2004 ANNUAL REPORT TO SHAREHOLDERS 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: There are, nevertheless, certain risks and challenges  including: 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: 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. • Completing significant asset divestitures resulting in  proceeds of approximately $1.4 billion. • Completion of our asset sales, including the remaining  TCC generation assets. • Rate activity such as the AEP Texas Central Company  (TCC) wires rate case and the Public Service Company  of Oklahoma rate case. • Pursue new environmentally friendly, state-of-the-art  coal-fired power plants. • Successfully operate unregulated investments such  as our wind farms and our barge and river transport  groups, which complement our core utility operations. • Efficiently manage generating facilities to benefit our  customers and to maximize off-system sales. • 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. OUTLOOK FOR 2005 17 • 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.