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assets. We also benefited from decreased interest expense reflecting the refinancings completed in 2004. 

## Investments – Gas Operations 

Our Loss Before Discontinued Operations, Extraordinary Item and Cumulative Effect of Accounting Changes from Gas Operations decreased $239 million to $51 million in 2004. The key driver of the decrease was $315 million of impairments recorded in 2003, partially offset by a $103 million decrease in income tax benefit principally related to the impairments. In January 2005, we announced the sale of 98% of our interest in Houston Pipeline Company, including gas and working capital, for $1 billion. This sale essentially completes our divestiture of natural gas assets in the U.S. 

## Investments – UK Operations 

Our Investments – UK Operations segment (all classified as Discontinued Operations) increased to $91 million in in- come, which includes a gain on sale of $128 million in 2004, compared with a loss of $508 million in 2003, before the cumulative effect of accounting changes. In July 2004, we completed the sale of substantially all operations and assets within our Investments – UK Operations segment. 

## Investments – Other 

Income Before Discontinued Operations, Extraordinary Item and Cumulative Effect of Accounting Changes from our Investments – Other segment increased from a loss of $278 million in 2003 to income of $78 million in 2004 pri- marily due to gains on asset sales in 2004 and impairments recorded in 2003. 

## FINANCIAL CONDITION 

We measure our financial condition by the strength of our balance sheet and the liquidity provided by our cash flows. During 2004, we improved our financial condition as a con- sequence of the following actions and events: 

• We reduced short-term debt by $303 million, termi- nated our Euro revolving credit facility, completed ap- proximately $2.3 billion of long-term debt redemptions, including optional redemptions such as our Steelhead financing, and funded $770 million of debt maturities. 

• We maintained stable credit ratings across the AEP System. Moody’s Investor Services assigned a positive outlook on AEP Inc.’s ratings, while the rated subsidiar- ies continued to have ratings with stable outlooks. 

Our $2.6 billion in cash flows from operations, com- bined with our reduction in cash expenditures for invest- ments in discontinued operations, the proceeds from asset sales, a reduction in the dividend beginning in the second quarter of 2003 and the use of a portion of our cash on hand, allowed us to reduce long-term debt by $1.8 billion and short-term debt by $303 million. 

Our common equity increased due to earnings exceed- ing the amount of dividends paid in 2004, a discretionary $200 million cash contribution to our pension fund which allowed us to remove a portion of the charge to equity related to the underfunded plan, and the issuance of $17 million of new common equity (related to our incentive compensation plans). 

As a consequence of the capital changes during 2004, we improved our ratio of debt to total capital from 64.6% to 59.1%. 

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