UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2003

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

For the transition period from to

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

1-11377	CINERGY CORP.	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 ý No o

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

Yes ý No o

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

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

As of April 30, 2003, shares of common stock outstanding for each registrant were as listed:

Registrant	Description	Shares

Cinergy Corp.	Par value $.01 per share	176,091,329

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
			2003 Quarterly Results of Operations - Historical
			Results of Operations - Future

3	Quantitative and Qualitative Disclosures About Market Risk

4	Controls and Procedures

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

	Certifications

CINERGY CORP.

AND SUBSIDIARY COMPANIES

CINERGY CORP.

CONSOLIDATED STATEMENTS OF INCOME

	Quarter Ended March 31
	2003		2002
	(in thousands, except per share amounts)
	(unaudited)
Operating Revenues (Note 3)
Electric	$	836,883	$	779,376
Gas	398,913		190,064
Other	45,986		16,937
Total Operating Revenues	1,281,782		986,377

Operating Expenses
Fuel and purchased and exchanged power (Note 3)	279,483		229,290
Gas purchased (Note 3)	235,995		109,880
Operation and maintenance	326,661		262,578
Depreciation	106,023		98,566
Taxes other than income taxes	77,749		72,422
Total Operating Expenses	1,025,911		772,736

Operating Income	255,871		213,641

Equity in Earnings (Losses) of Unconsolidated Subsidiaries	592		4,689
Miscellaneous - Net	8,375		(1,309		)
Interest	60,564		61,223
Preferred Dividend Requirement of Subsidiary Trust	5,970		5,913

Income Before Taxes	198,304		149,885

Income Taxes	57,823		53,777
Preferred Dividend Requirements of Subsidiaries	858		858

Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principles	139,623		95,250

Discontinued operations, net of tax	—		478
Cumulative effect of a change in accounting principles, net of tax (Note 1(j)( viii ))	26,462		(10,899		)
Net Income	$	166,085	$	84,829

Average Common Shares Outstanding	173,387		164,295

Earnings Per Common Share (Note 9)
Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principles	$	0.81	$	0.58
Discontinued operations, net of tax	—		—
Cumulative effect of a change in accounting principles, net of tax	0.15		(0.06		)
Net Income	$	0.96	$	0.52

Earnings Per Common Share - Assuming Dilution (Note 9)
Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principles	$	0.80	$	0.58
Discontinued operations, net of tax	—		—
Cumulative effect of a change in accounting principles, net of tax	0.15		(0.06		)
Net Income	$	0.95	$	0.52

Dividends Declared Per Common Share	$	0.46	$	0.45

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

CINERGY CORP.

CONSOLIDATED BALANCE SHEETS

ASSETS

	March 31 2003		December 31 2002
	(in thousands)
	(unaudited)

Current Assets
Cash and cash equivalents	$	259,159	$	221,083
Restricted deposits	8,221		8,116
Notes receivable	96,884		135,873
Accounts receivable less accumulated provision for doubtful accounts of $12,881 at March 31, 2003, and $16,374 at December 31, 2002	1,383,244		1,292,410
Materials, supplies, and fuel (Note 1(d))	245,061		319,456
Energy risk management current assets (Note 1(c))	439,358		464,028
Prepayments and other	108,367		118,208
Total Current Assets	2,540,294		2,559,174

Property, Plant, and Equipment - at Cost
Utility plant in service	9,100,552		8,641,351
Construction work in progress	508,021		469,300
Total Utility Plant	9,608,573		9,110,651
Non-regulated property, plant, and equipment	4,355,409		4,704,904
Accumulated depreciation (Note 1(j)( iii ))	5,184,319		5,166,881
Net Property, Plant, and Equipment	8,779,663		8,648,674

Other Assets
Regulatory assets	1,016,477		1,022,696
Investments in unconsolidated subsidiaries	427,378		417,188
Energy risk management non-current assets (Note 1(c))	92,631		162,773
Other investments	165,130		163,851
Goodwill	43,717		43,717
Other intangible assets	14,117		14,736
Other	336,811		273,099
Total Other Assets	2,096,261		2,098,060

Assets of Discontinued Operations	1,916		1,120

Total Assets	$	13,418,134	$	13,307,028

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 2003			December 31 2002
	(in thousands)
	(unaudited)

Current Liabilities
Accounts payable	$	1,455,370		$	1,321,968
Accrued taxes	235,646			254,823
Accrued interest	60,328			64,340
Notes payable and other short-term obligations (Note 5)	327,616			667,973
Long-term debt due within one year	318,949			191,454
Energy risk management current liabilities (Note 1(c))	434,111			407,710
Other	91,450			108,056
Total Current Liabilities	2,923,470			3,016,324

Non-Current Liabilities
Long-term debt (Note 4)	3,977,024			4,080,768
Deferred income taxes	1,507,089			1,471,872
Unamortized investment tax credits	115,792			118,095
Accrued pension and other postretirement benefit costs	642,121			626,167
Energy risk management non-current liabilities (Note 1(c))	84,805			143,991
Other	213,643			183,613
Total Non-Current Liabilities	6,540,474			6,624,506

Liabilities of Discontinued Operations	1,831			1,707

Total Liabilities	9,465,775			9,642,537

Preferred Trust Securities
Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company	308,702			308,187

Cumulative Preferred Stock of Subsidiaries
Not subject to mandatory redemption	62,828			62,828

Common Stock Equity (Note 2)
Common stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 175,876,919 at March 31, 2003, and 168,663,115 at December 31, 2002	1,759			1,687
Paid-in capital	2,116,222			1,918,136
Retained earnings	1,491,861			1,403,453
Accumulated other comprehensive income (loss)	(29,013		)	(29,800		)
Total Common Stock Equity	3,580,829			3,293,476

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholders’ Equity	$	13,418,134		$	13,307,028

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

CINERGY CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

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

Quarter Ended March 31, 2003

Balance at January 1, 2003 (168,663,115 shares)	$	1,687	$	1,918,136	$	1,403,453		$	(29,800	)	$	3,293,476
Comprehensive income:
Net income					166,085						166,085
Other comprehensive income (loss), net of tax effect of ($275)
Foreign currency translation adjustment								2,090			2,090
Unrealized gain (loss) on investment trusts								(851		)	(851		)
Cash flow hedges (Note 1(j)( iv ))								(452		)	(452		)
Total comprehensive income											166,872

Issuance of common stock - net (7,213,804 shares)	72		193,896								193,968
Dividends on common stock ($.46 per share)					(77,685		)				(77,685		)
Other			4,190		8						4,198

Ending balance at March 31, 2003 (175,876,919 shares)	$	1,759	$	2,116,222	$	1,491,861		$	(29,013	)	$	3,580,829

Quarter Ended March 31, 2002

Balance at January 1, 2002 (159,402,839 shares)	$	1,594	$	1,619,659	$	1,337,135		$	(16,929	)	$	2,941,459
Comprehensive income:
Net income					84,829						84,829
Other comprehensive income (loss), net of tax effect of $1,084
Foreign currency translation adjustment								(1,584		)	(1,584		)
Unrealized gain (loss) on investment trusts								(1,051		)	(1,051		)
Minimum pension liability adjustment								136			136
Cash flow hedges (Note 1(j)( iv ))								240			240
Total comprehensive income											82,570

Issuance of common stock - net (7,423,257 shares)	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 (166,826,096 shares)	$	1,669	$	1,839,338	$	1,350,090		$	(19,188	)	$	3,171,909

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

CINERGY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Activities
Net income	$	166,085		$	84,829
Items providing or (using) cash currently:
Depreciation	106,023			98,566
Loss (gain) on discontinued operations, net of tax	—			(478		)
Cumulative effect of a change in accounting principles, net of tax	(26,462		)	10,899
Change in net position of energy risk management activities	9,730			(50,005		)
Deferred income taxes and investment tax credits - net	18,013			2,594
Equity in (earnings) losses of unconsolidated subsidiaries	(592		)	(4,689		)
Allowance for equity funds used during construction	(3,579		)	(2,850		)
Regulatory assets deferrals	(20,588		)	(17,665		)
Regulatory assets amortization	27,966			29,976
Accrued pension and other postretirement benefit costs	15,954			(105		)
Deferred costs under gas recovery mechanism	(38,659		)	5,955
Changes in current assets and current liabilities:
Restricted deposits	(105		)	(728		)
Accounts and notes receivable	(51,845		)	76,442
Materials, supplies, and fuel	74,395			22,459
Prepayments	1,382			1,101
Accounts payable	133,402			(29,497		)
Accrued taxes and interest	(23,189		)	50,274
Other assets	3,489			13,449
Other liabilities	6,045			(6,918		)

Net cash provided by (used in) operating activities	397,465			283,609

Financing Activities
Change in short-term debt	(340,357		)	(205,918		)
Issuance of long-term debt	35,000			—
Redemption of long-term debt	(11,270		)	(30,722		)
Retirement of preferred stock of subsidiaries	—			(2		)
Issuance of common stock	193,968			215,969
Dividends on common stock	(77,685		)	(71,882		)

Net cash provided by (used in) financing activities	(200,344		)	(92,555		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(151,187		)	(187,678		)
Acquisitions and other investments	(7,858		)	(18,125		)

Net cash provided by (used in) investing activities	(159,045		)	(205,803		)

Net increase (decrease) in cash and cash equivalents	38,076			(14,749		)

Cash and cash equivalents at beginning of period	221,083			111,067

Cash and cash equivalents at end of period	$	259,159		$	96,318

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	67,259		$	48,373
Income taxes	$	66,477		$	19,242

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

THE CINCINNATI GAS & ELECTRIC COMPANY

AND SUBSIDIARY COMPANIES

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Revenues (Note 3)
Electric	$	428,564		$	398,119
Gas	275,276			179,609
Total Operating Revenues	703,840			577,728

Operating Expenses
Fuel and purchased and exchanged power (Note 3)	130,554			107,248
Gas purchased	171,765			107,968
Operation and maintenance	134,760			105,855
Depreciation	49,264			48,160
Taxes other than income taxes	60,518			53,486
Total Operating Expenses	546,861			422,717

Operating Income	156,979			155,011

Miscellaneous - Net	6,584			(3,704		)
Interest	25,841			22,855

Income Before Taxes	137,722			128,452

Income Taxes	51,424			50,867

Income Before Cumulative Effect of a Change in Accounting Principles	86,298			77,585

Cumulative effect of a change in accounting principles, net of tax (Note 1(j)( viii ))	30,938			—

Net Income	$	117,236		$	77,585

Preferred Dividend Requirement	211			211

Net Income Applicable to Common Stock	$	117,025		$	77,374

Net Income	$	117,236		$	77,585

Other Comprehensive Income (Loss), Net of Tax Effect	(306		)	(172		)

Comprehensive Income	$	116,930		$	77,413

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

ASSETS

	March 31 2003		December 31 2002
	(in thousands)
	(unaudited)

Current Assets
Cash and cash equivalents	$	26,870	$	45,336
Restricted deposits	3,037		3,071
Notes receivable from affiliated companies	207,402		148,823
Accounts receivable less accumulated provision for doubtful accounts of $2,707 at March 31, 2003, and $5,942 at December 31, 2002	106,416		117,269
Accounts receivable from affiliated companies	27,650		97,584
Materials, supplies, and fuel	94,226		121,881
Energy risk management current assets (Note 1(c))	74,339		57,912
Prepayments and other	14,409		8,560
Total Current Assets	554,349		600,436

Property, Plant, and Equipment - at Cost
Utility plant in service
Electric	2,097,439		2,073,133
Gas	1,019,175		1,003,870
Common	249,593		248,938
Total Utility Plant In Service	3,366,207		3,325,941
Construction work in progress	80,664		84,249
Total Utility Plant	3,446,871		3,410,190
Non-regulated property, plant, and equipment	3,469,525		3,445,056
Accumulated depreciation (Note 1(j)( iii ))	2,692,027		2,712,105
Net Property, Plant, and Equipment	4,224,369		4,143,141

Other Assets
Regulatory assets	596,271		604,776
Energy risk management non-current assets (Note 1(c))	33,946		64,762
Other investments	1,081		1,082
Other	193,325		127,550
Total Other Assets	824,623		798,170

Total Assets	$	5,603,341	$	5,541,747

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 2003			December 31 2002
	(in thousands)
	(unaudited)

Current Liabilities
Accounts payable	$	241,667		$	195,812
Accounts payable to affiliated companies	40,652			146,558
Accrued taxes	159,892			159,199
Accrued interest	18,042			22,872
Notes payable and other short-term obligations (Note 5)	112,100			112,100
Notes payable to affiliated companies (Note 5)	3,260			8,947
Long-term debt due within one year	230,000			120,000
Energy risk management current liabilities (Note 1(c))	89,627			49,288
Other	37,255			37,160
Total Current Liabilities	932,495			851,936

Non-Current Liabilities
Long-term debt	1,459,760			1,569,713
Deferred income taxes	916,930			882,628
Unamortized investment tax credits	83,695			85,198
Accrued pension and other postretirement benefit costs	205,087			201,284
Energy risk management non-current liabilities (Note 1(c))	20,335			31,326
Other	84,583			88,843
Total Non-Current Liabilities	2,770,390			2,858,992

Total Liabilities	3,702,885			3,710,928

Cumulative Preferred Stock
Not subject to mandatory redemption	20,485			20,485

Common Stock Equity
Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at March 31, 2003, and December 31, 2002	762,136			762,136
Paid-in capital	586,292			586,292
Retained earnings	557,595			487,652
Accumulated other comprehensive income (loss)	(26,052		)	(25,746		)
Total Common Stock Equity	1,879,971			1,810,334

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder’s Equity	$	5,603,341		$	5,541,747

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

THE CINCINNATI GAS & ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Activities
Net income	$	117,236		$	77,585
Items providing or (using) cash currently:
Depreciation	49,264			48,160
Deferred income taxes and investment tax credits - net	13,092			7,465
Cumulative effect of a change in accounting principles, net of tax	(30,938		)	—
Change in net position of energy risk management activities	1,041			(2,069		)
Allowance for equity funds used during construction	(719		)	543
Regulatory assets deferrals	(5,949		)	(11,131		)
Regulatory assets amortization	16,376			11,494
Accrued pension and other postretirement benefit costs	3,803			(307		)
Deferred costs under gas cost recovery mechanism	(38,659		)	5,955
Changes in current assets and current liabilities:
Restricted deposits	34			(764		)
Accounts and notes receivable	103,008			121,927
Materials, supplies, and fuel	27,655			33,593
Prepayments	361			535
Accounts payable	(60,051		)	(59,074		)
Accrued taxes and interest	(4,137		)	34,192
Other assets	(4,677		)	4,331
Other liabilities	(6,924		)	980

Net cash provided by (used in) operating activities	179,816			273,415

Financing Activities
Change in short-term debt, including net affiliate notes	(86,487		)	(141,171		)
Dividends on preferred stock	(211		)	(211		)
Dividends on common stock	(47,082		)	(44,787		)

Net cash provided by (used in) financing activities	(133,780		)	(186,169		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(64,501		)	(80,191		)
Other investments	(1		)	(840		)

Net cash provided by (used in) investing activities	(64,502		)	(81,031		)

Net increase (decrease) in cash and cash equivalents	(18,466		)	6,215

Cash and cash equivalents at beginning of period	45,336			9,074

Cash and cash equivalents at end of period	$	26,870		$	15,289

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	30,010		$	9,551
Income taxes	$	29,451		$	12,620

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

PSI ENERGY, INC.

AND SUBSIDIARY COMPANY

PSI ENERGY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Revenues (Note 3)
Electric	$	411,688		$	366,401

Operating Expenses
Fuel and purchased and exchanged power (Note 3)	166,872			123,049
Operation and maintenance	112,385			115,079
Depreciation	42,712			37,748
Taxes other than income taxes	15,882			16,397
Total Operating Expenses	337,851			292,273

Operating Income	73,837			74,128

Miscellaneous - Net	2,158			5,351
Interest	20,115			19,291

Income Before Taxes	55,880			60,188

Income Taxes	21,659			22,105

Income Before Cumulative Effect of a Change in Accounting Principle	34,221			38,083

Cumulative effect of a change in accounting principle, net of tax (Note 1(j)( viii ))	(494		)	—

Net Income	$	33,727		$	38,083

Preferred Dividend Requirement	647			647

Net Income Applicable to Common Stock	$	33,080		$	37,436

Net Income	$	33,727		$	38,083

Other Comprehensive Income (Loss), Net of Tax Effect	(630		)	(497		)

Comprehensive Income	$	33,097		$	37,586

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

ASSETS

	March 31 2003		December 31 2002
	(in thousands)
	(unaudited)

Current Assets
Cash and cash equivalents	$	4,095	$	2,007
Restricted deposits	20		20
Notes receivable from affiliated companies	37,548		53,755
Accounts receivable less accumulated provision for doubtful accounts of $1,927 at March 31, 2003, and $5,656 at December 31, 2002	62,504		84,819
Accounts receivable from affiliated companies	439		437
Materials, supplies, and fuel	132,959		137,292
Energy risk management current assets (Note 1(c))	8,023		8,701
Prepayments and other	34,806		44,725
Total Current Assets	280,394		331,756

Property, Plant, and Equipment - at Cost
Utility plant in service	5,734,345		5,315,410
Construction work in progress	427,357		385,051
Total Utility Plant	6,161,702		5,700,461
Accumulated depreciation	2,374,840		2,334,157
Net Property, Plant, and Equipment (Note 11)	3,786,862		3,366,304

Other Assets
Regulatory assets	420,206		417,920
Energy risk management non-current assets (Note 1(c))	12,539		16,590
Other investments	54,477		54,683
Other	42,044		35,703
Total Other Assets	529,266		524,896

Total Assets	$	4,596,522	$	4,222,956

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 2003			December 31 2002
	(in thousands)
	(unaudited)

Current Liabilities
Accounts payable	$	73,155		$	113,563
Accounts payable to affiliated companies	39,150			107,364
Accrued taxes	107,385			105,960
Accrued interest	26,811			23,078
Notes payable and other short-term obligations (Note 5)	—			35,000
Notes payable to affiliated companies (Note 5)	229,865			138,055
Long-term debt due within one year	83,838			56,000
Energy risk management current liabilities (Note 1(c))	7,133			8,000
Other	22,550			22,335
Total Current Liabilities	589,887			609,355

Non-Current Liabilities
Long-term debt (Note 4)	1,699,186			1,315,984
Deferred income taxes	536,174			538,745
Unamortized investment tax credits	32,097			32,897
Accrued pension and other postretirement benefit costs	188,107			184,299
Energy risk management non-current liabilities (Note 1(c))	15,837			17,157
Other	89,647			80,879
Total Non-Current Liabilities	2,561,048			2,169,961

Total Liabilities	3,150,935			2,779,316

Cumulative Preferred Stock
Not subject to mandatory redemption	42,343			42,343

Common Stock Equity
Common stock - without par value; $.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at March 31, 2003, and December 31, 2002	539			539
Paid-in capital	426,931			426,931
Retained earnings	984,523			981,946
Accumulated other comprehensive income (loss)	(8,749		)	(8,119		)
Total Common Stock Equity	1,403,244			1,401,297

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder’s Equity	$	4,596,522		$	4,222,956

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

PSI ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Activities
Net income	$	33,727		$	38,083
Items providing or (using) cash currently:
Depreciation	42,712			37,748
Cumulative effect of a change in accounting principle, net of tax	494			—
Deferred income taxes and investment tax credits - net	(2,654		)	(8,580		)
Change in net position of energy risk management activities	(1,245		)	133
Allowance for equity funds used during construction	(2,860		)	(3,393		)
Regulatory assets deferrals	(14,639		)	(6,534		)
Regulatory assets amortization	11,590			18,482
Accrued pension and other postretirement benefit costs	3,808			2,864
Changes in current assets and current liabilities:
Restricted deposits	—			(2		)
Accounts and notes receivable	38,520			99,305
Materials, supplies, and fuel	4,333			(16,776		)
Prepayments	1,345			1,074
Accounts payable	(108,622		)	(60,867		)
Accrued taxes and interest	5,158			37,874
Other assets	7,355			534
Other liabilities	1,066			128

Net cash provided by (used in) operating activities	20,088			140,073

Financing Activities
Change in short-term debt, including net affiliate notes	56,810			24,057
Issuance of long-term debt	35,000			—
Redemption of long-term debt	—			(23,000		)
Retirement of preferred stock	—			(2		)
Dividends on preferred stock	(647		)	(647		)
Dividends on common stock	(30,503		)	(26,944		)

Net cash provided by (used in) financing activities	60,660			(26,536		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(77,833		)	(104,977		)
Other investments	(827		)	(3,557		)

Net cash provided by (used in) investing activities	(78,660		)	(108,534		)

Net increase (decrease) in cash and cash equivalents	2,088			5,003

Cash and cash equivalents at beginning of period	2,007			1,587

Cash and cash equivalents at end of period	$	4,095		$	6,590

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	20,465		$	22,819
Income taxes	$	36,000		$	6,590

Non-cash financing and investing activities:
Issuance of promissory notes to affiliated company for acquisition of assets	$	375,969		$	—

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

THE UNION LIGHT , HEAT AND POWER COMPANY

THE UNION LIGHT, HEAT AND POWER COMPANY

STATEMENTS OF INCOME

	Quarter Ended March 31
	2003		2002
	(in thousands)
	(unaudited)

Operating Revenues
Electric	$	54,929	$	51,857
Gas	49,384		35,204
Total Operating Revenues	104,313		87,061

Operating Expenses
Electricity purchased from parent company for resale	39,123		36,838
Gas purchased	31,500		22,889
Operation and maintenance	12,585		9,452
Depreciation	4,445		4,220
Taxes other than income taxes	1,161		1,201
Total Operating Expenses	88,814		74,600

Operating Income	15,499		12,461

Miscellaneous - Net	1,479		(5,168		)
Interest	1,502		1,505

Income Before Taxes	15,476		5,788

Income Taxes	6,070		1,904

Net Income	$	9,406	$	3,884

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

ASSETS

	March 31 2003		December 31 2002
	(in thousands)
	(unaudited)

Current Assets
Cash and cash equivalents	$	7,559	$	3,926
Notes receivable from affiliated companies	9,902		13,337
Accounts receivable less accumulated provision for doubtful accounts of $91 at March 31, 2003, and $84 at December 31, 2002	710		703
Accounts receivable from affiliated companies	682		1,671
Materials, supplies, and fuel	3,516		8,182
Prepayments and other	158		316
Total Current Assets	22,527		28,135

Property, Plant, and Equipment - at Cost
Utility plant in service
Electric	262,800		258,094
Gas	221,244		215,505
Common	31,629		31,679
Total Utility Plant In Service	515,673		505,278
Construction work in progress	11,482		14,745
Total Utility Plant	527,155		520,023
Accumulated depreciation	191,743		187,876
Net Property, Plant, and Equipment	335,412		332,147

Other Assets
Regulatory assets	9,678		5,134
Other	22,309		16,811
Total Other Assets	31,987		21,945

Total Assets	$	389,926	$	382,227

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 2003			December 31 2002
	(in thousands)
	(unaudited)

Current Liabilities
Accounts payable	$	13,565		$	8,816
Accounts payable to affiliated companies	20,331			22,297
Accrued taxes	1,016			1,487
Accrued interest	1,217			1,226
Long-term debt due within one year	20,000			20,000
Notes payable to affiliated companies (Note 5)	4,543			14,076
Other	6,658			6,368
Total Current Liabilities	67,330			74,270

Non-Current Liabilities
Long-term debt	54,661			54,653
Deferred income taxes	47,877			43,360
Unamortized investment tax credits	3,077			3,143
Accrued pension and other postretirement benefit costs	15,891			15,620
Other	14,520			14,017
Total Non-Current Liabilities	136,026			130,793

Total Liabilities	203,356			205,063

Common Stock Equity
Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at March 31, 2003, and December 31, 2002	8,780			8,780
Paid-in capital	23,644			23,644
Retained earnings	154,206			144,800
Accumulated other comprehensive income (loss)	(60		)	(60		)
Total Common Stock Equity	186,570			177,164

Commitments and Contingencies (Note 7)

Total Liabilities and Shareholder’s Equity	$	389,926		$	382,227

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

STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2003			2002
	(in thousands)
	(unaudited)

Operating Activities
Net income	$	9,406		$	3,884
Items providing or (using) cash currently:
Depreciation	4,445			4,220
Deferred income taxes and investment tax credits - net	4,451			(727		)
Allowance for equity funds used during construction	(85		)	(47		)
Regulatory assets deferrals	(33		)	4,687
Regulatory assets amortization	(22		)	(887		)
Accrued pension and other postretirement benefit costs	271			(43		)
Deferred costs under gas cost recovery mechanism	(9,372		)	4,347
Changes in current assets and current liabilities:
Accounts and notes receivable	4,417			14,388
Materials, supplies, and fuel	4,666			7,272
Prepayments	158			150
Accounts payable	2,783			3,648
Accrued taxes and interest	(480		)	1,990
Other assets	20			224
Other liabilities	174			397

Net cash provided by (used in) operating activities	20,799			43,503

Financing Activities
Change in short-term debt, including net affiliate notes	(9,533		)	(35,978		)

Net cash provided by (used in) financing activities	(9,533		)	(35,978		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(7,633		)	(7,382		)
Other investments	—			(114		)

Net cash provided by (used in) investing activities	(7,633		)	(7,496		)

Net increase (decrease) in cash and cash equivalents	3,633			29

Cash and cash equivalents at beginning of period	3,926			4,099

Cash and cash equivalents at end of period	$	7,559		$	4,128

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	1,437		$	875
Income taxes	$	3,000		$	1,901

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

NOTES TO FINANCIAL STATEMENTS

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 registrants’ combined Form 10-K for the year ended December 31, 2002 (2002 10-K). Certain amounts in the 2002 Financial Statements have been reclassified to conform to the 2003 presentation.

(b) Financial Derivatives

We use derivative financial instruments to manage funding costs and exposures to fluctuations in interest 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 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.

We use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows) and treasury locks (an agreement that fixes the yield or price on a specific treasury security for a specific period, which we sometimes use in connection with the issuance of fixed rate debt). We account for such derivatives at fair value, and we assess the effectiveness of any interest rate swaps and/or treasury locks used in hedging activities.

At March 31, 2003, the ineffectiveness of instruments that we have classified as cash flow hedges of variable-rate debt instruments was not material. Reclassification of unrealized gains or losses on cash flow hedges of debt instruments from Accumulated other comprehensive income (loss) occurs as interest is accrued on the debt instrument. We currently estimate that on an after-tax basis, $5 million of unrealized losses will be reclassified as a charge to Interest during

the twelve-month period ending March 31, 2004. See (j)( iv ) below for further discussion of Statement 133.

(c) Energy Marketing and Trading

We market and trade electricity, natural gas, coal, and other energy-related products. We designate derivative transactions as trading or non-trading at the time they are originated in accordance with Emerging Issues Task Force (EITF) Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3). Derivatives are classified as non-trading only when we have the intent and projected ability to fulfill substantially all obligations from company-owned assets. Such classification is generally limited to the sale of generation to third parties when it is not required to meet native load requirements (end-use customers within our public utility companies’ franchise service territory). All other energy derivatives (excluding electric, coal, and gas purchase contracts for use in serving our native load requirements) are classified as trading. Gas trading is comprised of transactions for which gas is physically delivered to a customer (physical gas trading), as well as transactions that are financial in nature for which delivery rarely occurs (financial gas trading). Since Cinergy owns no gas production and has limited transmission capabilities, all gas transactions (other than procurement and sale of gas to The Cincinnati Gas & Electric Company ( CG&E ) and to The Union Light, Heat and Power Company ( ULH&P ) retail customers) are considered trading whether physical or financial. Certain gas and coal contracts do not meet the definition of a derivative and, therefore, are not required to be classified as trading or non-trading.

We account for non-trading derivatives and non-derivative energy contracts on the accrual basis of accounting (accrual contracts). Non-trading derivatives are accounted for as accrual only if the contract qualifies for the normal purchases and sales scope exception in Statement 133. We account for all trading derivatives using the fair value method of accounting. Under the fair value method of accounting, unrealized trading derivatives are shown at fair value in our Balance Sheets as Energy risk management assets and Energy risk management liabilities . All changes in fair value of such contracts are reflected as gains or losses in our Statements of Income. In October 2002, the EITF reached a consensus in EITF 02-3 to rescind EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). This decision required that non-derivative contracts previously accounted for at fair value be accounted for on an accrual basis, beginning January 1, 2003. See (j)( i ) below for further discussion.

In 2003, we began reflecting realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues pursuant to the requirements of EITF 02-3, regardless of whether the transactions were settled physically. Prior to 2003, the realized results for trading contracts that were physical in nature were presented as either (a) Operating Revenues , if sales contracts or (b) Fuel and purchased and exchanged power expense or Gas purchased expense, if purchase contracts. The presentation for 2002 has been reclassified to conform to the new presentation. Non-trading derivatives, as well as substantially all energy marketing contracts that are not derivatives, are presented on a gross basis in Operating Revenues or Fuel and purchased and exchanged power expense. (For more information see Note 3).

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

• generating station outages;

• least-cost alternative;

• native load requirements; and

• extreme weather.

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

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

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

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

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

(d) Inventory

Prior to January 1, 2003, natural gas inventory for our domestic gas trading operation, Cinergy Marketing & Trading, LP (Marketing & Trading) was accounted for at fair value. All other inventory was accounted for at the lower of cost or market, cost being determined through the weighted average method. Effective January 1, 2003, accounting for Marketing & Trading’s gas inventory was adjusted to the lower of cost or market method with a cumulative effect adjustment, as required by EITF 02-3. See (j)( i ) below for additional discussion of the impacts of adopting EITF 02-3.

(e) Intangible Assets

Goodwill and other intangibles with indefinite lives are not amortized. Goodwill is assessed for impairment annually, or when circumstances indicate that the fair value of a reporting unit has declined significantly, by applying a fair-value-based test. This test is applied at the “reporting unit” level, which is not broader than the current business segments discussed in Note 8. Acquired intangible assets are 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 intent to do so.

(f) Impairment of Long-lived Assets

We evaluate long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. So long as an asset or group of assets is not held for sale, the determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for an impairment loss if the carrying value is greater than the fair value. Once assets are classified as held for sale, the comparison of undiscounted cash flows to carrying value is disregarded and an impairment loss is recognized for any amount by which the carrying value exceeds the fair value of the assets.

Cinergy has classified certain non-core investments as held for sale. The results of operations for these investments are presented as Discontinued operations, net of tax in our financial statements.

(g) Stock-Based Compensation

We have historically accounted for our stock-based compensation plans using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Effective January 1, 2003, Cinergy adopted prospectively the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (Statement 148), for all employee awards granted or modified after January 1, 2003. The following table illustrates the effect on our Net Income and Earnings Per Common Share (EPS) if the fair value based method had been applied to all outstanding and unvested awards in each period.

		Quarter Ended March 31
		(in millions, except per share amounts)
		2003		2002

Net income, as reported		$	166	$	85

Add:	Stock-based employee compensation expense included in reported net income, net of related tax effects.	4		3

Deduct:	Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.	5		3

Pro-forma net income		$	165	$	85

EPS - as reported		$	0.96	$	0.52
EPS - pro-forma		$	0.95	$	0.52

EPS Assuming Dilution - as reported		$	0.95	$	0.52
EPS Assuming Dilution - pro-forma		$	0.94	$	0.52

The pro-forma amounts reflect certain assumptions used in estimating fair values. As a result of this and other factors which may effect the timing and amounts of stock-based compensation, the pro-forma effect on Net Income and EPS may not be representative of future periods.

(h) Asset Retirement Obligations

We recognize the fair value of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred. The initial recognition of this liability is accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability is 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 is recorded prospectively for any property, plant, and equipment increases.

We do not recognize liabilities for asset retirement obligations for which the fair value cannot be reasonably estimated. CG&E and PSI Energy, Inc. ( PSI ) have asset retirement obligations associated with river structures at certain generating stations. However, the retirement date for these river structures cannot be determined; therefore, the fair value of the associated liability currently cannot be estimated and no amounts are recognized in the financial statements herein.

Effective with our adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143), on January 1, 2003, we do not accrue the estimated cost of removal when no obligation exists for any of our non-regulated assets, even if removal of the asset is likely. For our rate-regulated assets where our tariff rate

includes a cost of removal component, we recognize a charge for estimated cost of removal under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (Statement 71), as part of depreciation. This includes most assets for PSI , CG&E , except for its generating assets, and ULH&P . See (j)( iii ) for additional information.

(i) Operating Revenues

Our operating companies record Operating revenues for electric and gas service when delivered to customers. Customers are billed throughout the month as both gas and electric meters are read. We recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed. This is termed “unbilled revenue” and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue, we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is subsequently billed.

The amount of unbilled revenues for Cinergy , CG&E , PSI , and ULH&P as of March 31, 2003 and 2002, were as follows:

	2003		2002
	(in millions)

Cinergy	$	119	$	123
CG&E and subsidiaries	67		68
PSI	52		55
ULH&P	12		11

(j) Accounting Changes

(i) Energy Trading

In October 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of new derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically. The consensus to rescind EITF 98-10 required most energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value. The consensus was immediately effective for all new contracts executed after October 25, 2002, and required a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, was a loss of $13 million for Cinergy and $8 million for CG&E , which includes primarily the impact of certain coal contracts, gas inventory, and certain gas contracts, which were all accounted for at fair value. We expect the ongoing impact of this rescission to have the largest impact on our gas trading business, which uses financial contracts, physical contracts, and gas inventory to take advantage of various arbitrage opportunities. Prior to the rescission of EITF 98-10, all of these activities were

accounted for at fair value. Under the revised guidance, only certain items are accounted for at fair value, which could increase volatility in reported results of operations.

The consensus to require all gains and losses on energy trading derivatives to be presented net in the Statements of Income was effective January 1, 2003, and required reclassification for all periods presented. This resulted in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense. However, Operating Income and Net Income were not affected by this change. See Note 3 for additional information.

(ii) Business Combinations and Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption (transition impairment test) and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards. This test must be applied at the “reporting unit” level, which is not permitted to be broader than the current business segments discussed in Note 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, was not material to our financial position or results of operations. We finalized our transition impairment test in the fourth quarter of 2002 and have recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of our international assets. This amount is reflected in Cinergy’s Statements of Income as a Cumulative effect of a change in accounting principles, net of tax . While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it required a transition impairment charge to be reflected as of January 1, 2002. We will continue to perform goodwill impairment tests annually, as required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.

(iii) Asset Retirement Obligations

In July 2001, the FASB issued Statement 143, which requires fair value recognition beginning January 1, 2003, of legal obligations associated with the retirement or removal of long-lived assets, at the time the obligations are incurred. The initial recognition of this liability is accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability is 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 is recorded prospectively for any property, plant, and equipment increases.

We previously accrued costs of removal on many long-lived assets through depreciation expense if we believed removal of the assets at the end of their useful life was likely. The Securities and Exchange Commission (SEC) staff has interpreted Statement 143 to disallow the accrual of estimated cost of removal when no obligation exists under Statement 143, even if removal of the asset is likely. As a result, all accumulated cost of removal for our non-regulated assets, primarily CG&E’s generation assets, was reversed upon adoption. However, accrued cost of removal for rate-regulated assets is recoverable through our rates as a component of depreciation. Since Statement 71 applies, accruing estimated cost of removal continues to be acceptable. As a result, accumulated cost of removal was not reversed upon adoption of Statement 143 for the rate-regulated assets of PSI , CG&E , and ULH&P .

We adopted Statement 143 on January 1, 2003, and Cinergy and CG&E both recognized a gain of $39 million (net of tax) for the cumulative effect of this change in accounting principle. Substantially all of this adjustment reflects the reversal of previously accrued cost of removal for CG&E’s generating assets, which do not apply Statement 71. Accumulated Depreciation at adoption includes $316 million, $25 million, and $146 million of accumulated cost of removal related to PSI’s , ULH&P’s , and CG&E’s utility plant in service assets, respectively, which represent regulatory liabilities and were not included as part of the cumulative effect adjustment. The increases in assets and liabilities from adopting Statement 143 were not material to our financial position.

Pro-forma results as if Statement 143 was applied retroactively for the years ended December 31, 2002, 2001, and 2000 and the quarter ended March 31, 2002 are not materially different from reported results.

(iv) Derivatives

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149). Statement 149 primarily amends Statement 133 to incorporate implementation conclusions previously cleared by the FASB staff, to clarify the definition of a derivative and to require derivative instruments that include up-front cash payments to be classified as a financing activity in the statement of cash flows. Implementation issues that have been previously cleared by the FASB staff will continue to be applied in accordance with their respective effective dates at the time that they were cleared and new guidance has varying implementation provisions, none of

which will apply until the third quarter of 2003. We have begun to evaluate the impacts of adopting Statement 149 but are currently unable to determine whether the impacts will be material to our results of operations or financial position.

There has been recent discussion about the use of broad market indices (e.g., consumer price index) in power sales contracts and whether such indices disqualify capacity contracts that otherwise qualify for the use of the normal purchases and sales scope exception. In April 2003, the FASB staff provided some proposed clarifications on this issue. This guidance is currently open for public comment. We expect this guidance to be finalized sometime during the summer of 2003, with a proposed effective date for Cinergy of October 1, 2003. We are unable to determine whether the impact of this recent interpretation would be material to our results of operations or financial position until the FASB staff finalizes its guidance.

(v) Exit Activities

In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under generally accepted accounting principles. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through December 31, 2002, were unaffected by this pronouncement. The impact of adoption on our financial position and results of operations was not material.

(vi) Accounting for Stock-Based Compensation

We have historically accounted for our stock-based compensation plans under APB 25. In July 2002, Cinergy announced that it would adopt Statement 123 for all employee awards granted or modified after January 1, 2003, and would begin measuring the compensation cost of stock-based awards under the fair value method. In December 2002, the FASB issued Statement 148, which amends Statement 123 and APB Opinion No. 28, Interim Financial Reporting . Statement 148 provides alternative methods of transition to Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Cinergy adopted Statement 148 on January 1, 2003, and has adopted the transition provisions that require expensing options prospectively beginning in the year of adoption. Awards granted prior to January 1, 2003, will continue to follow the intrinsic value method prescribed by APB 25. The impact of adoption on our financial position and results of operations, assuming award levels and fair values similar to past years, is not material. This change will primarily impact the accounting for stock options and other performance based awards related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan, the Cinergy Corp. Employee Stock Purchase and Savings Plan, and the Cinergy Corp. Stock Option Plan.

(vii) Consolidation of Special Purpose Entities (SPE)

The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities in January 2003. This interpretation will significantly change the consolidation requirements for SPEs. We have begun reviewing the impact of this interpretation but have not yet concluded whether consolidation of certain SPEs will be required. There are two SPEs for which consolidation may be required. These SPEs have individual power sale agreements to an unrelated third party for approximately 45 megawatts (MW) of capacity, ending in 2009, and 35 MW of capacity, ending in 2016. In addition, the SPEs have individual power purchase agreements with Cinergy Capital & Trading, Inc. (Capital & Trading) to supply the power. Capital & Trading also provides various services, including certain credit support facilities.

Cinergy’s quantifiable exposure to loss as a result of involvement with these two SPEs is $28 million, which includes investments in these entities of $3 million and exposure under the capped credit facilities of approximately $25 million. There is also a non-capped facility, but it can only be called upon in the event the SPE breaches representations, violates covenants, or other unlikely events.

If appropriate, consolidation of all assets and liabilities of these two SPEs, at their carrying values, will be required in the third quarter of 2003. Approximately $225 million of non-recourse debt would be included in Cinergy’s Balance Sheet upon initial consolidation. However, the impact on results of operations would be expected to be immaterial.

Cinergy believes that its accounts receivable sale facility, as discussed in the 2002 10-K, would remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and this interpretation.

(viii) Cumulative effect of a change in accounting principles, net of tax

The following table summarizes the various cumulative effect adjustments (net of tax) discussed above for the rescission of EITF 98-10, and the adoption of Statement 142 and Statement 143:

	Quarter Ended March 31
	2003			2002
	(in thousands)

Cinergy(1)
Goodwill impairment (Statement 142 adoption)	$	—		$	(10,899	)
Rescission of EITF 98-10 (EITF 02-3 adoption)	(12,512		)	—
Asset retirement obligation (Statement 143 adoption)	38,974			—
	26,462			(10,899		)

CG&E
Rescission of EITF 98-10 (EITF 02-3 adoption)	(8,239		)	—
Asset retirement obligation (Statement 143 adoption)	39,177			—
	30,938			—
PSI
Rescission of EITF 98-10 (EITF 02-3 adoption)	(494		)	—
	(494		)	—

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

2. Common Stock

As discussed in the 2002 10-K, Cinergy currently issues new Cinergy Corp. common stock shares to satisfy obligations under its various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. During the first quarter of 2003, Cinergy issued approximately 1.5 million shares under these plans.

On January 15, 2003, Cinergy Corp. filed a registration statement with the SEC with respect to the issuance of common stock, preferred stock, and other securities in an aggregate offering amount of $750 million. On February 5, 2003, Cinergy sold 5.7 million shares of common stock of Cinergy Corp. with net proceeds of approximately $175 million under this registration statement. The net proceeds from the transaction were used to reduce short-term debt of Cinergy Corp. and for other general corporate purposes.

3. Change in Method of Revenue Presentation for Energy Trading Derivatives

In October 2002, the EITF reached consensus in EITF 02-3 to require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically. This consensus was effective beginning January 1, 2003, and required reclassification for the quarter ended March 31, 2002.

We have reclassified amounts in our Statements of Income in accordance with EITF 02-3. The table below presents the effect of the change in revenue presentation on Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense for the quarter ended March 31, 2002. Operating Income and Net Income were not affected by this change.

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

Electric Operating Revenues as previously reported	$	1,283,424		$	635,886		$	629,844

Adjustment for effect of EITF 02-3 implementation	(492,921		)	(237,767		)	(263,443		)
Other(2)	(11,127		)	—			—

Electric Operating Revenues as adjusted	779,376			398,119			366,401

Gas Operating Revenues as previously reported	903,261			179,609			—

Adjustment for effect of EITF 02-3 implementation	(713,197		)	—			—

Gas Operating Revenues as adjusted	190,064			179,609			—

Fuel and purchased and exchanged power expense as previously reported	727,547			345,015			386,492

Adjustment for effect of EITF 02-3 implementation	(492,921		)	(237,767		)	(263,443		)
Other(2)	(5,336		)	—			—

Fuel and purchased and exchanged power expense as adjusted	229,290			107,248			123,049

Gas purchased expense as previously reported	823,077			107,968			—

Adjustment for effect of EITF 02-3 implementation	(713,197		)	—			—

Gas purchased expense as adjusted	109,880			107,968			—


(1)	The results of Cinergy also include amounts related to non-registrants and include the elimination of certain intercompany amounts.
(2)	Item represents amounts reclassified to Discontinued operations, net of tax .

4. Long-term Debt

In October 2002, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) for the purpose of securing authorization and approval to issue two subordinated promissory notes to Cinergy Corp. for the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants. In January 2003, the IURC granted this request, and in February 2003, PSI issued the notes. One subordinated note was for the principal amount of $200 million with an annual interest rate of 6.302% and will mature on April 15, 2004. The second subordinated note was for $176 million with an annual interest rate of 6.403% and will mature on September 1, 2004.

On March 7, 2003, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $35 million of its Environmental Refunding Revenue Bonds Series 2003, due April 1, 2022. Interest was initially set at 1.05% and will reset every 35 days by auction. The bonds are not putable by the holders; therefore, PSI’s debt obligation is classified as Long-term debt . On March 28, 2003, the proceeds from this borrowing plus the interest income earned were used to cause the refunding of the $35 million principal amount outstanding of the City of Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1997 Series.

On April 25, 2003, PSI redeemed $26.8 million of the following Series A, Medium-term Notes:

Principal Amount	Interest Rate		Maturity Date
(in millions)

$2.0	8.37	%	11/08/2006
5.0	8.81		05/16/2022
3.0	8.80		05/18/2022
16.8	8.67		06/01/2022

5. Notes Payable and Other Short-term Obligations

At March 31, 2003, Cinergy Corp. had $796 million remaining unused and available capacity relating to its $1 billion revolving credit facilities. These revolving credit facilities included the following:

Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available
		(in millions)

364-day senior revolving	April 2003
Direct borrowing		$		$	—	$
Commercial paper support				193

Total 364-day facility		600		193		407

Three-year senior revolving	May 2004
Direct borrowing				—
Commercial paper support				—
Letter of Credit support				11

Total three-year facility		400		11		389

Total credit facilities		$	1,000	$	204	$	796

In April 2003, Cinergy Corp. successfully placed a $600 million, 364-day senior unsecured revolving credit facility. This facility replaces a $600 million, 364-day facility that expired April 30, 2003.

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

	March 31, 2003				December 31, 2002
	Established Lines		Outstanding		Established Lines		Outstanding
	(in millions)
Cinergy
Cinergy Corp.
Revolving lines	$	1,000	$	—	$	1,000	$	25
Uncommitted lines (1)	65		—		65		—
Commercial paper (2)			193				473

Operating companies
Uncommitted lines (1)	75		—		75		—
Pollution control notes			112				147

Non-regulated subsidiaries
Revolving lines	8		1		7		1
Short-term debt	22		22		22		22

Cinergy Total			$	328			$	668

CG&E and subsidiaries
Uncommitted lines (1)	$	15	$	—	$	15	$	—
Pollution control notes			112				112
Money pool			3				9

CG&E Total			$	115			$	121

PSI
Uncommitted lines (1)	$	60	$	—	$	60	$	—
Pollution control notes			—				35
Money pool			230				138

PSI Total			$	230			$	173

ULH&P
Money pool			$	5			$	14

ULH&P Total			$	5			$	14

(1)	Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.
(2)	The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving lines.

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

• a consolidated net worth of $2 billion; and

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

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

• bankruptcy;

• defaults in the payment of other indebtedness; and

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

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

6. Energy Trading Credit Risk

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate Credit Risk function. As of March 31, 2003, approximately 98 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed by a parent company or other entity rated Investment Grade. No single non-investment grade counterparty accounts for more than one percent of our total credit exposure. Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

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

7. Commitments and Contingencies

(a) Guarantees

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

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

the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.

Cinergy has guaranteed the payment of $33 million as of March 31, 2003, for unconsolidated subsidiaries’ debt and for borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program. Cinergy may be obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation by the unconsolidated subsidiary or an unexcused breach of guaranteed payment obligations by certain directors, officers, and key employees. The majority of these guarantees expire in two years.

Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures. These guarantees support performance under various agreements and instruments (such as construction contracts, operation and maintenance agreements and energy service agreements). Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary. Cinergy Corp. has estimated its maximum potential amount to be $133 million under these guarantees as of March 31, 2003. Cinergy Corp. may also have recourse to third parties for claims required to be paid under certain of these guarantees. The majority of these guarantees expire at the completion of the underlying performance agreements, generally 15 to 20 years.

Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities. Examples of these contracts include purchase and sale agreements and operating agreements. In general, these provisions indemnify the counterparty for matters such as breaches of representations and warranties and covenants contained in the contract. In some cases, particularly with respect to purchase and sale agreements, the potential liability for certain indemnification obligations is capped, in whole or in part (generally at an aggregate amount not exceeding the sale price), and subject to a deductible amount before any payments would become due. In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential amount is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred, which is not practicable to estimate unless and until the event occurs. Cinergy has estimated the maximum potential amount, where estimable, to be $129 million under these indemnification provisions and considers the likelihood of making any material payments under these provisions to be remote. The termination period for the majority of matters provided by indemnification provisions in purchase and sale agreements generally ranges from one to six years.

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

(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.

(i) Nitrogen Oxide (NO _X ) State Implementation Plan (SIP) Call

In October 1998, the EPA finalized its ozone transport rule, also known as the NO _X SIP Call. It applied to 22 states in the eastern half of the United States (U.S.), including the three states in which our electric utilities operate, and proposed a model NO _X emission allowance trading program. This rule recommended that states reduce NO _X emissions primarily from industrial and utility sources to a certain level by May 2003.

In August 2000, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) extended the deadline for NO _X reductions to May 31, 2004. In June 2001, the Court of Appeals remanded portions of the NO _X SIP Call to the EPA for reconsideration of how growth was factored into the state NO _X budgets. On May 1, 2002, the EPA published, in the Federal Register, a final rule reaffirming its growth factors and state NO _X budgets, with additional explanation. The states of West Virginia and Illinois, along with various industry groups (some of which we are a member), have challenged the growth factors and state NO _X budgets in an action filed in the Court of Appeals. It is unclear when the Court of Appeals will reach a decision in this case, or whether this decision will result in an increase or decrease in the size of the NO _X reduction requirement, or a deferral of the May 31, 2004 compliance deadline.

The states of Indiana and Kentucky developed final NO _X SIP rules in response to the NO _X SIP Call, through cap and trade programs, in June and July of 2001, respectively. On November 8, 2001, the EPA approved Indiana’s SIP rules, which became effective December 10, 2001. On April 11, 2002, the EPA proposed direct final approval of Kentucky’s rules and they became effective on June 10, 2002. The state of Ohio completed its NO _X SIP rules in response to the NO _X SIP Call on July 8, 2002, with an effective date of July 18, 2002. On January 16, 2003, the EPA proposed a direct final rule to approve Ohio’s SIP. The EPA has since withdrawn that proposal, and now intends to issue a conditional approval, which will not take effect until Ohio changes one specific aspect of its final rule (relating to the date flow control takes effect). Cinergy’s current plans for compliance with the EPA’s NO _X SIP Call would also satisfy compliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.

On September 25, 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI , to invest in pollution control equipment and other methods to reduce NO _X emissions. This plan includes the following:

• install nine selective catalytic reduction units at several different generating stations;

• install other pollution control technologies, including new computerized combustion controls, at all generating stations;

• make combustion improvements; and

• utilize the NO _X allowance market to buy or sell NO _X allowances as appropriate.

The current estimate for additional expenditures for this investment is approximately $238 million and is in addition to the $604 million already incurred to comply with this program.

(ii) Section 126 Petitions

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

In December 1999, the EPA granted four Section 126 petitions relating to NO _X emissions. This ruling affected all of our Ohio and Kentucky facilities, as well as some of our Indiana facilities, and required us to reduce our NO _X emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge to the Section 126 requirements, and remanded portions of the rule to the EPA for reconsideration of how growth was factored into the emission limitations. On May 1, 2002, the EPA issued a final rule extending the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NO _X SIP Call.

On April 4, 2003, the EPA issued a proposed rule withdrawing the Section 126 rule in states with approved SIPs under the NO _X SIP Call, which include the states of Indiana and Kentucky. The proposed rule states that the EPA will withdraw the Section 126 in Ohio once Ohio has a fully approved SIP. As a result of these actions, we anticipate that the Section 126 rule will not affect any of our facilities.

See (e) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NO _X SIP Call.

(c) New Source Review (NSR)

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

On November 3, 1999, the United States sued a number of holding companies and electric utilities, including Cinergy , CG&E , and PSI , in various U.S. District Courts. The Cinergy , CG&E , and PSI suit alleged violations of the CAA at two of our generating stations relating to NSR and New Source Performance Standards requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at CG&E’s W.C. Beckjord Generating Station (Beckjord Station) and at PSI’s Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation. Since that time, two amendments to the complaint have been filed by the United States, alleging additional violations of the CAA, including allegations involving different generating units. In addition, three northeast states and two environmental groups have intervened in the case.

On December 21, 2000, Cinergy , CG&E , and PSI reached an agreement in principle with the parties in the litigation for a negotiated resolution of the CAA claims in the litigation. See (e) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.

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

At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. The parties continue to negotiate. If the settlement is not completed, we intend to defend against the allegations vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims or whether resolution of these matters would have a material effect on our financial position or results of operations.

(d) Beckjord Station Notice of Violation (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 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. 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 United States, three northeast states, and two environmental groups for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy’s operating subsidiaries. The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties. If a final agreement is reached with these parties, it would resolve past claims of alleged NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (c) and (d).

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

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

• build four additional sulfur dioxide (SO ₂ ) scrubbers, the first of which must be operational by December 31, 2007;

• upgrade existing particulate control systems;

• phase in the operation of NO _X reduction technology year-round starting in 2004;

• reduce our existing Title IV SO ₂ cap by 35 percent in 2013;

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

• implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO ₂ allowances by 2005.

The estimated cost for these capital expenditures is expected to be approximately $700 million through 2013. These capital expenditures are in addition to our previously announced commitment to install NO _X controls as discussed in (b) above, but does include capital costs that Cinergy would expect to spend regardless of the settlement due to new environmental requirements expected in the second half of this decade.

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

At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. The parties continue to negotiate. 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 upon their claims or whether resolution of these matters would have a material effect on our financial position or results of operations.

(f) Manufactured Gas Plant (MGP) Sites

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.

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 and NIPSCO made claims against PSI for the costs of investigating and remediating the sites. In 1998, NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements (Agreements). These Agreements allocated the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) liability for past and future costs at the MGP sites in Indiana among the three companies. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate, under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.

PSI notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSI filed suit in Hendricks County Circuit Court in the State of

Indiana against its general liability insurance carriers. PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI , or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was moved to the Hendricks County Superior Court in July 1998. The trial court issued a variety of rulings with respect to the claims and defenses in the litigation. PSI has appealed certain adverse rulings to the Indiana Court of Appeals. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals to the Indiana Court of Appeals.

CG&E is 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 has begun preliminary site assessments to obtain information about some of these MGP sites.

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

(g) Asbestos Claims Litigation

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

One specific case filed against PSI has been tried to verdict. The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and for PSI on punitive damages. PSI is appealing the judgment in this case. The total damages were immaterial to PSI’s financial position and results of operations. At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.

(h) Gas Customer Choice

In January 2000, Cinergy Investments (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy

Cooperative (Energy Cooperative). In February 2001, Cinergy , CG&E , and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.

Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in the consolidated suit. In March 2001, Cinergy , CG&E , and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. This lawsuit is pending in the Licking County Common Pleas Court. Trial is anticipated to occur in late 2003 or early 2004. In October 2001, Cinergy , CG&E , and Investments initiated litigation against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation. This customer litigation is pending in the Hamilton County Common Pleas Court. A trial date has not been set. We intend to vigorously defend these lawsuits. At the present time, we cannot predict the outcome of these suits.

(i) 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 was held in July 2002, and in March 2003 the IURC issued an order giving final approval to PSI’s recovery of the $16 million.

(j) PSI Retail Rate Case

In December 2002, PSI filed a petition with the IURC seeking approval of a base retail electric rate increase. PSI filed initial testimony in this case in March 2003. PSI proposes an increase in revenues of approximately $200 million, or an average increase of approximately 15 percent over PSI’s retail electric rates in effect at the end of 2002. An IURC decision is expected in the first quarter of 2004.

(k) PSI Construction Work in Progress (CWIP) Ratemaking Treatment for NO _X Equipment

In April 2003, PSI filed an application with the IURC requesting that its CWIP rate adjustment mechanism be updated for expenditures through December 2002 related to NO _X equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on certain pollution control equipment while and after the equipment is under construction. Testimony and exhibits supporting PSI’s second CWIP rate adjustment mechanism update have not yet been filed. However, amounts proposed for potential recovery are presented below:

PSI CWIP Ratemaking for NO _X Equipment

	PSI
	(in millions)

Total retail CWIP expenditures as of December 31, 2002	$	305

Proposed total amount requested through CWIP mechanism(1)	35
Less: previously approved CWIP mechanism amounts	(28		)
Proposed incremental CWIP mechanism amounts	$	7

(1)	Amounts include retail customers’ portion only and represent an annual return on qualified NO _X equipment expenditures.

PSI’s initial CWIP rate mechanism adjustment (authorized in July 2002) resulted in an approximately one percent increase in customer rates. Under the IURC’s CWIP rules, PSI may update its CWIP tracker at six-month intervals. The first such update to PSI’s CWIP rate mechanism occurred in the first quarter of 2003. The IURC’s July 2002 order also authorized PSI to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used during construction (AFUDC). Pursuant to Statement of Financial Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans , the equity component of AFUDC will not be deferred for financial reporting after the related assets are placed in service.

(l) PSI Purchased Power Tracker (Tracker)

The Tracker 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 recovered through the existing fuel adjustment clause.

PSI is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portion), with the remaining 10 percent deferred for subsequent recovery in PSI’s general rate case. In March 2002, PSI filed a petition with the IURC seeking approval to extend the Tracker process beyond the summer of 2002. A hearing was held on January 16, 2003, and the case is now awaiting an IURC order. We cannot predict the outcome of this proceeding at this time.

(m) CG&E Gas Rate Case

In the third quarter of 2001, CG&E filed a retail gas rate case with the Public Utilities Commission of Ohio (PUCO) seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over 10 years. CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002. An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, effective May 30, 2002. In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case. In the fourth quarter of 2002, CG&E filed an application to increase its rates under the tracking mechanism. In April 2003, CG&E entered into a settlement agreement with the parties, providing for an increase of $6.5 million, which the PUCO subsequently approved.

(n) ULH&P Gas Rate Case

As discussed in the 2002 10-K, in the second quarter of 2001, ULH&P filed a retail gas rate case with the Kentucky Public Service Commission (KPSC) seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years. ULH&P made its second annual filing for an increase under the tracking mechanism in March 2003. The application seeks an increase of $2 million. ULH&P expects the KPSC to rule on the application during the second quarter of 2003. At the present time, ULH&P cannot predict the outcome of this proceeding. The Kentucky Attorney General has appealed the KPSC’s approval of the tracking mechanism to the Franklin Circuit Court and has also appealed the KPSC’s August 2002 order approving the new tracking mechanism rates. At the present time, ULH&P cannot predict the timing or outcome of this litigation.

(o) Contract Disputes

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

Cinergy , through a subsidiary of Capital & Trading, is in arbitration with a counterparty concerning various disputes under an agreement whereby we market natural gas that the counterparty produces or acquires in North America. We have reserved for a portion of the amount billed based on the current estimate of net realizable value. Absent a voluntary resolution to the disputes, we intend to pursue the arbitration vigorously.

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

(p) Enron Corp. (Enron) Bankruptcy

In December 2001, Enron filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in the months prior to its bankruptcy filing and have filed a motion with the bankruptcy court overseeing the Enron bankruptcy seeking appropriate netting of the various payables and receivables between and among Enron and Cinergy entities. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and the applicable provisions of the U.S. Bankruptcy Code, as approved by the court. While we cannot predict the court’s resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact on our financial position or results of operations.

8. Financial Information by Business Segment

As discussed in the 2002 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, 2003.

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 and performs the following activities:

• energy risk management;

• proprietary arbitrage activities; and

• customized energy solutions.

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

Power Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses. This is accomplished through various subsidiaries and joint ventures. Power Technology also manages Cinergy Ventures, LLC

(Ventures), Cinergy’s venture capital subsidiary. Ventures invests in emerging energy technologies that can benefit future Cinergy business development activities.

Following are the financial results by business unit. Certain amounts for the prior year have been restated to reflect implementation of EITF 02-3 and other prior year amounts have been reclassified to conform to the current presentation.

Financial results by business unit for the quarters ended March 31, 2003, and March 31, 2002 are as indicated below.

Business Units

	Cinergy Business Units
	Energy Merchant			Regulated Businesses			Power Technology			Total			Reconciling Eliminations(1)			Consolidated
	(in thousands)

Quarter ended March 31, 2003

Operating revenues-
External customers	$	447,466	(3)	$	834,315	(4)	$	1		$	1,281,782		$	—		$	1,281,782
Intersegment revenues	39,123			—			—			39,123			(39,123		)	—

Cost of sales -
Fuel and purchased and exchanged power	138,495			140,988			—			279,483			—			279,483
Gas purchased	64,230			171,765			—			235,995			—			235,995

Discontinued operations, net of tax	—			—			—			—			—			—
Cumulative effect of a change in accounting principles, net of tax	26,462			—			—			26,462			—			26,462

Segment profit (loss)(2)	97,105			74,069			(5,089		)	166,085			—			166,085

Quarter ended March 31, 2002

Operating revenues -
External customers	$	271,613		$	714,762		$	2		$	986,377		$	—		$	986,377
Intersegment revenues	36,838			—			—			36,838			(36,838		)	—

Cost of sales -
Fuel and purchased and exchanged power	107,569			121,721			—			229,290			—			229,290
Gas purchased	1,912			107,968			—			109,880			—			109,880

Discontinued operations, net of tax	478			—			—			478			—			478
Cumulative effect of a change in accounting principle, net of tax	(10,899		)	—			—			(10,899		)	—			(10,899		)

Segment profit (loss)(2)	16,638			72,797			(4,606		)	84,829			—			84,829


(1)	The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.
(2)	Management utilizes segment profit (loss) to evaluate segment performance.
(3)	The increase in 2003 is primarily due to the increase in the average price realized on wholesale commodity non-firm transactions and the sale of synthetic fuel which began in July 2002.
(4)	The increase in 2003 is primarily due to the increase in the average price received per thousand cubic feet (mcf) delivered reflecting a substantial increase in the wholesale gas commodity costs, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism. Also contributing to this increase was higher mcf volumes sold due to colder than normal weather.

Total segment assets at March 31, 2003, and December 31, 2002, were as follows:

Business Units

	Cinergy Business Units
	Energy Merchant		Regulated Businesses		Power Technology		Total		All Other(1)		Consolidated
	(in thousands)

Total segment assets at March 31, 2003	$	5,305,552	$	7,902,311	$	159,185	$	13,367,048	$	51,086	$	13,418,134
Total segment assets at December 31, 2002	5,774,750		7,283,812		155,252		13,213,814		93,214		13,307,028


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

9. EPS

A reconciliation of EPS to EPS – Assuming Dilution (EPS - assuming dilution) is presented below for the quarters ended March 31, 2003 and March 31, 2002:

	Income			Shares	EPS
	(in thousands, except per share amounts)
Quarter ended March 31, 2003
EPS:
Income before cumulative effect of a change in accounting principles	$	139,623			$	0.81
Cumulative effect of a change in accounting principles, net of tax	26,462				0.15
Net Income	$	166,085		173,387	$	0.96

Effect of dilutive securities:
Common stock options				724
Directors’ compensation plans				134
Contingently issuable common stock				717

EPS - assuming dilution:
Net income plus assumed conversions	$	166,085		174,962	$	0.95

Quarter ended March 31, 2002
EPS:
Income before discontinued operations and cumulative effect of a change in accounting principle	$	95,250			$	0.58
Discontinued operations, net of tax	478				—
Cumulative effect of a change in accounting principle, net of tax	(10,899		)		(0.06		)
Net Income	$	84,829		164,295	$	0.52

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	$	84,829		165,965	$	0.52

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, 2003 and 2002, approximately 3.5 million and 3.1 million shares, respectively, were excluded from the EPS - assuming dilution calculation.

Also excluded from the EPS - assuming dilution calculation for the quarters ended March 31, 2003 and 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contracts associated with the preferred trust securities issued by Cinergy Corp. in December 2001. The number of shares issuable 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 2002 10-K, CG&E is in a market development period, beginning the transition to electric deregulation in the state of Ohio. The transition period is governed by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and a stipulated agreement adopted and approved by the PUCO. Under CG&E’s transition plan, retail customers continue to receive transportation services from CG&E , but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from CG&E . The shopping credits generally reflect the costs of electric generation included in CG&E’s frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than CG&E’s electric generation costs in order to stimulate the development of the competitive retail electric service market.

CG&E recovers its regulatory assets and other transition costs through a Regulatory Transition Charge (RTC) paid by all retail customers. As the RTC is collected from customers, CG&E amortizes the deferred balance of regulatory assets and other transition costs. A portion of the RTC collected from customers is recognized currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference in the shopping credits provided to customers and the wholesale revenues from switched generation. The ability of CG&E to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of CG&E’s electric sales, prices in the wholesale power markets, and the amount of customers switching to other electric suppliers.

On January 10, 2003, CG&E filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be determined when the market development period ends. In the filing, CG&E seeks to establish a market-based standard service offer rate for non-residential customers that do not switch suppliers and a process for establishing the competitively bid generation service option required by the Electric Restructuring Bill. As of March 31, 2003, more than 20 percent of the load in each of CG&E’s non-residential customer classes has switched to other electric suppliers. Under its transition plan, CG&E may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be ended. CG&E is not requesting to end the market development period for non-residential customers at this time. CG&E is unable to predict the outcome of this proceeding.

11. Transfer of Generating Assets

In December 2002, the IURC approved a settlement agreement among PSI , the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing PSI’s purchase of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates. In February 2003, the Federal Energy Regulatory Commission (FERC) issued an order under Section 203 of the Federal Power Act authorizing PSI’s acquisition of the plants, which occurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order. At this time, we cannot predict the outcome of this matter.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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

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

• Factors affecting operations, such as:

(1) unanticipated weather conditions;

(2) unscheduled generation outages;

(3) unusual maintenance or repairs;

(4) unanticipated changes in costs;

(5) environmental incidents, including costs of compliance with existing
and future environmental requirements; and

(6) electric transmission or gas pipeline system constraints.

• Legislative and regulatory initiatives.

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

• Financial or regulatory accounting principles.

• Political, legal, and economic conditions and developments in the countries in which we have a presence.

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

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

• Availability of, or cost of, capital.

• Employee workforce factors.

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

• Costs and effects of legal and administrative proceedings, settlements, investigations, and claims. Examples can be found in Note 7 of the “Notes to Financial Statements” in “Part 1. Financial Information”.

We undertake no obligation to update the information contained herein.

MD&A - INTRODUCTION

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

The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2002 (2002 10-K). The results discussed below are not necessarily indicative of the results that may occur in any future periods.

INTRODUCTION

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

• factors affecting current and future operations;

• potential sources of cash for future capital expenditures;

• why revenues and expenses changed from period to period; and

• how the above items affect our overall financial condition.

ORGANIZATION

Cinergy Corp. , a Delaware corporation created in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company ( CG&E ) and PSI Energy, Inc. ( PSI ), both of which are public utility subsidiaries. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the Securities and Exchange Commission (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.; and

• Cinergy Global Resources, 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

MD&A - LIQUIDITY AND CAPITAL RESOURCES

Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen during this market development period.

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

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

LIQUIDITY AND CAPITAL RESOURCES

Environmental Issues

Cinergy’s 2002 10-K, includes a discussion of certain environmental issues that could affect our liquidity. These include:

• Ambient Air Standards;

• Regional Haze;

• Global Climate Change; and

• Air Toxics Regulation.

In addition, see Note 7 of the “Notes to Financial Statements” in “Item 1. Financial Information” contained herein, for additional information regarding other environmental items and other matters that could effect our liquidity.

Pensions

Cinergy maintains qualified defined benefit pension plans covering substantially all United States (U.S.) employees meeting certain minimum age and service requirements. Plan assets consist of investments in equity and fixed income securities. Funding for the qualified defined benefit pension plans is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, future funding obligations could increase substantially. Cinergy’s minimum required contributions for calendar year 2003 are $11 million, as compared to $4 million for the calendar year 2002. We are considering additional discretionary contributions of up to $50 million for the calendar year 2003. The discretionary contributions would be intended to improve the overall funding of the plan.

Other Investing Activities

Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including PUHCA. The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under PUHCA can invest as well as the amount of capital

that can be invested in permissible non-utility businesses. Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest or commit to invest in certain non-utility businesses, including:

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

An EWG is an entity, certified by the Federal Energy Regulatory Commission (FERC), devoted exclusively to owning and/or operating, and selling power from one or more electric generating facilities. An EWG whose generating facilities are located in the U.S. is limited to making only wholesale sales of electricity.

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

In May 2001, the SEC issued an order under PUHCA authorizing Cinergy to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion. As of March 31, 2003, we had invested or committed to invest $1.0 billion in EWGs and FUCOs, leaving available investment capacity under the May 2001 order of $2.4 billion.

• Qualifying Facilities and Energy-Related Non-utility Entities

SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations , Long-term debt (including amounts due within one year), Preferred Trust Securities , Cumulative Preferred Stock of Subsidiaries , and total Common Stock Equity ) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities. At March 31, 2003, we had invested and/or guaranteed approximately $0.5billion of the $1.3 billion available.

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, 2003, we had $608 million outstanding under the guarantees issued, of which approximately 88 percent represents guarantees of obligations reflected on Cinergy’s Consolidated Balance Sheets. The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its

consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. See Note 7(a) of the “Notes to Financial Statements” in “Item 1. Financial Information” for a discussion of guarantees in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued on behalf of consolidated subsidiaries; and it includes potential liabilities under indemnification clauses.

Collateral Requirements

Cinergy has certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade. Based upon our March 31, 2003 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $75 million in collateral related to its gas and power trading operations.

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. Cinergy believes that it has adequate financial resources to meet its future needs.

Notes Payable and Other Short-term Obligations

We are required to secure authority to issue short-term debt from the SEC under the PUHCA and from the PUCO. The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp. , PSI , and ULH&P . The PUCO has regulatory jurisdiction over the issuance of short-term debt by CG&E .

	Short-term Regulatory Authority March 31, 2003
	(millions)
	Authority			Outstanding

Cinergy Corp.	$	5,000	(1)	$	193
CG&E and subsidiaries	671			3
PSI	600			230
ULH&P	65			5

(1)

Cinergy Corp., under the PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

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

Cinergy Corp.’s short-term borrowing consists primarily of unsecured revolving lines of credit and the sale of commercial paper. Cinergy Corp.’s $1 billion revolving credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E and PSI . In addition, Cinergy , CG&E , and PSI maintain uncommitted lines of credit. These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance. The following is a summary of outstanding short-term borrowings for Cinergy , CG&E , PSI , and ULH&P , including variable rate pollution control notes:

	Short-term Borrowings March 31, 2003
	Established Lines		Outstanding		Unused		Standby Liquidity(3)		Available Revolving Lines of Credit
	(in millions)

Cinergy
Cinergy Corp.
Revolving lines	$	1,000	$	—	$	1,000	$	204	$	796
Uncommitted lines(1)	65		—		65
Commercial paper(2)			193		607

Operating companies
Uncommitted lines(1)	75		—		75
Pollution control notes			112

Non-regulated subsidiaries
Revolving lines	8		1		7				7
Short-term debt	22		22		—

Cinergy Total			$	328					$	803

CG&E and subsidiaries
Uncommitted lines(1)	$	15	$	—	$	15
Pollution control notes			112
Money pool			3

CG&E Total			$	115

PSI
Uncommitted lines(1)	$	60	$	—	$	60
Pollution control notes			—
Money pool			230

PSI Total			$	230

ULH&P
Money pool			$	5

ULH&P Total			$	5


(1)	Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.
(2)	The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving lines.
(3)	Standby liquidity is reserved against the revolving lines to support the commercial paper program and outstanding letters of credit (currently $193 million and $11 million, respectively).

Credit Facility	Expiration		Established Lines		Outstanding and Committed		Unused and Available
		(in millions)

364-day senior revolving	April 2003
Direct borrowing			$		$	—	$
Commercial paper support					193

Total 364-day facility			600		193		407

Three-year senior revolving	May 2004
Direct borrowing					—
Commercial paper support					—
Letter of Credit support					11

Total three-year facility			400		11		389

Total credit facilities			$	1,000	$	204	$	796

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

• a consolidated net worth of $2 billion; and

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

• bankruptcy;

• defaults in the payment of other indebtedness; and

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

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

Variable Rate Pollution Control Notes

CG&E has issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to have their notes redeemed on a daily, monthly, or annual basis, they are reflected in Notes payable and other short-term obligations on the Balance Sheets for Cinergy and CG&E . At March 31, 2003, CG&E had $112 million outstanding in variable rate pollution control notes, classified as short-term debt. PSI had no outstanding short-term pollution control notes. Any short-term pollution control note borrowings outstanding do not reduce the unused and available short-term debt regulatory authority of CG&E , PSI , and ULH&P . See Notes 4 and 5 of the “Notes to Financial Statements” in “Item 1. Financial Information” for additional information regarding pollution control notes.

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 a component of Notes receivable from affiliated companies and/or Notes payable to affiliated companies on the Balance Sheets of CG&E , PSI , and ULH&P . Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of CG&E , PSI , and ULH&P .

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.

A summary of our long-term debt authorizations at March 31, 2003, is as follows:

	Authorized		Used		Available
	(in millions)

Cinergy Corp.
PUHCA total capitalization(1)	$	5,000	$	1,521	$	3,479

CG&E and subsidiaries(2)
State Public Utility Commissions	575		—		575

PSI
State Public Utility Commission	500		83		417

ULH&P
State Public Utility Commission	75		—		75

(1)	Cinergy Corp., under PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.
(2)	Includes amounts for ULH&P .

Cinergy Corp. has an effective shelf registration statement with the SEC relating to the issuance of up to $750 million in any combination of common stock, preferred stock, stock purchase contracts or unsecured debt securities, of which approximately $573 million remains available for issuance. CG&E has an effective shelf registration statement with the SEC relating to the issuance of up to $500 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance. PSI has an effective shelf registration statement with the SEC relating to the issuance of up to $700 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance. ULH&P has effective shelf registration statements with the SEC relating to the issuance of up to $50 million in unsecured debt securities and up to $40 million in first mortgage bonds, of which $30 million in unsecured debt securities and $20 million in first mortgage bonds remain available for issuance.

Off-Balance Sheet Financing

As discussed in the 2002 10-K, Cinergy uses special-purpose entities (SPE) to finance various projects. The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation 46) in January 2003. This interpretation will significantly change the consolidation requirements for SPEs. We have begun reviewing the impact of this interpretation but have not yet concluded whether consolidation of certain SPEs will be required. There are two SPEs for which consolidation may be required. These SPEs have individual power sale agreements to an unrelated third party for approximately 45 megawatts (MW) of capacity, ending in 2009, and 35 MW of capacity, ending in 2016. In addition, the SPEs have individual power purchase agreements with Cinergy Capital & Trading, Inc. (Capital & Trading) to supply the power. Capital & Trading also provides various services, including certain credit support facilities.

If appropriate, consolidation of all assets and liabilities of these two SPEs, at their carrying values, will be required in the third quarter of 2003. Approximately $225 million of non-recourse debt would be included in Cinergy’s Consolidated Balance Sheets upon initial consolidation. However, the impact on results of operations would be expected to be immaterial.

Cinergy holds investments in various unconsolidated subsidiaries which are accounted for under the equity method and has guaranteed approximately $8 million of the debt of these entities.

Securities Ratings

As of March 31, 2003, the major credit ratings agencies rated our securities as follows:

	Fitch(1)	Moody’s(2)	S&P(3)

Cinergy Corp.
Corporate Credit	BBB+	Baa2	BBB+
Senior Unsecured Debt	BBB+	Baa2	BBB
Commercial Paper	F-2	P-2	A-2
Preferred Trust Securities	BBB+	Baa2	BBB

CG&E
Senior Secured Debt	A-	A3	A-
Senior Unsecured Debt	BBB+	Baa1	BBB
Junior Unsecured Debt	BBB	Baa2	BBB-
Preferred Stock	BBB	Baa3	BBB-
Commercial Paper	F-2	P-2	Not Rated

PSI
Senior Secured Debt	A-	A3	A-
Senior Unsecured Debt	BBB+	Baa1	BBB
Junior Unsecured Debt	BBB	Baa2	BBB-
Preferred Stock	BBB	Baa3	BBB-
Commercial Paper	F-2	P-2	Not Rated

ULH&P
Senior Unsecured Debt	Not Rated	Baa1	BBB

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

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

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

Equity Securities

As discussed in the 2002 10-K, under the SEC’s June 2000 Order, Cinergy Corp. is permitted to increase its total capitalization by $5 billion. The proceeds from any new issuances will be used for general corporate purposes.

See Note 2 of the “Notes to Financial Statements” in “Part 1. Financial Information” for additional information regarding other common stock issuances.

67

MD&A - QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

2003 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, 2003 and 2002 were as follows:

	Cinergy(1)				CG&E and subsidiaries				PSI
	2003		2002		2003		2002		2003		2002
	(in thousands)

Electric gross margin	$	557,400	$	550,086	$	298,010	$	290,871	$	244,816	$	243,352
Gas gross margin	162,918		80,184		103,511		71,641		—		—
Net income	166,085		84,829		117,236		77,585		33,727		38,083

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

Net income for the first quarter of 2003 was $166 million ($.95 per share on a diluted basis) as compared to $85 million ($.52 per share on a diluted basis) for the same period last year. Income before taxes for the period was $198 million compared to $150 million for the same period a year ago. Increased gross margins, primarily from wholesale and retail gas operations, were partially offset by higher operating costs. These gas margins primarily reflect the results of our domestic gas trading operation, Cinergy Marketing & Trading, LP (Marketing & Trading) as well as an increased volume of retail sales due to colder than normal weather during the quarter. Also contributing to the gas margin increase over 2002 was the impact of accounting changes that required certain gas contracts and inventory to be accounted for on the accrual basis beginning in 2003. Cinergy’s increased income also reflects a net gain resulting from the implementation of certain accounting changes, which have been reflected as a cumulative effect of a change in accounting principles. See Note 1(j)( viii ) of the “Notes to Financial Statements” in “Item 1. Financial Information” for further information regarding these accounting changes.

Electric Operating Revenues

	Cinergy(1)						CG&E and subsidiaries						PSI
	2003		2002		% Change		2003		2002		% Change		2003		2002		% Change
	(in millions)

Retail	$	678	$	651	4		$	328	$	334	(2	)	$	350	$	318	10
Wholesale	126		94		34		70		33		N/M		56		44		27
Transportation	6		2		N/M		6		2		N/M		—		—		—
Other	27		32		(16	)	25		29		(14	)	6		4		50
Total	$	837	$	779	7		$	429	$	398	8		$	412	$	366	13

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

N/M Not meaningful to an understanding of the change.

Electric operating revenues increased for Cinergy , CG&E , and PSI for the quarter ended March 31, 2003, as compared to 2002. Retail revenues increased for Cinergy and PSI primarily due to

increased megawatt hour (MWh) sales due to colder than normal weather. PSI’s retail revenues reflect increases in MWh sales in residential, commercial, and industrial customer classes. PSI’s increase also reflects a higher price received per MWh due to tariff adjustments associated with fuel cost recovery and certain construction programs. CG&E’s retail revenues decreased slightly for the quarter ended March 31, 2003, as compared to 2002. Increased residential sales, attributable to colder than normal weather, were offset by decreases in revenue from commercial and industrial customers. This decrease reflects a sluggish economy and the migration of certain customers to a transportation-only tariff in connection with the Ohio electric customer choice program.

Wholesale revenues increased for Cinergy , CG&E ,and PSI for the quarter ended March 31, 2003, as compared to 2002. The increase in wholesale revenues for Cinergy and CG&E primarily reflects higher non-firm wholesale sales volumes due to the colder than normal weather. Also contributing to the increase was an increase in the wholesale gross margin realized per MWh. CG&E’s increase also reflects the implementation of the new joint operating agreement effective April 2002. In connection with the implementation of the new operating agreement, the majority of new wholesale sales transactions entered into since April 2002 were originated on behalf of CG&E . PSI’s increase reflects higher wholesale gross margins realized per MWh. This increase was partially offset by lower wholesale sales volumes due to the new joint operating agreement.

Gas Operating Revenues

	Cinergy(1)					CG&E and subsidiaries
	2003		2002		% Change	2003		2002		% Change
	(in millions)

Retail	$	253	$	161	57	$	253	$	161	57
Wholesale	125		11		N/M	—		—		—
Transportation	20		17		18	20		17		18
Other	1		1		—	2		2		—
Total	$	399	$	190	N/M	$	275	$	180	53

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

N/M Not meaningful to an understanding of the change.

Gas operating revenues increased for Cinergy and CG&E for the quarter ended March 31, 2003, as compared to 2002. Cinergy’s and CG&E’s retail gas revenues increased due to an increase in retail per thousand cubic feet (mcf) sales and higher prices received per mcf delivered. The increase in retail gas sales volumes is primarily the result of the colder than normal weather in the first quarter of 2003. The higher price per mcf delivered reflects an increase in CG&E’s base rates, as approved by the PUCO in May 2002, and tariff adjustments associated with the gas main replacement program and gas cost recovery mechanism. For further information see Note 7(m) in the “Notes to Financial Statements” in “Item 1. Financial Information”. CG&E’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

Wholesale gas revenues consist almost exclusively of activity within Marketing & Trading. Cinergy began reporting revenues from energy trading derivative contracts on a net basis in 2003, in accordance with the required adoption of Emerging Issues Task Force (EITF) Issue 02-3, Issues Involved in Accounting for Derivatives Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3). See Note 3 in the “Notes to Financial Statements” in “Item 1. Financial Information” for additional information. Wholesale gas revenues for Cinergy increased for the quarter ended March 31, 2003, as compared to 2002. Marketing & Trading began engaging in significant storage activities in the second quarter of 2002, resulting in increased revenues, which must be presented on a gross revenue basis. (Storage activity involves acquiring and storing gas primarily during off-peak periods for withdrawal and sale during periods of higher demand.) Additionally, revenues (net margins) increased from basis trading due to extreme volatility of natural gas prices.

Other Revenues

Other revenues for Cinergy increased for the quarter ended March 31, 2003, as compared to 2002, primarily due to the sale of synthetic fuel, which began in July 2002.

Operating Expenses

	Cinergy(1)					CG&E and subsidiaries					PSI
	2003		2002		% Change	2003		2002		% Change	2003		2002		% Change
	(in millions)

Fuel	$	240	$	204	18	$	105	$	93	13	$	135	$	110	23
Purchased and exchanged power	39		25		56	26		14		86	32		13		N/M
Gas purchased	236		110		N/M	172		108		59	—		—		—
Operation and maintenance	327		263		24	135		106		27	112		115		(3	)
Depreciation	106		99		7	49		48		2	43		38		13
Taxes other than income taxes	78		72		8	60		54		11	16		16		—
Total	$	1,026	$	773	33	$	547	$	423	29	$	338	$	292	16

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

N/M Not meaningful to an understanding of the change.

Fuel

Fuel primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the quarter ended March 31, 2002, to the quarter ended March 31, 2003:

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

Fuel expense - March 31, 2002	$	204	$	93	$	110

Increase (decrease) due to changes in:
Price of fuel	6		—		6
Deferred fuel cost	13		—		13
MWh generation	14		8		6
Other(2)	3		4		—

Fuel expense - March 31, 2003	$	240	$	105	$	135

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

(2) Includes costs of third party coal sales.

Purchased and Exchanged Power

Purchased and exchanged power expense increased for Cinergy , CG&E ,and PSI for the quarter ended March 31, 2003, as compared to 2002. This increase is primarily the result of increases in MWh volumes purchased caused by the colder than normal weather conditions. Also, contributing to this increase was an increase in the price paid per MWh. First quarter average wholesale electricity prices were 85 percent higher over the same period in 2002. As discussed above, CG&E’s and PSI’s Purchased and exchanged power expense also reflects the effects of the implementation of the new joint operating agreement beginning in April 2002.

Gas Purchased

Gas purchased expense increased for Cinergy and CG&E for the quarter ended March 31, 2003, as compared to 2002. This increase was primarily due to an increase in the average cost per mcf of gas purchased. Also, contributing to the increase was increased volumes purchased. The primary cause of the price and consumption increases was the colder than normal weather experienced in the Midwest, which drove up the demand for natural gas. CG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law. As discussed under “Gas Operating Revenues”, storage activity is required to be presented on a gross basis, resulting in the utilization of storage gas being reflected as Gas purchased expense rather than netted with gas revenue. With Marketing & Trading’s increased storage activity, a significantly greater quantity of gas was sold during the quarter.

Operation and Maintenance

Operation and maintenance expense increased for Cinergy and CG&E and decreased for PSI for the quarter ended March 31, 2003 as compared to 2002. Cinergy’s increase primarily reflects costs associated with the production of synthetic fuel, which began in July 2002. Additionally, Cinergy’s , CG&E’s , and PSI’s comparative Operation and maintenance expenses reflect an increase in the costs of employee compensation and benefit programs. Cinergy’s and CG&E’s increase also reflects increased amortization of regulatory transition assets.

Depreciation

Depreciation expense increased for Cinergy , CG&E , and PSI for the quarter ended March 31, 2003, as compared to 2002. This increase was primarily attributable to the addition of depreciable plant. Cinergy’s increase also includes the addition of the depreciable equipment associated with the production of synthetic fuel, which began in July 2002.

Taxes Other Than Income Taxes

Taxes other than income taxes expense increased for Cinergy and CG&E for the quarter ended March 31, 2003, as compared to 2002. This increase was primarily attributable to an increase in gas and electric sales volumes. Also contributing to CG&E’s increase was an increase in property taxes.

Miscellaneous - net

Miscellaneous - net increased for the quarter ended March 31, 2003, as compared to 2002, primarily due to the recognition of expense in 2002 for previously deferred costs, that were denied recovery in the final order on ULH&P’s gas rate case. Also contributing to this increase was a gain on the sale of property held for potential future use in Ohio.

Interest

Interest expense decreased for Cinergy and increased for CG&E for the quarter ended March 31, 2003, as compared to 2002. Cinergy’s decrease was primarily the result of lower interest rates. CG&E’s increase was mainly due to an increase in the amount of long-term debt outstanding, partially offset by a reduction in the amount of short-term debt outstanding. In general, long-term fixed interest rates are higher than variable short-term interest rates.

Income Taxes

Income taxes expense increased for Cinergy for the quarter ended March 31, 2003, as compared to 2002, primarily due to increased taxable income. Partially offsetting this increase were the tax credits associated with the production and sale of synthetic fuel, which began in July 2002.

Cumulative Effect of a Change in Accounting Principles, Net of Tax

Cinergy , CG&E , and PSI recognized a Cumulative effect of a change in accounting principles, net of tax gain/(loss) of approximately $26 million, $31 million, and $(0.5) million, respectively. The cumulative effect of a change in accounting principles is a result of the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143) and the rescission of EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). See Note 1(j)( viii ) of the “Notes to Financial Statements” in “Item 1. Financial Information” for further information.

In 2002, Cinergy recognized a Cumulative effect of a change in accounting principle, net of tax loss of approximately $11 million as a result of implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142). See Note 1(j)( viii ) of the “Notes to Financial Statements” in “Item 1. Financial Information” for further information.

ULH&P

The Results of Operations discussion for ULH&P is presented only for the three months ended March 31, 2003, 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, 2003 and 2002, were as follows:

	ULH&P
	2003		2002
	(in thousands)

Electric gross margin	$	15,806	$	15,019
Gas gross margin	17,884		12,315
Net income	9,406		3,884

Electric Operating Revenues

Electric operating revenues increased for the three months ended March 31, 2003, as compared to 2002, mainly due to an increase in MWh sales resulting from colder than normal weather.

Electricity Purchased from Parent Company for Resale

Electricity purchased from parent company for resale increased for the three months ended March 31, 2003, as compared to 2002 due to an increase in consumption as a result of colder than normal weather.

Gas Operating Revenues

Gas operating revenues increased for the three months ended March 31, 2003, as compared to 2002. This increase is primarily due to an increase in mcf sold and higher prices received per mcf, as a result of colder than normal weather. New base rates for ULH&P , which were effective January 31, 2002, and tariff adjustments associated with the gas main replacement program and gas cost recovery mechanism also contributed to this increase. For further information see Note 7(n) in the “Notes to Financial Statements” in “Item 1. Financial Information”. ULH&P’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

Gas Purchased

Gas purchased expense increased for the three months ended March 31, 2003, as compared to 2002, due to increased purchases and higher prices paid per mcf, primarily the result of colder than normal weather experienced in the Midwest, which drove up the demand for natural gas. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

Operation and Maintenance

Operation and maintenance expense increased for the three months ended March 31, 2003, as compared to 2002, due primarily to increased amortization of demand side management program costs and maintenance of overhead lines costs.

Miscellaneous - net

Miscellaneous - net increased for the three months ended March 31, 2003, as compared to 2002, primarily due to the recognition of expense in 2002 for previously deferred costs, that were denied recovery in the final order on ULH&P’s gas rate case.

Income Taxes

Income taxes expense increased for the three months ended March 31, 2003, as compared to 2002, primarily due to an increase in taxable income.

MD&A - RESULTS OF OPERATIONS - FUTURE

FUTURE EXPECTATIONS/TRENDS

In the “Future Expectations/Trends” section, we discuss electric and gas industry developments, market risk sensitive instruments and positions, and accounting matters. Each of these discussions will address the current status and potential future impact on our results of operations and financial condition.

ELECTRIC INDUSTRY

Wholesale Market Developments

Supply-side Actions

In December 2002, the Indiana Utility Regulatory Commission (IURC) approved a settlement agreement among PSI , the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing PSI’s purchase of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates. In February 2003, the FERC issued an order under Section 203 of the Federal Power Act authorizing PSI’s acquisition of the plants, which occurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order. At this time, we cannot predict the outcome of this matter.

Retail Market Developments

Ohio

Federal Update

Energy Bill

The U.S. House of Representatives (House) passed the Energy Policy Act in April 2003. This followed extensive committee debate and attempts to pass similar legislation in 2002. This year’s bill includes PUHCA repeal, tax incentives for gas and electric distribution lines, and combined heat and power and renewable energy.

The U.S. Senate (Senate) Energy and Natural Resources Committee passed its version of the Energy Bill in April 2003. That legislation is scheduled to be considered by the entire Senate sometime during the second quarter of 2003. The Senate version includes PUHCA repeal and encourages regional dialogues between states and the FERC on the continued formation of regional transmission organizations.

Clear Skies Legislation

The importance of Clear Skies legislation is that it would replace unpredictable environmental regulations with set targets and timetables, allowing the industry adequate time to access needed capital and build environmental improvement projects. Clear Skies legislation would seek an overall 70 percent improvement in emissions from power plants over a phased-in reduction schedule beginning in 2010 and stretching to 2018. The first hearing was held on the legislation in early April 2003 and Cinergy testified in favor of swift passage. Additional hearings are scheduled and the Senate Environment Committee hopes to review the bill in subcommittee in the second quarter of 2003. Timing for consideration is less certain with the House. Therefore, the prospects for passage of the Clear Skies legislation are unclear.

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

Historical

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.

FERC Orders

In related activity, the FERC issued an order in December 2001, in response to protests of the Midwest ISO’s proposed methodology related to the calculation of its administrative adder fees for the services it provides. Cinergy and a number of other parties filed protests to the proposed methodology, suggesting, among other things, that the methodology was inconsistent with the transmission owners’ prior agreement with the Midwest ISO and selectively allowed only independent transmission companies to choose which unbundled administrative adder services they wished to purchase from the Midwest ISO. A partial settlement was reached in the FERC proceeding, resolving the issues addressed by Cinergy’s protest in a manner favorable to Cinergy . The settlement agreement was approved by the FERC in a February 24, 2003 order and will be implemented during 2003 - resulting in about $25 million of administrative adder credits to be shared among the Midwest ISO transmission owners.

In late 2001 and early 2002, the FERC issued its Opinion Nos. 453 and 453-A ordering, among other things, that transmission service for bundled retail customers (i.e., customers who cannot select an alternative energy provider) be provided under the Midwest ISO’s open access transmission tariff, and that the Midwest ISO’s charges for its administrative services apply to bundled retail customers. Cinergy and other parties have appealed these orders to the U.S. Court of Appeals for the District of Columbia Circuit (the Court), challenging the application of the Midwest ISO’s tariff, and the Midwest ISO’s charges for its administrative services to bundled retail customers. At the request of the FERC, the Court remanded the matter back to the FERC for further proceedings. In its order on remand, the FERC upheld its prior determinations in Opinion Nos. 453 and 453-A. Cinergy and other Midwest ISO transmission owners have requested rehearing of the FERC’s order on remand. Cinergy cannot predict the outcome of the rehearing request, whether the matter will again be appealed to the courts, or the outcome of any such appeal.

Significant Rate Developments

PSI Retail Rate Case

PSI Purchased Power Tracker (Tracker)

PSI Fuel Adjustment Charge

PSI Construction Work in Progress (CWIP) Ratemaking Treatment for Nitrogen Oxide (NO _X ) Equipment

PSI CWIP Ratemaking for NO _X Equipment

	PSI
	(in millions)

Total retail CWIP expenditures as of December 31, 2002	$	305

Proposed total amount requested through CWIP mechanism(1)	35
Less: previously approved CWIP mechanism amounts	(28		)
Proposed incremental CWIP mechanism amounts	$	7

(1)	Amounts include retail customers’ portion only and represent an annual return on qualified NO _X equipment expenditures.

Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans , the equity component of AFUDC will not be deferred for financial reporting after the related assets are placed in service.

GAS INDUSTRY

ULH&P Gas Rate Case

CG&E Gas Rate Case

In the third quarter of 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over 10 years. CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002. An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, effective May 30, 2002. In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case. In the fourth quarter of 2002, CG&E filed an application to increase its rates under the tracking mechanism. In April 2003, CG&E entered into a settlement agreement with the parties, providing for an increase of $6.5 million, which the PUCO subsequently approved.

Gas Prices

Natural gas prices began to escalate dramatically during the fourth quarter of 2002 and peaked midway through the first quarter of 2003. This significant increase in gas costs prompted CG&E and ULH&P to make additional interim filings with the PUCO and KPSC, respectively, to increase their gas cost adjustment rates for the remaining two months of the quarter which began in March 2003. These interim filings were subsequently approved by the Commissions. Currently, neither CG&E nor ULH&P profit from changes in the cost of gas. Natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

In May 2003, ULH&P filed an application with the KPSC requesting approval of a gas procurement-hedging program designed to mitigate the effects of gas price volatility on customers. If approved, the hedging program will allow the pre-arranging of between 20-65 percent of winter heating season base load gas requirements and between 0-50 percent of summer season base load gas requirements.

ULH&P uses primarily fixed price forward contracts and contracts with a ceiling and floor on the price. These contracts employ the normal purchases and sales exemption, and do not involve Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activity (Statement 133), hedges.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

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

Changes in Fair Value

The changes in fair value of the energy risk management assets and liabilities for the quarters ended March 31, 2003 and 2002, are presented in the table below:

	Change in Fair Value
	March 31, 2003									March 31, 2002
	Cinergy(1)			CG&E			PSI			Cinergy(1)		CG&E			PSI
	(in millions)

Fair value of contracts outstanding at beginning of period:	$	75		$	42		$	—		$	18	$	28		$	(7	)

Inception value of new contracts when entered(2)	—			—			—			3		1			1

Changes in fair value attributable to changes in valuation techniques and assumptions(3)	1			1			—			—		—			—

Other changes in fair value(4)	73			4			3			1		5			—

Option premiums paid/(received)	(2		)	1			—			28		—			—

Cumulative effect of a change in accounting principle(5)	(20		)	(13		)	(1		)	—		—			—

Contracts settled	(114		)	(37		)	(4		)	18		(4		)	(1		)

Fair value of contracts outstanding at end of period	$	13		$	(2	)	$	(2	)	$	68	$	30		$	(7	)

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

(2) Represents fair value, recognized in income, attributable to long-term, structured contracts, primarily in power, which is recorded on the date a deal is signed. These contracts are primarily with end-use customers or municipalities that seek to limit their risk to power price volatility. While caps and floors often exist in such contracts, the amount of power supplied can vary from hour to hour to mirror the customers load volatility. See Note 1(j)( i ) in the “Notes to Financial Statements” in “Item 1. Financial Information” for additional information regarding inception gains.

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

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

(5) See Note 1(j)( i ) of the “Notes to Financial Statements” in “Item 1. Financial Information” for further information.

The following table presents the expected maturity of the Energy risk management assets and Energy risk management liabilities as of March 31, 2003:

	Fair Value of Contracts as of March 31, 2003
	Maturing
Source of Fair Value(1)	Within 12 months			12-36 months			36-60 months		Thereafter			Total Fair Value
	(in millions)

Cinergy (2)
Prices actively quoted	$	(4	)	$	(2	)	$	—	$	—		$	(6	)

Prices based on models and other valuation methods	9			15			3		(8		)	19

Total	$	5		$	13		$	3	$	(8	)	$	13

CG&E
Prices actively quoted	$	(11	)	$	(5	)	$	—	$	—		$	(16	)

Prices based on models and other valuation methods	(4		)	15			3		—			14

Total	$	(15	)	$	10		$	3	$	—		$	(2	)

PSI
Prices actively quoted	$	(1	)	$	(9	)	$	—	$	—		$	(10	)

Prices based on models and other valuation methods	2			3			3		—			8

Total	$	1		$	(6	)	$	3	$	—		$	(2	)

(1) Active quotes are considered to be available for two years for standard electricity transactions and three years for standard gas transactions. Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value. Long-term transactions can have portions in both categories depending on the tenor.

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

Energy Trading Credit Risk

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

ACCOUNTING MATTERS

Critical Accounting Policies

Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles (GAAP) requires the use of assumptions and estimates. In certain instances, the application of GAAP requires judgments regarding future events, including the likelihood of success of particular initiatives, legal and regulatory challenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions.

Cinergy’s 2002 10-K includes a discussion of accounting policies that are significant to the presentation of Cinergy’s financial position and results of operations. These include:

• Fair Value Accounting for Energy Marketing and Trading;

• Retail Customer Revenue Recognition;

• Regulatory Accounting;

• Pension and Other Postretirement Benefits; and

• Impairment of Long-lived Assets.

Accounting Changes

Energy Trading

In October 2002, the EITF reached consensus in EITF 02-3 to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of new derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically. The consensus to rescind EITF 98-10 required most energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value. The consensus was immediately effective for all new contracts executed after October 25, 2002, and required a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, was a loss of $13 million for Cinergy and $8 million for CG&E , which includes primarily the impact of certain coal contracts, gas inventory, and certain gas contracts, which were all accounted for at fair value. We expect the ongoing impact of this rescission to have the largest impact on our gas trading business, which uses financial contracts, physical contracts, and gas inventory to take advantage of various arbitrage opportunities. Prior to the rescission of EITF 98-10, all of these activities were accounted for at fair value. Under the revised guidance, only certain items are accounted for at

fair value, which could increase volatility in future results of operations. As a result, we are reviewing the possible application of hedge accounting under Statement 133.

Business Combinations and Intangible Assets

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and Statement 142. Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption (transition impairment test) and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards. This test must be applied at the “reporting unit” level, which is not permitted to be broader than the current business segments discussed in Note 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.

Asset Retirement Obligations

was reversed upon adoption. However, accrued cost of removal for rate-regulated assets is recoverable through our rates as a component of depreciation. Since Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation , applies, accruing estimated cost of removal continues to be acceptable. As a result, accumulated cost of removal was not reversed upon adoption of Statement 143 for the rate-regulated assets of PSI , CG&E , and ULH&P .

Derivatives

Accounting for Stock-Based Compensation

We have historically accounted for our stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) . In July 2002, Cinergy announced that it would adopt Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123) for all employee awards granted or modified after January 1, 2003, and would begin measuring the compensation cost of stock-based awards under the fair value method. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (Statement 148), which amends Statement 123 and

APB Opinion No. 28, Interim Financial Reporting. Statement 148 provides alternative methods of transition to Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Cinergy adopted Statement 148 on January 1, 2003, and has adopted the transition provisions that require expensing options prospectively beginning in the year of adoption. Awards granted prior to January 1, 2003, will continue to follow the intrinsic value method prescribed by APB 25. The impact of adoption on our financial position and results of operations, assuming award levels and fair values similar to past years, is not material. This change will primarily impact the accounting for stock options and other performance based awards related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan, the Cinergy Corp. Employee Stock Purchase and Savings Plan, and the Cinergy Corp. Stock Option Plan.

Consolidation of SPEs

The FASB issued Interpretation 46, in January 2003. This interpretation will significantly change the consolidation requirements for SPEs. We have begun reviewing the impact of this interpretation but have not yet concluded whether consolidation of certain SPEs will be required. There are two SPEs for which consolidation may be required. These SPEs have individual power sale agreements to an unrelated third party for approximately 45 MW of capacity, ending in 2009, and 35 MW of capacity, ending in 2016. In addition, the SPEs have individual power purchase agreements with Capital & Trading to supply the power. Capital & Trading also provides various services, including certain credit support facilities.

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 1. Financial Information”.

ITEM 4. CONTROLS AND PROCEDURES

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

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC’s rules and forms.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We currently, and from time to time, are involved in lawsuits, claims, and complaints incidental to the conduct of our business. In the opinion of management, no such proceeding is likely to have a material adverse effect on us.

See Note 7 of the “Notes to Financial Statements” in “Item 1. Financial Information” for further information regarding our commitments and contingencies.

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

The annual meeting of shareholders of Cinergy Corp. was held on April 22, 2003, in Covington, Kentucky.

At the meeting, three Class III directors were elected to the board of Cinergy Corp. to serve for three-year terms ending in 2006, as set forth below:

Directors	Votes For	Votes Withheld

Class III
Phillip R. Cox	141,244,619	2,739,531
James E. Rogers	140,128,456	3,855,694
John J. Schiff, Jr.	141,206,249	2,777,901

In lieu of the annual meeting of shareholders of The Cincinnati Gas & Electric Company ( CG&E ), a resolution was duly adopted via unanimous written consent of Cinergy Corp. , CG&E’s sole shareholder, effective April 21, 2003, electing the following members to the Board of Directors for one-year terms expiring in 2004:

• James E. Rogers

• R. Foster Duncan

• James L. Turner

The annual meeting of shareholders of PSI Energy, Inc. ( PSI ) was held on April 22, 2003, in Covington, Kentucky. 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 elected at the annual meeting for one-year terms expiring in 2004:

• Michael G. Browning

• James E. Rogers

• Douglas F. Esamann

None of the 651,089 outstanding shares, representing 423,431 votes, of the preferred stock of PSI , were present or voted at the annual meeting.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The documents listed below are being filed on behalf of Cinergy Corp. , The Cincinnati Gas & Electric Company ( CG&E ), PSI Energy, Inc. ( PSI ), and The Union Light, Heat and Power Company ( ULH&P ) and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:

Exhibit Designation	Registrant	Nature of Exhibit	Previously Filed as Exhibit to:

Additional Exhibits

4-xxx	PSI	Loan Agreement between PSI and the Indiana Development Finance Authority dated as of February 15, 2003.

4-yyy	PSI	6.302% Subordinated Note between PSI and Cinergy Corp. , dated February 5, 2003.

4-zzz	PSI	6.403% Subordinated Note between PSI and Cinergy Corp. dated February 5, 2003.

10-tt	PSI	Asset Purchase Agreement by and among Cinergy Capital & Trading, Inc., CinCap Madison, LLC and PSI dated as of February 5, 2003.

10-uu	PSI	Asset Purchase Agreement by and among Cinergy Capital & Trading, Inc., CinCap VII, LLC and PSI dated as of February 5, 2003.

99.1	Cinergy Corp. CG&E PSI ULH&P	Certification of James E. Rogers under Section 906 of Sarbanes-Oxley Act.

99.2	Cinergy Corp. CG&E PSI ULH&P	Certification of R. Foster Duncan under Section 906 of Sarbanes-Oxley Act.

(b) The following reports on Form 8-K were filed during the quarter ended March 31, 2003.

Date of Report	Registrant	Item Filed

January 31, 2003	Cinergy Corp.	Item 7. Financial Statements and Exhibits

		Item 9. Regulation FD Disclosure

February 5, 2003	Cinergy Corp.	Item 5. Other Events

		Item 7. Financial Statements and Exhibits

February 7, 2003	PSI	Item 9. Regulation FD Disclosure

SIGNATURES

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 09, 2003		/s/	Bernard F. Roberts
			Bernard F. Roberts
			Duly Authorized Officer
			and
			Chief Accounting Officer

I , James E. Rogers, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 09, 2003

/s/ James E. Rogers
	James E. Rogers
Chief Executive Officer

I, R. Foster Duncan, certify that:

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

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

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

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

Date: May 09, 2003

/s/ R. Foster Duncan
	R. Foster Duncan
Chief Financial Officer

Exhibit 4-xxx

EXECUTION COPY

LOAN AGREEMENT

between

INDIANA DEVELOPMENT FINANCE AUTHORITY

and

PSI ENERGY, INC.

$35,000,000
Indiana Development Finance Authority
Environmental Refunding
Revenue Bonds, Series 2003
(PSI Energy, Inc. Project)

Dated
as of
February 15, 2003

TABLE OF CONTENTS

ARTICLE I.	DEFINITIONS

Section 1.1.	Use of Defined Terms
Section 1.2.	Definitions
Section 1.3.	Interpretation
Section 1.4.	Captions and Headings

ARTICLE II.	REPRESENTATIONS

Section 2.1.	Representations of the Issuer
Section 2.2.	No Warranty by Issuer of Condition or Suitability of the Project
Section 2.3.	Representations and Covenants of the Company

ARTICLE III.	COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS

Section 3.1.	Acquisition, Construction and Installation
Section 3.2.	Project Description
Section 3.3.	Issuance of the Bonds; Application of Proceeds
Section 3.4.	Investment of Fund Moneys
Section 3.5.	Rebate Fund

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

Section 4.1.	Loan Repayment
Section 4.2.	Additional Payments
Section 4.3.	Place of Payments
Section 4.4.	Obligations Unconditional
Section 4.5.	Assignment of Revenues and Agreement
Section 4.6.	Municipal Bond Insurance Policy; Liquidity Facility; Cancellation
Section 4.7.	Company’s Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods
Section 4.8.	Company’s Obligation to Purchase Bonds

ARTICLE V.	ADDITIONAL AGREEMENTS AND COVENANTS

Section 5.1.	Right of Inspection
Section 5.2.	Maintenance

Section 5.3.	Removal of Portions of the Project Facilities
Section 5.4.	Operation of Project Facilities
Section 5.5.	Insurance
Section 5.6.	Workers’ Compensation Coverage
Section 5.7.	Damage; Destruction and Eminent Domain
Section 5.8.	Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted
Section 5.9.	Indemnification
Section 5.10.	Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes
Section 5.11.	Use of Project Facilities
Section 5.12.	Assignment by Company
Section 5.13.	The Depository Trust Company Letter of Representation

ARTICLE VI.	REDEMPTION

Section 6.1.	Optional Redemption
Section 6.2.	Extraordinary Optional Redemption
Section 6.3.	Mandatory Redemption
Section 6.4.	Notice of Redemption
Section 6.5.	Actions by Issuer

ARTICLE VII.	EVENTS OF DEFAULT AND REMEDIES

Section 7.1.	Events of Default
Section 7.2.	Remedies on Default
Section 7.3.	No Remedy Exclusive
Section 7.4.	Agreement to Pay Attorneys’ Fees and Expenses
Section 7.5.	No Waiver
Section 7.6.	Notice of Default

ARTICLE VIII.	MISCELLANEOUS

Section 8.1.	Term of Agreement
Section 8.2.	Amounts Remaining in Funds
Section 8.3.	Notices
Section 8.4.	Extent of Covenants of the Issuer; No Personal Liability
Section 8.5.	Binding Effect
Section 8.6.	Amendments and Supplements
Section 8.7.	Execution Counterparts
Section 8.8.	Severability
Section 8.9.	Governing Law

LOAN AGREEMENT

THIS LOAN AGREEMENT is made and entered into as of February 15, 2003 between the INDIANA DEVELOPMENT FINANCE AUTHORITY (the “Issuer”), a separate body corporate and politic organized and existing under the laws of the State of Indiana, and PSI ENERGY, INC. (the “Company”), a public utility and corporation duly organized and validly existing under the laws of the State of Indiana. Capitalized terms used in the following recitals are used as defined in Article I of this Agreement.

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

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

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

ARTICLE I.

DEFINITIONS

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

Section 1.2. Definitions . As used herein:

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

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

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

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

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

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

“Force Majeure” means any of the following:

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

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

“Generating Station” means the Gibson Generating Station.

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

“Insurance Agreement” means the Insurance Agreement related to the Bonds, dated March 7, 2003, between the Company and the Bond Insurer, as amended or supplemented from time to time.

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

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

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

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

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

“Notice Address” means:

(a)	As to the Issuer:	Indiana Development Finance Authority
		One North Capitol, Suite 900
		Indianapolis, Indiana 46204
		Attention: Executive Director

(b)	As to the Company:	PSI Energy, Inc.
		139 East Fourth Street
		Cincinnati, Ohio 45202
		Attention: Treasurer

(c)	As to the Trustee:	Fifth Third Bank, Indiana
		Fifth Third Center
		38 Fountain Square
		Cincinnati, Ohio 45263
		Attention: Corporate Trust Administration

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

“Original Bonds” means the City of Princeton, Indiana Pollution Control Revenue Bonds, 1982 Series B (Public Service Company of Indiana, Inc. Project C).

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

“Pollution Control Facility” or “Pollution Control Facilities” means those facilities which are pollution control facilities as defined in Section 24 of Chapter 10.9 of the Act.

“Prior Bonds” means the Original Bonds, the Series 1987 Bonds and the Refunded Bonds.

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

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

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

“Project Site” means the Gibson Generating Station, Highway 64 West, Gibson County, Indiana.

“Refunded Bonds” means the City of Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1997 Series (PSI Energy, Inc. Project).

“Refunded Bonds Indenture” means the Trust Indenture dated as of February 1, 1997 between the City of Princeton, Indiana and Fifth Third Bank, Indiana (as successor to The Fifth Third Bank of Central Indiana).

“Refunded Bonds Loan Agreement” means the Loan Agreement dated as of February 1, 1997 between the City of Princeton, Indiana and the Company.

“Refunded Bonds Trustee” means Fifth Third Bank, Indiana (as successor to The Fifth Third Bank of Central Indiana), as trustee under the Refunded Bonds Indenture.

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

“Series 1982 Indenture” means the Trust Indenture dated as of April 1, 1982 between American Fletcher National Bank & Trust Company, as predecessor to Bank One, Indianapolis, NA and Bank One Trust Company, NA, and the City of Princeton, Indiana.

“Series 1982 Loan Agreement” means the Loan Agreement dated as of April 1, 1982 between the City of Princeton, Indiana and Public Service Company of Indiana, Inc., as predecessor to PSI Energy, Inc.

“Series 1987 Bonds” means the City of Princeton, Indiana 7.6% Pollution Control Refunding Revenue Bonds, 1987 Series (Public Service Company of Indiana, Inc. Project C).

“Series 1987 Indenture” means the Trust Indenture dated as of March 15, 1987 between American Fletcher National Bank & Trust Company, as predecessor to Bank One, Indianapolis, NA and Bank One Trust Company, NA, and the City of Princeton, Indiana.

“Series 1987 Loan Agreement” means the Loan Agreement dated as of March 15, 1987 between the City of Princeton, Indiana and Public Service Company of Indiana, Inc., as predecessor to PSI Energy, Inc.

“State” means the State of Indiana.

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

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

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

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

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

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

(End of Article I)

ARTICLE II.

REPRESENTATIONS

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

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

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

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

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

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

(d) The Project constitutes and will constitute either land or property of a character subject to the allowance for depreciation for purposes of the Code, and all expenditures for the

7 cost of constructing the Project have been charged to a capital account for federal income tax purposes (or would have been so charged either with or but for a proper election to deduct such amounts).

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

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

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

(h) Substantially all (at least 90%) of the proceeds of the Original Bonds were used to provide “solid waste disposal facilities” within the meaning of Section 103(b)(4)(E) of the 1954 Code and “pollution control facilities” within the meaning of Section 103(b)(4)(F) of the 1954 Code, the original use of which facilities commenced with the Company on October 1, 1982, and which facilities were described in inducement resolutions adopted by the City of Princeton, Indiana, on October 16, 1978. Construction of such facilities financed with the proceeds of the Original Bonds was not commenced by the Company prior to October 16, 1978. All of the proceeds of the Original Bonds have been spent for the Project pursuant to the Series 1982 Loan Agreement or to pay costs of issuance of the Original Bonds. The proceeds of the Refunded Bonds (other than any accrued interest thereon) were used exclusively to refund the Series 1987 Bonds, which were used exclusively to refund the Original Bonds; any investment earnings on such proceeds of any of the Refunded Bonds and the Series 1987 Bonds were used to pay principal, premium or interest on the Series 1987 Bonds and the Original Bonds, respectively; none of the proceeds of either the Refunded Bonds or the Bonds was or will be used to pay for any costs of issuance of the Refunded Bonds or the Bonds, respectively. The principal amount of the Bonds does not exceed the outstanding principal amount of the Refunded Bonds. The original principal amount of the Refunded Bonds did not exceed the then-outstanding principal amount of the Series 1987 Bonds and the original principal amount of the Series 1987 Bonds did not exceed the then-outstanding amount of the Original Bonds. The proceeds of the Bonds, the Refunded Bonds and the Series 1987 Bonds were each used to retire the Refunded Bonds, the Series 1987 Bonds and the Original Bonds, respectively, not later than 90 days after the date of issuance of such bonds. The proceeds of the Bonds (other than any accrued interest thereon) will be used exclusively to refund the Refunded Bonds; any investment earnings thereon will be used to pay principal, premium or interest on the Refunded Bonds.

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

(j) It has used or operated or has caused to be used or operated, and presently intends to use or operate or cause to be used or operated the Project Facilities in a manner consistent with the Project Purposes until the date on which the Bonds have been fully paid and knows of no reason why the Project Facilities will not be so operated. The Company does not intend to sell or otherwise dispose of the Project or any portion thereof.

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

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

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

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

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

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

(q) On the date of issuance and delivery of each of the Prior Bonds, the Company reasonably expected that at least 85% of the respective spendable proceeds of each of the Prior Bonds would be expended to carry out the respective governmental purpose of each such issue within the 3-year period beginning on the issue date of such issue and the Company reasonably expected that the proceeds of each of the Prior Bonds would be spent in accordance with the spending requirements of Section 149(g)(2) of the Code. The spendable proceeds of each of the

9 Prior Bonds have been fully expended prior to the date of issuance of the Bonds. The proceeds of each of the Prior Bonds series were not invested in nonpurpose investments having a substantially guaranteed yield for four years or more.

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

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

(End of Article II)

ARTICLE III.

COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS

Section 3.1 . Acquisition, Construction and Installation . The Company represents that it has caused the Project Facilities to be acquired, constructed and installed on the Project Site, substantially in accordance with the Project Description and in conformance with all applicable zoning, planning, building and other similar regulations of all governmental authorities having jurisdiction over the Project and all permits, variances and orders issued in respect of the Project by EPA, and that the proceeds derived from the Original Bonds and Refunded Bonds, including any investment thereof, were expended in accordance with the Series 1982 Indenture or Series 1982 Loan Agreement, Series 1987 Indenture or Series 1987 Loan Agreement, or Refunded Bonds Indenture and the Refunded Bonds Loan Agreement.

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

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

The Company hereby requests that the Issuer notify the Refunded Bonds Trustee (unless the Refunded Bonds Trustee has already received such notice), pursuant to the Refunded Bonds Indenture, that the entire outstanding principal amount of the Refunded Bonds is to be redeemed on April 1, 2003 at a redemption price of 100% of the principal amount thereof plus accrued interest to that redemption date.

The proceeds from the sale of the Bonds (other than any accrued interest) shall be loaned to the Company to assist the Company in refunding the Refunded Bonds in order to reduce the interest cost payable by the Company; those proceeds shall be deposited in the Refunding Fund. On March 28, 2003, all moneys on deposit in the Refunding Fund shall be disbursed by the Trustee as provided in Section 5.02 of the Indenture to the Refunded Bonds Trustee for deposit in the Bond Fund created in the Refunded Bonds Indenture and applied by the Refunded Bonds Trustee to the defeasance of the Refunded Bonds on March 28, 2003, and for the payment of

principal of and interest on the Refunded Bonds on April 1, 2003. The Company shall pay to the Refunded Bonds Trustee prior to the date of redemption of such series of Refunded Bonds such additional amounts as shall be required to pay in full on such date the entire amount of principal of, premium and interest due on the Refunded Bonds.

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

Section 3.4 . Investment of Fund Moneys . At the oral (confirmed promptly in writing) or written request of the Company, any moneys held as part of the Bond Fund, the Refunding Fund or the Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments; provided, that such moneys shall be invested or reinvested by the Trustee only in Eligible Investments which shall mature, or which shall be subject to redemption by the holder thereof at the option of such holder, not later than the date upon which the moneys so invested are needed to make payments from those Funds. The Issuer (to the extent it retained or retains direction or control) and the Company each hereby represents that the investment and reinvestment and the use of the proceeds of the Refunded Bonds were restricted in such manner and to such extent as was necessary so that the Refunded Bonds would not constitute arbitrage bonds under Section 148 of the Code or its statutory predecessor and each hereby covenants that it will restrict that investment and reinvestment and the use of the proceeds of the Bonds in such manner and to such extent, if any, as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code.

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

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

12 shall remain in effect and be binding upon the Company notwithstanding the release and discharge of the Indenture. The Company shall obtain and keep such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code.

(End of Article III)

ARTICLE IV.

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

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

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

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

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

The Company shall pay the Administration Expenses to the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, and any Paying Agent or Authenticating Agent, as appropriate, as Additional Payments hereunder.

The Company may, without creating a default hereunder, contest in good faith the reasonableness of any such cost or expense incurred or to be paid by the Issuer and any Administration Expenses claimed to be due to the Trustee, the Registrar, the Auction Agent, the Remarketing Agent, any Paying Agent or any Authenticating Agent.

In the event the Company should fail to pay any Loan Payments, Additional Payments or Administration Expenses when due, the payment in default shall continue as an obligation of the Company until the amount in default shall have been fully paid together with interest thereon during the default period at the Interest Rate for Advances.

Section 4.3 . Place of Payments . The Company shall make all Loan Payments directly to the Trustee at its Principal Office. Additional Payments shall be made directly to the person or entity to whom or to which they are due.

Section 4.4 . Obligations Unconditional . The obligations of the Company to make Loan Payments, Additional Payments and any payments required of the Company under Section 5.08 of the Indenture shall be absolute and unconditional, and the Company shall make such payments without abatement, diminution or deduction regardless of any cause or circumstances whatsoever including, without limitation, any defense, set-off, recoupment or counterclaim which the Company may have or assert against the Issuer, the Trustee, the Registrar, the Remarketing Agent, the Auction Agent, the Paying Agent or any other Person.

Section 4.5 . Assignment of Revenues and Agreement . To secure the payment of Bond Service Charges, the Issuer shall, by the Indenture, (a) absolutely and irrevocably assign to the Trustee, its successors in trust and its and their assigns forever, all of the Issuer’s rights and remedies under this Agreement (except for the Unassigned Issuer Rights), and (b) grant a security interest to the Trustee, its successors in trust and its and their assigns forever, in all of its rights to and interest in the Revenues including, without limitation, all Loan Payments and other amounts receivable by or on behalf of the Issuer under the Agreement in respect of repayment of the Loan. The Company hereby agrees and consents to those assignments and that grant of a security interest.

Section 4.6 . Municipal Bond Insurance Policy; Liquidity Facility; Cancellation . (a) The Company agrees to provide for the payment of the principal of and interest on the Bonds by causing the Municipal Bond Insurance Policy to be delivered to the Trustee on the date of the delivery of the Bonds.

(b) The Company may provide for the delivery of a Liquidity Facility.

(c) The Company may cancel any Liquidity Facility then in effect at such time and direct the Trustee in writing to surrender such Liquidity Facility to the Liquidity Facility Issuer by which it was issued in accordance with the Indenture; provided, that no such cancellation shall become effective and no such surrender shall take place until all Bonds subject to purchase pursuant to Section 4.07(d) of the Indenture have been so purchased or redeemed with the proceeds of such Liquidity Facility.

Section 4.7 . Company’s Option to Elect Rate Period; Changes in Auction Date and Length of Auction Periods . The Company shall have, and is hereby granted, the option to elect to convert on any Conversion Date the interest rate borne by the Bonds to another Variable Rate

15 or return to the Auction Rate, to be effective for a Rate Period pursuant to the provisions of Article II of the Indenture and subject to the terms and conditions set forth therein. The Company also shall have the option to direct the change of Auction Dates and/or the length of Auction Rate Periods in accordance with the Indenture. To exercise such options, the Company shall give the written notice required by the Indenture.

Section 4.8 . Company’s Obligation to Purchase Bonds . The Company hereby agrees to pay or cause to be paid to the Trustee or the Paying Agent, on or before each day on which Bonds may be or are required to be tendered for purchase, amounts equal to the amounts to be paid by the Trustee or the Paying Agent with respect to the Bonds tendered for purchase on such dates pursuant to Article IV of the Indenture; provided, however, that the obligation of the Company to make any such payment under this Section shall be reduced by the amount of (A) moneys paid by the Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent, (B) moneys drawn under any Liquidity Facility, for the purpose of paying such purchase price and (C) other moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the Indenture.

(End of Article IV)

ARTICLE V.

ADDITIONAL AGREEMENTS AND COVENANTS

Section 5.1 . Right of Inspection . The Company agrees that, subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Issuer and the Trustee and their or any of their respective duly authorized agents shall have the right at all reasonable times to enter upon the Project Site to examine and inspect the Projects.

Section 5.2 . Maintenance . The Company shall use its best efforts to keep and maintain the Project Facilities, including all appurtenances thereto and any personal property therein or thereon, in good repair and good operating condition so that the Project Facilities will continue to constitute Pollution Control Facilities for the purposes of the operation thereof as required by Section 5.4 hereof.

So long as such shall not be in violation of the Act or impair the character of the Project Facilities as Pollution Control Facilities and provided there is continued compliance with applicable laws and regulations of governmental entities having jurisdiction thereof, the Company shall have the right to remodel the Project Facilities or make additions, modifications and improvements thereto, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by the Company and the same shall, when made, become a part of the Project Facilities.

Section 5.3 . Removal of Portions of the Project Facilities . The Company shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project Facilities, except that, subject to Section 5.4 hereof, it will use its best efforts to ensure the continued character of the Project Facilities as Pollution Control Facilities. The Company shall have the right from time to time to substitute personal property or fixtures for any portions of the Project Facilities, provided that the personal property or fixtures so substituted shall not impair the character of the Project Facilities as Pollution Control Facilities. Any such substituted property or fixtures shall, when so substituted, become a part of the Project Facilities. The Company shall also have the right to remove any portion of the Project Facilities, without substitution therefor; provided, that the Company shall deliver to the Trustee a certificate signed by an Engineer describing said portion of the Project Facilities and stating that the removal of such property or fixtures will not impair the character of the Project Facilities as Pollution Control Facilities.

Section 5.4 . Operation of Project Facilities . The Company will, subject to its obligations and rights to maintain, repair or remove portions of the Project Facilities, as provided in Sections 5.2 and 5.3 hereof, use its best efforts to continue operation of the Project Facilities so long as and to the extent that operation thereof is required to comply with laws or regulations of governmental entities having jurisdiction thereof or unless the Issuer shall have approved the discontinuance of such operation (which approval shall not be unreasonably withheld). The

17 Company agrees that it will, within the design capacities thereof, use its best efforts to operate and maintain the Project Facilities in accordance with all applicable, valid and enforceable rules and regulations of governmental entities having jurisdiction thereof; provided, that the Company reserves the right to contest in good faith any such laws or regulations.

Nothing in this Agreement shall prevent or restrict the Company, in its sole discretion, at any time, from discontinuing or suspending either permanently or temporarily its use of any facility of the Company served by the Project Facilities and in the event such discontinuance or suspension shall render unnecessary the continued operation of the Project Facilities, the Company shall have the right to discontinue the operation of the Project Facilities during the period of any such discontinuance or suspension.

Section 5.5 . Insurance . The Company shall cause the Project Facilities to be kept insured against fire or other casualty to the extent that property of similar character is usually so insured by companies similarly situated and operating like properties, to a reasonable amount by reputable insurance companies or, in lieu of or supplementing such insurance in whole or in part, adopt some other method or plan of protection against loss by fire or other casualty at least equal in protection to the method or plan of protection against loss by fire or other casualty of companies similarly situated and operating properties subject to similar or greater fire or other hazards or on which properties an equal or higher primary fire or other casualty insurance rate has been set by reputable insurance companies.

Section 5.6 . Workers’ Compensation Coverage . Throughout the term of this Agreement, the Company shall comply, or cause compliance, with applicable workers’ compensation laws of the State.

Section 5.7 . Damage; Destruction and Eminent Domain . If, during the term of this Agreement, the Project Facilities or any portion thereof is destroyed or damaged in whole or in part by fire or other casualty, or title to, or the temporary use of, the Project Facilities or any portion thereof shall have been taken by the exercise of the power of eminent domain, the Company (unless it shall have exercised its option to prepay the Loan Payments pursuant to Section 6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project Facilities so damaged, destroyed or taken with such changes, alterations and modifications (including the substitution and addition of other property) as may be necessary or desirable for the administration and operation of the Project Facilities as Pollution Control Facilities and as shall not impair the character or significance of the Project Facilities as furthering the purposes of the Act.

Section 5.8 . Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted . The Company agrees that, during the term of this Agreement, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided that the Company may, without violating its agreement contained in this Section, consolidate with or merge into another

18 corporation, or permit one or more other corporations to consolidate with or merge into it, or sell or otherwise transfer to another corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided the surviving, resulting or transferee corporation, as the case may be (if other than the Company), is a corporation organized and existing under the laws of one of the states of the United States, and assumes in writing all of the obligations of the Company herein, and, if not an Indiana corporation, is qualified to do business in the State.

If consolidation, merger or sale or other transfer is made as provided in this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section.

Section 5.9 . Indemnification .

(a) The Company shall release the State of Indiana, the Issuer (including, but not limited to, members of the Indiana Development Finance Authority, and their attorneys, agents and employees) or any of their officials, officers, employees, members, independent contractors or agents (hereinafter the “Indemnified Parties”) from, agrees that the Indemnified Parties shall not be liable for, and agrees to protect, defend, indemnify and hold harmless the Indemnified Parties from and against, any loss or damage to property, or any injury to or death of any person, that may be occasioned by any cause whatsoever pertaining to the Project, or the use thereof or arising from any act or failure to act by the Company or any of the Company’s agents, contractors, servants, employees, or licensees, or arising from any accident, injury or damage whatsoever caused to any person, firm or limited liability company occurring during the term of this Agreement, or against all losses, claims, costs, damages, liabilities and expenses which they may incur in connection with or arising out of the direct or indirect application of the proceeds of the Loan hereunder, and from and against all costs, liabilities and expenses incurred in or in connection with any claim, action or proceeding brought thereon; provided , however , that the indemnity in this section shall be effective only to the extent of any loss in excess of amounts paid to the Indemnified Parties from any insurance carried with respect to the loss sustained. The Company further agrees to protect, defend, indemnify and hold harmless the Indemnified Parties against and from any and all costs, liabilities, expenses and claims arising from any breach or default on the part of the Company in the performance of any covenant or agreement on the part of the Company to be performed pursuant to the terms of any of the loan documents, or in connection with the issuance of the Bonds and the furnishing of information concerning the Project, the Company, its financial status or other matters relating to the Company. In case any action or proceeding is brought against the Indemnified Parties by reason of any such claim, the Company upon notice from the Indemnified Parties covenants to resist or defend such action or proceeding at the Company’s expense. None of the Indemnified Parties shall settle or compromise such claim, action or proceeding without the written consent of the Company, which shall not be unreasonably withheld, if there exists no Event of Default by the Company as defined in Section 7.1 hereof. Nothing contained in this section, however, shall require the

19 Company to indemnify the Indemnified Parties from any cost, liability, expense, loss or claim arising out of or resulting from the willful misconduct or gross negligence of any such Person.

(b) Notwithstanding the foregoing, the Company shall be entitled to pursue its remedies against the Issuer for damages to the Company resulting directly from personal injury or property damage caused by the gross negligence or willful misconduct of the Issuer.

(c) Notwithstanding anything in the foregoing to the contrary, the Company shall furnish the Issuer and Bond Counsel with information required to complete Internal Revenue Service Form 8038 with respect to the Bonds, and the Company shall protect, defend, indemnify and hold harmless the Issuer and Bond Counsel against all consequences of any material misrepresentation in or material omission from such Form 8038.

(d) No covenant or agreement contained in the Bonds or this Agreement shall be deemed to be a covenant or agreement of any member of the Issuer or of any officer or employee of the Issuer in his or her individual capacity, and neither the Issuer nor any officer or employee of the Issuer executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance of the Bonds.

(e) The indemnity set forth herein shall be in addition to any other obligations of the Company to the holder or amounts due hereunder to the Issuer or at common law or otherwise, and shall survive any termination of this Agreement, and the payment of all obligations.

Section 5.10 . Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes . The Company hereby covenants and represents that it has taken and caused to be taken and shall take and cause to be taken all actions that may be required of it for the interest on the Bonds to be and remain excluded from the gross income of the Holders for federal income tax purposes, and that it has not taken or permitted to be taken on its behalf, and covenants that it will not take, or permit to be taken on its behalf, any action which, if taken, would adversely affect that exclusion under the provisions of the Code.

Section 5.11 . Use of Project Facilities . The Issuer agrees that it will not take any action, or cause any action to be taken on its behalf, to interfere with the Company’s ownership interest in the Project or to prevent the Company from having possession, custody, use and enjoyment of the Project other than pursuant to Article VII of this Agreement or Article VII of the Indenture.

Section 5.12 . Assignment by Company . Notwithstanding any other provision of this Loan Agreement, this Agreement may be assigned in whole or in part by the Company and the Project may be sold or conveyed by the Company without the necessity of obtaining the consent of either the Issuer or the Trustee and after providing written notice to the Issuer but, subject, however, to each of the following conditions:

20

(a) The Company must provide the Trustee and the Remarketing Agent with an Opinion of Bond Counsel that such action will not affect the exclusion of interest on the Bonds for federal income tax purposes.

(b) The Bond Insurer must provide to the Trustee its written consent to such action.

(c) The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Issuer and the Trustee a true and complete copy of each such assignment together with any instrument of assumption.

(d) Any assignment from the Company shall not materially impair fulfillment of the Project Purposes to be accomplished by operation of the Project as herein provided.

Section 5.13 . The Depository Trust Company Letter of Representation . The Company agrees that it shall cause the Trustee on behalf of the Issuer to fulfill the obligations set forth in the Depository Trust Company Letter of Representation for the Bonds.

(End of Article V)

ARTICLE VI.

REDEMPTION

Section 6.1. Optional Redemption . Provided no Event of Default shall have occurred and be subsisting, at any time and from time to time, the Company may deliver moneys to the Trustee in addition to Loan Payments or Additional Payments required to be made and direct the Trustee to use the moneys so delivered for the purpose of calling Bonds for optional redemption in accordance with the applicable provisions of the Indenture providing for optional redemption at the redemption price stated in the Indenture. Pending application for those purposes, any moneys so delivered shall be held by the Trustee in a special account in the Bond Fund and delivery of those moneys shall not, except as set forth in Section 4.1 hereof, operate to abate or postpone Loan Payments or Additional Payments otherwise becoming due or to alter or suspend any other obligations of the Company under this Agreement.

Section 6.2 . Extraordinary Optional Redemption . The Company shall have, subject to the conditions hereinafter imposed, the option during a Term Rate Period to direct the redemption of the Bonds in whole upon the occurrence of the event described below in paragraph (c) and in part upon the occurrence of the other events described below in accordance with the applicable provisions of the Indenture.

(a) The Project Facilities or the Generating Station shall have been damaged or destroyed to such an extent that (1) the Project Facilities or the Generating Station cannot reasonably be expected to be restored, within a period of six consecutive months, to the condition thereof immediately preceding such damage or destruction or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project Facilities or Generating Station for a period of six consecutive months.

(b) Title to, or the temporary use of, all or a significant part of the Project Facilities or the Generating Station shall have been taken under the exercise of the power of eminent domain to such an extent (1) that the Project Facilities or the Generating Station cannot reasonably be expected to be restored within a period of six consecutive months to a condition of usefulness comparable to that existing prior to the taking or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of the Project Facilities or Generating Station for a period of six consecutive months.

(c) As a result of any changes in the Constitution of the State, the Constitution of the United States of America or any state or federal laws or as a result of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after any contest thereof by the Issuer or the Company in good faith, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed in this Agreement.

22 (d) Unreasonable burdens or excessive liabilities shall have been imposed upon the Issuer or the Company with respect to the Project Facilities or the Generating Station or the operation thereof, including, without limitation, the imposition of federal, state or other ad valorem, property, income or other taxes other than ad valorem taxes at the rates presently levied upon privately owned property used for the same general purpose as the Project Facilities or the Generating Station.

(e) Changes in the economic availability of raw materials, operating supplies, energy sources or supplies or facilities (including, but not limited to, facilities in connection with the disposal of industrial wastes) necessary for the operation of the Project Facilities or the Generating Station for the Project Purposes occur or technological or other changes occur which the Company cannot reasonably overcome or control and which in the Company’s reasonable judgment render the Project Facilities or Generating Station uneconomic or obsolete for the Project Purposes.

(f) Any court or administrative body shall enter a judgment, order or decree, or shall take administrative action, requiring the Company to cease all or any substantial part of its operations served by the Project Facilities or the Generating Station to such extent that the Company is or will be prevented from carrying on its normal operations at the Project Facilities or Generating Station for a period of six consecutive months.

(g) The termination by the Company of operations at the Generating Station.

The amount payable by the Company in the event of its exercise of the option granted in this Section shall be the sum of the following:

(i) An amount of money which, when added to the moneys and investments held to the credit of the Bond Fund, will be sufficient pursuant to the provisions of the Indenture to pay, at 100% of the principal amount thereof plus accrued interest to the redemption date, and discharge, all or such portion of Outstanding Bonds to be redeemed on the earliest applicable redemption date, that amount to be paid to the Trustee, plus

(ii) An amount of money equal to the Additional Payments relating to those Bonds accrued and to accrue until actual final payment and redemption of those Bonds, that amount or applicable portions thereof to be paid to the Trustee or to the Persons to whom those Additional Payments are or will be due.

The requirement of (ii) above with respect to Additional Payments to accrue may be met if provisions satisfactory to the Trustee and the Issuer are made for paying those amounts as they accrue.

The rights and options granted to the Company in this Section may be exercised whether or not the Company is in default hereunder; provided, that such default will not relieve the Company from performing those actions which are necessary to exercise any such right or option granted hereunder.

Section 6.3 . Mandatory Redemption . The Company shall deliver to the Trustee the moneys needed to redeem the Bonds in accordance with any mandatory redemption provisions relating thereto as may be set forth in Sections 4.01(b) of the Indenture.

Section 6.4 . Notice of Redemption . In order to exercise an option granted in, or to consummate a redemption required by, this Article VI, the Company shall, within 180 days following the event authorizing the exercise of such option, or at any time during the continuation of the condition referred to in paragraphs (c), (d) or (e) of Section 6.2 hereof, or at any time that optional redemption of the Bonds is permitted under the Indenture as provided in Section 6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as defined in the Indenture), give written notice to the Issuer and the Trustee that it is exercising its option to direct the redemption of Bonds, or that the redemption thereof is required by Section 4.01(b) of the Indenture due to the occurrence of a Determination of Taxability, as the case may be, in accordance with the Agreement and the Indenture, and shall specify therein the date on which such redemption is to be made, which date shall not be more than 180 days from the date such notice is mailed. The Company shall make arrangements satisfactory to the Trustee for the giving of the required notice of redemption to the Holders of the Bonds, in which arrangements the Issuer shall cooperate.

Section 6.5 . Actions by Issuer . At the request of the Company or the Trustee, the Issuer shall take all steps required of it under the applicable provisions of the Indenture or the Bonds to effect the redemption of all or a portion of the Bonds pursuant to this Article VI.

(End of Article VI)

ARTICLE VII.

EVENTS OF DEFAULT AND REMEDIES

Section 7.1 . Events of Default . Each of the following shall be an Event of Default:

(a) The occurrence of an event of default as defined in Section 7.01 (a), (b), or (c) of the Indenture;

(b) The Company shall fail to observe and perform any other agreement, term or condition contained in this Agreement, other than such failure as will have resulted in an event of default described in (a) above and the continuation of that failure for a period of 90 days after notice thereof shall have been given to the Company by the Issuer or the Trustee, or for such longer period as the Issuer and the Trustee may agree to in writing; provided, that failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues that action to completion within 150 days after the expiration of initial cure period as determined above, or within such longer period as the Issuer and the Trustee may agree to in writing; and

(c) The receipt by the Trustee of written notice from the Bond Insurer that an event of default has occurred and is continuing under the Insurance Agreement; and

(d) (i) By decree of a court of competent jurisdiction the Company shall be adjudicated a bankrupt, or an order shall be made approving a petition or answer filed seeking reorganization or readjustment of the Company under the federal bankruptcy laws or other law or statute of the United States of America or of the state of incorporation of the Company or of any other state, or, by order of such a court, a trustee in bankruptcy, a receiver or receivers shall be appointed of all or substantially all of the property of the Company, and any such decree or order shall have continued unstayed on appeal or otherwise and in effect for a period of sixty (60) days; or

(ii) The Company shall file a petition in voluntary bankruptcy or shall make an assignment for the benefit of creditors or shall consent to the appointment of a receiver or receivers of all or any part of its property, or shall file a petition seeking reorganization or readjustment under the Federal bankruptcy laws or other law or statute of the United States of America or any state thereof, or shall file a petition to take advantage of any debtors’ act.

Notwithstanding the foregoing, if, by reason of Force Majeure, the Company is unable to perform or observe any agreement, term or condition hereof which would give rise to an Event of Default under subsection (b) hereof, the Company shall not be deemed in default during the continuance of such inability. However, the Company shall promptly give notice to the Trustee and the Issuer of the existence of an event of Force Majeure and shall use its best efforts to

remove the effects thereof; provided that the settlement of strikes or other industrial disturbances shall be entirely within its discretion.

The exercise of remedies hereunder shall be subject to any applicable limitations of federal bankruptcy law affecting or precluding that declaration or exercise during the pendency of or immediately following any bankruptcy, liquidation or reorganization proceedings.

Section 7.2 . Remedies on Default . Whenever an Event of Default shall have happened and be subsisting, either or both of the following remedial steps may be taken:

(a) The Issuer or the Trustee may have access to, inspect, examine and make copies of the books, records, accounts and financial data of the Company, only, however, insofar as they pertain to the Project; or

(b) The Issuer or the Trustee may pursue all remedies now or hereafter existing at law or in equity to recover all amounts, including all Loan Payments and Additional Payments and under Section 4.8 hereof the purchase price of Bonds tendered for purchase, then due and thereafter to become due under this Agreement, or to enforce the performance and observance of any other obligation or agreement of the Company under this Agreement.

Notwithstanding the foregoing, the Issuer shall not be obligated to take any step which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until a satisfactory indemnity bond has been furnished to the Issuer at no cost or expense to the Issuer. Any amounts collected as Loan Payments or applicable to Loan Payments and any other amounts which would be applicable to payment of Bond Service Charges collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture or, if the outstanding Bonds have been paid and discharged in accordance with the provisions of the Indenture, shall be paid as provided in Section 5.07 of the Indenture for transfers of remaining amounts in the Bond Fund.

The provisions of this Section are subject to the further limitation that the rescission and annulment by the Trustee of its declaration that all of the Bonds are immediately due and payable also shall constitute a rescission and annulment of any corresponding declaration made pursuant to this Section and a rescission and annulment of the consequences of that declaration and of the Event of Default with respect to which that declaration has been made, provided that no such rescission and annulment shall extend to or affect any subsequent or other default or impair any right consequent thereon.

Section 7.3 . No Remedy Exclusive . No remedy conferred upon or reserved to the Issuer or the Trustee by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair that right or power or shall be construed to be a waiver thereof, but any such right or

26 power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than any notice required by law or for which express provision is made herein.

Section 7.4 . Agreement to Pay Attorneys’ Fees and Expenses . If an Event of Default should occur and the Issuer or the Trustee should incur expenses, including attorneys’ fees, in connection with the enforcement of this Agreement or the collection of sums due hereunder, the Company shall be required, to the extent permitted by law, to reimburse the Issuer and the Trustee, as applicable, for the expenses so incurred upon demand.

Section 7.5 . No Waiver . No failure by the Issuer or the Trustee to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of their right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof.

Section 7.6 . Notice of Default . The Company shall notify the Trustee and the Bond Insurer immediately if it becomes aware of the occurrence of any Event of Default hereunder or of any fact, condition or event which, with the giving of notice or passage of time or both, would become an Event of Default.

(End of Article VII)

ARTICLE VIII.

MISCELLANEOUS

Section 8.1 . Term of Agreement . This Agreement shall be and remain in full force and effect from the date of delivery of the Bonds to the Original Purchaser until such time as (i) all of the Bonds shall have been fully paid (or provision made for such payment) and the Indenture has been released pursuant to Section 9.01 thereof and (ii) all other sums payable by the Company under this Agreement shall have been paid; provided, however, the obligations of the Company under Sections 4.2 and 5.9 hereof shall survive any termination of this Agreement.

Section 8.2 . Amounts Remaining in Funds . Any amounts in the Bond Fund remaining unclaimed by the Holders of Bonds for four years after the due date thereof (whether at stated maturity, by redemption, upon acceleration or otherwise), at the option of the Company, shall be deemed to belong to and shall be paid, subject to Section 5.06 of the Indenture, at the written request of the Company, to the Company by the Trustee. With respect to that principal of and any premium and interest on the Bonds to be paid from moneys paid to the Company pursuant to the preceding sentence, the Holders of the Bonds entitled to those moneys shall look solely to the Company for the payment of those moneys. Further, any amounts remaining in the Bond Fund and any other special funds or accounts created under this Agreement or the Indenture, except the Rebate Fund, after all of the Bonds shall be deemed to have been paid and discharged under the provisions of the Indenture and all other amounts required to be paid under this Agreement and the Indenture have been paid, shall be paid to the Company to the extent that those moneys are in excess of the amounts necessary to effect the payment and discharge of the Outstanding Bonds.

Section 8.3. Notices . All notices, certificates, requests or other communications hereunder shall be in writing, except as provided in Section 3.4 hereof, and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Issuer, the Company, the Bond Insurer or the Trustee shall also be given to the others. The Company, the Issuer, the Bond Insurer and the Trustee, by notice given hereunder, may designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent.

Section 8.4 . Extent of Covenants of the Issuer; No Personal Liability . All covenants, obligations and agreements of the Issuer contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future member, officer, agent or employee of the Issuer in other than his official capacity, and neither the members of the Issuer nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof

28 or by reason of the covenants, obligations or agreements of the Issuer contained in this Agreement or in the Indenture.

Section 8.5 . Binding Effect . This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Issuer, the Company and their respective permitted successors and assigns provided that this Agreement may not be assigned by the Company (except as permitted under Sections 5.8 or 5.12 hereof) and may not be assigned by the Issuer except to (i) the Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or secure payment of Bond Service Charges or (ii) any successor public body to the Issuer.

Section 8.6 . Amendments and Supplements . Except as otherwise expressly provided in this Agreement or the Indenture, subsequent to the issuance of the Bonds and prior to all conditions provided for in the Indenture for release of the Indenture having been met, this Agreement may not be effectively amended, changed, modified, altered or terminated by the parties hereto except with the consents required by, and in accordance with, the provisions of Article XI of the Indenture, as applicable.

Section 8.7 . Execution Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument.

Section 8.8 . Severability . If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a judicial or administrative authority to be invalid or unenforceable, that determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law.

Section 8.9 . Governing Law . This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State.

(End of Article VIII)

IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be duly executed in their respective names, all as of the date hereinbefore written.

	INDIANA DEVELOPMENT FINANCE AUTHORITY


	By:	/s/ ALFRED HAMMONDS
		Alfred Hammonds, Chairman

Attest:


/s/ W. CALVIN KELLY
W. Calvin Kelly, Acting Executive Director

[Issuer’s Signature Page to Loan Agreement]

	PSI ENERGY, INC.


	By:	/s/ WENDY L. AUMILLER
		Treasurer

[Borrower’s Signature Page to Loan Agreement]

EXHIBIT A

DESCRIPTION OF POLLUTION CONTROL FACILITIES
AT
GIBSON GENERATING STATION

Financed by Original Bonds

Flue Gas Desulphurization and Sludge Fixation System for Unit 5 of the Gibson Generating Station

Electrostatic Precipitator for Unit 5 of the Gibson Generating Station

Off-Road Solid Waste Transport and Disposal Equipment and Solid Waste Disposal Site Improvement

Exhibit 4-yyy

No. R-2003-1

$200,000,000

PSI ENERGY, INC.
6.302% Subordinated Note
Due 2004

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION OF THE UNITED STATES OF AMERICA (“BLUE SKY LAWS”) AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT AND, IN EACH CASE, IN ACCORDANCE WITH ALL APPLICABLE BLUE SKY LAWS.

PSI Energy, Inc. , a corporation duly organized and existing under the laws of the state of Indiana (herein called the “Company”), for value received, hereby promises to pay to CINERGY CORP., or registered assigns, the principal sum of Two Hundred Million and No/100 Dollars ($200,000,000.00) on April 15, 2004, and to pay interest thereon from February 5, 2003 or from the most recent interest payment date to which interest has been paid or duly provided for, semiannually on April 15 and October 15 in each year, commencing April 15, 2003, at the rate of 6.302% per annum, until the principal hereof is paid or made available for payment.

Payment of the principal of and interest on this Note will be made at the office or agency of the Company maintained for that purpose in Cincinnati, Ohio, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check.

Interest on this Note shall be computed on the basis of a 360-day year of twelve 30-day months.

Any payment on this Note due on any day which is not a Business Day in the City of Cincinnati, Ohio need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the due date and no interest shall accrue for the period from and after such date. For purposes of this Note “Business Day,” means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in Cincinnati, Ohio are authorized or obligated by law or executive order to close.

Redemption

This Note is subject to redemption upon not less than 30 days’ notice by mail, at a redemption price equal to 100% of the principal amount, as a whole or in part, at the election of the Company, together with accrued interest to the redemption date.

In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof.

Subordination

The indebtedness evidenced by this Note is, to the extent and in the manner provided herein, expressly subordinate and subject in right of payment to the prior payment in full of all Senior Debt of the Company (as defined hereinbelow) whether outstanding at the date hereof or hereafter incurred. Each holder and owner of this Note, by accepting the same, agrees to and shall be bound by such provisions.

For purpose hereof, the “Senior Debt” of the Company means the principal of, premium, if any, interest on and any other payment due pursuant to any of the following, whether outstanding at the date of execution of this Note or thereafter incurred, created or assumed: (a) all indebtedness of the Company evidenced by notes, debentures, bonds or other securities sold by the Company for money, excluding this Note, but including all first mortgage bonds of the Company outstanding from time to time; (b) all indebtedness of others of the kinds described in the preceding clause (a) assumed by or guaranteed in any manner by the Company, including through an agreement to purchase, contingent or otherwise; and (c) all renewals, extensions or refundings of indebtedness of the kinds described in any of the preceding clauses (a) and (b); unless, in the case of any particular indebtedness, renewal, extension or refunding, the instrument creating or evidencing the same or the assumption or guarantee of the same expressly provides that such indebtedness, renewal, extension or refunding is not superior in right of payment to or is pari passu with this Note.

In the event and during the continuation of any default in the payment of principal, premium, interest or any other payment due on any Senior Debt continuing beyond the period of grace, if any, specified in the instrument evidencing such Senior Debt, unless and until such default shall have been cured or waived or shall have ceased to exist, or in the event that the maturity of any Senior Debt has been accelerated because of a default, then no payment shall be made by the Company with respect to the principal of or interest on this Note.

In the event that, notwithstanding the foregoing, any payment shall be received by the holder of this Note when such payment is prohibited by the preceding paragraph, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their respective interests may appear.

Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Debt shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made on account of the principal or interest on this Note; and upon any such dissolution or winding-up or liquidation or reorganization any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holder of this Note would be entitled, except for the provisions of this Note, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the holder of this Note if received by it, directly to the holders of Senior Debt (pro rata to such holders on the basis of the respective amounts of Senior Debt held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Debt may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Debt in full, in money or money’s worth, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt, before any payment or distribution is made to the holder of this Note.

In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the holder of this Note before all Senior Debt is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Debt or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Debt may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Debt.

For purposes of this Note, the words, “cash, property or securities” shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated with respect to this Note to the payment of all Senior Debt which may at the time be outstanding; provided that (i) the Senior Debt is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of the Senior Debt are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in this Note shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes hereunder if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated hereunder.

Subject to the payment in full of all Senior Debt, the rights of the holder of this Note shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt; and, for the purposes of such subrogation, no payment or distributions to the holders of the Senior Debt of any cash, property or securities to which the holder of this Note would be entitled except for the provisions hereunder, and no payment over to or for the benefit of the holders of Senior Debt by the holder of this Note, shall, as between the Company, its creditors other than holders of Senior Debt, and the holder of this Note, be deemed to be a payment by the Company to or on account of the Senior Debt. It is understood that the subordination provisions of this Note are and are intended solely for the purposes of defining the relative rights of the holder of this Note, on the one hand, and the holders of the Senior Debt on the other hand.

Nothing contained in this Note is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Debt, and the holder of this Note, the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holder of this Note and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent the holder of this Note from exercising all remedies otherwise permitted by applicable law upon default hereunder, subject to the rights, if any, of the holders of Senior Debt in respect of cash, property or securities of the Company received upon the exercise of any such remedy.

Events of Default

“Event of Default,” wherever used herein with respect to this Note, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(1) default in the payment of any interest upon this Note when it becomes due and payable, and continuance of such default for a period of 30 days; or

(2) default in the payment of the principal of this Note at its maturity; or

(3) default in the performance, or breach, of any covenant or warranty of the Company in this Note (other than a covenant or warranty a default in whose performance or whose breach is elsewhere specifically dealt with) and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the holder of the Note a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(4) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or

(5) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by it to the filing of such petition or to the appointment of, or taking possession of the Company or of any substantial part of its property by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official or the making by the Company of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

If an Event of Default (other than an Event of Default specified in paragraphs (4) or (5) above) occurs and is continuing, then the holder of this Note may declare the principal amount to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal amount shall become immediately due and payable. If an Event of Default specified in paragraphs (4) or (5) above occurs, the principal amount of this Note shall automatically, and without any declaration or other action on the part of the holder, become immediately due and payable.

No delay or omission of the holder of this Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Note or by law to the holder may be exercised from time to time, and as often as may be deemed expedient, by the holders.

Consolidations and Mergers Permitted

Nothing contained in this Note shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company or its successor or successors) authorized to acquire and operate the same; provided, however, the Company hereby covenants and agrees that, upon any such consolidation, merger, sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of and interest on this Note in accordance with its terms, according to its tenor, and the due and punctual performance and observance of all the covenants and conditions of hereunder to be kept or performed by the Company, shall be expressly assumed, by written agreement satisfactory in form to the holder executed and delivered to the holder by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property.

In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor corporation of the due and punctual payment of the principal of and interest on this Note and the due and punctual performance of all of the covenants and conditions hereunder to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and thereupon the predecessor corporation shall be relieved of all obligations and covenants under this Note.

Nothing contained in this Note shall prevent the Company from merging into itself or acquiring by purchase or otherwise all or any part of the property of any other corporation (whether or not affiliated with the Company).

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated: February 5, 2003

	PSI ENERGY, INC.


	By:	/s/ WENDY L. AUMILLER
		Wendy L. Aumiller
		Treasurer

Exhibit 4-zzz

No. R-2003-2

$175,968,944.94

PSI ENERGY, INC.
6.403% Subordinated Note
Due 2004

PSI Energy, Inc. , a corporation duly organized and existing under the laws of the state of Indiana (herein called the “Company”), for value received, hereby promises to pay to CINERGY CORP., or registered assigns, the principal sum of One Hundred and Seventy Five Million Nine Hundred and Sixty Eight Thousand Nine Hundred and Forty Four and 94/100 Dollars ($175,968,944.94) on September 1, 2004, and to pay interest thereon from February 5, 2003 or from the most recent interest payment date to which interest has been paid or duly provided for, semiannually on March 1 and September 1 in each year, commencing March 1, 2003, at the rate of 6.403% per annum, until the principal hereof is paid or made available for payment.

Interest on this Note shall be computed on the basis of a 360-day year of twelve 30-day months.

Redemption

In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof.

Subordination

Events of Default

(1) default in the payment of any interest upon this Note when it becomes due and payable, and continuance of such default for a period of 30 days; or

(2) default in the payment of the principal of this Note at its maturity; or

Consolidations and Mergers Permitted

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated: February 5, 2003

	PSI ENERGY, INC.


	By:	/s/ WENDY L. AUMILLER
		Wendy L. Aumiller
		Treasurer

Exhibit 10-tt

ASSET PURCHASE AGREEMENT

BY AND AMONG

CINERGY CAPITAL & TRADING, INC.,

CINCAP MADISON, LLC

AND

PSI ENERGY, INC.

Dated as of February 5, 2003

ARTICLE I
DEFINITIONS

ARTICLE II
PURCHASE AND SALE

Section 2.01.	Transfer of Assets
Section 2.02.	Excluded Assets
Section 2.03.	Assumed Liabilities
Section 2.04.	Excluded Liabilities

ARTICLE III
PURCHASE PRICE; CLOSING

Section 3.01.	Purchase Price
Section 3.02.	Inventory
Section 3.03.	Proration
Section 3.04.	Closing
Section 3.05.	Closing Deliveries

ARTICLE IV
REPRESENTATIONS AND WARRANTIES

Section 4.01.	Representations and Warranties of Parent and Seller
Section 4.02.	Representations and Warranties of Buyer

ARTICLE V
COVENANTS

Section 5.01.	Books and Records
Section 5.02.	Finder’s Fees
Section 5.03.	Tax Matters
Section 5.04.	Further Assurances

ARTICLE VI
INDEMNIFICATION

Section 6.01.	Survival
Section 6.02.	Indemnification
Section 6.03.	Procedure for Indemnification

ARTICLE VII
MISCELLANEOUS PROVISIONS

Section 7.01	Notices

Section 7.02.	Waiver
Section 7.03.	Entire Agreement; Amendment etc.
Section 7.04.	Assignment
Section 7.05.	Severability
Section 7.06.	Bulk Sales Laws
Section 7.07.	Governing Law
Section 7.08.	Counterparts; Facsimile Execution
Section 7.09.	Schedules
Section 7.10	U.S. Dollars
Section 7.11.	Dispute Resolution
Section 7.12.	Ratemaking
Section 7.13.	State Review

SCHEDULES

Schedule I		Form of Deed
Schedule II		Form of Bill of Sale
Schedule III		Form of Assumption Agreement

DISCLOSURE SCHEDULES

Schedule 2.01(b)		Tangible Personal Property
Schedule 2.01(d)		Transferred Contracts
Schedule 2.01(e)		Transferred Permits
Schedule 4.01(c)(ii)		Seller’s Required Governmental and Third Party Consents
Schedule 4.01(g)(i)		Real Property
Schedule 4.01(k)		Environmental Permits
Schedule 4.01(m)		Seller Contracts
Schedule 4.01(o)		Permits
Schedule 4.02(c)(ii)		Buyer’s Required Governmental and Third Party Consents

ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of February 5, 2003, by and among Cinergy Capital & Trading, Inc., an Indiana corporation (“Parent”), CinCap Madison, LLC, a Delaware limited liability company and indirect wholly-owned subsidiary of Parent (“Seller”), and PSI Energy, Inc., an Indiana corporation (“Buyer” and, together with Parent and Seller, “Parties” and individually, a “Party”).

W I T N E S S E T H

WHEREAS, Seller owns the Madison Generating Station (“Madison Station”), a simple cycle, natural gas-fired electric generating station located in Madison Township, Butler County, Ohio, comprised of eight GE Model 7EA combustion turbines with an aggregate summer rated capacity of approximately 576 megawatts, together with certain other assets, properties, facilities and rights associated therewith or ancillary thereto; and

WHEREAS, Buyer desires to purchase and assume from Seller, and Seller desires to sell and assign to Buyer, the Purchased Assets (as hereinafter defined) and certain associated liabilities, upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the mutual covenants, agreements, representations and warranties hereinafter set forth, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Definitions . (a) As used in this Agreement, the following terms have the following meanings::

“ Affiliate ” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“ Ancillary Agreements ” means the Assumption Agreement, the Bill of Sale and the Deed.

“ Assumption Agreement ” means the form of Assumption Agreement of Buyer in favor of Seller attached hereto as Schedule III.

“ Assumed Liabilities ” has the meaning set forth in Section 2.03.

“ Bill of Sale ” means the form of Bill of Sale from Seller to Buyer attached hereto as Schedule II.

“ Buyer ” has the meaning set in the first paragraph of this Agreement.

“ Buyer Indemnitee ” has the meaning set forth in Section 6.02.

“ Buyer’s Required Consents ” means Buyer’s Required Governmental Consents and Buyer’s Required Third-Party Consents.

“ Buyer’s Required Governmental Consents ” means the consents, approvals, filings and/or notices of, with, from or to Governmental Authorities listed in Section I of Schedule 4.02(c)(ii).

“ Buyer’s Required Third-Party Consents ” means the consents, approvals, filings and/or notices of, with, from or to Third Parties (other than Governmental Authorities) listed in Section II of Schedule 4.02(c)(ii).

“ Carrying Costs ” means an amount in dollars equal to the financing costs associated with Madison Station incurred from the earlier of (1) the date of the Indiana Utility Regulatory Commission Order in Cause No. 42145 granting Buyer a certificate of public convenience and necessity to purchase the Madison Station, or (2) December 1, 2002, to and including the Closing Date, to be calculated at Buyer’s weighted cost of capital using the return on equity from Buyer’s last retail base rate case (11% ROE).

“ CERCLA ” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time.

“ Closing ” has the meaning set forth in Section 3.04.

“ Closing Date ” has the meaning set forth in Section 3.04.

“ Closing Inventory ” means an amount in dollars equal to all Inventories on the Closing Date.

“ Deed ” means the form of Warranty Deed and Assignment of Adjoining Easement and License Interests from Seller to Buyer attached hereto as Schedule I.

“ Direct Claim ” has the meaning set forth in Section 6.03(c).

“ Encumbrance ” means any security interest, pledge, mortgage, lien, charge, option to purchase, lease, claim, restriction, covenant, title defect, hypothecation, assignment, deposit arrangement or other encumbrance of any kind or any preference,

priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or title retention agreement).

“ Environmental Condition ” means the presence or Release to the environment, whether at the Real Property or otherwise, of Hazardous Substances, including any migration of Hazardous Substances through air, soil or groundwater at, to or from the Real Property or at, to or from any Off-Site Location, regardless of when such presence or Release occurred or is discovered.

“ Environmental Laws ” means all (a) Laws relating to pollution or protection of the environment, natural resources or human health and safety, including Laws relating to Releases or threatened Releases of Hazardous Substances or otherwise relating to the manufacture, formulation, generation, processing, distribution, use, treatment, storage, Release, transport, Remediation, abatement, cleanup or handling of Hazardous Substances, (b) Laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Substances and (c) Laws relating to the management or use of natural resources.

“ Environmental Liabilities ” has the meaning set forth in Section 2.03.

“ Environmental Permit ” has the meaning set forth in Section 4.01(k).

“ Excluded Assets ” has the meaning set forth in Section 2.02.

“ Excluded Liabilities ” has the meaning set forth in Section 2.04.

“ GAAP ” means United States generally accepted accounting principles as in effect from time to time, applied on a consistent basis.

“ Good Utility Practice ” means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods or acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition.

“ Governmental Authority ” means any: (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.

“ Hazardous Substances ” means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become

friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain levels of polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “hazardous constituents,” “restricted hazardous materials,” “extremely hazardous substances,” “toxic substances,” “contaminants,” “pollutants,” “toxic pollutants,” or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law.

“ Improvements ” means all buildings, structures, machinery and equipment, fixtures, construction in progress, and other improvements, including all piping, cables and similar equipment forming part of the mechanical, electrical, plumbing or HVAC infrastructure of any building, structure or equipment, located on and affixed to the Real Property.

“ Indemnifiable Loss ” has the meaning set forth in Section 6.02(a).

“ Indemnifying Party ” has the meaning set forth in Section 6.02(d).

“ Indemnitee ” has the meaning set forth in Section 6.02(c).

“ Inventories ” means all inventories of fuels, supplies, materials and spare parts of Seller located on or in transit to the Real Property.

“ Knowledge ” means the actual knowledge of the corporate officer or officers of the specified Person charged with responsibility for the particular function as of the date of this Agreement, or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of the certificate, after reasonable inquiry by each such officer of selected employees of the specified Person whom such officer believes, in good faith, to be the persons generally responsible for the subject matters to which the knowledge is pertinent.

“ Laws ” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country and any domestic or foreign state, county, city or other political subdivision or of any Governmental Authority.

“ Liability ” means any liability or obligation, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether incurred or consequential, and whether due or to become due.

“ Madison Station ” has the meaning given in the recitals to this Agreement.

“ Material Adverse Effect ” means (i) any event, circumstance or condition materially impairing the ability of Seller or Parent to perform its obligations under this Agreement or any Ancillary Agreement, or (ii) any change in or effect on Seller or the Purchased Assets that is materially adverse to the Purchased Assets, other than (a) any change resulting from changes in the international, national, regional or local wholesale or retail markets for electricity, (b) any change resulting from changes in the international, national, regional or local markets for fuel used at Madison Station, (c) any change resulting from changes in the North American, national, regional or local electric transmission system, and (d) any change in Law generally applicable to similarly situated Persons.

“ Net Book Value ” means an amount in dollars, as set forth in the balance sheet of Seller as of the applicable date, equal to total fixed assets net of accrued depreciation.

“ Off-Site Location ” means any real property other than the Real Property.

“ Organizational Documents ” means (a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the limited liability company or operating agreement and certificate of formation of a limited liability company; (c) the partnership agreement and any statement of partnership of a general partnership; (d) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (e) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (f) any amendment to any of the foregoing.

“ Parent ” has the meaning set forth in the first paragraph of this Agreement.

“ Party ” has the meaning set forth in the first paragraph of this Agreement.

“ Permits ” has the meaning set forth in Section 4.01(o).

“ Permitted Encumbrances ” means (i) the respective rights and obligations of the Parties under this Agreement and the Ancillary Agreements; (ii) all matters that would be disclosed in a current title commitment or title policy or survey for the Real Property; (iii) Encumbrances for Taxes not yet due or which are being contested in good faith by appropriate proceedings and that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (iv) carriers’, warehousemen’s, materialmen’s, mechanics’, repairman’s or other like Encumbrances arising in the ordinary course of business that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (v) zoning, planning, conservation restriction and other land use and environmental regulations by Governmental Authorities; (vi) Encumbrances resulting from legal proceedings being contested in good faith by appropriate proceedings that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (vii) other Encumbrances that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

“ Person ” means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Authority.

“ Prime Rate ” means as of any date, the prime rate as published in The Wall Street Journal on such date or, if not published on such date, on the most recent date of publication.

“ Purchase Price ” has the meaning set forth in Section 3.01.

“ Purchased Assets ” has the meaning set forth in Section 2.01.

“ Real Property ” has the meaning set forth in Section 4.01(g)(i).

“ Real Property Lease ” has the meaning set forth in Section 4.01(g)(ii).

“ Release ” means any release, spill, leak, discharge, disposal of, pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing to escape into or through the environment.

“ Remediation ” means an action of any kind to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Real Property or an Off-Site Location, including the following activities to the extent they relate to, result from or arise out of the presence of a Hazardous Substance at the Real Property or an Off-Site Location: (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Real Property or an Off-Site Location under Environmental Laws that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of removal actions on the Real Property or an Off-Site Location, remedial technologies applied to the surface or subsurface soils, excavation and treatment or disposal of soils at an Off-Site Location, systems for long-term treatment of surface water or groundwater, engineering controls or institutional controls; and (f) any other activities reasonably determined by a Party to be necessary or appropriate or required under Environmental Laws to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Real Property or an Off-Site Location.

“ Representatives ” means, with respect to a Party, such respective directors (or parties performing similar functions), officers, employees, representatives, agents and advisors (including accountants, legal counsel, environmental consultants and financial advisors).

“ Seller ” has the meaning set forth in the first paragraph of this Agreement.

“ Seller Indemnitee ” has the meaning set forth in Section 6.02(a).

“ Seller’s Required Consents ” means Seller’s Required Governmental Consents and Seller’s Required Third-Party Consents.

“ Seller’s Required Governmental Consents ” means the consents, approvals, filings and/or notices of, with, from or to Governmental Authorities listed in Section I of Schedule 4.01(c)(ii).

“ Seller’s Required Third-Party Consents ” means the consents, approvals, filings and/or notices of, with, from or to Third Parties (other than Governmental Authorities) listed in Section II of Schedule 4.01(c)(ii).

“ Tax ” means any tax, charge, fee, levy, penalty or other assessment imposed by any federal, state, local or foreign taxing authority, including, but not limited to, any income, gross receipts, excise, property, sales, transfer, use, franchise, payroll, withholding, social security or other tax, including any interest, penalty or addition attributable thereto.

“ Third Party Claim ” has the meaning set forth in Section 6.03(a).

“ Transferred Contracts ” has the meaning set forth in Section 2.01(d).

“ Transferred Intellectual Property ” has the meaning set forth in Section 2.01(h).

“ Transferred Permits ” has the meaning set forth in Section 2.01(e).

(b) Interpretation . In this Agreement, unless otherwise specified or where the context otherwise requires:

(i) a reference, without more, to a recital is to the relevant recital to this Agreement, to an Article or Section is to the relevant Article or Section of this Agreement, and to a Schedule is to the relevant Schedule to this Agreement;

(ii) words importing any gender shall include other genders;

(iii) words importing the singular only shall include the plural and vice versa;

(iv) the words “include,” “includes” or “including” shall be deemed to be followed by the words “without limitation;”

(v) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof;

(vi) reference to any applicable Law means, if applicable, such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder,

(vii) “or” is used in the inclusive sense of “and/or”;

(viii) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto;

(ix) the words “hereof,” “herein” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement; and

(x) references to any party hereto or any other agreement or document shall include such party’s successors and permitted assigns, but, if applicable, only if such successors and assigns are not prohibited by this Agreement.

ARTICLE II

PURCHASE AND SALE

Section 2.01. Transfer of Assets . Upon the terms and conditions set forth in this Agreement, at the Closing, Seller shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and acquire from Seller, free and clear of all Encumbrances other than Permitted Encumbrances, all of Seller’s right, title and interest in, to and under the real and personal property, tangible and intangible, constituting, or used in connection with the operation of, Madison Station, except as otherwise provided in Section 2.02, each as of the Closing Date, including all of Seller’s right, title and interest in, to and under the following assets (collectively, the “Purchased Assets”):

(a) the Real Property;

(b) the machinery, fixtures, equipment (including communications equipment), vehicles, furniture and other personal property located on the Real Property, including the items of tangible personal property listed on Schedule 2.01(b);

(d) subject to the receipt of any necessary consents and approvals, the contracts or agreements (including any licenses or real or personal property leases, other

than any thereof constituting Transferred Permits or Transferred Intellectual Property) listed on Schedule 2.01(d) (the “Transferred Contracts”);

(e) subject to the receipt of any necessary consents and approvals, the permits, licenses, certificates, certifications, orders and other governmental authorizations listed on Schedule 2.01(e) (the “Transferred Permits”);

(f) all unexpired, transferable warranties and guarantees from manufacturers, vendors and other third parties with respect to any item of real or tangible personal property referred to in clauses (a), (b) and (c) of this Section 2.01;

(g) all books, expired purchase orders, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures, studies, reports, equipment repair, safety, maintenance or service records, and similar items (subject to the right of Seller to retain copies of same for its use), other than such items that are proprietary to third parties and accounting records (to the extent that any of the foregoing is contained in an electronic format, Seller shall cooperate with Buyer to transfer such items to Buyer in a format that is reasonably acceptable to Buyer); and

(h) subject to the receipt of any necessary consents and approvals, any Intellectual Property (the “Transferred Intellectual Property”).

Notwithstanding the foregoing, the transfer of the Purchased Assets pursuant to this Agreement shall not include the assumption of any Liability related to the Purchased Assets unless Buyer expressly assumes that Liability pursuant to Section 2.03.

Section 2.02. Excluded Assets . Notwithstanding anything to the contrary contained in Section 2.01 or elsewhere in this Agreement, the following assets of Seller (collectively, the “Excluded Assets”) are not part of the sale and purchase contemplated hereunder, are excluded from the Purchased Assets and shall remain the property of Seller after the Closing:

(a) all cash, cash equivalents, bank deposits, accounts and notes receivables (trade or otherwise), prepaid expenses and any income, sales, payroll or other Tax receivables;

(b) all minute books, limited liability company interest transfer books, corporate seals and other corporate records;

(c) any refund, credit penalty payment, adjustment or reconciliation (i) related to Taxes paid prior to the Closing Date in respect of the Purchased Assets, whether such refund, adjustment or reconciliation is received as a payment or, subject to Section 3.03, as a credit against future Taxes payable, or (ii) arising under Assigned Contract and relating to a period before the Closing Date;

(d) the rights of Seller in, to and under all contracts, agreements, arrangements, permits or licenses of any nature, of which the obligations of Seller thereunder are not expressly assumed by Buyer pursuant to Section 2.03;

(e) any insurance policies; and

(f) the rights of Seller under this Agreement and the Ancillary Agreements.

Section 2.03 . Assumed Liabilities . On the Closing Date, Buyer shall execute and deliver in favor of Seller the Assumption Agreement, pursuant to which Buyer shall assume and agree to pay, perform and discharge, without recourse to Seller or Parent, the following Liabilities of Seller, solely to the extent such Liabilities accrue or arise from and after the Closing, other than Excluded Liabilities (as defined below), in accordance with the respective terms and subject to the respective conditions thereof (collectively, the “Assumed Liabilities”):

(a) All Liabilities of Seller under the Transferred Contracts, Transferred Permits and Transferred Intellectual Property, in each case in accordance with the terms thereof, except to the extent that such Liabilities, but for a breach or default by Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice would constitute a default by Seller;

Purchased Assets; (iv) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; (v) any Remediation of any Environmental Condition or Release of Hazardous Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; and (vi) any obligation to repower, replace, decommission, deactivate, dismantle, demolish or close the Purchased Assets or any portion thereof, or any surface impoundments or other waste or effluent handling or storage units on owned or leased adjacent properties used in connection with the operation of the Purchased Assets;

(c) all liabilities or obligations to third parties for personal injury or tort, or similar causes of action arising solely out of the ownership, lease, maintenance or operation of the Purchased Assets, (collectively, “Tort Liabilities”), but in each case solely to the extent accruing or arising from and after the Closing Date; and

(d) any Tax that may be imposed by any federal, state or local government on the ownership, sale, operation or use of the Purchased Assets on or after the Closing Date, except for any income Taxes attributable to income received by Seller.

Section 2.04. Excluded Liabilities . Except for the Assumed Liabilities, Buyer shall not assume by virtue of this Agreement, the Assumption Agreement or any other Ancillary Agreement, or the transactions contemplated hereby or thereby, or otherwise, and shall have no liability for, any Liabilities of Seller (the “Excluded Liabilities”), including any of the following Liabilities:

(a) any Liabilities of Seller in respect of any Excluded Assets or other assets of Seller that are not Purchased Assets, except to the extent caused by the acts or omissions of Buyer or its Representatives or Buyer’s ownership, lease, maintenance or operation of the Purchased Assets;

(b) any Liabilities in respect of Taxes attributable to the Purchased Assets for taxable periods ending before the Closing Date;

(c) any Liabilities of Seller (i) arising from the breach or default by Seller, prior to the Closing Date, of any Transferred Contract, Transferred Permit or Transferred Intellectual Property or (ii) in respect of any other contract, agreement, personal property lease, permit, license or other arrangement or instrument entered into by Seller;

(d) subject to Section 3.03, any payment obligations of Seller, including accounts or notes payable, arising prior to the Closing Date;

(e) any fines and penalties imposed by any Governmental Authority resulting from any act or omission by Seller that occurred prior to the Closing Date;

(f) any income Taxes attributable to income received by Seller;

(g) any Liability of Seller arising as a result of its execution and delivery of this Agreement or any Ancillary Agreement, the performance of its obligations hereunder or thereunder, or the consummation by Seller of the transactions contemplated hereby or thereby; and

(h) any Liability of Seller based on Seller’s acts or omissions after the Closing; and

(i) any and all Environmental Liabilities and Tort Liabilities accruing, arising, existing or occurring prior to the Closing Date.

ARTICLE III

PURCHASE PRICE; CLOSING

Section 3.01. Purchase Price . The purchase price payable by Buyer to Seller for the Purchased Assets is $306,366,920.30, such amount being equal to (a) the Net Book Value at the earlier of (1) the date of the Indiana Utility Regulatory Commission Order in Cause No. 42145 granting Buyer a certificate of public convenience and necessity to purchase the Madison Station, or (2) December 1, 2002, plus (b) the Carrying Costs (collectively, the “Purchase Price”).

Section 3.02. Inventory . At Closing, in addition to payment of the Purchase Price, Buyer shall also compensate Seller for the Closing Inventory, at cost.

Section 3.03. Proration . (a) Buyer and Seller agree that all of the items normally prorated, including those listed below, relating to the business and operation of the Purchased Assets shall be prorated as of the Closing Date, with Seller liable to the extent such items relate to any time period through the Closing Date, and Buyer liable to the extent such items relate to periods subsequent to the Closing Date:

(i) personal property, real estate, occupancy and any other Taxes, assessments and other charges, if any, on or with respect to the business and operation of the Purchased Assets;

(ii) rent, Taxes and other items payable by or to Seller under any of the Seller Agreements to be assigned to and assumed by the Buyer hereunder;

(iii) any permit, license or registration fees with respect to any Environmental Permit or other Permit; and

(iv) sewer rents and charges for water, telephone, electricity and other utilities.

(b) In connection with such proration, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual amount of such Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be reprorated upon request of either the Seller or the Buyer made within 60 days of the date that the actual amounts become available. Seller and Buyer agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.03.

Section 3.04. Closing . The sale, assignment, conveyance, transfer and delivery of the Purchased Assets, the payment of the Purchase Price, and the consummation of the other transactions contemplated by this Agreement shall take place at a closing (the “Closing”), to be held at the offices of Cinergy Corp., 139 East Fourth Street, Cincinnati Ohio 45201 at 10:00 a.m. eastern standard time (or another mutually acceptable time and location), on the date of execution and delivery of this Agreement by each of the Parties (or on such other date as may be mutually agreed upon by the Parties) (the “Closing Date”) The Closing shall be effective for all purposes as of the close of business on the Closing Date.

Section 3.05. Closing Deliveries . (a) At the Closing, Parent will deliver, or cause to be delivered, to Buyer:

(i) the Deed, duly executed and acknowledged by Seller and in recordable form;

(ii) the Bill of Sale, duly executed by Seller;

(iii) copies of all Seller’s Required Consents obtained by Parent or Seller ;

(iv) the certificate of incorporation, certificate of formation or similar formation document of each of Parent and Seller, certified as of a date not earlier than 15 days prior to the Closing Date, by the office of the Secretary of State of such entity’s organization;

(v) a certificate of good standing with respect to (A) Seller , dated as of a date not earlier than 20 days prior to the Closing Date, from the office of the Secretary of State of such entity’s organization and from the office of Secretary of State of each state in which Seller is qualified or licensed to do business as a foreign limited liability company, and (B) Parent, dated as of a date not earlier than 20 days prior to the Closing Date, from the office of the Secretary of State of such entity’s organization;

(vi) copies, certified on the Closing Date by the Secretary or Assistant Secretary of each of Parent and Seller of corporate or limited liability company resolutions, as applicable, authorizing the execution and delivery of this Agreement and each Ancillary Agreement to which Parent or Seller is a party, and the consummation of the transactions contemplated hereby and thereby;

(vii) a certificate dated the Closing Date of the Secretary or Assistant Secretary of each of Parent and Seller identifying the name and title and bearing the signatures of the respective officers thereof authorized to execute and deliver this Agreement and each Ancillary Agreement to which Parent or Seller is a party;

(viii) a complete copy of the Organizational Documents as in effect on the Closing Date of each of Parent and Seller, certified by the Secretary or Assistant Secretary of each of Parent and Seller; and

(ix) such other documents as Buyer may reasonably request to carry out the purposes of this Agreement.

(b) At the Closing, Buyer will issue to Cinergy Corp. in full satisfaction of the Purchase Price one or more promissory notes, each in substantially the form attached as Exhibit A to the Buyer’s Petition filed with the Indiana Utility Regulatory Commission in Cause No. 42311 on October 18, 2002. In addition, Buyer will deliver, or cause to be delivered, to Seller:

(i) the Assumption Agreement, duly executed by Buyer;

(ii) copies of all Buyer’s Required Consents obtained by Buyer;

(iii) the certificate of incorporation, certificate of formation or similar formation document of Buyer , certified as of a date not earlier than 20 days prior to the Closing Date, by the office of the Secretary of State of such entity’s organization;

(iv) copies, certified on the Closing Date by the Secretary or Assistant Secretary of Buyer, of corporate resolutions authorizing the execution and delivery of this Agreement and each Ancillary Agreement to which Buyer is a party, and the consummation of the transactions contemplated hereby and thereby;

(v) a certificate dated the Closing Date of the Secretary or Assistant Secretary of Buyer identifying the name and title and bearing the signatures of the

officers thereof authorized to execute and deliver this Agreement and each Ancillary Agreement to which Buyer is a party;

(vi) a complete copy of the Organizational Documents as in effect on the Closing Date of Buyer, certified by the Secretary or Assistant Secretary of Buyer; and

(vii) such other documents as Seller or Parent may reasonably request to carry out the purposes of this Agreement.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

Section 4.01. Representations and Warranties of Parent and Seller . Parent and Seller jointly and severally represent and warrant to Buyer as follows:

(a) Organization and Good Standing; Qualification . Parent is a corporation duly formed, validly existing and in good standing under the laws of the State of Indiana. Seller is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware. Seller has all requisite power and authority to own, lease or operate the Purchased Assets and to carry on its business as it is now being conducted. Parent has all requisite power and authority to own the outstanding limited liability company interests of Seller and to carry on its business with respect to Seller as it is now being conducted. Seller does not own, directly or indirectly, any capital stock or other equity securities of, or have any other direct or indirect equity or other ownership interest in, any other corporation, limited liability company, partnership, entity or business. Seller is duly qualified or licensed to do business as a foreign limited liability company and is in good standing as a foreign limited liability company in each jurisdiction in which the character or location of the properties owned or used by it or the nature of the business conducted by it makes such qualification or license necessary, except for jurisdictions in which the failure to be so qualified, licensed or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(b) Authority and Enforceability . Each of Parent and Seller has full corporate or limited liability company (as applicable) power and authority to execute and deliver, and carry out its obligations under, this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Parent and Seller of this Agreement and each Ancillary Agreement to which it is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate or limited liability company (as applicable) action on the part of Parent and Seller . Assuming the due authorization, execution and delivery of this Agreement and each Ancillary Agreement to which it is a party by Buyer, and

subject to the receipt of Seller’s Required Consents, each of this Agreement and each such Ancillary Agreement constitutes a legal, valid and binding obligation of Parent and/or Seller, as the case may be, enforceable against Parent and/or Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other similar laws affecting the rights and remedies of creditors generally and by general principles of equity.

(c) No Violation; Consents and Approvals . (i) Subject to obtaining Seller’s Required Consents, neither the execution, delivery and performance by Parent and Seller of this Agreement and each Ancillary Agreement to which Parent or Seller is a party, nor the consummation by Parent and Seller of the transactions contemplated hereby and thereby, will (A) conflict with or result in any breach of any provision of the Organizational Documents of Parent or Seller; (B) result in a default (or give rise to any right of termination, cancellation or acceleration), or require a consent, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Parent or Seller is a party or by which it or any of the Purchased Assets may be bound, except for any such defaults or consents (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; or (C) constitute a violation of any law, regulation, order, judgment or decree applicable to Parent or Seller, except for any such violations as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(ii) Except as set forth in Section I of Schedule 4.01(c)(ii) (listing each of Seller’s Required Governmental Consents) or Section II thereof (listing each of Seller’s Required Third-Party Consents), no consent or approval of, filing with, or notice to, any Governmental Authority or other Person is necessary for the execution, delivery and performance of this Agreement by Parent or Seller or of any Ancillary Agreement to which Parent or Seller is a party, or the consummation by Parent or Seller of the transactions contemplated hereby and thereby, other than such consents, approvals, filings or notices which, if not obtained or made, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(d) Ownership . Parent owns beneficially and of record all the outstanding limited liability company interests of CinCap VIII, LLC, a Delaware limited liability company (“CinCap VIII”), free and clear of all Encumbrances. CinCap VIII owns beneficially and of record all the outstanding limited liability company interests of Seller, free and clear of all Encumbrances .

(e) Financial Statements; No Material Adverse Effect; No Undisclosed Liabilities . (i) Seller has delivered to Buyer a balance sheet of Seller as at December 31, 2001, and the related statement of income for the fiscal year then ended, including the notes thereto. Such financial statements fairly present the financial condition and the results of operations of Seller as of the date and for the period referred to in such financial statements, all in accordance with GAAP.

(ii) Since December 31, 2001, there has not been any Material Adverse Effect and, to the Knowledge of Parent and Seller, no event has occurred or circumstance exists that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

(iii) Seller has no liabilities or obligations of any nature except for (A) liabilities or obligations reflected in the financial statements referred to in paragraph (i) of this Section 4.01(e), including the notes thereto; (B) liabilities or obligations incurred in the ordinary course of business, whether before or after the respective dates of the financial statements referred to in paragraph (i) of this Section 4.01(e); and (C) liabilities or obligations which in the aggregate are not material to the Purchased Assets.

(f) Insurance . All material policies of fire, liability, workers’ compensation and other forms of insurance owned or held by, or on behalf of, Parent or Seller and insuring the Purchased Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and workers’ compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation.

(g) Real Property . (i) Schedule 4.01(g)(i) sets forth all real property owned, used or occupied by Seller (the “Real Property”), including a description of all land, and all encumbrances, easements or rights of way of record (or, if not of record, of which Seller or Parent has Knowledge) granted on or appurtenant to or otherwise affecting such Real Property, and all plants, buildings, structures or other Improvements located thereon. To the Knowledge of Parent and Seller, encumbrances, easements or rights of way which are not of record, if any, would not have a Material Adverse Effect. There are now in full force and effect duly issued certificates of occupancy permitting the Real Property and Improvements located thereon to be legally used and occupied as the same are now constituted. To the Knowledge of Parent and Seller, no fact or condition exists which would prohibit or adversely affect the ordinary rights of access to and from the Real Property from and to the existing highways and roads and there is no pending or, to the Knowledge of Parent or Seller, threatened restriction or denial, governmental or otherwise, upon such ingress and egress. To the Knowledge of Parent and Seller, there is not (i) any claim of adverse possession or prescriptive rights involving any of the Real Property, (ii) any structure located on any Real Property which encroaches on or over the boundaries of neighboring or adjacent properties or (iii) any structure of any other party which encroaches on or over the boundaries of any such Real Property. To the Knowledge of Parent and Seller, no public improvements have been commenced and none are planned which in either case may result in special assessments or otherwise would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(ii) There are no material Real Property leases (the “Real Property Leases”) relating to the Purchased Assets under which the Seller is a lessee, lessor or under which Seller has any interest.

(h) Conveyance of Real Property . No state, municipal, or other governmental approval regarding the division, platting, or mapping of real estate is required as a prerequisite to the conveyance by Seller to Buyer (or as a prerequisite to the recording of any conveyance document) of any Real Property pursuant to the terms hereof.

(i) Improvements . Neither Seller nor any Affiliate thereof has received any written notices from any Governmental Authority stating or alleging that any Improvements have not been constructed in compliance with applicable Laws. No written notice has been received by the Seller or any Affiliate thereof from any Governmental Authority requiring or advising as to the need for any repair, alteration, restoration or improvement in connection with the Purchased Assets.

(j) Title; Condition and Sufficiency of Assets . (i) Subject to Permitted Encumbrances, Seller is the holder of record title to the Real Property and has good and valid title to the other Purchased Assets which it purports to own, free and clear of all Encumbrances.

(ii) The tangible assets (real and personal) at, related to, or used in connection with Madison Station, taken as a whole, (A) are in good operating and usable condition and repair, free from any defects (except for ordinary wear and tear, in light of their respective ages and historical usages, and except for such defects as do not materially interfere with the use thereof in the conduct of the normal operation and maintenance of the Purchased Assets taken as a whole) and (B) have been maintained consistent with Good Utility Practice.

(iii) Except for immaterial omissions, the Purchased Assets (A) constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate Seller’s business in the manner presently operated by Seller and (B) include all of the operating assets of Seller.

(k) Environmental Matters . (i) Seller or its Affiliate, Cinergy Power Generation Services, LLC, adel1 limited liability company (“GGPS”) holds, and is in compliance with, all permits, certificates, certifications, licenses and other authorizations issued by Governmental Authorities under Environmental Laws (collectively, “Environmental Permits”) that are required for Seller to conduct the business and operations of the Purchased Assets, and Seller is otherwise in compliance with all applicable Environmental Laws with respect to the business and operations of the Purchased Assets, except for any such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;

(ii) neither Seller nor Parent has received any written request for information, or been notified of any violation, or that it is a potentially responsible party, under CERCLA or any other Environmental Law for contamination or air emissions at Madison Station or the Real Property, except for any such requests or notices that would result in liabilities under such laws as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and there are no claims, actions, proceedings or investigations pending or, to the Knowledge of Seller or Parent, threatened against Seller before any Governmental Authority or body acting in an adjudicative capacity relating in any way to any Environmental Laws or against Seller or Parent concerning contamination or air emissions at Madison Station or the Real Property; and

(iii) there are no outstanding judgments, decrees or judicial orders relating to the Purchased Assets regarding compliance with any Environmental Law or to the investigation or cleanup of Hazardous Substances under any Environmental Law relating to the Purchase Assets, except for such outstanding judgments, decrees or judicial orders as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(iv) Section I of Schedule 4.01(k) lists all Environmental Permits.

The representations and warranties made in this Section 4.01(k) are the exclusive representations and warranties of Parent and Seller relating to environmental matters.

(l) Condemnation . There are no pending or, to the Knowledge of Parent or Seller, threatened proceedings or governmental actions to condemn or take by power of eminent domain all or any part of the Purchased Assets.

(m) Contracts and Leases . (i) Schedule 4.01(m) lists all written contracts, agreements, licenses (other than Environmental Permits, Permits or Intellectual Property) or personal property leases that are material to the business or operations of the Purchased Assets, other than any such agreements, licenses, or personal property leases that are expected to expire or terminate on or prior to the Closing Date.

(ii) Except as disclosed in Schedule 4.01(m), each Transferred Contract (A) constitutes a legal, valid and binding obligation of Seller and, to Parent’s and Seller’s Knowledge, constitutes a valid and binding obligation of the other parties thereto, (B) is in full force and effect and Seller has not delivered or received any written notice of termination thereunder, and (C) may be transferred to Buyer pursuant to this Agreement without the consent of the other parties thereto and will continue in full force and effect thereafter, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder.

(iii) Except as set forth in Schedule 4.01(m), there is not under any Transferred Contract any default or event which, with notice or lapse of time or both, (A) would constitute a default by Seller or, to Parent’s or Seller’s Knowledge, any other party

thereto, (B) would constitute a default by Seller or, to Parent’s or Seller’s Knowledge, any other party thereto which would give rise to an automatic termination, or the right of discretionary termination, thereof, or (C) would cause the acceleration of any of Seller’s obligations thereunder or result in the creation of any Encumbrance (other than any Permitted Encumbrance) on any of the Purchased Assets. There are no claims, actions, proceedings or investigations pending or, to the Knowledge of Seller or Parent, threatened against Seller or any other party to any Transferred Contract before any Governmental Authority or body acting in an adjudicative capacity relating in any way to any Transferred Contract or the subject matter thereof. Seller and Parent have no Knowledge of any defense, offset or counterclaim arising under any Transferred Contract.

(n) Legal Proceedings . There are no actions or proceedings pending or, to the Knowledge of Seller or Parent, threatened against Seller before any court, arbitrator or Governmental Authority, which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. Seller is not subject to any outstanding judgments, rules, orders, writs, injunctions or decrees of any court, arbitrator or Governmental Authority which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

(o) Permits . (i) Seller has all permits, licenses, franchises-and other governmental authorizations, consents and approvals (other than Environmental Permits, which are addressed in Section 4.01(k)) (collectively, “Permits”) necessary to own and operate the Purchased Assets, except where any failures to have such Permits would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Neither Seller nor Parent has received any written notification that Seller is in violation, nor does Parent or Seller have Knowledge of any violations, of any such Permits, or any Law or judgment of any Government Authority applicable to Seller with respect to the Purchased Assets, except for violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(ii) Schedule 4.01(o) lists all material Permits.

(p) Taxes . Seller has-filed all Tax Returns that are required to be filed by it with respect to any Tax, and Seller has paid all Taxes that have become due as indicated thereon, except where such Tax is being contested in good faith by appropriate proceedings, or where any failures to so file or pay would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There are no Encumbrances for Taxes on the Purchased Assets that are not Permitted Encumbrances.

(q) Intellectual Property . Seller has such ownership of or such rights by license or other agreement to use all Intellectual Property necessary to permit Seller to conduct its business as currently conducted, except where any failures to have such ownership, license or right to use would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Seller is not, nor has Parent or Seller received any notice that Seller is, in default (or with the giving of notice or lapse of time

or both, would be in default) under any contract to use such Intellectual Property, and there are no material restrictions on the transfer of any material contract, or any interest therein, held by Seller in respect of such Intellectual Property. Neither Parent nor Seller has received notice that Seller is infringing any Intellectual Property of any other Person in connection with the operation or business of the Purchased Assets.

(r) Compliance with Laws . Seller is in compliance with all applicable Laws with respect to the ownership or operation of the Purchased Assets, except where any such failures to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(s) EWG Status . Seller is an “exempt wholesale generator” and Madison Station is an “eligible facility,” each within the meaning of Section 32(a) of the Public Utility Holding Company Act of 1935.

(t) Employees. Seller has no employees or employee benefit plans nor has had any employees or employee benefit plans since the date of its formation. Seller has not assumed (voluntarily or by operation of Law or order) or incurred any liabilities associated with employees or employee benefit plans, including without limitation under or pursuant to the Employee Retirement Income Security Act of 1974, as amended.

(u) Limitation of Representations and Warranties . EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT AND IN ANY ANCILLARY AGREEMENT, PARENT AND SELLER ARE NOT MAKING, AND HEREBY DISCLAIM, ANY OTHER REPRESENTATIONS AND WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING SELLER, PARENT, MADISON STATION OR THE PURCHASED ASSETS OR ANY PART THEREOF.

Section 4.02. Representations and Warranties of Buyer . Buyer represents and warrants to Seller and Parent as follows:

(a) Organization and Good Standing . Buyer is a corporation duly formed, validly existing and in good standing under the laws of the State of Indiana and has all requisite power and authority to own, lease or operate its properties and to carry on its business as it is now being conducted.

(b) Authority and Enforceability . Buyer has full corporate power and authority to execute and deliver and carry out its obligations under this Agreement and each Ancillary Agreement to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Buyer of this Agreement and each such Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action by Buyer. Assuming the due authorization, execution and delivery of this Agreement and each such Ancillary Agreement by the other party or

parties thereto, and subject to the receipt of Buyer’s Required Consents, each of this Agreement and each such Ancillary Agreement constitutes a legal, valid and binding obligation of Buyer , enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other similar laws affecting the rights and remedies of creditors generally and by general principles of equity.

(c) No Violation; Consents and Approvals . (i) Subject to obtaining Buyer’s Required Consents, neither the execution, delivery and performance by Buyer of this Agreement and each Ancillary Agreement to which Buyer is a party, nor the consummation by Buyer of the transactions contemplated hereby and thereby, will (A) conflict with or result in any breach of any provision of the Organizational Documents of Buyer; (B) result in a default (or give rise to any right of termination, cancellation or acceleration), or require a consent, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer is a party or by which any of their respective material properties or assets may be bound, except for any such defaults or consents (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Buyer to perform its obligations under this Agreement and the Ancillary Agreements; or (iii) constitute a violation of any law, regulation, order, judgment or decree applicable to Buyer, except for any such violations as would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Buyer to perform its obligations under this Agreement and the Ancillary Agreements.

(ii) Except as set forth in Section I of Schedule 4.02(c)(ii) (listing each of Buyer’s Required Governmental Consents) or Section II thereof (listing each of Buyer’s Required Third-Party Consents), no consent or approval of, filing with, or notice to, any Governmental Authority or other Person is necessary for the execution and delivery of this Agreement or any Ancillary Agreement by Buyer, or the consummation by Buyer or Company of the transactions contemplated hereby and thereby, except for any such consents, approvals, filings or notices which, if not obtained or made, would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Buyer to perform its obligations under this Agreement and the Ancillary Agreements.

(d) Legal Proceedings . There are no actions or proceedings pending or, to the Knowledge of Buyer, threatened against Buyer before any court, arbitrator or Governmental Authority, which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of Buyer to perform its obligations under this Agreement and the Ancillary Agreements. Buyer is not subject to any outstanding judgments, rules, orders, writs, injunctions or decrees of any court, arbitrator or Governmental Authority which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of Buyer to perform its obligations under this Agreement and the Ancillary Agreements.

(e) Availability of Funds . Buyer has or will have liquid capital or committed sources therefor sufficient to permit Buyer to perform in full when due all of its obligations under this Agreement and any Ancillary Agreement to which it is a party.

ARTICLE V

COVENANTS

Section 5.01. Books and Records . For a period of 7 years after the Closing Date (or such other date as the Parties may mutually determine), each Party and its Representatives shall have reasonable access to all books and records of the Purchased Assets , to the extent that such access may reasonably be required by such Party in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters affected by the operation of the Purchased Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the other Party with respect to such access pursuant to this Section 5.01. If the Party in possession of such books and records desires to dispose of any such books and records upon or prior to the expiration of such seven-year period, such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at such other Party’s expense, to segregate and remove such books and records as such other Party may select.

Section 5.02. Finder’s Fees . Seller and Parent, on the one hand, and Buyer, on the other hand, represent and warrant to the other that no broker, finder or other Person is entitled to any brokerage fees, commissions or finder’s fees in connection with the transactions contemplated hereby by reason of any action taken by the Party making such representation. Seller and Parent, on the one hand, and Buyer, on the other hand, will pay to the other or otherwise discharge, and will indemnify and hold the other harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder’s fees incurred by reason of any action taken by the indemnifying party.

Section 5.03. Tax Matters . All transfer, use, stamp, sales and similar Taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be the sole responsibility of Seller and, to the extent paid by Buyer, Seller shall promptly reimburse Buyer upon request.

Section 5.04. Further Assurances . (a) Subject to the terms and conditions of this Agreement, each of Seller and Parent, on the one hand, and Buyer, on the other hand, shall use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transfer of the Purchased Assets pursuant to this Agreement and the assumption of the Assumed Liabilities, including using

commercially reasonable efforts with a view to obtaining all necessary consents, approvals and authorizations of, and making all required notices or filings with, third parties required to be obtained or made in order to consummate the transactions hereunder, including the transfer of the Transferred Permits to Buyer. Neither Seller and Parent, on the one hand, nor Buyer, on the other hand, shall, without prior written consent of the other, take or fail to take any action which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement.

(b) In the event that any portion of the Purchased Assets shall not have been conveyed to Buyer at the Closing, Seller shall, subject to paragraphs (c) and (d) immediately below, convey such asset to Buyer as promptly as practicable after the Closing.

(c) To the extent, if any, that Seller’s rights under any Transferred Contract may not be assigned without the consent of any other party thereto, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful. Seller and Buyer agree that if any consent to an assignment of any Transferred Contract has not been obtained at the Closing Date, or if any attempted assignment would be ineffective or would impair Buyer’s rights and obligations under the Transferred Contract in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at its option and to the maximum extent permitted by law and such Transferred Contract, shall, after the Closing Date, (i) appoint Buyer to be Seller’s agent with respect to such Transferred Contract or (ii) to the maximum extent permitted by law and such Transferred Contract, enter into such reasonable arrangements with Buyer or take such other commercially reasonable actions to provide Buyer with the same or substantially similar rights and obligations of such Transferred Contract. From and after the Closing Date, Seller, Parent and Buyer shall cooperate and use commercially reasonable efforts to obtain an assignment to Buyer of any such Transferred Contract.

(d) To the extent that Seller’s rights under any warranty or guaranty described in Section 2.01(f) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof or be unlawful. The Parties agree that if any consent to an assignment of any such warranty or guaranty has not been obtained or if any attempted assignment would be ineffective or would impair Buyer’s rights and obligations under the warranty or guaranty in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller shall use commercially reasonable efforts to the extent permitted by law and such warranty or guaranty, to enforce such warranty or guaranty for the benefit of Buyer to the maximum extent possible so as to provide Buyer with the benefits and obligations of such warranty or guaranty. Notwithstanding the foregoing, Seller shall not be obligated to bring or file suit against any third party, provided that if Seller determines not to bring or file suit after being requested by Buyer to do so, Seller shall assign, to the

extent permitted by law or any applicable agreement, its rights in respect of the claims so that Buyer may bring or file such suit.

ARTICLE VI

INDEMNIFICATION

Section 6.01. Survival . (a) The representations and warranties of the Parties contained herein shall survive the Closing for a period of one year and thereafter shall be of no further force and effect, except that (i) the representations and warranties set forth in Section 4.01(k) shall survive the Closing for a period of three years, (ii) the representations and warranties set forth in Section 4.01(p) shall survive the Closing for the period of the applicable statute of limitations, (iii) the representations and warranties set forth in Section 4.01(a), (b) and (c) and Section 4.02(a), (b) and (c) shall survive indefinitely, and (iv) any representation or warranty as to which a claim has been asserted during the survival period shall continue in effect with respect to such claim until such claim has been finally resolved or settled.

(b) The covenants and agreements of the Parties contained in this Agreement shall survive the Closing in accordance with their respective terms.

Section 6.02. Indemnification. (a) From and after the Closing, Buyer shall indemnify, defend and hold harmless Seller and Parent and their Representatives (each, a “Seller Indemnitee”) from and against any and all claims, demands, suits, losses, liabilities, penalties, damages, obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys’ fees and reasonable disbursements in connection therewith) (each, an “Indemnifiable Loss”) asserted against or suffered by any Seller Indemnitee relating to, resulting from or arising out of (i) any breach by Buyer of any representation, warranty, covenant or agreement of Buyer contained in this Agreement or the Ancillary Agreements, or (ii) the Assumed Liabilities.

(b) From and after the Closing, Parent and Seller shall indemnify, defend and hold harmless Buyer and its Representatives (each, a “Buyer Indemnitee”) from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer Indemnitee relating to, resulting from or arising out of (i) any breach by Parent or Seller of any of their representations, warranties, covenants or agreements contained in this Agreement or the Ancillary Agreements, (ii) the Excluded Liabilities, or (iii) noncompliance with any bulk sales or transfer laws as provided in Section 7.06.

and (ii) to take into account any net Tax benefit realized by the Indemnitee arising from the recognition of such Indemnifiable Loss (but only to the extent that the Parties, following good faith negotiations for a period of 30 days, jointly agree that such Tax benefit would be realized by the Indemnitee).

(d) The expiration or termination of any covenant, agreement, representation or warranty shall not affect the Parties’ obligations under this Section 6.02 if the Indemnitee provided the Person required to provide indemnification under this Agreement (the “Indemnifying Party”) with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment.

(e) The rights and remedies of the Parties under this Article VI are exclusive and in lieu of any and all other rights and remedies which the Parties may have under this Agreement or otherwise for declaratory, injunctive or monetary relief with respect to any breach of or failure to perform any representation, warranty, covenant or agreement set forth in this Agreement, after the occurrence of the Closing.

(f) Each Party waives any provision of law to the extent that it would limit or restrict the agreements contained in this Section 6.02. Notwithstanding any provisions in this Agreement to the contrary, each Party retains its remedies at law or in equity with respect to willful, knowing or intentional misrepresentations or breaches of this Agreement.

(g) Notwithstanding anything to the contrary herein, no Party (including an Indemnitee) shall be entitled to recover from any other Party (including an Indemnifying Party) for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement or any amount in excess of the actual compensatory damages, court costs and reasonable attorney’s fees suffered by such party. The Parties waive any right to recover punitive, special, exemplary and consequential damages arising in connection with or with respect to this Agreement. The provisions of this Section 6.02(g) shall not apply to indemnification for a Third Party Claim.

(h) An Indemnitee shall use commercially reasonable efforts to mitigate all Indemnifiable Losses, including availing itself of any defenses, limitations, rights of contribution, claims against third parties and other rights at law or equity. Commercially reasonable efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any losses or expenses for which indemnification would otherwise be due hereunder, and, in addition to its other obligations hereunder, the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee’s reasonable expenditures in undertaking such mitigation.

(i) The rights and obligations of indemnification under this Section 6.02 shall not be limited or subject to set-off based on any violation or alleged violation of any obligation under this Agreement or otherwise, including but not limited to breach or alleged breach by the Indemnitee of any representation, warranty, covenant or agreement contained in this Agreement.

Section 6.03. Procedure for Indemnification . (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a party to this Agreement or any Affiliate of a Party to this Agreement (a “Third Party Claim”) with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than 20 days after the Indemnitee’s receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party’s expense and by such Indemnifying Party’s own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee’s own expense. If an Indemnifying Party elects not to assume the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the Indemnifying Party’s liability pursuant to this Agreement.

(b) If, within 20 days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 6.03(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within 20 days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. Without the prior written consent of the Indemnitee, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within 10 days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will

be the amount of such settlement offer plus reasonable costs or expenses paid or incurred by Indemnitee up to the date of said notice.

(c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a “Direct Claim”) shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than 30 days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of 30 days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty 30 day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement.

(d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest thereon from the date of payment thereof at the Prime Rate) shall promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party, to the extent of such indemnity payment, shall be subrogated to all rights of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against such third party on account of said indemnity payment are hereby made subordinate in right of payment to the Indemnitee’s rights against such third party. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party shall duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights, and otherwise cooperate in the prosecution of such claims at the direction of the Indemnifying Party. Nothing in this Section 6.03(d) shall require any Party hereto to obtain or maintain any insurance coverage.

(e) A failure to give timely notice as provided in this Section 6.03 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually and materially prejudiced as a result of such failure.

ARTICLE VII

MISCELLANEOUS PROVISIONS

Section 7.01 Notices . All notices and other communications hereunder shall be in writing and shall be deemed given (i) on the day when delivered personally or by e-mail (with confirmation) or facsimile transmission (with confirmation), (ii) on the next business day when delivered to a nationally recognized overnight delivery service, or (iii) 5 business days after deposited as registered or certified mail (return receipt requested), in each case, postage prepaid, addressed to the recipient Party at its address set forth below (or to such other addresses and e-mail and facsimile numbers for a Party as shall be specified by like notice; provided, however, that any notice of a change of address or e-mail or facsimile number shall be effective only upon receipt thereof):

If to Seller or Parent, to:

		Cinergy Capital & Trading, Inc.
		c/o CinCap Madison, LLC
		139 East Fourth Street
		Cincinnati, OH 45202
		M. Stephen Harkness
		Vice President, Chief Operating and
		Financial Officer
		Facsimile No.: 513-419-5719
		e-mail: sharkness@cinergy.com

If to Buyer, to:

	PSI Energy, Inc.
	1000 East Main Street
	Plainfield, Indiana 46168
	Douglas F. Esamann/President
	Facsimile No: 317/838-2987
	e-mail: desamann@cinergy.com

Section 7.02. Waiver . The rights and remedies of the Parties are cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable Law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by each other Party; (b) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving such notice or demand to take further action

without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

Section 7.03. Entire Agreement; Amendment etc.

(a) This Agreement and the Ancillary Agreements, including the Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the Parties, whether written or oral, with respect to the transactions contemplated hereby.

(b) This Agreement may not be amended, supplemented, terminated or otherwise modified except by a written agreement executed by Seller, Parent and Buyer. In addition, any proposed amendment hereto is subject to Section 7.13.

(c) This Agreement shall be binding upon and inure solely to the benefit of each Party hereto and, other than with respect to Sections 7.12 and 7.13, nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

Section 7.04. Assignment . This Agreement and all the of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by, on the one hand, Seller and Parent, and on the other hand, Buyer, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other Party, and any attempt to make any such assignment without such consent will be null and void. Notwithstanding the foregoing, Seller or Buyer may assign or otherwise transfer its rights hereunder and under any Ancillary Agreement to any bank, financial institution or other lender providing financing to Seller or Buyer, as applicable, as collateral security for such financing; provided, however, that no such assignment shall (x) impair or materially delay the consummation of the transactions contemplated hereby or (y) relieve or discharge Seller or Buyer, as the case may be, from any of its obligations hereunder and thereunder.

Section 7.05. Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties will negotiate in good faith to modify this Agreement so as to effect the original intent of the

Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

Section 7.06. Bulk Sales Laws . Buyer hereby acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provisions of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement; and Buyer hereby irrevocably waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions.

Section 7.07. Governing Law . This Agreement will be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to choice of law principles thereof.

Section 7.08. Counterparts; Facsimile Execution . This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement and will become effective when one or more counterparts have been signed by each of the Parties and delivered to each other Party, it being understood that the Parties need not sign the same counterpart. This Agreement may be executed by facsimile signature(s).

Section 7.09. Schedules . The Schedules to this Agreement are intended to be and hereby are specifically made a part of this Agreement

Section 7.10 U.S. Dollars . Unless otherwise stated, all dollar amounts set forth herein are United States (U.S.) dollars.

Section 7.11. Dispute Resolution . (a) If a dispute arises between the Parties relating to this Agreement, the Parties agree to use the following alternative dispute resolution (“ADR”) procedures prior to any Party pursuing other available remedies:

(i) A meeting shall be held promptly between the Parties, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute.

(ii) If, within 30 days after such meeting, the Parties have not succeeded in negotiating a resolution of the dispute, they will jointly appoint a mutually acceptable neutral person not affiliated with either Party (the “Neutral”) to act as a mediator. If the Parties are unable to agree on the Neutral within 20 days, they shall seek

assistance in such regard from the CPR Institute for Dispute Resolution, Inc. (“CPR”). The Parties shall share the fees of the Neutral and all other common fees and expenses equally.

(iii) The mediation may proceed in accordance with CPR’s Model Procedure for Mediation of Business Disputes, or the Parties may establish their own procedure.

(iv) The Parties shall pursue mediation in good faith and in a timely manner. In the event the mediation does not result in resolution of the dispute within 60 days, then, upon 7 days” written notice to the other Party, either Party may propose another form of ADR (e.g., arbitration, a mini-trial, or a summary jury trial) or may pursue other available remedies.

(b) All ADR proceedings shall be strictly confidential and used solely for the purposes of settlement. Any materials prepared by one Party for the ADR proceedings shall not be used as evidence by the other Party in any subsequent litigation; provided, however, that the underlying facts supporting such materials may be subject to discovery.

(c) Each Party fully understands its specific obligations under the ADR provisions of this Agreement. Neither Party considers such obligations to be vague or in any way unenforceable, and neither Party will contend to the contrary at any future time or in any future proceeding.

Section 7.12. Ratemaking. Buyer shall not seek to overturn, reverse, set aside, change or enjoin, whether through appeal or the initiation or maintenance of any action in any forum, a decision or order of the Indiana Utility Regulatory Commission (“IURC”) which pertains to recovery, disallowance, deferral or ratemaking treatment of any expense, charge, cost or allocation incurred or accrued by Buyer in or as a result of this Agreement (or any amendment hereto) on the basis that this Agreement and any such expense, charge, cost or allocation was filed with or approved by the Securities and Exchange Commission (“SEC”).

Section 7.13. State Review . In the event the Parties execute an amendment to this Agreement, the Parties shall fulfill the following obligations, where applicable (it being understood that none of such obligations are intended to detract from the authority of the SEC under the Public Utility Holding Company Act of 1935):

(a) Prior to filing any amendment with the SEC, the Parties shall file with the IURC and provide to the Indiana Utility Consumer Counselor (and, provide, upon request, to other appropriate parties) a copy of such amendment.

(b) In the event that the amendment is finally rejected or disapproved or found to be unreasonable by the IURC prior to filing with the SEC, the amendment shall not become effective and the Parties shall not request SEC approval of the amendment.

(c) In the event that the amendment is rejected or disapproved or found to be unreasonable by IURC after it has been filed with but before it has been approved by the SEC, the amendment shall be terminated and the Parties agree to request withdrawal of the filing.

(d) Notwithstanding “(b)” and “(c)” immediately above, in the event that the amendment is rejected, disapproved or found to be unreasonable by IURC before it has been approved by the SEC, the Parties shall have the right to request further revisions of the amendment in order to cure or remove the cause of the IURC’s rejection, disapproval or finding of unreasonableness. Upon request by a Party, the other Parties shall agree promptly to negotiate in good faith to revise the amendment and thereafter to file for any necessary regulatory authorization of the renegotiated amendment. If the Parties are unable to reach agreement satisfactory to each of them and to the IURC after good faith negotiations, then “(b)” or “(c)” immediately above, as applicable, shall apply.

(e) In the event that the IURC has previously approved the amendment prior to SEC approval, “(f)” immediately below shall not apply.

(f) In the event that an amendment has become effective and is subsequently rejected, disapproved or found to be unreasonable by IURC, the Parties shall make a good faith effort to terminate, amend or modify the amendment in a manner which remedies the IURC’s adverse findings without adverse impact on any of the Parties. The Parties shall request to meet with representatives of the IURC and make a good faith attempt to resolve any differences regarding the subject amendment. If agreement can be reached to terminate the amendment or amend or modify the amendment in a manner satisfactory to the Parties and to the representatives of the IURC, then the Parties shall file such amendment with the appropriate state and federal regulatory agencies, seeking all necessary regulatory authorizations. If the Parties are unable to reach agreement satisfactory to each of them and to the IURC after good faith negotiations, then they shall be under no further obligation to amend the amendment.

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IN WITNESS WHEREOF, each of the Parties has caused this Asset Purchase Agreement to be executed on its behalf by its respective officer thereunto duly authorized, all as of the day and year first above written.

CINERGY CAPITAL & TRADING, INC.


By:		/s/ M. Stephen Harkness
		M. Stephen Harkness
		Vice President, Chief Operations and Financial Officer


CINCAP MADISON, LLC


By:		/s/ M. Stephen Harkness
		M. Stephen Harkness
		Vice President, Chief Operating and Financial Officer


PSI ENERGY, INC.


By:	/s/ Douglas F. Esamann
	Douglas F. Esamann
	President

SCHEDULE I : FORM OF DEED

CinCap Madison, LLC , a foreign limited liability company, organized and existing under the laws of the State of Delaware, and formerly named Duke Energy Madison, LLC (hereinafter referred to as “Grantor”), for valuable consideration paid, grants, with general warranty covenants, to PSI Energy, Inc. , an Indiana corporation, whose tax-mailing address is 1000 East Main Street, Plainfield, Indiana 46168, Attn: Tax Dept. (hereinafter referred to as “Grantee”), the following REAL PROPERTY:

Situate in Section 7, Town 1, Range 4, Madison Township, Butler County, Ohio, and being more particularly described as follows:

Beginning at a set iron pin in the south line of Section 7, said point being in the north line of the lands conveyed to Cincinnati Gas and Electric Company by Deed Book 1682 Page 485, Butler County, Ohio Recorder’s Office, said point also being North 89° 58’ 54” West, 1176.81 feet from the southeast corner of said Section 7; thence continuing along said south line of Section 7 and the north line of the lands of said Cincinnati Gas and Electric Company, North 89° 58’ 54” West, passing concrete monuments at 238.53 feet and 941.46 feet, a total distance of 946.46 feet to an existing iron pin, said point being witnessed by a concrete monument lying South 00° 20’ 25” West, 5.00 feet; thence along the east and north line of the lands conveyed to Philip Morris Companies by Deed Book 6207 Page 1298, Butler County, Ohio Recorder’s Office, North 00° 20’ 25” East, 2389.12 feet to an existing iron pin and North 87° 11’ 45” West, passing a concrete monument at 5.00 feet, a total distance of 1045.20 feet to an existing stone; thence along the west line of the lands conveyed to Dorothy L. Wintersteed by Deed Book 6267 Page 866, Butler County, Ohio Recorder’s’s Office, North 00° 20’ 25” East, passing a set iron pin at 1593.41, a total distance of 1608.42 feet to a point in the centerline of Kennel Road; thence along said centerline, South 87° 44’ 16” East, 75.04 feet to a point; thence leaving said centerline, South 00° 20’ 25” West, passing a set iron pin at 15.01 feet, a total distance of 1534.06 feet to a set iron pin; thence South 87° 11’ 45” East, 1045.20 feet to a set iron pin; thence South 00° 20’ 25” West, 1079.75 feet to a set iron pin; thence South 89° 58’ 54” East, 871.45 feet to a set iron pin in the west line of the lands conveyed to First National Bank of Southwest Ohio by Deed Book 1722 Page 501, Butler County, Ohio Recorder’s Office; thence along said west line, South 00° 20’ 25” West, 1380.79 feet to a point of beginning.

Containing 36.303 acres of land.

Subject to all legal highways, easements and restrictions of record.

Being the same premises conveyed to Grantor in Deed Book 6376, Page 323 , Butler County, Ohio Recorder’s Office.

Bearings are based on State Plane Coordinates.

The above description is the result of a field survey performed by McGill Smith Punshon, Inc. under the direction of Richard D. Nichols, P.S. No. 7929 dated November 25, 1998, the survey of which is recorded in Plat Book Volume 37 at Page 22, Butler County Engineer’s Record of Land Surveys.

and all the Estate, Right, Title and Interest of Grantor in and to the REAL PROPERTY; To Have and To Hold the same, with all the privileges and appurtenances thereunto belonging, to Grantee, its successors and assigns forever. Grantor does hereby Covenant and Warrant that the title so conveyed to Grantee is Clear, Free and Unencumbered , and that it will Defend the same against all lawful claims of all persons whomsoever.

Grantor also assigns and transfers to Grantee, and its successors and assigns, all right, title and interest which Grantor derives from the following easement or license interests:

1. Easement Agreement granted by Miller Brewing Company to Grantor dated November 8, 1999 and filed for record on January 12, 2000 as Instrument No. 200000002350 in Official Record 6440, Page 1955 in the Office of the Recorder of Butler County, Ohio;

2. Grant of Easement granted by The Cincinnati Gas & Electric Company to Grantor dated January 10, 2000 and filed for record on January 13, 2000 as Instrument No. 200000002693 in Official Record 6441, Page 646 in the Office of the Recorder of Butler County, Ohio; and

3. Operating License Agreement granted by The Cincinnati Gas & Electric Company to Grantor dated December 21, 1999, a Memorandum of

said Agreement being under date of March 31, 2000 and recorded on April 12, 2000 as Instrument No. 200000019856 in Official Record 6464, Page 2212 in the Office of the Recorder of Butler County, Ohio.

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IN WITNESS WHEREOF, CinCap Madison, LLC has caused this instrument to be executed by its duly authorized officer, this day of , 200 .

	CinCap Madison, LLC


	By
		M. Stephen Harkness
		Its Vice President, and Chief Operating and Financial Officer

STATE OF OHIO, HAMILTON COUNTY, ss:

Before me, a Notary Public in and for said State, personally appeared M. Stephen Harkness, Vice President, and Chief Operating and Financial Officer of CinCap Madison, LLC, who acknowledged that he did sign said instrument as such officer on behalf of said limited liability company, and that said instrument is his free act and deed individually and as such officer, and the free and act and deed of CinCap Madison, LLC.

IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my notarial seal this day of , 200 .


	Notary Public

	Printed Name:

	In and for the State of Ohio

	My Commission Expires:

This instrument prepared by Janice Walker, Attorney at Law.

SCHEDULE II: FORM OF BILL OF SALE

BILL OF SALE made, executed and delivered as of this day of , 200 by CinCap Madison, LLC, a Delaware limited liability company (“Seller”) to PSI Energy, Inc., an Indiana corporation (“Buyer”). (Capitalized terms used herein but not defined herein have the respective meanings assigned in that certain Asset Purchase Agreement of even date herewith (the “Asset Purchase Agreement”) by and among Seller, Buyer and Cinergy Capital & Trading, Inc., an Indiana corporation (“CC&T”).)

WHEREAS, Seller, Buyer and CC&T are parties to the Asset Purchase Agreement providing for, among other things, the sale and transfer to Buyer of all of Seller’s right, title and interest in, to and under the real and personal property, tangible and intangible, constituting, or used in connection with the operation of, that certain natural gas-fired electric generating station known as the Madison Generating Station, located in Madison Township, Butler County, Ohio (as more fully described in the Asset Purchase Agreement), in exchange for the consideration, and subject to the other terms and conditions, specified in the Asset Purchase Agreement; and

WHEREAS, the parties to the Asset Purchase Agreement having executed and delivered such agreement contemporaneously herewith, Seller now desires to carry out the intent and purposes of the Asset Purchase Agreement by its execution and delivery to Buyer of this instrument, evidencing the vesting in Buyer (together with such other instruments as Buyer shall have otherwise received concurrently herewith or may hereafter request, including the Deed and certain Assignment and Assumption Agreements) of substantially all of the properties and assets constituting, or used in connection with the operation of, the Madison Generating Station;

NOW, THEREFORE, in consideration of the premises, and for good and valuable consideration paid by Buyer, the receipt, adequacy and legal sufficiency of which are hereby acknowledged, Seller, intending to be legally bound, hereby agrees as follows:

ARTICLE I

SALE AND TRANSFER OF ASSETS

Seller hereby irrevocably and unconditionally sells, transfers, assigns, conveys, grants and delivers to Buyer, effective as of the execution and delivery hereof, free and clear of all Encumbrances (other than Permitted Encumbrances), all of Seller’s right, title and interest in and to the following (collectively, the “Purchased Assets”):

(a) the machinery, fixtures, equipment (including communications equipment), vehicles, furniture and other personal property located on the Real Property, including the items of tangible personal property listed on Schedule 2.01(b) of the Asset Purchase Agreement;

(b) all Inventories;

(c) subject to the receipt of any necessary consents and approvals, the contracts or agreements (including any licenses or real or personal property leases, other than any thereof constituting Transferred Permits or Transferred Intellectual Property) listed on Schedule 2.01(d) of the Asset Purchase Agreement;

(d) subject to the receipt of any necessary consents and approvals, the permits, licenses, certificates, certifications, orders and other governmental authorizations listed on Schedule 2.01(e) of the Asset Purchase Agreement;

(e) all unexpired, transferable warranties and guarantees from manufacturers, vendors and other third parties with respect to any item of real or tangible personal property referred to in the preceding clauses (a) and (b);

(f) all books, expired purchase orders, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures, studies, reports, equipment repair, safety, maintenance or service records, and similar items (subject to the right of Seller to retain copies of same for its use), other than such items that are proprietary to third parties and accounting records (to the extent that any of the foregoing is contained in an electronic format, Seller shall cooperate with Buyer to transfer such items to Buyer in a format that is reasonably acceptable to Buyer);

(g) subject to the receipt of any necessary consents and approvals, any intellectual property; and .

(h) all other assets and properties used in connection with the Madison Generating Station.

ARTICLE II

FURTHER ACTIONS

Seller covenants and agrees to warrant and defend the sale, transfer, assignment, conveyance, grant and delivery of the Purchased Assets hereby made against all persons whomsoever, to take all steps reasonably necessary to establish the record of Buyer’s title to the Purchased Assets and, at the request of Buyer, to execute and deliver such further instruments of transfer and assignment and take such other actions as Buyer may reasonably request to more effectively transfer and assign to and vest in Buyer each of the Purchased Assets, all at the sole cost and expense of Seller.

ARTICLE III

POWER OF ATTORNEY

Without limiting Article 2 hereof, Seller hereby constitutes and appoints Buyer the true and lawful agent and attorney in fact of Seller, with full power of substitution and resubstitution, in whole or in part, in the name and stead of Seller but on behalf and for the benefit of Buyer and its successors and assigns, from time to time:

(a) to demand, receive and collect any and all of the Purchased Assets and to give receipts and releases for and with respect to the same, or any part thereof;

(b) to institute and prosecute, in the name of Seller or otherwise, any and all proceedings at law, in equity or otherwise, that Buyer or its successors and assigns may deem proper in order to collect or reduce to possession any of the Assets and in order to collect or enforce any claim or right of any kind hereby assigned or transferred, or intended so to be; and

(c) to do all things legally permissible, required or reasonably deemed by Buyer to be required to recover and collect the Assets and to use Seller’s name in such manner as Buyer may reasonably deem necessary for the collection and recovery of same,

Seller hereby declaring that the foregoing powers are coupled with an interest and are and shall be irrevocable by Seller.

ARTICLE IV

TERMS OF ASSET PURCHASE AGREEMENT

The terms of the Asset Purchase Agreement, including but not limited to Seller’s representations, warranties, covenants, agreements and indemnities relating to the Purchased Assets, are incorporated herein by this reference. Seller acknowledges and agrees that the representations, warranties, covenants, agreements and indemnities contained in the Asset Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein. In the event of any conflict or inconsistency between the terms of the Asset Purchase Agreement and the terms hereof, the terms of the Asset Purchase Agreement shall govern.

IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly signed on its behalf as of the date first above written.

	CINCAP MADISON, LLC


	By:
		Name: Michael J. Cyrus
		Title: President

SCHEDULE III: FORM OF ASSUMPTION AGREEMENT

ASSUMPTION AGREEMENT made and effective as of , 200 by PSI Energy, Inc., an Indiana corporation (“Buyer”), in favor of CinCap Madison, LLC, a Delaware limited liability company (“Seller”) . (Capitalized terms used herein but not defined herein have the respective meanings assigned in that certain Asset Purchase Agreement of even date herewith (the “Asset Purchase Agreement”) by and among Buyer, Seller and Cinergy Capital & Trading, Inc., an Indiana corporation (“Parent”).)

WHEREAS, pursuant to the Asset Purchase Agreement, and by means of various agreements and instruments executed and delivered in connection therewith (including without limitation the Deed, Bill of Sale and certain assignment and assumption agreements), concurrently with the execution and delivery hereof, Seller is selling and conveying to Buyer, and Buyer is purchasing from Seller, for the consideration and upon the terms and conditions set forth in the Asset Purchase Agreement, all of Seller’s right, title and interest in and to the assets (tangible and intangible) comprising, or used in connection with, the Madison Generating Station (the “Purchased Assets”); and

WHEREAS, the Asset Purchase Agreement contemplates in Section 2.03 thereof that, on the Closing Date, in consideration of the foregoing, Buyer shall also execute this instrument in favor of Seller, agreeing to assume various liabilities and obligations of Seller relating to the Purchased Assets, as more specifically set forth below;

NOW, THEREFORE, in consideration of the premises and the transactions contemplated by the Asset Purchase Agreement, including without limitation the execution and delivery simultaneously herewith of the Bill of Sale and the Deed, Buyer, intending to be legally bound, hereby agrees as follows:

ARTICLE I

ASSUMPTION OF ASSUMED LIABILITIES

Section 1.1 Assumption of Assumed Liabilities . Effective upon the execution and delivery hereof, Buyer hereby assumes and agrees to pay, perform and discharge, without recourse to Seller or Parent, the following Liabilities of Seller (excluding, however, for the avoidance of doubt, for all purposes whatsoever any Excluded Liabilities), solely to the extent such Liabilities accrue or arise from and after the Closing, in each case in accordance with the respective terms and subject to the respective conditions thereof (collectively, the “Assumed Liabilities”):

(b) all Liabilities with respect to Madison Station arising under or relating to Environmental Laws or relating to any claim in respect of Environmental Conditions or Hazardous Substances, including settlements, judgments, costs and expenses, including reasonable attorneys fees, whether based on common law or Environmental Laws, but in each case solely to the extent accruing or arising from and after the Closing Date, with respect to (i) any violation or alleged violation of Environmental Laws with respect to the ownership, lease, maintenance or operation of any of the Purchased Assets, including any fines or penalties that arise in connection with the ownership, lease, maintenance or operation of the Purchased Assets, and the costs associated with correcting any such violations; (ii) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by any Environmental Condition or the presence or Release of Hazardous Substances at, on, in, under, adjacent to or migrating from the Purchased Assets, including any Environmental Condition or Hazardous Substances contained in building materials at or adjacent to the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or near the Purchased Assets; (iii) any Remediation of any Environmental Condition or Hazardous Substances that are present or have been Released at, on, in, under, adjacent to or migrating from, the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells or in other environmental media at or adjacent to the Purchased Assets; (iv) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; (v) any Remediation of any Environmental Condition or Release of Hazardous Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; and (vi) any obligation to repower, replace, decommission, deactivate, dismantle, demolish or close the Purchased Assets or any portion thereof, or any surface impoundments or other waste or effluent handling or storage units on owned or leased adjacent properties used in connection with the operation of the Purchased Assets;

(c) all liabilities or obligations to third parties for personal injury or tort, or similar causes of action arising solely out of the ownership, lease, maintenance or operation of the Purchased Assets, but in each case solely to the extent accruing or arising from and after the Closing Date; and

ARTICLE II

FURTHER ACTIONS

Buyer hereby covenants and agrees, at its own expense, to execute and deliver, at the request of Seller, from time to time after the Closing Date, such further instruments of assumption and to take such other actions as Seller may reasonably request to more effectively consummate the assumptions provided in this Assumption Agreement.

ARTICLE III

TERMS OF ASSET PURCHASE AGREEMENT

The terms of the Asset Purchase Agreement, including but not limited to Buyer’s representations, warranties, covenants, agreements and indemnities relating to the Assumed Liabilities, are incorporated herein by this reference. Buyer acknowledges and agrees that its representations, warranties, covenants, agreements and indemnities contained in the Asset Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein. In the event of any conflict or inconsistency between the terms of the Asset Purchase Agreement and the terms hereof, the terms of the Asset Purchase Agreement shall govern.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

IN WITNESS WHEREOF, Buyer has caused this Assumption Agreement in favor of CinCap Madison, LLC, as Seller, to be duly signed on its behalf as of the date first above written.

	PSI ENERGY, INC.


	By:
		Name: Douglas F. Esamann
		Title: President

SCHEDULE 2.01(B) : TANGIBLE PERSONAL PROPERTY

• Eight General Electric Model PG712EA gas turbine generator units:

• Fuel system, including eight gas heaters;

• Plant high voltage power system & interconnection, including four three-winding generator step-up transfomers;

• Water supply and treatment systems, including 200,000 gallon demineralized water storage tank;

• Fire protection system, including CO2 suppression systems, 220,000 gallon raw water tank, fire water loop, sprinkler system

• Plant auxiliary power system, including auxiliary transformers, DC power supply system and AC uninterruptible power supply system;

• Black start diesel generators, including two black start diesel generators capable of producing 1.2 MW each and fuel oil storage tanks;

• Continuous emissions monitoring;

• Plant control systems;

• Communications systems;

• Security and access, including chain link security fence topped with barbed wire enclosing plant site and electronically operated access gate;

• Storm water drainage; and

• Maintenance/warehouse facilities

SCHEDULE 2.01(D): TRANSFERRED CONTRACTS

Fuel Supply and Management Agreement, dated as of September 1, 2001 (“Fuel Management Agreement”), between Seller and Cinergy Marketing & Trading, LP (“CMT”)

Water Purchase Agreement, dated as of March 10, 2000, between Seller and The Cincinnati Gas & Electric Company

Operational Balancing Agreement, dated as of March 1, 2000 (“OBA”), between Seller and Texas Eastern Transmission Company (“TETCO”)

Service Agreement for Rate Schedule FT-1, Contract # 830098, dated February 2000, between Seller and TETCO (“Service Agreement”)

Letter Agreement dated February 1, 2000 between Seller and TETCO re Service Agreement

SCHEDULE 2.01(E): TRANSFERRED PERMITS

Air construction permit (No. 14-4682) issued by Hamilton County Department of Environmental Protection of the State of Ohio (“HCDEP”)

Title V operating permit (permit pending) issued by HCDEP

Title IV acid rain permit (permit pending) issued by HCDEP

Call sign no. WPTE533 issued by the Federal Communications Commission (Wireless Telecommunications Bureau) (“FCC”)

SCHEDULE 4.01(C)(II): SELLER’S REQUIRED GOVERNMENTAL AND THIRD PARTY CONSENTS

Section I: Seller’s Required Governmental Consents

Federal Energy Regulatory Commission under Section 203 of Federal Power Act

FCC with respect to the transfer to Buyer of rights to Call Sign No. WPTE533

Section II: Seller’s Required Third-Party Consents

TETCO with respect to the assignment to Buyer of the OBA and the Service Agreement

CMT with respect to Fuel Management Agreement

SCHEDULE 4.01(G)(I): REAL PROPERTY

1. For a description of all land owned, used or occupied by Seller, see Schedule I to this Asset Purchase Agreement.

2. Easement Agreement granted by Miller Brewing Company to Seller upon adjoining land dated November 8, 1999 and filed for record on January 12, 2000 as Instrument No. 200000002350 in Official Record 6440, Page 1955 in the Office of the Recorder of Butler County, Ohio.

3. Grant of Easement granted by The Cincinnati Gas & Electric Company to Seller upon adjoining land dated January 10, 2000 and filed for record on January 13, 2000 as Instrument No. 200000002693 in Official Record 6441, Page 646 in the Office of the Recorder of Butler County, Ohio.

4. Operating License Agreement granted by The Cincinnati Gas & Electric Company to Seller upon adjoining land dated December 21, 1999, a Memorandum of said Agreement being under date of March 31, 2000 and filed for record on April 12, 2000 as Instrument No. 200000019856 in Official Record 6464, Page 2212 in the Office of the Recorder of Butler County, Ohio.

5. Restrictive covenant as to the use of the land for the operation of an electric generation facility and ancillary uses directly related to such operation and for no other purpose without the prior written consent of First National Bank of Southwestern Ohio, Trustee, as contained in that certain Fiduciary Deed dated June 21, 1999 and filed for record on June 21, 1999 as Instrument No. 9900049174 in Official Record 6376, Page 323 in the Office of the Recorder of Butler County, Ohio.

6. Easement granted to The Cincinnati Gas & Electric Company dated May 3, 1944 and filed for record on July 11, 1944 as Instrument No. 5043 in Miscellaneous Record 15, Page 70 in the Office of the Recorder of Butler County, Ohio.

7. Grant granted to The Cincinnati Gas & Electric Company dated March 19, 1953 and filed for record on April 4, 1953 as Instrument No. 380 in Miscellaneous Record 28, Page 170 in the Office of the Recorder of Butler County, Ohio.

8. Grant of Easement granted to The Cincinnati Gas & Electric Company dated June 1, 1990 and filed for record on June 20, 1990 in Deed Record 1698, Page 499 in the Office of the Recorder of Butler County, Ohio.

9. Easement granted to Texas Eastern Transmission, LP dated July 3, 2001 and filed for record on August 13, 2001 as Instrument No. 200100057845 in Official Record 6655, Page 1556 in the Office of the Recorder of Butler County, Ohio.

10. For a description of plants, buildings, structures or other Improvements located on the Real Property, see Schedule 2.01(b) to this Asset Purchase Agreement.

SCHEDULE 4.01(K): ENVIRONMENTAL PERMITS

The permits listed in Schedule 2.01(e) are hereby incorporated by reference herein.

SCHEDULE 4.01(M): SELLER CONTRACTS

The contracts listed in Schedule 2.01(d) are hereby incorporated by reference herein.

SCHEDULE 4.01(0): PERMITS

EWG certification (Duke Energy Madison, LLC, 91 FERC par. 62,068 (2000))

Market-based wholesale rate authority (CinCap Madison, LLC, FERC Docket Nos. ER00-1784 and ER02-322 (letter order, April 19, 2002)

In addition, the permits listed in Schedule 2.01(e) are hereby incorporated by reference herein.

SCHEDULE 4.02(C)(II): BUYER’S REQUIRED GOVERNMENTAL AND THIRD PARTY CONSENTS

Section I: Buyer’s Required Governmental Consents

Federal Energy Regulatory Commission under Section 203 of Federal Power Act

Indiana Utility Regulatory Commission under applicable provisions of the Indiana Code in respect of (i) the purchase of the Madison Station by Buyer and (ii) the issuance by Buyer of long-term promissory notes in consideration therefor.

FCC with respect to the transfer to Buyer of rights to Call Sign No. WPTE533

Section II: Buyer’s Required Third-Party Consents

TETCO with respect to the assignment to Buyer of the OBA and the Service Agreement

Exhibit 10-uu

ASSET PURCHASE AGREEMENT

BY AND AMONG

CINERGY CAPITAL & TRADING, INC.,

CINCAP VII, LLC

AND

PSI ENERGY, INC.

Dated as of February 5, 2003

ARTICLE I
DEFINITIONS

ARTICLE II
PURCHASE AND SALE

Section 2.01.	Transfer of Assets
Section 2.02.	Excluded Assets
Section 2.03.	Assumed Liabilities
Section 2.04.	Excluded Liabilities

ARTICLE III
PURCHASE PRICE; CLOSING

Section 3.01.	Purchase Price
Section 3.02.	Inventory
Section 3.03.	Proration
Section 3.04.	Closing
Section 3.05.	Closing Deliveries

ARTICLE IV
REPRESENTATIONS AND WARRANTIES

Section 4.01.	Representations and Warranties of Parent and Seller
Section 4.02.	Representations and Warranties of Buyer

ARTICLE V
COVENANTS

Section 5.01.	Books and Records
Section 5.02.	Finder’s Fees
Section 5.03.	Tax Matters
Section 5.04.	Further Assurances

ARTICLE VI
INDEMNIFICATION

Section 6.01.	Survival
Section 6.02.	Indemnification
Section 6.03.	Procedure for Indemnification

ARTICLE VII
MISCELLANEOUS PROVISIONS

Section 7.01	Notices

Section 7.02.	Waiver
Section 7.03.	Entire Agreement; Amendment etc.
Section 7.04.	Assignment
Section 7.05.	Severability
Section 7.06.	Bulk Sales Laws
Section 7.07.	Governing Law
Section 7.08.	Counterparts; Facsimile Execution
Section 7.09.	Schedules
Section 7.10	U.S. Dollars
Section 7.11.	Dispute Resolution
Section 7.12.	Ratemaking
Section 7.13.	State Review

SCHEDULES

Schedule I		Form of Deed
Schedule II		Form of Bill of Sale
Schedule III		Form of Assumption Agreement

DISCLOSURE SCHEDULES

Schedule 2.01(b)		Tangible Personal Property
Schedule 2.01(d)		Transferred Contracts
Schedule 2.01(e)		Transferred Permits
Schedule 4.01(c)(ii)		Seller’s Required Governmental and Third Party Consents
Schedule 4.01(g)(i)		Real Property
Schedule 4.01(k)		Environmental Permits
Schedule 4.01(m)		Seller Contracts
Schedule 4.01(o)		Permits
Schedule 4.02(c)(ii)		Buyer’s Required Governmental and Third Party Consents

ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of February 5, 2003, by and among Cinergy Capital & Trading, Inc., an Indiana corporation (“Parent”), CinCap VII, LLC, a Delaware limited liability company and indirect wholly-owned subsidiary of Parent (“Seller”), and PSI Energy, Inc., an Indiana corporation (“Buyer” and, together with Parent and Seller, “Parties” and individually, a “Party”).

W I T N E S S E T H

WHEREAS, Seller owns the Henry County Generating Station (“Henry County Station”), a simple cycle, natural gas-fired electric generating station located in Henry County, Indiana, comprised of three GE Model LM 6000 combustion turbines with an aggregate summer rated capacity of approximately 136.5 megawatts, together with certain other assets, properties, facilities and rights associated therewith or ancillary thereto; and