period was $395 million compared to $512 million for the same period a year ago. Increased total gross margins were offset by the recognition of approximately $71 million of costs associated with employee severance programs and charges related to the write-off of certain equipment and technology investments, and higher operating costs.

Electric Operating Revenues

		Cinergy(1)						CG&E and subsidiaries						PSI
		2002		2001		% Change		2002		2001		% Change		2002		2001		% Change
		(in millions)
Retail		$	2,121	$	2,052	3		$	1,101	$	1,116	(1	)	$	1,020	$	935	9
Wholesale			2,930		4,738	(38	)		2,043		2,273	(10	)		826		2,422	(66	)
Transportation			9		2	—			9		2	—			—		—	—
Other			118		46	—			97		30	—			28		24	17
	Total	$	5,178	$	6,838	24		$	3,250	$	3,421	(5	)	$	1,874	$	3,381	(45	)

(1)

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

Electric operating revenues for Cinergy, CG&E, and PSI decreased for the nine months ended September 30, 2002, as compared to 2001. Cinergy's and CG&E's decrease in wholesale revenues primarily reflects a reduction in the average price received per MWh. Additionally, the decrease in PSI's wholesale revenues primarily reflect the implementation of the new joint operating agreement effective April 2002 (see "Termination of the Operating Agreement" in "Results of Operations-Future"). In connection with implementation of the new operating agreement, the majority of new wholesale sales transactions entered into since April 2002 were originated on behalf of CG&E.

        Retail revenues increased for Cinergy and PSI due to increased MWh sales, as a result of warmer than normal weather. Also contributing to the increase were higher realizations and changes in rate tariff adjustments associated with demand-side management, Purchase Power Tracker (Tracker), and fuel cost recovery programs. The cost of fuel for PSI's retail customers is passed on dollar-for-dollar under the state mandated fuel cost recovery mechanism. CG&E's retail revenues were relatively flat for the nine months ended September 30, 2002, as compared to 2001. Increased residential sales, attributable to warmer than normal weather, were offset by decreases in revenue from commercial and industrial customers. This decrease reflects a sluggish economy and the migration of such customers to a transportation-only tariff, in connection with the Ohio electric customer choice program.

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        Other Electric operating revenues increased for Cinergy and CG&E for the nine months ended September 30, 2002, as compared to 2001, due primarily to third party coal sales.

Gas Operating Revenues

		Cinergy(1)						CG&E and subsidiaries
		2002		2001		% Change		2002		2001		% Change
		(in millions)
Retail		$	242	$	422	(43	)	$	242	$	422	(43	)
Wholesale			3,026		3,380	(10	)		—		—	—
Transportation			32		29	10			32		29	10
Other			2		6	(67	)		3		7	(57	)
	Total	$	3,302	$	3,837	(14	)	$	277	$	458	(40	)

(1)

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

Gas operating revenues for Cinergy and CG&E decreased for the nine months ended September 30, 2002, as compared to 2001. Decreases in retail gas revenues were primarily due to a lower price received per mcf delivered. The lower price reflects a substantial decrease in the wholesale gas commodity cost, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism.

Cinergy's decrease in wholesale gas revenues was mainly due to a lower price received per mcf sold by Marketing & Trading. Wholesale natural gas commodity spot prices were 33 percent lower on average than in the nine months ended 2001. This decrease was partially offset by an increase in the amount of mcf delivered.

Other Revenues

        Other revenues increased for the nine months ended September 30, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel, beginning in July 2002.

Operating Expenses

		Cinergy(1)						CG&E and subsidiaries						PSI
		2002		2001		% Change		2002		2001		% Change		2002		2001		% Change
		(in millions)
Fuel		$	672	$	606	11		$	303	$	268	13		$	357	$	332	8
Purchased and exchanged power			2,685		4,525	(41	)		1,998		2,253	(11	)		722		2,337	(69	)
Gas purchased			3,143		3,668	(14	)		145		315	(54	)		—		—	—
Operation and maintenance			973		782	24			394		349	13			386		302	28
Depreciation			304		278	9			146		139	5			116		111	5
Taxes other than income taxes			202		176	15			150		136	10			47		38	24
	Total	$	7,979	$	10,035	(20	)	$	3,136	$	3,460	(9	)	$	1,628	$	3,120	(48	)

(1)

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

62

Fuel

Fuel primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the nine months ended September 30, 2001, to the nine months ended September 30, 2002:

	Cinergy(1)		CG&E			PSI
	(in millions)
Fuel expense—September 30, 2001	$	606	$	268		$	332
Increase (decrease) due to changes in:
Price of fuel		1		(17	)		18
Deferred fuel cost		13		—			13
MWh generation		4		10			(6	)
Other(2)		48		42			—
Fuel expense—September 30, 2002	$	672	$	303		$	357

(1)

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

(2)

Includes costs of third party coal sales.

Purchased and Exchanged Power

Purchased and exchanged power expense decreased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002, as compared to 2001. Cinergy's and CG&E's decrease is due primarily to a reduction in the purchase price. Partially offsetting this decrease in purchase price was an increase in volumes purchased. As discussed above, CG&E's and PSI's purchased and exchanged power expense also reflects the effects of the implementation of the new joint operating agreement beginning in April 2002.

Gas Purchased

Gas purchased expense decreased for Cinergy and CG&E for the nine months ended September 30, 2002, as compared to 2001. Cinergy's decrease is primarily due to a decrease in the average cost per mcf of gas purchased by Marketing & Trading. Wholesale natural gas commodity spot prices were 33 percent lower on average than the nine months ended last year. CG&E's gas purchased expense decreased primarily due to a decrease in the average cost purchased per mcf. CG&E's wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

Operation and Maintenance

Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002, as compared to 2001. Cinergy's, CG&E's, and PSI's increase reflects the recognition of costs associated with employee severance programs, which began in the second quarter of 2002, increased costs of employee compensation and benefit programs, and higher transmission expenses. Cinergy's and PSI's increase also reflects increased amortization of demand-side management expenditures. Additionally, Cinergy's increase includes costs associated with the production of synthetic fuel, beginning in July 2002.

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Depreciation

Depreciation expense increased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002, as compared to 2001, primarily attributable to the addition of depreciable plant, including Cinergy's acquisitions of non-regulated peaking generation in 2001.

Taxes Other Than Income Taxes

Taxes other than income taxes increased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002, as compared to 2001. This increase is primarily attributable to increased property taxes.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries

Equity in earnings (losses) of unconsolidated subsidiaries increased for the nine months ended September 30, 2002, as compared to 2001, primarily due to changes in the market valuation of certain technology investments recognized in 2001, and the dissolution of a subsidiary.

Miscellaneous—Net

Miscellaneous—net expense increased for Cinergy for the nine months ended September 30, 2002, as compared to 2001, primarily reflecting the write-off of certain equipment and technology investments.

Interest

Interest expense decreased for Cinergy, CG&E, and PSI for the nine months ended September 30, 2002, as compared to 2001, primarily as a result of lower interest rates.

Preferred Dividend Requirement of Subsidiary Trust

Preferred dividend requirement of subsidiary trust relates to quarterly payments to be made to holders of Cinergy's preferred trust securities, which were issued in December 2001.

Income Taxes

Income tax expense decreased for Cinergy and PSI for the nine months ended September 30, 2002, as compared to 2001. This decrease was primarily due to the decrease in taxable income. Also contributing to Cinergy's decrease were tax credits associated with the production of synthetic fuel beginning July 2002. CG&E's income tax expense increased for the nine months ended September 30, 2002, as compared to 2001, primarily reflecting tax changes, including state rate changes, due to deregulation.

ULH&P

        The Results of Operations discussion for ULH&P is presented only for the nine months ended September 30, 2002, in accordance with General Instruction H(2)(a) of Form 10-Q.

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        Electric and gas margins and net income for ULH&P for the nine months ended September 30, 2002 and 2001, were as follows:

	ULH&P
	2002		2001
	(in thousands)
Electric gross margin	$	52,255	$	61,164
Gas gross margin		22,652		26,740
Net income		9,110		26,854

Electric Gross Margin

Electric operating revenues decreased $5.4 million for the nine months ended September 30, 2002, as compared to 2001, primarily due to recognition of revenues in 2001 which were previously deferred subject to refund in connection with a 2000 retail rate filing with the KPSC. A settlement was reached in May 2001, allowing ULH&P to retain these revenues. Warmer than normal weather partially offset the decrease in revenues. Electricity purchased from parent company for resale increased $3.5 million for the nine months ended September 30, 2002, as compared to 2001, due to a new wholesale power contract with CG&E that became effective in January 2002. This five-year agreement is a negotiated fixed-rate contract that replaced the previous cost of service based contract that expired on December 31, 2001.

Gas Gross Margin

Gas operating revenues decreased $29.2 million for the nine months ended September 30, 2002, as compared to 2001. This decrease is primarily due to lower price received per mcf. The lower price reflects a substantial decrease in the wholesale gas commodity cost. Partially offsetting the decrease in gas revenues was an increase in ULH&P's base rates approved by the KPSC in January 2002 (see "ULH&P Gas Rate Case" in "Results of Operations—Future"). Gas purchased expenses decreased $25.1 million for the nine months ended September 30, 2002, as compared to 2001, due to lower prices paid per mcf. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

Operation and Maintenance

Operation and maintenance expense increased $9.2 million for the nine months ended September 30, 2002, as compared to 2001, due primarily to higher transmission costs associated with the new wholesale power contract with CG&E that became effective in January 2002.

Miscellaneous—net

Miscellaneous—net expense increased for the nine months ended September 30, 2002, as compared to 2001, primarily due to the expensing of previously deferred costs, that were denied recovery in the final order on ULH&P's gas rate case.

Income Taxes

Income tax expense decreased for the nine months ended September 30, 2002, as compared to 2001, primarily due to a reduction in taxable income.

65

RESULTS OF OPERATIONS—FUTURE

Electric Industry

Wholesale Market Developments

Federal Energy Regulatory Commission (FERC) Notice of Proposed Rulemaking (NOPR)

        In July 2002, the FERC issued a NOPR on "Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design", that proposed significant changes designed to create genuine wholesale competition, efficient transmission systems, the right pricing signals for investment in transmission, generation facilities and demand reduction, and more customer options. Market monitoring and market power mitigation proposals are also critical parts of the proposals for standardized power market rules. Among other things, the FERC also proposes to amend its regulations under the Federal Power Act to modify the proforma open access transmission tariff established under the FERC's Order No. 888 to remedy remaining undue discrimination in the provision of interstate transmission services and in other industry practices, and to assure just and reasonable rates within and among regional power markets. FERC proposes to require all public utilities with open access transmission tariffs to file modifications to their tariffs to reflect non-discriminatory, standardized transmission services and standardized wholesale electric market design. FERC proposes a phased compliance process. By July 31, 2003, all public utilities that own, operate, or control interstate transmission facilities must file revised open access transmission tariffs to become effective September 30, 2003, that place transmission service for bundled retail customers under the same terms and conditions of service as wholesale transmission. By December 1, 2003, all public utilities that own, control, or operate interstate transmission facilities must file revised open access transmission tariffs, to become effective no later than September 30, 2004, or such other time as directed by the FERC, that reflect all of the remaining revisions and requirements of the Final Rule in the proceeding. Cinergy is currently evaluating this ruling and at this time cannot determine the impact to either our financial position or results of operations.

Retail Market Developments

Ohio

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

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

        Under CG&E's transition plan, retail customers continue to receive transportation services from CG&E, but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from CG&E. The shopping credits generally reflect the costs of electric generation included in CG&E's frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than CG&E's

66

electric generation costs in order to stimulate the development of the competitive electric retail service market.

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

Supply-side Actions

        In December 2001, PSI filed a petition with the IURC to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from subsidiaries of Cinergy Capital & Trading, Inc. (Capital & Trading). This transfer, if approved, will increase PSI's generating portfolio by approximately 800 megawatts (MW). See "Transfer of Generating Assets to PSI" for additional information.

Demand-side Actions

        In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW, and 6,088 MW for Cinergy, CG&E, and PSI, respectively. Cinergy and CG&E subsequently set new record peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002. We met customer demands with our own supply and planned purchases from other regional electric suppliers.

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

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

        On December 15, 2001, the Midwest ISO initiated startup of its operations with the provision of a variety of support or stand-alone services to its transmission owning members. The Midwest ISO achieved full startup, including implementation of tariff administration, on February 1, 2002. Although the Midwest ISO continues to develop, modify, and enhance its various operating practices, it has assumed functional control of the transmission systems of its member companies, including the Cinergy utilities. The impact of this transfer was not material to our financial position or results of operations.

        In July 2002, the FERC issued a NOPR that proposed significant changes to the electricity wholesale market. At this time we are unable to determine the impact of the NOPR upon the Midwest ISO and Cinergy. See "Federal Energy Regulatory Commission Notice of Proposed Rulemaking" for further discussion.

        Finally, in its July 17, 2002 open meeting and subsequent orders, FERC reaffirmed its expectation that the Midwest ISO and the PJM Interconnection, LLC (PJM) implement a common wholesale market between them by October 1, 2004. FERC also imposed more immediate deadlines upon the Midwest ISO, PJM, and various other parties to establish certain protocols, including the elimination of pancaked transmission rates between the Midwest ISO and PJM, necessary to establish a "virtual" single regional transmission organization among the Midwest ISO and PJM companies. As part of the FERC orders, the FERC has opened an investigation under Section 206 of the Federal Power Act into the justness and reasonableness of the "through and out" transmission rates of the Midwest ISO and

67

PJM. Cinergy is participating in the Section 206 hearing, along with the other transmission owners who are members or potential members of the Midwest ISO or PJM. Pursuant to an order issued in July 2002, the FERC indicated that it plans to issue a decision by July 31, 2003. As part of this proceeding, Cinergy is advocating the removal of pancaked transmission rates between the Midwest ISO and PJM including all of the former Alliance Regional Transmission Organization companies, as well as lost revenue recovery for transmission owners who are affected by the removal of the pancaked transmission rates. At this time, Cinergy cannot determine the impact of either the FERC orders or the related Section 206 investigation upon either our financial position or results of operations.

Federal Update

Energy Bill

        President George W. Bush (President Bush), in conjunction with the work of an inter-agency energy task force headed by Vice President Richard Cheney, developed a number of recommendations to address the energy security needs of America. The U.S. House of Representatives (House) passed its version of energy security legislation, H.R. 4 in 2001 and the U.S. Senate (Senate) passed its version, S. 517, on April 25, 2002. The bill remains in a joint House/Senate Conference Committee. Many issues are yet to be resolved and may not result in a final bill that will be acceptable to both Houses of Congress before this congressional session ends.

        Both House and Senate versions of the energy bill include tax provisions for favorable gas distribution line depreciation changes, tax incentives for combined heat and power facilities and for other non-traditional fuel sources such as biomass.

        The Senate bill includes an electricity provision that calls for repeal of the PUHCA with consumer protection provisions and increased oversight by the FERC over mergers. The Senate bill also includes a Renewable Portfolio Standard, mandating that utilities purchase an increasing percent of power from renewable sources.

        At this time, it is not possible to predict whether energy legislation will pass by the end of this session of Congress or what provisions affecting Cinergy will be included. Because of this, it is not possible at this time to determine the impact of the pending legislation on our financial position or results of operations.

Significant Rate Developments

Purchased Power Tracker

        As discussed in the 2001 Form 10-K, in May 1999, PSI filed a petition with the IURC seeking approval of a Tracker. This request was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not sought through the existing fuel adjustment clause.

        A hearing was held before the IURC in February 2001, to determine whether it was appropriate for PSI to continue the Tracker for future periods. In April 2001, a favorable order was received extending the Tracker process for two years, through the summer of 2002. PSI is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portions), with the remaining 10 percent deferred for subsequent recovery in PSI's next general rate case.

        In June 2001, PSI filed a petition with the IURC seeking approval of the recovery of its summer 2001 purchased power costs through the Tracker. In October 2001, PSI filed an amended petition with the IURC, seeking approval of the costs associated with additional power purchases made during July and August 2001. In February 2002, the IURC issued an order approving the recovery of $15.3 million of PSI's summer 2001 purchase power costs via the Tracker. The remaining $1.7 million was deferred

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for subsequent recovery in PSI's next general rate case. In March 2002, PSI filed a petition with the IURC seeking approval to extend the Tracker process beyond the summer of 2002 and seek recovery of power purchases made year-round (rather than just in the summer months) as needed to maintain adequate reserves. A hearing is scheduled for the first quarter of 2003.

        In June 2002, PSI filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs. A hearing is scheduled for the first quarter of 2003.

Termination of Operating Agreement

        As discussed in the 2001 Form 10-K, CG&E, PSI, and Services filed a notice of termination of the operating agreement with the FERC in October 2000. In December 2000, the FERC ruled that the companies have the contractual right to terminate the agreement and established a termination effective date in May 2001 and also set a hearing date in May 2001 on the issue of the reasonableness of termination.

        Certain parties appealed the FERC's decision to establish a termination date. In March 2001, the IURC initiated an investigation proceeding into the termination of the operating agreement. In May 2001, the parties to the FERC proceeding reached a settlement agreement resolving the termination issues and certain compensation and damage issues. The settlement agreement was approved by the FERC in June 2001 and delayed the termination of the existing operating agreement until a new successor agreement was approved by the FERC.

        In August 2001, the parties to both the IURC proceeding and the previous FERC proceeding entered into two complementary settlement agreements. Both the IURC and FERC agreements were conditioned upon FERC acceptance of the proposed successor agreements. The IURC settlement agreement was approved by the IURC in September 2001. Cinergy filed the successor agreements with the FERC in October 2001 and in March 2002, the FERC approved the successor agreements. The successor agreements allow Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E at market based pricing. The successor agreements were implemented effective in April 2002.

PSI Fuel Adjustment Charge

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

        In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under-billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under-billed deferred fuel costs. A hearing was held on July 30, 2002. We anticipate a decision in the fourth quarter of 2002.

Construction Work in Progress (CWIP) Ratemaking Treatment for Nitrogen Oxide (NO_X ) Equipment

        During the third quarter of 2001, PSI filed an application with the IURC requesting CWIP ratemaking treatment for costs related to NO_X equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on the equipment during the construction period. PSI filed its case-in-chief testimony in January 2002. In

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July 2002, the IURC approved the application allowing PSI to commence CWIP ratemaking treatment for its NO_X equipment investments made through December 31, 2001. Initially this rate adjustment will result in approximately a one percent increase in customer rates. Under the IURC's CWIP rules, PSI may update its CWIP Tracker at six-month intervals. The IURC's July order also authorized PSI to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used during construction. Pursuant to FASB Statement No. 92, Regulated Enterprises—Accounting for Phase-in Plans, the equity component of allowance for funds used during construction will not be deferred for financial reporting.

        On September 4, 2002, PSI filed its first six-month CWIP Tracker update with the IURC, covering investments made in NO_X emission reduction equipment from January 1, 2002 through June 30, 2002. An IURC order allowing for the recovery of these incremental expenditures is expected during the first quarter of 2003.

Transfer of Generating Assets to PSI

        In December 2001, PSI filed a petition with the IURC requesting approval, under Indiana's Power Plant Construction Act, to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from their current owners, subsidiaries of Capital & Trading, to address its need for increased generating capacity. PSI, the IURC Staff, and the Indiana Utility Consumer Counselor reached a settlement agreement in September 2002, which if approved by the IURC, would authorize PSI to purchase the two peaking plants. Other parties are still opposing PSI's proposed purchase of these plants. A hearing before the IURC was held in October 2002. PSI anticipates receiving an IURC order in this case during the fourth quarter of 2002.

        In September 2002, PSI and the applicable Capital & Trading subsidiaries filed applications with the SEC under PUHCA and the FERC under the Federal Power Act requesting authorization for the transfer. However, in October 2002, the SEC notified PSI that the transaction is exempt from the SEC's jurisdiction under PUHCA and accordingly PSI and the Capital & Trading subsidiaries withdrew the SEC application. In October 2002, several parties intervened and filed protests in the proceeding before the FERC, opposing the transfer. Cinergy timely filed an answer to these protests. Cinergy expects the FERC to issue an order in this case during the fourth quarter of 2002.

2002 Purchased Power Costs

        In May 2002, the IURC approved a settlement agreement between PSI, the IURC staff, and the Indiana Office of Utility Consumer Counselor pertaining to PSI's 2002 purchased power arrangements. This agreement allows PSI to purchase the output of the Henry County, Indiana and Butler County, Ohio peaking plants through December 31, 2002. The parties also agreed to not challenge the recovery of costs for the purchase of power from these plants, as well as the costs of additional purchases needed for reliability purposes, through PSI's Tracker. The order also provides for cost recovery of energy charges associated with PSI's 2002 reliability purchases through the fuel cost recovery mechanism.

Gas Industry

ULH&P Gas Rate Case

        On May 4, 2001, ULH&P filed a retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services by $7.3 million annually, or 8.4 percent overall. In addition to an increase in base rates, ULH&P requested recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $112 million over the next ten years. A hearing on this matter was held in November 2001 and an order was issued on January 31, 2002. In the order, the KPSC authorized a base rate increase of $2.7 million, or 2.8 percent overall, to be effective on January 31, 2002. In addition, the KPSC authorized ULH&P to implement

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the tracking mechanism to recover the costs of the accelerated gas main replacement program for an initial period of three years, with the possibility of renewal for the full ten years. Per the terms of the order, the tracker will be set annually. The first filing was made on March 27, 2002 and was approved by the KPSC in an order issued on August 30, 2002. The Kentucky Attorney General (Attorney General) has appealed the KPSC's approval of the tracking mechanism to the Franklin Circuit Court (Court). The KPSC's August 30, 2002 order requires ULH&P to maintain records of the revenues collected under the tracking mechanism to enable ULH&P to refund such revenues, in case the Attorney General's appeal is upheld and the KPSC orders a refund. ULH&P filed an application for rehearing with the KPSC on September 20, 2002, in which ULH&P requested that the KPSC eliminate this requirement. On October 7, 2002, the KPSC issued an order granting ULH&P's application for rehearing in part. The KPSC's order clarified that ULH&P must maintain its records of the revenues collected under the tracking mechanism in case a refund is ordered at a later date; however, the KPSC's order stated that it will not address the issue of whether to order a refund unless the Court rules that the KPSC lacked the requisite authority to approve the tracking mechanism. As a result, ULH&P will not record these revenues as subject to refund unless the Court so rules. At the present time, ULH&P cannot predict the outcome of this litigation.

CG&E Gas Rate Case

        On July 31, 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution services by approximately $26 million, or 5 percent overall. Simultaneously, CG&E requested recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $716 million over the next ten years. CG&E entered into a settlement agreement with most of the parties to the case, resolving most of the issues, and CG&E filed the settlement agreement with the PUCO on April 17, 2002. The settlement agreement provides for a base rate increase of $15.1 million or 3.3 percent and also provides for implementation of the tracking mechanism, subject to rate caps, through the date of CG&E's next base rate case. CG&E agreed, as part of the settlement agreement, not to file a new gas base rate case prior to January 1, 2004, absent certain exceptional circumstances. On May 30, 2002, the PUCO issued an order approving the settlement.

CG&E Gas Hedging Program

        As discussed in the 2001 Form 10-K, in July 2001, CG&E filed an application with the PUCO requesting pre-approval of its gas procurement-hedging program. This request was subsequently denied. However, in denying CG&E's request for pre-approval of a hedging program, the PUCO order provided clarification that prudently incurred hedging costs are a valid component of CG&E's gas purchasing strategy. As a result, CG&E hedged approximately 50 percent of its winter 2001/2002 base load requirements, using primarily fixed price forward contracts and contracts with a ceiling and floor on the price. These contracts employ the normal purchases and sales exemption, and do not involve Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activity, (Statement 133) hedges. CG&E was authorized to recover the hedging program costs through its gas cost recovery mechanism.

Market Risk Sensitive Instruments and Positions

        The transactions associated with the Energy Merchant Business Unit (Energy Merchant) energy marketing and trading activities give rise to various risks, including price risk. Price risk represents the potential risk of loss from adverse changes in market price of electricity or other energy commodities. As Energy Merchant continues to develop its energy marketing and trading business (and due to its substantial investment in generation assets), 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.

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        The changes in fair value of the energy risk management assets and liabilities for the period ended September 30, 2002, are presented in the table below:

Change in Fair Value
September 30, 2002
(in millions)

	Year to Date September 30
Fair value of contracts outstanding at beginning of period:	$	18
Inception value of new contracts when entered(1)		6
Changes in fair value attributable to changes in valuation techniques and assumptions(2)		14
Other changes in fair value(3)		72
Option premiums paid/(received)		24
Contract reclassifications(4)		14
Contract acquisition(5)		(16	)
Contracts settled		(38	)
Fair value of contracts outstanding at end of period	$	94

(1)

Represents fair value, recognized in income, attributable to long-term, structured contracts, primarily in power, which is recorded on the date a deal is signed. These contracts are primarily with end-use customers or municipalities that seek to limit their risk to power price volatility. While caps and floors often exist in such contracts, the amount of power supplied can vary from hour to hour to mirror the customers load volatility. See "Accounting Changes" for additional information regarding inception gains.

(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.

(4)

Represents reclassifications of the settlement value of contracts that have been terminated as a result of counterparty non-performance to non-current other liabilities. These contracts no longer have price risk and are therefore not considered energy trading contracts.

(5)

Capital & Trading acquired a portfolio of gas contracts and inventory in July 2002. This amount represents the fair value of net Energy Risk Management Liabilities assumed. There was no inception gain or loss recognized at the date of acquisition.

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        The following table presents the expected maturity of the Energy risk management assets and Energy risk management liabilities as of September 30, 2002:

	Fair Value of Contracts at September 30, 2002
	Maturing
Source of Fair Value(1)	Within 12 months		12-36 months			36-60 months		Thereafter		Total Fair Value
Prices actively quoted	$	18	$	(5	)	$	—	$	—	$	13
Prices based on models and other valuation methods		29		32			8		12		81
Total	$	47	$	27		$	8	$	12	$	94

(1)

Active quotes are considered to be 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 tenor.

Concentrations of Credit Risk

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

Energy Trading Credit Risk

Cinergy's extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines 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. As of September 30, 2002, approximately 98 percent of the credit exposure related to energy trading and marketing activity was with counterparties 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.

        In December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and the applicable provisions of the U.S. Bankruptcy Code, as approved by the court. While we cannot predict the court's resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact on our financial position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for utilizing the normal exemption under Statement 133 (see Note 1(d)(iv) of the "Notes to Financial Statements" in "Item 1. Financial Information"). These contracts were recognized at fair value when the contracts were terminated in the fourth quarter of 2001.

        We continually review and monitor our credit exposure to all counterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty's financial status or public debt ratings.

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Accounting Changes

Energy Trading

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

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

(1)

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

        In October 2002, the EITF reached a consensus to rescind EITF 98-10. All energy trading contracts that do not qualify as a derivative will no longer be accounted for at fair value. Instead, accrual accounting will be used. The consensus is immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect adjustment to income after tax in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The magnitude of this adjustment will depend on the fair value as of January 1, 2003, of energy trading contracts meeting the criteria outlined above. Cinergy has begun reviewing the various contracts to determine the effect of this change.

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

Business Combinations and Intangible Assets

        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Statement 142 requires that goodwill be

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assessed for impairment upon adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards. This test must be applied at the "reporting unit" level, which is not permitted to be broader than the current business segments discussed in Note 9 of the "Notes to Financial Statements" in "Item 1. Financial Information". Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We began applying Statement 141 in the third quarter of 2001 and Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the first quarter of 2002, is not material to our financial position or results of operations. We have identified the reporting units for Cinergy and finalized the initial transition impairment test. Based on the result of this test, the transition impact of applying Statement 142 is not material to our financial position or results of operations. We will continue to perform goodwill impairment tests annually, as required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.

Asset Retirement Obligations

        In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time the obligations are incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the passage of time (recognized as an operation expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of removal on many regulated, long-lived assets through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets that we conclude have a retirement obligation under Statement 143, the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of 2003. We have formed an implementation team and are continuing to analyze the impact of this statement. However, at this time, we have not determined whether its implementation will be material to our financial position or results of operations.

Derivatives

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

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

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financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

        In December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our financial position or results of operations.

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

        In May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. The proposed effective date would be the first quarter of 2003. We do not believe the amendment as currently drafted, will have a material effect on our financial position or results of operations.

Asset Impairment

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets (Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 was effective beginning with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.

Exit Activities

        In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under generally accepted accounting principles. Certain of the costs discussed in Note 8 of the "Notes to Financial Statements" in "Item 1. Financial Information" were accrued under previous accounting standards that Statement 146 will supersede when it becomes effective. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through September 30, 2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results of operations is not expected to be material.

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Accounting for Stock-Based Compensation

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

Other

        On October 24, 2002, Cinergy, through a press release, reported its third quarter 2002 results consistent with the EITF's June 2002 consensus in EITF 02-3 (see Energy Trading above). This consensus required all realized and unrealized gains and losses on energy trading contracts be presented net in the income statement whether or not settled physically. Subsequent to the release, on October 25, 2002, the EITF reached a consensus which effectively supersedes the original June 2002 consensus. As a result, the adoption of EITF 02-3 is to become effective beginning in 2003. Cinergy, CG&E, PSI, and ULH&P have filed their third quarter 2002 financial statements herein consistent with their previous policy, and will adopt the revised consensus effective January 1, 2003.

Other Matters

Employee Severance Programs

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

        In June 2002, a VERP was also offered to approximately 70 Utility Workers of America / Independent Utilities Union # 600 (IUU) employees. As a result of the 41 employees electing the VERP in the third quarter of 2002, Cinergy, CG&E, and PSI recorded expenses of approximately $4 million, $2 million (including $1 million related to ULH&P), and $1 million, respectively, in the third quarter of 2002 relating to benefits provided to IUU VERP participants.

Pension Plans

Cinergy maintains defined benefit pension plans covering substantially all U.S. employees meeting certain minimum age and service requirements. Plan assets consist of investments in equity and fixed

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income securities. The company is required to meet certain minimum funding standards under the Employee Retirement Income Security Act of 1974. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, future funding obligations could increase substantially. Although the funding valuation will not be completed until 2003, preliminary estimates indicate a funding requirement of approximately $11 million for the calendar year 2003, which includes approximately $4.4 million related to the 2002 plan year. Additional contributions applicable to the 2003 plan year, to be made in 2004, are estimated at $24 million. Contributions for the calendar year 2002 were $4 million.

        The decline in market value of fund assets coupled with anticipated assumption changes regarding discount rate and long-term rate of return will also affect recognized pension expense under Statement of Financial Accounting Standards No. 87 Employers' Accounting for Pensions. Preliminary estimates of the effects of the above factors indicate an increase in expense of approximately $20 million in 2003.

New Business Initiatives

        In the third quarter of 2002, Capital & Trading completed an acquisition of a coal-based synthetic fuel production facility which converts coal feedstock into synthetic fuel for sale to a third party. The cost of this acquisition was approximately $60 million. The synthetic fuel produced at this facility qualifies for tax credits in accordance with Section 29 of the Internal Revenue Code. Eligibility for these tax credits expires in 2007. We anticipate the operation of the facility, together with the tax credits, will benefit our net income.

Collective Bargaining Agreements

        As discussed in the 2001 Form 10-K, the collective bargaining agreements of the IUU and the International Brotherhood of Electrical Workers # 1393 (IBEW) expired on April 1, 2002 and April 30, 2002, respectively. With regards to the contracts, the parties have negotiated new three-year agreements that will run through March 31, 2005 and April 30, 2005 for the IUU and IBEW, respectively.

Federal Tax Law Changes

        In March 2002, President Bush signed into law the Job Creation and Worker Assistance Act of 2002, also known as the Economic Stimulus Package. The primary benefit to Cinergy is the allowance of additional first-year depreciation deductions for tax purposes, equal to 30 percent of the adjusted tax basis of qualified property. This provision applies to qualifying additions after September 11, 2001. The provisions of this bill will not have a material impact on our financial position or results of operations.

Indiana Tax Law Changes

        In June 2002, the Indiana Legislature passed a bill, which was signed by the Governor, containing new tax law provisions in Indiana that apply to both utility and non-utility companies with operations in the state. After review of the new provisions, we do not believe that the total impact of these changes will materially impact Cinergy or PSI.

PUCO Review of Financial Condition of Ohio Regulated Utilities

        In October 2002, as the result of recent financial problems experienced by certain public utility companies and the current state of the economy, the PUCO issued an order initiating a review of the financial condition of the nineteen large public utilities (gas, electric, and telecommunication) serving Ohio customers, including CG&E. The PUCO intends to identify available measures to ensure that the

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regulated operations of the Ohio public utilities are not adversely impacted by the parent or affiliate companies' unregulated operations. The PUCO has requested comments, to be filed by November 12, 2002, regarding how the review should be conducted and on the potential measures the PUCO could take to protect the financial condition of the regulated utilities. CG&E filed comments; however, at this time we cannot predict the outcome of this review.

Shareholder Rights Plan

        In July 2000, Cinergy Corp.'s board of directors approved a Shareholder Rights Plan. Under the plan, each shareholder of record on October 30, 2000, received, as a dividend, a right to purchase from Cinergy Corp. one share of common stock at a price of $100. The rights were scheduled to expire in October 2010.

        As part of its dedication to ensure a leadership position in adopting corporate governance practices that are considered best in class, on August 28, 2002, Cinergy Corp.'s board of directors approved a resolution to accelerate the termination date of the company's Shareholder Rights Plan. Under the resolution, the company terminated the plan, effective September 16, 2002. The company also amended the contract with the plan's agent and notified the SEC and the New York Stock Exchange of the change.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        This information is provided in, and incorporated by reference from, the "Market Risk Sensitive Instruments and Positions" section in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in "Part I. Financial Information".

ITEM 4. CONTROLS AND PROCEDURES

        Disclosure controls and procedures are our controls and other procedures that are designed to ensure 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 in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure 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 the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.

        There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

CITY OF NEWPORT, KENTUCKY

        On January 29, 2002, ULH&P instituted litigation proceedings in the Campbell County Circuit Court in the Commonwealth of Kentucky against the City of Newport, Kentucky, City of Newport doing business as (d/b/a/) the Newport Water Works and also known as (a/k/a) City of Newport Water Department and the Kentucky Risk Management Association. The complaint states that on or about October 5, 2000, a water main owned and under the control of the City of Newport and/or the City of Newport d/b/a/ Newport Water Works and a/k/a/ City of Newport Water Department located in and underground at the Newport Shopping Center on Monmouth Street, Newport, Campbell County, Kentucky ruptured. The abrasive action of the pressurized stream of water combined with the sand, gravel, and dirt flowing directly on the surface of the natural gas main, caused a hole that breached the adjacent natural gas main of ULH&P. ULH&P has incurred total damages in excess of $3.5 million.

        In February 2002, a third party complaint was filed by the City of Newport against the owners of the shopping center, Newport Company, Newport Associates, American Diversified Developments, Inc., and Newport Associates Limited Partnership. Subsequently, ULH&P filed a Second Amended Complaint naming the additional parties.

        In October 2002, all parties reached a settlement on this issue effectively ending this dispute.

        See Note 7 of the "Notes to Financial Statements" in "Item 1. Financial Information" for additional information regarding certain legal proceedings.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

The documents listed below are being filed on behalf of Cinergy Corp., CG&E, PSI, and ULH&P and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:

Exhibit Designation	Registrant	Nature of Exhibit	Previously Filed as Exhibit to:
4-qqq	Cinergy Corp. CG&E	Thirty-ninth Supplemental Indenture dated as of September 1, 2002, between CG&E and The Bank of New York, as Trustee.
4-rrr	Cinergy Corp. PSI	Fifty-fourth Supplemental Indenture dated as of September 1, 2002, between PSI and LaSalle Bank National Association, as Trustee.
4-sss	Cinergy Corp. CG&E	Sixth Supplemental Indenture between CG&E and Fifth Third Bank dated as of September 15, 2002.
4-ttt	Cinergy Corp. PSI	Loan Agreement between PSI and the Indiana Development Finance Authority dated as of September 1, 2002.
4-uuu	Cinergy Corp. PSI	Loan Agreement between PSI and the Indiana Development Finance Authority dated as of September 1, 2002.
4-vvv	Cinergy Corp. CG&E	Loan Agreement between CG&E and the Ohio Air Quality Development Authority dated as of September 1, 2002.
4-www	Cinergy Corp.	First Amendment to Rights Agreement, dated August 28, 2002, effective September 16, 2002, between Cinergy Corp. and The Fifth Third Bank, as Rights Agent.	Cinergy Corp. Form 8-A/A, Amendment No. 1, filed September 16, 2002

(b)

The following reports on Form 8-K were filed during the quarter or prior to the filing of the Form 10-Q for the quarter ended September 30, 2002.

Date of Report	Registrant	Item Filed
August 13, 2002	Cinergy Corp., CG&E, PSI, and ULH&P	Item 9. Regulation FD Disclosure

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SIGNATURES

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P) believe that the disclosures are adequate to make the information presented not misleading. In the opinion of Cinergy Corp., CG&E, PSI, and ULH&P, these statements reflect all adjustments (which include normal, recurring adjustments) necessary to reflect the results of operations for the respective periods. The unaudited statements are subject to such adjustments as the annual audit by independent public accountants may disclose to be necessary.

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed by an officer and the chief accounting officer on their 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 13, 2002
/s/  BERNARD F. ROBERTS Bernard F. Roberts
Duly Authorized Officer
and
Chief Accounting Officer

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I, James E. Rogers, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this quarterly report;

4.

The registrants' other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants' other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants' ability to record, process, summarize and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal controls; and

6.

The registrants' other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/  JAMES E. ROGERSChief Executive Officer

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I, R. Foster Duncan, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this quarterly report;

4.

The registrants' other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants' other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants' ability to record, process, summarize and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal controls; and

6.

The registrants' other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/  R. FOSTER DUNCANChief Financial Officer

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QuickLinks

TABLE OF CONTENTS
CINERGY CORP. AND SUBSIDIARY COMPANIES
CINERGY CORP. CONSOLIDATED STATEMENTS OF INCOME
CINERGY CORP. CONSOLIDATED BALANCE SHEETS
CINERGY CORP. CONSOLIDATED BALANCE SHEETS
CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (Continued)
CINERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CINCINNATI GAS & ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
PSI ENERGY, INC. AND SUBSIDIARY COMPANY
PSI ENERGY, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
PSI ENERGY, INC. CONSOLIDATED BALANCE SHEETS
PSI ENERGY, INC. CONSOLIDATED BALANCE SHEETS
PSI ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
THE UNION LIGHT, HEAT AND POWER COMPANY
THE UNION LIGHT, HEAT AND POWER COMPANY STATEMENTS OF INCOME
THE UNION LIGHT, HEAT AND POWER COMPANY BALANCE SHEETS
THE UNION LIGHT, HEAT AND POWER COMPANY BALANCE SHEETS
THE UNION LIGHT, HEAT AND POWER COMPANY STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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

RESULTS OF OPERATIONS—FUTURE

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

EX-4.QQQ

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Exhibit 4-QQQ

THE CINCINNATI GAS & ELECTRIC COMPANY

and

THE BANK OF NEW YORK,
                                                     Trustee

Thirty-ninth Supplemental Indenture

Dated as of September 1, 2002

THE CINCINNATI GAS & ELECTRIC COMPANY
Thirty-ninth Supplemental Indenture
Dated as of September 1, 2002

TABLE OF CONTENTS

		Page
Parties		1
Recitals		1
Form of Bonds of Series Due 2037		2
Form of Trustee's Certificate on Bonds, Series Due 2037		5
ARTICLE ONE BONDS OF SERIES DUE 2037 AND ISSUE THEREOF
Section 1.	Series and Form of Bonds of Series Due 2037	6
Section 2.	Issue of Bonds of Series Due 2037	6
Section 3.	Dates, Interest Rate, etc., of Bonds of Series Due 2037	6
Section 4.	Fully Registered Bond; Transfer Restrictions; Denominations	6
Section 5.	Interest Payments; Interest for Purposes of Section 5 of Article Five	7
Section 6.	Redemption of Bonds of Series Due 2037	7
Section 7.	Absence of Maintenance and Replacement Fund	7
ARTICLE TWO COVENANTS OF THE COMPANY
Section 1.	Confirmation of Covenants by Company in First Mortgage	7
Section 2.	Covenants with Respect to Subsidiaries	7
ARTICLE THREE AMENDMENT OF ARTICLE ONE, ARTICLE FIVE, ARTICLE ELEVEN, AND ARTICLE EIGHTEEN OF THE FIRST MORTGAGE AS AMENDED
Section 1.	Amendment to Section 5 of Article One	8
Section 2.	Amendment to Section 2 of Article Eleven	8
Section 3.	Amendment to Section 3 of Article Five	8
Section 4.	Amendment to Section 2 of Article Eighteen	8
ARTICLE FOUR MISCELLANEOUS
Section 1.	Thirty-ninth Supplemental Indenture to Form Part of First Mortgage	9
Section 2.	Definitions in First Mortgage Shall Apply to Thirty-ninth Supplemental Indenture	9
Section 3.	Execution in Counterparts	9

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        THIRTY-NINTH SUPPLEMENTAL INDENTURE, dated as of September 1, 2002, between The Cincinnati Gas & Electric Company, a corporation of the State of Ohio (the "Company"), and The Bank of New York, a New York banking corporation (the "Trustee"), as Trustee (formerly Irving Trust Company).

        WHEREAS, the Company has executed and delivered to the Trustee a certain Indenture, dated as of August 1, 1936 (the "First Mortgage"), to secure the payment of the principal of and interest on an issue of bonds of the Company, unlimited in aggregate principal amount (the Bonds);

        WHEREAS ,Article Two of the First Mortgage provides that the Bonds may be issued in series, and Article Eighteen of the First Mortgage as amended provides that the Company and the Trustee may from time to time enter into one or more indentures supplemental to the First Mortgage for the purpose of establishing the terms and provisions of any series of Bonds other than the initial series;

        WHEREAS, the Company and the Trustee have amended and supplemented the First Mortgage by means of thirty-eight supplemental indentures (the "First Mortgage as amended") under the Thirty- third, Thirty-fourth, Thirty-fifth and Thirty-sixth of which there are Bonds now outstanding;

        WHEREAS, the Company, pursuant to resolutions duly adopted by its Board of Directors at a duly called and held meeting, has approved the form, terms, and provisions of this Thirty-ninth Supplemental Indenture and authorized its execution for the purpose of creating under the First Mortgage as amended and this Thirty-ninth Supplemental Indenture a new series of First Mortgage Bonds of Series Due 2037, which bonds are to be substantially in the following form, with appropriate omissions, insertions, and variations as in the First Mortgage as amended and in this Thirty-ninth Supplemental Indenture provided or permitted:

        [THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

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        [FORM OF BOND OF SERIES DUE 2037]

        THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON TRANSFER, TO WAIVERS OF CERTAIN RIGHTS OF EXCHANGE, AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE WITH APPLICABLE SECURITIES LAWS.

        THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TO AMBAC ASSURANCE CORPORATION UNDER THE INSURANCE AGREEMENT DATED AS OF SEPTEMBER 1, 2002 BETWEEN AMBAC ASSURANCE CORPORATION AND THE CINCINNATI GAS & ELECTYRIC COMPANY.

No. $

THE CINCINNATI GAS & ELECTRIC COMPANY

FIRST MORTGAGE BOND
SERIES DUE 2037

Due September 1, 2037

        THE CINCINNATI GAS & ELECTRIC COMPANY, a corporation of the State of Ohio (the "Company"), for value received hereby promises to pay to AMBAC ASSURANCE CORPORATION, or registered assigns, on September 1, 2037, at the office or agency of the Company in the Borough of Manhattan, The City of New York, the principal sum of                          Dollars ($ ) in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, and to pay by check to the person in whose name this Bond is registered interest thereon from the interest payment date to which interest has been paid last preceding the date hereof (unless the date hereof is an interest payment date to which interest has been paid, in which case from the date hereof, or unless the date hereof is September 18, 2002, or prior thereto, in which case from the Initial Interest Accrual Date (hereinbelow defined), or unless the date hereof is between a record date and the interest payment date for such record date, in which case from such interest payment date), at the rate from time to time borne by the Ohio Air Quality Development Authority, State of Ohio, Air Quality Development Revenue Refunding Bonds, 2002 Series A (the "OAQDA Bonds") issued by the Ohio Air Quality Development Authority ("OAQDA") under a Trust Indenture, dated as of September 1, 2002, between OAQDA and Fifth Third Bank, as trustee (the "OAQDA Indenture"), in like coin or currency, payable at such office or agency on each Interest Payment Date (hereinbelow defined), until the Company's obligation with respect to the payment of such principal shall have been discharged; provided, however, that in no event shall the rate of interest borne by this Bond exceed the Maximum Interest Rate (hereinbelow defined).

        This Bond is one of an issue of First Mortgage Bonds of the Company issued and to be issued in series under and pursuant to and equally secured by an indenture of mortgage and deed of trust dated as of August 1, 1936, executed by the Company to The Bank of New York, as Trustee, as amended and supplemented as hereinafter stated, and is one of a series of such First Mortgage Bonds, which series is designated as the First Mortgage Bonds, Series Due 2037, of the Company (the "Bonds of Series Due 2037"), the terms and provisions of which have been established by a Thirty-ninth Supplemental Indenture dated as of September 1, 2002, executed by the Company to The Bank of New York, as Trustee. Subsequent to the execution and delivery of the indenture of mortgage and deed of trust there have been executed and delivered thirty-nine indentures supplemental thereto, including the Thirty-

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ninth Supplemental Indenture, supplementing and amending as therein set forth certain provisions thereof. The indenture of mortgage and deed of trust and the supplemental indentures collectively are sometimes called the Indenture.

        The "Initial Interest Accrual Date" for the Bonds of Series Due 2037 shall be the date that interest begins to accrue on the OAQDA Bonds. Each Interest Payment Date under the OAQDA Indenture shall be an "Interest Payment Date" for the Bonds of Series 2037. The "Maximum Interest Rate" shall be the lesser of (a) 13% per annum or (b) so long as the Company is subject to regulation by The Public Utilities Commission of Ohio ("PUCO"), 10% per annum or such other higher rate as may then be approved by the PUCO.

        For a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the Bonds and of the Trustee therein and thereto, the duties and immunities of the Trustee, and the terms and conditions upon which the Bonds are issued and secured, reference is hereby made to the Indenture. The rights and obligations of the Company and of the holders and registered owners of the Bonds of this issue may be modified or amended at the request of the Company by an indenture or indentures supplemental to the Indenture, executed pursuant to the consent of the holders or registered owners of at least 66²/3% in principal amount of the Bonds then outstanding affected by such modification or amendment, all in the manner and subject to the limitations set forth in the Indenture, any consent by the holder or registered owner of any Bond being conclusive and binding upon such holder or registered owner and upon all of its future holders and owners, irrespective of whether or not any notation of such consent is made upon the Bond; provided that no such modification or amendment by such supplemental indenture shall extend the maturity of, or reduce the rate of interest on, or otherwise modify the terms of payment of the principal of, or interest on, this Bond, which obligations are absolute and unconditional, nor permit the creation of any lien ranking prior to or equal with the lien of the Indenture on any of the mortgaged property.

        This Bond is issued to Ambac Assurance Corporation ("Ambac") as security for the payment by the Company of its obligations under that certain Insurance Agreement dated as of September 10, 2002 between the Company and Ambac (the "Insurance Agreement"). The Insurance Agreement was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, the OAQDA Bonds. The proceeds of the OAQDA Bonds have been loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between OAQDA and the Company.

        Notwithstanding any other provision of this Bond, no principal shall be due and payable on this Bond unless and until an Event of Default shall have occurred under Section 4.01 of the Insurance Agreement by reason of a failure by the Company to pay its obligations under the Insurance Agreement. If such an Event of Default under the Insurance Agreement shall occur, it shall be deemed to be a default, for purposes of the Indenture, in the payment of an amount of principal of this Bond equal to the amount of such unpaid obligations.

        If and when interest is paid on the OAQDA Bonds for any given period of time, then there is deemed to have been paid on the Bonds of Series Due 2037 an amount of interest equal to such interest paid on the OAQDA Bonds. The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on this Bond.

        The Bonds of Series 2037 shall be deemed to have been paid and no longer outstanding under the Indenture to the extent that the OAQDA Bonds are paid or deemed to have been paid and are no longer outstanding under the OAQDA Indenture and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full, and the Trustee has been notified to such effect by the Company.

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        Notwithstanding the foregoing, this Bond shall be deemed to have been paid and redeemed at any time if and to the extent that the OAQDA Bonds are redeemed pursuant to the OAQDA Indenture, in whole or in part, in an amount equal to 100% of the principal amount of the OAQDA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. The Bonds of Series 2037 are not otherwise redeemable prior to their maturity.

        In the event of such redemption of the OAQDA Bonds, the Company shall notify Ambac and the Trustee that a like principal amount of this Bond shall be deemed to have been paid and redeemed. Ambac shall surrender this Bond to the Company for cancellation and discharge by the Trustee upon the expiration of the Insurance Agreement or in the event that the Release Test (as defined in the Insurance Agreement) is satisfied.

        The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Indenture, upon the happening of a completed default as in the Indenture provided.

        This Bond shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the Insurance Agreement. Subject to the foregoing, this Bond is transferable as prescribed in the Indenture by the registered owner hereof in person, or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond; and thereupon a new registered Bond or Bonds of Series Due 2037 for a like principal amount and of authorized denominations will be issued to the transferee in exchange therefor as provided in the Indenture, and upon payment, if the Company shall require it, of the charges therein prescribed. The Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes.

        Bonds of Series Due 2037 are issuable as registered Bonds in the denominations of $1,000 and integral multiples thereof.

        No recourse shall be had for the payment of the principal of, or interest on, this Bond, or under or upon any obligation, covenant, or agreement contained in the Indenture, against any incorporator or any past, present, or future subscriber to capital stock, shareholder, officer, or director, as such, of the Company or of any predecessor or successor corporation, either directly or through the Company or any predecessor or successor corporation, under any present or future rule of law, statute, or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, shareholders, officers, and directors being released by the registered owner hereof by the acceptance of this Bond and being likewise waived and released by the terms of the Indenture.

        This Bond shall not become valid or obligatory for any purpose until The Bank of New York, the Trustee under the Indenture, or its successor thereunder, shall have signed the form of certificate endorsed hereon.

        IN WITNESS WHEREOF, The Cincinnati Gas & Electric Company has caused this Bond to be signed in its name by its President or a Vice President, manually or in facsimile, and its corporate seal or a facsimile thereof to be affixed hereto or reproduced hereon and attested by its Secretary or an Assistant Secretary, manually or in facsimile.

Dated

THE CINCINNATI GAS & ELECTRIC COMPANY,
By
	President

Attest:
	Secretary

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        [FORM OF TRUSTEE'S CERTIFICATE ON ALL BONDS OF SERIES DUE 2037]

        This Bond is one of the Bonds, of the series designated therein, described in the within-mentioned Indenture.

THE BANK OF NEW YORK,                                                  Trustee,
By
	Authorized Signatory.

         [THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

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        WHEREAS, all things necessary to make the Bonds of Series Due 2037 herein described, when duly authenticated by the Trustee and issued by the Company, valid, binding, and legal obligations of the Company, and to make this Thirty-ninth Supplemental Indenture a valid and binding agreement supplemental to the First Mortgage, have been done and performed;

THIS THIRTY-NINTH SUPPLEMENTAL INDENTURE WITNESSETH

        In consideration of the premises and of the acceptance and purchase of the Bonds of Series Due 2037, the Company agrees with the Trustee as follows:

ARTICLE ONE
BONDS OF SERIES DUE 2037 AND ISSUE THEREOF

        SECTION 1.    There shall be a series of Bonds designated as set forth in the second paragraph of the form of Bond, each of which shall bear the descriptive title First Mortgage Bond. The aggregate principal amount of the Bonds of Series Due 2037 which may be outstanding under the First Mortgage as amended and this Thirty-ninth Supplemental Indenture shall be limited to $84,000,000, except as provided in Section 9 of Article Two of the First Mortgage as amended.

        The Bonds of Series Due 2037 and the Trustee's certificate to be endorsed on all the Bonds of such series shall respectively be substantially as recited above, with such appropriate omissions, insertions, and variations as in the First Mortgage as amended and in this Thirty-ninth Supplemental Indenture permitted.

        SECTION 2.    Upon the execution and delivery of this Thirty-ninth Supplemental Indenture and upon delivery to the Trustee of $84,000,000 aggregate principal amount of Bonds of Series Due 2037, executed by the Company, and upon compliance by the Company with the provisions of the First Mortgage as amended, the Trustee shall, without awaiting the filing or recording of this Thirty-ninth Supplemental Indenture, authenticate and deliver the Bonds.

        SECTION 3.    Bonds of Series Due 2037 shall be dated the date of their authentication, shall mature on September 1, 2037, shall bear interest at the rate set forth in the first paragraph of the form of Bond until paid or redeemed as hereinafter provided, payable by check on each Interest Payment Date (as defined the form of the Bond), and shall be payable as to both principal and interest in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, at the office or agency of the Company in The City of New York.

        SECTION 4.    The Bonds of Series 2037 shall be issued in the form of a separate, single, authenticated, fully registered bond for each such series which need not be in the form of a lithographed or engraved certificate, but may be typewritten or printed on ordinary paper or such paper as the Trustee may reasonably request and shall be registered in the name of Ambac Assurance Corporation ("Ambac").

        The Bonds of Series 2037 are being issued to Ambac as security for the payment by the Company of its obligations under the Insurance Agreement, dated as of September 1, 2002, between Ambac and the Company (the "Insurance Agreement"), which was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, certain bonds (the "OAQDA Bonds") to be issued under a Trust Indenture, dated as of September 1, 2002, between the Ohio Air Quality Development Authority ("OAQDA") and Fifth Third Bank, as trustee (the "OAQDA Indenture"). The proceeds of the OAQDA Bonds will be loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between the OAQDA and the Company.

        The Bonds of Series 2037 shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the Insurance Agreement.

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        Bonds of Series Due 2037 shall be issued in the denominations of $1,000 and authorized multiples thereof.

        SECTION 5.    If and when interest is paid on the OAQDA Bonds for any given period of time, then there is deemed to have been paid on the Bonds of Series 2037 an amount of interest equal to such interest paid on the OAQDA Bonds. The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on the Bonds of Series 2037.

        For purposes of the calculation required by Section 5 of Article Five of the First Mortgage as amended, annual interest in respect of: the Bonds of Series 2037 shall be equal to the sum of (i) the sum of the amounts determined by multiplying the principal amount of the OAQDA Bonds, if any, outstanding on the date of such calculation which bear a fixed rate of interest by such fixed rate, plus (ii) the amount determined by multiplying the aggregate principal amount of the OAQDA Bonds, if any, outstanding on the date of such calculation which bear interest at rates which may fluctuate or may fluctuate from time to time in accordance with methods specified in such OAQDA Bonds by 13% per annum.

        SECTION 6.    The Bonds of Series 2037 shall be deemed to have been paid and redeemed at any time if and to the extent that the OAQDA Bonds are redeemed pursuant to the OAQDA Indenture relating thereto, in whole or in part, in an amount equal to 100% of the principal amount of the OAQDA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. In the event of such redemption of the OAQDA Bonds, the Company shall notify Ambac and the Trustee that a like principal amount of the Bonds of Series 2037 shall be deemed to have been paid and redeemed. The Bonds of Series 2037 are not otherwise redeemable prior to their maturity.

        SECTION 7.    The covenant to provide a Maintenance and Replacement Fund contained in the provisions of Section 5 of Article Eight of the First Mortgage as amended shall not apply in respect of the Bonds of Series Due 2037.

ARTICLE TWO
COVENANTS OF THE COMPANY

        SECTION 1.    All covenants and agreements by the Company in the First Mortgage as heretofore and hereby amended are hereby confirmed, except the covenant contained in Section 5 of Article Eight.

        SECTION 2.    So long as any Bonds of Series Due 2037 shall be outstanding the Company (a) will not sell or otherwise dispose of any equity securities owned by it of The Union Light, Heat and Power Company, a Kentucky corporation (the "Subsidiary") otherwise than to the Subsidiary or otherwise than as part of a merger or consolidation of the Subsidiary into or with the Company or the liquidation of the Subsidiary, unless all the equity securities owned by the Company of the Subsidiary shall be sold or otherwise disposed of and the proceeds of such sale or other disposition deposited with the Trustee hereunder to be held and disposed of as provided in Section 5 of Article Eleven of the First Mortgage as amended, and (b) will not permit the Subsidiary to sell, otherwise than to the Company, any equity securities issued by the Subsidiary; provided that nothing in this clause (b) shall prevent the Subsidiary, in connection with the sale of equity securities to the Company, from selling equity securities to others than the Company to the extent necessary to satisfy the preemptive rights of minority stockholders under applicable law.

        So long as any Bonds of Series Due 2037 shall be outstanding, the Company (a) will not sell or otherwise dispose of any securities, other than equity securities, owned by it of the Subsidiary otherwise than to the Subsidiary or otherwise than as part of the merger or consolidation of the Subsidiary into or with the Company; or (b) so long as any equity securities of the Subsidiary shall be owned by the

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Company, will not permit the Subsidiary to issue or sell, otherwise than to the Company, any securities, other than equity securities, issued by the Subsidiary if, in either case, after giving effect to such sale or other disposition, the outstanding securities, other than equity securities, of the Subsidiary will be in excess of 75% of the plant account of the Subsidiary as shown by its books as of the end of the calendar month next preceding such sale or other disposition after deducting from such plant account the amount of the reserves for depreciation and amortization applicable thereto shown by the books of the Subsidiary and any other reserves shown by its books which are applicable to such plant account or any part thereof.

        The term "equity securities", as used in this Section, shall mean any securities other than bonds, notes, or other evidences of indebtedness bearing interest at a fixed rate and payable on demand or having a fixed maturity date.

ARTICLE THREE
AMENDMENT OF ARTICLE ONE, ARTICLE FIVE, ARTICLE ELEVEN, AND
ARTICLE EIGHTEEN OF THE FIRST MORTGAGE AS AMENDED

        SECTION 1.  The Bonds of Series Due 2037 are hereby excluded from subdivision (7) of Section 5 of Article One of the First Mortgage as heretofore and hereby amended or supplemented.

        SECTION 2.  Article Eleven of the First Mortgage is hereby amended by inserting after the words "or other similar property," in subdivision (1) of Section 2 thereof the following:

"or any nuclear fuel materials, assemblies or components,"

        SECTION 3.  Article Five of the First Mortgage is hereby amended by substituting for the words "in a principal amount not exceeding sixty per centum (60%) of" in Section 3 thereof the following:

"in a principal amount not exceeding sixty-six and two-thirds per centum (66²/3%) of"

        SECTION 4.  Article Eighteen of the First Mortgage is hereby amended by:

        (a)    substituting for the words "with the consent of holders of seventy-five per centum (75%) in aggregate principal amount of the Bonds at the time outstanding;" in Section 2 thereof the following:

"with the consent of holders of sixty-six and two-thirds per centum (66²/3%) in aggregate principal amount of the Bonds at the time outstanding;"

        (b)  substituting for the third paragraph of Section 2 thereof the following:

"Whenever, at any time after the completion of publication of said notice, the Company shall deliver to the Trustee an instrument or instruments executed by holders of at least sixty-six and two-thirds per centum (66²/3%) in aggregate principal amount of the Bonds affected, outstanding at the time of such delivery, consenting to the substance of the proposed modification or amendment, thereupon the Trustee shall execute such supplemental indenture in substantially the form of the copy thereof on file with the Trustee, and no holder of any Bond shall have any right or interest to object to the execution of said supplemental indenture or to object to any of the terms or provisions therein contained, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the Company from executing the same or from taking any action pursuant to the provisions thereof, provided that, in lieu of an instrument or instruments executed by holders of Bonds, the consent of the holders of any series of Bonds to any such proposed modification or amendment may be set forth in and

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evidenced by the supplemental indenture establishing the terms and provisions of such series."

ARTICLE FOUR
MISCELLANEOUS

        SECTION 1.  The provisions of this Thirty-ninth Supplemental Indenture shall become effective immediately upon the execution and delivery hereof, except that the provisions hereof modifying and amending the First Mortgage as amended shall become effective simultaneously with and upon the initial issue of Bonds of Series Due 2037. From and after such initial issue of Bonds of Series Due 2037, this Thirty-ninth Supplemental Indenture shall form a part of the First Mortgage and all the terms and conditions hereof shall be deemed to be part of the terms of the First Mortgage, as fully and with the same effect as if they had been set forth in the First Mortgage as originally executed. Except as modified or amended by this Thirty-ninth Supplemental Indenture, the First Mortgage as amended shall remain and continue in full force and effect in accordance with the terms and provisions thereof, and all the covenants, conditions, terms, and provisions of the First Mortgage as amended shall be applicable with respect to the Bonds of Series Due 2037, except in so far as such covenants, conditions, terms, and provisions are limited and applicable only to the Bonds of another or other series, and all the covenants, conditions, terms, and provisions of the First Mortgage as amended with respect to the Trustee shall remain in full force and effect and be applicable to the Trustee under this Thirty-ninth Supplemental Indenture in the same manner as though set out herein at length. All representations and recitals contained in this Thirty-ninth Supplemental Indenture and in the Bonds of Series Due 2037 (save only the Trustee's certificate upon such Bonds) are made by and on behalf of the Company, and the Trustee is in no way responsible therefor or for any statement therein contained or for the validity or sufficiency thereof.

        SECTION 2.  The terms defined in Article One of the First Mortgage as heretofore and hereby amended, when used in this Thirty-ninth Supplemental Indenture shall, respectively, have the meanings set forth in such Article.

        No Bonds of Series Due 2037 shall be deemed to be outstanding within the meaning of the phrase "so long as any of the Bonds of Series Due 2037 shall be outstanding" as used in this Thirty-ninth Supplemental Indenture, if the Company shall have redeemed all the Bonds of Series Due 2037 in accordance with this Thirty-ninth Supplemental Indenture.

        SECTION 3.  This Thirty-ninth Supplemental Indenture may be executed in several counterparts and each counterpart shall be an original instrument.

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        IN WITNESS WHEREOF, THE CINCINNATI GAS & ELECTRIC COMPANY has caused this instrument to be signed on its behalf by one of its Vice Presidents and its corporate seal to be hereunto affixed and attested by its Secretary, and The Bank of New York has caused this instrument to be signed on its behalf by a Vice President and its corporate seal to be hereunto affixed and attested by an Assistant Treasurer, as of the day and year first above written.

	THE CINCINNATI GAS & ELECTRIC COMPANY,
	By	/s/  RONALD R. REISING Ronald R. Reising, Vice President—Finance
ATTEST:
/s/  JEROME A. VENNEMANN Jerome A. Vennemann, Secretary	(CORPORATE SEAL)
Signed and acknowledged in our presence on behalf of THE CINCINNATI GAS & ELECTRIC COMPANY:
/s/  DEBBY GARRETT Debby Garrett, Witness
/s/  JULIE M. THOMPSON Julie M. Thompson, Witness
	THE BANK OF NEW YORK,
	By	/s/  PAUL SCHMALZEL Paul Schmalzel, Vice President
ATTEST:
/s/  JOSEPH LLORET Joseph Lloret, Assistant Treasurer	(CORPORATE SEAL)
Signed and acknowledged in our presence on behalf of THE BANK OF NEW YORK:
/s/  MARY LAGUMINA Mary LaGumina, Witness
/s/  PATRICIA GALLAGHER Patricia Gallagher, Witness

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STATE OF OHIO	)
	)	SS:
COUNTY OF HAMILTON	)

        On this 9^th day of September 2002, RONALD R. REISING and JEROME A. VENNEMANN, came before me and acknowledged that they signed and sealed this instrument as VICE PRESIDENT—FINANCE and SECRETARY, respectively, of THE CINCINNATI GAS & ELECTRIC COMPANY and that the same were free acts; and such VICE PRESIDENT—FINANCE, being duly sworn, said that he resides in HAMILTON COUNTY, OHIO, that he is a VICE PRESIDENT of the corporation, that the seal affixed hereto is its corporate seal, that it was affixed by order of its Board of Directors, and that he signed his name thereto by like order.

        IN WITNESS WHEREOF I have signed my name and affixed my official seal.

(NOTARIAL SEAL)
	/s/  CECILIA A. TEMPLE
	Notary Public
My commission expires 09-28-03.
County of residence:    Hamilton

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STATE OF NEW YORK	)
	)	SS:
COUNTY OF NEW YORK	)

        On this 10^th day of September 2002, PAUL SCHMALZEL and JOSEPH LLORET, came before me and acknowledged that they signed and sealed this instrument as VICE PRESIDENT and ASSISTANT TREASURER, respectively, of THE BANK OF NEW YORK, and that the same were free acts; and such VICE PRESIDENT being duly sworn, said that he resides in EATONTOWN, NEW JERSEY, that he is a VICE PRESIDENT of THE BANK OF NEW YORK, that the seal affixed hereto is its corporate seal, that it was affixed by authority of its Board of Directors, and that he signed his name thereto by like authority.

        IN WITNESS WHEREOF I have signed my name and affixed my official seal.

	(NOTARIAL SEAL)
	/s/  ROBERT HIRSCH
	Notary Public
My commission expires 2006.
County of residence: New York

This instrument was prepared by:

Bradley C. Arnett, Esq.
139 East Fourth Street
Cincinnati, Ohio 45202

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Exhibit 4-QQQ

EX-4.RRR

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Exhibit 4-RRR

FIFTY-FOURTH SUPPLEMENTAL
INDENTURE

TO

INDENTURE DATED SEPTEMBER 1, 1939

PSI ENERGY, INC.

(FORMERLY NAMED "PUBLIC SERVICE COMPANY OF INDIANA, INC." AND
SUCCESSOR BY CONSOLIDATION TO PUBLIC SERVICE COMPANY OF INDIANA)

TO

LASALLE BANK NATIONAL ASSOCIATION
AS TRUSTEE

(FORMERLY NAMED "LASALLE NATIONAL BANK" AND THE
SUCCESSOR TRUSTEE TO THE FIRST NATIONAL BANK OF CHICAGO)

DATED AS OF SEPTEMBER 1, 2002

CREATING FIRST MORTGAGE BONDS, SERIES FFF, DUE MARCH 1, 2031 AND
FIRST MORTGAGE BONDS, SERIES GGG, DUE MARCH 1, 2019

AND

OTHERWISE SUPPLEMENTING AND AMENDING THE INDENTURE

TABLE OF CONTENTS

		Page
PARTIES:
	Company (PSI Energy, Inc. formerly named Public Service Company of Indiana, Inc., successor by consolidation to Initial Mortgagor (Public Service Company of Indiana)), and Trustee	1
RECITALS:
	Indenture of the Initial Mortgagor, dated September 1, 1939, and First Supplemental Indenture thereto of the Initial Mortgagor, dated as of March 1, 1941	1
	Consolidation of Initial Mortgagor (and four other companies) into the Company	1
	Execution by Company of Second Supplemental Indenture to the original Indenture	1
	Company substituted for Initial Mortgagor under Indenture1 Execution by Company of Third through the Fifty-Third Supplemental Indentures to the original Indenture	2
	LaSalle Bank National Association, successor to original Trustee	3
	Change of name of Company from Public Service Company of Indiana, Inc. to PSI Energy, Inc.	3
	Amount of bonds presently outstanding under the Indenture	3
	Fifty-Fourth Supplemental Indenture and Bonds of Series FFF and GGG authorized	3
	Conditions precedent performed	4
EXECUTING CLAUSE		4

i

		Page
ARTICLE I. FIRST MORTGAGE BONDS, SERIES FFF, DUE MARCH 1, 2031, AND FIRST MORTGAGE BONDS, SERIES GGG, DUE MARCH 1, 2019.
Section 1.	Creation and designation of Bonds of Series FFF and GGG	3
Section 2.	Bonds of Series FFF and GGG to be in registered form only	3
	Form of face of the Series FFF Bond	5
	Form of reverse of the Series FFF Bond and Trustee's certificate	7
	Form of face of the Series GGG Bond	9
	Form of reverse of the Series GGG Bond and Trustee's certificate	11
Section 3.	Date of Bonds of Series FFF and GGG	13
Section 4.	Maturity dates and interest rates of Bonds of Series FFF and GGG	13
Section 5.	Place and manner of payment of Bonds of Series FFF and GGG	13
Section 6.	Denominations and numbering of definitive Bonds of Series FFF and GGG	13
	Temporary Bonds of Series FFF and GGG and exchange thereof for definitive bonds	14
Section 7	Maintenance and Renewal Fund shall not apply to the Bonds of Series FFF and GGG	14
Section 8.	Inspection requirements shall not apply to the Bonds of Series FFF and GGG	14
Section 9.	Company's right to further amend the original Indenture	14
ARTICLE II. ISSUANCE OF BONDS OF SERIES FFF AND GGG.
Section 1.	Aggregate principal amount of Bonds of Series FFF and Bonds of Series GGG issuable at once	15
ARTICLE III. INDENTURE AMENDMENTS.
Section 1.	Amendments to Article I of the original Indenture	15
Section 2.	Amendments to Article VII of the original Indenture	15
Section 3.	No sinking fund for the Bonds of Series FFF and GGG	16

ARTICLE IV. CONCERNING THE TRUSTEE.
Acceptance of trust by Trustee	16
Trustee not responsible for validity or sufficiency of Fifty-Fourth Supplemental Indenture, etc.	16
Terms and conditions of Article XVII of the original Indenture to be applied to the Fifty-Fourth Supplemental Indenture	16

ii

ARTICLE V. MISCELLANEOUS PROVISIONS.
Section 1.	References in any article or section of the original Indenture refer to such article or section as amended by all Fifty-Four Supplemental Indentures thereto	17
Section 2.	Operation and construction of amendments to the original Indenture	17
Section 3.	All covenants, etc., for sole benefit of parties to the Fifty-Fourth Supplemental Indenture and holders of bonds	17
Section 4.	Table of contents and headings of articles not part of Fifty-Fourth Supplemental Indenture	17
Section 5.	Execution of Fifty-Fourth Supplemental Indenture in counterparts	17
Section 6.	Payments Due on Legal Holidays	17

ATTESTATION CLAUSE	18
SIGNATURES	18
ACKNOWLEDGMENT BY COMPANY	19
ACKNOWLEDGMENT BY TRUSTEE	20

iii

        FIFTY-FOURTH SUPPLEMENTAL INDENTURE dated as of the first day of September, 2002, made and entered into by and between PSI ENERGY, INC. (hereinafter commonly referred to as the "Company"), a corporation organized and existing under the laws of the State of Indiana, formerly named Public Service Company of Indiana, Inc., and the successor by consolidation to Public Service Company of Indiana, an Indiana corporation, party of the first part, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States and having its office or place of business in the City of Chicago, State of Illinois, formerly named LaSalle National Bank, and the successor trustee to The First National Bank of Chicago (hereinafter commonly referred to as the "Trustee"), party of the second part,

        WITNESSETH:

        WHEREAS, Public Service Company of Indiana (hereinafter commonly referred to as the "Initial Mortgagor"), prior to its consolidation with certain other corporations to form the Company, executed and delivered to the Trustee a certain indenture of mortgage or deed of trust (hereinafter called the "original Indenture" when referred to as existing prior to any amendment thereto, and the "Indenture" when referred to as heretofore, now or hereafter amended), dated September 1, 1939, and a First Supplemental Indenture thereto, dated as of March 1, 1941, to secure the bonds of the Initial Mortgagor, its successors and assigns, issued from time to time under the Indenture in series for the purposes of and subject to the limitations specified in the Indenture; and

        WHEREAS, the Company on September 6, 1941, became, through a consolidation, the successor of the Initial Mortgagor (and four other companies) and succeeded to all the rights and became liable for all the obligations of the Initial Mortgagor (and such other companies); and

        WHEREAS, after said consolidation, the Company executed and delivered a Second Supplemental Indenture, dated as of November 1, 1941, to the original Indenture for the purposes, among others, of (i) the making by the Company of an agreement of assumption and adoption by it of the Indenture, (ii) the assumption by the Company of the bonds (and interest and premium, if any, thereon) issued or to be issued under the Indenture, and of all terms, covenants and conditions binding upon it under the Indenture, and the agreeing by the Company to pay, perform and fulfill the same, and (iii) the conveying to the Trustee upon the trusts declared in the Indenture, but subject to any outstanding liens and encumbrances, all the property which the Company then owned or which it might thereafter acquire, except property of a character similar to the property of the Initial Mortgagor which is excluded from the lien of the Indenture; and

        WHEREAS, all conditions have been met and all acts and things necessary have been done and performed to make the Indenture the valid and binding agreement of the Company and to substitute the Company for the Initial Mortgagor under the Indenture, and to vest the Company with each and every right and power of the Initial Mortgagor, including the right and power to issue bonds thereunder; and

        WHEREAS, the Company has subsequently executed and delivered, for purposes authorized under the Indenture, a Third Supplemental Indenture dated as of March 1, 1942, a Fourth Supplemental Indenture dated as of May 1, 1943, a Fifth Supplemental Indenture dated as of August 1, 1944, a Sixth Supplemental Indenture dated as of September 1, 1945, a Seventh Supplemental Indenture dated as of November 1, 1947, an Eighth Supplemental Indenture dated as of January 1, 1949, a Ninth Supplemental Indenture dated as of May 1, 1950, a Tenth Supplemental Indenture dated as of July 1, 1952, an Eleventh Supplemental Indenture dated as of January 1, 1954, a Twelfth Supplemental Indenture dated as of October 1, 1957, a Thirteenth Supplemental Indenture dated as of February 1, 1959, a Fourteenth Supplemental Indenture dated as of July 15, 1960, a Fifteenth Supplemental Indenture dated as of June 15, 1964, a Sixteenth Supplemental Indenture dated as of January 1, 1969, a Seventeenth Supplemental Indenture dated as of March 1, 1970, an Eighteenth Supplemental Indenture dated as of January 1, 1971, a Nineteenth Supplemental Indenture dated as of January 1, 1972, a

1

Twentieth Supplemental Indenture dated as of February 1, 1974, a Twenty-First Supplemental Indenture dated as of August 1, 1974, a Twenty-Second Supplemental Indenture dated as of August 1, 1975, a Twenty-Third Supplemental Indenture dated as of January 1, 1977, a Twenty-Fourth Supplemental Indenture dated as of October 1, 1977, a Twenty-Fifth Supplemental Indenture dated as of September 1, 1978, a Twenty-Sixth Supplemental Indenture dated as of September 1, 1978, a Twenty-Seventh Supplemental Indenture dated as of March 1, 1979, a Twenty-Eighth Supplemental Indenture dated as of May 1, 1979, a Twenty-Ninth Supplemental Indenture dated as of March 1, 1980, a Thirtieth Supplemental Indenture dated as of August 1, 1980, a Thirty-First Supplemental Indenture dated as of February 1, 1981, a Thirty-Second Supplemental Indenture dated as of August 1, 1981, a Thirty-Third Supplemental Indenture dated as of December 1, 1981, a Thirty-Fourth Supplemental Indenture dated as of December 1, 1982, a Thirty-Fifth Supplemental Indenture dated as of March 30, 1984, a Thirty-Sixth Supplemental Indenture dated as of November 15, 1984, a Thirty-Seventh Supplemental Indenture dated as of August 15, 1985, a Thirty-Eighth Supplemental Indenture dated as of October 1, 1986, a Thirty-Ninth Supplemental Indenture dated as of March 15, 1987, a Fortieth Supplemental Indenture dated as of June 1, 1987, a Forty-First Supplemental Indenture dated as of June 15, 1988, a Forty-Second Supplemental Indenture dated as of August 1, 1988, a Forty-Third Supplemental Indenture dated as of September 15, 1989, a Forty-Fourth Supplemental Indenture dated as of March 15, 1990, a Forty-Fifth Supplemental Indenture dated as of March 15, 1990, a Forty-Sixth Supplemental Indenture dated as of June 1, 1990, a Forty-Seventh Supplemental Indenture dated as of July 15, 1991, a Forty-Eighth Supplemental Indenture dated as of July 15, 1992, a Forty-Ninth Supplemental Indenture dated as of February 15, 1993, a Fiftieth Supplemental Indenture dated as of February 15, 1993, a Fifty-First Supplemental Indenture dated as of February 1, 1994, a Fifty-Second Supplemental Indenture dated as of April 30, 1999, and a Fifty-Third Supplemental Indenture dated as of June 15, 2001, each supplementing and amending the Indenture; and

        WHEREAS, the Thirty-Fifth Supplemental Indenture authorized and appointed LaSalle Bank National Association, a national banking association duly organized and existing under the law of the United States of America with its principal office in Chicago, Illinois and formerly named LaSalle National Bank, as Successor Trustee to The First National Bank of Chicago, which appointment was accepted, and all trust powers under the Indenture were thereby transferred from The First National Bank of Chicago to LaSalle Bank National Association; and

        WHEREAS, the Forty-Sixth Supplemental Indenture amended the Indenture to reflect a change in the name of the Company from Public Service Company of Indiana, Inc. to PSI Energy, Inc. effective as of April 20, 1990; and

        WHEREAS, as of September 1, 2002, the only bonds that have been heretofore issued under the Indenture which are now outstanding are $300,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series VV, Due July 15, 2026" and $545,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series WW, Due August 15, 2027" and $50,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series ZZ, 5³/4%, Due February 15, 2028" and $30,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series AAA, 7¹/8%, Due February 1, 2024" and $124,665,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series BBB, 8%, Due July 15, 2009" (such bonds being hereinafter referred to as "Bonds of Series BBB") and $53,055,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series CCC, 8.85%, Due January 15, 2022" and $38,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series DDD, 8.31%, Due September 1, 2032" and $325,000,000 aggregate principal amount of "PSI Energy, Inc. First Mortgage Bonds, Series EEE, 6.65%, Due June 15, 2006"; and

        WHEREAS, in accordance with the provisions of Section 1 of Article XVIII of the Indenture, the Board of Directors has authorized the execution and delivery by the Company of a Fifty-Fourth Supplemental Indenture, substantially in the form of this Fifty-Fourth Supplemental Indenture, for the

2

purpose of creating a fifty-first and fifty-second series of bonds to be issued under the Indenture, to be known as, respectively, "PSI Energy, Inc. First Mortgage Bonds, Series FFF, Due March 1, 2031" (such series to consist of a single bond being hereinafter referred to as the "Series FFF Bond") and "PSI Energy, Inc. First Mortgage Bonds, Series GGG, Due March 1, 2019" (such series to consist of a single bond being hereinafter referred to as the "Series GGG Bond") (the Series FFF Bond and the Series GGG Bond, when referred to collectively in this Fifty-Fourth Supplemental Indenture, shall be hereinafter referred to as the "Bonds of Series FFF and GGG"), and prescribing the form and substance of the Bonds of Series FFF and GGG and the terms, provisions and characteristics thereof, and for the purpose of adding to the covenants and agreements of the Company for the protection of the bondholders and of the trust estate and of making such changes in the Indenture as are deemed necessary or desirable and as are permitted by the Indenture; and

        WHEREAS, all conditions and requirements necessary to make this Fifty-Fourth Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized:

        NOW, THEREFORE, in consideration of the premises, and of the acceptance and purchase of the Bonds of Series FFF and GGG by the holders and registered owners thereof, and of the sum of One Dollar ($1.00) duly paid by the Trustee to the Company, the receipt whereof is hereby acknowledged, and in accordance with and subject to the terms and provisions of the Indenture, the Company and the Trustee, respectively, have entered into, executed and delivered this Fifty-Fourth Supplemental Indenture for the uses and purposes hereinafter expressed, that is to say:

ARTICLE I.

FIRST MORTGAGE BONDS, SERIES FFF, DUE MARCH 1, 2031 AND
FIRST MORTGAGE BONDS, SERIES GGG, DUE MARCH 1, 2019

Section 1.    There are hereby created a fifty-first and fifty-second series of bonds to be issued under and secured by the Indenture, to be designated as "PSI Energy, Inc. First Mortgage Bonds, Series FFF, Due March 1, 2031" (such series to consist of a single bond, which shall be the Series FFF Bond hereinbefore referred to) and "PSI Energy, Inc. First Mortgage Bonds, Series GGG, Due March 1, 2019" (such series to consist of a single bond, which shall be the Series GGG Bond hereinbefore referred to), respectively.

Section 2.    The Series FFF Bond and Series GGG Bond each shall be issued only in the form of a separate, single, authenticated, fully registered bond which (i) need not be in the form of a lithographed or engraved certificate, but may be typewritten or printed on ordinary paper or such paper as the Trustee may reasonably request, (ii) shall represent and be denominated in a principal amount not to exceed twenty-three million dollars ($23,000,000), with respect to Series FFF Bond, and a principal amount not to exceed twenty-four million six hundred thousand dollars ($24,600,000) with respect to the Series GGG Bond, (iii) shall be executed by the Company and authenticated by the Trustee in accordance with the provisions of the Indenture, and (iv) shall be registered in the name of Ambac Assurance Corporation, or its permitted assigns ("Ambac").

        The Series FFF Bond is being issued to Ambac as security for the payment by the Company of its obligations under the Insurance Agreement, dated as of September 1, 2002, between Ambac and the Company, which was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, certain bonds (the "Series 2002A IDFA Bonds") to be issued under a Trust Indenture, dated as of September 1, 2002, between the Indiana Development Finance Authority ("IDFA") and Fifth Third Bank, Indiana, as trustee. The proceeds of the Series 2002A IDFA Bonds will be loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between IDFA and the Company.

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        The Series GGG Bond is being issued to Ambac as security for the payment by the Company of its obligations under an Insurance Agreement, dated as of September 1, 2002, between Ambac and the Company, which was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, certain bonds (the "Series 2002B IDFA Bonds") to be issued under a Trust Indenture, dated as of September 1, 2002, between the IDFA and Fifth Third Bank, Indiana, as trustee. The proceeds of the Series 2002B IDFA Bonds will be loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between IDFA and the Company.

        The Series FFF Bond and the Series GGG Bond each shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the applicable Insurance Agreement referred to hereinabove, provided that the Trustee shall have received notice from the Company of such an assignment (which notice the Trustee may rely upon without further inquiry).

        The Series FFF Bond and the Trustee's certificate to be endorsed thereon, and the Series GGG Bond and the Trustee's certificate to be endorsed thereon, shall be substantially in the following forms, respectively:

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(FORM OF FACE OF THE SERIES FFF BOND)

THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON TRANSFER, TO WAIVERS OF CERTAIN RIGHTS OF EXCHANGE, AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TO AMBAC ASSURANCE CORPORATION UNDER THE INSURANCE AGREEMENT DATED AS OF SEPTEMBER 1, 2002 BETWEEN AMBAC ASSURANCE CORPORATION AND PSI ENERGY, INC.

No. FFF-
$                        

PSI ENERGY, INC.
FIRST MORTGAGE BOND, SERIES FFF,
DUE MARCH 1, 2031

        PSI Energy, Inc., an Indiana corporation (hereinafter called the "Company"), for value received, hereby promises to pay to AMBAC ASSURANCE CORPORATION, or registered assigns, the principal sum of                        Dollars ($            ) on the first day of March, 2031 and to pay interest on said principal sum, on each Interest Payment Date (hereinbelow defined), until said principal sum is paid, at the rate from time to time borne by the Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 2002A (the "Series 2002A IDFA Bonds") issued by the Indiana Development Finance Authority ("IDFA") under a Trust Indenture, dated as of September 1, 2002, between IDFA and Fifth Third Bank, Indiana, as trustee (the "IDFA Indenture"); provided, however, that in no event shall the rate of interest borne by this Bond exceed 13% per annum. Both the principal of and the interest on this bond shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts at the office or agency of the Company in Plainfield, Indiana, or, at the option of the registered owner hereof, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, except that interest on this bond may be paid, at the option of the Company, by check or draft mailed to the address of the person entitled thereto as it appears on the books of the Company maintained for that purpose.

        This bond is issued to Ambac Assurance Corporation, or its permitted assigns ("Ambac") as security for the payment by the Company of its obligations under that certain Insurance Agreement dated as of September 12, 2002 between the Company and Ambac (the "Insurance Agreement"). The Insurance Agreement was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, the Series 2002A IDFA Bonds. The proceeds of the Series 2002A IDFA Bonds have been loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between IDFA and the Company.

        Notwithstanding any other provision of this bond, no principal shall be due and payable on this bond unless and until an Event of Default shall have occurred under Section 4.01 of the Insurance Agreement by reason of a failure by the Company to pay its obligations under the Insurance Agreement and the Trustee shall have received notice from Ambac or the Company of such an Event of Default (which notice the Trustee may rely upon without further inquiry). If such an Event of Default under the Insurance Agreement shall occur, it shall be deemed to be a default, for purposes of the Indenture, in the payment of an amount of principal of this bond equal to the amount of such unpaid obligation.

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        REFERENCE IS MADE TO THE FURTHER PROVISIONS OF THIS BOND SET FORTH ON THE REVERSE HEREOF. SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE.

        This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee, or its successor in trust under the Indenture, of the certificate endorsed hereon.

        IN WITNESS WHEREOF, PSI Energy, Inc. has caused this bond to be executed in its name by the manual or facsimile signature of its President or an Executive Vice President or one of its Vice Presidents, and its corporate seal or a facsimile thereof to be hereto affixed and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries.

Dated as of:

		PSI ENERGY, INC.
		By
			President
ATTEST:
	Secretary

6

(FORM OF REVERSE OF THE SERIES FFF BOND)

        This bond is one of the bonds of the Company issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust, dated September 1, 1939, from Public Service Company of Indiana (predecessor of the Company) to The First National Bank of Chicago, as Trustee, to which LaSalle Bank National Association is successor trustee, (which indenture as amended by all supplemental indentures is hereinafter referred to as the "Indenture"). Said Trustee or its successor in trust under the Indenture is hereinafter sometimes referred to as the "Trustee." Reference is hereby made to the Indenture for a description of the property mortgaged and pledged and the nature and extent of the security for said bonds. By the terms of the Indenture, the bonds secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest and in other respects as in the Indenture provided.

        This bond is designated as "PSI Energy, Inc. First Mortgage Bonds, Series FFF, Due March 1, 2031" (hereinafter referred to as the "Series FFF Bond") of the Company issued under and secured by the Indenture and created by a Fifty-Fourth Supplemental Indenture, dated as of September 1, 2002 (the "Fifty-Fourth Supplemental Indenture"), which also amends the Indenture.

        The rights and obligations of the Company and of the bearers and registered owners of bonds may be modified or amended with the consent of the Company by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of the bonds then outstanding at a meeting of bondholders called for the purpose (and by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of bonds of any series affected by such modification or amendment in case one or more, but less than all, series of bonds are so affected), all in the manner and subject to the limitations set forth in the Indenture, any consent by the bearer or registered owner of any bond being conclusive and binding upon such bearer or registered owner and upon all future bearers or registered owners of such bond, irrespective of whether or not any notation of such consent is made on such bond; provided that no such modification or amendment shall, among other things, extend the maturity or reduce the amount of, or reduce the rate of interest on, or otherwise modify the terms of the payment of the principal of, or interest or premium (if any) on this bond, which obligations are absolute and unconditional, or permit the creation of any lien ranking prior to or equal with the lien of the Indenture on any of the mortgaged property. The Fifty-Fourth Supplemental Indenture provides that at any time when no bonds issued under the Indenture prior to the issuance of the "PSI Energy, Inc. First Mortgage Bonds, Series BBB, 8%, Due July 15, 2009" are outstanding, the Company reserves the right to amend the Indenture, without the consent or other action by the holders of the bonds outstanding at that time, to decrease the seventy-five per centum (75%) vote requirement referred to above to sixty-six and two-thirds per centum (66²/3%).

        The Series FFF Bond shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the Insurance Agreement, provided that the Trustee shall have received notice from the Company of such an assignment (which notice the Trustee may rely upon without further inquiry).

        Each Interest Payment Date under the IDFA Indenture shall be an Interest Payment Date for the Series FFF Bond. If and when interest is paid on the Series 2002A IDFA Bonds for any given period of time, then there is deemed to have been paid on this Series FFF Bond an amount of interest equal to such interest paid on the Series 2002A IDFA Bonds. The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on this Series FFF Bond.

        The Series FFF Bond shall be deemed to have been paid and no longer outstanding under the Indenture to the extent that Series 2002A IDFA Bonds are paid or deemed to have been paid and are no longer outstanding under the IDFA Indenture and all amounts owed by the Company to Ambac

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under the Insurance Agreement have been indefeasibly paid in full, and the Trustee has received notice to such effect from the Company (which notice the Trustee may rely upon without further inquiry).

        Notwithstanding the foregoing, this bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2002A IDFA Bonds are redeemed pursuant to the IDFA Indenture, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2002A IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of this bond shall be deemed to have been paid and redeemed. The Series FFF Bond is not otherwise redeemable prior to its maturity.

        Ambac shall surrender this bond to the Company for cancellation and discharge by the Trustee upon the expiration of the Insurance Agreement or in the event that the Release Test (as defined in the Insurance Agreement) is satisfied. The Trustee may cancel and discharge the Series FFF Bond upon presentment thereof by the Company without making further inquiry.

        In the case of any of certain events of default specified in the Indenture, the principal of this bond may be declared or may become due and payable prior to the stated date of maturity hereof in the manner and with the effect provided in the Indenture.

        No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, shareholder, officer or director, past, present or future, of the Company or of any predecessor or successor company, either directly or through the Company or such predecessor or successor company, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, shareholders, directors and officers being waived and released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture.

(FORM OF TRUSTEE'S CERTIFICATE)

TRUSTEE'S CERTIFICATE

        This bond is the Series FFF Bond designated therein referred to and described in the within mentioned Indenture and Fifty-Fourth Supplemental Indenture.

LASALLE BANK NATIONAL ASSOCIATION,     AS TRUSTEE,
By	Authorized Officer

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(FORM OF FACE OF THE SERIES GGG BOND)

THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON TRANSFER, TO WAIVERS OF CERTAIN RIGHTS OF EXCHANGE, AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TO AMBAC ASSURANCE CORPORATION UNDER THE INSURANCE AGREEMENT DATED AS OF SEPTEMBER 1, 2002 BETWEEN AMBAC ASSURANCE CORPORATION AND PSI ENERGY, INC.

No. GGG-
$                        

PSI ENERGY, INC.
FIRST MORTGAGE BOND, SERIES GGG,
DUE MARCH 1, 2019

        PSI Energy, Inc., an Indiana corporation (hereinafter called the "Company"), for value received, hereby promises to pay to AMBAC ASSURANCE CORPORATION, or registered assigns, the principal sum of                        Dollars ($            ) on the first day of March, 2019 and to pay interest on said principal sum, on each Interest Payment Date (hereinbelow defined), until said principal sum is paid, at the rate from time to time borne by the Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 2002B (the "Series 2002B IDFA Bonds") issued by the Indiana Development Finance Authority ("IDFA") under a Trust Indenture, dated as of September 1, 2002, between IDFA and Fifth Third Bank, Indiana, as trustee (the "IDFA Indenture"); provided, however, that in no event shall the rate of interest borne by this Bond exceed 13% per annum. Both the principal of and the interest on this bond shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts at the office or agency of the Company in Plainfield, Indiana, or, at the option of the registered owner hereof, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, except that interest on this bond may be paid, at the option of the Company, by check or draft mailed to the address of the person entitled thereto as it appears on the books of the Company maintained for that purpose.

        This bond is issued to Ambac Assurance Corporation, or its permitted assigns ("Ambac") as security for the payment by the Company of its obligations under that certain Insurance Agreement dated as of September 12, 2002 between the Company and Ambac (the "Insurance Agreement"). The Insurance Agreement was entered into in connection with the delivery by Ambac of its Financial Guaranty Insurance Policy insuring certain payments of principal of, and interest on, the Series 2002B IDFA Bonds. The proceeds of the Series 2002B IDFA Bonds have been loaned to the Company pursuant to a Loan Agreement, dated as of September 1, 2002, between IDFA and the Company.

        Notwithstanding any other provision of this bond, no principal shall be due and payable on this bond unless and until an Event of Default shall have occurred under Section 4.01 of the Insurance Agreement by reason of a failure by the Company to pay its obligations under the Insurance Agreement and the Trustee shall have received notice from Ambac or the Company of such an Event of Default (which notice the Trustee may rely upon without further inquiry). If such an Event of Default under the Insurance Agreement shall occur, it shall be deemed to be a default, for purposes of the Indenture, in the payment of an amount of principal of this bond equal to the amount of such unpaid obligation.

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        REFERENCE IS MADE TO THE FURTHER PROVISIONS OF THIS BOND SET FORTH ON THE REVERSE HEREOF. SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE.

        This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee, or its successor in trust under the Indenture, of the certificate endorsed hereon.

        IN WITNESS WHEREOF, PSI Energy, Inc. has caused this bond to be executed in its name by the manual or facsimile signature of its President or an Executive Vice President or one of its Vice Presidents, and its corporate seal or a facsimile thereof to be hereto affixed and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries.

Dated as of:		PSI ENERGY, INC.
		By
			President
ATTEST:
	Secretary

10

(FORM OF REVERSE OF THE SERIES GGG BOND)

        This bond is one of the bonds of the Company issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust, dated September 1, 1939, from Public Service Company of Indiana (predecessor of the Company) to The First National Bank of Chicago, as Trustee, to which LaSalle Bank National Association is successor trustee, (which indenture as amended by all supplemental indentures is hereinafter referred to as the "Indenture"). Said Trustee or its successor in trust under the Indenture is hereinafter sometimes referred to as the "Trustee." Reference is hereby made to the Indenture for a description of the property mortgaged and pledged and the nature and extent of the security for said bonds. By the terms of the Indenture, the bonds secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest and in other respects as in the Indenture provided.

        This bond is designated as "PSI Energy, Inc. First Mortgage Bonds, Series GGG, Due March 1, 2019" (hereinafter referred to as the "Series GGG Bond") of the Company issued under and secured by the Indenture and created by a Fifty-Fourth Supplemental Indenture, dated as of September 1, 2002 (the "Fifty-Fourth Supplemental Indenture"), which also amends the Indenture.

        The rights and obligations of the Company and of the bearers and registered owners of bonds may be modified or amended with the consent of the Company by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of the bonds then outstanding at a meeting of bondholders called for the purpose (and by an affirmative vote of the bearers or registered owners entitled to vote of at least seventy-five per centum (75%) in principal amount of bonds of any series affected by such modification or amendment in case one or more, but less than all, series of bonds are so affected), all in the manner and subject to the limitations set forth in the Indenture, any consent by the bearer or registered owner of any bond being conclusive and binding upon such bearer or registered owner and upon all future bearers or registered owners of such bond, irrespective of whether or not any notation of such consent is made on such bond; provided that no such modification or amendment shall, among other things, extend the maturity or reduce the amount of, or reduce the rate of interest on, or otherwise modify the terms of the payment of the principal of, or interest or premium (if any) on this bond, which obligations are absolute and unconditional, or permit the creation of any lien ranking prior to or equal with the lien of the Indenture on any of the mortgaged property. The Fifty-Fourth Supplemental Indenture provides that at any time when no bonds issued under the Indenture prior to the issuance of the "PSI Energy, Inc. First Mortgage Bonds, Series BBB, 8%, Due July 15, 2009" are outstanding, the Company reserves the right to amend the Indenture, without the consent or other action by the holders of the bonds outstanding at that time, to decrease the seventy-five per centum (75%) vote requirement referred to above to sixty-six and two-thirds per centum (66²/3%).

        The Series GGG Bond shall be transferable only as required to effect an assignment thereof to a successor-in-interest of Ambac under the Insurance Agreement, provided that the Trustee shall have received notice from the Company of such an assignment (which notice the Trustee may rely upon without further inquiry).

        Each Interest Payment Date under the IDFA Indenture shall be an Interest Payment Date for the Series GGG Bond. If and when interest is paid on the Series 2002B IDFA Bonds for any given period of time, then there is deemed to have been paid on this Series GGG Bond an amount of interest equal to such interest paid on the Series 2002B IDFA Bonds. The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on this Series GGG Bond.

        The Series GGG Bond shall be deemed to have been paid and no longer outstanding under the Indenture to the extent that Series 2002B IDFA Bonds are paid or deemed to have been paid and are no longer outstanding under the IDFA Indenture and all amounts owed by the Company to Ambac

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under the Insurance Agreement have been indefeasibly paid in full, and the Trustee has received notice to such effect from the Company (which notice the Trustee may rely upon without further inquiry).

        Notwithstanding the foregoing, this bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2002B IDFA Bonds are redeemed pursuant to the IDFA Indenture, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2002B IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of this bond shall be deemed to have been paid and redeemed. The Series GGG Bond is not otherwise redeemable prior to its maturity.

        Ambac shall surrender this bond to the Company for cancellation and discharge by the Trustee upon the expiration of the Insurance Agreement or in the event that the Release Test (as defined in the Insurance Agreement) is satisfied. The Trustee may cancel and discharge the Series GGG Bond upon presentment thereof by the Company without making further inquiry.

        In the case of any of certain events of default specified in the Indenture, the principal of this bond may be declared or may become due and payable prior to the stated date of maturity hereof in the manner and with the effect provided in the Indenture.

        No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, shareholder, officer or director, past, present or future, of the Company or of any predecessor or successor company, either directly or through the Company or such predecessor or successor company, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, shareholders, directors and officers being waived and released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture.

(FORM OF TRUSTEE'S CERTIFICATE)

TRUSTEE'S CERTIFICATE

        This bond is the Series GGG Bond designated therein referred to and described in the within mentioned Indenture and Fifty-Fourth Supplemental Indenture.

LASALLE BANK NATIONAL ASSOCIATION,     AS TRUSTEE,
By	Authorized Officer

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        Section 3.    Each Bond of Series FFF and GGG issued prior to the first interest payment date shall be dated as of September 12, 2002, and otherwise shall be dated as provided in Section 1 of Article II of the Indenture.

        Section 4.    The Series FFF Bond shall be due and payable on March 1, 2031, and shall bear interest from September 12, 2002, at the rate from time to time borne by the Series 2002A IDFA Bonds (as referred to in the form of the bond hereinabove set forth). The Series GGG Bond shall be due and payable on March 1, 2019, and shall bear interest from September 12, 2002, at the rate from time to time borne by the Series 2002B IDFA Bonds (as referred to in the form of the bond hereinabove set forth).

        If and when interest is paid on the Series 2002A IDFA Bonds for any given period of time, then there is deemed to have been paid on the Series FFF Bond an amount of interest equal to such interest paid on the Series 2002A IDFA Bonds. If and when interest is paid on the Series 2002B IDFA Bonds for any given period of time, then there is deemed to have been paid on the Series GGG Bond an amount of interest equal to such interest paid on the Series 2002B IDFA Bonds. The Company shall promptly notify the Trustee of the amounts and Interest Payment Dates if any interest becomes payable on the Series FFF Bond or the Series GGG Bond.

        For purposes of the calculation required by the first paragraph of Section 5 of Article IV of the Indenture, annual interest in respect of:

        (a)  the Series FFF Bond shall be equal to the sum of (i) the sum of the amounts determined by multiplying the principal amount of the Series 2002A IDFA, if any, outstanding on the date of such calculation which bear a fixed rate of interest by such fixed rate, plus (ii) the amount determined by multiplying the aggregate principal amount of the Series 2002A IDFA Bonds, if any, outstanding on the date of such calculation which bear interest at rates which may fluctuate or may fluctuate from time to time in accordance with methods specified in such Series 2002A IDFA Bonds by 13% per annum; and

        (b)  the Series GGG Bond shall be equal to the sum of (i) the sum of the amounts determined by multiplying the principal amount of the Series 2002B IDFA, if any, outstanding on the date of such calculation which bear a fixed rate of interest by such fixed rate, plus (ii) the amount determined by multiplying the aggregate principal amount of the Series 2002B IDFA Bonds, if any, outstanding on the date of such calculation which bear interest at rates which may fluctuate or may fluctuate from time to time in accordance with methods specified in such Series 2002B IDFA Bonds by 13% per annum.

        Section 5.    Both the principal of and the interest on the Bonds of Series FFF and GGG shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, at the office or agency of the Company in Plainfield, Indiana, or, at the option of the holder thereof, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, except that interest on the Bonds of Series FFF and GGG may be paid, at the option of the Company, by check or draft mailed to the address of the person entitled thereto as it appears on the books of the Company maintained for that purpose.

        Section 6.    A single Series FFF Bond shall be issued and shall be numbered "FFF-1." A single Series GGG Bond shall be issued and shall be numbered "GGG-1."

        The Bonds of Series FFF and GGG shall be executed on behalf of the Company by the manual or facsimile signature of its President or an Executive Vice President or one of its Vice Presidents and shall have affixed thereto the seal of the Company or a facsimile thereof attested by the manual or

13

facsimile signature of its Secretary or one of its Assistant Secretaries and shall be authenticated by the execution by the Trustee of the certificate endorsed on said bonds.

        No service charge will be made by the Company for the transfer or for the exchange of Bonds of Series FFF and GGG except, in the case of transfer, a charge sufficient to reimburse the Company for any tax or other governmental charge payable in connection therewith.

        Pursuant to the provisions of Section 11 of Article II of the Indenture, Bonds of Series FFF and GGG may be issued in temporary form, and if temporary bonds be issued, the Company shall, with all reasonable dispatch, at its own expense and without charge to the holders of the temporary bonds, prepare and execute definitive Bonds of Series FFF and GGG and exchange the temporary bonds for such definitive bonds in the manner provided for in said section, provided, however, no presentation or surrender of temporary Bonds of Series FFF and GGG shall be necessary in order for the holders entitled to interest thereon to receive such interest.

        Section 7.    Article IX of the Indenture, "Maintenance and Renewal Fund and Sinking Fund Provisions" as heretofore amended or supplemented shall not apply to the Bonds of Series BBB or to any subsequently created series of bonds (which includes the Bonds of Series FFF and GGG) from and after the date on which no series of bonds created under the Indenture prior to the Bonds of Series BBB are outstanding.

        Section 8.    Section 22 of Article V of the Indenture as heretofore amended or supplemented which, among other things, requires an inspection of the mortgaged property every two years by an independent engineer, shall not apply to the Bonds of Series BBB or to any subsequently created series of bonds (which includes the Bonds of Series FFF and GGG), from and after the date in which no series of bonds created under the Indenture prior to the Bonds of Series BBB are outstanding.

        Section 9.    The Company reserves the right, without consent or other action by the holders of the Bonds of Series BBB or of any subsequently created series of bonds (which includes the Bonds of Series FFF and GGG), to amend the Indenture, as heretofore amended or supplemented, at any time after all bonds of any series created prior to the Bonds of Series BBB are no longer outstanding under the Indenture, as follows:

(a)    by substituting for the words "in principal amount not greater than sixty per centum (60%) of" in Section 3 of Article IV thereof the following:

"in principal amount not greater than sixty-six and two-thirds per centum (66²/3%) of".

(b)    by substituting for the words "shall exceed sixty per centum (60%) of the value of bondable property so acquired" in Section 9 of Article V thereof the following:

"shall exceed sixty-six and two-thirds per centum (66²/3%) of the value of bondable property so acquired".

(c)    by substituting for the words "shall be deemed to be paid within the meaning of this article; provided, that the date for the payment or redemption of such bonds shall be not more than one (1) year after such moneys shall have been so set apart or paid." in the first paragraph of Article XIV thereof the following:

"shall be deemed to be paid within the meaning of this article.".

(d)    by substituting for the words "with the consent of holders of at least seventy-five per centum (75%) in aggregate principal amount of the bonds at the time outstanding;" in sub-section (a) of Section 3 of Article XVIII thereof the following:

"with the consent of holders of at least sixty-six and two-thirds per centum (66²/3%) in aggregate principal amount of the bonds at the time outstanding;".

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(e)    by substituting for the words "holders (or persons entitled to vote the bonds) of not less than seventy-five per centum (75%) in aggregate principal amount of the bonds entitled to be voted" in sub-section (l) of Section 3 of Article XVIII thereof the following:

"holders (or persons entitled to vote the bonds) of not less than sixty-six and two-thirds per centum (66²/3%) in aggregate principal amount of the bonds entitled to be voted".

(f)    by substituting for the words "holders (or persons entitled to vote the bonds) of at least seventy-five per centum (75%) in principal amount of the bonds outstanding" in sub-section (m) of Section 3 of Article XVIII thereof the following:

"holders (or persons entitled to vote the bonds) of at least sixty-six and two-thirds per centum (66²/3%) in principal amount of the bonds outstanding".

ARTICLE II.

ISSUANCE OF BONDS OF SERIES FFF AND GGG.

        Section 1.    The Series FFF Bond, in the principal amount not exceeding twenty-three million dollars ($23,000,000) and the Series GGG Bond in the principal amount not exceeding twenty-four million six hundred thousand dollars ($24,600,000), may be executed by the Company and delivered to the Trustee for authentication, and shall be authenticated and delivered by the Trustee to or upon the order of the Company (which authentication and delivery may be made without awaiting the filing or recording of this Fifty-Fourth Supplemental Indenture), upon receipt by the Trustee of the resolutions, certificates, orders, opinions and other instruments required by the provisions of Section 3 of Article IV of the Indenture to be received by the Trustee as a condition to the authentication and delivery by the Trustee of bonds pursuant to said Section 3.

ARTICLE III.

INDENTURE AMENDMENTS.

        Section 1.    Article I of the Indenture, as heretofore amended, is hereby further amended (i) by adding immediately after subdivision "(93)" thereof an additional subdivision numbered "(94)" and reading as follows:

"(94) The term 'Fifty-Fourth Supplemental Indenture' shall mean the Fifty-Fourth Supplemental Indenture executed by the Company and the Trustee, dated as of September 1, 2002, supplementing and amending the Indenture, and the terms 'Series FFF Bond' shall mean the 'PSI Energy, Inc. First Mortgage Bonds, Series FFF, Due March 1, 2031,' and 'Series GGG Bond' shall mean the 'PSI Energy, Inc. First Mortgage Bonds, Series GGG, Due March 1, 2019,', created by the Fifty-Fourth Supplemental Indenture."

and (ii) by changing the numbering of the present subdivision "(94)" thereof to "(95)".

        Section 2.    Article VII of the Indenture, as heretofore amended, is hereby further amended by inserting therein immediately after Section 38 thereof, a new section designated "Section 39" and reading as follows:

        "Section 39. The Series FFF Bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2002A IDFA Bonds are redeemed pursuant to the IDFA Indenture relating thereto, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2002A IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of the Bonds of Series FFF shall be deemed to have been paid and redeemed.

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        The Series GGG Bond shall be deemed to have been paid and redeemed at any time if and to the extent that the Series 2002B IDFA Bonds are redeemed pursuant to the IDFA Indenture relating thereto, in whole or in part, in an amount equal to 100% of the principal amount of the Series 2002B IDFA Bonds redeemed and all amounts owed by the Company to Ambac under the Insurance Agreement have been indefeasibly paid in full. In such an event, the Company shall notify Ambac and the Trustee that a like principal amount of the Bonds of Series GGG shall be deemed to have been paid and redeemed.

        The Bonds of Series FFF and GGG are not otherwise redeemable prior to their maturity. The terms "Series 2002A IDFA Bonds", "Series 2002B IDFA Bonds", "IDFA Indenture", "Ambac" and "Insurance Agreement" shall have the respective meanings specified in the Fifty-Fourth Supplemental Indenture.

Section 3.    The Bonds of Series FFF and GGG shall not be entitled to the benefit of a sinking fund.

ARTICLE IV.

CONCERNING THE TRUSTEE.

        The Trustee hereby accepts the trusts hereby declared and agrees to perform the same upon the terms and conditions in the Indenture and in this Fifty-Fourth Supplemental Indenture set forth. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Fifty-Fourth Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article XVII of the Indenture shall apply to this Fifty-Fourth Supplemental Indenture.

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ARTICLE V.

MISCELLANEOUS PROVISIONS.

        Section 1.    Wherever in the original Indenture or in any of the fifty-four supplemental indentures thereto reference is made to any article or section of the original Indenture, such reference shall be deemed to refer to such article or section as amended by such supplemental indentures.

        Section 2.    Upon the execution and delivery hereof, the Indenture shall thereupon be deemed to be amended as hereinabove set forth as fully and with the same effect as if the amendments made hereby were set forth in the original Indenture and each of the fifty-four supplemental indentures to the Indenture shall henceforth be read, taken and construed as one and the same instrument; but such amendments shall not operate so as to render invalid or improper any action heretofore taken under the original Indenture or said supplemental indentures.

        Section 3.    All the covenants, stipulations and agreements in this Fifty-Fourth Supplemental Indenture contained are and shall be for the sole and exclusive benefit of the parties hereto, their successors and assigns, and of the holders from time to time of the bonds.

        Section 4.    The table of contents to, and the headings of the different articles of, this Fifty-Fourth Supplemental Indenture are inserted for convenience of reference, and are not to be taken to be any part of the provisions hereof, nor to control or affect the meaning, construction or effect of the same.

        Section 5.    This Fifty-Fourth Supplemental Indenture may be simultaneously executed in any number of counterparts, and all such counterparts shall constitute but one and the same instrument.

        Section 6.    Whenever a payment of principal or interest in respect of the Bonds of Series FFF and GGG are due on any day other than a business day (as hereinafter defined), such payment shall be payable on the first business day next following such date, and, in the case of a principal payment, interest on such principal payment shall accrue to the date of such principal payment. For the purposes of this Section 6 the term business day shall mean any day other than a day on which the Trustee is authorized by law to close.

[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]

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        IN WITNESS WHEREOF, said PSI Energy, Inc. has caused this instrument to be executed in its corporate name by its President or one of its Vice Presidents and to be attested by its Secretary or one of its Assistant Secretaries and said LaSalle Bank National Association has caused this instrument to be executed in its corporate name by one of its First Vice Presidents and to be attested by one of its Assistant Secretaries, in several counterparts, all as of the day and year first above written.

	PSI ENERGY, INC.
(CORPORATE SEAL)	By	/s/  RONALD R. REISING Ronald R. Reising Vice President—Finance
ATTEST:
/s/  JEROME A. VENNEMANN Jerome A. Vennemann, Assistant Secretary
Signed and delivered by PSI Energy, Inc.     in the presence of:
/s/  DEBBY GARRETT Debby Garrett, Witness
/s/  JULIE M. THOMPSON Julie M. Thompson, Witness
	LASALLE BANK NATIONAL ASSOCIATION
(CORPORATE SEAL)	By	/s/  VICTORIA Y. DOUYON Victoria Y. Douyon First Vice President
ATTEST:
/s/  RUSSELL C. BERGMAN Russell C. Bergman, Assistant Secretary
Signed and delivered by LaSalle Bank National Association in the presence of:
/s/  DEBRA DONALDSON Debra Donaldson, Witness
/s/  ALVITA GRIFFIN Alvita Griffin, Witness

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STATE OF OHIO	)
	)	ss:
COUNTY OF HAMILTON	)

        BE IT REMEMBERED, that on this 9^th day of September, 2002, before me, the undersigned, a notary public in and for the County and State aforesaid, duly commissioned and qualified, personally appeared Ronald R. Reising and Jerome A. Vennemann, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, and personally known to me to be the Vice President—Finance, and an Assistant Secretary, respectively, of PSI Energy, Inc., an Indiana corporation, and acknowledged that they signed and delivered said instrument as their free and voluntary act as such Vice President—Finance, and Assistant Secretary, respectively, and as the free and voluntary act of said PSI Energy, Inc., for the uses and purposes therein set forth; in pursuance of the power and authority granted to them by resolution of the Board of Directors of said Company.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal the day and year aforesaid.

(NOTARIAL SEAL)
	/s/  CECILIA A. TEMPLENotary Public

My commission expires 09-28-03.

County of residence: Hamilton

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STATE OF ILLINOIS	)
	)	ss:
COUNTY OF COOK	)

        BE IT REMEMBERED, that on this 6^th day of September, 2002, before me, the undersigned, a notary public in and for the County and State aforesaid, duly commissioned and qualified, personally appeared Victoria Y. Douyon and Russell C. Bergman, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, and personally known to me to be a First Vice President and an Assistant Secretary, respectively, of LaSalle Bank National Association, a national banking association, and acknowledged that they signed and delivered said instrument as their free and voluntary act as such First Vice President and Assistant Secretary, respectively, and as the free and voluntary act of said LaSalle Bank National Association, for the uses and purposes therein set forth; in pursuance of the power and authority granted to them by the bylaws of said association.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal the day and year aforesaid.

(NOTARIAL SEAL)
	/s/  MARY ANN KICMALNotary Public

My commission expires 12-1-05.

County of residence: Cook

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Exhibit 4-RRR

EX-4.SSS

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Exhibit 4-SSS

THE CINCINNATI GAS & ELECTRIC COMPANY

AND

FIFTH THIRD BANK,
Trustee

Sixth Supplemental Indenture

Dated as of September 15, 2002

To

Indenture

Dated as of May 15, 1995

5.70% Debentures Due 2012

        SIXTH SUPPLEMENTAL INDENTURE, dated as of September 15, 2002, between The Cincinnati Gas & Electric Company, a corporation duly organized and existing under the laws of the State of Ohio (herein called the "Company"), having its principal office at 139 East Fourth Street, Cincinnati, Ohio 45202, and Fifth Third Bank, an Ohio banking corporation, as Trustee (herein called the "Trustee"), under the Indenture dated as of May 15, 1995 between the Company and the Trustee (the "Indenture").

Recitals of the Company

        The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the "Securities"), to be issued in one or more series as provided in the Indenture.

        Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 5.70% Debentures Due 2012 (herein called the "Debentures"), in this Sixth Supplemental Indenture.

        All things necessary to make this Sixth Supplemental Indenture a valid agreement of the Company have been done.

        Now, Therefore, This Sixth Supplemental Indenture Witnesseth:

        For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows:

ARTICLE ONE

Terms of the Debentures

        Section 101.    There is hereby authorized a series of Securities designated the "5.70% Debentures Due 2012". The Debentures shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on September 15, 2012 and shall be issued in the form of a registered Global Security without coupons, registered in the name of Cede & Co., as nominee of The Depository Trust Company (the "Depository").

        The initial issue of the Debentures shall be limited in aggregate principal amount to $500,000,000 (except as provided in Section 301(2) of the Indenture). However, the Company may, from time to time, without notice to or the consent of the registered holders of the Debentures then outstanding, issue additional Debentures, without limitation as to the aggregate principal amount thereof.

        Section 102.    The provisions of Section 305 of the Indenture applicable to Global Securities shall apply to the Debentures.

        Section 103.    Interest on each of the Debentures shall be payable semiannually on March 15 and September 15 in each year (each an "Interest Payment Date"), commencing on March 15, 2003, at the rate per annum specified in the designation of the Debentures from September 23, 2002, or from the most recent Interest Payment Date to which interest has been paid or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the Person in whose name such Debenture (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the Business Day immediately preceding such Interest Payment Date. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. As used herein, "Business Day" means any day, other than a Saturday or Sunday, or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to be closed.

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        Section 104.    Subject to agreements with or the rules of the Depositary or any successor book-entry security system or similar system with respect to Global Securities, payments of interest will be made by check mailed to the Holder of each Debenture at the address shown in the Security Register, and payments of the principal amount of each Debenture will be made at maturity by check against presentation of the Debenture at the office or agency of the Trustee.

        Section 105.    The Debentures shall be issued in denominations of $1,000 or any integral multiple of $1,000.

        Section 106.    Principal and interest on the Debentures shall be payable in the coin or currency of the United States of America, which, at the time of payment, is legal tender for public and private debts.

        Section 107.    The Debentures shall be subject to defeasance and covenant defeasance, at the Company's option, as provided for in Sections 1302 and 1303 of the Indenture.

        Section 108.    Subject to the terms of Article Eleven of the Indenture, the Company shall have the right to redeem the Debentures, at any time in whole or from time to time in part, until maturity (such redemption, a "Make-Whole Redemption"), at a Redemption Price equal to the sum of (i) the principal amount of the Debentures being redeemed plus accrued and unpaid interest thereon to the Redemption Date, and (ii) the Make-Whole Amount, if any, with respect to the Debentures being redeemed. For purposes of this Section 108:

        "Make-Whole Amount" means, in connection with any Make-Whole Redemption of any Debentures, the excess, if any, of (i) the sum, as determined by a Quotation Agent, of the present value of the principal amount of such Debentures to be redeemed, together with scheduled payments of interest thereon from the Redemption Date to September 15, 2012 (not including any portion of such payments of interest accrued as of the Redemption Date), in each case discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate over (ii) 100% of the principal amount of the Debentures to be redeemed.

        "Adjusted Treasury Rate" means, with respect to any Redemption Date for a Make-Whole Redemption, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date, calculated on the third Business Day preceding the Redemption Date, plus in each case .25% (25 basis points).

        "Comparable Treasury Issue" means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term from the Redemption Date to the Stated Maturity of the Debentures that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Debentures.

        "Quotation Agent" means the Reference Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer" means a primary U.S. Government securities dealer.

        "Comparable Treasury Price" means, with respect to any Redemption Date for a Make-Whole Redemption, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release designated "H.15" (or any successor release) published by the Board of Governors of the Federal Reserve System or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the

2

highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the average of such Quotations.

        "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date for a Make-Whole Redemption, the average, as determined by the Trustee (after consultation with the Company), of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.

        Notice of any redemption by the Company will be mailed at least 30 days but not more than 60 days before any Redemption Date to each Holder of Debentures to be redeemed. If less than all the Debentures are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem fair and appropriate, the Debentures to be redeemed.

        Unless the Company defaults in payment of the Redemption Price, on and after any Redemption Date, interest will cease to accrue on the Debentures or portions thereof called for redemption.

ARTICLE TWO

Form of the Debentures

        Section 201.    The Debentures are to be substantially in the following form and shall include substantially the legend shown so long as the Debentures are Global Securities:

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(FORM OF FACE OF DEBENTURE)

No. $

CUSIP No.: 172070 CN 2
ISIN: US172070CN29
Common Code: 015526378

THE CINCINNATI GAS & ELECTRIC COMPANY

5.70% DEBENTURE DUE 2012

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

        THE CINCINNATI GAS & ELECTRIC COMPANY, a corporation duly organized and existing under the laws of the State of Ohio (herein called the "Company," which term includes any successor Person under the Indenture hereafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of                        and No/100 Dollars ($                        ) on September 15, 2012, and to pay interest thereon from September 23, 2002 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on March 15 and September 15 in each year, commencing March 15, 2003, at the rate of 5.70% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the Business Day immediately preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.

        Payment of the principal of and interest on this Security will be made at the corporate trust office of the Trustee maintained for that purpose in the City of Cincinnati, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register.

        Any payment on this Security due on any day which is not a Business Day in the City of New York need not be made on such day, but may be made on the next succeeding Business Day with the same

4

force and effect as if made on the due date and no interest shall accrue for the period from and after such date, unless such payment is a payment at maturity or upon redemption, in which case interest shall accrue thereon at the stated rate for such additional days.

        As used herein, "Business Day" means any day, other than a Saturday or Sunday, or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to be closed.

        Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

        Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

        In Witness Whereof, the Company has caused this instrument to be duly executed.

THE CINCINNATI GAS & ELECTRIC COMPANY

By

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CERTIFICATE OF AUTHENTICATION

Dated:

        This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

FIFTH THIRD BANK,     as Trustee
By	Authorized Signatory

(FORM OF REVERSE OF DEBENTURE)

        This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of May 15, 1995 (herein called the "Indenture," which term shall have the meaning assigned to it in such instrument), between the Company and Fifth Third Bank, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, which series is issuable without limitation as to the aggregate principal amount thereof.

        The Securities of this series are subject to optional redemption at any time in whole or from time to time in part, until maturity (such redemption, a "Make-Whole Redemption"), at a Redemption Price equal to the sum of (i) the principal amount of the Securities being redeemed plus accrued and unpaid interest thereon to the Redemption Date, and (ii) the Make-Whole Amount (as defined below), if any, with respect to the Securities being redeemed.

        "Make-Whole Amount" means, in connection with any Make-Whole Redemption of any Securities, the excess, if any, of (i) the sum, as determined by a Quotation Agent of the present value of the principal amount of such Securities to be redeemed, together with scheduled payments of interest thereon from the Redemption Date to September 15, 2012 (not including any portion of such payments of interest accrued as of the Redemption Date), in each case discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate over (ii) 100% of the principal amount of the Securities to be redeemed.

        "Adjusted Treasury Rate" means, with respect to any Redemption Date for a Make-Whole Redemption, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date, calculated on the third Business Day preceding the Redemption Date, plus in each case .25% (25 basis points).

        "Comparable Treasury Issue" means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term from the Redemption Date to the Stated Maturity of the Securities that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities.

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        "Quotation Agent" means the Reference Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer" means a primary U.S. Government securities dealer.

        "Comparable Treasury Price" means, with respect to any Redemption Date for a Make-Whole Redemption, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release designated "H.15" (or any successor release) published by the Board of Governors of the Federal Reserve System or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the average of such Quotations.

        "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date for a Make-Whole Redemption, the average, as determined by the Trustee (after consultation with the Company), of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.

        Notice of any redemption by the Company will be mailed at least 30 days but not more than 60 days before any Redemption Date to each Holder of Securities to be redeemed. If less than all the Securities are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem fair and appropriate, the Securities to be redeemed.

        Unless the Company defaults in payment of the Redemption Price, on and after any Redemption Date, interest will cease to accrue on the Securities or portions thereof called for redemption.

        The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security upon compliance with certain conditions set forth in the Indenture.

        If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

        The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

        As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 35% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such

7

Event of Default as Trustee and offered the Trustee reasonably satisfactory indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

        No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

        As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

        The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

        No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

        Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

        All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

ARTICLE THREE

Issuance of Debentures

        Section 301.    An initial issue of the Debentures in the aggregate principal amount of $500,000,000 may, upon execution of this Sixth Supplemental Indenture, or from time to time hereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures upon a Company Order without any further action by the Company. Additional Debentures may be issued by the Company pursuant to the terms of the Indenture and this Sixth Supplemental Indenture.

ARTICLE FOUR

Paying Agent and Security Registrar

        Section 401.    Fifth Third Bank will be the Paying Agent and Security Registrar for the Debentures.

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ARTICLE FIVE

Sundry Provisions

        Section 501.    Except as otherwise expressly provided in this Sixth Supplemental Indenture or in the form of Debenture or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of Debenture that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.

        Section 502.    The Indenture, as supplemented by this Sixth Supplemental Indenture, is in all respects ratified and confirmed, and this Sixth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

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        This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

        In Witness Whereof, the parties hereto have caused this Sixth Supplemental Indenture to be duly executed as of the date first above written.

THE CINCINNATI GAS & ELECTRIC     COMPANY
By	/s/  WENDY L. AUMILLER Wendy L. Aumiller Treasurer
FIFTH THIRD BANK, as Trustee
By	/s/  CHRISTINE M. SCHAUB Christine M. Schaub Vice President

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Exhibit 4-SSS

EX-4.TTT

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Exhibit 4-TTT

LOAN AGREEMENT

between

INDIANA DEVELOPMENT FINANCE AUTHORITY

and

PSI ENERGY, INC.

$23,000,000
Indiana Development Finance Authority
Environmental Refunding
Revenue Bonds, Series 2002A
(PSI Energy, Inc. Project)

Dated

as of

September 1, 2002

TABLE OF CONTENTS

		Page
ARTICLE I.	DEFINITIONS	2
Section 1.1.	Use of Defined Terms	2
Section 1.2.	Definitions	2
Section 1.3.	Interpretation	5
Section 1.4.	Captions and Headings	5
ARTICLE II.	REPRESENTATIONS	6
Section 2.1.	Representations of the Issuer	6
Section 2.2.	No Warranty by Issuer of Condition or Suitability of the Project	6
Section 2.3.	Representations and Covenants of the Company	6
ARTICLE III.	COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS	9
Section 3.1.	Acquisition, Construction and Installation	9
Section 3.2.	Project Description	9
Section 3.3.	Issuance of the Bonds; Application of Proceeds	9
Section 3.4.	Investment of Fund Moneys	9
Section 3.5.	Rebate Fund	10
ARTICLE IV.	LOAN BY ISSUER; LOAN PAYMENTS; ADDITIONAL PAYMENTS; MUNICIPAL BOND INSURANCE POLICY AND LIQUIDITY FACILITY	11
Section 4.1.	Loan Repayment	11
Section 4.2.	Additional Payments	11
Section 4.3.	Place of Payments	11
Section 4.4.	Obligations Unconditional	11
Section 4.5.	Assignment of Revenues and Agreement	12
Section 4.6.	Municipal Bond Insurance Policy; Liquidity Facility; Cancellation	12
Section 4.7.	Company's Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods	12
Section 4.8.	Company's Obligation to Purchase Bonds	12
ARTICLE V.	ADDITIONAL AGREEMENTS AND COVENANTS	13
Section 5.1.	Right of Inspection	13
Section 5.2.	Maintenance	13
Section 5.3.	Removal of Portions of the Project Facilities	13
Section 5.4.	Operation of Project Facilities	14
Section 5.5.	Insurance	14
Section 5.6.	Workers' Compensation Coverage	14
Section 5.7.	Damage; Destruction and Eminent Domain	14
Section 5.8.	Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted	14
Section 5.9.	Indemnification	14
Section 5.10.	Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes	15
Section 5.11.	Use of Project Facilities	15
Section 5.12.	Assignment by Company	15
Section 5.13.	The Depository Trust Company Letter of Representation	16

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ARTICLE VI.	REDEMPTION	17
Section 6.1.	Optional Redemption	17
Section 6.2.	Extraordinary Optional Redemption	17
Section 6.3.	Mandatory Redemption	18
Section 6.4.	Notice of Redemption	18
Section 6.5.	Actions by Issuer	19
ARTICLE VII.	EVENTS OF DEFAULT AND REMEDIES	20
Section 7.1.	Events of Default	20
Section 7.2.	Remedies on Default	20
Section 7.3.	No Remedy Exclusive	21
Section 7.4.	Agreement to Pay Attorneys' Fees and Expenses	21
Section 7.5.	No Waiver	21
Section 7.6.	Notice of Default	21
ARTICLE VIII.	MISCELLANEOUS	22
Section 8.1.	Term of Agreement	22
Section 8.2.	Amounts Remaining in Funds	22
Section 8.3.	Notices	22
Section 8.4.	Extent of Covenants of the Issuer; No Personal Liability	22
Section 8.5.	Binding Effect	22
Section 8.6.	Amendments and Supplements	22
Section 8.7.	Execution Counterparts	23
Section 8.8.	Severability	23
Section 8.9.	Governing Law	23
EXHIBIT A Project		24

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LOAN AGREEMENT

        THIS LOAN AGREEMENT is made and entered into as of September 1, 2002 between the INDIANA DEVELOPMENT FINANCE AUTHORITY (the "Issuer"), a separate body corporate and politic organized and existing under the laws of the State of Indiana, and PSI ENERGY, INC. (the "Company"), a public utility and corporation duly organized and validly existing under the laws of the State of Indiana. Capitalized terms used in the following recitals are used as defined in Article I of this Agreement.

        Pursuant to Indiana Code, Title 4, Article 4, Chapters 10.9 and 11 (collectively, the "Act"), the Issuer has determined to issue, sell and deliver the Bonds, and to lend the proceeds derived from the sale thereof to the Company to assist in the refunding of the Refunded Bonds as defined below. The Refunded Bonds were issued to provide funds to make a loan to the Company to assist in the refinancing of its portion of the costs of the Project as defined below.

        The Company and the Issuer each have full right and lawful authority to enter into this Agreement and to perform and observe the provisions hereof on their respective parts to be performed and observed.

        NOW THEREFORE, in consideration of the premises and the mutual representations and agreements hereinafter contained, the Issuer and the Company agree as follows (provided that any obligation of the Issuer or the State created by or arising out of this Agreement shall never constitute a general debt of the Issuer or the State or give rise to any pecuniary liability of the Issuer or the State but shall be payable solely out of Revenues):

ARTICLE I.

DEFINITIONS

        Section 1.1.    Use of Defined Terms.    In addition to the words and terms defined elsewhere in this Agreement, the Indenture or by reference to another document, the words and terms set forth in Section 1.2 hereof shall have the meanings set forth therein unless the context or use clearly indicates another meaning or intent. Such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms defined therein.

        Section 1.2.    Definitions.    As used herein:

        "Additional Payments" means the amounts required to be paid by the Company pursuant to the provisions of Section 4.2 hereof.

        "Administration Expenses" means the compensation (which compensation shall not be greater than that typically charged in similar circumstances) and reimbursement of reasonable expenses and advances payable to the Trustee, the Registrar, the Remarketing Agent, the Broker-Dealer, the Auction Agent, any Paying Agent and any Authenticating Agent.

        "Agreement" means this Loan Agreement, as amended or supplemented from time to time.

        "Engineer" means an engineer (who may be an employee of the Company) or engineering firm qualified to practice the profession of engineering under the laws of the State and who or which is acceptable to the Trustee.

        "EPA" means the Department of Environmental Management of the State and any successor body, agency, commission or department.

        "Event of Default" means any of the events described as an Event of Default in Section 7.1 hereof.

        "Force Majeure" means any of the following:

        (i)    acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornados; storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, nuclear accidents or other malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of a utility serving the Project; shortages of labor, materials, supplies or transportation; or

        (ii)  any cause, circumstance or event not reasonably within the control of the Company.

        "Generating Stations" means collectively the Gibson Generating Station, the Cayuga Generating Station, the Edwardsport Generating Station, the Gallagher Generating Station and the Wabash River Generating Station and "Generating Station" means any one of such separately.

        "Indenture" means the Trust Indenture related to the Bonds, dated as of the same date as this Agreement, between the Issuer and the Trustee, as amended or supplemented from time to time.

        "Insurance Agreement" means the Insurance Agreement relating to the Bonds, dated as of the same date as this Agreement, between the Company and the Bond Insurer, as amended or supplemented from time to time.

        "Interest Rate for Advances" means the interest rate per year payable on the Bonds.

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        "Loan" means the loan by the Issuer to the Company of the proceeds received from the sale of the Bonds.

        "Loan Payment Date" means any date on which any Bond Service Charges are due and payable.

        "Loan Payments" means the amounts required to be paid by the Company in repayment of the Loan pursuant to Section 4.1 hereof.

        "1954 Code" means the Internal Revenue Code of 1954 as amended from time to time through the date of enactment of the Code. References to the 1954 Code and Sections of the 1954 Code include relevant applicable regulations (including temporary regulations) and proposed regulations thereunder and any successor provisions to those Sections, regulations or proposed regulations.

        "Notice Address" means:

(a)    As to the Issuer:	Indiana Development Finance Authority One North Capitol, Suite 320 Indianapolis, Indiana 46204 Attention: Executive Director
(b)    As to the Company:	PSI Energy, Inc. 139 East Fourth Street Cincinnati, Ohio 45202 Attention: Treasurer
(c)    As to the Trustee:	Fifth Third Bank, Indiana Fifth Third Center 38 Fountain Square Cincinnati, Ohio 45263 Attention: Corporate Trust Administration

or such additional or different address, notice of which is given under Section 8.3 hereof.

        "Original Bonds" means the $23,000,000 Indiana Employment Development Commission 8¹/4% Environmental Revenue Bonds, Series 1988 (Public Service Company of Indiana, Inc.).

        "Original Bonds Indenture" means the Trust Indenture dated as of June 15, 1988 between Bank One, Indianapolis, National Association (as successor to American Fletcher National Bank & Trust Company) and the Indiana Employment Development Commission, as predecessor to the Issuer.

        "Original Bonds Loan Agreement" means the Loan Agreement dated as of June 15, 1988 between the Indiana Employment Development Commission, as predecessor of the Issuer and Public Service Company of Indiana, as predecessor of the Company, as amended as of March 15, 1990 and as of March 15, 1992.

        "Person" or words importing persons mean firms, associations, partnerships (including without limitation, general and limited partnerships), limited liability entities, joint ventures, societies, estates, trusts, corporations, public or governmental bodies, other legal entities and natural persons.

        "Pollution Control Facility" or "Pollution Control Facilities" means those facilities which are pollution control facilities as defined in Section 24 of Chapter 10.9 of the Act and those facilities described in Section 103(b)(4)(F) of the Internal Revenue Code of 1954, as amended, and the final, proposed and temporary regulations promulgated thereunder and other administrative authority in effect.

        "Prior Bonds" means the Original Bonds and the Refunded Bonds.

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        "Project" or "Project Facilities" means the real, personal or real and personal property, including undivided or other interests therein, identified in the Project Description, financed with the proceeds of the Original Bonds.

        "Project Description" means collectively the description of the Project Facilities originally financed with the proceeds of the Original Bonds, attached hereto as Exhibit A.

        "Project Purposes" means the purposes of Pollution Control Facilities as described in the Act and as particularly described in Exhibit A hereto.

        "Project Site" means with respect to the various components of the Project, certain pollution control, solid waste disposal and sewage facilities of the Company at its following facilities: (a) the Cayuga Generating Station, State Road 63, Cayuga, Vermillion County, Indiana; (b) the Edwardsport Generating Station, State Road 67, Edwardsport, Knox County, Indiana; (c) the Gallagher Generating Station, Jackson Street, New Albany, Floyd County, Indiana; (d) the Gibson Generating Station, Highway 64 West, Gibson County, Indiana; and (e) the Wabash River Generating Station, Bolton Road, Terre Haute, Vigo County, Indiana.

        "Refunded Bonds" means the $23,000,000 Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 1998 (PSI Energy, Inc. Project).

        "Refunded Bonds Indenture" means the Trust Indenture dated as of July 15, 1998 between the Indiana Development Finance Authority and Fifth Third Bank, Indiana (formerly, The Fifth Third Bank of Central Indiana).

        "Refunded Bonds Loan Agreement" means the Loan Agreement dated as of July 15, 1998 between the Issuer and the Company.

        "Refunded Bonds Trustee" means Fifth Third Bank, Indiana (formerly The Fifth Third Bank of Central Indiana), as trustee under the Refunded Bonds Indenture.

        "Revenues" means (a) the Loan Payments, (b) all other moneys received or to be received by the Issuer (excluding any fees paid to the Issuer) or the Trustee in respect of repayment of the Loan, including without limitation, all moneys and investments in the Bond Fund, (c) any moneys and investments in the Refunding Fund, and (d) all income and profit from the investment of the foregoing moneys. The term "Revenues" does not include any moneys or investments in the Rebate Fund or the Bond Purchase Fund.

        "Solid Waste Disposal Facility" or "Solid Waste Disposal Facilities" means those facilities defined as pollution control facilities in Section 24 of Chapter 10.9 of the Act and those facilities described in Section 142(a)(6) of the Code.

        "State" means the State of Indiana.

        "Trustee" means Fifth Third Bank, Indiana located in Indianapolis, Indiana, a corporation duly organized and validly existing under the laws of the State, until a successor Trustee shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Trustee" shall mean the successor Trustee. "Principal Office" of the Trustee shall mean the principal corporate trust office of the Trustee, which office at the date of issuance of the Bonds is located at its Notice Address.

        "Unassigned Issuer Rights" means all of the rights of the Issuer to receive Additional Payments under Section 4.2 hereof, to inspection pursuant to Section 5.1 hereof, to be held harmless and indemnified under Section 5.9 hereof, to be reimbursed for attorney's fees and expenses under Section 7.4 hereof and to give or withhold consent to amendments, changes, modifications, alterations and termination of this Agreement under Section 8.6 hereof and its right to enforce such rights.

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        Section 1.3.    Interpretation.    Any reference herein to the State, to the Issuer or to any member or officer of either includes entities or officials succeeding to their respective functions, duties or responsibilities pursuant to or by operation of law or lawfully performing their functions.

        Any reference to a section or provision of the Constitution of the State or the Act, or to a section, provision or chapter of the Indiana Code, or to any statute of the United States of America, includes that section, provision or chapter as amended, modified, revised, supplemented or superseded from time to time; provided, that no amendment, modification, revision, supplement or superseding section, provision or chapter shall be applicable solely by reason of this provision, if it constitutes in any way an impairment of the rights or obligations of the Issuer, the State, the Holders, the Trustee, the Registrar, the Auction Agent, an Authenticating Agent, a Paying Agent, the Bond Insurer, the Remarketing Agent, or the Company under this Agreement, the Indenture or the Bonds.

        Unless the context indicates otherwise, words importing the singular number include the plural number, and vice versa; the terms "hereof", "hereby", "herein", "hereto", "hereunder" and similar terms refer to this Agreement; and the term "hereafter" means after, and the term "heretofore" means before, the date of delivery of the Bonds. Words of any gender include the correlative words of the other genders, unless the sense indicates otherwise.

        Section 1.4.    Captions and Headings.    The captions and headings in this Agreement are used solely for convenience of reference and in no way define, limit or describe the scope or intent of any Articles, Sections, subsections, paragraphs or subparagraphs or clauses hereof.

(End of Article I)

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ARTICLE II.

REPRESENTATIONS

        Section 2.1.    Representations of the Issuer.    The Issuer represents that: (a) it is a body corporate and politic duly organized and validly existing under the laws of the State; (b) it has duly accomplished all conditions necessary to be accomplished by it prior to the issuance and delivery of the Bonds and the execution and delivery of this Agreement and the Indenture; (c) it is not in violation of or in conflict with any provisions of the laws of the State which would impair its ability to carry out its obligations contained in this Agreement or the Indenture; (d) it is empowered to enter into the transactions contemplated by this Agreement and the Indenture; (e) it has duly authorized the execution, delivery and performance of this Agreement and the Indenture; (f) it will do all things in its power in order to maintain its existence or assure the assumption of its obligations under this Agreement and the Indenture by any successor municipal corporation; and (g) following reasonable notice, a public hearing was held on August 20, 2002 with respect to the issuance of the Bonds as required by Section 147(f) of the Code.

        Section 2.2.    No Warranty by Issuer of Condition or Suitability of the Project.    The Issuer makes no warranty, either express or implied, as to the suitability or utilization of the Project for the Project Purposes, or as to the condition of the Project Facilities or that the Project Facilities are or will be suitable for the Company's purposes or needs.

        Section 2.3.    Representations and Covenants of the Company.    The Company represents that:

        (a)  The Company has been duly incorporated and is validly existing as a corporation under the laws of the State, with power and authority (corporate and other) to own its properties and conduct its business, to execute and deliver this Agreement and to perform its obligations under this Agreement.

        (b)  This Agreement has been duly authorized, executed and delivered by the Company and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.

        (c)  The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby will not violate any provision of law or regulation applicable to the Company, or of any writ or decree of any court or governmental instrumentality, or of the Amended Articles of Consolidation, as amended, or the By-laws of the Company, or of any mortgage, indenture, contract, agreement or other undertaking to which the Company is a party or which purports to be binding upon the Company or upon any of its assets.

        (d)  The Project constitutes and will constitute either land or property of a character subject to the allowance for depreciation for purposes of the Code, and all expenditures for the cost of constructing the Project have been charged to a capital account for federal income tax purposes (or would have been so charged either with or but for a proper election to deduct such amounts).

        (e)  No portion of the Project had been acquired and placed in operation at substantially the level for which it was designed for more than one year prior to the date of delivery of the Original Bonds which financed such portion of the Project.

        (f)    The weighted average maturity of the Bonds does not exceed 120% of the average economic life of the Project Facilities originally financed by the Original Bonds (determined under Section 147(b) of the Code).

        (g)  The portions of the Project (i) which are Pollution Control Facilities were designed to meet or exceed applicable federal, state and local requirements then in effect for the control of air pollution and have been and will be used to abate or control air pollution or contamination by removing,

6

altering, disposing of or storing pollutants, contaminants, wastes or heat, and the Pollution Control Facilities components of the Project as designed constitute "air pollution control facilities" or facilities functionally related or subordinate thereto within the meaning of Section 103(b)(4)(F) of the 1954 Code, and the final, temporary and proposed regulations promulgated thereunder and other administrative authority in effect; and (ii) which are Solid Waste Disposal Facilities have been and will be used for the collection, storage, treatment, utilization, processing or final disposal of solid waste and constitute "solid waste disposal facilities" within the meaning of Section 142(a)(6) of the Code and the regulations applicable thereto.

        (h)  The Project has been and will be used wholly to control pollution and dispose of solid waste and was designed for no significant purpose other than pollution control and disposal of solid waste, and the Project was not designed to result in an increase in production or capacity, in a material extension of the useful life of the Generating Stations or, in the case of the portions of the Project which are Pollution Control Facilities, in the recovery of by-products of any substantial value.

        (i)    Substantially all (at least 95%) of the proceeds of the Original Bonds were used to provide "Solid Waste Disposal Facilities" and "Pollution Control Facilities".

        (j)    Acquisition, construction and installation or the incurrence of Cost of Construction (as defined in the Original Bonds Loan Agreement) for the Pollution Control Facilities portion of the Project or any separate facility thereof was not commenced prior to the adoption of the resolution of the City of Princeton, Indiana, on October 16, 1978; and acquisition, construction and installation or the incurrence of Cost of Construction for the Solid Waste Disposal Facilities portion of the Project or any separate facility thereof was not commenced prior to the adoption of the applicable resolution of the Issuer on April 18, 1988, and no such portion of the Project was, in fact, operated at such design level prior to October 1, 1987.

        (k)  All of the proceeds of the Original Bonds were spent for the Project Facilities pursuant to the Original Bonds Loan Agreement or to pay costs of issuance of the Original Bonds. The proceeds of the Refunded Bonds (other than any accrued interest thereon) were used exclusively to refund the Original Bonds; any investment earnings on such proceeds of the Refunded Bonds were used to pay principal, premium or interest on the Original Bonds; and none of the proceeds of the Refunded Bonds was used to pay for any costs of issuance of the Refunded Bonds. The principal amount of the Refunded Bonds did not exceed the then outstanding principal amount of the Original Bonds. The proceeds of the Refunded Bonds were used to retire the Original Bonds not later than 90 days after the date of issuance of the Refunded Bonds. The proceeds of the Bonds (other than any accrued interest thereon) will be used exclusively to refund the Refunded Bonds; any investment earnings on such proceeds of the Bonds will be used to pay principal, premium or interest on the Refunded Bonds; and none of the proceeds of the Bonds will be used to pay for any costs of issuance of the Bonds. The principal amount of the Bonds does not exceed the outstanding principal amount of the Refunded Bonds. The proceeds of the Bonds will be used to retire the Refunded Bonds not later than 90 days after the date of issuance of the Bonds.

        (l)    It has caused the Project to be substantially completed. The Project constitutes Pollution Control Facilities under the Act and is consistent with the purposes of the Act. The Project is being, and the Company will cause the Project to be, operated and maintained in such manner to conform with all applicable zoning, planning, building, environmental and other applicable governmental regulations and all permits, variances and orders issued or granted pursuant thereto, including the permit-to-install for the Project, which permits, variances and orders have not been withdrawn or otherwise suspended, and to be consistent with the Act.

        (m)  It has used or operated or has caused to be used or operated, and presently intends to use or operate or cause to be used or operated the Project Facilities in a manner consistent with the Project Purposes until the date on which the Bonds have been fully paid and knows of no reason why the

7

Project Facilities will not be so operated. The Company does not intend to sell or otherwise dispose of the Project or any portion thereof.

        (n)  None of the proceeds of each of the Prior Bonds was used and none of the proceeds of the Bonds will be used to provide any airplane, skybox or other private luxury box, or health club facility, any facility primarily used for gambling or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

        (o)  Less than 25% of the proceeds of each of the Prior Bonds was used to acquire land or any interest therein, and none of such proceeds was used to provide land which was used for farming purposes.

        (p)  None of the proceeds of each of the Prior Bonds was used to acquire existing property or any interest therein unless the first use of such property was by the Company and was pursuant to and followed such acquisition.

        (q)  At no time will any funds constituting gross proceeds of the Bonds be used in a manner as would constitute failure of compliance with Section 148 of the Code.

        (r)  The Prior Bonds were not, and the Bonds will not be, "federally guaranteed" within the meaning of Section 149(b) of the Code.

        (s)  It is not anticipated that as of the date hereof, there will be created any "replacement proceeds", within the meaning of Section 1.148-1(c) of the Treasury Regulations, with respect to the Bonds; however, in the event that any such replacement proceeds are deemed to have been created, such amounts will be invested in compliance with Section 148 of the Code.

        (t)    On the date of issuance and delivery each of the Prior Bonds, the Company reasonably expected that at least 85% of the respective spendable proceeds of each of the Prior Bonds would be expended to carry out the respective governmental purpose of each such issue within the 3-year period beginning on the issue date of such issue and the Company reasonably expected that the proceeds of each of the Prior Bonds would be spent in accordance with the spending requirements of Section 149(g)(2) of the Code. The spendable proceeds of each of the Prior Bonds have been fully expended prior to the date of issuance of the Bonds. The proceeds of each of the Prior Bonds were not invested in nonpurpose investments having a substantially guaranteed yield for four years or more.

        (u)  The information furnished by the Company and used by the issuer in preparing the certifications and statements pursuant to Sections 148 and 149(e) of the Code or their statutory predecessors with respect to each of the Prior Bonds was accurate and complete as of the respective date of issuance thereof, and the information furnished by the Company and used by the Issuer in preparing the certification pursuant to Section 148 of the Code and in preparing the information statement pursuant to Section 149(e) of the Code, both referred to in the Bond Resolution, will be accurate and complete as of the date of issuance of the Bonds.

        (v)  The Project Facilities do not include any office except for offices (i) located on the Project Site and (ii) not more than a de minimis amount of the functions to be performed at which is not directly related to the day-to-day operations of the Project Facilities.

(End of Article II)

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ARTICLE III.

COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS

        Section 3.1.    Acquisition, Construction and Installation.    The Company represents that it has caused the Project Facilities to be acquired, constructed and installed on the respective Project Sites, substantially in accordance with the Project Description and in conformance with all applicable zoning, planning, building and other similar regulations of all governmental authorities having jurisdiction over the Project and all permits, variances and orders issued in respect of the Project by EPA, and that the proceeds derived from the Original Bonds and the Refunded Bonds, including any investment thereof, were expended in accordance with the respective Original Bonds Indenture and the Original Bonds Loan Agreement and Refunded Bonds Indenture and Refunded Bonds Loan Agreement.

        Section 3.2.    Project Description.    The Project Description may be changed from time to time by, or with the consent of, the Company provided that any such change shall also be filed with the Issuer and provided further that no change in the Project Description shall materially change the function of the Project Facilities unless the Trustee shall have received (i) an Engineer's certificate that such changes will not impair the significance or character of the Project Facilities as Pollution Control Facilities and (ii) an Opinion of Bond Counsel or ruling of the Internal Revenue Service to the effect that such amendment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes.

        Section 3.3.    Issuance of the Bonds; Application of Proceeds.    To provide funds to make the Loan to the Company to assist the Company in the refunding of the Refunded Bonds, the Issuer will issue, sell and deliver the Bonds to the Original Purchaser. The Bonds will be issued pursuant to the Indenture in the aggregate principal amount, will bear interest, will mature and will be subject to redemption as set forth therein. The Company hereby approves the terms and conditions of the Indenture and the Bonds, and the terms and conditions under which the Bonds will be issued, sold and delivered.

        The Company hereby requests that the Issuer notify the Refunded Bonds Trustee (unless the Refunded Bonds Trustee has already received such notice), pursuant to the Refunded Bonds Indenture, that the entire outstanding principal amount of the Refunded Bonds is to be redeemed on October 1, 2002, at a redemption price of 100% of the principal amount thereof plus accrued interest to that redemption date.

        The proceeds from the sale of the Bonds (other than any accrued interest) shall be loaned to the Company to assist the Company in refunding the Refunded Bonds in order to reduce the interest cost payable by the Company; those proceeds shall be deposited in the Refunding Fund. On October 1, 2002, all moneys on deposit in the Refunding Fund shall be disbursed by the Trustee as provided in Section 5.02 of the Indenture to the Refunded Bonds Trustee for deposit in the Bond Fund created in the Refunded Bonds Indenture and applied by the Refunded Bonds Trustee to the payment of principal of and interest on the Refunded Bonds on their redemption on October 1, 2002. The Company shall pay to the Refunded Bonds Trustee prior to the date of redemption of such series of Refunded Bonds such additional amounts as shall be required to pay in full on such date the entire amount of principal of, premium and interest due on the Refunded Bonds.

        Pending disbursement pursuant to this Section, the proceeds so deposited in the Refunding Fund, together with any investment earnings thereon, shall constitute a part of the Revenues assigned by the Issuer to the Trustee for the payment of Bond Service Charges. Any accrued interest shall be deposited in the Bond Fund.

        Section 3.4.    Investment of Fund Moneys.    At the oral (confirmed promptly in writing) or written request of the Company, any moneys held as part of the Bond Fund, the Refunding Fund or the Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments; provided, that such

9

moneys shall be invested or reinvested by the Trustee only in Eligible Investments which shall mature, or which shall be subject to redemption by the holder thereof at the option of such holder, not later than the date upon which the moneys so invested are needed to make payments from those Funds. The Issuer (to the extent it retained or retains direction or control) and the Company each hereby represents that the investment and reinvestment and the use of the proceeds of the Refunded Bonds were restricted in such manner and to such extent as was necessary so that the Refunded Bonds would not constitute arbitrage bonds under Section 148 of the Code or its statutory predecessor and each hereby covenants that it will restrict that investment and reinvestment and the use of the proceeds of the Bonds in such manner and to such extent, if any, as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code.

        The Company shall provide the Issuer with, and the Issuer may base its certificate and statement, each as authorized by the Bond Resolution, on a certificate of an appropriate officer, employee or agent of or consultant to the Company for inclusion in the transcript of proceedings for the Bonds, setting forth the reasonable expectations of the Company on the date of delivery of and payment for the Bonds regarding the amount and use of the proceeds of the Bonds and the facts, estimates and circumstances on which those expectations are based.

        Section 3.5.    Rebate Fund.    To the extent required by Section 5.08 of the Indenture, within five days after the end of the fifth Bond Year (as defined in the Indenture) and every fifth Bond Year thereafter, and within five days after payment in full of all outstanding Bonds, the Company shall calculate the amount of Excess Earnings (as defined in the Indenture) as of the end of that Bond Year or the date of such payment and shall notify the Trustee of that amount. If the amount then on deposit in the Rebate Fund created under the Indenture is less than the amount of Excess Earnings (computed by taking into account the amount or amounts, if any, previously paid to the United States pursuant to Section 5.08 of the Indenture and this Section), the Company shall, within five days after the date of the aforesaid calculation, pay to the Trustee for deposit in the Rebate Fund an amount sufficient to cause the Rebate Fund to contain an amount equal to the Excess Earnings. The obligation of the Company to make such payments shall remain in effect and be binding upon the Company notwithstanding the release and discharge of the Indenture. The Company shall obtain and keep such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code.

(End of Article III)

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ARTICLE IV.

LOAN BY ISSUER; LOAN PAYMENTS;
ADDITIONAL PAYMENTS; MUNICIPAL BOND INSURANCE
POLICY AND LIQUIDITY FACILITY

        Section 4.1.    Loan Repayment.    Upon the terms and conditions of this Agreement, the Issuer agrees to make the Loan to the Company. The proceeds of the Loan shall be deposited with the Trustee pursuant to Section 3.3 hereof. In consideration of and in repayment of the Loan, the Company shall make, as Loan Payments, to the Trustee for the account of the Issuer, payments which correspond, as to time, and are equal in amount as of the Loan Payment Date, to the corresponding Bond Service Charges payable on the Bonds. All Loan Payments received by the Trustee shall be held and disbursed in accordance with the provisions of the Indenture and this Agreement for application to the payment of Bond Service Charges.

        The Company shall be entitled to a credit against the Loan Payments required to be made on any Loan Payment Date to the extent that the balance of the Bond Fund is then in excess of amounts required (a) for the payment of Bonds theretofore matured or theretofore called for redemption, or to be called for redemption pursuant to Section 6.1 hereof (b) for the payment of interest for which checks or drafts have been drawn and mailed by the Trustee or Paying Agent, and (c) to be deposited in the Bond Fund by the Indenture for use other than for the payment of Bond Service Charges due on that Loan Payment Date.

        Except for such interest of the Company as may hereafter arise pursuant to Section 8.2 hereof or Sections 5.06 or 5.07 of the Indenture, the Company and the Issuer each acknowledge that neither the Company, the State nor the Issuer has any interest in the Bond Fund or the Bond Purchase Fund, and any moneys deposited therein shall be in the custody of and held by the Trustee in trust for the benefit of the Holders.

        Section 4.2.    Additional Payments.    The Company shall pay to the Issuer, as Additional Payments hereunder, any and all costs and expenses incurred or to be paid by the Issuer in connection with the issuance and delivery of the Bonds or otherwise related to actions taken by the Issuer under this Agreement or the Indenture.

        The Company shall pay the Administration Expenses to the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, and any Paying Agent or Authenticating Agent, as appropriate, as Additional Payments hereunder.

        The Company may, without creating a default hereunder, contest in good faith the reasonableness of any such cost or expense incurred or to be paid by the Issuer and any Administration Expenses claimed to be due to the Trustee, the Registrar, the Auction Agent, the Remarketing Agent, any Paying Agent or any Authenticating Agent.

        In the event the Company should fail to pay any Loan Payments, Additional Payments or Administration Expenses when due, the payment in default shall continue as an obligation of the Company until the amount in default shall have been fully paid together with interest thereon during the default period at the Interest Rate for Advances.

        Section 4.3.    Place of Payments.    The Company shall make all Loan Payments directly to the Trustee at its Principal Office. Additional Payments shall be made directly to the person or entity to whom or to which they are due.

        Section 4.4.    Obligations Unconditional.    The obligations of the Company to make Loan Payments, Additional Payments and any payments required of the Company under Section 5.08 of the Indenture shall be absolute and unconditional, and the Company shall make such payments without abatement, diminution or deduction regardless of any cause or circumstances whatsoever including, without

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limitation, any defense, set-off, recoupment or counterclaim which the Company may have or assert against the Issuer, the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, the Paying Agent or any other Person.

        Section 4.5.    Assignment of Revenues and Agreement.    To secure the payment of Bond Service Charges, the Issuer shall, by the Indenture, (a) absolutely and irrevocably assign to the Trustee, its successors in trust and its and their assigns forever, all of the Issuer's rights and remedies under this Agreement (except for the Unassigned Issuer Rights), and (b) grant a security interest to the Trustee, its successors in trust and its and their assigns forever, in all of its rights to and interest in the Revenues including, without limitation, all Loan Payments and other amounts receivable by or on behalf of the Issuer under the Agreement in respect of repayment of the Loan. The Company hereby agrees and consents to those assignments and that grant of a security interest.

        Section 4.6.    Municipal Bond Insurance Policy; Liquidity Facility; Cancellation.    (a) The Company agrees to provide for the payment of the principal of and interest on the Bonds by causing the Municipal Bond Insurance Policy to be delivered to the Trustee on the date of the delivery of the Bonds.

        (b)  The Company may provide for the delivery of a Liquidity Facility.

        (c)  The Company may cancel any Liquidity Facility then in effect at such time and direct the Trustee in writing to surrender such Liquidity Facility to the Liquidity Facility Issuer by which it was issued in accordance with the Indenture; provided, that no such cancellation shall become effective and no such surrender shall take place until all Bonds subject to purchase pursuant to Section 4.07(d) of the Indenture have been so purchased or redeemed with the proceeds of such Liquidity Facility.

        Section 4.7.    Company's Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods.    The Company shall have, and is hereby granted, the option to elect to convert on any Conversion Date the interest rate borne by the Bonds to another Variable Rate or return to the Auction Rate, to be effective for a Rate Period pursuant to the provisions of Article II of the Indenture and subject to the terms and conditions set forth therein. The Company also shall have the option to direct the change of Auction Dates and/or the length of Auction Rate Periods in accordance with the Indenture. To exercise such options, the Company shall give the written notice required by the Indenture.

        Section 4.8.    Company's Obligation to Purchase Bonds.    The Company hereby agrees to pay or cause to be paid to the Trustee or the Paying Agent, on or before each day on which Bonds may be or are required to be tendered for purchase, amounts equal to the amounts to be paid by the Trustee or the Paying Agent with respect to the Bonds tendered for purchase on such dates pursuant to Article IV of the Indenture; provided, however, that the obligation of the Company to make any such payment under this Section shall be reduced by the amount of (A) moneys paid by the Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent, (B) moneys drawn under any Liquidity Facility, for the purpose of paying such purchase price and (C) other moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the Indenture.

(End of Article IV)

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ARTICLE V.

ADDITIONAL AGREEMENTS AND COVENANTS

        Section 5.1.    Right of Inspection.    The Company agrees that, subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Issuer and the Trustee and their or any of their respective duly authorized agents shall have the right at all reasonable times to enter upon the Project Site to examine and inspect the Projects.

        Section 5.2.    Maintenance.    The Company shall use its best efforts to keep and maintain the Project Facilities, including all appurtenances thereto and any personal property therein or thereon, in good repair and good operating condition so that the Project Facilities will continue to constitute Pollution Control Facilities or Solid Waste Disposal Facilities, for the purposes of the operation thereof as required by Section 5.4 hereof.

        So long as such shall not be in violation of the Act or impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities, and provided there is continued compliance with applicable laws and regulations of governmental entities having jurisdiction thereof, the Company shall have the right to remodel the Project Facilities or make additions, modifications and improvements thereto, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by the Company and the same shall, when made, become a part of the Project Facilities.

        Section 5.3.    Removal of Portions of the Project Facilities.    The Company shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project Facilities, except that, subject to Section 5.4 hereof, it will use its best efforts to ensure the continued character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities. The Company shall have the right from time to time to substitute personal property or fixtures for any portions of the Project Facilities, provided that the personal property or fixtures so substituted shall not impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities. Any such substituted property or fixtures shall, when so substituted, become a part of the Project Facilities. The Company shall also have the right to remove any portion of the Project Facilities, without substitution therefor; provided, that the Company shall deliver to the Trustee a certificate signed by an Engineer describing said portion of the Project Facilities and stating that the removal of such property or fixtures will not impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities.

        Section 5.4.    Operation of Project Facilities.    The Company will, subject to its obligations and rights to maintain, repair or remove portions of the Project Facilities, as provided in Sections 5.2 and 5.3 hereof, use its best efforts to continue operation of the Project Facilities so long as and to the extent that operation thereof is required to comply with laws or regulations of governmental entities having jurisdiction thereof or unless the Issuer shall have approved the discontinuance of such operation (which approval shall not be unreasonably withheld). The Company agrees that it will, within the design capacities thereof, use its best efforts to operate and maintain the Project Facilities in accordance with all applicable, valid and enforceable rules and regulations of governmental entities having jurisdiction thereof; provided, that the Company reserves the right to contest in good faith any such laws or regulations.

        Nothing in this Agreement shall prevent or restrict the Company, in its sole discretion, at any time, from discontinuing or suspending either permanently or temporarily its use of any facility of the Company served by the Project Facilities and in the event such discontinuance or suspension shall render unnecessary the continued operation of the Project Facilities, the Company shall have the right to discontinue the operation of the Project Facilities during the period of any such discontinuance or suspension.

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        Section 5.5.    Insurance.    The Company shall cause the Project Facilities to be kept insured against fire or other casualty to the extent that property of similar character is usually so insured by companies similarly situated and operating like properties, to a reasonable amount by reputable insurance companies or, in lieu of or supplementing such insurance in whole or in part, adopt some other method or plan of protection against loss by fire or other casualty at least equal in protection to the method or plan of protection against loss by fire or other casualty of companies similarly situated and operating properties subject to similar or greater fire or other hazards or on which properties an equal or higher primary fire or other casualty insurance rate has been set by reputable insurance companies.

        Section 5.6.    Workers' Compensation Coverage.    Throughout the term of this Agreement, the Company shall comply, or cause compliance, with applicable workers' compensation laws of the State.

        Section 5.7.    Damage; Destruction and Eminent Domain.    If, during the term of this Agreement, the Project Facilities or any portion thereof is destroyed or damaged in whole or in part by fire or other casualty, or title to, or the temporary use of, the Project Facilities or any portion thereof shall have been taken by the exercise of the power of eminent domain, the Company (unless it shall have exercised its option to prepay the Loan Payments pursuant to Section 6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project Facilities so damaged, destroyed or taken with such changes, alterations and modifications (including the substitution and addition of other property) as may be necessary or desirable for the administration and operation of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities and as shall not impair the character or significance of the Project Facilities as furthering the purposes of the Act.

        Section 5.8.    Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted.    The Company agrees that, during the term of this Agreement, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided that the Company may, without violating its agreement contained in this Section, consolidate with or merge into another corporation, or permit one or more other corporations to consolidate with or merge into it, or sell or otherwise transfer to another corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided the surviving, resulting or transferee corporation, as the case may be (if other than the Company), is a corporation organized and existing under the laws of one of the states of the United States, and assumes in writing all of the obligations of the Company herein, and, if not an Indiana corporation, is qualified to do business in the State.

        If consolidation, merger or sale or other transfer is made as provided in this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section.

        Section 5.9.    Indemnification.    The Company releases the Issuer from, agrees that the Issuer shall not be liable for, and indemnifies the Issuer against, all liabilities, claims, costs and expenses imposed upon or asserted against the Issuer on account of: (a) any loss or damage to property or injury to or death of or loss by any person that may be occasioned by any cause whatsoever pertaining to the construction, maintenance, operation and use of the Project Facilities; (b) any breach or default on the part of the Company in the performance of any covenant or agreement of the Company under this Agreement or any related document, or arising from any act or failure to act by the Company, or any of its agents, contractors, servants, employees or licensees; (c) the authorization, issuance and sale of the Bonds, and the provision of any information furnished in connection therewith concerning the Project Facilities or the Company (including, without limitation, any information furnished by the Company for inclusion in any certifications made by the Issuer under Section 3.4 hereof or for inclusion in, or as a basis for preparation of, the Form 8038 information statement to be filed by the

14

Issuer); and (d) any claim or action or proceeding with respect to the matters set forth in (a), (b) and (c) above brought thereon.

        The Company agrees to indemnify the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent, and the Registrar (each hereinafter referred to in this section as an "indemnified party") for and to hold each of them harmless against all liabilities, claims, costs and expenses incurred without negligence or willful misconduct on the part of the indemnified party, on account of any action taken or omitted to be taken by the indemnified party in accordance with the terms of this Agreement, the Bonds or the Indenture or any action taken at the request of or with the consent of the Company, including the costs and expenses of the indemnified party in defending itself against any such claim, action or proceeding brought in connection with the exercise or performance of any of its powers or duties under this Agreement, the Bonds or the Indenture.

        In case any action or proceeding is brought against the Issuer, or an indemnified party in respect of which indemnity may be sought hereunder, the party seeking indemnity promptly shall give notice of that action or proceeding to the Company, and the Company upon receipt of that notice shall have the obligation and the right to assume the defense of the action or proceeding; provided, that failure of a party to give that notice shall not relieve the Company from any of its obligations under this Section unless that failure prejudices the defense of the action or proceeding by the Company. At its own expense, an indemnified party may employ separate counsel and participate in the defense; provided, however, where it is ethically inappropriate for one firm to represent the interests of the Issuer, and any other indemnified party or parties, the Company shall pay the Issuer's legal expenses in connection with the Issuer's retention of separate counsel. The Company shall not be liable for any settlement made without its consent.

        The indemnification set forth above is intended to and shall include the indemnification of all affected officials, directors, officers and employees of the Issuer, the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent, and the Registrar, respectively. That indemnification is intended to and shall be enforceable by the Issuer, the Trustee, the Paying Agent, the Remarketing Agent and the Registrar, respectively, to the full extent permitted by law.

        Section 5.10.    Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes.    The Company hereby covenants and represents that it has taken and caused to be taken and shall take and cause to be taken all actions that may be required of it for the interest on the Bonds to be and remain excluded from the gross income of the Holders for federal income tax purposes, and that it has not taken or permitted to be taken on its behalf, and covenants that it will not take, or permit to be taken on its behalf, any action which, if taken, would adversely affect that exclusion under the provisions of the Code.

        Section 5.11.    Use of Project Facilities.    The Issuer agrees that it will not take any action, or cause any action to be taken on its behalf, to interfere with the Company's ownership interest in the Project or to prevent the Company from having possession, custody, use and enjoyment of the Project other than pursuant to Article VII of this Agreement or Article VII of the Indenture.

        Section 5.12.    Assignment by Company.    Notwithstanding any other provision of this Loan Agreement, this Agreement may be assigned in whole or in part by the Company and the Project may be sold or conveyed by the Company without the necessity of obtaining the consent of either the Issuer or the Trustee, subject, however, to each of the following conditions:

        (a)  The Company must provide the Trustee and the Remarketing Agent with an Opinion of Bond Counsel that such action will not affect the exclusion of interest on the Bonds for federal income tax purposes.

        (b)  The Bond Insurer must provide to the Trustee its written consent to such action.

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        (c)  The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Issuer and the Trustee a true and complete copy of each such assignment together with any instrument of assumption.

        (d)  Any assignment from the Company shall not materially impair fulfillment of the Project Purposes to be accomplished by operation of the Project as herein provided.

        Section 5.13.    The Depository Trust Company Letter of Representation.    The Company agrees that it shall cause the Trustee on behalf of the Issuer to fulfill the obligations set forth in the Depository Trust Company Letter of Representation for the Bonds.

(End of Article V)

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ARTICLE VI.

REDEMPTION

        Section 6.1.    Optional Redemption.    Provided no Event of Default shall have occurred and be subsisting, at any time and from time to time, the Company may deliver moneys to the Trustee in addition to Loan Payments or Additional Payments required to be made and direct the Trustee to use the moneys so delivered for the purpose of calling Bonds for optional redemption in accordance with the applicable provisions of the Indenture providing for optional redemption at the redemption price stated in the Indenture. Pending application for those purposes, any moneys so delivered shall be held by the Trustee in a special account in the Bond Fund and delivery of those moneys shall not, except as set forth in Section 4.1 hereof, operate to abate or postpone Loan Payments or Additional Payments otherwise becoming due or to alter or suspend any other obligations of the Company under this Agreement.

        Section 6.2.    Extraordinary Optional Redemption.    The Company shall have, subject to the conditions hereinafter imposed, the option during a Term Rate Period to direct the redemption of the Bonds in whole upon the occurrence of the event described below in paragraph (c) and in part upon the occurrence of the other events described below in accordance with the applicable provisions of the Indenture. In the event that any of the events described below affect less than all of the Project Facilities and the Generating Stations which they serve, the Bonds may be redeemed in an amount equal to the outstanding principal amount of the Bonds multiplied by the allocable percentage figure for each Project Facility, to-wit: 43.5% for Facility 1, 1% for Facility 2, 0% for Facility 3, 0% for Facility 4, 5% for Facility 5, 44.5% for Facility 6, 0% for Facility 7 and 6% for Facility 8.

        (a)  One or more of the Project Facilities or the Generating Stations which they serve shall have been damaged or destroyed to such an extent that (1) such Project Facilities or such Generating Stations cannot reasonably be expected to be restored, within a period of six consecutive months, to the condition thereof immediately preceding such damage or destruction or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of such Project Facilities or such Generating Stations for a period of six consecutive months.

        (b)  Title to, or the temporary use of, all or a significant part of one or more of the Project Facilities or the Generating Stations which they serve shall have been taken under the exercise of the power of eminent domain to such an extent (1) that such Project Facilities or such Generating Stations cannot reasonably be expected to be restored within a period of six consecutive months to a condition of usefulness comparable to that existing prior to the taking or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of such Project Facilities or such Generating Stations for a period of six consecutive months.

        (c)  As a result of any changes in the Constitution of the State, the Constitution of the United States of America or any state or federal laws or as a result of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after any contest thereof by the Issuer or the Company in good faith, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed in this Agreement.

        (d)  Unreasonable burdens or excessive liabilities shall have been imposed upon the Issuer or the Company with respect to one or more of the Project Facilities or the Generating Stations which they serve or the operation thereof, including, without limitation, the imposition of federal, state or other ad valorem, property, income or other taxes other than ad valorem taxes at the rates presently levied upon privately owned property used for the same general purpose as such Project Facilities or such Generating Stations.

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        (e)  Changes in the economic availability of raw materials, operating supplies, energy sources or supplies or facilities (including, but not limited to, facilities in connection with the disposal of industrial wastes) necessary for the operation of one or more of the Project Facilities or the Generating Stations which they serve for the Project Purposes occur or technological or other changes occur which the Company cannot reasonably overcome or control and which in the Company's reasonable judgment render such Project Facilities or such Generating Stations uneconomic or obsolete for the Project Purposes.

        (f)    Any court or administrative body shall enter a judgment, order or decree, or shall take administrative action, requiring the Company to cease all or any substantial part of its operations served by one or more of the Project Facilities or the Generating Stations which they serve to such extent that the Company is or will be prevented from carrying on its normal operations at such Project Facilities or such Generating Stations for a period of six consecutive months.

        (g)  The termination by the Company of operations at any of the Generating Stations which are served by any of the Project Facilities.

        The amount payable by the Company in the event of its exercise of the option granted in this Section shall be the sum of the following:

        (i)    An amount of money which, when added to the moneys and investments held to the credit of the Bond Fund, will be sufficient pursuant to the provisions of the Indenture to pay, at 100% of the principal amount thereof plus accrued interest to the redemption date, and discharge, all or such portion of Outstanding Bonds to be redeemed on the earliest applicable redemption date, that amount to be paid to the Trustee, plus

        (ii)  An amount of money equal to the Additional Payments relating to those Bonds accrued and to accrue until actual final payment and redemption of those Bonds, that amount or applicable portions thereof to be paid to the Trustee or to the Persons to whom those Additional Payments are or will be due.

The requirement of (ii) above with respect to Additional Payments to accrue may be met if provisions satisfactory to the Trustee and the Issuer are made for paying those amounts as they accrue.

        The rights and options granted to the Company in this Section may be exercised whether or not the Company is in default hereunder; provided, that such default will not relieve the Company from performing those actions which are necessary to exercise any such right or option granted hereunder.

        Section 6.3.    Mandatory Redemption.    The Company shall deliver to the Trustee the moneys needed to redeem the Bonds in accordance with any mandatory redemption provisions relating thereto as may be set forth in Sections 4.01(b) of the Indenture.

        Section 6.4.    Notice of Redemption.    In order to exercise an option granted in, or to consummate a redemption required by, this Article VI, the Company shall, within 180 days following the event authorizing the exercise of such option, or at any time during the continuation of the condition referred to in paragraphs (c), (d) or (e) of Section 6.2 hereof, or at any time that optional redemption of the Bonds is permitted under the Indenture as provided in Section 6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as defined in the Indenture), give written notice to the Issuer and the Trustee that it is exercising its option to direct the redemption of Bonds, or that the redemption thereof is required by Section 4.01(b) of the Indenture due to the occurrence of a Determination of Taxability, as the case may be, in accordance with the Agreement and the Indenture, and shall specify therein the date on which such redemption is to be made, which date shall not be more than 180 days from the date such notice is mailed. The Company shall make arrangements satisfactory to the Trustee for the giving of the required notice of redemption to the Holders of the Bonds, in which arrangements the Issuer shall cooperate.

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        Section 6.5.    Actions by Issuer.    At the request of the Company or the Trustee, the Issuer shall take all steps required of it under the applicable provisions of the Indenture or the Bonds to effect the redemption of all or a portion of the Bonds pursuant to this Article VI.

(End of Article VI)

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ARTICLE VII.

EVENTS OF DEFAULT AND REMEDIES

        Section 7.1.    Events of Default.    Each of the following shall be an Event of Default:

        (a)  The occurrence of an event of default as defined in Section 7.01 (a), (b), or (c) of the Indenture;

        (b)  The Company shall fail to observe and perform any other agreement, term or condition contained in this Agreement, other than such failure as will have resulted in an event of default described in (a) above and the continuation of that failure for a period of 90 days after notice thereof shall have been given to the Company by the Issuer or the Trustee, or for such longer period as the Issuer and the Trustee may agree to in writing; provided, that failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues that action to completion within 150 days after the expiration of initial cure period as determined above, or within such longer period as the Issuer and the Trustee may agree to in writing; and

        (c)  The receipt by the Trustee of written notice from the Bond Insurer that an event of default has occurred and is continuing under the Insurance Agreement; and

        (i)    By decree of a court of competent jurisdiction the Company shall be adjudicated a bankrupt, or an order shall be made approving a petition or answer filed seeking reorganization or readjustment of the Company under the federal bankruptcy laws or other law or statute of the United States of America or of the state of incorporation of the Company or of any other state, or, by order of such a court, a trustee in bankruptcy, a receiver or receivers shall be appointed of all or substantially all of the property of the Company, and any such decree or order shall have continued unstayed on appeal or otherwise and in effect for a period of sixty (60) days; or

        (ii)  The Company shall file a petition in voluntary bankruptcy or shall make an assignment for the benefit of creditors or shall consent to the appointment of a receiver or receivers of all or any part of its property, or shall file a petition seeking reorganization or readjustment under the Federal bankruptcy laws or other law or statute of the United States of America or any state thereof, or shall file a petition to take advantage of any debtors' act.

        Notwithstanding the foregoing, if, by reason of Force Majeure, the Company is unable to perform or observe any agreement, term or condition hereof which would give rise to an Event of Default under subsection (b) hereof, the Company shall not be deemed in default during the continuance of such inability. However, the Company shall promptly give notice to the Trustee and the Issuer of the existence of an event of Force Majeure and shall use its best efforts to remove the effects thereof; provided that the settlement of strikes or other industrial disturbances shall be entirely within its discretion.

        The exercise of remedies hereunder shall be subject to any applicable limitations of federal bankruptcy law affecting or precluding that declaration or exercise during the pendency of or immediately following any bankruptcy, liquidation or reorganization proceedings.

        Section 7.2.    Remedies on Default.    Whenever an Event of Default shall have happened and be subsisting, either or both of the following remedial steps may be taken:

        (a)  The Issuer or the Trustee may have access to, inspect, examine and make copies of the books, records, accounts and financial data of the Company, only, however, insofar as they pertain to the Project; or

        (b)  The Issuer or the Trustee may pursue all remedies now or hereafter existing at law or in equity to recover all amounts, including all Loan Payments and Additional Payments and under

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Section 4.8 hereof the purchase price of Bonds tendered for purchase, then due and thereafter to become due under this Agreement, or to enforce the performance and observance of any other obligation or agreement of the Company under this Agreement.

        Notwithstanding the foregoing, the Issuer shall not be obligated to take any step which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until a satisfactory indemnity bond has been furnished to the Issuer at no cost or expense to the Issuer. Any amounts collected as Loan Payments or applicable to Loan Payments and any other amounts which would be applicable to payment of Bond Service Charges collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture or, if the outstanding Bonds have been paid and discharged in accordance with the provisions of the Indenture, shall be paid as provided in Section 5.07 of the Indenture for transfers of remaining amounts in the Bond Fund.

        The provisions of this Section are subject to the further limitation that the rescission and annulment by the Trustee of its declaration that all of the Bonds are immediately due and payable also shall constitute a rescission and annulment of any corresponding declaration made pursuant to this Section and a rescission and annulment of the consequences of that declaration and of the Event of Default with respect to which that declaration has been made, provided that no such rescission and annulment shall extend to or affect any subsequent or other default or impair any right consequent thereon.

        Section 7.3.    No Remedy Exclusive.    No remedy conferred upon or reserved to the Issuer or the Trustee by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair that right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than any notice required by law or for which express provision is made herein.

        Section 7.4.    Agreement to Pay Attorneys' Fees and Expenses.    If an Event of Default should occur and the Issuer or the Trustee should incur expenses, including attorneys' fees, in connection with the enforcement of this Agreement or the collection of sums due hereunder, the Company shall be required, to the extent permitted by law, to reimburse the Issuer and the Trustee, as applicable, for the expenses so incurred upon demand.

        Section 7.5.    No Waiver.    No failure by the Issuer or the Trustee to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of their right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof.

        Section 7.6.    Notice of Default.    The Company shall notify the Trustee and the Bond Insurer immediately if it becomes aware of the occurrence of any Event of Default hereunder or of any fact, condition or event which, with the giving of notice or passage of time or both, would become an Event of Default.

(End of Article VII)

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ARTICLE VIII.

MISCELLANEOUS

        Section 8.1.    Term of Agreement.    This Agreement shall be and remain in full force and effect from the date of delivery of the Bonds to the Original Purchaser until such time as (i) all of the Bonds shall have been fully paid (or provision made for such payment) and the Indenture has been released pursuant to Section 9.01 thereof and (ii) all other sums payable by the Company under this Agreement shall have been paid; provided, however, the obligations of the Company under Sections 4.2 and 5.9 hereof shall survive any termination of this Agreement.

        Section 8.2.    Amounts Remaining in Funds.    Any amounts in the Bond Fund remaining unclaimed by the Holders of Bonds for four years after the due date thereof (whether at stated maturity, by redemption, upon acceleration or otherwise), at the option of the Company, shall be deemed to belong to and shall be paid, subject to Section 5.06 of the Indenture, at the written request of the Company, to the Company by the Trustee. With respect to that principal of and any premium and interest on the Bonds to be paid from moneys paid to the Company pursuant to the preceding sentence, the Holders of the Bonds entitled to those moneys shall look solely to the Company for the payment of those moneys. Further, any amounts remaining in the Bond Fund and any other special funds or accounts created under this Agreement or the Indenture, except the Rebate Fund, after all of the Bonds shall be deemed to have been paid and discharged under the provisions of the Indenture and all other amounts required to be paid under this Agreement and the Indenture have been paid, shall be paid to the Company to the extent that those moneys are in excess of the amounts necessary to effect the payment and discharge of the Outstanding Bonds.

        Section 8.3.    Notices.    All notices, certificates, requests or other communications hereunder shall be in writing, except as provided in Section 3.4 hereof, and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Issuer, the Company, the Bond Insurer or the Trustee shall also be given to the others. The Company, the Issuer, the Bond Insurer and the Trustee, by notice given hereunder, may designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent.

        Section 8.4.    Extent of Covenants of the Issuer; No Personal Liability.    All covenants, obligations and agreements of the Issuer contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future member, officer, agent or employee of the Issuer in other than his official capacity, and neither the members of the Issuer nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or by reason of the covenants, obligations or agreements of the Issuer contained in this Agreement or in the Indenture.

        Section 8.5.    Binding Effect.    This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Issuer, the Company and their respective permitted successors and assigns provided that this Agreement may not be assigned by the Company (except as permitted under Sections 5.8 or 5.12 hereof) and may not be assigned by the Issuer except to (i) the Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or secure payment of Bond Service Charges or (ii) any successor public body to the Issuer.

        Section 8.6.    Amendments and Supplements.    Except as otherwise expressly provided in this Agreement or the Indenture, subsequent to the issuance of the Bonds and prior to all conditions provided for in the Indenture for release of the Indenture having been met, this Agreement may not be effectively amended, changed, modified, altered or terminated by the parties hereto except with the

22

consents required by, and in accordance with, the provisions of Article XI of the Indenture, as applicable.

        Section 8.7.    Execution Counterparts.    This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument.

        Section 8.8.    Severability.    If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a judicial or administrative authority to be invalid or unenforceable, that determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law.

        Section 8.9.    Governing Law.    This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State.

(End of Article VIII)

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        IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be duly executed in their respective names, all as of the date hereinbefore written.

	INDIANA DEVELOPMENT FINANCE AUTHORITY
	By:	/s/  THOMAS F. MCKENNA Thomas F. McKenna, Designee of Lt. Governor—Authorized Signatory
Attest:
/s/  CALVIN KELLY Calvin Kelly, Acting Executive Director
[Issuer's Signature Page to Loan Agreement]

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	PSI ENERGY, INC.
	By:	/s/  WENDY L. AUMILLER Treasurer
[Borrower's Signature Page to Loan Agreement]

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EXHIBIT A

Project

DESCRIPTION OF SOLID WASTE DISPOSAL AND
POLLUTION CONTROL FACILITIES

        The Project as amended is comprised of the following Solid Waste Disposal Facilities and Pollution Control Facilities constructed and installed in connection with the following Generating Stations.

Facility 1 —	Flue gas desulfurization system and sludge fixation system for Gibson Generating Station, Unit 5, including facilities for transport of fly ash for sludge fixation purposes and modifications and upgrades to the Company's undivided ownership interest in the Gibson Generating Station, Unit 5, ash handling and sludge disposal system.
Facility 2 —	An ash sluice pump, ash pond dike addition and an irrigation system functionally related and subordinate to the ash handling and disposal system for the Cayuga Generating Station.
Facility 3 —	Surfacing of loading area for loading of unregenerated spent resin on industrial vacuum trucks for the disposal of the unregenerated spend resin for the Cayuga Generating Station.
Facility 4 —	The discrete portions of the demineralizer used in the regeneration of spent resin or the Edwardsport Generating Station.
Facility 5 —	Miscellaneous improvements to the ash handling and disposal system for the Gallagher Generating Station, including the replacement of insulation on Units No. 1, No. 2 and No. 4 economizer hoppers, replacement of Unit No. 1, No. 2 and No. 4 economizer dust lines, replacement of ash sluice pumps and replacement of low pressure service water pumps for Units 1, 2, 3 and 4.
Facility 6 —	Miscellaneous improvements to and expansion of ash handling and disposal facilities for the Gibson Generating Station, including the acquisition of land and construction of a 500 acre ash storage pond for Unit 5, replacement of ash sluice 2B pump, motor, coupling and monitoring relay for Unit 2, replacement of ash sluice 4A pump and extensions of existing ash transport lines for Unit 4, and improvements and modifications of fly ash disposal equipment for Unit 1 and Unit 2.
Facility 7 —	Addition to landfill aggregate materials building for housing of solid waste transport and disposal equipment for the Gibson Generating Station Unit 5.
Facility 8 —	Miscellaneous improvements to and expansion of ash handling and disposal facilities for the Wabash River Generating Station, including an ash hopper modifications for Wabash River Generating Station, Units 1-6.

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Exhibit 4-TTT

EX-4.UUU

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Exhibit 4-UUU

LOAN AGREEMENT

between

INDIANA DEVELOPMENT FINANCE AUTHORITY

and

PSI ENERGY, INC.

$24,600,000
Indiana Development Finance Authority
Environmental Refunding
Revenue Bonds, Series 2002B
(PSI Energy, Inc. Project)

Dated

as of

September 1, 2002

TABLE OF CONTENTS

		Page
ARTICLE I.	DEFINITIONS	2
Section 1.1.	Use of Defined Terms	2
Section 1.2.	Definitions	2
Section 1.3.	Interpretation	4
Section 1.4.	Captions and Headings	5
ARTICLE II.	REPRESENTATIONS	6
Section 2.1.	Representations of the Issuer	6
Section 2.2.	No Warranty by Issuer of Condition or Suitability of the Project	6
Section 2.3.	Representations and Covenants of the Company	6
ARTICLE III.	COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS	9
Section 3.1.	Acquisition, Construction and Installation	9
Section 3.2.	Project Description	9
Section 3.3.	Issuance of the Bonds; Application of Proceeds	9
Section 3.4.	Investment of Fund Moneys	9
Section 3.5.	Rebate Fund	10
ARTICLE IV.	LOAN BY ISSUER; LOAN PAYMENTS; ADDITIONAL PAYMENTS; MUNICIPAL BOND INSURANCE POLICY AND LIQUIDITY FACILITY	11
Section 4.1.	Loan Repayment	11
Section 4.2.	Additional Payments	11
Section 4.3.	Place of Payments	11
Section 4.4.	Obligations Unconditional	11
Section 4.5.	Assignment of Revenues and Agreement	12
Section 4.6.	Municipal Bond Insurance Policy; Liquidity Facility; Cancellation	12
Section 4.7.	Company's Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods	12
Section 4.8.	Company's Obligation to Purchase Bonds	12
ARTICLE V.	ADDITIONAL AGREEMENTS AND COVENANTS	13
Section 5.1.	Right of Inspection	13
Section 5.2.	Maintenance	13
Section 5.3.	Removal of Portions of the Project Facilities	13
Section 5.4.	Operation of Project Facilities	13
Section 5.5.	Insurance	13
Section 5.6.	Workers' Compensation Coverage	14
Section 5.7.	Damage; Destruction and Eminent Domain	14
Section 5.8.	Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted	14
Section 5.9.	Indemnification	14
Section 5.10.	Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes	15
Section 5.11.	Use of Project Facilities	15
Section 5.12.	Assignment by Company	15
Section 5.13.	The Depository Trust Company Letter of Representation	16

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ARTICLE VI.	REDEMPTION	17
Section 6.1.	Optional Redemption	17
Section 6.2.	Extraordinary Optional Redemption	17
Section 6.3.	Mandatory Redemption	18
Section 6.4.	Notice of Redemption	18
Section 6.5.	Actions by Issuer	18
ARTICLE VII.	EVENTS OF DEFAULT AND REMEDIES	19
Section 7.1.	Events of Default	19
Section 7.2.	Remedies on Default	19
Section 7.3.	No Remedy Exclusive	20
Section 7.4.	Agreement to Pay Attorneys' Fees and Expenses	20
Section 7.5.	No Waiver	20
Section 7.6.	Notice of Default	20
ARTICLE VIII.	MISCELLANEOUS	21
Section 8.1.	Term of Agreement	21
Section 8.2.	Amounts Remaining in Funds	21
Section 8.3.	Notices	21
Section 8.4.	Extent of Covenants of the Issuer; No Personal Liability	21
Section 8.5.	Binding Effect	21
Section 8.6.	Amendments and Supplements	21
Section 8.7.	Execution Counterparts	22
Section 8.8.	Severability	22
Section 8.9.	Governing Law	22

ii

LOAN AGREEMENT

        THIS LOAN AGREEMENT is made and entered into as of September 1, 2002 between the INDIANA DEVELOPMENT FINANCE AUTHORITY (the "Issuer"), a separate body corporate and politic organized and existing under the laws of the State of Indiana, and PSI ENERGY, INC. (the "Company"), a public utility and corporation duly organized and validly existing under the laws of the State of Indiana. Capitalized terms used in the following recitals are used as defined in Article I of this Agreement.

        Pursuant to Indiana Code, Title 4, Article 4, Chapters 10.9 and 11 (collectively, the "Act"), the Issuer has determined to issue, sell and deliver the Bonds, and to lend the proceeds derived from the sale thereof to the Company to assist in the refunding of the Refunded Bonds as defined below. The Refunded Bonds were issued to provide funds to make a loan to the Company to assist in the refinancing of its portion of the costs of the Project as defined below.

        The Company and the Issuer each have full right and lawful authority to enter into this Agreement and to perform and observe the provisions hereof on their respective parts to be performed and observed.

        NOW THEREFORE, in consideration of the premises and the mutual representations and agreements hereinafter contained, the Issuer and the Company agree as follows (provided that any obligation of the Issuer or the State created by or arising out of this Agreement shall never constitute a general debt of the Issuer or the State or give rise to any pecuniary liability of the Issuer or the State but shall be payable solely out of Revenues):

ARTICLE I.

DEFINITIONS

        Section 1.1.    Use of Defined Terms.    In addition to the words and terms defined elsewhere in this Agreement, the Indenture or by reference to another document, the words and terms set forth in Section 1.2 hereof shall have the meanings set forth therein unless the context or use clearly indicates another meaning or intent. Such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms defined therein.

        Section 1.2.    Definitions.    As used herein:

        "Additional Payments" means the amounts required to be paid by the Company pursuant to the provisions of Section 4.2 hereof.

        "Administration Expenses" means the compensation (which compensation shall not be greater than that typically charged in similar circumstances) and reimbursement of reasonable expenses and advances payable to the Trustee, the Registrar, the Remarketing Agent, the Broker-Dealer, the Auction Agent, any Paying Agent and any Authenticating Agent.

        "Agreement" means this Loan Agreement, as amended or supplemented from time to time.

        "Engineer" means an engineer (who may be an employee of the Company) or engineering firm qualified to practice the profession of engineering under the laws of the State and who or which is acceptable to the Trustee.

        "EPA" means the Department of Environmental Management of the State and any successor body, agency, commission or department.

        "Event of Default" means any of the events described as an Event of Default in Section 7.1 hereof.

        "Force Majeure" means any of the following:

        (i)    acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornados; storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, nuclear accidents or other malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of a utility serving the Project; shortages of labor, materials, supplies or transportation; or

        (ii)  any cause, circumstance or event not reasonably within the control of the Company.

        "Generating Station" means the Gibson Generating Station.

        "Indenture" means the Trust Indenture related to the Bonds, dated as of the same date as this Agreement, between the Issuer and the Trustee, as amended or supplemented from time to time.

        "Insurance Agreement" means the Insurance Agreement related to the Bonds, dated as of the same date as this Agreement, between the Company and the Bond Insurer, as amended or supplemented from time to time.

        "Interest Rate for Advances" means the interest rate per year payable on the Bonds.

        "Loan" means the loan by the Issuer to the Company of the proceeds received from the sale of the Bonds.

        "Loan Payment Date" means any date on which any Bond Service Charges are due and payable.

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        "Loan Payments" means the amounts required to be paid by the Company in repayment of the Loan pursuant to Section 4.1 hereof.

        "1954 Code" means the Internal Revenue Code of 1954 as amended from time to time through the date of enactment of the Code. References to the 1954 Code and Sections of the 1954 Code include relevant applicable regulations (including temporary regulations) and proposed regulations thereunder and any successor provisions to those Sections, regulations or proposed regulations.

        "Notice Address" means:

(a)    As to the Issuer:	Indiana Development Finance Authority One North Capitol, Suite 320 Indianapolis, Indiana 46204 Attention: Executive Director
(b)    As to the Company:	PSI Energy, Inc. 139 East Fourth Street Cincinnati, Ohio 45202 Attention: Treasurer
(c)    As to the Trustee:	Fifth Third Bank, Indiana Fifth Third Center 38 Fountain Square Cincinnati, Ohio 45263 Attention: Corporate Trust Administration

or such additional or different address, notice of which is given under Section 8.3 hereof.

        "Original Bonds" means, collectively, the Series 1973 Bonds and the Series 1979 Bonds.

        "Person" or words importing persons mean firms, associations, partnerships (including without limitation, general and limited partnerships), limited liability entities, joint ventures, societies, estates, trusts, corporations, public or governmental bodies, other legal entities and natural persons.

        "Pollution Control Facility" or "Pollution Control Facilities" means those facilities which are pollution control facilities as defined in Section 24 of Chapter 10.9 of the Act and those facilities described in Section 103(b)(4)(F) of the Internal Revenue Code of 1954, as amended, and the final, proposed and temporary regulations promulgated thereunder and other administrative authority in effect.

        "Prior Bonds" means the Original Bonds and the Refunded Bonds.

        "Project" or "Project Facilities" means the real, personal or real and personal property, including undivided or other interests therein, identified in the Project Description, financed with the proceeds of the Original Bonds.

        "Project Description" means collectively the description of the Project Facilities originally financed with the proceeds of the Original Bonds, attached hereto as Exhibit A.

        "Project Purposes" means the purposes of Pollution Control Facilities as described in the Act and as particularly described in Exhibit Ahereto.

        "Project Site" means the Gibson Generating Station, Highway 64 West, Gibson County, Indiana.

        "Refunded Bonds" means the City of Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1996 Series (PSI Energy, Inc. Project).

3

        "Refunded Bonds Indenture" means the Trust Indenture dated as of November 1, 1996 between the City of Princeton, Indiana and Fifth Third Bank, Indiana (as successor to The Fifth Third Bank of Central Indiana).

        "Refunded Bonds Loan Agreement" means the Loan Agreement dated as of November 1, 1996 between the City of Princeton, Indiana and the Company.

        "Refunded Bonds Trustee" means Fifth Third Bank, Indiana (as successor to The Fifth Third Bank of Central Indiana), as trustee under the Refunded Bonds Indenture.

        "Revenues" means (a) the Loan Payments, (b) all other moneys received or to be received by the Issuer (excluding any fees paid to the Issuer) or the Trustee in respect of repayment of the Loan, including without limitation, all moneys and investments in the Bond Fund, (c) any moneys and investments in the Refunding Fund, and (d) all income and profit from the investment of the foregoing moneys. The term "Revenues" does not include any moneys or investments in the Rebate Fund or the Bond Purchase Fund.

        "Series 1973 Bonds" means the City of Princeton, Indiana Pollution Control Revenue Bonds, 1973 Series (Public Service Company of Indiana, Inc. Project A).

        "Series 1973 Indenture" means the Trust Indenture dated as of December 15, 1973 between American Fletcher National Bank & Trust Company, as predecessor to Bank One, Indianapolis, NA and Bank One Trust Company, NA.

        "Series 1973 Loan Agreement" means the Loan Agreement dated as of December 15, 1973 between the City of Princeton, Indiana and Public Service Company of Indiana, Inc., as predecessor to PSI Energy, Inc.

        "Series 1979 Bonds" means the City of Princeton, Indiana Pollution Control Revenue Bonds, 1979 Series (Public Service Company of Indiana, Inc. Project B).

        "Series 1979 Indenture" means the Trust Indenture dated as of March 1, 1979 between American Fletcher National Bank & Trust Company, as predecessor to Bank One, Indianapolis, NA and Bank One Trust Company, NA.

        "Series 1979 Loan Agreement" means the Loan Agreement dated as of March 1, 1979 between the City of Princeton, Indiana and Public Service Company of Indiana, Inc., as predecessor to PSI Energy, Inc.

        "State" means the State of Indiana.

        "Trustee" means Fifth Third Bank, Indiana located in Indianapolis, Indiana, a corporation duly organized and validly existing under the laws of the State, until a successor Trustee shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Trustee" shall mean the successor Trustee. "Principal Office" of the Trustee shall mean the principal corporate trust office of the Trustee, which office at the date of issuance of the Bonds is located at its Notice Address.

        "Unassigned Issuer Rights" means all of the rights of the Issuer to receive Additional Payments under Section 4.2 hereof, to inspection pursuant to Section 5.1 hereof, to be held harmless and indemnified under Section 5.9 hereof, to be reimbursed for attorney's fees and expenses under Section 7.4 hereof and to give or withhold consent to amendments, changes, modifications, alterations and termination of this Agreement under Section 8.6 hereof and its right to enforce such rights.

        Section 1.3.    Interpretation.    Any reference herein to the State, to the Issuer or to any member or officer of either includes entities or officials succeeding to their respective functions, duties or responsibilities pursuant to or by operation of law or lawfully performing their functions.

4

        Any reference to a section or provision of the Constitution of the State or the Act, or to a section, provision or chapter of the Indiana Code, or to any statute of the United States of America, includes that section, provision or chapter as amended, modified, revised, supplemented or superseded from time to time; provided, that no amendment, modification, revision, supplement or superseding section, provision or chapter shall be applicable solely by reason of this provision, if it constitutes in any way an impairment of the rights or obligations of the Issuer, the State, the Holders, the Trustee, the Registrar, the Auction Agent, an Authenticating Agent, a Paying Agent, the Bond Insurer, the Remarketing Agent, or the Company under this Agreement, the Indenture or the Bonds.

        Unless the context indicates otherwise, words importing the singular number include the plural number, and vice versa; the terms "hereof", "hereby", "herein", "hereto", "hereunder" and similar terms refer to this Agreement; and the term "hereafter" means after, and the term "heretofore" means before, the date of delivery of the Bonds. Words of any gender include the correlative words of the other genders, unless the sense indicates otherwise.

        Section 1.4.    Captions and Headings.    The captions and headings in this Agreement are used solely for convenience of reference and in no way define, limit or describe the scope or intent of any Articles, Sections, subsections, paragraphs or subparagraphs or clauses hereof.

(End of Article I)

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ARTICLE II.

REPRESENTATIONS

        Section 2.1.    Representations of the Issuer.    The Issuer represents that: (a) it is a body corporate and politic duly organized and validly existing under the laws of the State; (b) it has duly accomplished all conditions necessary to be accomplished by it prior to the issuance and delivery of the Bonds and the execution and delivery of this Agreement and the Indenture; (c) it is not in violation of or in conflict with any provisions of the laws of the State which would impair its ability to carry out its obligations contained in this Agreement or the Indenture; (d) it is empowered to enter into the transactions contemplated by this Agreement and the Indenture; (e) it has duly authorized the execution, delivery and performance of this Agreement and the Indenture; (f) it will do all things in its power in order to maintain its existence or assure the assumption of its obligations under this Agreement and the Indenture by any successor municipal corporation; and (g) following reasonable notice, a public hearing was held on August 20, 2002 with respect to the issuance of the Bonds as required by Section 147(f) of the Code.

        Section 2.2.    No Warranty by Issuer of Condition or Suitability of the Project.    The Issuer makes no warranty, either express or implied, as to the suitability or utilization of the Project for the Project Purposes, or as to the condition of the Project Facilities or that the Project Facilities are or will be suitable for the Company's purposes or needs.

        Section 2.3.    Representations and Covenants of the Company.    The Company represents that:

        (a)  The Company has been duly incorporated and is validly existing as a corporation under the laws of the State, with power and authority (corporate and other) to own its properties and conduct its business, to execute and deliver this Agreement and to perform its obligations under this Agreement.

        (b)  This Agreement has been duly authorized, executed and delivered by the Company and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.

        (c)  The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby will not violate any provision of law or regulation applicable to the Company, or of any writ or decree of any court or governmental instrumentality, or of the Amended Articles of Consolidation, as amended, or the By-laws of the Company, or of any mortgage, indenture, contract, agreement or other undertaking to which the Company is a party or which purports to be binding upon the Company or upon any of its assets.

        (d)  The Project constitutes and will constitute either land or property of a character subject to the allowance for depreciation for purposes of the Code, and all expenditures for the cost of constructing the Project have been charged to a capital account for federal income tax purposes (or would have been so charged either with or but for a proper election to deduct such amounts).

        (e)  No portion of the Project had been acquired and placed in operation at substantially the level for which it was designed for more than one year prior to the date of delivery of the Original Bonds series which financed such portion of the Project.

        (f)    The weighted average maturity of the Bonds does not exceed 120% of the average economic life of the Project Facilities originally financed by the Original Bonds (determined under Section 147(b) of the Code).

        (g)  The Project has been and will be used wholly to control pollution and dispose of solid waste and sewage and was designed for no significant purpose other than pollution control and disposal of solid waste and sewage, and the Project was not designed to result in an increase in production or

6

capacity, in a material extension of the useful life of the Generating Stations or, in the case of the portions of the Project which are Pollution Control Facilities, in the recovery of by-products of any substantial value.

        (h)  Substantially all (at least 90%) of the proceeds of each of the Series 1973 Bonds and the Series 1979 Bonds were used to provide "pollution control facilities" within the meaning of Section 103(b)(4)(F) of the 1954 Code, the original use of which facilities commenced with the Company, and which facilities were described in inducement resolutions adopted by the Issuer on August 27, 1973 with respect to those facilities financed with the proceeds of the Series 1973 Bonds and on January 19, 1976 with respect to those facilities financed with the proceeds of the Series 1979 Bonds. Construction of the cooling lake financed with the proceeds of the Series 1973 Bonds were commenced by the Company prior to August 31, 1972 and such cooling lake was not placed in service by the Company prior to August 27, 1973. Construction of the other pollution control facilities financed with the proceeds of the Series 1973 Bonds and the construction of the pollution control facilities financed with the proceeds of the Series 1979 Bonds was not commenced prior to August 27, 1973 and January 19, 1976, respectively. All of the proceeds of the Series 1973 Bonds have been spent for the Series 1973 Bonds portion of the Project pursuant to the Series 1973 Loan Agreement or to pay costs of issuance of the Series 1973 Bonds, and all of the proceeds of the Series 1979 Bonds have been spent for the Series 1979 Bonds portion of the Project pursuant to the Series 1979 Loan Agreement or to pay costs of issuance of the Series 1979 Bonds. The proceeds of the Refunded Bonds (other than any accrued interest thereon) were used exclusively to refund the Original Bonds; any investment earnings on such proceeds of the Refunded Bonds were used to pay principal, premium or interest on the Original Bonds; and none of the proceeds of the Refunded Bonds was used to pay for any costs of issuance of the Refunded Bonds. The principal amount of the Refunded Bonds did not exceed the then outstanding principal amount of the Original Bonds. The proceeds of the Refunded Bonds were used to retire the Original Bonds not later than 90 days after the date of issuance of the Refunded Bonds. The proceeds of the Bonds (other than any accrued interest thereon) will be used exclusively to refund the Refunded Bonds; any investment earnings thereon will be used to pay principal, premium or interest on the Refunded Bonds; and none of the proceeds of the Bonds will be used to pay for any costs of issuance of the Bonds. The principal amount of the Bonds does not exceed the outstanding principal amount of the Refunded Bonds. The proceeds of the Bonds will be used to retire the Refunded Bonds not later than 90 days after the date of issuance of the Bonds.

        (i)    It has caused the Project to be substantially completed. The Project constitutes Pollution Control Facilities under the Act and is consistent with the purposes of the Act. The Project is being, and the Company will cause the Project to be, operated and maintained in such manner to conform with all applicable zoning, planning, building, environmental and other applicable governmental regulations and all permits, variances and orders issued or granted pursuant thereto, including the permit-to-install for the Project, which permits, variances and orders have not been withdrawn or otherwise suspended, and to be consistent with the Act.

        (j)    It has used or operated or has caused to be used or operated, and presently intends to use or operate or cause to be used or operated the Project Facilities in a manner consistent with the Project Purposes until the date on which the Bonds have been fully paid and knows of no reason why the Project Facilities will not be so operated. The Company does not intend to sell or otherwise dispose of the Project or any portion thereof.

        (k)  None of the proceeds of each of the Prior Bonds was used and none of the proceeds of the Bonds will be used to provide any airplane, skybox or other private luxury box, or health club facility, any facility primarily used for gambling or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

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        (l)    Less than 25% of the proceeds of each of the Prior Bonds was used to acquire land or any interest therein, and none of such proceeds was used to provide land which was used for farming purposes.

        (m)  None of the proceeds of each of the Prior Bonds was used to acquire existing property or any interest therein unless the first use of such property was by the Company and was pursuant to and followed such acquisition.

        (n)  At no time will any funds constituting gross proceeds of the Bonds be used in a manner as would constitute failure of compliance with Section 148 of the Code.

        (o)  The Prior Bonds were not, and the Bonds will not be, "federally guaranteed" within the meaning of Section 149(b) of the Code.

        (p)  It is not anticipated that as of the date hereof, there will be created any "replacement proceeds", within the meaning of Section 1.148-1(c) of the Treasury Regulations, with respect to the Bonds; however, in the event that any such replacement proceeds are deemed to have been created, such amounts will be invested in compliance with Section 148 of the Code.

        (q)  On the date of issuance and delivery of each of the Prior Bonds, the Company reasonably expected that at least 85% of the respective spendable proceeds of each of the Prior Bonds would be expended to carry out the respective governmental purpose of each such issue within the 3-year period beginning on the issue date of such issue and the Company reasonably expected that the proceeds of each of the Prior Bonds would be spent in accordance with the spending requirements of Section 149(g)(2) of the Code. The spendable proceeds of each of the Prior Bonds have been fully expended prior to the date of issuance of the Bonds. The proceeds of each of the Prior Bonds series were not invested in nonpurpose investments having a substantially guaranteed yield for four years or more.

        (r)  The information furnished by the Company and used by the issuer in preparing the certifications and statements pursuant to Sections 148 and 149(e) of the Code or their statutory predecessors with respect to each of the Prior Bonds was accurate and complete as of the respective date of issuance thereof, and the information furnished by the Company and used by the Issuer in preparing the certification pursuant to Section 148 of the Code and in preparing the information statement pursuant to Section 149(e) of the Code, both referred to in the Bond Resolution, will be accurate and complete as of the date of issuance of the Bonds.

        (s)  The Project Facilities do not include any office except for offices (i) located on the Project Site and (ii) not more than a de minimis amount of the functions to be performed at which is not directly related to the day-to-day operations of the Project Facilities.

(End of Article II)

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ARTICLE III.

COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS

        Section 3.1.    Acquisition, Construction and Installation.    The Company represents that it has caused the Project Facilities to be acquired, constructed and installed on the respective Project Sites, substantially in accordance with the Project Description and in conformance with all applicable zoning, planning, building and other similar regulations of all governmental authorities having jurisdiction over the Project and all permits, variances and orders issued in respect of the Project by EPA, and that the proceeds derived from the Original Bonds and Refunded Bonds, including any investment thereof, were expended in accordance with the respective Series 1973 Indenture or respective Series 1973 Loan Agreement, Series 1979 Indenture or Series 1979 Loan Agreement, or Refunded Bonds Indenture and the Refunded Bonds Loan Agreement.

        Section 3.2.    Project Description.    The Project Description may be changed from time to time by, or with the consent of, the Company provided that any such change shall also be filed with the Issuer and provided further that no change in the Project Description shall materially change the function of the Project Facilities unless the Trustee shall have received (i) an Engineer's certificate that such changes will not impair the significance or character of the Project Facilities as Pollution Control Facilities and (ii) an Opinion of Bond Counsel or ruling of the Internal Revenue Service to the effect that such amendment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes.

        Section 3.3.    Issuance of the Bonds; Application of Proceeds.    To provide funds to make the Loan to the Company to assist the Company in the refunding of the Refunded Bonds, the Issuer will issue, sell and deliver the Bonds to the Original Purchaser. The Bonds will be issued pursuant to the Indenture in the aggregate principal amount, will bear interest, will mature and will be subject to redemption as set forth therein. The Company hereby approves the terms and conditions of the Indenture and the Bonds, and the terms and conditions under which the Bonds will be issued, sold and delivered.

        The Company hereby requests that the Issuer notify the Refunded Bonds Trustee (unless the Refunded Bonds Trustee has already received such notice), pursuant to the Refunded Bonds Indenture, that the entire outstanding principal amount of the Refunded Bonds is to be redeemed on October 1, 2002 at a redemption price of 100% of the principal amount thereof plus accrued interest to that redemption date.

        The proceeds from the sale of the Bonds (other than any accrued interest) shall be loaned to the Company to assist the Company in refunding the Refunded Bonds in order to reduce the interest cost payable by the Company; those proceeds shall be deposited in the Refunding Fund. On October 1, 2002, all moneys on deposit in the Refunding Fund shall be disbursed by the Trustee as provided in Section 5.02 of the Indenture to the Refunded Bonds Trustee for deposit in the Bond Fund created in the Refunded Bonds Indenture and applied by the Refunded Bonds Trustee to the payment of principal of and interest on the Refunded Bonds on October 1, 2002. The Company shall pay to the Refunded Bonds Trustee prior to the date of redemption of such series of Refunded Bonds such additional amounts as shall be required to pay in full on such date the entire amount of principal of, premium and interest due on the Refunded Bonds.

        Pending disbursement pursuant to this Section, the proceeds so deposited in the Refunding Fund, together with any investment earnings thereon, shall constitute a part of the Revenues assigned by the Issuer to the Trustee for the payment of Bond Service Charges. Any accrued interest shall be deposited in the Bond Fund.

        Section 3.4.    Investment of Fund Moneys.    At the oral (confirmed promptly in writing) or written request of the Company, any moneys held as part of the Bond Fund, the Refunding Fund or the

9

Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments; provided, that such moneys shall be invested or reinvested by the Trustee only in Eligible Investments which shall mature, or which shall be subject to redemption by the holder thereof at the option of such holder, not later than the date upon which the moneys so invested are needed to make payments from those Funds. The Issuer (to the extent it retained or retains direction or control) and the Company each hereby represents that the investment and reinvestment and the use of the proceeds of the Refunded Bonds were restricted in such manner and to such extent as was necessary so that the Refunded Bonds would not constitute arbitrage bonds under Section 148 of the Code or its statutory predecessor and each hereby covenants that it will restrict that investment and reinvestment and the use of the proceeds of the Bonds in such manner and to such extent, if any, as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code.

        The Company shall provide the Issuer with, and the Issuer may base its certificate and statement, each as authorized by the Bond Resolution, on a certificate of an appropriate officer, employee or agent of or consultant to the Company for inclusion in the transcript of proceedings for the Bonds, setting forth the reasonable expectations of the Company on the date of delivery of and payment for the Bonds regarding the amount and use of the proceeds of the Bonds and the facts, estimates and circumstances on which those expectations are based.

        Section 3.5.    Rebate Fund.    To the extent required by Section 5.08 of the Indenture, within five days after the end of the fifth Bond Year (as defined in the Indenture) and every fifth Bond Year thereafter, and within five days after payment in full of all outstanding Bonds, the Company shall calculate the amount of Excess Earnings (as defined in the Indenture) as of the end of that Bond Year or the date of such payment and shall notify the Trustee of that amount. If the amount then on deposit in the Rebate Fund created under the Indenture is less than the amount of Excess Earnings (computed by taking into account the amount or amounts, if any, previously paid to the United States pursuant to Section 5.08 of the Indenture and this Section), the Company shall, within five days after the date of the aforesaid calculation, pay to the Trustee for deposit in the Rebate Fund an amount sufficient to cause the Rebate Fund to contain an amount equal to the Excess Earnings. The obligation of the Company to make such payments shall remain in effect and be binding upon the Company notwithstanding the release and discharge of the Indenture. The Company shall obtain and keep such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code.

(End of Article III)

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ARTICLE IV.

LOAN BY ISSUER; LOAN PAYMENTS;
ADDITIONAL PAYMENTS; MUNICIPAL BOND INSURANCE
POLICY AND LIQUIDITY FACILITY

        Section 4.1.    Loan Repayment.    Upon the terms and conditions of this Agreement, the Issuer agrees to make the Loan to the Company. The proceeds of the Loan shall be deposited with the Trustee pursuant to Section 3.3 hereof. In consideration of and in repayment of the Loan, the Company shall make, as Loan Payments, to the Trustee for the account of the Issuer, payments which correspond, as to time, and are equal in amount as of the Loan Payment Date, to the corresponding Bond Service Charges payable on the Bonds. All Loan Payments received by the Trustee shall be held and disbursed in accordance with the provisions of the Indenture and this Agreement for application to the payment of Bond Service Charges.

        The Company shall be entitled to a credit against the Loan Payments required to be made on any Loan Payment Date to the extent that the balance of the Bond Fund is then in excess of amounts required (a) for the payment of Bonds theretofore matured or theretofore called for redemption, or to be called for redemption pursuant to Section 6.1 hereof (b) for the payment of interest for which checks or drafts have been drawn and mailed by the Trustee or Paying Agent, and (c) to be deposited in the Bond Fund by the Indenture for use other than for the payment of Bond Service Charges due on that Loan Payment Date.

        Except for such interest of the Company as may hereafter arise pursuant to Section 8.2 hereof or Sections 5.06 or 5.07 of the Indenture, the Company and the Issuer each acknowledge that neither the Company, the State nor the Issuer has any interest in the Bond Fund or the Bond Purchase Fund, and any moneys deposited therein shall be in the custody of and held by the Trustee in trust for the benefit of the Holders.

        Section 4.2.    Additional Payments.    The Company shall pay to the Issuer, as Additional Payments hereunder, any and all costs and expenses incurred or to be paid by the Issuer in connection with the issuance and delivery of the Bonds or otherwise related to actions taken by the Issuer under this Agreement or the Indenture.

        The Company shall pay the Administration Expenses to the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, and any Paying Agent or Authenticating Agent, as appropriate, as Additional Payments hereunder.

        The Company may, without creating a default hereunder, contest in good faith the reasonableness of any such cost or expense incurred or to be paid by the Issuer and any Administration Expenses claimed to be due to the Trustee, the Registrar, the Auction Agent, the Remarketing Agent, any Paying Agent or any Authenticating Agent.

        In the event the Company should fail to pay any Loan Payments, Additional Payments or Administration Expenses when due, the payment in default shall continue as an obligation of the Company until the amount in default shall have been fully paid together with interest thereon during the default period at the Interest Rate for Advances.

        Section 4.3.    Place of Payments.    The Company shall make all Loan Payments directly to the Trustee at its Principal Office. Additional Payments shall be made directly to the person or entity to whom or to which they are due.

        Section 4.4.    Obligations Unconditional.    The obligations of the Company to make Loan Payments, Additional Payments and any payments required of the Company under Section 5.08 of the Indenture shall be absolute and unconditional, and the Company shall make such payments without abatement, diminution or deduction regardless of any cause or circumstances whatsoever including, without

11

limitation, any defense, set-off, recoupment or counterclaim which the Company may have or assert against the Issuer, the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, the Paying Agent or any other Person.

        Section 4.5.    Assignment of Revenues and Agreement.    To secure the payment of Bond Service Charges, the Issuer shall, by the Indenture, (a) absolutely and irrevocably assign to the Trustee, its successors in trust and its and their assigns forever, all of the Issuer's rights and remedies under this Agreement (except for the Unassigned Issuer Rights), and (b) grant a security interest to the Trustee, its successors in trust and its and their assigns forever, in all of its rights to and interest in the Revenues including, without limitation, all Loan Payments and other amounts receivable by or on behalf of the Issuer under the Agreement in respect of repayment of the Loan. The Company hereby agrees and consents to those assignments and that grant of a security interest.

        Section 4.6.    Municipal Bond Insurance Policy; Liquidity Facility; Cancellation.    (a) The Company agrees to provide for the payment of the principal of and interest on the Bonds by causing the Municipal Bond Insurance Policy to be delivered to the Trustee on the date of the delivery of the Bonds.

        (b)  The Company may provide for the delivery of a Liquidity Facility.

        (c)  The Company may cancel any Liquidity Facility then in effect at such time and direct the Trustee in writing to surrender such Liquidity Facility to the Liquidity Facility Issuer by which it was issued in accordance with the Indenture; provided, that no such cancellation shall become effective and no such surrender shall take place until all Bonds subject to purchase pursuant to Section 4.07(d) of the Indenture have been so purchased or redeemed with the proceeds of such Liquidity Facility.

        Section 4.7.    Company's Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods.    The Company shall have, and is hereby granted, the option to elect to convert on any Conversion Date the interest rate borne by the Bonds to another Variable Rate or return to the Auction Rate, to be effective for a Rate Period pursuant to the provisions of Article II of the Indenture and subject to the terms and conditions set forth therein. The Company also shall have the option to direct the change of Auction Dates and/or the length of Auction Rate Periods in accordance with the Indenture. To exercise such options, the Company shall give the written notice required by the Indenture.

        Section 4.8.    Company's Obligation to Purchase Bonds.    The Company hereby agrees to pay or cause to be paid to the Trustee or the Paying Agent, on or before each day on which Bonds may be or are required to be tendered for purchase, amounts equal to the amounts to be paid by the Trustee or the Paying Agent with respect to the Bonds tendered for purchase on such dates pursuant to Article IV of the Indenture; provided, however, that the obligation of the Company to make any such payment under this Section shall be reduced by the amount of (A) moneys paid by the Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent, (B) moneys drawn under any Liquidity Facility, for the purpose of paying such purchase price and (C) other moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the Indenture.

(End of Article IV)

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ARTICLE V.

ADDITIONAL AGREEMENTS AND COVENANTS

        Section 5.1.    Right of Inspection.    The Company agrees that, subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Issuer and the Trustee and their or any of their respective duly authorized agents shall have the right at all reasonable times to enter upon the Project Site to examine and inspect the Projects.

        Section 5.2.    Maintenance.    The Company shall use its best efforts to keep and maintain the Project Facilities, including all appurtenances thereto and any personal property therein or thereon, in good repair and good operating condition so that the Project Facilities will continue to constitute Pollution Control Facilities for the purposes of the operation thereof as required by Section 5.4 hereof.

        So long as such shall not be in violation of the Act or impair the character of the Project Facilities as Pollution Control Facilities and provided there is continued compliance with applicable laws and regulations of governmental entities having jurisdiction thereof, the Company shall have the right to remodel the Project Facilities or make additions, modifications and improvements thereto, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by the Company and the same shall, when made, become a part of the Project Facilities.

        Section 5.3.    Removal of Portions of the Project Facilities.    The Company shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project Facilities, except that, subject to Section 5.4 hereof, it will use its best efforts to ensure the continued character of the Project Facilities as Pollution Control Facilities. The Company shall have the right from time to time to substitute personal property or fixtures for any portions of the Project Facilities, provided that the personal property or fixtures so substituted shall not impair the character of the Project Facilities as Pollution Control Facilities. Any such substituted property or fixtures shall, when so substituted, become a part of the Project Facilities. The Company shall also have the right to remove any portion of the Project Facilities, without substitution therefor; provided, that the Company shall deliver to the Trustee a certificate signed by an Engineer describing said portion of the Project Facilities and stating that the removal of such property or fixtures will not impair the character of the Project Facilities as Pollution Control Facilities.

        Section 5.4.    Operation of Project Facilities.    The Company will, subject to its obligations and rights to maintain, repair or remove portions of the Project Facilities, as provided in Sections 5.2 and 5.3 hereof, use its best efforts to continue operation of the Project Facilities so long as and to the extent that operation thereof is required to comply with laws or regulations of governmental entities having jurisdiction thereof or unless the Issuer shall have approved the discontinuance of such operation (which approval shall not be unreasonably withheld). The Company agrees that it will, within the design capacities thereof, use its best efforts to operate and maintain the Project Facilities in accordance with all applicable, valid and enforceable rules and regulations of governmental entities having jurisdiction thereof; provided, that the Company reserves the right to contest in good faith any such laws or regulations.

        Nothing in this Agreement shall prevent or restrict the Company, in its sole discretion, at any time, from discontinuing or suspending either permanently or temporarily its use of any facility of the Company served by the Project Facilities and in the event such discontinuance or suspension shall render unnecessary the continued operation of the Project Facilities, the Company shall have the right to discontinue the operation of the Project Facilities during the period of any such discontinuance or suspension.

        Section 5.5.    Insurance.    The Company shall cause the Project Facilities to be kept insured against fire or other casualty to the extent that property of similar character is usually so insured by companies

13

similarly situated and operating like properties, to a reasonable amount by reputable insurance companies or, in lieu of or supplementing such insurance in whole or in part, adopt some other method or plan of protection against loss by fire or other casualty at least equal in protection to the method or plan of protection against loss by fire or other casualty of companies similarly situated and operating properties subject to similar or greater fire or other hazards or on which properties an equal or higher primary fire or other casualty insurance rate has been set by reputable insurance companies.

        Section 5.6.    Workers' Compensation Coverage.    Throughout the term of this Agreement, the Company shall comply, or cause compliance, with applicable workers' compensation laws of the State.

        Section 5.7.    Damage; Destruction and Eminent Domain.    If, during the term of this Agreement, the Project Facilities or any portion thereof is destroyed or damaged in whole or in part by fire or other casualty, or title to, or the temporary use of, the Project Facilities or any portion thereof shall have been taken by the exercise of the power of eminent domain, the Company (unless it shall have exercised its option to prepay the Loan Payments pursuant to Section 6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project Facilities so damaged, destroyed or taken with such changes, alterations and modifications (including the substitution and addition of other property) as may be necessary or desirable for the administration and operation of the Project Facilities as Pollution Control Facilities and as shall not impair the character or significance of the Project Facilities as furthering the purposes of the Act.

        Section 5.8.    Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted.    The Company agrees that, during the term of this Agreement, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided that the Company may, without violating its agreement contained in this Section, consolidate with or merge into another corporation, or permit one or more other corporations to consolidate with or merge into it, or sell or otherwise transfer to another corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided the surviving, resulting or transferee corporation, as the case may be (if other than the Company), is a corporation organized and existing under the laws of one of the states of the United States, and assumes in writing all of the obligations of the Company herein, and, if not an Indiana corporation, is qualified to do business in the State.

        If consolidation, merger or sale or other transfer is made as provided in this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section.

        Section 5.9.    Indemnification.    The Company releases the Issuer from, agrees that the Issuer shall not be liable for, and indemnifies the Issuer against, all liabilities, claims, costs and expenses imposed upon or asserted against the Issuer on account of: (a) any loss or damage to property or injury to or death of or loss by any person that may be occasioned by any cause whatsoever pertaining to the construction, maintenance, operation and use of the Project Facilities; (b) any breach or default on the part of the Company in the performance of any covenant or agreement of the Company under this Agreement or any related document, or arising from any act or failure to act by the Company, or any of its agents, contractors, servants, employees or licensees; (c) the authorization, issuance and sale of the Bonds, and the provision of any information furnished in connection therewith concerning the Project Facilities or the Company (including, without limitation, any information furnished by the Company for inclusion in any certifications made by the Issuer under Section 3.4 hereof or for inclusion in, or as a basis for preparation of, the Form 8038 information statement to be filed by the Issuer); and (d) any claim or action or proceeding with respect to the matters set forth in (a), (b) and (c) above brought thereon.

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        The Company agrees to indemnify the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent, and the Registrar (each hereinafter referred to in this section as an "indemnified party") for and to hold each of them harmless against all liabilities, claims, costs and expenses incurred without negligence or willful misconduct on the part of the indemnified party, on account of any action taken or omitted to be taken by the indemnified party in accordance with the terms of this Agreement, the Bonds or the Indenture or any action taken at the request of or with the consent of the Company, including the costs and expenses of the indemnified party in defending itself against any such claim, action or proceeding brought in connection with the exercise or performance of any of its powers or duties under this Agreement, the Bonds or the Indenture.

        In case any action or proceeding is brought against the Issuer, or an indemnified party in respect of which indemnity may be sought hereunder, the party seeking indemnity promptly shall give notice of that action or proceeding to the Company, and the Company upon receipt of that notice shall have the obligation and the right to assume the defense of the action or proceeding; provided, that failure of a party to give that notice shall not relieve the Company from any of its obligations under this Section unless that failure prejudices the defense of the action or proceeding by the Company. At its own expense, an indemnified party may employ separate counsel and participate in the defense; provided, however, where it is ethically inappropriate for one firm to represent the interests of the Issuer, and any other indemnified party or parties, the Company shall pay the Issuer's legal expenses in connection with the Issuer's retention of separate counsel. The Company shall not be liable for any settlement made without its consent.

        The indemnification set forth above is intended to and shall include the indemnification of all affected officials, directors, officers and employees of the Issuer, the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent, and the Registrar, respectively. That indemnification is intended to and shall be enforceable by the Issuer, the Trustee, the Paying Agent, the Remarketing Agent and the Registrar, respectively, to the full extent permitted by law.

        Section 5.10.    Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes.    The Company hereby covenants and represents that it has taken and caused to be taken and shall take and cause to be taken all actions that may be required of it for the interest on the Bonds to be and remain excluded from the gross income of the Holders for federal income tax purposes, and that it has not taken or permitted to be taken on its behalf, and covenants that it will not take, or permit to be taken on its behalf, any action which, if taken, would adversely affect that exclusion under the provisions of the Code.

        Section 5.11.    Use of Project Facilities.    The Issuer agrees that it will not take any action, or cause any action to be taken on its behalf, to interfere with the Company's ownership interest in the Project or to prevent the Company from having possession, custody, use and enjoyment of the Project other than pursuant to Article VII of this Agreement or Article VII of the Indenture.

        Section 5.12.    Assignment by Company.    Notwithstanding any other provision of this Loan Agreement, this Agreement may be assigned in whole or in part by the Company and the Project may be sold or conveyed by the Company without the necessity of obtaining the consent of either the Issuer or the Trustee, subject, however, to each of the following conditions:

        (a)  The Company must provide the Trustee and the Remarketing Agent with an Opinion of Bond Counsel that such action will not affect the exclusion of interest on the Bonds for federal income tax purposes.

        (b)  The Bond Insurer must provide to the Trustee its written consent to such action.

        (c)  The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Issuer and the Trustee a true and complete copy of each such assignment together with any instrument of assumption.

15

        (d)  Any assignment from the Company shall not materially impair fulfillment of the Project Purposes to be accomplished by operation of the Project as herein provided.

        Section 5.13.    The Depository Trust Company Letter of Representation.    The Company agrees that it shall cause the Trustee on behalf of the Issuer to fulfill the obligations set forth in the Depository Trust Company Letter of Representation for the Bonds.

(End of Article V)

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ARTICLE VI.

REDEMPTION

        Section 6.1.    Optional Redemption.    Provided no Event of Default shall have occurred and be subsisting, at any time and from time to time, the Company may deliver moneys to the Trustee in addition to Loan Payments or Additional Payments required to be made and direct the Trustee to use the moneys so delivered for the purpose of calling Bonds for optional redemption in accordance with the applicable provisions of the Indenture providing for optional redemption at the redemption price stated in the Indenture. Pending application for those purposes, any moneys so delivered shall be held by the Trustee in a special account in the Bond Fund and delivery of those moneys shall not, except as set forth in Section 4.1 hereof, operate to abate or postpone Loan Payments or Additional Payments otherwise becoming due or to alter or suspend any other obligations of the Company under this Agreement.

        Section 6.2.    Extraordinary Optional Redemption.    The Company shall have, subject to the conditions hereinafter imposed, the option during a Term Rate Period to direct the redemption of the Bonds in whole upon the occurrence of the event described below in paragraph (c) and in part upon the occurrence of the other events described below in accordance with the applicable provisions of the Indenture.

        (a)  The Project Facilities or the Generating Station shall have been damaged or destroyed to such an extent that (1) the Project Facilities or the Generating Station cannot reasonably be expected to be restored, within a period of six consecutive months, to the condition thereof immediately preceding such damage or destruction or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project Facilities or Generating Station for a period of six consecutive months.

        (b)  Title to, or the temporary use of, all or a significant part of the Project Facilities or the Generating Station shall have been taken under the exercise of the power of eminent domain to such an extent (1) that the Project Facilities or the Generating Station cannot reasonably be expected to be restored within a period of six consecutive months to a condition of usefulness comparable to that existing prior to the taking or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project Facilities or Generating Station for a period of six consecutive months.

        (c)  As a result of any changes in the Constitution of the State, the Constitution of the United States of America or any state or federal laws or as a result of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after any contest thereof by the Issuer or the Company in good faith, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed in this Agreement.

        (d)  Unreasonable burdens or excessive liabilities shall have been imposed upon the Issuer or the Company with respect to the Project Facilities or the Generating Station or the operation thereof, including, without limitation, the imposition of federal, state or other ad valorem, property, income or other taxes other than ad valorem taxes at the rates presently levied upon privately owned property used for the same general purpose as the Project Facilities or the Generating Station.

        (e)  Changes in the economic availability of raw materials, operating supplies, energy sources or supplies or facilities (including, but not limited to, facilities in connection with the disposal of industrial wastes) necessary for the operation of the Project Facilities or the Generating Station for the Project Purposes occur or technological or other changes occur which the Company cannot reasonably overcome or control and which in the Company's reasonable judgment render the Project Facilities or Generating Station uneconomic or obsolete for the Project Purposes.

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        (f)    Any court or administrative body shall enter a judgment, order or decree, or shall take administrative action, requiring the Company to cease all or any substantial part of its operations served by the Project Facilities or the Generating Station to such extent that the Company is or will be prevented from carrying on its normal operations at the Project Facilities or Generating Station for a period of six consecutive months.

        (g)  The termination by the Company of operations at the Generating Station.

        The amount payable by the Company in the event of its exercise of the option granted in this Section shall be the sum of the following:

        (i)    An amount of money which, when added to the moneys and investments held to the credit of the Bond Fund, will be sufficient pursuant to the provisions of the Indenture to pay, at 100% of the principal amount thereof plus accrued interest to the redemption date, and discharge, all or such portion of Outstanding Bonds to be redeemed on the earliest applicable redemption date, that amount to be paid to the Trustee, plus

        (ii)  An amount of money equal to the Additional Payments relating to those Bonds accrued and to accrue until actual final payment and redemption of those Bonds, that amount or applicable portions thereof to be paid to the Trustee or to the Persons to whom those Additional Payments are or will be due.

The requirement of (ii) above with respect to Additional Payments to accrue may be met if provisions satisfactory to the Trustee and the Issuer are made for paying those amounts as they accrue.

        The rights and options granted to the Company in this Section may be exercised whether or not the Company is in default hereunder; provided, that such default will not relieve the Company from performing those actions which are necessary to exercise any such right or option granted hereunder.

        Section 6.3.    Mandatory Redemption.    The Company shall deliver to the Trustee the moneys needed to redeem the Bonds in accordance with any mandatory redemption provisions relating thereto as may be set forth in Sections 4.01(b) of the Indenture.

        Section 6.4.    Notice of Redemption.    In order to exercise an option granted in, or to consummate a redemption required by, this Article VI, the Company shall, within 180 days following the event authorizing the exercise of such option, or at any time during the continuation of the condition referred to in paragraphs (c), (d) or (e) of Section 6.2 hereof, or at any time that optional redemption of the Bonds is permitted under the Indenture as provided in Section 6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as defined in the Indenture), give written notice to the Issuer and the Trustee that it is exercising its option to direct the redemption of Bonds, or that the redemption thereof is required by Section 4.01(b) of the Indenture due to the occurrence of a Determination of Taxability, as the case may be, in accordance with the Agreement and the Indenture, and shall specify therein the date on which such redemption is to be made, which date shall not be more than 180 days from the date such notice is mailed. The Company shall make arrangements satisfactory to the Trustee for the giving of the required notice of redemption to the Holders of the Bonds, in which arrangements the Issuer shall cooperate.

        Section 6.5.    Actions by Issuer.    At the request of the Company or the Trustee, the Issuer shall take all steps required of it under the applicable provisions of the Indenture or the Bonds to effect the redemption of all or a portion of the Bonds pursuant to this Article VI.

(End of Article VI)

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ARTICLE VII.

EVENTS OF DEFAULT AND REMEDIES

        Section 7.1.    Events of Default.    Each of the following shall be an Event of Default:

        (a)  The occurrence of an event of default as defined in Section 7.01 (a), (b), or (c) of the Indenture;

        (b)  The Company shall fail to observe and perform any other agreement, term or condition contained in this Agreement, other than such failure as will have resulted in an event of default described in (a) above and the continuation of that failure for a period of 90 days after notice thereof shall have been given to the Company by the Issuer or the Trustee, or for such longer period as the Issuer and the Trustee may agree to in writing; provided, that failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues that action to completion within 150 days after the expiration of initial cure period as determined above, or within such longer period as the Issuer and the Trustee may agree to in writing; and

        (c)  The receipt by the Trustee of written notice from the Bond Insurer that an event of default has occurred and is continuing under the Insurance Agreement; and

        (i)    By decree of a court of competent jurisdiction the Company shall be adjudicated a bankrupt, or an order shall be made approving a petition or answer filed seeking reorganization or readjustment of the Company under the federal bankruptcy laws or other law or statute of the United States of America or of the state of incorporation of the Company or of any other state, or, by order of such a court, a trustee in bankruptcy, a receiver or receivers shall be appointed of all or substantially all of the property of the Company, and any such decree or order shall have continued unstayed on appeal or otherwise and in effect for a period of sixty (60) days; or

        (ii)  The Company shall file a petition in voluntary bankruptcy or shall make an assignment for the benefit of creditors or shall consent to the appointment of a receiver or receivers of all or any part of its property, or shall file a petition seeking reorganization or readjustment under the Federal bankruptcy laws or other law or statute of the United States of America or any state thereof, or shall file a petition to take advantage of any debtors' act.

        Notwithstanding the foregoing, if, by reason of Force Majeure, the Company is unable to perform or observe any agreement, term or condition hereof which would give rise to an Event of Default under subsection (b) hereof, the Company shall not be deemed in default during the continuance of such inability. However, the Company shall promptly give notice to the Trustee and the Issuer of the existence of an event of Force Majeure and shall use its best efforts to remove the effects thereof; provided that the settlement of strikes or other industrial disturbances shall be entirely within its discretion.

        The exercise of remedies hereunder shall be subject to any applicable limitations of federal bankruptcy law affecting or precluding that declaration or exercise during the pendency of or immediately following any bankruptcy, liquidation or reorganization proceedings.

        Section 7.2.    Remedies on Default.    Whenever an Event of Default shall have happened and be subsisting, either or both of the following remedial steps may be taken:

        (a)  The Issuer or the Trustee may have access to, inspect, examine and make copies of the books, records, accounts and financial data of the Company, only, however, insofar as they pertain to the Project; or

        (b)  The Issuer or the Trustee may pursue all remedies now or hereafter existing at law or in equity to recover all amounts, including all Loan Payments and Additional Payments and under

19

Section 4.8 hereof the purchase price of Bonds tendered for purchase, then due and thereafter to become due under this Agreement, or to enforce the performance and observance of any other obligation or agreement of the Company under this Agreement.

        Notwithstanding the foregoing, the Issuer shall not be obligated to take any step which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until a satisfactory indemnity bond has been furnished to the Issuer at no cost or expense to the Issuer. Any amounts collected as Loan Payments or applicable to Loan Payments and any other amounts which would be applicable to payment of Bond Service Charges collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture or, if the outstanding Bonds have been paid and discharged in accordance with the provisions of the Indenture, shall be paid as provided in Section 5.07 of the Indenture for transfers of remaining amounts in the Bond Fund.

        The provisions of this Section are subject to the further limitation that the rescission and annulment by the Trustee of its declaration that all of the Bonds are immediately due and payable also shall constitute a rescission and annulment of any corresponding declaration made pursuant to this Section and a rescission and annulment of the consequences of that declaration and of the Event of Default with respect to which that declaration has been made, provided that no such rescission and annulment shall extend to or affect any subsequent or other default or impair any right consequent thereon.

        Section 7.3.    No Remedy Exclusive.    No remedy conferred upon or reserved to the Issuer or the Trustee by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair that right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than any notice required by law or for which express provision is made herein.

        Section 7.4.    Agreement to Pay Attorneys' Fees and Expenses.    If an Event of Default should occur and the Issuer or the Trustee should incur expenses, including attorneys' fees, in connection with the enforcement of this Agreement or the collection of sums due hereunder, the Company shall be required, to the extent permitted by law, to reimburse the Issuer and the Trustee, as applicable, for the expenses so incurred upon demand.

        Section 7.5.    No Waiver.    No failure by the Issuer or the Trustee to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of their right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof.

        Section 7.6.    Notice of Default.    The Company shall notify the Trustee and the Bond Insurer immediately if it becomes aware of the occurrence of any Event of Default hereunder or of any fact, condition or event which, with the giving of notice or passage of time or both, would become an Event of Default.

(End of Article VII)

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ARTICLE VIII.

MISCELLANEOUS

        Section 8.1.    Term of Agreement.    This Agreement shall be and remain in full force and effect from the date of delivery of the Bonds to the Original Purchaser until such time as (i) all of the Bonds shall have been fully paid (or provision made for such payment) and the Indenture has been released pursuant to Section 9.01 thereof and (ii) all other sums payable by the Company under this Agreement shall have been paid; provided, however, the obligations of the Company under Sections 4.2 and 5.9 hereof shall survive any termination of this Agreement.

        Section 8.2.    Amounts Remaining in Funds.    Any amounts in the Bond Fund remaining unclaimed by the Holders of Bonds for four years after the due date thereof (whether at stated maturity, by redemption, upon acceleration or otherwise), at the option of the Company, shall be deemed to belong to and shall be paid, subject to Section 5.06 of the Indenture, at the written request of the Company, to the Company by the Trustee. With respect to that principal of and any premium and interest on the Bonds to be paid from moneys paid to the Company pursuant to the preceding sentence, the Holders of the Bonds entitled to those moneys shall look solely to the Company for the payment of those moneys. Further, any amounts remaining in the Bond Fund and any other special funds or accounts created under this Agreement or the Indenture, except the Rebate Fund, after all of the Bonds shall be deemed to have been paid and discharged under the provisions of the Indenture and all other amounts required to be paid under this Agreement and the Indenture have been paid, shall be paid to the Company to the extent that those moneys are in excess of the amounts necessary to effect the payment and discharge of the Outstanding Bonds.

        Section 8.3.    Notices.    All notices, certificates, requests or other communications hereunder shall be in writing, except as provided in Section 3.4 hereof, and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Issuer, the Company, the Bond Insurer or the Trustee shall also be given to the others. The Company, the Issuer, the Bond Insurer and the Trustee, by notice given hereunder, may designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent.

        Section 8.4.    Extent of Covenants of the Issuer; No Personal Liability.    All covenants, obligations and agreements of the Issuer contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future member, officer, agent or employee of the Issuer in other than his official capacity, and neither the members of the Issuer nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or by reason of the covenants, obligations or agreements of the Issuer contained in this Agreement or in the Indenture.

        Section 8.5.    Binding Effect.    This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Issuer, the Company and their respective permitted successors and assigns provided that this Agreement may not be assigned by the Company (except as permitted under Sections 5.8 or 5.12 hereof) and may not be assigned by the Issuer except to (i) the Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or secure payment of Bond Service Charges or (ii) any successor public body to the Issuer.

        Section 8.6.    Amendments and Supplements.    Except as otherwise expressly provided in this Agreement or the Indenture, subsequent to the issuance of the Bonds and prior to all conditions provided for in the Indenture for release of the Indenture having been met, this Agreement may not be effectively amended, changed, modified, altered or terminated by the parties hereto except with the

21

consents required by, and in accordance with, the provisions of Article XI of the Indenture, as applicable.

        Section 8.7.    Execution Counterparts.    This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument.

        Section 8.8.    Severability.    If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a judicial or administrative authority to be invalid or unenforceable, that determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law.

        Section 8.9.    Governing Law.    This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State.

(End of Article VIII)

22

        IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be duly executed in their respective names, all as of the date hereinbefore written.

	INDIANA DEVELOPMENT FINANCE AUTHORITY
	By:	/s/  THOMAS F. MCKENNA Thomas F. McKenna, Designee of Lt. Governor—Authorized Signatory
Attest:
/s/  CALVIN KELLY Calvin Kelly, Acting Executive Director
[Issuer's Signature Page to Loan Agreement]

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	PSI ENERGY, INC.
	By:	/s/  WENDY L. AUMILLER Treasurer
[Borrower's Signature Page to Loan Agreement]

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EXHIBIT A

DESCRIPTION OF POLLUTION CONTROL FACILITIES
AT
GIBSON GENERATING STATION

Financed by Series 1973 Bonds

A 2,950 acre cooling lake.

An electrostatic precipitator for Unit 1 of the Gibson Generating Station.

Facilities functionally related and subordinate thereto.

Financed by Series 1979 Bonds

An electronstatic precipitator for Unit 3 of the Gibson Generating Station.

An electronstatic precipitator for Unit 4 of the Gibson Generating Station.

Facilities functionally related and subordinate thereto.

25

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Exhibit 4-UUU

EX-4.VVV

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Exhibit 4-VVV

LOAN AGREEMENT

between

OHIO AIR QUALITY DEVELOPMENT AUTHORITY

and

THE CINCINNATI GAS & ELECTRIC COMPANY

$84,000,000
State of Ohio
Air Quality Development Revenue Refunding Bonds
2002 Series A
(The Cincinnati Gas & Electric Company Project)

Dated

as of

September 1, 2002

INDEX

(This Index is not a part of the Agreement
but rather is for convenience of reference only.)

		Page
Preambles		1
ARTICLE I DEFINITIONS
Section 1.1	Use of Defined Terms	1
Section 1.2	Definitions	1
Section 1.3	Interpretation	5
Section 1.4	Captions and Headings	5
ARTICLE II REPRESENTATIONS
Section 2.1	Representations of the Authority	6
Section 2.2	No Warranty by Authority of Condition or Suitability of the Project	6
Section 2.3	Representations and Covenants of the Company	6
ARTICLE III COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS
Section 3.1	Acquisition, Construction and Installation	9
Section 3.2	Project Description	9
Section 3.3	Issuance of the Bonds; Application of Proceeds	9
Section 3.4	Investment of Fund Moneys	10
Section 3.5	Rebate Fund	10
ARTICLE IV LOAN BY AUTHORITY; LOAN PAYMENTS; ADDITIONAL PAYMENTS; BOND INSURANCE POLICY; AND LIQUIDITY FACILITY
Section 4.1	Loan Repayment	11
Section 4.2	Additional Payment	11
Section 4.3	Place of Payments	12
Section 4.4	Obligations Unconditional	12
Section 4.5	Assignment of Revenues and Agreement	12
Section 4.6	Bond Insurance Policy; Liquidity Facility; Cancellation	12
Section 4.7	Company's Option to Elect Rate Periods; Changes in the Auction Date and Length of Auction Periods	12
Section 4.8	Company's Obligation to Purchase Bonds	12
ARTICLE V ADDITIONAL AGREEMENTS AND COVENANTS
Section 5.1	Right of Inspection	13
Section 5.2	Maintenance	13
Section 5.3	Removal of Portions of the Project Facilities	13
Section 5.4	Operation of Project Facilities	13
Section 5.5	Insurance	13

-i-

Section 5.6	Workers' Compensation Coverage	14
Section 5.7	Damage; Destruction and Eminent Domain	14
Section 5.8	Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted	14
Section 5.9	Indemnification	14
Section 5.10	Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes	15
Section 5.11	Ownership of Project; Use of Project	15
Section 5.12	Assignment of Agreement in Whole or in Part by Company	15
Section 5.13	Assignment of Agreement in Whole by Company (Novation)	16
ARTICLE VI REDEMPTION
Section 6.1	Optional Redemption	17
Section 6.2	Extraordinary Optional Redemption	17
Section 6.3	Mandatory Redemption	18
Section 6.4	Notice of Redemption	18
Section 6.5	Actions by Authority	18
ARTICLE VII EVENTS OF DEFAULT AND REMEDIES
Section 7.1	Events of Default	19
Section 7.2	Remedies on Default	20
Section 7.3	No Remedy Exclusive	20
Section 7.4	Agreement to Pay Attorneys' Fees and Expenses	20
Section 7.5	No Waiver	20
Section 7.6	Notice of Default	20
ARTICLE VIII MISCELLANEOUS
Section 8.1	Term of Agreement	21
Section 8.2	Amounts Remaining in Funds	21
Section 8.3	Notices	21
Section 8.4	Extent of Covenants of the Authority; No Personal Liability	21
Section 8.5	Binding Effect	21
Section 8.6	Amendments and Supplements	21
Section 8.7	[Reserved]	22
Section 8.8	Continuing Disclosure	22
Section 8.9	Execution Counterparts	22
Section 8.10	Severability	22
Section 8.11	Governing Law	22
Signatures		23
Exhibit A—DESCRIPTION OF AIR QUALITY FACILITIES AT WILLIAM H. ZIMMER
	ELECTRIC GENERATING STATION	A-1

-ii-

LOAN AGREEMENT

        THIS LOAN AGREEMENT is made and entered into as of September 1, 2002 between the OHIO AIR QUALITY DEVELOPMENT AUTHORITY (the "Authority"), a body politic and corporate organized and existing under the laws of the State of Ohio, and THE CINCINNATI GAS & ELECTRIC COMPANY (the "Company"), a public utility and corporation duly organized and validly existing under the laws of the State of Ohio. Capitalized terms used in the following recitals are used as defined in Article I of this Agreement.

        Pursuant to Section 13 of Article VIII of the Ohio Constitution and the Act, the Authority has determined to issue, sell and deliver the Bonds and to lend the proceeds derived from the sale thereof to the Company to assist in the refunding of the Refunded Bonds as defined below. The Refunded Bonds were originally issued to assist the Company in the financing of its portion of the costs of the Project as defined below.

        The Company and the Authority each have full right and lawful authority to enter into this Agreement and to perform and observe the provisions hereof on their respective parts to be performed and observed.

        NOW THEREFORE, in consideration of the premises and the mutual representations and agreements hereinafter contained, the Authority and the Company agree as follows (provided that any obligation of the Authority or the State created by or arising out of this Agreement shall never constitute a general debt of the Authority or the State or give rise to any pecuniary liability of the Authority or the State but shall be payable solely out of Revenues, including the Loan Payments made pursuant hereto):

ARTICLE I
DEFINITIONS

        Section 1.1.    Use of Defined Terms.    In addition to the words and terms defined elsewhere in this Agreement or by reference to another document, the words and terms set forth in Section 1.2 hereof shall have the meanings set forth therein unless the context or use clearly indicates another meaning or intent. Such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms defined therein.

        Section 1.2.    Definitions.    As used herein:

        "Act" means Chapter 3706, Ohio Revised Code, as enacted and amended from time to time pursuant to Section 13 of Article VIII of the Ohio Constitution.

        "Additional Payments" means the amounts required to be paid by the Company pursuant to the provisions of Section 4.2 hereof.

        "Administration Expenses" means the compensation (which compensation shall not be greater than that typically charged in similar circumstances) and reimbursement of reasonable expenses and advances payable to the Trustee, the Registrar, the Remarketing Agent, the Broker-Dealer, the Auction Agent, any Paying Agent and any Authenticating Agent.

        "Agreement" means this Loan Agreement, as amended or supplemented from time to time.

        "Air Quality Facility" or "Air Quality Facilities" means those facilities which are air quality facilities as defined in Section 3706.01, Ohio Revised Code.

        "Auction Agent" means an Auction Agent as defined in the Indenture.

        "Authenticating Agent" means the Authenticating Agent as defined in the Indenture.

        "Authority Fee" means the aggregate fee of $262,500 due to the Authority from the Company in connection with the issuance of the Bonds hereunder.

        "Authorized Company Representative" means the Authorized Company Representative as defined in the Indenture.

        "Authorized Denominations" means Authorized Denominations as defined in the Indenture.

        "Bond Fund" means the Bond Fund created in the Indenture.

        "Bond Insurance Policy" means the Bond Insurance Policy as defined in the Indenture.

        "Bond Insurer" means the Bond Insurer as defined in the Indenture.

        "Bond Purchase Fund" means the Bond Purchase Fund as defined in the Indenture.

        "Bond Resolution" means the resolution of the Authority providing for the issuance of the Bonds and approving this Agreement, the Indenture and related matters, as amended or supplemented from time to time.

        "Bond Service Charges" means, for any period or time, the principal of, premium, if any, and interest due on the Bonds for that period or payable at that time whether due at maturity or upon acceleration or redemption or otherwise.

        "Bonds" means the $84,000,000 Air Quality Development Revenue Refunding Bonds, 2002 Series A (The Cincinnati Gas & Electric Company Project), issued by the Authority pursuant to the Bond Resolution and the Indenture.

        "Bonds Outstanding" or "Outstanding Bonds" means Outstanding Bonds as defined in the Indenture.

        "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to the Code and Sections of the Code include relevant applicable regulations and proposed regulations thereunder and under the Internal Revenue Code of 1954, as amended, and any successor provisions to those Sections, regulations or proposed regulations and, in addition, all applicable official rulings and judicial determinations under the foregoing applicable to the Bonds.

        "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement as defined in the Indenture.

        "Conversion Date" means the Conversion Date as defined in the Indenture.

        "Eligible Investments" means Eligible Investments as defined in the Indenture.

        "Engineer" means an engineer (who may be an employee of the Company) or engineering firm qualified to practice the profession of engineering under the laws of the State and who or which is acceptable to the Trustee.

        "EPA" means the Environmental Protection Agency of the State and any successor body, agency, commission or department.

        "Event of Default" means any of the events described as an Event of Default in Section 7.1 hereof.

        "Force Majeure" means any of the causes, circumstances or events described as constituting Force Majeure in Section 7.1 hereof.

        "Government Obligations" means Government Obligations as defined in the Indenture.

        "Holder" or "Holder of a Bond" means the Person in whose name a Bond is registered on the Register.

        "Indenture" means the Trust Indenture, dated as of the same date as this Agreement, between the Authority and the Trustee, as amended or supplemented from time to time.

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        "Insurance Agreement" means the Insurance Agreement between the Company and the Bond Insurer, as amended or supplemented from time to time.

        "Interest Rate for Advances" means the interest rate per year payable on the Bonds.

        "Investment Grade Rating" means a long-term debt rating by a Rating Agency that is included in one of the four highest debt rating categories of the Rating Agency, provided that such rating categories shall mean generic categories and without regard to or other qualifications of ratings within each such generic rating category such as "+", "—", "1", "2" or "3".

        "Issuance Costs" means those costs relating to the issuance of the Bonds as that term is used in Section 147(g) of the Code, including financial, legal, accounting and printing fees, charges and expenses, underwriting fees, the Authority Fee, initial acceptance fees of the Trustee, any Authenticating Agent, the Registrar and any Paying Agent, and all other such fees, charges and expenses incurred in connection with the authorization, sale, issuance and delivery of the Bonds.

        "Liquidity Facility" means a Liquidity Facility as defined in the Indenture.

        "Liquidity Facility Issuer" means a Liquidity Facility Issuer as defined in the Indenture.

        "Loan" means the loan by the Authority to the Company of the proceeds received from the sale of the Bonds.

        "Loan Payment Date" means any date on which any Bond Service Charges are due and payable.

        "Loan Payments" means the amounts required to be paid by the Company in repayment of the Loan pursuant to Section 4.1 hereof.

        "1954 Code" means the Internal Revenue Code of 1954 as amended from time to time through the date of enactment of the Code. References to the 1954 Code and Sections of the 1954 Code include relevant applicable regulations (including temporary regulations) and proposed regulations thereunder and any successor provisions to those Sections, regulations or proposed regulations.

        "Notice Address" means:

(a) As to the Authority:	Ohio Air Quality Development Authority 1901 LeVeque Tower 50 West Broad Street Columbus, Ohio 43215 Attention: Executive Director
(b) As to the Company:	The Cincinnati Gas & Electric Company 24th Floor Atrium II 139 East Fourth Street Cincinnati, Ohio 45202 Attention: Treasurer
(c) As to the Trustee:	Fifth Third Bank 38 Fountain Square Plaza Mail Drop 10AT60 Cincinnati, Ohio 45263 Attention: Corporate Trust Administration

or such additional or different address, notice of which is given under Section 8.3 hereof.

        "Opinion of Bond Counsel" means a written opinion of nationally recognized bond counsel selected by the Company and acceptable to the Trustee who is experienced in matters relating to the

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exclusion from gross income for federal income tax purposes of interest on obligations issued by states and their political subdivisions. Bond Counsel may be counsel to the Trustee or the Company.

        "Original Purchaser" means the Original Purchaser as defined in the Indenture.

        "Paying Agent" means the Paying Agent as defined in the Indenture.

        "Person" or words importing persons mean firms, associations, partnerships (including without limitation, general and limited partnerships), limited liability entities, joint ventures, societies, estates, trusts, corporations, public or governmental bodies, other legal entities and natural persons.

        "Plant" means the William H. Zimmer Electric Generating Station.

        "Prior Bonds" means, collectively, the Refunded Bonds and the $84,000,000 State of Ohio Pollution Control Revenue Bonds, 1985 Series (The Cincinnati Gas & Electric Company Project).

        "Project" or "Project Facilities" means the real, personal or real and personal property, including undivided or other interests therein, identified in the Project Description.

        "Project Description" means the description of the Project Facilities attached hereto as Exhibit A, as the same may be amended in accordance with this Agreement.

        "Project Purposes" means the purposes of Air Quality Facilities as described in the Act and as particularly described in Exhibit A hereto.

        "Project Site" means the William H. Zimmer Electric Generating Station in Clermont County, Ohio.

        "Rate Period" means a Rate Period as defined in the Indenture.

        "Rating Agency" means Moody's and S&P, as each of these terms are defined in the Indenture.

        "Rebate Fund" means the Rebate Fund created in the Indenture.

        "Refunded Bonds" means, collectively, the $42,000,000 State of Ohio Customized Purchase Revenue Bonds, 1985 Series A (The Cincinnati Gas & Electric Company Project) dated December 12, 1985 and the $42,000,000 State of Ohio Customized Purchase Revenue Bonds, 1985 Series B (The Cincinnati Gas & Electric Company Project) dated December 12, 1985.

        "Refunded Bonds Indenture" means, collectively, the respective Amended and Restated Trust Indentures for the Refunded Bonds between the Authority and the Refunded Bonds Trustee, each dated as of December 1, 1985.

        "Refunded Bonds Loan Agreement" mean, collectively, the respective Loan Agreements between the Authority and the Company, each dated as of December 1, 1985 and entered into in connection with the Refunded Bonds.

        "Refunded Bonds Trustee" means Fifth Third Bank, as trustee under the Refunded Bonds Indenture.

        "Refunding Fund" means the Refunding Fund created in the Indenture.

        "Register" means the books kept and maintained for the registration and transfer of Bonds pursuant to Section 3.05 of the Indenture.

        "Registrar" means the Registrar as defined in the Indenture.

        "Remarketing Agent" means the Remarketing Agent as defined in the Indenture.

        "Restructuring Transaction" means the sale or transfer by the Company of some or all of its electric generating facilities and associated assets and liabilities, which sale or transfer includes the

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Plant, to an entity or entities organized and existing under the laws of one of the states of the United States of America, the District of Columbia or under the laws of the United States of America and qualified to do business in the State (the "GenCo") if such transfer or sale is, in the sole discretion of the Company, necessary or desirable in order to permit the Company or an affiliate of the Company to provide retail electric service in the State or to comply with any law of the State relating to electric utility restructuring.

        "Revenues" means (a) the Loan Payments, (b) all other moneys received or to be received by the Authority (excluding the Authority Fee) or the Trustee in respect of repayment of the Loan, including without limitation, all moneys and investments in the Bond Fund, (c) any moneys and investments in the Refunding Fund, and (d) all income and profit from the investment of the foregoing moneys. The term "Revenues" does not include any moneys or investments in the Rebate Fund or the Bond Purchase Fund.

        "State" means the State of Ohio.

        "Term Rate Period" means a Term Rate Period as defined in the Indenture.

        "Trustee" means Fifth Third Bank, Cincinnati, Ohio, a bank duly organized and validly existing under the laws of the State and duly authorized to exercise corporate trust powers in the State, until a successor Trustee shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Trustee" shall mean the successor Trustee. "Principal Office" of the Trustee shall mean a corporate trust office of the Trustee, which office at the date of issuance of the Bonds is located at its Notice Address.

        "Unassigned Authority Rights" means all of the rights of the Authority to receive Additional Payments under Section 4.2 hereof, to inspection pursuant to Section 5.1 hereof, to be held harmless and indemnified under Section 5.9 hereof, to be reimbursed for attorney's fees and expenses under Section 7.4 hereof and to give or withhold consent to amendments, changes, modifications, alterations and termination of this Agreement under Section 8.6 hereof and its right to enforce such rights.

        "Variable Rate" means a Variable Rate as defined in the Indenture.

        Section 1.3.    Interpretation.    Any reference herein to the State, to the Authority or to any member or officer of either includes entities or officials succeeding to their respective functions, duties or responsibilities pursuant to or by operation of law or lawfully performing their functions.

        Any reference to a section or provision of the Constitution of the State or the Act, or to a section, provision or chapter of the Ohio Revised Code, or to any statute of the United States of America, includes that section, provision or chapter as amended, modified, revised, supplemented or superseded from time to time; provided, that no amendment, modification, revision, supplement or superseding section, provision or chapter shall be applicable solely by reason of this provision, if it constitutes in any way an impairment of the rights or obligations of the Authority, the State, the Holders, the Trustee, the Registrar, an Auction Agent, an Authenticating Agent, a Paying Agent, the Bond Insurer, the Remarketing Agent, or the Company under this Agreement, the Indenture or the Bonds.

        Unless the context indicates otherwise, words importing the singular number include the plural number, and vice versa; the terms "hereof", "hereby", "herein", "hereto", "hereunder" and similar terms refer to this Agreement; and the term "hereafter" means after, and the term "heretofore" means before, the date of delivery of the Bonds. Words of any gender include the correlative words of the other genders, unless the sense indicates otherwise.

        Section 1.4.    Captions and Headings.    The captions and headings in this Agreement are used solely for convenience of reference and in no way define, limit or describe the scope or intent of any Articles, Sections, subsections, paragraphs or subparagraphs or clauses hereof.

(End of Article I)

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ARTICLE II
REPRESENTATIONS

        Section 2.1.    Representations of the Authority.    The Authority represents that: (a) it is a body politic and corporate duly organized and validly existing under the laws of the State; (b) it has duly accomplished all conditions necessary to be accomplished by it prior to the issuance and delivery of the Bonds and the execution and delivery of this Agreement and the Indenture; (c) it is not in violation of or in conflict with any provisions of the laws of the State which would impair its ability to carry out its obligations contained in this Agreement or the Indenture; (d) it is empowered to enter into the transactions contemplated by this Agreement and the Indenture; (e) it has duly authorized the execution, delivery and performance of this Agreement and the Indenture; (f) it will do all things in its power in order to maintain its existence or assure the assumption of its obligations under this Agreement and the Indenture by any successor public body; and (g) following reasonable notice, a public hearing was held on August 6, 2002 with respect to the issuance of the Bonds as required by Section 147(f) of the Code.

        Section 2.2.    No Warranty by Authority of Condition or Suitability of the Project.    The Authority makes no warranty, either express or implied, as to the suitability or utilization of the Project for the Project Purposes, or as to the condition of the Project or that the Project is or will be suitable for the Company's purposes or needs.

        Section 2.3.    Representations and Covenants of the Company.    The Company represents that:

        (a)  The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State, with power and authority (corporate and other) to own its properties and conduct its business, to execute and deliver this Agreement and to perform its obligations under this Agreement;

        (b)  This Agreement and the Continuing Disclosure Agreement have each been duly authorized, executed and delivered by the Company and this Agreement and the Continuing Disclosure Agreement each constitute a valid and legally binding obligation of the Company, enforceable in accordance with their terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles;

        (c)  The execution, delivery and performance by the Company of this Agreement and the Continuing Disclosure Agreement and the consummation of the transactions contemplated hereby and thereby will not violate any provision of law or regulation applicable to the Company, or of any writ or decree of any court or governmental instrumentality, or of the Articles of Incorporation, as amended, or the Regulations of the Company, or of any mortgage, indenture, contract, agreement or other undertaking to which the Company is a party or which purports to be binding upon the Company or upon any of its assets;

        (d)  Substantially all (at least 90%) of the proceeds of the Prior Bonds were used to provide "pollution control facilities" within the meaning of Sections 103(b)(4)(F) of the 1954 Code, the original use of which facilities commenced with the Company, the construction of which facilities began before September 26, 1985 and was completed on or after such date, and which facilities were described in an inducement resolution adopted by the Authority before September 26, 1985, and all of the proceeds of the Prior Bonds have been spent for the Project or to pay costs of issuance of the Prior Bonds. All of such pollution control facilities consist either of land or of property of a character subject to the allowance for depreciation provided in Section 167 of the Code. The proceeds of the Bonds (other than any accrued interest thereon) will be used exclusively to refund the Refunded Bonds, any investment earnings thereon will be used to pay

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principal, premium or interest on the Refunded Bonds, and none of the proceeds of the Bonds will be used to pay for any costs of issuance of the Bonds. The Prior Bonds were issued on December 12, 1985. The principal amount of the Bonds does not exceed the outstanding principal amount of the Refunded Bonds. The proceeds of the Bonds will be used to retire the Refunded Bonds not later than 90 days after the date of issuance of the Bonds.

        (e)  It has caused the Project to be substantially completed. The Project constitutes Air Quality Facilities under the Act and is consistent with the purposes of Section 13 of Article VIII of the Ohio Constitution and of the Act. The Project is being, and the Company will cause the Project to be, operated and maintained in such manner to conform with all applicable zoning, planning, building, environmental and other applicable governmental regulations and all permits, variances and orders issued or granted pursuant thereto, including the permit-to-install for the Project, which permits, variances and orders have not been withdrawn or otherwise suspended, and to be consistent with the Act.

        (f)    It has used or operated or has caused to be used or operated, and presently intends to use or operate or cause to be used or operated the Project Facilities in a manner consistent with the Project Purposes until the date on which the Bonds have been fully paid and knows of no reason why the Project Facilities will not be so operated. The Company does not intend to sell or otherwise dispose of the Project or any portion thereof.

        (g)  None of the proceeds of the Prior Bonds were used and none of the proceeds of the Bonds will be used to provide any airplane, skybox or other private luxury box, or health club facility; any facility primarily used for gambling; or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

        (h)  Less than 25% of the proceeds of the Prior Bonds have been used and less than 25% of the proceeds of the Bonds will be used directly or indirectly to acquire land or any interest therein, and none of such proceeds has been or will be used to provide land which is to be used for farming purposes.

        (i)    No portion of the proceeds of the Prior Bonds has been used and no portion of the proceeds of the Bonds will be used to acquire existing property or any interest therein unless the first use of such property was by the Company and was pursuant to and followed such acquisition.

        (j)    Less than an insubstantial portion of the proceeds of the Prior Bonds were, and none of the proceeds of the Bonds will be, used to provided working capital. No construction, reconstruction or acquisition of the Project was commenced prior to the taking of official action by the Authority with respect thereto except for preparation of plans and specifications and other preliminary engineering work.

        (k)  The Refunded Bonds were not, and the Bonds will not be, "federally guaranteed" within the meaning of Section 149(b) of the Code.

        (l)    At no time will any funds constituting gross proceeds of the Bonds be used in a manner as would constitute failure of compliance with Section 148 of the Code;

        (m)  It is not anticipated that as of the date hereof, there will be created any "replacement proceeds", within the meaning of Section 1.148-1(c) of the Treasury Regulations, with respect to the Bonds; however, in the event that any such replacement proceeds are deemed to have been created, such amounts will be invested in compliance with Section 148 of the Code.

        (n)  On the date of issuance and delivery of the Prior Bonds, the Company reasonably expected that at least 85% of the spendable proceeds of such Prior Bonds would be expended to carry out the governmental purposes of such issue within the 5-year period beginning on the date such issue was issued but did not reasonably expect that 85% of such spendable proceeds would be

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so expended within the 3-year period beginning on such date. All of the spendable proceeds of the Prior Bonds have been expended as of the date of issuance of the Bonds. None of the proceeds of such issue, if any, were invested in nonpurpose investments having a substantially guaranteed yield for 4 years or more.

        (o)  The respective average maturities of the Prior Bonds and the Bonds do not exceed 120% of the respective average reasonably expected economic life of the Project Facilities financed by the proceeds of the Prior Bonds and the Bonds (determined under Section 147(b) of the Code).

        (p)  The information furnished by the Company and used by the Authority in preparing the certifications and statements pursuant to Sections 148 and 149(e) of the Code or their statutory predecessors with respect to the Prior Bonds was accurate and complete as of the date of issuance of the Prior Bonds, and the information furnished by the Company and used by the Authority in preparing the certification pursuant to Section 148 of the Code and in preparing the information statement pursuant to Section 149(e) of the Code, both referred to in the Bond Resolution, will be accurate and complete as of the date of issuance of the Bonds.

        (q)  The Project Facilities do not include any office except for offices (i) located on the Project Site and (ii) not more than a de minimis amount of the functions to be performed at which is not directly related to the day-to-day operations of the Project Facilities.

(End of Article II)

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ARTICLE III

COMPLETION OF THE PROJECT;
ISSUANCE OF THE BONDS

        Section 3.1.    Acquisition, Construction and Installation.    The Company represents that it and the other public utility companies which own undivided interests in the Project Facilities with the Company as tenants-in-common have caused the Project Facilities to be acquired, constructed and installed on the Project Site, substantially in accordance with the Project Description and in conformance with all applicable zoning, planning, building and other similar regulations of all governmental authorities having jurisdiction over the Project and all permits, variances and orders issued in respect of the Project by EPA, and that the proceeds derived from the Refunded Bonds, including any investment thereof, were expended in accordance with the Refunded Bonds Indenture and the Refunded Bonds Loan Agreement.

        Section 3.2.    Project Description.    The Project Description may be changed from time to time by, or with the consent of, the Company provided that any such change shall also be filed with the Authority and provided further that no change in the Project Description shall materially change the function of the Project Facilities unless the Trustee shall have received (i) an Engineer's certificate that such changes will not impair the significance or character of the Project Facilities as Air Quality Facilities and (ii) an Opinion of Bond Counsel or ruling of the Internal Revenue Service to the effect that such amendment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes.

        Section 3.3.    Issuance of Bonds; Application of Proceeds.    To provide funds to make the Loan to the Company to assist the Company in the refunding of the Refunded Bonds, the Authority will issue, sell and deliver the Bonds to the Original Purchaser. The Bonds will be issued pursuant to the Indenture in the aggregate principal amount, will bear interest, will mature and will be subject to redemption as set forth therein. The Company hereby approves the terms and conditions of the Indenture and the Bonds, and the terms and conditions under which the Bonds will be issued, sold and delivered.

        The Company hereby requests that the Authority notify the Refunded Bonds Trustee pursuant to the Refunded Bonds Indenture, that the entire outstanding principal amount of the Refunded Bonds is to be redeemed and paid on October 7, 2002 (such date of redemption and payment is hereinafter referred to as the "Redemption Date"), at a redemption price of 100% of the principal amount thereof, plus interest accrued to the Redemption Date. The Company acknowledges that the proceeds of the Bonds (including any interest income thereon) may be insufficient to pay the full costs of refunding the Refunded Bonds and that the Authority has made no representation or warranty with respect to the sufficiency thereof. The Company further acknowledges that it is (and will remain after the issuance of the Bonds) obligated to, and hereby confirms that it will, pay all costs of the refunding and redemption of the Refunded Bonds.

        The proceeds from the sale of the Bonds (other than any accrued interest) shall be loaned to the Company to assist the Company in refunding the Refunded Bonds and shall be deposited in the Refunding Fund and disbursed as follows: those sale proceeds will be deposited in the Principal Account of the Refunding Fund (as created and defined in the Indenture), and on the Redemption Date all moneys on deposit in the Principal Account of the Refunding Fund, together with all moneys on deposit in the Interest Account up to, but not exceeding, the principal and interest due on the Refunded Bonds on the Redemption Date (and, if such moneys are insufficient for such purpose, together with any other moneys delivered by the Company for such purpose to the Trustee, in its capacity as the Refunded Bonds Trustee under the Refunded Bonds Indenture) shall be applied by the Trustee, in its capacity as Refunded Bonds Trustee, to reimburse the Bank (as defined in the Refunded

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Bonds Indenture) for the Trustee's draws on the Letter of Credit (as defined in the Refunded Bonds Indenture and in its capacity as Refunded Bonds Trustee) for the payment of principal of and interest on the Refunded Bonds on the Redemption Date.

        Any amounts remaining in the Interest Account after the redemption of all of the Refunded Bonds shall be disbursed by the Trustee to the Company upon the written request of the Authorized Company Representative solely for the purpose of paying, or to reimburse the Company for its payment of, Issuance Costs in an aggregate amount that does not exceed 2% of the proceeds of the Bonds, computed for this purpose as the issue price of the Bonds less any accrued interest included therein.

        Pending disbursement pursuant to this Section, the proceeds so deposited in the Refunding Fund, together with any investment earnings thereon, shall constitute a part of the Revenues assigned by the Authority to the Trustee for the payment of Bond Service Charges. All investment earnings shall be credited to the Interest Account of the Refunding Fund. Any accrued interest shall be deposited in the Bond Fund.

        Section 3.4.    Investment of Fund Moneys.    At the oral (confirmed promptly in writing) or written request of the Company, any moneys held as part of the Bond Fund or the Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments; provided, that such moneys shall be invested or reinvested by the Trustee only in Eligible Investments which shall mature, or which shall be subject to redemption by the holder thereof at the option of such holder, not later than the date upon which the moneys so invested are needed to make payments from those Funds. The Authority and the Company each hereby covenants that it will restrict that investment and reinvestment and the use of the proceeds of the Bonds in such manner and to such extent, if any, as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code.

        The Company shall provide the Authority with, and the Authority may base its certificate and statement, each as authorized by the Bond Resolution, on a certificate of an appropriate officer, employee or agent of or consultant to the Company for inclusion in the transcript of proceedings for the Bonds, setting forth the reasonable expectations of the Company on the date of delivery of and payment for the Bonds regarding the amount and use of the proceeds of the Bonds and the facts, estimates and circumstances on which those expectations are based.

        Section 3.5.    Rebate Fund.    To the extent required by Section 5.09 of the Indenture, within five days after the end of the fifth Bond Year (as defined in the Indenture) and every fifth Bond Year thereafter, and within five days after payment in full of all outstanding Bonds, the Company shall calculate the amount of Excess Earnings (as defined in the Indenture) as of the end of that Bond Year or the date of such payment and shall notify the Trustee of that amount. If the amount then on deposit in the Rebate Fund created under the Indenture is less than the amount of Excess Earnings (computed by taking into account the amount or amounts, if any, previously paid to the United States pursuant to Section 5.09 of the Indenture and this Section), the Company shall, within five days after the date of the aforesaid calculation, pay to the Trustee for deposit in the Rebate Fund an amount sufficient to cause the Rebate Fund to contain an amount equal to the Excess Earnings. The obligation of the Company to make such payments shall remain in effect and be binding upon the Company notwithstanding the release and discharge of the Indenture. The Company shall obtain and keep such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code.

(End of Article III)

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ARTICLE IV

LOAN BY AUTHORITY; LOAN PAYMENTS;
ADDITIONAL PAYMENTS; BOND INSURANCE; AND LIQUIDITY FACILITY

        Section 4.1.    Loan Repayment.    Upon the terms and conditions of this Agreement, the Authority agrees to make the Loan to the Company. The proceeds of the Loan shall be deposited with the Trustee pursuant to Section 3.3 hereof. In consideration of and in repayment of the Loan, the Company shall make, as Loan Payments, to the Trustee for the account of the Authority, payments which correspond, as to time, and are equal in amount, to the Bond Service Charges payable on the Bonds. All Loan Payments received by the Trustee shall be held and disbursed in accordance with the provisions of the Indenture and this Agreement for application to the payment of Bond Service Charges.

        The Company shall be entitled to a credit against the Loan Payments required to be made on any Loan Payment Date to the extent that the balance of the Bond Fund is then in excess of amounts required (a) for the payment of Bonds theretofore matured or theretofore called for redemption, or to be called for redemption pursuant to Section 6.1 hereof (b) for the payment of interest for which checks or drafts have been drawn and mailed by the Trustee or Paying Agent, and (c) to be deposited in the Bond Fund by the Indenture for use other than for the payment of Bond Service Charges due on that Loan Payment Date.

        The Company's obligation to make Loan Payments shall be reduced to the extent of any payments made by the Bond Insurer to the Trustee in respect of the principal of, premium, if any, or interest on the Bonds when due pursuant to the Bond Insurance Policy, provided, that the Bond Insurer has been reimbursed for such payments in accordance with the terms of the Insurance Agreement.

        Except for such interest of the Company as may hereafter arise pursuant to Section 8.2 hereof or Sections 5.07 or 5.08 of the Indenture, the Company and the Authority each acknowledge that neither the Company, the State nor the Authority has any interest in the Bond Fund or the Bond Purchase Fund, and any moneys deposited therein shall be in the custody of and held by the Trustee in trust for the benefit of the Holders.

        Section 4.2.    Additional Payments.    The Company shall pay to the Authority, the Authority Fee and, as Additional Payments hereunder, any and all costs and expenses incurred or to be paid by the Authority in connection with the issuance and delivery of the Bonds or otherwise related to actions taken by the Authority under this Agreement or the Indenture.

        The Company shall pay the Administration Expenses to the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, and any Paying Agent or Authenticating Agent, as appropriate, as Additional Payments hereunder.

        The Company may, without creating a default hereunder, contest in good faith the reasonableness of any such cost or expense incurred or to be paid by the Authority and any Administration Expenses claimed to be due to the Trustee, the Registrar, the Auction Agent, the Remarketing Agent, any Paying Agent or any Authenticating Agent.

        In the event the Company should fail to pay any Loan Payments, Additional Payments or Administration Expenses when due, the payment in default shall continue as an obligation of the Company until the amount in default shall have been fully paid together with interest thereon during the default period at the Interest Rate for Advances.

        Section 4.3.    Place of Payments.    The Company shall make all Loan Payments directly to the Trustee at its Principal Office. Additional Payments shall be made directly to the person or entity to whom or to which they are due.

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        Section 4.4.    Obligations Unconditional.    The obligations of the Company to make Loan Payments, Additional Payments and any payments required of the Company under Section 5.09 of the Indenture shall be absolute and unconditional, and the Company shall make such payments without abatement, diminution or deduction regardless of any cause or circumstances whatsoever including, without limitation, any defense, set-off, recoupment or counterclaim which the Company may have or assert against the Authority, the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, the Paying Agent or any other Person.

        Section 4.5.    Assignment of Revenues and Agreement.    To secure the payment of Bond Service Charges, the Authority shall, by the Indenture, (a) absolutely and irrevocably assign to the Trustee, its successors in trust and its and their assigns forever, all of the Authority's rights and remedies under this Agreement (except for the Unassigned Authority Rights), and (b) grant a security interest to the Trustee, its successors in trust and its and their assigns forever, in all of its rights to and interest in the Revenues including, without limitation, all Loan Payments and other amounts receivable by or on behalf of the Authority under the Agreement in respect of repayment of the Loan. The Company hereby agrees and consents to those assignments and that grant of a security interest.

        Section 4.6.    Bond Insurance Policy; Liquidity Facility; Cancellation.    (a) The Company agrees to provide for the payment of the principal of and interest on the Bonds by causing the Bond Insurance Policy to be delivered to the Trustee on the date of the delivery of the Bonds.

        (b)  The Company may provide for the delivery of a Liquidity Facility.

        (c)  The Company may cancel any Liquidity Facility then in effect at such time and direct the Trustee in writing to surrender such Liquidity Facility to the Liquidity Facility Issuer by which it was issued in accordance with the Indenture; provided, that no such cancellation shall become effective and no such surrender shall take place until all Bonds subject to purchase pursuant to Section 4.07(d) of the Indenture have been so purchased or redeemed with the proceeds of such Liquidity Facility.

        Section 4.7.    Company's Option to Elect Rate Period; Changes in the Auction Date and Length of Auction Periods.    The Company shall have, and is hereby granted, the option to elect to convert on any Conversion Date the interest rate borne by the Bonds to another Variable Rate, or to return to the Auction Rate, to be effective for a Rate Period pursuant to the provisions of Article II of the Indenture and subject to the terms and conditions set forth therein. The Company shall also have the option to direct the change of Auction Dates and/or the length of Auction Rate Periods (as such terms are defined in the Indenture) in accordance with the Indenture. To exercise such options, the Company shall give the written notice required by the Indenture.

        Section 4.8.    Company's Obligation to Purchase Bonds.    The Company hereby agrees to pay or cause to be paid to the Trustee or the Paying Agent, on or before each day on which Bonds may be or are required to be tendered for purchase, amounts equal to the amounts to be paid by the Trustee or the Paying Agent with respect to the Bonds tendered for purchase on such dates pursuant to Article IV of the Indenture; provided, however, that the obligation of the Company to make any such payment under this Section shall be reduced by the amount of (A) moneys paid by the Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent, (B) moneys drawn under a Liquidity Facility, if any, for the purpose of paying such purchase price and (C) other moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the Indenture.

(End of Article IV)

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ARTICLE V

ADDITIONAL AGREEMENTS AND COVENANTS

        Section 5.1.    Right of Inspection.    The Company agrees that, subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Authority and the Trustee and their or any of their respective duly authorized agents shall have the right at all reasonable times to enter upon the Project Site to examine and inspect the Project.

        Section 5.2.    Maintenance.    The Company shall use its best efforts to keep and maintain the Project Facilities, including all appurtenances thereto and any personal property therein or thereon, in good repair and good operating condition so that the Project Facilities will continue to constitute Air Quality Facilities, for the purposes of the operation thereof as required by Section 5.4 hereof.

        So long as such shall not be in violation of the Act or impair the character of the Project Facilities as Air Quality Facilities, and provided there is continued compliance with applicable laws and regulations of governmental entities having jurisdiction thereof, the Company shall have the right to remodel the Project Facilities or make additions, modifications and improvements thereto, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by the Company and the same shall, when made, become a part of the Project Facilities.

        Section 5.3.    Removal of Portions of the Project Facilities.    The Company shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project Facilities, except that, subject to Section 5.4 hereof, it will use its best efforts to ensure the continued character of the Project Facilities as Air Quality Facilities. The Company shall have the right from time to time to substitute personal property or fixtures for any portions of the Project Facilities, provided that the personal property or fixtures so substituted shall not impair the character of the Project Facilities as Air Quality Facilities. Any such substituted property or fixtures shall, when so substituted, become a part of the Project Facilities. The Company shall also have the right to remove any portion of the Project Facilities, without substitution therefor; provided, that the Company shall deliver to the Trustee a certificate signed by an Engineer describing said portion of the Project Facilities and stating that the removal of such property or fixtures will not impair the character of the Project Facilities as Air Quality Facilities.

        Section 5.4.    Operation of Project Facilities.    The Company will, subject to its obligations and rights to maintain, repair or remove portions of the Project Facilities, as provided in Sections 5.2 and 5.3 hereof, use its best efforts to continue operation of the Project Facilities so long as and to the extent that operation thereof is required to comply with laws or regulations of governmental entities having jurisdiction thereof or unless the Authority shall have approved the discontinuance of such operation (which approval shall not be unreasonably withheld). The Company agrees that it will, within the design capacities thereof, use its best efforts to operate and maintain the Project Facilities in accordance with all applicable, valid and enforceable rules and regulations of governmental entities having jurisdiction thereof; provided, that the Company reserves the right to contest in good faith any such laws or regulations.

        Nothing in this Agreement shall prevent or restrict the Company, in its sole discretion, at any time, from discontinuing or suspending either permanently or temporarily its use of any facility of the Company served by the Project Facilities and in the event such discontinuance or suspension shall render unnecessary the continued operation of the Project Facilities, the Company shall have the right to discontinue the operation of the Project Facilities during the period of any such discontinuance or suspension.

        Section 5.5.    Insurance.    The Company shall cause the Project Facilities to be kept insured against fire or other casualty to the extent that property of similar character is usually so insured by companies

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similarly situated and operating like properties, to a reasonable amount by reputable insurance companies or, in lieu of or supplementing such insurance in whole or in part, adopt some other method or plan of protection against loss by fire or other casualty at least equal in protection to the method or plan of protection against loss by fire or other casualty of companies similarly situated and operating properties subject to similar or greater fire or other hazards or on which properties an equal or higher primary fire or other casualty insurance rate has been set by reputable insurance companies.

        Section 5.6.    Workers' Compensation Coverage.    Throughout the term of this Agreement, the Company shall comply, or cause compliance, with applicable workers' compensation laws of the State.

        Section 5.7.    Damage; Destruction and Eminent Domain.    If, during the term of this Agreement, the Project Facilities or any portion thereof is destroyed or damaged in whole or in part by fire or other casualty, or title to, or the temporary use of, the Project Facilities or any portion thereof shall have been taken by the exercise of the power of eminent domain, the Company (unless it shall have exercised its option to prepay the Loan Payments pursuant to Section 6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project Facilities so damaged, destroyed or taken with such changes, alterations and modifications (including the substitution and addition of other property) as may be necessary or desirable for the administration and operation of the Project Facilities as Air Quality Facilities and as shall not impair the character or significance of the Project Facilities as furthering the purposes of the Act.

        Section 5.8.    Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted.     The Company agrees that, during the term of this Agreement, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided that the Company may, without violating its agreement contained in this Section, consolidate with or merge into another corporation, or permit one or more other corporations to consolidate with or merge into it, or sell or otherwise transfer to another corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided the surviving, resulting or transferee corporation, as the case may be (if other than the Company), is a corporation organized and existing under the laws of one of the states of the United States, and assumes in writing all of the obligations of the Company herein, and, if not an Ohio corporation, is qualified to do business in the State.

        If consolidation, merger or sale or other transfer is made as provided in this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section.

        Section 5.9.    Indemnification.    The Company releases the Authority from, agrees that the Authority shall not be liable for, and indemnifies the Authority against, all liabilities, claims, costs and expenses imposed upon or asserted against the Authority on account of: (a) any loss or damage to property or injury to or death of or loss by any person that may be occasioned by any cause whatsoever pertaining to the construction, maintenance, operation and use of the Project Facilities; (b) any breach or default on the part of the Company in the performance of any covenant or agreement of the Company under this Agreement or any related document, or arising from any act or failure to act by the Company, or any of its agents, contractors, servants, employees or licensees; (c) the authorization, issuance and sale of the Bonds, and the provision of any information furnished in connection therewith concerning the Project Facilities or the Company (including, without limitation, any information furnished by the Company for inclusion in any certifications made by the Authority under Section 3.4 hereof or for inclusion in, or as a basis for preparation of, the Form 8038 information statement to be filed by the Authority; and (d) any claim or action or proceeding with respect to the matters set forth in (a), (b) and (c) above brought thereon.

        The Company agrees to indemnify the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent and the Registrar (each hereinafter referred to in this section as an "indemnified

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party") for and to hold each of them harmless against all liabilities, claims, costs and expenses incurred without negligence or willful misconduct on the part of the indemnified party, on account of any action taken or omitted to be taken by the indemnified party in accordance with the terms of this Agreement, the Bonds or the Indenture or any action taken at the request of or with the consent of the Company, including the costs and expenses of the indemnified party in defending itself against any such claim, action or proceeding brought in connection with the exercise or performance of any of its powers or duties under this Agreement, the Bonds or the Indenture.

        In case any action or proceeding is brought against the Authority or an indemnified party in respect of which indemnity may be sought hereunder, the party seeking indemnity promptly shall give notice of that action or proceeding to the Company, and the Company upon receipt of that notice shall have the obligation and the right to assume the defense of the action or proceeding; provided, that failure of a party to give that notice shall not relieve the Company from any of its obligations under this Section unless that failure prejudices the defense of the action or proceeding by the Company. At its own expense, an indemnified party may employ separate counsel and participate in the defense; provided, however, where it is ethically inappropriate for one firm to represent the interests of the Authority and any other indemnified party or parties, the Company shall pay the Authority's legal expenses in connection with the Authority's retention of separate counsel. The Company shall not be liable for any settlement made without its consent.

        The indemnification set forth above is intended to and shall include the indemnification of all affected officials, directors, officers and employees of the Authority, the Trustee, the Paying Agent, the Remarketing Agent, the Auction Agent and the Registrar, respectively. That indemnification is intended to and shall be enforceable by the Authority, the Trustee, the Paying Agent, the Remarketing Agent and the Registrar, respectively, to the full extent permitted by law.

        Section 5.10.    Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes.    The Company hereby covenants and represents that it has taken and caused to be taken and shall take and cause to be taken all actions that may be required of it for the interest on the Bonds to be and remain excluded from the gross income of the Holders for federal income tax purposes, and that it has not taken or permitted to be taken on its behalf, and covenants that it will not take, or permit to be taken on its behalf, any action which, if taken, would adversely affect that exclusion under the provisions of the Code.

        Section 5.11.    Ownership of Project; Use of Project.    The Authority agrees that it does not have and shall not have any interest in, title to or ownership of the Project or the Project Site. The Authority does hereby covenant and agree that it will not take any action, or cause any action to be taken on its behalf, during the term of this Agreement, other than pursuant to Article VII of this Agreement or Article VII of the Indenture, to interfere with the Company's ownership interest in the Project or to prevent the Company from having possession, custody, use and enjoyment of the Project, except such action as is requested by the Trustee in enforcing any remedies available to it under this Agreement or the Indenture.

        Section 5.12.    Assignment of Agreement in Whole or in Part by Company.    This Agreement may be assigned in whole or in part by the Company without the necessity of obtaining the consent of either the Authority or the Trustee, subject, however, to each of the following conditions:

          (a)    No assignment (other than pursuant to Section 5.8 or Section 5.13 hereof) shall relieve the Company from primary liability for any of its obligations hereunder, and in the event of any such assignment the Company shall continue to remain primarily liable for the payment of the Loan Payments and Additional Payments and for performance and observance of the agreements on its part herein provided to be performed and observed by it.

          (b)    Any assignment by the Company must retain for the Company such rights and interests as will permit it to perform its obligations under this Agreement, and any assignee from the

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Company shall assume the obligations of the Company hereunder to the extent of the interest assigned.

          (c)    The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Authority and the Trustee a true and complete copy of each such assignment together with any instrument of assumption.

          (d)    Any assignment from the Company shall not materially impair fulfillment of the Project Purposes to be accomplished by operation of the Project as herein provided.

        5.13    Assignment of Agreement in Whole by Company (Novation).    In addition to an assignment contemplated by Sections 5.8 and 5.12 hereof, this Agreement may be assigned as a whole by the Company, subject, however, to each of the following conditions:

          (a)    The Company's rights, duties and obligations under this Agreement and all related documents are assigned to, and assumed in full by, the assignee either (i) as of a date the Bonds are subject to mandatory purchase under Section 4.07 of the Indenture or (ii) as of a date specified by the Company in connection with a Restructuring Transaction but, in such case, only if the assignee is the GenCo and the Company has delivered to the Authority and the Trustee written evidence of an Investment Grade Rating (taking into account such assignment to, and assumption in full by, the GenCo) with respect to the Bonds from each Rating Agency.

          (b)    The assignee and the Company shall execute an assignment and assumption agreement, in form and substance reasonably acceptable to the Company, and acknowledged and agreed to by the Authority and the Trustee, whereby the assignee shall confirm and acknowledge that it has assumed all of the rights, duties and obligations of the Company under this Agreement and all related documentation and agrees to be bound by and to perform and comply with the terms and provisions of this Agreement and all related documentation as if it had originally executed the same; provided further that if there is more than one assignee, such assignment and assumption agreement shall be on a joint and several basis among all assignees.

          (c)    The Company shall furnish to the Authority and the Trustee (i) an opinion of Bond Counsel (as defined in the Indenture) that such assignment is authorized or permitted by the Act and will not adversely affect the exclusion from gross income of interest on the Bonds, (ii) an opinion of counsel to the assignee to the effect that such assignment and assumption agreement has been duly authorized by the assignee and constitutes the legal, valid and binding obligation of the assignee, enforceable against the assignee in accordance with its terms, subject to laws relating to or affecting generally the enforcement of creditors' rights, including, without limitation, bankruptcy and insolvency laws and to general principles of equity (regardless of whether considered in a proceeding in equity or at law) and (iii) a certificate of an Authorized Company Representative and an opinion of counsel to the Company, each stating that such transaction complies with this Section 5.13 and that all conditions precedent herein relating to such transaction have been complied with.

          (d)    The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Authority and the Trustee a true and complete copy of such assignment and assumption agreement.

          (e)    Any assignment from the Company shall not materially impair fulfillment of the purpose of the Project as herein provided.

          (f)    Upon the effectiveness of such assignment and assumption, the assignee shall be deemed to be the "Company" hereunder and the assignor shall be relieved of all liability hereunder.

(End of Article V)

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ARTICLE VI

REDEMPTION

        Section 6.1.    Optional Redemption.    Provided no Event of Default shall have occurred and be subsisting, at any time and from time to time, the Company may deliver moneys to the Trustee in addition to Loan Payments or Additional Payments required to be made and direct the Trustee to use the moneys so delivered for the purpose of calling Bonds for optional redemption in accordance with the applicable provisions of the Indenture providing for optional redemption at the redemption price stated in the Indenture. Pending application for those purposes, any moneys so delivered shall be held by the Trustee in a special account in the Bond Fund and delivery of those moneys shall not, except as set forth in Section 4.1 hereof, operate to abate or postpone Loan Payments or Additional Payments otherwise becoming due or to alter or suspend any other obligations of the Company under this Agreement.

        Section 6.2.    Extraordinary Optional Redemption.    The Company shall have, subject to the conditions hereinafter imposed, the option during a Term Rate Period to direct the redemption of the Bonds in whole in accordance with the applicable provisions of the Indenture upon the occurrence of any of the following events:

        (a)  The Project or the Plant shall have been damaged or destroyed to such an extent that (1) the Project or the Plant cannot reasonably be expected to be restored, within a period of six consecutive months, to the condition thereof immediately preceding such damage or destruction or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project or the Plant for a period of six consecutive months.

        (b)  Title to, or the temporary use of, all or a significant part of the Project or the Plant shall have been taken under the exercise of the power of eminent domain to such an extent (1) that the Project or the Plant cannot reasonably be expected to be restored within a period of six consecutive months to a condition of usefulness comparable to that existing prior to the taking or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project or the Plant for a period of six consecutive months.

        (c)  As a result of any changes in the Constitution of the State, the Constitution of the United States of America or any state or federal laws or as a result of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after any contest thereof by the Authority or the Company in good faith, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed in this Agreement.

        (d)  Unreasonable burdens or excessive liabilities shall have been imposed upon the Authority or the Company with respect to the Project or the Plant or the operation thereof, including, without limitation, the imposition of federal, state or other ad valorem, property, income or other taxes other than ad valorem taxes at the rates presently levied upon privately owned property used for the same general purpose as the Project or the Plant.

        (e)  Changes in the economic availability of raw materials, operating supplies, energy sources or supplies or facilities (including, but not limited to, facilities in connection with the disposal of industrial wastes) necessary for the operation of the Project or the Plant for the Project Purposes occur or technological or other changes occur which the Company cannot reasonably overcome or control and which in the Company's reasonable judgment render the Project or the Plant uneconomic or obsolete for the Project Purposes.

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        (f)    Any court or administrative body shall enter a judgment, order or decree, or shall take administrative action, requiring the Company to cease all or any substantial part of its operations served by the Project or the Plant to such extent that the Company is or will be prevented from carrying on its normal operations at the Project or the Plant for a period of six consecutive months.

        (g)  The termination by the Company of operations at the Plant.

        The amount payable by the Company in the event of its exercise of the option granted in this Section shall be the sum of the following:

          (i)  An amount of money which, when added to the moneys and investments held to the credit of the Bond Fund, will be sufficient pursuant to the provisions of the Indenture to pay, at 100% of the principal amount thereof plus accrued interest to the redemption date, and discharge, all Outstanding Bonds on the earliest applicable redemption date, that amount to be paid to the Trustee, plus

        (ii)  An amount of money equal to the Additional Payments relating to those Bonds accrued and to accrue until actual final payment and redemption of those Bonds, that amount or applicable portions thereof to be paid to the Trustee or to the Persons to whom those Additional Payments are or will be due.

The requirement of (ii) above with respect to Additional Payments to accrue may be met if provisions satisfactory to the Trustee and the Authority are made for paying those amounts as they accrue.

        The rights and options granted to the Company in this Section may be exercised whether or not the Company is in default hereunder; provided, that such default will not relieve the Company from performing those actions which are necessary to exercise any such right or option granted hereunder.

        Section 6.3.    Mandatory Redemption.    The Company shall deliver to the Trustee the moneys needed to redeem the Bonds in accordance with any mandatory redemption provisions relating thereto as may be set forth in Section 4.01(b) of the Indenture.

        Section 6.4.    Notice of Redemption.    In order to exercise an option granted in, or to consummate a redemption required by, this Article VI, the Company shall, within 180 days following the event authorizing the exercise of such option, or at any time during the continuation of the condition referred to in paragraphs (c), (d) or (e) of Section 6.2 hereof, or at any time that optional redemption of the Bonds is permitted under the Indenture as provided in Section 6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as defined in the Indenture), give written notice to the Authority and the Trustee that it is exercising its option to direct the redemption of Bonds, or that the redemption thereof is required by Section 4.01(b) of the Indenture due to the occurrence of a Determination of Taxability, as the case may be, in accordance with the Agreement and the Indenture, and shall specify therein the date on which such redemption is to be made, which date shall not be more than 180 days from the date such notice is mailed. The Company shall make arrangements satisfactory to the Trustee for the giving of the required notice of redemption to the Holders of the Bonds, in which arrangements the Authority shall cooperate.

        Section 6.5.    Actions by Authority.    At the request of the Company or the Trustee, the Authority shall take all steps required of it under the applicable provisions of the Indenture or the Bonds to effect the redemption of all or a portion of the Bonds pursuant to this Article VI.

(End of Article VI)

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ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES

        Section 7.1.    Events of Default.    Each of the following shall be an Event of Default:

        (a)  The occurrence of an event of default as defined in Section 7.01 (a), (b) or (c) of the Indenture;

        (b)  The Company shall fail to observe and perform any other agreement, term or condition contained in this Agreement, other than such failure as has resulted in an event of default described in (a) above and the continuation of that failure for a period of 90 days after notice thereof shall have been given to the Company by the Authority or the Trustee, or for such longer period as the Authority and the Trustee may agree to in writing; provided, that failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues that action to completion within 150 days after the expiration of initial cure period as determined above, or within such longer period as the Authority and the Trustee may agree to in writing; and

        (c)  The receipt by the Trustee of written notice from the Bond Insurer that an event of default has occurred and is continuing under the Insurance Agreement; and

        (d)  By decree of a court of competent jurisdiction the Company shall be adjudicated a bankrupt, or an order shall be made approving a petition or answer filed seeking reorganization or readjustment of the Company under the federal bankruptcy laws or other law or statute of the United States of America or of the state of incorporation of the Company or of any other state, or, by order of such a court, a trustee in bankruptcy, a receiver or receivers shall be appointed of all or substantially all of the property of the Company, and any such decree or order shall have continued unstayed on appeal or otherwise and in effect for a period of sixty (60) days; and

        (e)  The Company shall file a petition in voluntary bankruptcy or shall make an assignment for the benefit of creditors or shall consent to the appointment of a receiver or receivers of all or any part of its property, or shall file a petition seeking reorganization or readjustment under the Federal bankruptcy laws or other law or statute of the United States of America or any state thereof, or shall file a petition to take advantage of any debtors' act.

        Notwithstanding the foregoing, if, by reason of Force Majeure, the Company is unable to perform or observe any agreement, term or condition hereof which would give rise to an Event of Default under subsection (b) hereof, the Company shall not be deemed in default during the continuance of such inability. However, the Company shall promptly give notice to the Trustee and the Authority of the existence of an event of Force Majeure and shall use its best efforts to remove the effects thereof; provided that the settlement of strikes or other industrial disturbances shall be entirely within its discretion.

        The term Force Majeure shall mean the following:

          (i)  acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornados; storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, nuclear accidents or other malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of a utility serving the Project; shortages of labor, materials, supplies or transportation; or

        (ii)  any cause, circumstance or event not reasonably within the control of the Company.

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        The exercise of remedies hereunder shall be subject to any applicable limitations of federal bankruptcy law affecting or precluding that declaration or exercise during the pendency of or immediately following any bankruptcy, liquidation or reorganization proceedings.

        Section 7.2.    Remedies on Default.    Whenever an Event of Default shall have happened and be subsisting, either or both of the following remedial steps may be taken:

        (a)  The Authority or the Trustee may have access to, inspect, examine and make copies of the books, records, accounts and financial data of the Company, only, however, insofar as they pertain to the Project; or

        (b)  The Authority or the Trustee may pursue all remedies now or hereafter existing at law or in equity to recover all amounts, including all Loan Payments and Additional Payments and under Section 4.9 hereof the purchase price of Bonds tendered for purchase, then due and thereafter to become due under this Agreement, or to enforce the performance and observance of any other obligation or agreement of the Company under this Agreement.

Notwithstanding the foregoing, the Authority shall not be obligated to take any step which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until a satisfactory indemnity bond has been furnished to the Authority at no cost or expense to the Authority. Any amounts collected as Loan Payments or applicable to Loan Payments and any other amounts which would be applicable to payment of Bond Service Charges collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture or, if the outstanding Bonds have been paid and discharged in accordance with the provisions of the Indenture, shall be paid as provided in Section 5.08 of the Indenture for transfers of remaining amounts in the Bond Fund.

        The provisions of this Section are subject to the further limitation that the rescission and annulment by the Trustee of its declaration that all of the Bonds are immediately due and payable also shall constitute a rescission and annulment of any corresponding declaration made pursuant to this Section and a rescission and annulment of the consequences of that declaration and of the Event of Default with respect to which that declaration has been made, provided that no such rescission and annulment shall extend to or affect any subsequent or other default or impair any right consequent thereon.

        Section 7.3.    No Remedy Exclusive.    No remedy conferred upon or reserved to the Authority or the Trustee by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair that right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than any notice required by law or for which express provision is made herein.

        Section 7.4.    Agreement to Pay Attorneys' Fees and Expenses.    If an Event of Default should occur and the Authority or the Trustee should incur expenses, including attorneys' fees, in connection with the enforcement of this Agreement or the collection of sums due hereunder, the Company shall be required, to the extent permitted by law, to reimburse the Authority and the Trustee, as applicable, for the expenses so incurred upon demand.

        Section 7.5.    No Waiver.    No failure by the Authority or the Trustee to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of their right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof.

        Section 7.6.    Notice of Default.    The Company shall notify the Trustee immediately if it becomes aware of the occurrence of any Event of Default hereunder or of any fact, condition or event which, with the giving of notice or passage of time or both, would become an Event of Default.

(End of Article VII)

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ARTICLE VIII
MISCELLANEOUS

        Section 8.1.    Term of Agreement.    This Agreement shall be and remain in full force and effect from the date of delivery of the Bonds to the Original Purchaser until such time as (i) all of the Bonds shall have been fully paid (or provision made for such payment) and the Indenture has been released pursuant to Section 9.01 thereof and (ii) all other sums payable by the Company under this Agreement shall have been paid.

        Section 8.2.    Amounts Remaining in Funds.    Any amounts in the Bond Fund remaining unclaimed by the Holders of Bonds for four years after the due date thereof (whether at stated maturity, by redemption, upon acceleration or otherwise), at the option of the Company, shall be deemed to belong to and shall be paid, subject to Section 5.07 of the Indenture, at the written request of the Company, to the Company by the Trustee. With respect to that principal of and any premium and interest on the Bonds to be paid from moneys paid to the Company pursuant to the preceding sentence, the Holders of the Bonds entitled to those moneys shall look solely to the Company for the payment of those moneys. Further, any amounts remaining in the Bond Fund and any other special funds or accounts created under this Agreement or the Indenture, except the Rebate Fund, after all of the Bonds shall be deemed to have been paid and discharged under the provisions of the Indenture and all other amounts required to be paid under this Agreement and the Indenture have been paid, shall be paid to the Company to the extent that those moneys are in excess of the amounts necessary to effect the payment and discharge of the Outstanding Bonds.

        Section 8.3.    Notices.    All notices, certificates, requests or other communications hereunder shall be in writing, except as provided in Section 3.4 hereof, and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Authority, the Company, the Bond Insurer or the Trustee shall also be given to the others. The Company, the Authority, the Bond Insurer and the Trustee, by notice given hereunder, may designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent.

        Section 8.4.    Extent of Covenants of the Authority; No Personal Liability.    All covenants, obligations and agreements of the Authority contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future member, officer, agent or employee of the Authority in other than his official capacity, and neither the members of the Authority nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or by reason of the covenants, obligations or agreements of the Authority contained in this Agreement or in the Indenture.

        Section 8.5.    Binding Effect.    This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Authority, the Company and their respective permitted successors and assigns provided that this Agreement may not be assigned by the Company (except as permitted under Sections 5.8, 5.12 or 5.13 hereof) and may not be assigned by the Authority except to (i) the Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or secure payment of Bond Service Charges or (ii) any successor public body to the Authority.

        Section 8.6.    Amendments and Supplements.    Except as otherwise expressly provided in this Agreement or the Indenture, subsequent to the issuance of the Bonds and prior to all conditions provided for in the Indenture for release of the Indenture having been met, this Agreement may not be effectively amended, changed, modified, altered or terminated by the parties hereto except with the

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consents required by, and in accordance with, the provisions of Article XI of the Indenture, as applicable.

        Section 8.7.    [Reserved].    .

        Section 8.8.    Continuing Disclosure.    The Authority hereby acknowledges the entry by the Company into the Continuing Disclosure Agreement under which the Company has assumed certain obligations for the benefit of the Holders of the Bonds. The Company agrees to perform its obligations under the Continuing Disclosure Agreement. The Company acknowledges and agrees that the Authority is not an "obligated person" (as defined in the Continuing Disclosure Agreement) with respect to the Bonds and represents that the Company is the only obligated person with respect to the Bonds. Notwithstanding any other provision of this Agreement, any failure by the Company to comply with any provision of the Continuing Disclosure Agreement shall not be a failure or a default, or an Event of Default, under this Agreement or the Indenture.

        Section 8.9.    Execution Counterparts.    This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument.

        Section 8.10.    Severability.    If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a judicial or administrative authority to be invalid or unenforceable, that determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law.

        Section 8.11.    Governing Law.    This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State.

(End of Article VIII)

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        IN WITNESS WHEREOF, the Authority and the Company have caused this Agreement to be duly executed in their respective names, all as of the date hereinbefore written.

OHIO AIR QUALITY DEVELOPMENT AUTHORITY
By:	/s/  MARK R. SHANAHAN Executive Director
THE CINCINNATI GAS & ELECTRIC COMPANY
By:	/s/  WENDY L. AUMILLER Treasurer

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EXHIBIT A

DESCRIPTION OF AIR QUALITY FACILITIES
AT
WILLIAM H. ZIMMER ELECTRIC
GENERATING STATION

        The Project consists of:

(A)

a high efficiency electrostatic precipitator system designed to remove particulates from the flue gas,



(B)

a flue gas desulfurization ("scrubber") system designed to remove sulfur dioxide from the flue gas,



(C)

a stack,



(D)

a coal dust control system,



(E)

a nitrous oxide control system, and



(F)

a cooling tower and circulating water system.

        The precipitator system includes electrostatic precipitators and a fly ash handling system, as well as all other necessary earthwork, piling, foundations, structural and miscellaneous steel, supports, siding, enclosures, electrical equipment, instrumentation and controls, mechanical equipment, related pumps and tanks, hoppers and storage silos, and associated equipment required for the foregoing and used exclusively in connection therewith. The precipitator system includes related drains, sumps and piping necessary to transmit collected waste waters to the waste water pond. The Project also includes precipitator inlet and outlet ductwork.

        The scrubber system includes an inlet plenum, six induced draft fans, ductwork to and including six absorber modules, ductwork to the stack, FGD reagent and lime unloading and handling system including required river cells, FGD reagent and lime silos, an FGD reagent and lime preparation facility, slurry tanks, scrubber sludge handling facilities which include thickener tanks, a sludge pond underflow and overflow tanks, a sludge handling building, stockpile facilities and auxiliary facilities. The scrubber system includes all earthwork including stream relocation, piling, foundations, structural and miscellaneous steel, siding, painting, electrical and mechanical components and associated equipment required for the scrubber system and used exclusively in connection therewith. The scrubber system includes related drains, sumps and piping necessary to transmit collected waste waters to the waste water pond, and also includes all pipes, pumps and associated mechanical and electrical components to supply and recycle water for the scrubber system operation. The scrubber system also includes a disposal area and the roads and bridges used exclusively for the transportation of scrubber sludge, bottom ash and other solid waste along with truck wash facilities and truck scales.

        The stack includes the stack shell and brick liner, as well as earthwork, piling, foundation and associated components.

        The coal dust control systems include a coal dust collection system, a coal dust suppression system and a coal wetting system.

        The cooling tower and circulating water system includes a natural draft cooling tower, a cooling tower basin, a cooling water flume, three circulating water pumps, circulating water pipes and valves, the make-up water subsystem, the blowdown subsystem, the cooling water chemical conditioning subsystem, mechanical and electrical auxiliaries, and related controls and instrumentation. The cooling water system also includes all related site development and earthwork, piling, foundations, structural and miscellaneous steel, siding, painting, electrical and mechanical components and associated equipment required for the cooling tower and circulating water system and used exclusively in connection therewith.

A-1

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Exhibit 4-VVV