2004 ANNUAL REPORT TO SHAREHOLDERS FINANCIAL CONDITION Investments – Gas Operations Investments – Other Investments – UK Operations 19 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.  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.  As a consequence of the capital changes during 2004,  we improved our ratio of debt to total capital from 64.6% to 59.1%. 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). 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. 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. 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: assets. We also benefited from decreased interest expense  reflecting the refinancings completed in 2004. • 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.