-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ichr0DLgi2ExwFV7OS2BZF3/XDGOrUrI2lChPoNMrR5tMGNhPjvmo504VpFHKeWu xT9j5YYEr/FQAmHdz42TfA== 0000899652-02-000040.txt : 20020513 0000899652-02-000040.hdr.sgml : 20020513 ACCESSION NUMBER: 0000899652-02-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINCINNATI GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000020290 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 310240030 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01232 FILM NUMBER: 02643950 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST ROOM 362-ANNEX STREET 2: PO BOX 960 CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872291 MAIL ADDRESS: STREET 1: 139 E. FOURTH ST. STREET 2: PO BOX 960 CITY: CINCINNATTI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGY CORP CENTRAL INDEX KEY: 0000899652 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311385023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11377 FILM NUMBER: 02643951 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872644 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET STREET 2: P.O BOX 960 CITY: CINCINATI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION LIGHT HEAT & POWER CO CENTRAL INDEX KEY: 0000100858 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 310473080 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-07793 FILM NUMBER: 02643952 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST STREET 2: C/O TREASURER DEPT, PO BOX 960 CITY: CINCINNATI STATE: OH ZIP: 45201 BUSINESS PHONE: 5133812000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSI ENERGY INC CENTRAL INDEX KEY: 0000081020 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 350594457 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03543 FILM NUMBER: 02643953 BUSINESS ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 BUSINESS PHONE: 3178399611 MAIL ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 FORMER COMPANY: FORMER CONFORMED NAME: PUBLIC SERVICE CO OF INDIANA INC DATE OF NAME CHANGE: 19900509 10-Q 1 form10q1stqtr2002.htm FORM 10-Q 1ST QUARTER 2002 Form 10Q 1st Qtr 2002

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

        (X)      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
        ( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from                     to                    

         Commission            Registrant, State of Incorporation,               I.R.S. Employer
        File Number               Address and Telephone Number                  Identification No.
        -----------               ----------------------------                  ------------------

          1-11377                         CINERGY CORP.                            31-1385023
                                    (A Delaware Corporation)
                                     139 East Fourth Street
                                     Cincinnati, Ohio 45202
                                         (513) 421-9500

           1-1232              THE CINCINNATI GAS & ELECTRIC COMPANY                31-0240030
                                      (An Ohio Corporation)
                                     139 East Fourth Street
                                     Cincinnati, Ohio 45202
                                         (513) 421-9500

           1-3543                       PSI ENERGY, INC.                            35-0594457
                                    (An Indiana Corporation)
                                      1000 East Main Street
                                    Plainfield, Indiana 46168
                                         (513) 421-9500

           2-7793            THE UNION LIGHT, HEAT AND POWER COMPANY                31-0473080
                                    (A Kentucky Corporation)
                                     139 East Fourth Street
                                     Cincinnati, Ohio 45202
                                         (513) 421-9500

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    X    No    __

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

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 April 30, 2002, shares of common stock outstanding for each registrant were as listed:

                   Registrant                              Description                             Shares
                   ----------                              -----------                             ------

  Cinergy Corp.                                 Par value $.01 per share                          167,072,010

  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
- ---------------
                          PART I FINANCIAL INFORMATION

  1   Financial Statements
           Cinergy Corp.
               Consolidated Statements of Income
               Consolidated Balance Sheets
               Consolidated Statements of Changes in Common Stock Equity
               Consolidated Statements of Cash Flows

           The Cincinnati Gas & Electric Company
               Consolidated Statements of Income and Comprehensive Income
               Consolidated Balance Sheets
               Consolidated Statements of Cash Flows

           PSI Energy, Inc.
               Consolidated Statements of Income and Comprehensive Income
               Consolidated Balance Sheets
               Consolidated Statements of Cash Flows

           The Union Light, Heat and Power Company
               Statements of Income
               Balance Sheets
               Statements of Cash Flows

      Notes to Financial Statements

      Cautionary Statements Regarding Forward-Looking Information

  2   Management's Discussion and Analysis of Financial Condition and Results
           of Operations
               Introduction
               Organization
               Liquidity and Capital Resources
               2002 Quarterly Results of Operations - Historical
               Results of Operations - Future

  3   Quantitative and Qualitative Disclosures About Market Risk

                            PART II OTHER INFORMATION

  1   Legal Proceedings

  4   Submission of Matters to a Vote of Security Holders

  6   Exhibits and Reports on Form 8-K

      Signatures


                                  CINERGY CORP.
                        CONSOLIDATED STATEMENTS OF INCOME

                                                                               Quarter Ended
                                                                                  March 31
                                                                         2002                  2001
- --------------------------------------------------------------------------------------------------------
                                                             (dollars in thousands, except per share amounts)
                                                                               (unaudited)

Operating Revenues
   Electric                                                           $1,283,424          $ 1,893,458
   Gas                                                                   903,261            1,813,822
   Other                                                                  17,078               18,022
                                                                  ------------------    --------------
         Total Operating Revenues                                      2,203,763            3,725,302

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

Operating Expenses
   Fuel and purchased and exchanged power                                727,547            1,364,654
   Gas purchased                                                         823,077            1,710,610
   Operation and maintenance                                             265,451              249,490
   Depreciation                                                           99,484               88,564
   Taxes other than income taxes                                          72,422               63,092
                                                                  ------------------    --------------
         Total Operating Expenses                                      1,987,981            3,476,410

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

Operating Income                                                         215,782              248,892

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

Equity in Earnings (Losses) of Unconsolidated Subsidiaries                 4,867               (1,239)
Miscellaneous - Net                                                       (1,047)              (4,694)
Interest                                                                  61,628               63,550
Preferred Dividend Requirement of Subsidiary Trust                         5,913                    -

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

Income Before Taxes                                                      152,061              179,409

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

Income Taxes                                                              55,475               58,304
Preferred Dividend Requirements of Subsidiaries                              858                  858
                                                                 ------------------    -----------------
Net Income                                                          $     95,728          $   120,247
                                                                 ==================    =================

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

Average Common Shares Outstanding                                        164,295              158,989

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

Earnings Per Common Share (Note 9)
   Net Income                                                       $       0.58          $      0.76

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

Earnings Per Common Share - Assuming Dilution (Note 9)
   Net Income                                                       $       0.58          $      0.75

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

Dividends Declared Per Common Share                                 $       0.45          $      0.45

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

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




                                  CINERGY CORP.
                           CONSOLIDATED BALANCE SHEETS

ASSETS
                                                                                March 31         December 31
                                                                                  2002              2001
                                                                               (unaudited)
- -------------------------------------------------------------------------------------------------------------
                                                                                  (dollars in thousands)

Current Assets
   Cash and cash equivalents                                                   $    96,318       $   111,067
   Restricted deposits                                                               8,783             8,055
   Notes receivable (Note 5)                                                       134,208            31,173
   Accounts receivable less accumulated provision for doubtful accounts
     of $13,958 at March 31, 2002, and $35,580 at December 31, 2001 (Note 5)     1,010,542         1,123,214
   Materials, supplies, and fuel - at average cost                                 218,605           240,812
   Energy risk management current assets (Note 1(c))                               313,359           449,397
   Prepayments and other                                                           105,412           110,311
                                                                             --------------    -------------
                  Total Current Assets                                           1,887,227         2,074,029

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

Property, Plant, and Equipment - at Cost
   Utility plant in service                                                      8,159,770         8,089,961
   Construction work in progress                                                   518,409           464,560
                                                                             --------------    -------------
         Total Utility Plant                                                     8,678,179         8,554,521
   Non-regulated property, plant, and equipment                                  4,566,393         4,527,994
   Accumulated depreciation                                                      4,920,796         4,845,620
                                                                             --------------    -------------
                  Net Property, Plant, and Equipment                             8,323,776         8,236,895

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

Other Assets
   Regulatory assets                                                             1,001,867         1,015,863
   Investments in unconsolidated subsidiaries                                      341,736           339,059
   Energy risk management non-current assets (Note 1(c))                           159,615           134,445
   Other investments                                                               175,905           164,155
   Goodwill                                                                         53,063            53,587
   Other intangible assets                                                          22,123            22,250
   Other                                                                           199,104           259,530
                                                                             --------------    -------------
                  Total Other Assets                                             1,953,413         1,988,889

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

Total Assets                                                                   $12,164,416       $12,299,813
                                                                             ==============    =============

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

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





                                  CINERGY CORP.
                           CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                         March 31        December 31
                                                                           2002              2001
                                                                       (unaudited)
- ------------------------------------------------------------------------------------------------------
                                                                           (dollars in thousands)

Current Liabilities
   Accounts payable                                                    $   999,529       $ 1,029,173
   Accrued taxes                                                           230,310           195,976
   Accrued interest                                                         72,156            56,216
   Notes payable and other short-term obligations (Note 4)                 949,151         1,155,786
   Long-term debt due within one year (Note 3)                             125,589           148,431
   Energy risk management current liabilities (Note 1(c))                  267,618           429,794
   Other                                                                   119,233           127,375
                                                                      --------------    --------------
                  Total Current Liabilities                              2,763,586         3,142,751

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

Non-Current Liabilities
   Long-term debt (Note 3)                                               3,585,452         3,596,730
   Deferred income taxes                                                 1,310,015         1,301,407
   Unamortized investment tax credits                                      125,110           127,385
   Accrued pension and other postretirement benefit costs                  438,704           438,962
   Energy risk management non-current liabilities (Note 1 (c))             136,922           135,619
   Other                                                                   252,204           246,340
                                                                      --------------    --------------
                  Total Non-Current Liabilities                          5,848,407         5,846,443

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

Total Liabilities                                                        8,611,993         8,989,194

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

Preferred Trust Securities
   Company obligated, mandatorily redeemable, preferred trust              306,785           306,327
   securities
     of subsidiary, holding solely debt securities of the company

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

Cumulative Preferred Stock of Subsidiaries
   Not subject to mandatory redemption                                      62,830            62,833

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

Common Stock Equity (Note 2)
   Common stock - $.01 par value; authorized shares - 600,000,000;
     outstanding shares - 166,826,096 at March 31, 2002, and
     159,402,839 at December 31, 2001                                        1,669             1,594
   Paid-in capital                                                       1,839,338         1,619,659
   Retained earnings                                                     1,360,989         1,337,135
   Accumulated other comprehensive income (loss)                           (19,188)          (16,929)
                                                                      --------------  --------------
                  Total Common Stock Equity                              3,182,808         2,941,459

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

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholders' Equity                             $12,164,416       $12,299,813
                                                                     ==============   ==============

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

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

                                  CINERGY CORP.
            CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

                                                                                                     Accumulated       Total
                                                                                                        Other          Common
                                                                    Common  Paid-in      Retained    Comprehensive     Stock
                                                                    Stock   Capital      Earnings    Income/(Loss)     Equity
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                          (dollars in thousands)
                                                                                               (unaudited)

Quarter Ended March 31, 2002

Balance at January 1, 2002                                          $1,594  $1,619,659  $1,337,135  $(16,929)      $2,941,459
Comprehensive income:
   Net income                                                                               95,728                     95,728
   Other comprehensive income (loss), net of tax effect of $3,150
     Foreign currency translation adjustment                                                          (1,584)          (1,584)
     Minimum pension liability adjustment                                                                136              136
     Unrealized gain (loss) on investment trusts                                                      (1,051)          (1,051)
     Cash flow hedges (Note 1(b))                                                                        240              240
                                                                                                                   ----------
   Total comprehensive income                                                                                          93,469

Issuance of 7,423,257 shares of common stock - net                      75     215,894                                215,969
Dividends on common stock ($.45 per share)                                                 (71,882)                   (71,882)
Other                                                                            3,785           8                      3,793
                                                                    ------ -----------  ----------  --------       ----------

Ending balance at March 31, 2002                                    $1,669  $1,839,338  $1,360,989  $(19,188)      $3,182,808
                                                                    ======  ==========  ==========  ========       ==========

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

 Quarter Ended March 31, 2001

Balance at January 1, 2001                                         $1,590   $1,619,153  $1,179,113  $(10,895)      $2,788,961
Comprehensive income:
   Net income                                                                              120,247                    120,247
   Other comprehensive income (loss), net of tax effect of
   ($817)
     Foreign currency translation adjustment                                                             696              696
     Minimum pension liability adjustment                                                                 91               91
     Unrealized gain (loss) on investment trusts                                                        (683)            (683)
     Cumulative effect of change in accounting principle                                              (2,500)          (2,500)
     Cash flow hedges (Note 1(b))                                                                     (2,065)          (2,065)
                                                                                                                   ----------
   Total comprehensive income                                                                                         115,786

Issuance of 33,870 shares of common stock - net                                    826                                    826
Treasury shares purchased                                                       (2,191)                                (2,191)
Treasury shares reissued                                                           378                                    378
Dividends on common stock ($.45 per share)                                                 (71,541)                   (71,541)
Other                                                                            1,200       1,733                      2,933
                                                                  --------  ----------  ----------  --------       ----------

Ending balance at March 31, 2001                                   $1,590   $1,619,366  $1,229,552  $(15,356)      $2,835,152
                                                                  ========  ==========  ==========  ========       ==========

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

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



                                  CINERGY CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                           Quarter Ended
                                                                                              March 31
                                                                                       2002             2001
- --------------------------------------------------------------------------------- --------------- ---------------
                                                                                       (dollars in thousands)
                                                                                            (unaudited)

Operating Activities
   Net income                                                                       $  95,728        $   120,247
   Items providing or (using) cash currently:
     Depreciation                                                                      99,484             88,564
     Change in net position of energy risk management activities                      (50,005)           (18,772)
     Deferred income taxes and investment tax credits - net                             2,594             (1,418)
     Equity in earnings of unconsolidated subsidiaries                                 (4,867)             1,239
     Allowance for equity funds used during construction                               (2,850)            (1,143)
     Regulatory assets deferrals                                                      (17,665)           (12,266)
     Regulatory assets amortization                                                    29,976             33,045
     Changes in current assets and current liabilities:
         Restricted deposits                                                             (728)            (1,375)
         Accounts and notes receivable, net of reserves on receivables sold            74,298           (231,528)
         Materials, supplies, and fuel                                                 22,207             (2,605)
         Accounts payable                                                             (29,644)           209,709
         Accrued taxes and interest                                                    50,274             51,117
     Other items - net                                                                  7,638            (48,721)
                                                                                   ------------     -------------

                  Net cash provided by (used in) operating activities                 276,440            186,093
- -----------------------------------------------------------------------------------------------------------------

Financing Activities
   Change in short-term debt                                                         (206,635)           680,423
   Issuance of long-term debt                                                               -             28,148
   Redemption of long-term debt                                                       (30,722)           (27,599)
   Retirement of preferred stock of subsidiaries                                           (2)                 -
   Issuance of common stock                                                           215,969                826
   Dividends on common stock                                                          (71,882)           (71,541)
                                                                                   ------------     -------------

                  Net cash provided by (used in) financing activities                 (93,272)           610,257
- -----------------------------------------------------------------------------------------------------------------

Investing Activities
   Construction expenditures (less allowance for equity funds used during
     construction)                                                                   (180,982)          (187,184)
   Acquisitions and other investments                                                 (16,935)          (514,729)
                                                                                  ------------      -------------

                  Net cash provided by (used in) investing activities                (197,917)          (701,913)
- -----------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                  (14,749)            94,437

Cash and cash equivalents at beginning of period                                      111,067             93,054
                                                                                  ------------      -------------

Cash and cash equivalents at end of period                                          $  96,318        $   187,491
                                                                                   ============     =============

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

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



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

                                                                                Quarter Ended
                                                                                  March 31
                                                                            2002             2001
- ----------------------------------------------------------------------------------------------------
                                                                         (dollars in thousands)
                                                                               (unaudited)

Operating Revenues
   Electric                                                           $  635,886        $   941,809
   Gas                                                                   179,609            325,093
                                                                      ----------        -----------
         Total Operating Revenues                                        815,495          1,266,902

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

Operating Expenses
   Fuel and purchased and exchanged power                                345,015            669,744
   Gas purchased                                                         107,968            238,291
   Operation and maintenance                                             105,855            111,625
   Depreciation                                                           48,160             45,607
   Taxes other than income taxes                                          53,486             47,371
                                                                      ----------         ----------
         Total Operating Expenses                                        660,484          1,112,638

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

Operating Income                                                         155,011            154,264

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

Miscellaneous - Net                                                       (3,704)            (2,404)
Interest                                                                  22,855             27,396

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

Income Before Taxes                                                      128,452            124,464

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

Income Taxes                                                              50,867             42,889
                                                                      ----------        -----------

Net Income                                                            $   77,585        $    81,575

Preferred Dividend Requirement                                               211                211
                                                                     -----------        -----------

Net Income Applicable to Common Stock                                 $   77,374        $    81,364
                                                                      ==========        ===========

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

Net Income                                                            $   77,585        $    81,575

Other Comprehensive Income (Loss), Net of Tax Effect of $85                 (172)            (3,915)
                                                                      ----------        -----------

Comprehensive Income                                                  $   77,413        $    77,660
                                                                      ==========        ===========

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

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

                    THE CINCINNATI GAS & ELECTRIC COMPANY
                           CONSOLIDATED BALANCE SHEETS

ASSETS
                                                                                  March 31    December 31
                                                                                    2002         2001
                                                                                 (unaudited)
- ---------------------------------------------------------------------------------------------------------
                                                                                 (dollars in thousands)

Current Assets
   Cash and cash equivalents                                                   $   15,289     $    9,074
   Restricted deposits                                                              4,304          3,540
   Notes receivable from affiliated companies (Note 5)                             66,184              -
   Accounts receivable less accumulated provision for doubtful accounts
     of $5,762 at March 31, 2002, and $25,874 at December 31, 2001 (Note 5)       179,728        332,970
   Accounts receivable from affiliated companies                                   15,366         12,112
   Materials, supplies, and fuel - at average cost                                104,526        138,119
   Energy risk management current assets (Note 1(c))                               34,925         44,360
   Prepayments and other                                                           11,493         13,087
                                                                               ----------     ----------
                  Total Current Assets                                            431,815        553,262

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

Property, Plant, and Equipment - at Cost
   Utility plant in service
     Electric                                                                   2,017,316      2,000,595
     Gas                                                                          937,636        926,381
     Common                                                                       257,353        253,978
                                                                               ----------     ----------
         Total Utility Plant In Service                                         3,212,305      3,180,954
   Construction work in progress                                                   96,676         96,247
                                                                               ----------     ----------
         Total Utility Plant                                                    3,308,981      3,277,201
   Non-regulated property, plant, and equipment                                 3,353,428      3,314,285
   Accumulated depreciation                                                     2,596,081      2,555,639
                                                                               ----------     ----------
                  Net Property, Plant, and Equipment                            4,066,328      4,035,847

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

Other Assets
   Regulatory assets                                                              591,303        592,491
   Energy risk management non-current assets (Note 1(c))                           63,577         48,982
   Other investments                                                                1,920          1,080
   Other                                                                           88,886        128,082
                                                                               ----------     ----------
                  Total Other Assets                                              745,686        770,635

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

Total Assets                                                                   $5,243,829     $5,359,744
                                                                               ==========     ==========

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

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


                    THE CINCINNATI GAS & ELECTRIC COMPANY
                           CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDER'S EQUITY
                                                                         March 31  December 31
                                                                           2002       2001
                                                                       (unaudited)
- ----------------------------------------------------------------------------------------------
                                                                      (dollars in thousands)

Current Liabilities
   Accounts payable                                                   $  292,538  $  352,450
   Accounts payable to affiliated companies                               31,233      30,419
   Accrued taxes                                                         138,091     116,616
   Accrued interest                                                       29,287      16,570
   Notes payable and other short-term obligations (Note 4)               196,100     196,100
   Notes payable to affiliated companies (Note 4)                        303,997     444,801
   Long-term debt due within one year                                    100,000     100,000
   Energy risk management current liabilities (Note 1(c))                 21,464      23,341
   Other                                                                  36,216      33,217
                                                                      ---------- -----------
                  Total Current Liabilities                            1,148,926   1,313,514

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

Non-Current Liabilities
   Long-term debt                                                      1,105,415   1,105,333
   Deferred income taxes                                                 788,132     779,295
   Unamortized investment tax credits                                     89,789      91,246
   Accrued pension and other postretirement benefit costs                166,107     165,326
   Energy risk management non-current liabilities (Note 1(c))             46,741      41,773
   Other                                                                 108,729     105,681
                                                                      ---------- -----------
                  Total Non-Current Liabilities                        2,304,913   2,288,654

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

Total Liabilities                                                      3,453,839   3,602,168

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

Cumulative Preferred Stock
   Not subject to mandatory redemption                                    20,486      20,486

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

Common Stock Equity
   Common stock - $8.50 par value; authorized shares - 120,000,000;
     outstanding shares - 89,663,086 at March 31, 2002, and
     December 31, 2001                                                   762,136     762,136
   Paid-in capital                                                       571,926     571,926
   Retained earnings                                                     441,292     408,706
   Accumulated other comprehensive income (loss)                          (5,850)     (5,678)
                                                                      ---------- -----------
                  Total Common Stock Equity                            1,769,504   1,737,090

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

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder's Equity                            $5,243,829  $5,359,744
                                                                      ==========  ==========

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

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



                    THE CINCINNATI GAS & ELECTRIC COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                              Quarter Ended
                                                                                                March 31
                                                                                           2002           2001
- ----------------------------------------------------------------------------------------------------------------
                                                                                         (dollars in thousands)
                                                                                               (unaudited)

Operating Activities
   Net income                                                                          $  77,585      $  81,575
   Items providing or (using) cash currently:
     Depreciation                                                                         48,160         45,607
     Deferred income taxes and investment tax credits - net                                7,465         (5,890)
     Change in net position of energy risk management activities                          (2,069)        (9,064)
     Allowance for equity funds used during construction                                     543           (427)
     Regulatory assets deferrals                                                         (11,131)        (6,530)
     Regulatory assets amortization                                                       11,494         15,956
     Changes in current assets and current liabilities:
         Restricted deposits                                                                (764)          (444)
         Accounts and notes receivable, net of reserves on receivables sold              121,927       (149,275)
         Materials, supplies, and fuel                                                    33,593         13,506
         Accounts payable                                                                (59,098)       120,700
         Accrued taxes and interest                                                       34,192         19,522
     Other items - net                                                                     8,439        (21,956)
                                                                                       ---------      ---------

                  Net cash provided by (used in) operating activities                    270,336        103,280
- ----------------------------------------------------------------------------------------------------------------

Financing Activities
   Change in short-term debt, including net affiliate notes                             (141,171)        38,051
   Dividends on preferred stock                                                             (211)          (212)
   Dividends on common stock                                                             (44,787)       (71,535)
                                                                                       ---------      ---------

                  Net cash provided by (used in) financing activities                   (186,169)       (33,696)
- ----------------------------------------------------------------------------------------------------------------

Investing Activities
   Construction expenditures (less allowance for equity funds used during
     construction)                                                                       (77,112)       (71,260)
   Other investments                                                                        (840)             -
                                                                                       ---------      ---------

                  Net cash provided by (used in) investing activities                    (77,952)       (71,260)
- ----------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                       6,215         (1,676)

Cash and cash equivalents at beginning of period                                           9,074         20,637
                                                                                       ---------      ---------

Cash and cash equivalents at end of period                                             $  15,289     $   18,961
                                                                                       =========      =========

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

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


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

                                                                              Quarter Ended
                                                                                March 31
                                                                          2002             2001
- ---------------------------------------------------------------------------------------------------
                                                                         (dollars in thousands)
                                                                               (unaudited)

Operating Revenues
   Electric                                                           $629,844        $924,608

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

Operating Expenses
   Fuel and purchased and exchanged power                              386,492         697,155
   Operation and maintenance                                           115,079          90,862
   Depreciation                                                         37,748          36,793
   Taxes other than income taxes                                        16,397          14,984
                                                                      --------        --------
         Total Operating Expenses                                      555,716         839,794

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

Operating Income                                                        74,128          84,814

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

Miscellaneous - Net                                                      5,351          (1,770)
Interest                                                                19,291          17,940

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

Income Before Taxes                                                     60,188          65,104

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

Income Taxes                                                            22,105          23,672
                                                                      --------        --------

Net Income                                                            $ 38,083        $ 41,432

Preferred Dividend Requirement                                             647             647
                                                                      --------        --------

Net Income Applicable to Common Stock                                 $ 37,436        $ 40,785

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

Net Income                                                            $ 38,083        $ 41,432

Other Comprehensive Income (Loss), Net of Tax Effect of $266              (497)           (465)
                                                                      --------        --------

Comprehensive Income                                                  $ 37,586        $ 40,967
                                                                      ========       =========

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

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


                                PSI ENERGY, INC.
                           CONSOLIDATED BALANCE SHEETS

ASSETS
                                                                                  March 31      December 31
                                                                                    2002            2001
                                                                                (unaudited)
- --------------------------------------------------------------------------------------------------------------
                                                                                    (dollars in thousands)

Current Assets
   Cash and cash equivalents                                                   $    6,590        $    1,587
   Restricted deposits                                                                521               519
   Notes receivable from affiliated companies (Note 5)                             42,754           444,801
   Accounts receivable less accumulated provision for doubtful accounts
     of $5,653 at March 31, 2002, and $6,773 at December 31, 2001 (Note 5)        229,987           336,994
   Accounts receivable from affiliated companies                                    2,324            10,470
   Materials, supplies, and fuel - at average cost                                104,437            87,661
   Energy risk management current assets (Note 1(c))                               22,517            28,201
   Prepayments and other                                                           37,608            41,041
                                                                               ----------        ----------
                  Total Current Assets                                            446,738           951,274

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

Property, Plant, and Equipment - at Cost
   Utility plant in service                                                     4,947,465         4,909,007
   Construction work in progress                                                  421,733           368,313
                                                                               ----------        ----------
         Total Utility Plant                                                    5,369,198         5,277,320
   Accumulated depreciation                                                     2,238,814         2,216,908
                                                                               ----------        ----------
                  Net Property, Plant, and Equipment                            3,130,384         3,060,412

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

Other Assets
   Regulatory assets                                                              410,564           423,372
   Energy risk management non-current assets (Note 1(c))                           38,853            30,164
   Other investments                                                               61,145            57,633
   Other                                                                           24,401            47,927
                                                                               ----------        ----------
                  Total Other Assets                                              534,963           559,096

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

Total Assets                                                                   $4,112,085        $4,570,782
                                                                               ==========        ==========

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

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




                                PSI ENERGY, INC.
                           CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDER'S EQUITY
                                                                                  March 31        December 31
                                                                                    2002              2001
                                                                                (unaudited)
- ---------------------------------------------------------------------------------------------------------------
                                                                                    (dollars in thousands)

Current Liabilities
   Accounts payable                                                             $  247,427       $   312,707
   Accounts payable to affiliated companies                                         31,783            27,370
   Accrued taxes                                                                   139,690           102,317
   Accrued interest                                                                 24,261            23,760
   Notes payable and other short-term obligations (Note 4)                         137,600           148,600
   Notes payable to affiliated companies (Note 4)                                   12,519           422,263
   Long-term debt due within one year (Note 3)                                         979            23,000
   Energy risk management current liabilities (Note 1(c))                           21,355            23,185
   Other                                                                            42,769            41,695
                                                                                ----------       -----------
                  Total Current Liabilities                                        658,383         1,124,897

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

Non-Current Liabilities
   Long-term debt (Note 3)                                                       1,324,179         1,325,089
   Deferred income taxes                                                           478,665           486,694
   Unamortized investment tax credits                                               35,321            36,139
   Accrued pension and other postretirement benefit costs                          158,164           154,799
   Energy risk management non-current liabilities (Note 1(c))                       46,741            41,773
   Other                                                                            62,806            63,557
                                                                                ----------       -----------
                  Total Non-Current Liabilities                                  2,105,876         2,108,051

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

Total Liabilities                                                                2,764,259        3,232,948

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

Cumulative Preferred Stock
   Not subject to mandatory redemption                                              42,344           42,347

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

Common Stock Equity
   Common stock - without par value; $.01 stated value; authorized shares -
     60,000,000; outstanding shares - 53,913,701 at March 31, 2002,
     and December 31, 2001                                                             539              539
   Paid-in capital                                                                 416,414          416,414
   Retained earnings                                                               890,621          880,129
   Accumulated other comprehensive income (loss)                                    (2,092)          (1,595)
                                                                                ----------       ----------
                  Total Common Stock Equity                                      1,305,482        1,295,487

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

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder's Equity                                      $4,112,085       $4,570,782
                                                                                ==========       ==========

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

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


                                                   PSI ENERGY, INC.
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                           Quarter Ended
                                                                                             March 31
                                                                                   2002            2001
- ----------------------------------------------------------------------------------------------------------------
                                                                                      (dollars in thousands)
                                                                                            (unaudited)

Operating Activities
   Net income                                                                   $  38,083      $  41,432
   Items providing or (using) cash currently:
     Depreciation                                                                  37,748         36,793
     Deferred income taxes and investment tax credits - net                        (8,580)         2,467
     Change in net position of energy risk management activities                      133         (9,064)
     Allowance for equity funds used during construction                           (3,393)          (716)
     Regulatory assets deferrals                                                   (6,534)        (5,736)
     Regulatory assets amortization                                                18,482         17,089
     Changes in current assets and current liabilities:
         Restricted deposits                                                           (2)          (469)
         Accounts and notes receivable, net of reserves on receivables sold        99,305       (183,458)
         Materials, supplies, and fuel                                            (16,776)       (18,657)
         Accounts payable                                                         (60,867)       179,766
         Accrued taxes and interest                                                37,874         29,671
     Other items - net                                                                983        (19,782)
                                                                                ---------      ---------

                  Net cash provided by (used in) operating activities             136,456         69,336
- ----------------------------------------------------------------------------------------------------------

Financing Activities
   Change in short-term debt, including net affiliate notes                        24,057         61,285
   Redemption of long-term debt                                                   (23,000)       (19,825)
   Retirement of preferred stock                                                       (2)             -
   Dividends on preferred stock                                                      (647)          (647)
   Dividends on common stock                                                      (26,944)             -
                                                                                -----------    ---------

                  Net cash provided by (used in) financing activities             (26,536)        40,813
- ----------------------------------------------------------------------------------------------------------

Investing Activities
   Construction expenditures (less allowance for equity funds used during
     construction)                                                               (101,360)      (101,931)
   Other investments                                                               (3,557)        (2,431)
                                                                                -----------    ---------

                  Net cash provided by (used in) investing activities            (104,917)      (104,362)
- ----------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                5,003          5,787

Cash and cash equivalents at beginning of period                                    1,587          1,311
                                                                                -----------    ---------

Cash and cash equivalents at end of period                                      $   6,590      $   7,098
                                                                                ===========    =========

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

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


                     THE UNION LIGHT, HEAT AND POWER COMPANY
                              STATEMENTS OF INCOME

                                                                          Quarter Ended
                                                                             March 31
                                                                     2002            2001
- ------------------------------------------------------------------------------------------------
                                                                      (dollars in thousands)
                                                                           (unaudited)

Operating Revenues
   Electric                                                        $51,857        $ 54,602
   Gas                                                              35,204          59,162
                                                                   -------        --------
         Total Operating Revenues                                   87,061         113,764

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

Operating Expenses
   Electricity purchased from parent company for resale             36,838          36,844
   Gas purchased                                                    22,889          42,912
   Operation and maintenance                                         9,452           9,247
   Depreciation                                                      4,220           4,165
   Taxes other than income taxes                                     1,201           1,107
                                                                   -------        --------
         Total Operating Expenses                                   74,600          94,275

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

Operating Income                                                    12,461          19,489

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

Miscellaneous - Net                                                 (5,168)           (469)
Interest                                                             1,505           1,693

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

Income Before Taxes                                                  5,788          17,327

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

Income Taxes                                                         1,904           3,472
                                                                   -------        --------

Net Income                                                         $ 3,884        $ 13,855
                                                                   =======        ========

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

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


                     THE UNION LIGHT, HEAT AND POWER COMPANY
                                 BALANCE SHEETS

ASSETS                                                                  March 31     December 31
                                                                          2002          2001
                                                                       (unaudited)
- ---------------------------------------------------------------------------------------------------------
                                                                        (dollars in thousands)

Current Assets
   Cash and cash equivalents                                             $  4,128     $  4,099
   Notes receivable from affiliate companies (Note 5)                      19,364            -
   Accounts receivable less accumulated provision for doubtful accounts
     of $0 at March 31, 2002, and $1,196 at December 31, 2001 (Note 5)        460       16,785
   Accounts receivable from affiliated companies                               42        2,401
   Materials, supplies, and fuel - at average cost                          3,563       10,835
   Prepayments and other                                                      150          300
                                                                         ----------  ---------
                  Total Current Assets                                     27,707       34,420

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

Property, Plant, and Equipment - at Cost
   Utility plant in service
     Electric                                                             249,047      248,223
     Gas                                                                  199,799      197,301
     Common                                                                50,985       50,289
                                                                         ----------- ---------
         Total Utility Plant In Service                                   499,831      495,813
   Construction work in progress                                           13,824       11,004
                                                                         ----------  ---------
         Total Utility Plant                                              513,655      506,817
   Accumulated depreciation                                               182,208      178,567
                                                                         ---------- ----------
                  Net Property, Plant, and Equipment                      331,447      328,250

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

Other Assets
   Regulatory assets                                                        3,987        7,838
   Other investments                                                          116            2
   Other                                                                      897        6,580
                                                                         ---------- ----------
                  Total Other Assets                                        5,000       14,420

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

Total Assets                                                             $364,154     $377,090
                                                                         ========== ==========

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

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




                     THE UNION LIGHT, HEAT AND POWER COMPANY
                                 BALANCE SHEETS

LIABILITIES AND SHAREHOLDER'S EQUITY
                                                                            March 31    December 31
                                                                              2002         2001
                                                                           (unaudited)
- ---------------------------------------------------------------------------------------------------
                                                                            (dollars in thousands)

Current Liabilities
   Accounts payable                                                         $  3,844    $    7,960
   Accounts payable to affiliated companies                                   23,920        16,156
   Accrued taxes                                                               8,484         7,051
   Accrued interest                                                            1,200           643
   Notes payable to affiliated companies (Note 4)                                  -        26,432
   Other                                                                       5,581         5,322
                                                                            --------    ----------
                  Total Current Liabilities                                   43,029        63,564

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

Non-Current Liabilities
   Long-term debt                                                             74,629        74,621
   Deferred income taxes                                                      27,665        28,323
   Unamortized investment tax credits                                          3,342         3,411
   Accrued pension and other postretirement benefit costs                     13,155        13,198
   Amounts due to customers - income taxes                                     7,148         7,148
   Other                                                                      19,099        14,622
                                                                            --------    ----------
                  Total Non-Current Liabilities                              145,038       141,323

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

Total Liabilities                                                            188,067       204,887

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

Common Stock Equity
   Common stock - $15.00 par value; authorized shares - 1,000,000;
   outstanding shares - 585,333 at March 31, 2002, and December 31, 2001       8,780         8,780
   Paid-in capital                                                            21,111        21,111
   Retained earnings                                                         146,204       142,320
   Accumulated other comprehensive income (loss)                                  (8)           (8)
                                                                            --------    ----------
                  Total Common Stock Equity                                  176,087       172,203

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

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder's Equity                                  $364,154    $  377,090
                                                                            ========    ==========

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

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

                     THE UNION LIGHT, HEAT AND POWER COMPANY
                            STATEMENTS OF CASH FLOWS

                                                                                    Quarter Ended
                                                                                      March 31
                                                                                2002          2001
- ----------------------------------------------------------------------------------------------------------
                                                                               (dollars in thousands)
                                                                                    (unaudited)

Operating Activities
   Net income                                                               $    3,884    $  13,855
   Items providing or (using) cash currently:
     Depreciation                                                                4,220        4,165
     Deferred income taxes and investment tax credits - net                       (727)        (266)
     Allowance for equity funds used during construction                           (47)          14
     Regulatory assets deferrals                                                 4,687         (270)
     Regulatory assets amortization                                               (887)          34
     Changes in current assets and current liabilities:
         Accounts and notes receivable, net of reserves on receivables sold     14,388        6,474
         Materials, supplies, and fuel                                           7,272        3,318
         Accounts payable                                                        3,648      (20,386)
         Accrued taxes and interest                                              1,990        6,831
     Other items - net                                                           4,923       (1,146)
                                                                            ----------    ---------

                  Net cash provided by (used in) operating activities           43,351       12,623
- ---------------------------------------------------------------------------------------------------

Financing Activities
   Change in short-term debt, including net affiliate notes                    (35,978)      (5,128)
                                                                            ----------    ---------

                  Net cash provided by (used in) financing activities          (35,978)      (5,128)
- ---------------------------------------------------------------------------------------------------

Investing Activities
   Construction expenditures (less allowance for equity funds used during
     construction)                                                              (7,230)      (7,059)
   Other investments                                                              (114)           -
                                                                            ----------    ---------

                  Net cash provided by (used in) investing activities           (7,344)      (7,059)
- ---------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                29          436

Cash and cash equivalents at beginning of period                                 4,099        6,460
                                                                            ----------    ---------

Cash and cash equivalents at end of period                                  $    4,128    $   6,896
                                                                            ==========    =========

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

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

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). Effective with our adoption of Statement 133 in the first quarter of 2001, we began accounting for interest rate swaps using mark-to-market accounting and are assessing the effectiveness of any swaps used in hedging activities. At March 31, 2002, the fair value, and 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 variable-rate debt instruments from other comprehensive income occurs as interest payments are accrued on the debt instrument. See Note 1(d) below for further discussion of Statement 133.

(c) Energy Marketing and Trading

We market and trade electricity, natural gas, 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 have the intent and projected ability to fulfill substantially all obligations from company-owned assets, with such classification being 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 coal and gas procurement 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 on a settlement basis (i.e., revenues and costs recorded when the underlying commodity is delivered) and trading transactions using the mark-to-market method of accounting, consistent with our application of Emerging Issues Task Force 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). To the extent that accrual transactions constitute derivatives under Statement 133, we typically utilize the normal purchases and sales exemption, when the criteria for the exemption are met. To the extent trading transactions constitute derivatives under Statement 133, we typically account for them using mark-to-market accounting, the same treatment as under EITF 98-10, and do not attempt to identify them as a hedging instrument. Under the mark-to-market 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. 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.

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

  • generating station outages;
  • least-cost alternative;
  • native load requirements; and
  • extreme weather.

We value contracts in the trading portfolio using end-of-the-period market prices, 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).

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 are in the process of exploring coal marketing as a commercial activity. To date, we have executed a small number of transactions that are classified as trading and accounted for at fair value. Should we further pursue coal marketing as a formal commercial activity, the volume of coal transactions accounted for at fair value would likely increase substantially. Since we are still evaluating the viability of this as a commercial activity, the impact to either our financial position or results of operations cannot be determined at this time.

(d)        Accounting Changes

     (i)        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 will be initially 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 current 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 8. 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 results of operations. We have identified the reporting units for Cinergy and are finalizing the initial transition impairment test. Based on the tentative results of this test, we believe 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.

     (ii)        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 such 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 beginning to analyze the impact of this statement, but, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our financial position or results of operations.

     (iii)        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 mark-to-market accounting, the effects of implementation were not material.

Our adoption did not reflect the potential impact of applying mark-to-market accounting to selected electricity options and capacity contracts. We had not historically marked these instruments to market because they are intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While much of the criteria this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material. 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. Based on a review of existing contracts, we do not believe this revised guidance, which will be effective in the third quarter of 2002, will have a material impact on our financial position or results of operations upon adoption. However, given our activity in energy trading, it could increase volatility in future results.

In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward component) and flexibility to take additional quantity (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it is applicable 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 will adopt this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergy has certain contracts that contain 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 should not be material to our results of operations or financial position. However, any coal transactions that constitute trading activities will continue to be accounted for at fair value pursuant to EITF 98-10, as discussed more fully in Note 1(c).

     (iv)        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 results of operations and financial position was not material.

(e) Related Party Transactions

To supplement its native load requirements for 2002, CG&E has agreed to purchase peaking power from Cinergy Capital & Trading, Inc., an indirect wholly-owned subsidiary of Cinergy Corp., pursuant to the terms of a wholesale market-based tariff. For the three months ended March 31, 2002, payments accrued under this contract totaled approximately $6 million.

2. Common Stock

On February 19, 2002, Cinergy Corp. filed a registration statement to increase the available issuance under the shelf registration statement filed in November 2001, to approximately $200 million. On February 22, 2002, Cinergy Corp. sold 6.5 million shares of common stock of Cinergy Corp. with net proceeds of approximately $200 million under these registration statements. The net proceeds from the transaction were used to reduce short-term debt of Cinergy Corp. and for other general corporate purposes.

As discussed in the 2001 Form 10-K, in November 2001, Cinergy chose to 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. This replaced our previous practice of purchasing shares in the open market to fulfill certain plan obligations. During the first quarter of 2002, Cinergy issued 923,257 shares under these plans.

3. Long-term Debt

In January 2002, PSI Energy, Inc. (PSI) retired $23 million principal amount of Medium-Term Notes, Series A, which had matured. The securities were not replaced by new issues of long-term debt.

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 will expire in June 2002.

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

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

                                     March 31, 2002                 December 31, 2001
                                     --------------                 -----------------

                              Established                      Established
                                 Lines        Outstanding         Lines        Outstanding
                                 -----        -----------         -----        -----------
                                                      (in millions)

Cinergy Corp.

   Revolving lines             $  1,150        $  349            $1,175         $  599
   Uncommitted lines (1)             40             -                40              -
   Commercial paper                 800           182               800            125

 Operating companies
   Revolving lines                    -             -                 -              -
   Uncommitted lines (1)             75            55                75             66
   Pollution control notes          N/A           279               N/A            279

 Non-regulated subsidiaries
   Revolving lines                   46            39                46             38
   Short-term debt                   45            45                49             49
                                                ---------                        ---------

Cinergy Total                                  $  949                           $1,156

CG&E and subsidiaries
   Revolving lines             $      -        $    -            $    -         $    -
   Uncommitted lines (1)             15             -                15              -
   Pollution control notes          N/A           196               N/A            196
   Money pool                       N/A           304               N/A            445
                                                ---------                        ---------

CG&E Total                                     $  500                           $  641

PSI
   Revolving lines             $      -        $    -            $    -         $    -
   Uncommitted lines (1)             60            55                60             66
   Pollution control notes          N/A            83               N/A             83
   Money pool                       N/A            12               N/A            422
                                                ---------                        ---------

PSI Total                                      $  150                           $  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.

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

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 does include a subordinated note from Cinergy Receivables for a portion of the purchase price (ranging from 15% to 40% 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 as 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 Notes receivable from affiliated companies on CG&E’s, PSI’s, and ULH&P’s Balance Sheets. 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 Notes receivable from affiliated companies 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).

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

- -------------------------------------------------------------------------------------------------
                                                            CG&E and
                                             Cinergy       subsidiaries       PSI     ULH&P

 Anticipated credit loss rate                  0.6 %            0.6 %        0.5 %     0.9 %
 Discount rate on expected cash flows          5.0 %            5.0 %        5.0 %     5.0 %
 Receivables turnover rate (1)                13.2 %           13.6 %       12.7 %    14.4 %

(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% and 20% unfavorable variation in credit losses or discount rates was 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. 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 March 31, 2002.

- ---------------------------------------------------------------------------------------------
                                                          CG&E and
                                              Cinergy   subsidiaries     PSI      ULH&P
                                                                (in millions)

 Receivables sold as of period end           $454           $288         $166       $ 42
 Less:  Retained Interest                     108             65           43         10
                                            -----           ----         ----       ----

   Net receivables sold as of period end     $346           $223         $123       $ 32

 Purchased beneficial interest               $  8           $  -         $  -       $  -

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

6. Energy Trading

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

In December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the United States (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 courts 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)). These contracts were recognized at fair value when the contracts were terminated in the fourth quarter of 2001. Fair value for these contracts, and all terminated contracts with Enron, is governed by the provisions of each contract, but typically approximates fair value at contract termination. However, the effect of the loss of Enron’s participation in the energy markets on long-term liquidity and price volatility, or on the creditworthiness of common counterparties cannot be determined. We continually review and monitor our credit exposure to all counterparties and adjust the fair value of our position, as appropriate.

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 March 31, 2002, we had $608 million outstanding under the guarantees issued, of which approximately 75% represents guarantees of obligations reflected on Cinergy’s Consolidated Balance Sheet. 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 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)        NOX SIP Call

In October 1998, the EPA finalized its ozone transport rule, also known as the Nitrogen Oxide (NOX) 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 NOX emission allowance-trading program. This rule recommended states reduce NOX emissions primarily from industrial and utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate NOX reductions and, at the discretion of the state, a NOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent NOX reductions by May 1, 2003, if states failed to revise their SIPs.

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

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

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

The states of Indiana and Kentucky developed final NOX SIP rules in response to the NOX 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 approval of Kentucky’s rules, which are expected to become effective in the near future. The state of Ohio is still in the process of developing its NOX SIP rules in response to the NOX SIP Call. Cinergy’s current plans for compliance with the EPA’s NOX SIP Call would also satisfy compliance with Indiana’s SIP rules and Kentucky’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 NOX emissions. The current estimate of additional expenditures for this investment is approximately $550 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 NOX allowances.

SCRs are the most proven technology currently available for reducing NOX 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 NOX 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 NOX emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge to the Section 126 requirements, and remanded portions of the rule to the EPA for reconsideration of how growth was factored into the emission limitations. On August 24, 2001, the Court of Appeals temporarily suspended the Section 126 compliance deadline, pending the EPA’s reconsideration of growth factors. On January 19, 2002, the EPA issued a memorandum to all Regional Air Division Directors confirming that the EPA would extend the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for NOX 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 NOX reductions from utilities in Indiana, Kentucky, and surrounding states which are less stringent than the EPA’s NOX SIP Call. Indiana and Kentucky committed to adopt utility NOX control rules by December 2000, that would require controls be installed by May 2003. However, Indiana halted the rulemaking for NOX controls at this level, but completed NOX SIP Call level reduction regulations. Kentucky has completed its rulemaking, and issued a final rule that changed the compliance deadline to mirror the NOX SIP Call of May 31, 2004. However, on November 1, 2001, the intent to withdraw the regulation was noted in the Kentucky Administrative Register.

See (e) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NOX 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. In July 1998, the EPA requested comments on proposed revisions to the NSR rules that could have the affect of changing NSR applicability by limiting exemptions contained in the current regulation. On June 22, 2001, the EPA issued an NSR 90-Day Review Paper and scheduled four public forums across the U.S. to gather more information on the impacts of NSR. Cinergy provided oral testimony at an EPA public forum held in Cincinnati, Ohio, on July 10, 2001, and submitted written comments as well.

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

On September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying Cinergy and CG&E of their intent to sue under the citizens’ suit provisions of the CAA. These states allege violations of the CAA by constructing and continuing to operate a major modification of CG&E’s W.C. Beckjord Generating Station (Beckjord Station) 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 NSPS 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.

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% of 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, but at this time, 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.

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 NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (c) and (d).

Under the terms of the tentative agreement, the EPA and the other plaintiffs have agreed to drop all challenges of past maintenance and repair activities at our coal-fired generation plants. 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 permitting requirements.

In return for resolution of claims regarding past maintenance activities, as well as future operational certainty and demand growth, 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 NOX reduction technology year-round starting in 2004;
  • retire 50,000 tons of SO2 allowances between 2001 and 2005 and reduce our SO2 cap by 35% in 2013;
  • pay a civil penalty of $8.5 million to the U.S. government; and
  • implement $21.5 million in environmental mitigation projects.

The estimated cost for these capital expenditures is expected to be approximately $700 million. These capital expenditures are in addition to our previously announced commitment to install NOX controls over the next four years as previously discussed in (b) above.

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. 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 condition 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.

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. Subsequently, PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was moved to the Hendricks County Superior Court (Superior Court) in July 1998. Discovery closed in the case at the end of August 2001. PSI and its insurance carriers filed briefs on various issues for decision by the Superior Court in hearings held in November 2001. In December 2001, the Superior Court rescheduled the trial to June 2002. On February 1, 2002, the Superior Court issued rulings on motions for summary judgment. The Superior Court granted the motions of several insurance carriers who claimed there was insufficient evidence concerning the terms of their policies. The insurance policies in question were between 1950-1958 and 1961-1964. 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. The trial against the remaining insurance carriers will go forward in June 2002. At the present time, PSI cannot predict the outcome of this litigation.

PSI has 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 does not believe it can provide an estimate of the reasonably possible total remediation costs for any site before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSI currently cannot determine the total costs that may be incurred in connection with the remediation of all sites, to the extent that remediation is required. According to current information, these future costs at the 21 Indiana MGP sites are not material to our financial condition or results of operations. 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.

     (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.

(g) 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 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. We intend to vigorously defend these lawsuits. At the present time, Cinergy cannot predict the outcome of these suits.

(h) 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. On June 26, 2001, PSI formally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated that it will reconsider its decision. PSI believes it has strong legal and factual arguments in its favor and that it will ultimately be permitted to recover these costs. However, PSI cannot definitively predict the ultimate outcome of this matter.

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 is scheduled for the second quarter of 2002.

8. 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
  • Power Technology and Infrastructure Services Business Unit (Power Technology).

The following section describes the activities of our business units as of March 31, 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 a regulated, integrated utility, and 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 and includes the following products and services:

  • providing energy management and consulting services to customers that operate retail facilities;
  • providing various utility operations and infrastructure services to utilities (for example, providing underground locating and construction services for utilities); and
  • building and maintaining fiber optic telecommunication networks for businesses, municipalities, telecommunications carriers, and schools.

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 for the quarters ended March 31, 2002, and March 31, 2001, and total segment assets at March 31, 2002, and December 31, 2001, are presented 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. 

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Business Units - Financial Results
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                    Cinergy Business Units
                                                                    ----------------------
                                            Energy       Regulated      Power               All        Reconciling
                                            Merchant     Businesses   Technology   Total   Other (1)  Eliminations (2)  Consolidated
                                           -----------------------------------------------------------------------------------------
                                                                                      (in thousands)

Quarter ended March 31, 2002
- ----------------------------

 Operating revenues-
   External customers                      $1,493,842(4) $  702,162(5) $  7,759   $ 2,203,763  $     -   $      -        $ 2,203,763
   Intersegment revenues                       36,838             -           -        36,838        -    (36,838)                 -
 Segment profit (loss)(3)                      28,342        72,797      (5,411)       95,728        -          -             95,728

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 Quarter ended March 31, 2001
 ----------------------------

 Operating revenues-
   External customers                      $2,885,383(4) $  825,478(5) $ 14,441   $ 3,725,302  $     -   $      -        $ 3,725,302
   Intersegment revenues                       35,573             -           -        35,573        -    (35,573)                 -
 Segment profit (loss)(3)                      43,129        81,916      (4,798)      120,247        -          -            120,247

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Business Units - Total Segment Assets
- ------------------------------------------------------------------------------------------------------------------------------------

Total segment assets at March 31, 2002     $5,078,705    $6,809,126    $219,607   $12,107,438  $56,978        N/A        $12,164,416
Total segment assets at December 31, 2001   4,956,109     7,084,104     213,260    12,253,473   46,340        N/A         12,299,813

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(1)  The All Other Category represents  miscellaneous  corporate items which are
     not  allocated  to  business  units for  purposes  of  segment  performance
     measurement.
(2)  The Reconciling  Eliminations category eliminates the intersegment revenues
     of Energy Merchant.
(3)  Management utilizes segment profit (loss) to evaluate segment performance.
(4)  The  decrease in 2002 is  primarily  due to the  decrease in average  price
     realized on wholesale commodity non-firm transactions.
(5)  The decrease in 2002 is primarily due to the decrease in price reflecting 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.

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9. Earnings Per Common Share (EPS)

A reconciliation of EPS to EPS - assuming dilution is presented below for the quarters ended March 31, 2002 and March 31, 2001:

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

                                               Income     Shares        EPS
                                           ------------------------------------
                                        (in thousands, except per share amounts)
Quarter ended March 31, 2002

EPS:
   Net Income                              $   95,728    164,295     $    0.58

Effect of dilutive securities:
   Common stock options                                      976
   Employee stock purchase and savings plan                    1
   Directors' compensation plans                             151
   Contingently issuable common stock                        542
                                           ------------------------

EPS - assuming dilution:
   Net income plus assumed conversions     $   95,728    165,965     $    0.58

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

 Quarter ended March 31, 2001
 EPS:
   Net Income                                $120,247    158,989     $    0.76

 Effect of dilutive securities:
   Common stock options                                      961
   Employee stock purchase and savings plan                   33
   Directors' compensation plans                             140
   Contingently issuable common stock                        300
                                           ------------------------

 EPS - assuming dilution:
   Net income plus assumed conversions       $120,247    160,423     $    0.75

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

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 March 31, 2002 and 2001, approximately three million and two million shares, respectively, were excluded from the EPS - assuming dilution calculation.

Also excluded from the EPS - - assuming dilution calculation for the quarter ended March 31, 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contract associated with the preferred trust securities issued by Cinergy Corp. in December 2001. 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.

10. Ohio Deregulation

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

On May 8, 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. On August 31, 2000, the PUCO approved CG&E’s stipulation agreement. Subsequently, two parties filed applications for rehearing with the PUCO. On October 18, 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. On April 6, 2001, CG&E filed for dismissal of this appeal. On July 25, 2001, the Ohio Supreme Court denied CG&E’s motion to dismiss. On April 17, 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.

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. 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, Cinergy does not plan to transfer CG&E’s generating assets to a non-regulated affiliate in the foreseeable future.

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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.
  • Legislative and regulatory initiatives regarding deregulation of the industry or potential national deregulation legislation.

  • 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 capital 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. This 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.

  • 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.

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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 to be expected 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.
TOC

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/or transportation of natural gas.

TOC

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 UV-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.

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 March 31, 2002, Cinergy Corp. had $607 million remaining unused and available capacity relating to its $1.2 billion revolving credit facilities. The revolving credit facilities are comprised of a $400 million, three-year senior revolving credit facility expiring in May 2004, a $150 million, three-year senior revolving credit facility expiring in June 2002, and a $600 million, 364-day senior revolving credit facility expiring in February 2003. The $600 million facility was intended to replace credit facilities expiring in 2002. At March 31, 2002, certain of our non-regulated subsidiaries had $7 million of unused and available revolving credit lines.

On March 22, 2002, ULH&P received approval from the Kentucky Public Service Commission (KPSC) to increase its short-term debt authority to $75 million. As of March 31, 2002, our operating companies had regulatory authority to borrow up to a total of $1.28 billion in short-term debt ($681 million for CG&E and its subsidiaries, including $75 million for ULH&P, and $600 million for PSI). As of March 31, 2002, CG&E and its subsidiaries had $377 million (including $75 million for ULH&P) unused and available and PSI had $532 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. These facilities are not firm sources of capital and represent an informal agreement to lend money, subject to availability, with pricing to be determined at the time of advance. At March 31, 2002, Cinergy Corp.‘s $40 million uncommitted line and CG&E’s $15 million uncommitted line were unused. PSI has an uncommitted line of $60 million, of which $5 million remained unused.

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 $1.2 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 March 31, 2002, Cinergy Corp. had $182 million in commercial paper outstanding.

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 net 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. Increases in these limits are subject to the approval of the respective commissions. During the first quarter of 2002, PSI filed an application with the Indiana Utility Regulatory Commission (IURC) requesting additional capital lease authority of up to $100 million. Also during the first quarter of 2002, ULH&P filed an application with the KPSC requesting additional capital lease authority of $25 million. We anticipate a decision on both requests in the second quarter of 2002.

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% of Cinergy Corp.‘s consolidated capital structure and that Cinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.

As of March 31, 2002, CG&E had $400 million remaining unused and available under its existing PUCO authority and ULH&P had $75 million remaining unused and available under its KPSC authority. In April 2002, CG&E received approval from the PUCO to increase its authority to $500 million. In March 2002, PSI filed an application with the IURC requesting additional long-term debt issuance authority of up to $500 million through December 31, 2003. We anticipate a decision by the IURC in May 2002. We may, at any time, seek to issue additional long-term debt, subject to regulatory approval.

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) began discussions in the first quarter of 2002 regarding a possible Interpretation of Statement of Financial Accounting Standard No. 94, Consolidation of All Majority-Owned Subsidiaries, to address accounting and reporting for SPEs. While an exposure draft of the proposed interpretation has yet to be issued (expected in the second quarter of 2002), indications are that the conditions for non-consolidation of SPEs will likely change. Given the tentative nature of this project and the lack of an exposure draft of the proposed interpretation, we cannot determine the impact that this guidance will have on our financial position or results of operations. However, it is possible that these changes could result in consolidation by Cinergy of some or all of the SPEs, as discussed in the 2001 Form 10-K, as well as the accounts receivable sale facility discussed in Note 5 of the “Notes to Financial Statements” in “Part I. Financial Information.”

Securities Ratings

As of March 31, 2002, the major credit ratings agencies rated our securities as follows:

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

                                         Fitch          Moody's(1)           S&P(2)

Cinergy Corp.

   Corporate Credit                     BBB+              Baa2              BBB+/A-2
   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)  Moody's Investors Service (Moody's)
 (2)  Standard & Poor's Ratings Services (S&P)

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

As discussed in the 2001 Form 10-K, on December 12, 2000, S&P placed its ratings of Cinergy Corp. and its operating affiliates, CG&E and PSI, on CreditWatch with negative implications. On November 14, 2001, Fitch changed the outlook of Cinergy’s ‘BBB+’ Senior unsecured debt to negative from stable due to increased leverage and planned environmental expenditures.

On April 19, 2002, Moody's reaffirmed the credit ratings of Cinergy Corp. and its operating affiliates, removed Cinergy Corp. from CreditWatch and its operating affiliates from negative outlook, and assigned stable outlooks to the debt and preferred stock of Cinergy Corp. and all of its operating affiliates.

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

Equity Securities

On February 22, 2002, Cinergy issued 6,500,000 shares of common stock and received approximately $200 million in proceeds. As discussed in the 2001 Form 10-K, in November 2001, Cinergy chose to 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.

Guarantees

We are subject to an SEC order under the PUHCA, which limits the amounts Cinergy Corp. can have outstanding under guarantees at any one time to $2 billion. As of March 31, 2002, we had $608 million outstanding under the guarantees issued, of which approximately 75% represents guarantees of obligations reflected on Cinergy Corp.‘s Consolidated Balance Sheet. The amount outstanding represents Cinergy Corp.‘s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures.

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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 March 31, 2002 and 2001 were as follows:

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

                                Cinergy (1)           CG&E and subsidiaries                PSI
                                -----------           -------------------------                ---
                             2002          2001        2002           2001         2002           2001
                             ----          ----        ----           ----         ----           ----
                                                          (in thousands)

 Electric gross margin    $  555,877    $528,804    $  290,871    $272,065      $  243,352    $227,453
 Gas gross margin             80,184     103,212        71,641      86,802               -           -
 Net income                   95,728     120,247        77,585      81,575          38,083      41,432

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

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

Diluted earnings per share for the first quarter 2002 was $.58 per share, as compared to $.75 per share for the same period last year. This decrease in earnings is primarily attributable to the effects of mild weather, reduced industrial demand due to the slow economy, and higher financing costs and depreciation expenses, reflecting increased investment activity.

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

Electric Operating Revenues

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                                Cinergy (1)                       CG&E and subsidiaries                          PSI
                                -----------                       -------------------------                          ---
                        2002      2001      % Change          2002       2001      % Change         2002       2001      % Change
                        ----      ----      --------          ----       ----      --------         ----       ----      --------
                                                                      (in millions)

 Retail               $    651    $  628          4         $   334     $ 339          (1)        $   318      $ 289         10
 Wholesale                 557     1,188        (53)            271       595         (54)            307        628        (51)
 Transportation              2         -          -               2         -           -               -          -          -
 Other                      73        77         (5)             29         8           -               5          8        (38)
                         ------    -------                     ------    --------                    -------    -------
   Total              $  1,283    $1,893        (32)        $   636     $ 942         (32)        $   630      $ 925        (32)

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

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

Electric operating revenues for Cinergy, CG&E, and PSI decreased for the quarter ended March 31, 2002, as compared to 2001, mainly due to a decrease in price per megawatt-hour (MWh) received and volumes on non-firm wholesale transactions related to energy marketing and trading activity. Non-firm power is power without a guaranteed commitment for physical delivery. Wholesale electric on-peak commodity prices were 45 percent lower on average than the first quarter last year. Cinergy’s and PSI’s decreases were partially offset by an increase in the average price realized from retail sales.

Gas Operating Revenues

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

                                     Cinergy (1)                         CG&E and subsidiaries
                                     -----------                         -------------------------
                            2002        2001       % Change         2002        2001       % Change
                            ----        ----       --------         ----        ----       --------
                                                        (in millions)

 Retail                    $ 161        $  307       (48)         $  161       $ 307          (48)
 Wholesale                   724         1,489       (51)              -           -            -
 Transportation               17            16         6              17          16            6
 Other                         1             2         -               1           2            -
                           ---------    -------                    --------    --------
  Total                    $ 903        $1,814       (50)         $  179       $ 325          (45)

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

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

Gas operating revenues for Cinergy decreased for the quarter ended March 31, 2002, as compared to 2001, mainly due to a lower price received per thousand cubic feet (mcf) sold by Cinergy Marketing and Trading, LP (Marketing and Trading). Wholesale natural gas commodity spot prices were 63 percent lower on average than in the first quarter of 2001.

Cinergy’s and CG&E’s retail gas revenues decreased primarily due to a combination of a lower price received per mcf and decreased volumes distributed resulting from warmer temperatures. 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.

Operating Expenses

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

                                 Cinergy (1)                      CG&E and subsidiaries                          PSI
                                 -----------                      -------------------------                          ---
                         2002       2001      % Change       2002        2001       % Change        2002        2001       % Change
                         ----       ----      --------       ----        ----       --------        ----        ----       --------
                                                                      (in millions)

 Fuel                 $   210       $  200         5      $     93      $   96          (3)          110       $  99           11                                                                                            $
 Purchased and
   exchanged power        518        1,164       (55)          252         574         (56)          277         598          (54)
 Gas purchased            823        1,711       (52)          108         238         (55)            -           -            -
 Operation and
   maintenance            265          249         6           106         112          (5)          115          91           26
 Depreciation             100           89        12            48          46           4            38          37            3
 Taxes other than
   income taxes            72           63        14            53          47          13            16          15            7
                         --------    -------                 --------    --------                  ---------    --------
   Total              $  1,988      $3,476       (43)     $    660      $1,113         (41)          556       $ 840          (34)                                                                                           $

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

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

Fuel

Fuel 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 March 31, 2001, to the quarter ended March 31, 2002: 

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

                                        Cinergy (1)      CG&E       PSI
                                                    (in millions)

 Fuel expense - March 31, 2001            $200           $96        $ 99

Increase (decrease) due to changes in:
 Price of fuel                              (6)           (7)          1
 Deferred fuel cost                         13             -          13
 MWh generation                             (8)           (5)         (3)
 Other                                      11             9           -
                                        ------         ------     ---------

Fuel expense - March 31, 2002             $210           $93        $110

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

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

Purchased and Exchanged Power

Purchased and exchanged power expense decreased for Cinergy, CG&E, and PSI for the quarter ended March 31, 2002, as compared to 2001, primarily due to a decrease in the purchase price and MWh purchased of non-firm wholesale power. Wholesale electric on-peak commodity prices were 45 percent lower on average than the first quarter last year.

Gas Purchased

Gas purchased expense decreased for Cinergy for the quarter ended March 31, 2002, as compared to 2001, primarily due to a decrease in the average cost per mcf of gas purchased by Marketing and Trading. CG&E’s gas purchased expense decreased primarily due to a decrease in the average cost per mcf of gas purchased. Wholesale natural gas commodity spot prices were 63 percent lower on average than in the first quarter of 2001.

Operation and Maintenance

Operation and maintenance expense increased for Cinergy and PSI for the quarter ended March 31, 2002, as compared to 2001, primarily due to increased maintenance costs related to PSI’s planned system outages and distribution line clearing programs.

Depreciation

Depreciation expense increased for Cinergy, CG&E, and PSI for the quarter ended March 31, 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 March 31, 2002, as compared to 2001. The increase was primarily attributable to property taxes and other taxes associated with deregulation in Ohio.

Preferred Dividend Requirements of Subsidiary Trust

Preferred dividend requirements of subsidiary trust was $5.9 million for the quarter ended March 31, 2002. This expense relates to quarterly payments to be made to holders of Cinergy’s Preferred Trust Securities, which were issued in December 2001, as discussed in the 2001 Form 10-K.

ULH&P

The Results of Operations discussion for ULH&P is presented only for the three months ended March 31, 2002, in accordance with General Instruction H(2)(a) of Form 10-Q.

Electric and gas margins and net income for ULH&P for the three months ended March 31, 2002, and 2001 were as follows:

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

                                            ULH&P
                                      2002        2001
                                       (in thousands)

 Electric gross margin             $  15,019     $17,758
 Gas gross margin                     12,315      16,250
 Net income                            3,884      13,855

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

Electric Gross Margin

Electric operating revenues decreased for the three months ended March 31, 2002, as compared to 2001, mainly due to the effects of mild weather, a slowed economy, and the average price realized per kilowatt-hour. Electricity purchased from parent company for resale remained constant for the three months ended March 31, 2002, as compared to 2001, reflecting lower purchases offset by a new wholesale power contract with CG&E that went into affect on January 1, 2002.

Gas Gross Margin

Gas operating revenues decreased for the three months ended March 31, 2002, as compared to 2001. This decrease is mainly due to the effects of mild weather and a lower average price realized per mcf. Gas purchased expenses decreased for the three months ended March 31, 2002, as compared to 2001, mainly due to lower prices and less quantities purchased due to the milder weather.

Miscellaneous - - net

Miscellaneous-net expense increased $4.7 million for the quarter ended March 31, 2002, as compared to 2001, primarily due to the expensing of previously deferred costs, which were denied recovery in connection with the final order on ULH&P’s gas rate case.

TOC

RESULTS OF OPERATIONS - FUTURE

Electric Industry

Retail Market Developments

Ohio

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

On May 8, 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. On August 31, 2000, the PUCO approved CG&E’s stipulation agreement. Subsequently, two parties filed applications for rehearing with the PUCO. On October 18, 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. On April 6, 2001, CG&E filed for dismissal of this appeal. On July 25, 2001, the Ohio Supreme Court denied CG&E’s motion to dismiss. On April 17, 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.

A Federal Energy Regulatory Commission (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. 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, 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.”

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 full functional control of the transmission systems of its member companies, including the Cinergy utilities. The impact of this transfer was not material to our results of operations or financial position.

Federal Update/Repeal of PUHCA

President Bush has indicated that legislation addressing the energy security needs of America deserves prompt consideration. He appointed Vice President Cheney to head an inter-agency task force which recommended a number of actions, many of which are embodied in HR 4, which passed the House of Representatives last summer. This legislation includes a number of tax provisions, research and development provisions for clean coal technology, and provisions to increase supplies of natural gas.

Legislation considering many of the President’s recommendations, including repeal of the PUHCA, reduced depreciation of gas pipelines, tax incentives for combined heat and power facilities and other non-traditional fuel sources, and other issues of interest to Cinergy, was passed by the Senate. The bill now moves to a conference committee where differences with the House passed version will be resolved. It is anticipated that the conference committee will take several months to complete its work and final passage of a bill may not occur before the end of the third quarter. It is difficult to anticipate what provisions will be accepted in the final legislative package or what additions or limitations to existing provisions (including PUHCA) might be included.

The President also recognized the need to balance the energy and environmental needs of the country and supported combining the multitude of environmental regulations facing electric utilities into one legislative package. The intent is to give the industry one clear set of environmental goals, along with an appropriate amount of time to meet necessary emission reductions, while providing environmental benefits to consumers. Cinergy has supported and promoted this approach with the industry, Congress, and the Bush Administration. The Bush Administration announced the framework of its multi-emission legislation in February 2002 and the Senate Environment and Public Works Committee is expected to review legislative proposals during the third quarter of 2002 although passage of legislation is not likely this year.

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 purchased power tracking mechanism (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 for two years, through the summer of 2002. PSI is authorized to recover 90% 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% deferred for subsequent recovery in PSI’s next general rate case (subject to a showing of prudence).

In June 2001, PSI filed a petition with the IURC seeking approval of the recovery through the Tracker of its summer 2001 purchased power costs. 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 for subsequent recovery in PSI’s next general rate case (subject to a showing of prudence).

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 FERC in October 2000. In December 2000, the FERC ruled that the companies have the contractural 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 are 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.

PSI Fuel Adjustment Charge

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 is scheduled for the second quarter of 2002.

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 owner, a subsidiary of Cinergy Capital & Trading, Inc., to address its need for increased generating capacity. The IURC has scheduled a hearing for August 2002. PSI is unable to predict the outcome of this request. This proposed transfer is also contingent upon receipt of approval from the FERC and the SEC under PUHCA.

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% 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% overall, to be effective on January 31, 2002. In addition, the KPSC authorized ULH&P to implement 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. The Kentucky Attorney General has appealed the KPSC’s approval of the tracking mechanism to the Franklin Circuit Court. 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% 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% 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. An evidentiary hearing on the reasonableness of the settlement agreement was held on April 24, 2002, with the remaining parties. CG&E cannot predict the timing or final outcome of this matter.

Market Risk Sensitive Instruments and Positions

The transactions associated with Energy Merchant Business Units (Energy Merchant) energy marketing and trading activities give rise to various risks, including market risk. Market 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.

The changes in fair value of the energy risk management assets and liabilities for the quarter ended March 31, 2002, are presented in the table below: 

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

          Change in Fair Value for the Quarter Ended
                        March 31, 2002
                         (in millions)

 Fair value of contracts outstanding at the
   beginning of the period                         $   18

 Fair value of new contracts when entered into
   during the period:
       Options(1)                                      28
       Other trading instruments                        3

 Changes in fair value attributable to changes in
   valuation techniques and assumptions                 -

 Other changes in fair value                            1

 Less:  Contracts realized or otherwise
   settled during the period                          (18)
                                                   ----------

 Fair value of contracts outstanding at the
   end of the period                               $   68
                                                   ==========

(1)    Represents net option premiums paid.

- --------------------------------------------------------------
The following table presents the expected maturity of the energy risk management assets and liabilities as of March 31, 2002: 
- ----------------------------------------------------------------------------------------
                                        Fair Value of Contracts at March 31, 2002
                                    ----------------------------------------------------

                                                   Maturing
                                   -----------------------------------------------------
         Source of Fair Value(1)       Within   12-36    36-60                 Total
                                     12 months  months  months  Thereafter   Fair Value
- ----------------------------------------------------------------------------------------
                                                              (in millions)

 Prices actively quoted               $ 3        $ -      $ -      $ -          $ 3

 Prices based on models
   and other valuation methods         43         12        8        2           65
                                      ---        ---      ---      ---          ---

 Total                                $46        $12      $ 8      $ 2          $68
                                      ===        ===      ===      ===          ===

(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.

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Accounting Changes

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 will be initially 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 current 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 8 of the “Notes to Financial Statements” in “Part I. 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 results of operations. We have identified the reporting units for Cinergy and are finalizing the initial transition impairment test. Based on the tentative results of this test, we believe 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 such 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 beginning to analyze the impact of this statement, but, at this time, we are unable to predict whether the implementation of this accounting standard will be material to our financial position or results of operations.

Derivatives

During 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (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 mark-to-market accounting, the effects of implementation were not material.

Our adoption did not reflect the potential impact of applying mark-to-market accounting to selected electricity options and capacity contracts. We had not historically marked these instruments to market because they are intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While much of the criteria this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material. 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. Based on a review of existing contracts, we do not believe this revised guidance, which will be effective in the third quarter of 2002, will have a material impact on our financial position or results of operations upon adoption. However, given our activity in energy trading, it could increase volatility in future results.

In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward component) and flexibility to take additional quantity (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it is applicable 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 will adopt this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergy has certain contracts that contain 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 should not be material to our results of operations or financial position. However, any coal transactions that constitute trading activities will continue to be accounted for at fair value pursuant to Emerging Issues Task Force 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activity (EITF 98-10), as discussed more fully in Note 1(c) of the “Notes to Financial Statements” in “Part I. Financial Information.”

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 results of operations and financial position was not material.

Other

Voluntary Early Retirement Program (VERP)

In March 2002, a VERP was offered to approximately 280 non-union employees. The costs of the VERP, which will be determined based on the employees’ level of acceptance, will be recognized in the second quarter of 2002.

Collective Bargaining Agreements

As discussed in the 2001 Form 10-K, the collective bargaining agreements of the Utility Workers of America / Independent Utilities Union # 600 (IUU) and the International Brotherhood of Electrical Workers # 1393 (IBEW) expired on April 1, 2002 and April 30, 2002, respectively. With regards to the IUU contract, the parties have negotiated a tentative agreement that will run through March 31, 2005, which is subject to ratification by the union membership. The contract with the IBEW has been extended through May 31, 2002 and negotiations on a new agreement are still in process.

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 provision of benefit to Cinergy will be the allowance of additional first-year depreciation deduction for tax purposes, equal to 30 percent of the adjusted basis of qualified property. This provision applies to qualifying additions after September 11, 2001. While Cinergy is currently analyzing the impacts of this provision, we do not believe it will have a material impact on our financial position or results of operations.

Changes in Independent Public Accountants

On April 30, 2002, Cinergy filed a Current Report on Form 8-K announcing that its board of directors approved the selection of Deloitte & Touche LLP as its independent public accountants for the fiscal year 2002, replacing Arthur Andersen LLP. The decision to change independent public accountants was not the result of any disagreements with Arthur Andersen LLP on matters of accounting principles or practices, financial statement disclosure or auditing scope and procedure. The transition to Deloitte & Touche LLP will begin in May 2002.

TOC

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” and Notes 1(b) and (c) and Note 6 of the “Notes to Financial Statements” in “Part I. Financial Information.”

TOC

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 water in the main was under pressure and upon the failure of the water main, the pressure, water, sand, and gravel provided an environment which resulted in “cutting” a hole in the adjacent gas distribution main owned by and under the control of ULH&P. The hole that breached the adjacent natural gas main was caused by 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. 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.

TOC

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders of Cinergy Corp. was held on May 2, 2002, in Indianapolis, Indiana.

At the meeting, one Class I director was elected to the board of Cinergy Corp. to serve for a two-year term ending in 2004, and three Class II directors were elected to Cinergy’s board to serve three-year terms ending in 2005, as set forth below: 

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

            Directors           Votes For            Votes Withheld
- ------------------------------------------------------------------------------

     Class I
     -------
 Dudley S. Taft                 141,127,943              2,547,812

     Class II
     --------
 Thomas E. Petry                141,145,443              2,530,312
 Mary L. Schapiro               140,393,479              3,282,276
 Philip R. Sharp                140,398,186              3,277,569

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

Additionally, shareholders at the meeting approved the Cinergy Corp. Annual Incentive Plan, as amended and restated effective January 25, 2002. There were 130,527,823 common shares voted for this amended and restated plan, 11,202,677 voted against this plan, and 1,945,247 abstentions.

Shareholders at the meeting also approved the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan, as amended and restated effective January 25, 2002. There were 129,351,888 common shares voted for this amended and restated plan, 12,277,278 voted against this plan, and 2,046,578 abstentions.

In lieu of the annual meeting of shareholders of CG&E, a resolution was duly adopted via unanimous written consent of Cinergy Corp., CG&E's sole shareholder, effective May 1, 2002, electing the following members to the Board of Directors for one-year terms expiring in 2003:

  • James E. Rogers
  • R. Foster Duncan
  • James L. Turner

The annual meeting of shareholders of PSI was held on May 2, 2002, in Indianapolis, Indiana. Proxies were not solicited for the annual meeting. Cinergy Corp. owns all of the 53,913,701 outstanding shares, representing a like number of votes, of the common stock of PSI. By unanimous vote, the following members to the Board of Directors were re-elected at the annual meeting for one-year terms expiring in 2003:

  • Michael G. Browning
  • James E. Rogers
  • Larry E. Thomas

None of the 651,099 outstanding shares, representing 423,441 votes, of the preferred stock of PSI, were present or voted at the annual meeting.

TOC

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) The documents listed below are being filed or have previously been 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                                                       Previously Filed
Designation     Registrant            Nature of Exhibit          as Exhibit to:
- --------------------------------------------------------------------------------

 3(ii)(a)       Cinergy Corp. Amended By-Laws of Cinergy Corp.
                              effective as of May 2, 2002

   10-yy        Cinergy Corp. Amendment to the Amended and Restated
                              Separation and Retirement Agreement and
                              Waiver and Release of Liability, between
                              Cinergy Corp. and Larry E. Thomas.

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

        (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 March 31, 2002. 

- -------------------- -----------------------------------------------------------
   Date of Report             Registrant                        Item Filed

 February 19, 2002   Cinergy Corp., CG&E,   Item 7.  Financial Statements
                     PSI, and ULH&P                    and Exhibits

 April 30, 2002      Cinergy Corp., CG&E,   Item 4.  Changes in Registrant's
                     PSI, and ULH&P                    Certifying Accountant

- -------------------- -----------------------------------------------------------
TOC

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:  May 13, 2002                         /s/   Bernard F. Roberts
                                         ---------------------------------------
                                                  Bernard F. Roberts
                                                  Duly Authorized Officer
                                                            and
                                                  Chief Accounting Officer
TOC
EX-99.B 3 bylawsofcinergy.htm BY-LAWS OF CINERGY CORP. By-Laws of Cinergy Corp. 




                                     BY-LAWS


                                       OF

                                  CINERGY CORP.












 Adopted:    October 24, 1994
 Amended:    January 25, 1996
 Amended:    December 18, 1997
 Amended:    April 22, 1998
 Amended:    October 15, 1998
 Amended:    April 21, 1999
 Amended:    April 27, 2000
 Amended:    December 14, 2000
 Amended:    May 2, 2002



                                TABLE OF CONTENTS

                                    ARTICLE I
                            Offices and Headquarters
                            ------------------------

    Section 1.1  Offices
            1.2  Headquarters

                                   ARTICLE II
                                  Stockholders
                                  ------------

    Section 2.1  Annual Meeting
            2.2  Special Meetings
            2.3  Notice of Meetings
            2.4  Quorum
            2.5  Voting
            2.6  Presiding Officer and Secretary
            2.7  Proxies
            2.8  List of Stockholders

                                   ARTICLE III
                                    Directors
                                    ---------

    Section 3.1  Number of Directors
            3.2  Election and Term of Directors
            3.3  Vacancies and Newly Created Directorships
            3.4  Resignation
            3.5  Meetings
            3.6  Quorum and Voting
            3.7  Written Consent of Directors in Lieu of a Meeting
            3.8  Compensation
            3.9  Contracts and Transactions Involving Directors

                                   ARTICLE IV
                      Committees of the Board of Directors
                      ------------------------------------

    Section 4.1  Appointment and Powers

                                    ARTICLE V
                         Officers, Agents and Employees
                         ------------------------------

    Section 5.1  Appointment and Term of Office
            5.2  The Chairman of the Board
    Section 5.3  Vice-Chairman
            5.4  Chief Executive Officer
            5.5  The President
            5.6  The Vice-Presidents
            5.7  The Secretary
            5.8  The Treasurer
            5.9  The Comptroller
            5.10 Resignation, Compensation and Bond

                                   ARTICLE VI
                                 Indemnification
                                 ---------------

    Section 6.1  Indemnification of Directors, Officers, Employees and Agents
            6.2  Advances for Litigation Expenses
            6.3  Indemnification Nonexclusive
            6.4  Indemnity Insurance
            6.5  Definitions


                                   ARTICLE VII
                                  Common Stock
                                  ------------

    Section 7.1  Certificates
            7.2  Transfers of Stock
            7.3  Lost, Stolen or Destroyed Certificates
            7.4  Stockholder Record Date
            7.5  Beneficial Owners

                                  ARTICLE VIII
                                      Seal
                                      ----

    Section 8.1  Seal

                                   ARTICLE IX
                                Waiver of Notice
                                ----------------

    Section 9.1  Waiver of Notice

                                    ARTICLE X
                                   Fiscal Year
                                   -----------

    Section 10.1 Fiscal Year

                                   ARTICLE XI
                             Contracts, Checks, etc.
                             -----------------------

    Section 11.1 Contracts, Checks, etc

                                   ARTICLE XII
                                   Amendments
                                   ----------

    Section 12.1 Amendments

                                  ARTICLE XIII
                                    Dividends
                                    ---------

    Section 13.1 Dividends






                                     BY-LAWS
                                       OF
                        CINERGY CORP. (THE "CORPORATION")

                                    ARTICLE I
                            Offices and Headquarters
                            ------------------------

     Section 1.1 Offices.  The location of the  Corporation's  principal  office
shall be in the City of  Cincinnati,  County  of  Hamilton,  State of Ohio.  The
Corporation may, in addition to the aforesaid  principal  office,  establish and
maintain an office or offices elsewhere in Delaware,  Ohio or Indiana or in such
other  states  and places as the Board of  Directors  may from time to time find
necessary or  desirable,  at which office or offices the books,  documents,  and
papers of the Corporation may be kept.

     Section 1.2  Headquarters.  Subject to the  sentence  next  following,  the
Corporation's  headquarters and executive offices,  shall be located in the City
of  Cincinnati,  County  of  Hamilton,  State  of  Ohio.  The  location  of  the
Corporation's headquarters and executive offices may be changed from the City of
Cincinnati,  County of Hamilton,  State of Ohio only by the affirmative  vote of
80% of the full Board of Directors of the Corporation and not by the vote of any
committee of the Board of  Directors.  As used in these  By-Laws,  the term "the
full Board of Directors"  shall mean all directors then in office  together with
any  vacancies,  however  created.  For the avoidance of doubt and as an example
only, if the Board of Directors  consists of 17 members and two vacancies exist,
the  affirmative  vote of 14 of the 15  members  of the  Corporation's  Board of
Directors  then in office would be required to authorize a change in location of
the  Corporation's  headquarters  and executive  offices.  The  headquarters and
executive offices of the Corporation's  subsidiary,  PSI Energy,  Inc., shall be
located in the City of Plainfield,  Indiana and the  headquarters  and executive
offices of the Corporation's subsidiary,  The Cincinnati Gas & Electric Company,
shall be located in the City of Cincinnati, Ohio.

                                   ARTICLE II
                                  Stockholders
                                  ------------

     Section  2.1  Annual  Meeting.  An annual  meeting of  stockholders  of the
Corporation  for the election of directors and for the  transaction of any other
proper business shall be held at such time and date in each year as the Board of
Directors may from time to time determine. The annual meeting in each year shall
be held at such hour on said day and at such place  within or without  the State
of Delaware as may be fixed by the Board of  Directors,  or if not so fixed,  at
the principal  business  office of the  Corporation  in the City of  Cincinnati,
County of Hamilton, State of Ohio.

     In lieu  of the  foregoing  and at the  sole  discretion  of the  Board  of
Directors, an annual meeting of stockholders of the Corporation for the election
of directors and for the transaction of any other proper business may be held by
means of remote  communication  (e.g.,  via the Internet) to the fullest  extent
permitted by Section 211 of the Delaware General Corporation Law.

     No business may be transacted at an annual meeting of  stockholders,  other
than  business  that is either:  (a)  specified in the notice of meeting (or any
supplement  thereto)  given by or at the direction of the Board of Directors (or
any duly authorized  committee  thereof);  (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized  committee  thereof);  or (c) otherwise  properly  brought before the
annual meeting by any stockholder of the  Corporation:  (i) who is a stockholder
of record on the date of the giving of the notice  provided  for in this Section
2.1 and on the record date for the  determination  of  stockholders  entitled to
vote at such annual  meeting;  and (ii) who complies with the notice  procedures
set forth in this Section 2.1.

     In  addition  to any other  applicable  requirements,  for  business  to be
properly  brought before an annual meeting by a  stockholder,  such  stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.

     To be timely, a stockholder's  notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than  ninety (90)  calendar  days nor more than one  hundred  twenty  (120)
calendar days prior to the anniversary date of the immediately  preceding annual
meeting of stockholders;  provided,  however,  that in the event that the annual
meeting is called for a date that is not within thirty (30) calendar days before
or after such anniversary  date, notice by the stockholder in order to be timely
must be so received  not later than the close of  business  on the tenth  (10th)
calendar  day  following  the day on which such notice of the date of the annual
meeting was mailed or such public  disclosure of the date of the annual  meeting
was made, whichever first occurs.

     To be in proper written form, a stockholder's  notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting:  (i) a brief  description of the business  desired to be brought before
the annual  meeting and the reasons for  conducting  such business at the annual
meeting;  (ii) the name and record address of such stockholder;  (iii) the class
or series  and number of shares of capital  stock of the  Corporation  which are
owned  beneficially or of record by such stockholder;  (iv) a description of all
arrangements or understandings  between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such  stockholder  and any  material  interest  of such  stockholder  in such
business;  and (v) a representation  that such stockholder  intends to appear in
person or by proxy at the  annual  meeting  to bring  such  business  before the
meeting.

     Notwithstanding  anything to the contrary in the By-Laws, no business shall
be conducted  at the annual  meeting of  stockholders  except  business  brought
before the annual  meeting in accordance  with the  procedures set forth in this
Section 2.1;  provided,  however,  that once business has been properly  brought
before the annual meeting in accordance  with such  procedures,  nothing in this
Section 2.1 shall be deemed to preclude  discussion  by any  stockholder  of any
such business.  If the presiding  officer of an annual meeting  determines  that
business was not properly  brought before the annual meeting in accordance  with
the foregoing  procedures,  the  presiding  officer shall declare to the meeting
that the business was not properly  brought before the meeting and such business
shall not be transacted.

     Section 2.2 Special Meetings.  A special meeting of the stockholders of the
Corporation  entitled  to vote on any  business  to be  considered  at any  such
meeting  may be called by the  Chairman  of the Board or the  President  or by a
majority of the members of the Board of Directors then in office, acting with or
without a meeting,  or by the persons who hold 50% of all shares outstanding and
entitled to vote  thereat  upon notice in writing,  stating the time,  place and
purpose of the special meeting.  The business  transacted at the special meeting
shall be confined to the purposes and objects stated in the call.

     Section  2.3 Notice of  Meetings.  Whenever  stockholders  are  required or
permitted to take any action at a meeting, unless notice is waived in writing by
all  stockholders  entitled  to vote at the  meeting,  a  written  notice of the
meeting shall be given which shall state the place, if any, date and hour of the
meeting,  the means of remote  communication,  if any, by which stockholders and
proxy  holders  may be deemed to be present in person and vote at such  meeting,
and, in the case of a special  meeting,  the  purpose or purposes  for which the
meeting is called.

     In lieu of and/or in  addition to the  foregoing,  notice of any meeting of
the stockholders of the Corporation may be given via electronic transmission, to
the fullest extent permitted by Section 232 of the Delaware General  Corporation
Law. To be valid, such electronic transmission notice must be in a form to which
the  stockholder  has consented.  Any  stockholder can revoke consent to receive
notice  by  a  form  of  electronic   transmission  by  written  notice  to  the
Corporation.  Such  consent  shall  be  deemed  revoked  after  two  consecutive
electronic  transmissions  by the  Corporation  are  returned as  undeliverable;
provided,  however,  the  inadvertent  failure  to treat any such  undeliverable
notices as a  revocation  shall not  invalidate  any  meeting  or other  action.
"Electronic  transmission"  shall mean any form of  communication,  not directly
involving the physical transmission of paper, that creates a record and that may
be retained,  retrieved,  and reviewed by a recipient  thereof,  and that may be
directly  reproduced  in paper form by such a  recipient  through  an  automated
process.

     Unless  otherwise  provided by law, and except as to any  stockholder  duly
waiving notice, the written notice of any meeting shall be given personally,  by
mail, or by a form of electronic transmission consented to by the stockholder to
whom  notice is given,  not less than 10 days nor more than 60 days  before  the
date of the meeting to each  stockholder  entitled to vote at such  meeting.  If
mailed,  notice  shall be deemed  given  when  deposited  in the  mail,  postage
prepaid,  directed to the stockholder at his or her address as it appears on the
records of the  Corporation.  If by a form of  electronic  transmission,  notice
shall be deemed given when transmitted to the stockholder in accordance with the
provisions  set  forth  herein;  provided,   however,  that  if  the  electronic
transmission  notice is posted on an  electronic  network  (e.g.,  a website  or
chatroom),  notice  shall be deemed given upon the later of (A) such posting and
(B) the giving of separate notice of the posting to the stockholder.

     When a meeting is adjourned  to another  time or place,  notice need not be
given of the adjourned  meeting if the time,  place,  if any,  thereof,  and the
means of remote communications,  if any, by which stockholders and proxy holders
may be deemed to be  present in person and vote at such  adjourned  meeting  are
announced at the meeting at which the  adjournment  is taken.  At the  adjourned
meeting  the  Corporation  may  transact  any  business  which  might  have been
transacted at the original  meeting.  If,  however,  the adjournment is for more
than 30 days,  or if after the  adjournment  a new record  date is fixed for the
adjourned  meeting,  a notice of the  adjourned  meeting  shall be given to each
stockholder of record entitled to vote at the meeting.

     Section  2.4  Quorum.  Except  as  otherwise  provided  by  law  or by  the
Certificate of Incorporation or by these By-Laws in respect of the vote required
for a specified action, at any meeting of stockholders the holders of a majority
of the outstanding stock entitled to vote thereat,  either present, in person or
represented  by proxy,  shall  constitute  a quorum for the  transaction  of any
business, but the stockholders present, although less than a quorum, may adjourn
the  meeting  to  another  time or place  and,  except as  provided  in the last
paragraph  of  Section  2.3 of these  By-Laws,  notice  need not be given of the
adjourned meeting.

     Section 2.5 Voting. Whenever directors are to be elected at a meeting, they
shall be elected by a plurality of the votes of the shares  present in person or
represented  by proxy at the meeting and entitled to vote thereon.  Whenever any
corporate action,  other than the election of directors,  is to be taken by vote
of stockholders at a meeting,  it shall,  except as otherwise required by law or
by the Certificate of  Incorporation  or by these By-Laws,  be authorized by the
affirmative  vote of the majority of shares  present in person or represented by
proxy at the meeting and entitled to vote thereon.

     Except  as   otherwise   provided  by  law,  or  by  the   Certificate   of
Incorporation,  each  holder of record of stock of the  Corporation  entitled to
vote on any matter at any meeting of  stockholders  shall be entitled to one (1)
vote for each share of such  stock  standing  in the name of such  holder on the
stock ledger of the Corporation on the record date for the  determination of the
stockholders entitled to vote at the meeting.

     Upon the demand of any stockholder entitled to vote, the vote for directors
or the vote on any other  matter at a meeting  shall be by written  ballot,  but
otherwise  the method of voting and the manner in which votes are counted  shall
be discretionary with the presiding officer at the meeting.

     Section  2.6  Presiding   Officer  and  Secretary.   At  every  meeting  of
stockholders,  and where the offices of the  Chairman of the Board and the Chief
Executive  Officer  are  held by  different  individuals,  the  Chief  Executive
Officer, or, in his or her absence, the Chairman of the Board, or, in his or her
absence, the appointee of the meeting, shall preside. The Secretary,  or, in his
or her absence, an Assistant Secretary,  or if none be present, the appointee of
the presiding officer of the meeting, shall act as secretary of the meeting. The
presiding  officer  shall have the  authority  to make all rules  regarding  the
conduct of any meeting including,  but not limited to, setting the agenda and/or
determining the proper order of business,  making  arrangements  with respect to
matters of safety and security,  determining  reserved seating  arrangements for
certain  stockholders  and/or others in attendance,  establishing  guidelines or
procedures for  participation by stockholders  and/or others in attendance,  and
making  any   determination   with  respect  to  possible   adjournment   and/or
postponement.

     Section  2.7  Proxies.  Each  stockholder  entitled to vote at a meeting of
stockholders  or to express  consent or dissent to  corporate  action in writing
without a meeting may authorize  another person or persons to act for him or her
by proxy,  but no such proxy shall be voted or acted upon after three years from
its date,  unless the proxy provides for a longer  period.  Every proxy shall be
signed by the stockholder or by his duly authorized  attorney. A stockholder may
authorize  another person or persons to act for him as proxy by  transmitting or
authorizing  the  transmission  of a  telegram,  cablegram,  or  other  means of
electronic  transmission to the person who will be the holder of the proxy or to
a proxy solicitation firm, proxy support service organization or like agent duly
authorized  by the person  who will be the  holder of the proxy to receive  such
transmission if such  transmission is submitted with  information  from which it
may be determined that the transmission was authorized by the stockholder.

     Section 2.8 List of  Stockholders.  The officer who has charge of the stock
ledger of the Corporation  shall prepare and make, at least 10 days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting,  arranged in  alphabetical  order,  and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any  stockholder,  for any purpose
germane to the  meeting,  for a period of at least 10 days prior to the meeting:
(i) on a reasonably accessible electronic network, provided that the information
required to gain access to such list is provided with the notice of the meeting,
or (ii) during  ordinary  business  hours, at the principal place of business of
the Corporation. If the meeting is to be held at a place, the list shall also be
produced  and kept at the time and place of the  meeting  during  the whole time
thereof, and may be inspected by any stockholder who is present.

     If any meeting of the  Corporation's  stockholders  is to be held solely by
means of  remote  communications  (e.g.,  the  Internet),  the list must be made
available  to  the  stockholders  during  the  entire  meeting  on a  reasonably
accessible electronic network. The notice of meeting must provide information by
which the stockholder can gain access to the electronic list.

     The stock ledger shall be the only evidence as to who are the  stockholders
entitled to examine the stock  ledger,  the list required by this Section or the
books of the  Corporation,  or to vote in person or by proxy at any  meeting  of
stockholders.

                                   ARTICLE III
                                    Directors
                                    ---------

     Section 3.1 Number of Directors.  The Board of Directors shall consist of a
number of directors not less than seven (7) and not more than  twenty-three (23)
as  determined  by a vote of not less  than 75% of the full  Board of  Directors
("Supermajority  Vote").  Any such  determination made by the Board of Directors
shall  continue in effect  unless and until changed by the Board of Directors by
Supermajority  Vote,  but no such change  shall  affect the term of any director
then in office.

     Section 3.2 Election and Term of Directors.  Only persons who are nominated
in accordance  with the following  procedures  shall be eligible for election as
directors. Except as may be required by applicable law, no person who is, at the
time of nomination, 70 years of age or older shall be eligible for election as a
director.  Nominations of persons as candidates for election as directors of the
Corporation may be made at a meeting of stockholders  (i) by or at the direction
of the Board of Directors acting by  Supermajority  Vote (or by a unanimous vote
of the remaining directors if a Supermajority Vote is not obtainable because the
number of vacancies on the Board of  Directors);  or (ii) by any  stockholder of
the  Corporation  entitled to vote for the election of directors at such meeting
who complies with the notice  procedures set forth herein.  Any nomination other
than  those  governed  by clause  (i) of the  preceding  sentence  shall be made
pursuant to timely notice in writing to the Secretary of the Corporation.  To be
timely,  a stockholder's  notice shall be delivered to or mailed and received at
the principal  office of the  Corporation  in the State of Ohio not less than 50
days prior to the meeting; provided,  however, that if less than 60 days' notice
or prior public  disclosure of the date of the meeting is given to  stockholders
or made public,  to be timely  notice by a  stockholder  must be so received not
later than the close of  business  on the tenth day  following  the day on which
such notice of the date of the meeting was mailed or such public  disclosure was
made. Such stockholder's notice to the Secretary shall set forth: (a) as to each
person whom the stockholder  proposes to nominate for election as director:  (i)
the name, age, business address,  and residence address of such person; (ii) the
principal occupation or employment of such person; (iii) the class and number of
any shares of capital stock of the Corporation  that are  beneficially  owned by
such  person;  and (iv) any other  information  relating  to such person that is
required to be  disclosed  in  solicitations  for  proxies  for the  election of
directors  pursuant to any then existing rules or regulations  promulgated under
the Securities  Exchange Act of 1934, as amended;  and (b) as to the stockholder
giving  notice:  (i) the name and record address of such  stockholder;  (ii) the
class  and  number  of  shares  of  capital  stock of the  Corporation  that are
beneficially  owned by such  stockholder,  and  (iii)  the  period  of time such
stockholder  has held such  shares.  The  Corporation  may require any  proposed
nominee to furnish such other  information  as may reasonably be required by the
Corporation to determine the eligibility of such proposed  nominee to serve as a
director.  No person  otherwise  eligible  for  election as a director  shall be
eligible for election as a director unless nominated as set forth herein.

     Commencing on October 24, 1994 (the "Classification  Date") of the Board of
Directors  of the  Corporation,  the terms of  office of the Board of  Directors
shall be divided  into three (3)  classes,  Class I, Class II and Class III,  as
determined  by the Board of  Directors.  All classes shall be as nearly equal in
number as possible.

     The terms of office of directors  classified shall be as follows:  (1) that
of Class I shall expire at the annual meeting of stockholders that occurs within
the first year after the Classification  Date, (2) that of Class II shall expire
at the annual meeting of  stockholders  that occurs within the second year after
the  Classification  Date,  and (3) that of Class III shall expire at the annual
meeting  of   stockholders   that  occurs   within  the  third  year  after  the
Classification   Date.  At  each  annual  meeting  of  stockholders   after  the
Classification  Date, the successors to directors whose terms shall expire shall
be elected to serve from the time of election and qualification  until the third
annual meeting following  election and until a successor shall have been elected
and qualified or until his earlier resignation, removal from office or death. As
being under 70 years of age constitutes a continuing  qualification  for service
on the Board of Directors, any director who reaches the age of 70 years while in
office shall,  except as limited by  applicable  law,  promptly  resign from the
Corporation's Board of Directors.

     Section 3.3 Vacancies and Newly Created Directorships.  Vacancies and newly
created  directorships  resulting from any increase in the authorized  number of
directors  may be filled by  election  at a meeting of  stockholders.  Except as
otherwise provided by law, and notwithstanding the provision of Section 3.6, the
remaining  directors,  whether  or not  constituting  a  majority  of the  whole
authorized number of directors,  may, by not less than a Supermajority  Vote (or
by a unanimous vote of the remaining  directors if a  Supermajority  Vote is not
obtainable  because of the number of vacancies on the Board of  Directors)  fill
any vacancy in the Board,  however arising,  for the unexpired term thereof. Any
person  elected  to fill a vacancy  in the Board  shall  hold  office  until the
expiration of the term of office for the class to which he or she is elected and
until  a  successor  is  elected  and  qualified  or  until  his or her  earlier
resignation, removal from office or death.

     Section 3.4  Resignation.  Any  director may resign at any time upon notice
given in writing or by  electronic  transmission  to the  Corporation.  Any such
resignation  shall take effect at the time specified  therein or, if the time be
not specified,  upon receipt  thereof,  and the acceptance of such  resignation,
unless  required  by the  terms  thereof,  shall not be  necessary  to make such
resignation effective.

     Section  3.5  Meetings.  Meetings  of the Board of  Directors,  regular  or
special,  may be held at any place  within  or  without  the State of  Delaware.
Members of the Board of Directors,  or of any committee designated by the Board,
may  participate  in a meeting of such Board or committee by means of conference
telephone  or other  communications  equipment  by means  of which  all  persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall  constitute  presence in person at such  meeting.  An annual
meeting of the Board of Directors shall be held within 10 days after each annual
election  of  directors.  If  such  election  occurs  at an  annual  meeting  of
stockholders, the annual meeting of the Board of Directors shall be held at such
time and place as shall be specified by the Board, and no notice thereof need be
given.  The Board of Directors may fix times and places for regular  meetings of
the Board and no notice of such meetings need be given. A special meeting of the
Board of Directors  shall be held whenever  called by the Chairman of the Board,
the Chief  Executive  Officer,  the  President  or by the  written  request of a
majority  of the  members of the Board of  Directors,  at such time and place as
shall be  specified  in the  notice or waiver  thereof.  Notice of each  special
meeting  shall be given by the  Secretary or by a person  calling the meeting to
each  director  in  writing,  through  the  mail,  or  personally  served  or by
telephone,  telecopy,  telegram,  cablegram  or  radiogram,  or via any  form of
electronic transmission,  in each such case within such time frame as the person
calling the meeting shall deem  appropriate,  and such notice shall be deemed to
be given at the time when the same shall be transmitted.

     Section  3.6 Quorum and Voting.  A majority of the full Board of  Directors
shall constitute a quorum for the transaction of business, but, if there be less
than a quorum  at any  meeting  of the Board of  Directors,  a  majority  of the
directors  present may adjourn  the  meeting  from time to time,  and no further
notice thereof need be given other than  announcement at the meeting which shall
be so  adjourned.  Except as otherwise  provided by law, by the  Certificate  of
Incorporation,  or by these By-Laws (including,  without  limitation,  where any
Supermajority  Vote or any other vote in excess of a majority is required),  the
vote of a majority  of the  directors  present at a meeting at which a quorum is
present shall be the act of the Board of Directors.

     Section 3.7 Written  Consent of Directors in Lieu of a Meeting.  Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
or of such  committee,  as the case may be,  consent  thereto  in  writing or by
electronic transmission, and the writing or writings or electronic transmissions
are filed with the minutes of proceedings of the Board or committee.

     Section 3.8  Compensation.  Each  director of the  Corporation  (other than
directors  who  are  salaried   officers  of  the  Corporation  or  any  of  its
subsidiaries)  shall be entitled to receive as  compensation  for services  such
reasonable  compensation,  which  may  include  pension,  disability  and  death
benefits,  as may be  determined  from time to time by the  Board of  Directors.
Reasonable  compensation  may also be paid to any  person  other than a director
officially called to attend any such meeting.

     Section 3.9 Contracts and Transactions Involving Directors.  No contract or
transaction  between  the  Corporation  and  one or  more  of its  directors  or
officers,  or between the  Corporation and any other  corporation,  partnership,
association,  or other  organization  in which one or more of its  directors  or
officers are directors or officers, or have a financial interest,  shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his, her
or their votes are counted for such  purpose,  if: (1) the material  facts as to
his or her  relationship  or interest and as to the contract or transaction  are
disclosed or are known to the Board of Directors or the committee, and the Board
or  committee  in good faith  authorizes  the  contract  or  transaction  by the
affirmative votes of a majority of the disinterested directors,  even though the
disinterested  directors be less than a quorum;  or (2) the material facts as to
his or her  relationship  or interest and as to the contract or transaction  are
disclosed or are known to the  stockholders  entitled to vote  thereon,  and the
contract or  transaction is  specifically  approved in good faith by vote of the
stockholders;  or (3) the contract or transaction is fair as to the  Corporation
as of  the  time  it is  authorized,  approved  or  ratified,  by the  Board  of
Directors,  a  committee  thereof,  or the  stockholders.  Common or  interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of  Directors  or of a  committee  which  authorizes  the  contract or
transaction.

                                   ARTICLE IV
                      Committees of the Board of Directors
                      ------------------------------------

     Section  4.1  Appointment  and  Powers.  The  Board of  Directors  may,  by
resolution  adopted by a  majority  of the  Board,  designate  from time to time
(subject to Article V hereof) no less than three (3) and no more than six (6) of
their  number to  constitute  an Executive  Committee,  and may delegate to such
committee  power to authorize the seal of the  Corporation  to be affixed to all
papers  which may  require  it and to  exercise  in the  intervals  between  the
meetings of the Board of Directors the powers of the Board in the  management of
the business and affairs of the  Corporation to the fullest extent  permitted by
Section 141(c)(2) of the Delaware General  Corporation Law;  provided,  however,
that the Executive  Committee  shall not have the power or authority to take any
action for which a  Supermajority  Vote or other vote in excess of a majority of
the Board of Directors is required. Each member of the Executive Committee shall
continue to be a member  thereof  only during the  pleasure of a majority of the
full Board of Directors.

     The  Executive  Committee may act by a majority of its members at a meeting
or by a writing signed by all of its members.

     All action by the  Executive  Committee  shall be  reported to the Board of
Directors at its meeting next succeeding such action.

     Non-employee  members of such  Executive  Committee  shall be  entitled  to
receive such fees and compensation as the Board of Directors may determine.

     The Board of Directors  may also appoint a Finance  Committee,  a Corporate
Governance  Committee,  an Audit  Committee,  a Public  Policy  Committee  and a
Compensation  Committee  and may also appoint  such other  standing or temporary
committees from time to time as they may see fit,  delegating to such committees
all or any  part of  their  own  powers  (subject  to the  provisions  of  these
By-Laws);  provided, however, that any compensation or benefits to be paid to an
executive  officer  who is also a  director  must be  approved  by the  Board of
Directors. The members of such committees shall be entitled to receive such fees
as the Board may determine.

     The Board of Directors  shall not amend,  modify,  vary or waive any of the
terms of the Amended and Restated  Agreement and Plan of  Reorganization  by and
among The Cincinnati Gas & Electric  Company,  PSI Resources,  Inc., PSI Energy,
Inc., the Corporation, Cinergy Corp., an Ohio corporation, and Cinergy Sub, Inc.
dated as of December 11, 1992, as amended and restated as of July 2, 1993 and as
of September 10, 1993 and as further amended as of June 20, 1994, as of July 26,
1994 and as of  September  30,  1994 (the  "Merger  Agreement")  other than by a
Supermajority Vote of the Board of Directors.

                                    ARTICLE V
                         Officers, Agents and Employees
                         ------------------------------

     Section 5.1 Appointment and Term of Office.  The executive  officers of the
Corporation,  shall consist of a Chairman of the Board, a Vice-Chairman, a Chief
Executive  Officer, a President,  one or more  Vice-Presidents,  a Secretary,  a
Treasurer  and a  Comptroller,  all of whom  shall be  elected  by the  Board of
Directors by a  Supermajority  Vote,  and shall hold office for one (1) year and
until their successors are chosen and qualified.  Any number of such offices may
be held by the same person, but no officer shall execute,  acknowledge or verify
any instrument in more than one capacity. Any vacancy occurring in the office of
the  Chairman,   Chief  Executive   Officer  or  President  shall  be  filed  by
Supermajority  Vote of the Board of  Directors.  The Chairman,  Chief  Executive
Officer  or  President  shall  be  subject  to  removal  without  cause  only by
Supermajority  Vote of the Board of Directors at a special  meeting of the Board
of Directors called for that purpose.

     The Board of Directors may appoint, and may delegate power to appoint, such
other non-executive  officers,  agents and employees as it may deem necessary or
proper,  who shall hold their  offices or  positions  for such terms,  have such
authority  and perform such duties as may from time to time be  determined by or
pursuant to authorization of the Board of Directors.

     Section 5.2 The Chairman of the Board. The Chairman of the Board shall be a
director and shall preside at all meetings of the Board of Directors and, in the
absence  or  inability  to act of  the  Chief  Executive  Officer,  meetings  of
stockholders  and shall,  subject to the Board's  direction and control,  be the
Board's representative and medium of communication, and shall perform such other
duties as may from  time-to-time  be  assigned  to the  Chairman of the Board by
Supermajority  Vote of the Board of  Directors.  The Chairman of the Board shall
direct the long-term  strategic  planning  process of the  Corporation and shall
also  lend his or her  expertise  to the  President,  as may be  requested  from
time-to-time  by the President.  The Chairman shall be a member of the Executive
Committee.

     Section  5.3  Vice-Chairman.  The  Vice-Chairman  of the  Board  shall be a
director and shall  preside at meetings of the Board of Directors in the absence
or inability to act of the Chairman of the Board or meetings of  stockholders in
the absence or inability to act of the Chief Executive  Officer and the Chairman
of the Board.  The  Vice-Chairman  shall  perform  such other duties as may from
time-to-time  be  assigned to him or her by  Supermajority  Vote of the Board of
Directors.  The Vice-Chairman  shall be a member of the Executive  Committee and
may be a member of such other  committees  of the Board as it shall from time to
time deem appropriate.

     Section 5.4 Chief Executive Officer. The Chief Executive Officer shall be a
director  and shall  preside at all  meetings of the  stockholders,  and, in the
absence or inability to act of the Chairman of the Board and the  Vice-Chairman,
meetings of the Board of Directors,  and shall submit a report of the operations
of the  Corporation  for the fiscal  year to the  stockholders  at their  annual
meeting and from time-to-time shall report to the Board of Directors all matters
within his or her knowledge  which the interests of the  Corporation may require
be brought to their notice. The Chief Executive Officer shall be the chairman of
the  Executive  Committee  and ex officio a member of all  standing  committees.
Where the offices of President and Chief Executive Officer are held by different
individuals, the President will report directly to the Chief Executive Officer.

     Section  5.5 The  President.  The  President  shall be the chief  operating
officer  of the  Corporation.  The  President  shall  have  general  and  active
management  and  direction  of  the  affairs  of  the  Corporation,  shall  have
supervision of all departments and of all officers of the Corporation, shall see
that the orders and  resolutions  of the Board of Directors and of the Executive
Committee are carried into effect,  and shall have the general powers and duties
of  supervision  and  management  usually vested in the office of President of a
corporation.  All corporate officers and functions except those reporting to the
Chairman of the Board or the Chief  Executive  Officer shall report  directly to
the President.

     Section 5.6 The  Vice-Presidents.  The  Vice-Presidents  shall perform such
duties as the Board of  Directors  shall,  from  time to time,  require.  In the
absence or incapacity of the  President,  the Vice  President  designated by the
President or Board of Directors or Executive Committee shall exercise the powers
and duties of the President.

     Section 5.7 The Secretary.  The Secretary  shall attend all meetings of the
Board of Directors,  of the Executive  Committee and any other  committee of the
Board of Directors and of the  stockholders  and act as clerk thereof and record
all  votes  and the  minutes  of all  proceedings  in a book to be kept for that
purpose,  and  shall  perform  like  duties  for the  standing  committees  when
required.

     The Secretary shall keep in safe custody the seal of the  Corporation  and,
whenever authorized by the Board of Directors or the Executive Committee,  affix
the seal to any instrument requiring the same.

     The Secretary  shall see that proper notice is given of all the meetings of
the  stockholders  of the  Corporation  and of the Board of Directors  and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors, the Chairman, the Chief Executive Officer, or the President.

     Assistant  Secretaries.  At the request of the Secretary,  or in his or her
absence or inability to act, the  Assistant  Secretary or, if there be more than
one, the  Assistant  Secretary  designated by the  Secretary,  shall perform the
duties of the  Secretary  and when so acting shall have all the powers of and be
subject to all the  restrictions  of the  Secretary.  The Assistant  Secretaries
shall  perform such other duties as may from time to time be assigned to them by
the President, the Secretary, or the Board of Directors.

     Section 5.8 The Treasurer.  The Treasurer shall be the financial officer of
the  Corporation,  shall keep full and  accurate  accounts  of all  collections,
receipts and disbursements in books belonging to the Corporation,  shall deposit
all moneys and other valuables in the name and to the credit of the Corporation,
in such  depositories  as may be  directed  by the  Board  of  Directors,  shall
disburse  the  funds  of the  Corporation  as may be  ordered  by the  Board  of
Directors,  the Chairman, the Chief Executive Officer, or the President,  taking
proper vouchers therefor, and shall render to the President, the Chief Executive
Officer, the Chairman, and/or directors at all regular meetings of the Board, or
whenever they may require it, and to the annual meeting of the stockholders,  an
account  of all  his or  her  transactions  as  Treasurer  and of the  financial
condition of the Corporation.

     The  Treasurer  shall  also  perform  such  other  duties  as the  Board of
Directors,  the Chairman, the Chief Executive Officer, or the President may from
time to time require.

     If  required  by the  Board  of  Directors  the  Treasurer  shall  give the
Corporation a bond in a form and in a sum with surety  satisfactory to the Board
of Directors for the faithful performance of the duties of his or her office and
the restoration to the Corporation in the case of his or her death,  resignation
or removal from office of all books, papers,  vouchers, money and other property
of whatever kind in his or her possession belonging to the Corporation.

     Assistant  Treasurers.  At the request of the  Treasurer,  or in his or her
absence or inability to act, the  Assistant  Treasurer or, if there be more than
one, the  Assistant  Treasurer  designated by the  Treasurer,  shall perform the
duties of the  Treasurer  and when so acting shall have all the powers of and be
subject to all the restrictions of the Treasurer. The Assistant Treasurers shall
perform  such other  duties as may from time to time be  assigned to them by the
President, the Treasurer, or the Board of Directors.

     Section 5.9 The  Comptroller.  The Comptroller  shall have control over all
accounts  and  records of the  Corporation  pertaining  to  moneys,  properties,
materials  and  supplies.  He or she shall  have  executive  direction  over the
bookkeeping and accounting  departments and shall have general  supervision over
the records in all other departments pertaining to moneys, properties, materials
and supplies.  He or she shall have such other powers and duties as are incident
to the office of Comptroller of a corporation  and shall be subject at all times
to the direction and control of the Board of Directors,  the Chairman, the Chief
Executive Officer, the President, or a Vice President.

     Assistant Comptrollers. At the request of the Comptroller, or in his or her
absence or inability to act, the Assistant Comptroller or, if there be more than
one, the Assistant Comptroller designated by the Comptroller,  shall perform the
duties of the Comptroller and when so acting shall have all the powers of and be
subject to all the restrictions of the Comptroller.  The Assistant  Comptrollers
shall  perform such other duties as may from time to time be assigned to them by
the President, the Comptroller, or the Board of Directors.

     Section 5.10  Resignation,  Compensation  and Bond.  Any  resignation  from
office by any  officer of the  Corporation  also shall be deemed,  to the extent
applicable,  to be a resignation  from any similar office held by such resigning
officer at any  affiliate or  subsidiary of the  Corporation,  unless  otherwise
expressly provided for within the resigning officer's letter of resignation. The
compensation  of  the  officers  of  the  Corporation  shall  be  fixed  by  the
Compensation Committee of the Board of Directors or, in lieu of the Compensation
Committee,  by the Board of  Directors,  but this power may be  delegated to any
officer in respect of other officers under his or her control.  The  Corporation
may secure the  fidelity of any or all of its  officers,  agents or employees by
bond or otherwise.

                                   ARTICLE VI
                                 Indemnification
                                 ---------------

     Section 6.1 Indemnification of Directors, Officers, Employees and Agents.

     (A) Any person who was or is a party or is threatened to be made a party to
any threatened,  pending or completed action, suit or proceeding, whether civil,
criminal,  administrative or investigative  (other than any action or suit by or
in the right of the  Corporation) by reason of the fact that he or she is or was
a director,  officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director,  officer,  employee or agent of
another  corporation,  partnership,  joint  venture,  trust or other  enterprise
(specifically  including  employee  benefit plans),  shall be indemnified by the
Corporation,  if, as and to the extent  authorized  by applicable  law,  against
expenses   (specifically   including   attorney's   fees),   judgments,    fines
(specifically including any excise taxes assessed on a person with respect to an
employee  benefit plan) and amounts paid in settlement  actually and  reasonably
incurred  by him or her in  connection  with the defense or  settlement  of such
action, suit or proceeding,  if he or she acted in good faith and in a manner he
or she reasonably  believed to be in or not opposed to the best interests of the
Corporation  and,  with respect to any  criminal  action or  proceeding,  had no
reasonable cause to believe his or her conduct was unlawful.  The termination of
any action, suit or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption  that the person did not act in good faith and in a manner he or she
reasonably  believed  to be in and not  opposed  to the  best  interests  of the
Corporation  and, with respect to any criminal  action or proceeding,  he or she
had no reasonable cause to believe his or her conduct was unlawful.

     (B) The Corporation  shall, to the extent not prohibited by applicable law,
indemnify  or  agree  to  indemnify  any  person  who was or is a  party,  or is
threatened to be made a party, to any threatened,  pending,  or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the  Corporation or is or was serving at the request of the Corporation
as a director,  trustee,  officer,  employee,  or agent of another  corporation,
domestic or foreign, non-profit or for-profit, partnership, joint venture, trust
or other enterprise  (specifically  including  employee benefit plans),  against
expenses (including  attorneys' fees) actually and reasonably incurred by him or
her in connection with the defense or settlement of such action or suit if he or
she acted in good  faith  and in a manner  reasonably  believed  to be in or not
opposed  to  the  best   interests  of  the   Corporation;   provided  that,  no
indemnification  shall be made in respect  of any  claim,  issue or matter as to
which such  person  shall  have been  adjudged  to be liable to the  Corporation
unless and only to the extent  that the Court of  Chancery or the court in which
such action or suit was brought shall determine upon application  that,  despite
the adjudication of liability but in view of all the  circumstances of the case,
such person is fairly and  reasonably  entitled to indemnity  for such  expenses
which the Court of Chancery or such other court shall deem proper.

     (C) To the extent  that a director or officer of the  Corporation  has been
successful  on the  merits or  otherwise  in  defense of any  action,  suit,  or
proceeding  referred  to in the  paragraphs  (A) or (B) of this  Section,  or in
defense of any claim,  issue, or matter therein,  he or she shall be indemnified
against  expenses,   specifically   including   attorneys'  fees,  actually  and
reasonably incurred by him or her in connection therewith.

     (D) Any  indemnification  under  Paragraphs  (A)  and (B) of this  Section,
unless ordered by a court,  shall be made by the Corporation  only as authorized
in the specific case upon a determination that  indemnification of the director,
officer, employee, or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in such Paragraphs (A) and (B).
Such determination shall be made as follows: (1) by a majority vote of the Board
of Directors,  even if less than a quorum,  consisting of directors who were not
parties  to  such  action,  suit,  or  proceeding;  (2) by a  committee  of such
directors  designated by a majority vote of such directors,  even if less than a
quorum;  (3) if the quorum described in (D)(1) of this Section is not obtainable
or, even if  obtainable  a quorum of  disinterested  directors  so  directs,  by
independent legal counsel in a written opinion; or (4) by the stockholders.

     Section  6.2  Advances  for  Litigation   Expenses.   Expenses   (including
attorneys'  fees)  incurred by a director,  officer,  employee,  or agent of the
Corporation in defending any civil,  criminal,  administrative  or investigative
action,  suit  or  proceeding,  shall  be paid by the  Corporation  as they  are
incurred in advance of the final disposition of such action,  suit or proceeding
upon  receipt  of an  undertaking  by or on  behalf of such  director,  officer,
employee,  or  agent:  (1) to  repay  such  amount  if it  shall  ultimately  be
determined  that he is not  entitled to be  indemnified  by the  Corporation  as
authorized  in  this  Article  VI;  and (2) to  cooperate  reasonably  with  the
Corporation concerning the action, suit or proceeding.

     Section 6.3 Indemnification  Nonexclusive.  The indemnification provided by
this  Article  shall not be  exclusive  of and shall be in addition to any other
rights  granted  to those  seeking  indemnification  under  the  Certificate  of
Incorporation,  these  By-Laws,  any  agreement,  any  vote of  stockholders  or
disinterested  directors or otherwise,  both as to action in his or her official
capacity  and as to action in another  capacity  while  holding  such office and
shall continue as to a person who has ceased to be a director, trustee, officer,
employee, or agent and shall inure to the benefit of the heirs,  executors,  and
administrators of such a person.

     Section 6.4 Indemnity Insurance.  The Corporation may purchase and maintain
insurance  or furnish  similar  protection,  including  but not limited to trust
funds, letters of credit, or self-insurance,  on behalf of or for any person who
is or was a director,  officer, employee, or agent of the Corporation,  or is or
was serving at the request of the Corporation as a director,  trustee,  officer,
employee or agent of another corporation,  domestic or foreign, nonprofit or for
profit,  partnership,  joint venture,  trust, or other  enterprise,  against any
liability  asserted  against  him or her and  incurred by him or her in any such
capacity,  or  arising  out of his or her  status  as such,  whether  or not the
Corporation  would have the power to indemnify him or her against such liability
under this Article.  Insurance may be purchased from or maintained with a person
in which the Corporation has a financial interest.

     Section 6.5  Definitions.  For purposes of this  Article:  (1) a person who
acted in good faith and in a manner he or she  reasonably  believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
conclusively  be  deemed  to have  acted in a manner  "not  opposed  to the best
interests  of the  Corporation";  (2) a person  shall be deemed to have acted in
"good faith" and in a manner he  reasonably  believed to be in or not opposed to
the best interests of the  Corporation,  or, with respect to any criminal action
or  proceeding,  to have had no  reasonable  cause to believe  his  conduct  was
unlawful,  if his  action is based on the  records  or books of  account  of the
Corporation  or another  enterprise,  or on  information  supplied to him by the
officers of the Corporation or another enterprise in the course of their duties,
or on the advice of legal counsel for the  Corporation or another  enterprise or
on  information  or records given or reports made to the  Corporation or another
enterprise by an independent  certified public  accountant or by an appraiser or
other  expert  selected  with  reasonable  care by the  Corporation  or  another
enterprise;  (3) the term "another  enterprise" as used in this Article VI shall
mean any other corporation or any partnership,  joint venture,  trust,  employee
benefit plan or other  enterprise  of which such person is or was serving at the
request of the Corporation as a director,  officer,  employee or agent;  and (4)
references  to "the  Corporation"  shall  include,  in addition to the resulting
corporation,  any  constituent  corporation  (including  any  constituent  of  a
constituent)  absorbed in a  consolidation  or merger,  which,  if its  separate
existence  had  continued,  would have had power and  authority to indemnify its
directors, officers, employees, and agents. ARTICLE VII Common Stock

     Section 7.1  Certificates.  Certificates for stock of the Corporation shall
be in such  form as shall be  approved  by the Board of  Directors  and shall be
signed in the name of the Corporation by the Chairman or the President or a Vice
President,  and by the Treasurer or an Assistant Treasurer,  or the Secretary or
an Assistant  Secretary.  Such  certificates  may be sealed with the seal of the
Corporation  or  a  facsimile  thereof.  Any  of  or  all  the  signatures  on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose  facsimile  signature has been placed upon a certificate
shall have ceased to be such officer,  transfer  agent or registrar  before such
certificate is issued,  it may be issued by the Corporation with the same effect
as if he or she were such  officer,  transfer  agent or registrar at the date of
issue.

     Section 7.2 Transfers of Stock.  Transfers of stock shall be made only upon
the books of the  Corporation  by the  holder,  in person or by duly  authorized
attorney, and on the surrender of the certificate or certificates for such stock
properly endorsed.  The Board of Directors shall have the power to make all such
rules and regulations,  not  inconsistent  with the Certificate of Incorporation
and these  By-Laws and the law, as the Board of Directors  may deem  appropriate
concerning the issue, transfer and registration of certificates for stock of the
Corporation. The Board of Directors or the Finance Committee may appoint one (1)
or more transfer agents or registrars of transfers, or both, and may require all
stock certificates to bear the signature of either or both.

     Section 7.3 Lost,  Stolen or Destroyed  Certificates.  The  Corporation may
issue a new stock certificate in the place of any certificate theretofore issued
by it, alleged to have been lost,  stolen or destroyed,  and the Corporation may
require the owner of the lost,  stolen or  destroyed  certificate  or his or her
legal  representative  to give the Corporation a bond sufficient to indemnify it
against any claim that may be made  against it on account of the  alleged  loss,
theft or  destruction  of any such  certificate  or the issuance of any such new
certificate.  The Board of  Directors  may require  such owner to satisfy  other
reasonable requirements.

     Section 7.4 Stockholder  Record Date. (A) In order that the Corporation may
determine  the  stockholders  entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting.

     If no record date is fixed by the Board of  Directors,  the record date for
determining  stockholders  entitled  to  notice  of or to vote at a  meeting  of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given,  or, if notice is waived,  at the close of business on
the day next preceding the day on which the meeting is held.

     A determination  of stockholders of record entitled to notice of or to vote
at a meeting of  stockholders  shall apply to any  adjournment  of the  meeting;
providing,  however,  that the Board of Directors  may fix a new record date for
the adjourned meeting.

     (B) In order that the Corporation may determine the  stockholders  entitled
to  consent to  corporate  action in  writing  without a  meeting,  the Board of
Directors  may fix a record  date,  which record date shall not precede the date
upon which the  resolution  fixing  the  record  date is adopted by the Board of
Directors,  and which record date shall not be more than ten days after the date
upon which the  resolution  fixing  the  record  date is adopted by the Board of
Directors.  If no  record  date has been  fixed by the Board of  Directors,  the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting,  when no prior action by the Board of Directors is
required  by law,  shall be the  first  date on which a signed  written  consent
setting  forth the action  taken or  proposed  to be taken is  delivered  to the
Corporation  by delivery to its registered  office in this State,  its principal
place of business,  or an officer or agent of the Corporation  having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to a  corporation's  registered  office shall be by hand or by certified or
registered mail, return receipt  requested.  If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
law,  the  record  date for  determining  stockholders  entitled  to  consent to
corporate  action in writing without a meeting shall be at the close of business
on the day on which the Board of Directors  adopts the  resolutions  taking such
prior action.

     (C) In order that the Corporation may determine the  stockholders  entitled
to receive  payment of any  dividend or other  distribution  or allotment of any
rights or the  stockholders  entitled to  exercise  any rights in respect of any
change,  conversion or exchange of stock, or for the purpose of any other lawful
action,  the Board of Directors  may fix a record date,  which record date shall
not  precede  the date upon  which the  resolution  fixing  the  record  date is
adopted,  and which  record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such  purpose  shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.

     Section  7.5  Beneficial  Owners.  The  Corporation  shall be  entitled  to
recognize the exclusive  right of a person  registered on its books as the owner
of shares to receive  dividends,  and to vote as such owner,  and to hold liable
for  calls  and  assessments  a person  registered  on its books as the owner of
shares,  and shall not be bound to recognize  any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof,  except as otherwise  provided by
law.

                                  ARTICLE VIII
                                      Seal
                                      ----

     Section 8.1 Seal. The seal of the Corporation shall be circular in form and
shall bear,  in addition to any other emblem or device  approved by the Board of
Directors,  the name of the Corporation,  the year of its  incorporation and the
words "Corporate  Seal" and "Delaware".  The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.

                                   ARTICLE IX
                                Waiver of Notice
                                ----------------

     Section  9.1 Waiver of Notice.  Whenever  notice is required to be given by
statute,  or under any provision of the  Certificate of  Incorporation  or these
By-Laws, a written waiver thereof, signed by the person entitled to notice, or a
waiver by  electronic  transmission  by the person  entitled to notice,  whether
before or after the time stated therein,  shall be deemed  equivalent to notice.
In the case of a  stockholder,  such  waiver  of  notice  may be  signed by such
stockholder's  attorney  or proxy duly  appointed  in writing.  Attendance  of a
person at a meeting shall constitute a waiver of notice of such meeting,  except
when the person attends a meeting for the express  purpose of objecting,  at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully  called or convened.  Neither the business to be transacted  at,
nor the  purpose  of,  any  regular  or  special  meeting  of the  stockholders,
directors  or members of a  committee  of  directors  need be  specified  in any
written waiver of notice or any waiver by electronic transmission.

                                    ARTICLE X
                                   Fiscal Year
                                   -----------

     Section 10.1 Fiscal Year. The Fiscal Year of the Corporation shall begin on
the first day of January and terminate on the  thirty-first day of December each
year.

                                   ARTICLE XI
                             Contracts, Checks, etc.
                             -----------------------

     Section 11.1 Contracts,  Checks, etc. The Board of Directors or the Finance
Committee may by  resolution  adopted at any meeting  designate  officers of the
Corporation who may in the name of the Corporation  execute  contracts,  checks,
drafts, and orders for the payment of money in its behalf and, in the discretion
of the Board of  Directors  or the Finance  Committee,  such  officers may be so
authorized  to sign such  contracts or checks  singly  without the  necessity of
counter-signature.

                                   ARTICLE XII
                                   Amendments
                                   ----------

     Section 12.1  Amendments.  Except as set forth below,  these By-Laws may be
amended or repealed by the Board of Directors or by the affirmative  vote of the
holders  of a  majority  of the  issued  and  outstanding  common  stock  of the
Corporation,  or by the unanimous  written  consent of the holders of the issued
and outstanding common stock of the Corporation.

     Notwithstanding  the  foregoing  paragraph,  the  affirmative  vote  of the
holders of at least 80% of the issued and outstanding  shares of common stock of
the  Corporation  shall be  required  to amend,  alter or  repeal,  or adopt any
provision  inconsistent  with,  the  requirements  of Section 2.2,  Section 3.1,
Section 3.2, Section 3.3 or this paragraph of Section 12.1 of these By-Laws,  in
addition to any  requirements  of law and any  provisions of the  Certificate of
Incorporation,  any By-law,  or any resolution of the Board of Directors adopted
pursuant to the Certificate of Incorporation (and  notwithstanding that a lesser
percentage  may be specified by law, the  Certificate  of  Incorporation,  these
By-Laws, such resolution, or otherwise).

     Notwithstanding any of the foregoing, the affirmative vote of a majority of
the holders of the issued and outstanding  common stock of the Corporation shall
be required to amend, alter or repeal, or adopt any provision  inconsistent with
(i) any provision of these By-Laws  requiring a Supermajority  Vote of the Board
of  Directors   (including   this   provision  of  Section  12.1)  or  (ii)  the
responsibilities  of the Chief  Executive  Officer or  President as set forth in
Section 5.4 or Section 5.5, and the Board of Directors  shall not  recommend any
such  amendment  to such  provisions  to the  stockholders  unless the  proposed
amendment is approved by the Board of Directors acting by Supermajority Vote.

                                  ARTICLE XIII
                                    Dividends
                                    ---------

     Section  13.1   Dividends.   Dividends   upon  the  capital  stock  of  the
Corporation,  subject to the provisions of the Certificate of Incorporation,  if
any,  may be  declared  by the Board of  Directors  at any  regular  or  special
meeting,  and may be paid in cash,  in  property,  or in shares  of the  capital
stock.  Before payment of any dividend,  there may be set aside out of any funds
of the  Corporation  available  for  dividends  such sum or sums as the Board of
Directors  from time to time,  in its  absolute  discretion,  deems  proper as a
reserve or reserves to meet contingencies,  or for equalizing dividends,  or for
repairing  or  maintaining  any property of the  Corporation,  or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
EX-99 4 larrythomas.htm SEPARATION AND RETIREMENT AGREEMENT-LARRY THOMAS Larry Thomas 
  Amendment to the Amended and Restated Separation and Retirement Agreement and
  -----------------------------------------------------------------------------
                        Waiver and Release of Liability
                        -------------------------------



     Cinergy Corp. and Larry E. Thomas (the "Parties")  entered into the Amended
and  Restated  Separation  and  Retirement  Agreement  and Waiver and Release of
Liability dated February 15, 2002 (the "Separation Agreement").  The Parties now
desire to amend the Separation Agreement through the adoption of this Amendment,
which is effective as of March 31, 2002, with the mutual exchange of promises as
consideration.  Capitalized  words and terms used throughout this Amendment that
are not defined elsewhere in this Amendment shall have the meaning given to them
in the Separation Agreement.

1.   Recital A of the  Separation  Agreement  shall be amended  and  restated to
     read, in its entirety, as follows:

     A.   The Executive has elected to terminate voluntarily his employment with
          Cinergy and retire effective May 31, 2002.

2.   The date  "March  31,  2002" in the  first  sentence  of  Recital  B of the
     Separation Agreement shall be replaced with "May 31, 2002".

3.   The date "March 31,  2002" in  Sections  1b, 1d, 2, 2a, 2b, 2c, 2e, 2g, 2h,
     2i, 2j and 2k of the Separation  Agreement  shall be replaced with "May 31,
     2002".

4.   Section 2m of the Separation  Agreement is amended and restated to read, in
     its entirety, as follows:

     m.   2002 Annual Incentive Plan. After May 31, 2002, provided the Executive
          ---------------------------
          timely executes and does not timely revoke the Waiver and Release, the
          Executive  will receive an AIP award for the 2002  performance  period
          equal to 5/12ths of the award  that he would have  received  if he had
          remained employed until the date of payment of the award,  which award
          will be paid  based  on a level  three  payout  with  respect  to both
          individual  and  corporate  goals,  which  payment shall be reduced by
          applicable withholding taxes and shall be payable in March, 2003.

5.   The  definition  of the  term  "Termination  Date"  in  Section  22k of the
     Separation  Agreement  shall  be  amended  and  restated  to  read,  in its
     entirety, as follows:

     k.   Termination Date. "Termination Date" means May 31, 2002.
          -----------------




IN WITNESS WHEREOF,  the Parties have caused this Agreement to be executed as of
the effective date set forth above.


CINERGY CORP.                                Larry E. Thomas


By:
      ----------------------------           --------------------------
      Jerome A. Vennemann                    Executive



By:
      ----------------------------
      Timothy J. Verhagen
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