The following discussion is a summary analysis of our re- sults of operations for the year 2004 compared with 2003 and an overview of our business outlook and financial condition. A complete analysis of our results of operations and discussion of our financial condition can be found in the Management’s Financial Discussion and Analysis of Results of Operations portion of Appendix A to the Proxy Statement. Appendix A and Form 10-K also contain de- tailed discussion of major uncertainties, contingencies, risks and other issues we face. 

Our Utility Operations, the core of our business, had a year of continued improvement despite some unfavorable operating conditions. Our results for the year reflect the increased demand from our industrial customers and sales growth in the residential and commercial classes. These are solid indicators that the economic recovery is reaching all sectors. We also realized a positive earnings impact due to a favorable court decision in Texas, which allows us to recover carrying costs for stranded costs in Texas. How- ever, these favorable results were not sufficient to offset the absence of the wholesale capacity auction true-up revenues in 2004 and higher planned plant maintenance and distri- bution system reliability improvement work. Additionally, unfavorable weather due to a mild summer in 2004 low- ered our revenues below expected norms and a significant late-December ice storm in parts of our eastern territory increased our storm damage repair operation and mainte- nance expenses. 

In May 2004, we announced the reorganization of our distribution and customer service operations into seven re- gional utility divisions, placing operational authority into the hands of division presidents and their support staffs. With this new structure, we have created stronger utilities by moving the decision-making closer to the customer and other external stakeholders. 

On October 1, 2004, we integrated our east region transmission and generation operations, commercial pro- cesses and data systems into those of PJM. While we con- tinue to own our transmission assets, use our low-cost gen- eration fleet to serve the needs of our native-load customers, and sell available generation to other parties, we are per- forming those functions through PJM. 

During 2004, we further stabilized our financial strength by: 

• Completing significant asset divestitures resulting in proceeds of approximately $1.4 billion. 

• Using the cash flows from our asset divestitures to reduce outstanding debt, resulting in an improved debt to total capital ratio of 59.1% at December 31, 2004. 

• Stabilizing our credit ratings as indicated by Moody’s change in outlook from “stable” to “positive” in August 2004. 

While we were extremely successful during 2004 in re- ducing our outstanding debt and the related debt to capital ratio from 64.6% to 59.1%, we have significant capital expen- ditures projected for the near-term. Through a combination of cash generated from operations and proceeds from our asset dispositions we expect to maintain the strength of our balance sheet and fund our capital expenditure program. After the completion of our remaining planned divestitures and after the results of our Texas true-up proceedings are finalized, we hope to recommend to the board gradual, sustainable increases to our current 35 cent per share quar- terly common stock dividend. In February 2005, our Board of Directors authorized us to repurchase up to $500 mill- ion of our common stock from time to time through 2006. 

## OUTLOOK FOR 2005 

We remain focused on the fundamental earning power of our utilities, and we are committed to maintaining the strength of our balance sheet. Our strategy for achieving these goals is well planned. We expect to: 

• Continue to identify opportunities to increase the effi- ciency of our operations and capital expenditure program. 

• Seek rate changes that are fair and reasonable and that allow us to make the necessary operational, reliability and environmental improvements to our system. 

• Efficiently manage generating facilities to benefit our customers and to maximize off-system sales. 

• Successfully operate unregulated investments such as our wind farms and our barge and river transport groups, which complement our core utility operations. 

• Pursue new environmentally friendly, state-of-the-art coal-fired power plants. 

There are, nevertheless, certain risks and challenges including: 

• Rate activity such as the AEP Texas Central Company (TCC) wires rate case and the Public Service Company of Oklahoma rate case. 

• Completion of our asset sales, including the remaining TCC generation assets. 

