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• TCC stranded generation cost recovery, including the generation securitization, wholesale capacity auction true-up, fuel and clawback transition charge, and re- lated carrying costs. 

• Fuel cost volatility and fuel cost recovery. 

• Financing and recovering the cost of capital expendi- tures, including environmental and new technology. 

## RESULTS OF OPERATIONS 

In 2004, AEP’s principal operating business segments and their major activities were: 

• Utility Operations: 

– Domestic generation of electricity for sale to retail and wholesale customers 

– Domestic electricity transmission and distribution 

• Investments – Gas Operations: 

– Gas pipeline and storage services 

• Investments – UK Operations: 

– Generation of electricity in the UK for sale to wholesale customers 

– Coal procurement and transportation to our plants 

• Investments – Other: 

– Bulk commodity barging operations, wind farms, independent power producers and other energy supply-related businesses. 

Income Before Discontinued Operations, Extraordi- nary Item and Cumulative Effect of Accounting Changes in 2004 increased $605 million compared to 2003 due to increased retail margins and stranded generation carrying cost deferrals at TCC in our Utility Operations, improved margins and lower impairments in our Gas Operations and Investments – Other segments, gains realized on the sale of 

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## AMERICAN ELECTRIC POWER COMPANY, INC. 

assets, and lower provisions for penalties and other expenses booked at the parent company. These increases were offset, in part, by decreased margins due to the divestiture of Tex- as generation assets, the loss of the capacity auction true-up revenues in Texas, and higher operation and maintenance expense, all occurring in our Utility Operations segment. 

Our Net Income for 2004 of $1,089 million, or $2.75 per share, includes income, net of tax, on discontinued op- erations of $83 million, resulting primarily from a gain on the sale of our UK Operations, and an extraordinary loss of $121 million, net of tax, which represents a provision for probable disallowance to the stranded cost net regulatory assets of TCC based on Public Utility Commission of Texas orders in nonaffiliated true-up proceedings. Our Net In- come for 2003 of $110 million, or $0.29 per share, includes a $605 million loss, net of tax, on discontinued operations and $193 million of income, net of tax, from the cumulative effect of changing our accounting for asset retirement obli- gations and for certain trading activities. 

Average shares outstanding increased to 396 million in 2004 from 385 million in 2003 due to a common stock issuance in 2003 and common shares issued related to our incentive compensation plans. The additional average shares outstanding decreased our 2004 earnings per share by $0.08. 

## Utility Operations 

In our Utility Operations, Income Before Discontinued Op- erations, Extraordinary Item and Cumulative Effect of Ac- counting Changes decreased $48 million to $1,171 million in 2004 primarily due to the absence of the wholesale capacity auction true-up revenues and higher purchased power costs resulting from the partial divestiture of a portion of TCC’s generation assets as part of the transition to retail compe- tition in Texas. In addition, operating expenses increased due to higher planned plant maintenance and distribution system reliability work, as well as storm damage repair due to major ice storms in our Ohio service territory. These de- creases were partially offset by increased demand resulting from higher usage and customer growth in our residential and commercial classes, as well as higher demand across most classes of customers reflecting the economic recovery in our regions. In addition, we recognized Carrying Costs on Texas Stranded Cost Recovery, which represents the debt component of carrying costs accrued on TCC’s net stranded generation costs and its capacity auction true-up 

