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<CAPTION>


                                                      UNITED STATES
                                            SECURITIES AND EXCHANGE COMMISSION
                                                  WASHINGTON, D.C. 20549
                                                        FORM 10-Q
                                 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                                         OF THE SECURITIES EXCHANGE ACT OF 1934
                                  For The Quarterly Period Ended SEPTEMBER 30, 2004
                                                            OR
                                 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                                       OF THE SECURITIES EXCHANGE ACT OF 1934
                                         For The Transition Period from       to 
                                                                        -----    ----

Commission                  Registrant, State of Incorporation,                                                   I.R.S. Employer
File Number                 Address of Principal Executive Offices, and Telephone Number                          Identification No.
-----------                 ------------------------------------------------------------                          ------------------

<C>                         <C>                                                                                   <C>       
1-3525                      AMERICAN ELECTRIC POWER COMPANY, INC. (A New York Corporation)                        13-4922640
0-18135                     AEP GENERATING COMPANY (An Ohio Corporation)                                          31-1033833
0-346                       AEP TEXAS CENTRAL COMPANY (A Texas Corporation)                                       74-0550600
0-340                       AEP TEXAS NORTH COMPANY (A Texas Corporation)                                         75-0646790
1-3457                      APPALACHIAN POWER COMPANY (A Virginia Corporation)                                    54-0124790
1-2680                      COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation)                                 31-4154203
1-3570                      INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation)                               35-0410455
1-6858                      KENTUCKY POWER COMPANY (A Kentucky Corporation)                                       61-0247775
1-6543                      OHIO POWER COMPANY (An Ohio Corporation)                                              31-4271000
0-343                       PUBLIC SERVICE COMPANY OF OKLAHOMA (An Oklahoma Corporation)                          73-0410895
1-3146                      SOUTHWESTERN ELECTRIC POWER COMPANY (A Delaware Corporation)                          72-0323455

All Registrants             1 Riverside Plaza, Columbus, Ohio  43215-2373
                            Telephone (614) 716-1000

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Sections 13 or 15(d) of the 
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to 
file such reports), and (2) have been subject to such filing requirements for the past 90 days.

                                                                                                   Yes   X          No       
                                                                                                       -----           ------

Indicate by check mark whether  American  Electric  Power Company,  Inc. is an accelerated  filer (as defined in Rule 12b-2 of
the Exchange Act).

                                                                                                   Yes   X          No      
                                                                                                       -----           ------

Indicate by check mark whether AEP Generating Company, AEP Texas Central Company, AEP Texas North Company, Appalachian Power 
Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, Ohio Power Company, Public 
Service Company of Oklahoma and Southwestern Electric Power Company, are accelerated filers (as defined in Rule 12b-2 of the 
Exchange Act).

                                                                                                   Yes               No   X  
                                                                                                       -----           ------

AEP Generating Company, AEP Texas North Company, Columbus Southern Power Company, Kentucky Power Company and Public Service 
Company of Oklahoma meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing 
this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.
</TABLE>



<PAGE>


                                            Number of Shares        
                                             of Common Stock      
                                             Outstanding at      Par Value at
                                           October 29, 2004    October 29, 2004
                                           ----------------    ----------------

American Electric Power Company, Inc.         395,704,805            $6.50 

AEP Generating Company                              1,000            1,000 

AEP Texas Central Company                       2,211,678               25 

AEP Texas North Company                         5,488,560               25 

Appalachian Power Company                      13,499,500                - 

Columbus Southern Power Company                16,410,426                - 

Indiana Michigan Power Company                  1,400,000                - 

Kentucky Power Company                          1,009,000               50 

Ohio Power Company                             27,952,473                - 

Public Service Company of Oklahoma              9,013,000               15 

Southwestern Electric Power Company             7,536,640               18 





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                         AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                      INDEX TO QUARTERLY REPORT ON FORM 10-Q
                                               September 30, 2004

                                                                                                                
<C>                   <C>                                                                                  
Glossary of Terms                                                                                                
Forward-Looking Information                                                                                      


Part I.  FINANCIAL INFORMATION

  Items 1, 2 and 3 - Financial Statements, Management's Financial Discussion
     and Analysis and Quantitative and Qualitative Disclosures About Risk
     Management Activities:

                      American Electric Power Company, Inc. and Subsidiary Companies:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                           Notes to Consolidated Financial Statements                                            

                      AEP Generating Company:
                           Management's Narrative Financial Discussion and Analysis                              
                           Financial Statements                                                                  

                      AEP Texas Central Company and Subsidiary:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      AEP Texas North Company:
                           Management's Narrative Financial Discussion and Analysis                              
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Financial Statements                                                                  

                      Appalachian Power Company and Subsidiaries:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      Columbus Southern Power Company and Subsidiaries:
                           Management's Narrative Financial Discussion and Analysis                              
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      Indiana Michigan Power Company and Subsidiaries:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      Kentucky Power Company:
                           Management's Narrative Financial Discussion and Analysis                              
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Financial Statements                                                                  

                      Ohio Power Company Consolidated:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      Public Service Company of Oklahoma:
                           Management's Narrative Financial Discussion and Analysis                              
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Financial Statements                                                                  

                      Southwestern Electric Power Company Consolidated:
                           Management's Financial Discussion and Analysis                                        
                           Quantitative and Qualitative Disclosures About Risk Management Activities             
                           Consolidated Financial Statements                                                     

                      Notes to Financial Statements of Registrant Subsidiaries                                   

                      Registrant Subsidiaries' Combined Management's Discussion and Analysis                     


 
   Item 4.            Controls and Procedures                                                                   


Part II.           OTHER INFORMATION

    Item 1.            Legal Proceedings                                                                         

    Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds                               

    Item 5.            Other Information                                                                         

    Item 6.            Exhibits                                                                                  
                                       Exhibits:
                                          Exhibit 10
                                          Exhibit 12
                                          Exhibit 31.1
                                          Exhibit 31.2
                                          Exhibit 32.1
                                          Exhibit 32.2


SIGNATURE                                                                                                        



This combined Form 10-Q is separately filed by American Electric Power Company, Inc., AEP Generating Company, AEP Texas Central 
Company, AEP Texas North Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, 
Kentucky Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company. Information
contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no 
representation as to information relating to the other registrants.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>

                                          GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

               Term                                Meaning
               ----                                -------
<C>                                <C> 
AEGCo                              AEP Generating Company, an electric utility subsidiary of AEP.
AEP                                American Electric Power Company, Inc.
AEP Consolidated                   AEP and its majority owned consolidated subsidiaries and consolidated affiliates.
AEP Credit                         AEP Credit,  Inc., a subsidiary of AEP which factors  accounts  receivable and accrued utility
                                            revenues for affiliated domestic electric utility companies.
AEP East companies                 APCo, CSPCo, I&M, KPCo and OPCo.
AEPES                              AEP Energy Services, Inc., a subsidiary of AEP Resources, Inc.
AEP System or the System           The American Electric Power System, an integrated electric utility system, owned and operated 
                                            by AEP's electric utility subsidiaries.
AEPSC                              American Electric Power Service Corporation, a service subsidiary providing management and
                                            professional services to AEP and its subsidiaries.
AEP System Power Pool or           Members are APCo, CSPCo, I&M, KPCo and OPCo. The Pool shares the generation, cost of 
AEP Power Pool                              generation and resultant wholesale system sales of the member companies.
AEP West companies                 PSO, SWEPCo, TCC and TNC.
ALJ                                Administrative Law Judge.
APCo                               Appalachian Power Company, an AEP electric utility subsidiary.
Cook Plant                         The Donald C. Cook Nuclear Plant, a two-unit, 2,110 MW nuclear plant owned by I&M.
CSPCo                              Columbus Southern Power Company, an AEP electric utility subsidiary.
CSW                                Central and South West  Corporation,  a subsidiary of AEP (Effective January 21, 2003, the
                                            legal name of Central and South West Corporation was changed to AEP Utilities, Inc.).
DETM                               Duke Energy Trading and Marketing L.L.C., a risk management counterparty.
DOE                                United States Department of Energy.
ECAR                               East Central Area Reliability Council.
EITF                               The Financial Accounting Standards Board's Emerging Issues Task Force.
ERCOT                              The Electric Reliability Council of Texas.
FASB                               Financial Accounting Standards Board.
Federal EPA                        United States Environmental Protection Agency.
FERC                               Federal Energy Regulatory Commission.
GAAP                               Generally Accepted Accounting Principles.
I&M                                Indiana Michigan Power Company, an AEP electric utility subsidiary.
IURC                               Indiana Utility Regulatory Commission.
JMG                                JMG Funding LP.
KPCo                               Kentucky Power Company, an AEP electric utility subsidiary.
KPSC                               Kentucky Public Service Commission.
KWH                                Kilowatthour.
LIG                                Louisiana Intrastate Gas, an AEP subsidiary.
ME SWEPCo                          Mutual Energy SWEPCo L.P., a Texas retail electric provider.
Money Pool                         AEP System's Money Pool.
MTM                                Mark-to-Market.
MW                                 Megawatt.
MWH                                Megawatthour.
NOx                                Nitrogen oxide.
OATT                               Open Access Transmission Tariff.
OPCo                               Ohio Power Company, an AEP electric utility subsidiary. 
PJM                                Pennsylvania - New Jersey - Maryland regional transmission organization. 
PSO                                Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCT                               The Public Utility Commission of Texas.
PUHCA                              Public Utility Holding Company Act.
PURPA                              The Public Utility Regulatory Policies Act of 1978.
Registrant Subsidiaries            AEP subsidiaries who are SEC registrants; AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo,
                                            TCC and TNC.
Risk Management Contracts          Trading and non-trading derivatives, including those derivatives designated as cash flow and 
                                            fair value hedges.
Rockport Plant                     A generating plant, consisting of two 1,300 MW coal-fired generating units near Rockport, Indiana
                                            owned by AEGCo and I&M.
RTO                                Regional Transmission Organization.
SEC                                Securities and Exchange Commission.
SFAS                               Statement of Financial  Accounting Standards issued by the Financial Accounting Standards
                                            Board.
SFAS 133                           Statement of Financial  Accounting Standards No. 133, 
                                            Accounting for Derivative Instruments and Hedging Activities.
                                            ------------------------------------------------------------
SNF                                Spent Nuclear Fuel.
SPP                                Southwest Power Pool.
STP                                South Texas Project Nuclear  Generating  Plant, owned 25.2% by AEP Texas Central Company, an
                                            AEP electric utility subsidiary.
SWEPCo                            Southwestern Electric Power Company, an AEP electric utility subsidiary.
TCC                               AEP Texas Central Company, an AEP electric utility subsidiary.
Tenor                             Maturity of a contract.
Texas Legislation                 Legislation enacted in 1999 to restructure the electric utility industry in Texas. 
TNC                               AEP Texas North Company, an AEP electric utility subsidiary. 
True-up Proceeding                A filing to be made under the Texas Legislation to finalize the amount of stranded costs and
                                            other true-up items and the recovery of such amounts.
TVA                                Tennessee Valley Authority.
VaR                                Value at Risk, a method to quantify risk exposure.
Virginia SCC                       Virginia State Corporation Commission.
Zimmer Plant                       William H.  Zimmer  Generating  Station, a 1,300 MW coal-fired unit owned 25.4% by Columbus
                                            Southern Power Company, an AEP subsidiary.

</TABLE>



<PAGE>

                           FORWARD-LOOKING INFORMATION

This report made by AEP and certain of its subsidiaries contains forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934. Although AEP and each of its registrant subsidiaries believe that 
their expectations are based on reasonable assumptions, any such statements 
may be influenced by factors that could cause actual outcomes and results to 
be materially different from those projected. Among the factors that could 
cause actual results to differ materially from those in the forward-looking 
statements are:

 o  Electric load and customer growth.
 o  Weather conditions, including storms.
 o  Available sources and costs of, and transportation for, fuels and the
    creditworthiness of fuel suppliers and transporters.
 o  Availability of generating capacity and the performance of AEP's generating
    plants. 
 o  The ability to recover regulatory assets and stranded costs in
    connection with deregulation. 
 o  The ability to recover increases in fuel and other energy costs through 
    regulated or competitive electric rates. 
 o  New legislation, litigation and government regulation including 
    requirements for reduced emissions of sulfur, nitrogen, mercury, 
    carbon and other substances.
 o  Resolution of pending and future rate cases, negotiations and other 
    regulatory decisions (including rate or other recovery for new
    investments and environmental compliance).
 o  Oversight and/or investigation of the energy sector or its participants.
 o  Resolution of litigation (including pending Clean Air Act enforcement
    actions and disputes arising from the bankruptcy of Enron Corp.).
 o  AEP's ability to constrain its operation and maintenance costs. 
 o  The success of disposing of investments that no longer match AEP's business
    model. 
 o  AEP's ability to sell assets at acceptable prices and on other acceptable 
    terms.
 o  International and country-specific developments affecting foreign
    investments including the disposition of any foreign investments.
 o  The economic climate and growth in AEP's service territory and changes in
    market demand and demographic patterns. 
 o  Inflationary trends. 
 o  AEP's ability to develop and execute a strategy based on a view regarding 
    prices of electricity, natural gas, and other energy-related commodities.
 o  Changes in the creditworthiness and number of participants in the energy
    trading market.
 o  Changes in the financial markets, particularly those affecting the
    availability of capital and AEP's ability to refinance existing debt at
    attractive rates.
 o  Actions of rating agencies, including changes in the ratings of debt and
    preferred stock. 
 o  Volatility and changes in markets for electricity, natural gas, and other 
    energy-related commodities. 
 o  Changes in utility regulation, including membership and integration in a 
    regional transmission structure. 
 o  Accounting pronouncements periodically issued by accounting standard-setting
    bodies.
 o  The performance of AEP's pension and other postretirement benefit plans. 
 o  Prices for power that AEP generates and sells at wholesale.
 o  Changes in technology and other risks and unforeseen events, including wars,
    the effects of terrorism (including increased security costs), embargoes 
    and other catastrophic events.



<PAGE>


         AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
    MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
    -----------------------------------------------------------------------

EXECUTIVE OVERVIEW
------------------

Utility Operations Segment Results
----------------------------------
While earnings from our Utility Operations were less than our earnings for the
same periods for the prior year, we are pleased with the results. Net income
from Utility Operations was $359 million for the third quarter 2004 and $845
million for the nine months ended September 30, 2004. We continue to see healthy
utility sales increases in most of our regions due to increased usage and growth
in our residential and commercial customer base for the first three quarters of
2004. Additionally, improvements in the economy are reflected in our industrial
sales. These favorable trends were not sufficient to offset the absence of the
Wholesale Capacity auction revenues in 2004, higher planned plant maintenance
and distribution system reliability improvement work, and the impact of
unfavorable weather in the third quarter due to a mild summer in 2004.

Progress Made on Asset Sales
----------------------------
We are on schedule with our planned divestiture of various unregulated
businesses and other assets and are making significant progress towards
completion of the disposal of our interests in AEP Texas Central Company (TCC)
generating assets. The proceeds from the sales are being used to reduce existing
long-term debt and other obligations. We expect the remaining asset sales to be
completed no later than mid 2005.

During the first six months of 2004, we completed (a) the sale of our interest
in the Pushan Power Plant in China, (b) the sale of Louisiana Intrastate Gas
Pipeline Company, and (c) the sale of the mining operations of AEP Coal.

During the third quarter 2004, we completed (a) the sale of two coal fired
plants in the U.K. (Fiddler's Ferry and Ferrybridge) along with related coal
inventory and a number of related commodity and freight contracts, (b) the sale
of our ownership interests in our two independent power producers in Florida and
one in Colorado, and (c) the sale of our 50 percent interest in South Coast
Power Limited, owner of the Shoreham Power Station in the U.K.

During October 2004, we completed (a) the sale of Jefferson Island Storage & Hub
LLC, including salt dome caverns and pipelines, (b) the sale of our ownership
interest in our final independent power producer in Colorado, and (c) the sale
of the former headquarters building for CSW in Dallas, Texas.

Unregulated assets that are currently being marketed include (a) our 50 percent
interest in Bajio, a 600 MW natural gas-fired generation facility located in
Mexico and (b) our 20 percent equity interest in Pacific Hydro, an Australian
renewable energy company. We will continue our effort to locate buyers for these
assets.

During the third quarter, we sold the majority of TCC's generation assets,
including eight natural gas plants, one coal-fired plant and one hydro plant.
The remaining TCC generation assets to be sold include TCC's share of the
Oklaunion Power Station and TCC's share of the South Texas Project (STP) nuclear
plant. Agreements have been reached for the sale of TCC's interest in both
facilities and we expect the sales to be completed in the first half of 2005.
Nevertheless, there could be potential delays in receiving necessary regulatory
approvals and clearances, which could delay the closings. The sale of the TCC
assets will allow us to determine stranded costs for recovery under the Texas
Legislation.

This year's sales of non-strategic, non-regulated international and domestic
assets are consistent with our strategy that focuses on our core domestic
utility business.

PJM Integration
---------------
We worked closely with regulators in all our states to successfully
address issues related to the PJM integration process. As a result of those
efforts, we transferred functional control of AEP's eastern transmission grid of
nearly 22,300 transmission miles to PJM Interconnection, a regional transmission
organization, on October 1, 2004. Our membership in PJM is expected to improve
the system reliability throughout the 12-state PJM RTO region.

Environmental
-------------
We have announced plans to invest approximately $3.5 billion in capital from
2004 to 2010, and a total of $5 billion through 2020, to install pollution
control equipment that preserves the low cost generation from our coal-fired 
power plants in the East. Fifty-one percent of our $3.5 billion capital plan 
relates to Ohio generation facilities, followed by Virginia and West Virginia 
with 35 percent, Kentucky with 9 percent and Indiana with 5 percent. Our 
overall relationships with regulators are important to our growth strategy and 
our goal of producing low-cost electricity with minimal impact on the 
environment. It is important that we manage the regulatory process to ensure 
that we receive fair recovery of our costs, including capital costs, as we 
fulfill our commitment to invest in environmental projects at our generating 
plants.

Overall Regulatory Matters and Regional Reorganization
------------------------------------------------------
Refocusing on the regulatory compact is essential to our success and will be 
one of the main drivers of our performance in the future. The regulatory compact
is the means through which we make necessary investments to serve our customers
and in return are provided, through regulation, the opportunity to recover our 
costs including a reasonable return on our investments.  Our recent regional 
reorganization along state and jurisdictional lines reinforces our focus on 
customer service and aligns management with successful financial outcomes. 

Texas Regulatory Activity
-------------------------

Stranded Cost Recovery
----------------------

We continue to devote a great deal of time and effort to the issue of stranded
cost recovery in Texas. We cannot file our case for stranded cost recovery until
TCC's generation assets have been sold unless a waiver is granted. TCC
is evaluating and may seek a good-cause exception to the true-up rule to allow
us to file our True-up Proceedings before the sale of all of our TCC generation
assets is completed. The only asset sales pending are our Oklaunion and STP 
interests. Both should be completed in the first half of 2005. The principal 
component of the process is the net stranded generation costs (approximately 
$1.3 billion). Other net regulatory assets may also be recovered through 
customer transition charges. 

The ultimate recovery of these assets is subject to what is expected to be a
contentious stranded cost True-up Proceeding. Although we believe that these
assets are recoverable under the Texas restructuring legislation, we anticipate
that other parties will contend that material amounts of stranded costs should
not be recovered. If these contentions are successful, in whole or in
substantial part, that would adversely affect future results of operations, cash
flows and financial condition.

TCC Rate Case
-------------

TCC has a base rate filing before the Public Utility Commission of Texas (PUCT)
in which we are requesting an adjusted $41 million rate increase. After hearing
the case, the ALJ has recommended a reduction in existing rates of somewhere
between $33 million and $43 million depending on the final treatment of 
consolidated tax savings. We have defended vigorously our request in briefs 
submitted to the PUCT. Hearings were held on the consolidated tax savings 
remand issue in September 2004. The PUCT is expected to issue a decision in 
the fourth quarter of 2004.

Ohio Regulatory Activity
------------------------
Our strategy to invest capital in environmental assets has particular
significance in Ohio, our largest jurisdiction with 11,130 MW of generation and
1.5 million customers. Fifty one percent of our $3.5 billion environmental
capital plan is anticipated to be spent in Ohio. We have filed our proposed rate
stabilization plan which includes a 7% increase each year for the generation
component of the rate for Ohio Power Company customers and a 3% rate increase
each year for Columbus Southern Power Company customers beginning in 2006 and
ending in 2008. Our plan also offers the option to remove the current
residential 5% generation discount earlier than the statutory elimination at the
end of 2005 to reduce the annual percentage increase to residential customers.
The plan includes the opportunity annually to request an additional increase
averaging 4% per year for both companies if costs exceed the currently
anticipated level. Our Ohio Companies' Rate Stabilization Plans also provide for
the deferral of environmental construction and in-service carrying costs plus
PJM RTO administrative fees in 2004 and 2005 for recovery through a wires charge
in 2006 through 2008. The plan is designed to recover the cost increases that
are expected to result from environmental improvements to our Ohio generating
units and the costs of transmission reliability improvements from joining PJM. A
non-affiliated utility received an order which rejected its request for
automatic increases and deferrals during the Market Development Period (MDP).
The PUCO has indicated in FirstEnergy companies' rate stabilization plans that
these plans are specific to a company's requirements and characteristics and the
PUCO's order in one case should not be considered precedent for another
company's rate stabilization plan. Management is unable to predict how the PUCO
will rule regarding our rate stabilization filings. The PUCO is expected to
issue an order before the end of the 2004.

Energy Costs
------------
Coal, natural gas and oil prices have increased dramatically during 2004. These
increasing costs are the result of increasing worldwide demand, supply 
uncertainty, and transportation constraints, as well as other factors that are
not fundamentally observable.  We manage price risk, particularly around coal,
through long-term purchase contracts, fuel clauses in several jurisdictions and
other fuel procurement activities.

Improving Our Balance Sheet
---------------------------
We are utilizing and will continue to utilize the cash generated by the sale of
certain assets to reduce existing long-term debt and other obligations. During
the nine months ended September 30, 2004, we reduced total long-term debt by
approximately $1.5 billion, or 10%. The result of our use of cash on hand and
sales proceeds to reduce debt has decreased our debt to total capitalization 
ratio from 64.6% at December 31, 2003 to 60.8% at September 30, 2004.

New Technology Plant
--------------------
We intend to build a synthetic-gas-fired plant up to 1,000 MW of capacity in the
next five to six years utilizing integrated gasification combined cycle (IGCC)
technology. We estimate that this new plant will cost up to $1.6 billion. We
have not determined a location for the plant, but it will likely be in one of
our eastern states, because of ready access to coal. We will work with state
regulators and legislators to establish a framework for recovery of this
significant investment in new clean coal technology before site selection. Our
significant planned investments in emission control installations at existing
coal-fired plants and our commitment to IGCC technology reinforces our belief
that coal will be a lower emission energy source of the future and further
signals our commitment to investing in clean, environmentally safe technology.

Additional Information
----------------------
For additional information on our strategic outlook, see "Management's Financial
Discussion and Analysis of Results of Operations," including "Business
Strategy," in our 2003 Annual Report. Also see the remainder of our
"Management's Financial Discussion and Analysis of Results of Operations" in
this Form 10-Q, along with the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS
---------------------

Segments
--------
Our principal operating business segments and their major activities are:
 o  Utility Operations:
     o  Domestic generation of electricity for sale to retail and wholesale 
        customers.
     o  Domestic electricity transmission and distribution.

 o  Investments-Gas Operations:*
     o  Gas pipeline and storage services.

 o  Investments-UK Operations:**
     o  International generation of electricity for sale to wholesale customers.
     o  Coal procurement and transportation to our U.K. plants.

 o  Investments-Other:***
     o  Bulk commodity barging operations, windfarms, independent power 
        producers and other energy supply related businesses.

   *   Operations of Louisiana Intrastate Gas, including Jefferson Island
       Storage, were classified as discontinued during 2003 and were sold
       during the second and fourth quarter 2004, respectively.
   **  UK Operations were classified as discontinued during 2003 and were sold
       during third quarter 2004. 
   *** Four independent power producers were sold during the third and fourth 
       quarter 2004.

There are numerous changes occurring in the businesses included in our segments
as a result of our continued divestiture of certain non-core operations.
Substantially all operations and assets within our Investments - UK Operations
segment were sold in July 2004. Within our Investments - Gas Operations segment,
we have recently sold LIG Pipeline Company, which included our gas pipeline
portion of Louisiana Intrastate Gas, and Jefferson Island Storage & Hub, L.L.C.,
which included our Louisiana gas storage assets held for sale. The only
substantive portion of the Investments - Gas Operations business that remains is
our Houston Pipe Line Company L.P. (HPL) operations, which includes the Bammel
storage facility and related pipeline assets. We will continue to operate HPL as
we evaluate our future plans for this investment.

In addition, there have been numerous divestitures of businesses, assets and
investments within our Investments - Other segment over the course of the past
nine months including AEP Coal and our interest in the Pushan Power Plant. We
also completed the sale of three independent power producers during the third
quarter 2004 and closed on the sale of a fourth independent power producer
facility early in the fourth quarter 2004. Our investment in South Coast Power
Limited, owner of the Shoreham Power Station in the U.K., was also sold in the
third quarter 2004. Our goal for the remaining assets in this segment, which
includes our unregulated investments in wind farms, and barging and river
transportation groups, is to operate them in such a way that they complement our
core capabilities in regulated utility operations.

All of the changes in these segments are leading us to review our business model
of the future and how we intend to manage our business overall. The decisions we
make over the course of the remainder of the year may lead to changes in our
reported business segments.

AEP Consolidated Results
------------------------

Our consolidated Net Income for the three and nine month periods ended September
30, 2004 and 2003 was as follows (Earnings and Average Shares Outstanding in
millions):

<TABLE>
<CAPTION>


                                                                                                  
                                                       Third Quarter                           Nine Months Ended September 30,
                                          -------------------------------------------       --------------------------------------
                                                  2004                   2003                    2004                   2003
                                          ------------------     --------------------       ----------------     -----------------
                                          Earnings     EPS       Earnings       EPS         Earnings   EPS       Earnings    EPS
                                          --------     ---       --------       ---         --------   ---       --------    ---
<C>                                         <C>       <C>          <C>         <C>            <C>     <C>          <C>      <C>   
Utility Operations                          $359      $0.90        $409        $1.03          $845    $2.13        $940     $2.46 
Investments - Gas Operations                 (28)     (0.07)        (21)       (0.05)          (41)   (0.10)        (64)    (0.17)
Investments - Other                           90       0.23         (45)       (0.11)           91     0.23         (45)    (0.12)
All Other*                                    (9)     (0.02)        (36)       (0.09)          (43)   (0.11)        (54)    (0.14)
                                            -----     ------       -----       ------         -----   ------       -----    ------
Income Before Discontinued Operations
  and Cumulative Effect of Accounting
  Changes                                    412       1.04         307         0.78           852     2.15         777      2.03 

Investments - Gas Operations                  (3)         -           2            -            (2)       -           6      0.01 
Investments - UK Operations                  120       0.30         (52)       (0.13)           56     0.14         (89)    (0.23)
Investments - Other                            1          -           -            -             6     0.01         (15)    (0.04)
                                            -----     ------       -----       ------         -----   ------       -----    ------
Discontinued Operations                      118       0.30         (50)       (0.13)           60     0.15         (98)    (0.26)

Utility Operations                             -          -           -            -             -        -         236      0.62 
Investments - Gas Operations                   -          -           -            -             -        -         (22)    (0.06)
Investments - UK Operations                    -          -           -            -             -        -         (21)    (0.05)
                                            -----     ------       -----       ------         -----   ------       -----    ------
Cumulative Effect of Accounting Changes        -          -           -            -             -        -         193      0.51
                                            -----     ------       -----       ------         -----   ------       -----    ------
Total Net Income                            $530      $1.34        $257        $0.65          $912    $2.30        $872     $2.28
                                            =====     ======       =====       ======         =====   ======       =====    ====== 
Average Shares Outstanding                              396                      395                    396                   382
                                                        ====                     ====                   ====                  ====
* All Other includes the parent company interest income and expense, as well as other non-allocated costs.

</TABLE>


Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Income Before Discontinued Operations and Cumulative Effect of Accounting
Changes increased $105 million to $412 million in third quarter 2004 compared to
third quarter 2003. Net Income for third quarter 2004 of $530 million or $1.34 
per share includes a gain, net of taxes, from discontinued operations of $118 
million. Net Income for third quarter 2003 of $257 million or $0.65 per share 
includes a loss, net of taxes, from discontinued operations of $50 million.

For the third quarter 2004 our Utility Operations Earnings decreased $50
million, or 12%, from the previous year driven primarily by the absence of the
Texas wholesale capacity auction true-up revenue in 2004 and milder weather in
the summer months of 2004 offset by higher industrial load growth.

Earnings from our UK Operations (which were sold on July 30, 2004) improved $172
million in the third quarter 2004 as compared to the same period in 2003
primarily due to a gain of $127 million, net of tax, on the sale. These
operations had impairment losses in 2003.  Please refer to our 2003 Annual 
Report for further discussion.

Earnings from our Gas Operations decreased $12 million from the previous year
reflecting a decrease in results from storage-related gas valuation losses,
which we expect will reverse in future periods.

Earnings from our Investments - Other segment increased $136 million. This
segment benefited from the sale of three of our IPP investments and the sale of
our 50 percent interest in South Coast Power Limited, owner of the Shoreham
Power Station in the U.K. in 2004 compared to the same period in 2003, which
included impairments on the IPPs. We recorded $95 million in gains from the sale
of these investments during the third quarter 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Income Before Discontinued Operations and Cumulative Effect of Accounting
Changes increased $75 million to $852 million in 2004 compared to 2003. Net
Income for 2004 of $912 million or $2.30 per share includes a gain, net of
taxes, from discontinued operations of $60 million. Net Income for 2003 of $872
million or $2.28 per share includes a loss, net of taxes, from discontinued
operations of $98 million and a benefit from a net $193 million of cumulative
effect of changes in accounting related to asset retirement obligations and
accounting for risk management contracts.

For the nine months ended September 30, 2004, Utility Operations Income Before
Discontinued Operations and Cumulative Effect of Accounting Changes decreased
$95 million or 10% from the previous year primarily due to the absence of the
Texas wholesale capacity auction true-up revenue in 2004.

Reduced losses at our UK Operations, included in discontinued operations, were 
responsible for $166 million (including cumulative effect of accounting changes)
of the increase in Net Income in 2004. In July 2004, we completed the sale of 
substantially all operations and assets within our Investments - UK Operations 
segment resulting in a gain of $127 million, net of tax, on the sale. These
operations had impairment losses in 2003.  Please refer to our 2003 Annual 
Report for further discussion.

Our Investments - Gas Operations segment posted a lower loss in 2004 due to
improved pipeline operations and lower operating expenses.

Our results of operations by operating segment are discussed below.

Utility Operations
------------------
                  

<TABLE>
<CAPTION>
                                                           Third Quarter                 Nine Months Ended September 30,
                                                     ----------------------              -------------------------------       
                                                     2004              2003                2004                   2003
                                                     ----              ----                ----                   ----
                                                                             (in millions)             
<C>                                                  <C>               <C>                 <C>                   <C>    
Revenues                                             $2,946            $3,112              $8,095                $8,483 
Fuel and Purchased Power                              1,054             1,121               2,635                 2,967
                                                     -------           -------             -------               -------    
Gross Margin                                          1,892             1,991               5,460                 5,516 
Depreciation and Amortization                           322               317                 940                   927 
Other Operating Expenses                                895               899               2,806                 2,659
                                                     -------           -------             -------               -------    
Operating Income                                        675               775               1,714                 1,930 
Other Income (Expense), Net                               7                15                  32                    18 
Interest Charges and Preferred
   Stock Dividend Requirements                          151               168                 471                   499 
Income Tax Expense                                      172               213                 430                   509
                                                     -------           -------             -------               -------    
Income Before Discontinued
   Operations and Cumulative Effect of
   Accounting Changes                                  $359              $409                $845                  $940
                                                     =======           =======             =======               =======
</TABLE>


<TABLE>
<CAPTION>


                                                 Summary of Selected Sales Data
                                                     For Utility Operations

                                               Third Quarter                  Nine Months Ended September 30,
                                          ------------------------            -------------------------------                   
                                          2004                2003               2004                 2003
                                          ----                ----               ----                  ----
Energy Summary                                                    (in millions of KWH)                                       
<C>                                      <C>                 <C>               <C>                  <C> 
Retail:
    Residential                          12,002              12,578             35,169               34,658  
    Commercial                           10,070              10,267             28,240               27,834  
    Industrial                           13,052              12,309             38,227               36,764  
    Miscellaneous                           857                 827              2,406                2,251
                                         -------             -------           --------             --------
  Subtotal                               35,981              35,981            104,042              101,507  
  Texas Retail and Other                    316                 725                802                2,264
                                         -------             -------           --------             --------
             Total                       36,297              36,706            104,844              103,771
                                         =======             =======           ========             ========

  Wholesale:                             23,613              19,669             62,838               56,385
                                         =======             =======           ========             ========
</TABLE>


<TABLE>
<CAPTION>



                                                    Summary of Selected Data
                                                     For Utility Operations

                                                                            
                                               Third Quarter                   Nine Months Ended September 30,
                                          ------------------------             -------------------------------
                                          2004                2003                 2004            2003
                                          ----                ----                 ----            ----
Weather Summary                                                   (in degree days)                                              
Eastern Region
--------------
<C>                                     <C>                  <C>                   <C>             <C>    
Actual - Heating                            1                   12                 2,032           2,181  
Normal - Heating*                           7                                      1,993           1,979  

Actual - Cooling                          553                  592                   869             750  
Normal - Cooling*                         679                                        960             962  

Western Region (PSO/SWEPCo)
---------------------------
Actual - Heating                            0                    0                   913           1,074  
Normal - Heating*                           2                                      1,013           1,006  

Actual - Cooling                        1,178                1,390                 1,867           2,034  
Normal - Cooling*                       1,398                                      2,058           2,050  

 *Normal Heating/Cooling represents the 30-year average of degree days.
</TABLE>


Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

<TABLE>
<CAPTION>

            Reconciliation of Third Quarter 2003 to Third Quarter 2004
Income Before Discontinued Operations and Cumulative Effect of Accounting Changes
                                  (in millions)

 <C>                                                 <C>            <C>  
 Third Quarter 2003                                                 $409 

 Changes in Gross Margin:
 ------------------------
 Retail Margins                                       (2)
 Texas Supply                                        (10)
 Wholesale Capacity Auction Revenues                 (61)
 Off-System Sales                                    (26)
                                                     ----
                                                                     (99)
 Changes in Operating And Other Expenses:
 ----------------------------------------
 Operations and Maintenance                           (3)
 Depreciation and Amortization                        (5)
 Taxes, Other                                          7 
 Other Income (Expense), Net                          (8)
 Interest Charges                                     17
                                                     ----
                                                                       8 

 Income Tax Expense                                                   41
                                                                    -----

 Third Quarter 2004                                                 $359
                                                                    =====
</TABLE>


Income from Utility Operations decreased $50 million to $359 million in 2004.
The key driver of the decrease was a $99 million decrease in gross margin
partially offset by an $8 million net decrease in operating and other expenses,
and a $41 million decrease in income taxes.

The major components of our change in gross margin, defined as utility revenues
net of related fuel and purchased power, were as follows:

 o  Overall retail margins in our utility business were slightly below last
    year. Residential demand decreased from the prior year as a result of
    lower usage by customers due to mild weather in the summer months of
    2004 across most of the service territory. Cooling degree days were
    down in both the East and the West as compared to the prior year.
    Partially offsetting the mild weather were favorable results from
    residential and commercial customer growth and increased demand in
    industrial classes from the continuing economic recovery in our
    regions.
 o  Our Texas supply business had a $10 million decrease in gross margin as
    a result of increased purchased power costs due to the divestiture of
    assets, and pursuant to our energy supply commitments we made to our 
    wholesale customers, at the end of the second quarter of 2004.
 o  Beginning in 2004, the wholesale capacity auction true-up ceased per
    rules of the PUCT. Related revenues are no longer recognized, resulting
    in $61 million of lower regulatory deferrals in 2004. For the years
    2003 and 2002, we recognized revenues for the wholesale capacity
    auction true-up for TCC as a regulatory asset for the difference
    between the actual market prices based upon the state-mandated auction
    of 15% of generation capacity and the earlier estimate of market price
    used in the PUCT's excess cost over market model.
 o  Margins from off-system sales for 2004 were $26 million lower than 2003
    primarily due to lower optimization activity.

Utility Operating and Other Expenses changed between years as follows:

 o  Interest expense decreased $17 million due to the refinancing of higher 
    coupon debt and the retirement of debt. 
 o  Income Tax expense decreased $41 million largely due to the decrease in 
    pre-tax income and other tax return adjustments.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------


<TABLE>
<CAPTION>

Reconciliation of Nine Months Ended September 30, 2003 to Nine Months Ended September 30, 2004
       Income Before Discontinued Operations & Cumulative Effect of Accounting Changes
                                        (in millions)

 <C>                                                             <C>             <C>  
 Nine Months Ended September 30, 2003                                            $940 

 Changes in Gross Margin:
 ------------------------
 Retail Margins                                                   119 
 Texas Supply                                                     (52)
 Wholesale Capacity Auction Revenues                             (169)
 Off-System Sales                                                  34 
 Other                                                             12
                                                                 -----
                                                                                  (56)
 Changes in Operating And Other Expenses:
 ----------------------------------------
 Operations and Maintenance                                      (138)
 Depreciation and Amortization                                    (13)
 Taxes, Other                                                      (9)
 Other Income (Expense), Net                                       14 
 Interest Charges                                                  28
                                                                 -----
                                                                                 (118)

 Income Tax Expense                                                                79
                                                                                 -----

 Nine Months Ended September 30, 2004                                            $845
                                                                                 =====
</TABLE>


Income from Utility Operations, before a $236 million cumulative effect of
accounting changes in 2003, decreased $95 million in 2004 to $845 million. Key
drivers of the change include $118 million increase in operating and other
expenses, a $56 million decrease in gross margin and a $79 million decrease in
income taxes.

The major components of our change in gross margin, defined as utility revenues
net of related fuel and purchased power, were as follows:

 o  Overall retail margins (excluding fuel recovery) in our utility
    business increased $60 million. Demand in the East and the West
    increased over the prior year as a consequence of higher usage in most
    classes and customer growth in the residential and commercial classes.
    Commercial and industrial demand also increased resulting from the
    economic recovery in our regions. Milder weather during the summer
    months of 2004 partially offset these favorable results.
 o  Fuel recovery in our non-Texas utility operations was a net $59 million
    favorable in comparison to last year due to higher fuel costs in the
    prior year resulting primarily from the conclusion of the amortization
    of deferred Cook plant outage costs and a fish intrusion outage causing
    us to purchase higher priced non-nuclear replacement power in 2003.
 o  Our Texas supply business had a $52 million decrease in gross margin
    principally due to the divestiture of TCC generation assets to comply
    with Texas stranded cost recovery regulations. This resulted in higher
    purchased power costs to fulfill contractual commitments.
 o  Beginning in 2004, the wholesale capacity auction true-up ceased per
    rules of the PUCT. Related revenues are no longer recognized, resulting
    in $169 million of lower regulatory deferrals in 2004. For the years
    2003 and 2002, we recognized the revenues for the wholesale capacity
    auction true-up for TCC as a regulatory asset for the difference
    between the actual market prices based upon the state-mandated auction
    of 15% of generation capacity and the earlier estimate of market price
    used in the PUCT's excess cost over market model.
 o  Margins  from off-system sales for 2004 were $34 million better than 
    in 2003 due to favorable optimization activity, somewhat offset by lower
    volumes.

Utility Operating and Other Expenses changed between years as follows:

 o  Maintenance and Other Operation expense increased $138 million due to a
    $67 million increase in generation expenses primarily due to the timing
    of planned plant outages in 2004 as compared to 2003, and increases in
    related chemical expenses. Additionally, distribution maintenance expense 
    increased $39 million from system reliability work.  Other increases of $22
    million include employee benefits, insurance, and other administrative and
    general expenses, magnified by favorable adjustments in 2003. These
    increases were offset, in part, by $30 million due to the conclusion of
    the amortization of our deferred Cook nuclear plant restart settlement
    expenses. Expenses of $40 million, comprised of various miscellaneous
    items, make up the remainder of the increase.
 o  Depreciation and amortization expense increased $13 million primarily
    due to a higher depreciable asset base, including the addition of
    capitalized software costs, increased amortization of regulatory
    assets, and the consolidation of JMG at Ohio Power (which had no impact
    on net income). These increases more than offset the decrease in
    expense at AEP Texas Central, which is due primarily to the cessation
    of depreciation on plants classified as held for sale.
 o  Taxes other than income taxes increased $9 million due to increased property
    tax values and assessments. 
 o  Interest expense decreased $28 million from the prior period due to the 
    refinancings of higher coupon debt. 
 o  Income Tax expense decreased $79 million due to the decrease in pre-tax 
    income and other prior year tax return adjustments.

Investments - Gas Operations     
----------------------------

<TABLE>
<CAPTION>

                                                                      Third Quarter             Nine Months Ended September 30,
                                                                   -------------------          -------------------------------
                                                                   2004           2003              2004               2003
                                                                   ----           ----              ----               ----
                                                                                       (in millions)                       
<C>                                                                <C>            <C>              <C>               <C>    
Revenues                                                           $746           $773             $2,214            $2,396 
Purchased Gas                                                       739            747              2,124             2,321
                                                                   -----          -----            -------           -------
Gross Margin                                                          7             26                 90                75 
Maintenance and Other Operation                                      34             40                 94               114 
Other Operating Expenses                                              3              -                  9                11
                                                                   -----          -----            -------           -------
Operating Loss                                                      (30)           (14)               (13)              (50)
Other Income (Expense), Net                                           -             (3)                (9)               (8)
Interest Expense                                                     14             15                 39                41 
Income Tax Benefit                                                   16             11                 20                35
                                                                   -----          -----            -------           -------
Net Loss Before Discontinued Operations and Cumulative
 Effect of Accounting Changes                                      $(28)          $(21)              $(41)             $(64)
                                                                   =====          =====            =======           =======
</TABLE>


Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Our $28 million loss from Gas Operations before discontinued operations and
cumulative effect of accounting changes compares with a $21 million loss
recorded in the third quarter of 2003. Gross margins decreased $19 million
year-over-year primarily due to valuation changes on price risk management of
fully-hedged physical gas inventories. As gas was injected into storage during
the spring and summer, we hedged the price risk by selling corresponding
quantities in the winter months. As compared to the prior year, we recognized
storage related valuation losses of approximately $23 million on these
fully-hedged positions, which will reverse as margins are recognized when gas is
withdrawn and delivered in future periods. Operating expenses increased by $3
million. Income tax benefits increased by $5 million due to the decrease in
pre-tax income.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Our $41 million loss from Gas Operations before discontinued operations and
cumulative effect of accounting changes compares with a $64 million loss
recorded in the year-to-date September 2003 period. Gross margins improved $15
million year-to-date September 30, 2004 to $90 million. As compared to the prior
year, current year margins have been reduced by $25 million due primarily to
valuation changes on fully-hedged inventory positions, which will reverse as
margins are recognized when gas is withdrawn and delivered in future periods.
Without this impact, margins would have been approximately $40 million higher in
the first nine months 2004 than the first nine months of 2003. This was driven
by $20 million of significant losses in 2003 from servicing a single contract,
improved earnings from the pipeline operations, and the avoidance of prior year
margin losses from the eliminated trading activities. In addition, operating
expenses decreased $22 million between periods as a result of gas trading
activities which have been eliminated and lower depreciation resulting from 2003
asset impairments. Income tax benefits decreased by $15 million primarily due to
the improvement in pre-tax income.

Investments - UK Operations
---------------------------

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Net income from our Investments - UK Operations segment (all classified as 
Discontinued Operations) increased to $120 million in income, which includes a 
gain on sale of $127 million in 2004, compared with a loss of $52 million in 
2003. During late 2003, we concluded that the UK Operations were not part of 
our core business and we began actively marketing our investment. In July 2004,
we completed the sale of substantially all operations and assets within our 
Investments - UK Operations segment. Included in the sale are the generating 
assets, commodity contracts, including electricity sales contracts, coal 
purchase and sale contracts and freight contracts with a number of different 
market counterparties for varying contract periods. The remaining assets and 
liabilities include certain coal, power and capacity positions and financial 
coal and freight swaps. The majority of these positions will either mature or 
be settled with the applicable counterparties during the fourth quarter 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Income from our Investments - UK Operations segment (all classified as 
Discontinued Operations) increased to $56 million in income, which includes a
gain on sale of $127 million in 2004, compared with a loss of $89 million in
2003, before the cumulative effect of accounting change. During late 2003, we
concluded that the UK Operations were not part of our core business and we began
actively marketing our investment. In July 2004, we completed the sale of
substantially all operations and assets within our Investments - UK Operations
segment.

Investments - Other
-------------------

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Income before discontinued operations and cumulative effect of accounting
changes from our Investments - Other segment increased by $135 million in 2004,
primarily due to an after-tax gain of approximately $64 million resulting from
the sale in July 2004 of our ownership interests in our two independent power
producers (IPPs) in Florida (Mulberry and Orange), and one in Colorado (Brush
II), and an after-tax gain of approximately $31 million resulting from the sale
of our 50 percent interest in South Coast Power Limited, owner of the Shoreham
Power Station in the UK. In addition, results in the current quarter did not
include a $45 million after-tax impairment in the third quarter of 2003, related
to our investment in the IPPs.

The above increases were primarily offset by a $2 million decrease in results at
our MEMCO operations due primarily to operational items and a $3 million
decrease at our IPPs and windfarms, resulting primarily from the sale of three
of our IPPs in the third quarter 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------
Income before discontinued operations and cumulative effect of accounting
changes from our Investments - Other segment increased from a loss of $45
million to $91 million of income in 2004.

The key components of the increase in income were as follows:

 o  We recorded an after-tax gain of approximately $64 million resulting from
    the sale in July 2004 of our ownership interests in our two independent
    power producers in Florida (Mulberry and Orange),
 o  We recorded an after-tax gain of approximately $31 million resulting from
    the sale of our 50% interest in South Coast Power Limited, owner of the
    Shoreham Power Station in the U.K.,
 o  Our results in 2004 did not include a $45 million after-tax  impairment  
    in the third quarter of 2003, related to our investment in the Colorado 
    IPPs.
 o  Our results at our MEMCO operations increased $2 million in 2004 due to a 
    stronger  freight  market in the nine month period in 2004 as compared to 
    2003.
 o  Our AEP Texas Provider of Last Resort (POLR) entity recorded a $6 million
    provision for uncollectible receivables in the first six months of 2003
    that did not recur in 2004,
 o  Our AEP Resources entity decreased its loss by $17 million in 2004 versus
    2003, primarily due to lower interest expense resulting from equity capital
    infusions in mid and late 2003 that were used to reduce debt and other
    corporate borrowings, and
 o  Our AEP Pro Serv entity  reduced losses from $4 million to break even, 
    primarily due to operations  winding down in 2004.

Offsetting these increases was the absence during 2004 of a $31 million 
nonrecurring gain recorded in the first quarter of 2003 primarily related to a 
gain from the sale of Mutual Energy and a $2 million decrease in results at 
our IPPs and windfarms resulting primarily from the sale of three of our IPPs 
in the third quarter 2004.

In discontinued operations, the Eastex Cogeneration facility near Longview,
Texas was sold in the third quarter 2003 and Pushan Power Plant was sold in
March 2004.

All Other
---------

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Our parent company's third quarter 2004 expenses decreased $27 million from the
level in the third quarter of 2003 due to a $23 million net decrease in expenses
primarily resulting from lower general advertisement expenses in 2004 and a
non-recurring, unfavorable receivable write-off in the prior period. Interest
expense was $6 million lower in the current period due to lower fixed rate
financing and buy back of parent bonds, and parent guarantee fee income from
subsidiaries was lower by $2 million compared to the prior period.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Our parent company's year-to-date 2004 expenses decreased $11 million from the
level in the year-to-date period of 2003 due to a $28 million net decrease in
expenses primarily resulting from lower insurance premiums and lower general
advertisement expenses in 2004 and a non-recurring, unfavorable receivable
write-off in the prior period. Interest income was $12 million lower in the
current period due to lower money pool and cash balances along with higher
interest rates on invested funds in 2003. Additionally, parent guarantee fee
income from subsidiaries was lower by $5 million compared to the prior period
due to the reduction of trading activities.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 33.0% and
35.8% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, energy production credits,
amortization of investment tax credits and state income taxes. The decrease in
the effective tax rate is primarily due to federal income tax return
adjustments.

The effective tax rates for the first nine months of 2004 and 2003 were 34.1%
and 35.4% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, energy production credits,
amortization of investment tax credits and state income taxes. The effective tax
rates remained relatively flat for the comparative period.

FINANCIAL CONDITION
-------------------

We measure our financial condition by the strength of our balance sheet and the
liquidity provided by our cash flows.

Capitalization
--------------

<TABLE>
<CAPTION>

                                                                   September 30,     December 31,
                                                                       2004              2003    
                                                                       ----              ----    
<C>                                                                   <C>               <C>   
Common Equity                                                          38.9%             35.1% 
Preferred Stock                                                         0.3               0.3    
Preferred Stock (Subject to Mandatory Redemption)                       0.3               0.3    
Long-term Debt, including amounts due within one year                  59.5              62.8    
Short-term Debt                                                         1.0               1.5    
                                                                      ------            ------

Total Capitalization                                                  100.0%            100.0% 
                                                                      ======            ====== 
</TABLE>


Our $2.3 billion in cash flows from operations, combined with our reduction in
cash expenditures for investments 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 $1.5 billion and short-term debt by $112 million.

Our common equity increased due to the issuance of $13 million of new common
equity (related to our incentive compensation plans) and the fact that our
earnings exceeded our dividends for the nine months ended September 30, 2004.

As a consequence of the capital changes during the nine months, we improved our
ratio of debt to total capital from 64.6% to 60.8% (preferred stock subject to
mandatory redemption is included in debt component of ratio).

Liquidity 
---------

Liquidity, or access to cash, is an important factor in determining our
financial stability. We are committed to preserving an adequate liquidity
position. 

Credit Facilities
-----------------

We manage our liquidity by maintaining adequate external financing commitments.
We had an available liquidity position, at September 30, 2004, of approximately
$4 billion as illustrated in the table below.

                                          Amount                Maturity
                                          ------                --------
                                       (in millions)
Commercial Paper Backup:
  Lines of Credit                         $1,000                May 2005
  Lines of Credit                            750                May 2006
  Lines of Credit                          1,000                May 2007
Letter of Credit Facility                    200                September 2006
                                          -------
Total                                      2,950 
Cash and Cash Equivalents                  1,282 
                                          -------
Total Liquidity Sources                    4,232 
Less: AEP Commercial Paper
           Outstanding                       180(a)
         Letters of Credit
           Outstanding                        36 
                                          -------
      
Net Available Liquidity at
  September 30, 2004                      $4,016 
                                          =======
 (a)  Amount does not include JMG Funding LP commercial paper outstanding
      in the amount of $20 million. This commercial paper is specifically
      associated with the Gavin scrubber lease and does not reduce
      available liquidity to AEP. The JMG Funding LP commercial paper is
      supported by a separate letter of credit facility
      not included above.

Debt Covenants and Borrowing Limitations
----------------------------------------

Our revolving credit agreements contain certain covenants and require us to
maintain our percentage of debt to total capitalization at a level that does not
exceed 67.5%. The method for calculating our outstanding debt and other capital
is contractually defined. At September 30, 2004, we were in compliance with the
covenants contained in these credit agreements and contractual debt to total
capitalization was 56.2%. Non-performance of these covenants could result in an
event of default under these credit agreements. In addition, the acceleration of
our payment obligations, or certain obligations of our subsidiaries, prior to
maturity under any other agreement or instrument relating to debt outstanding in
excess of $50 million would cause an event of default under these credit
agreements and permit the lenders to declare the amounts outstanding to be
payable.

Our revolving credit facilities generally prohibit new borrowings if we
experience a material adverse change in our business or operations. We may,
however, make new borrowings under these facilities if we experience a material
adverse change so long as the proceeds of such borrowings are used to repay
outstanding commercial paper.

Under an SEC order, we and our utility subsidiaries cannot incur additional
indebtedness if the issuer's common equity would constitute less than 30% (25%
for TCC) of its capital. In addition, this order restricts us and our utility
subsidiaries from issuing long-term debt unless that debt will be rated
investment grade by at least one nationally recognized statistical rating
organization. At September 30, 2004, we were in compliance with this order.

Money pool and external borrowings may not exceed SEC or state commission
authorized limits. At September 30, 2004, we had not exceeded the SEC or state
commission authorized limits.

Credit Ratings
--------------

We continue to take steps to improve our credit quality, including executing
plans during 2004 to further reduce our outstanding debt through the use of
proceeds from our planned dispositions and other available cash on hand.

AEP's ratings have not been adjusted by any rating agency during 2004. On August
2, 2004, Moody's Investors Service (Moody's) changed their outlook on AEP to 
"positive" from "stable," while keeping the remaining rated subsidiaries
on "stable" outlook. The other major rating agencies currently have AEP and our
rated subsidiaries on "stable" outlook.

Our current ratings by the major agencies are as follows:

                                     Moody's           S&P            Fitch
                                     -------           ---            -----

AEP Short-term Debt                  P-3               A-2            F-2
AEP Senior Unsecured Debt            Baa3              BBB            BBB

If AEP or any of its rated subsidiaries receive an upgrade from any of the
rating agencies listed above, our borrowing costs could decrease.  If we receive
a downgrade in our credit ratings by one of the nationally recognized rating 
agencies listed above, our borrowing costs could increase and access to borrowed
funds could be negatively affected.

Common Stock Dividends
----------------------

After the completion of our planned divestitures and after the results of our
Ohio and Texas rate proceedings are known, we hope to be able to recommend to
the Board of Directors a modest increase in our common stock dividend from its
current quarterly level of 35 cents per share.

Cash Flow
---------

Our cash flows are a major factor in managing and maintaining our liquidity
strength.


<TABLE>
<CAPTION>

                                                                             Nine Months Ended September 30,
                                                                                 2004             2003
                                                                                 ----             ----
                                                                                     (in millions)          
    <C>                                                                         <C>              <C>   
    Cash and Cash Equivalents at Beginning of Period                              $976           $1,084
                                                                                -------          -------
    Net Cash Flows From Operating Activities                                     2,265            1,756  
    Net Cash Flows From (Used For) Investing Activities                            130           (1,540) 
    Net Cash Flows From (Used For) Financing Activities                         (2,089)             320
                                                                                -------          -------
    Net Increase in Cash and Cash Equivalents                                      306              536
                                                                                -------          -------
    Cash and Cash Equivalents at End of Period                                  $1,282           $1,620
                                                                                =======          =======

</TABLE>


Cash from operations, combined with a bank-sponsored receivables purchase
agreement and short-term borrowings, provide necessary working capital and help
us meet other short-term cash needs.

We use our corporate borrowing program to meet the short-term borrowing needs of
our subsidiaries. The corporate borrowing program includes a utility money pool,
which funds the utility subsidiaries, and a non-utility money pool, which funds
the majority of the non-utility subsidiaries. In addition, we also fund, as
direct borrowers, the short-term debt requirements of our other subsidiaries
that are not participants in the non-utility money pool. As of September 30,
2004, we had credit facilities totaling $2.75 billion to support our commercial
paper program. At September 30, 2004, we had $214 million outstanding in
short-term borrowings of which $180 million was commercial paper supported by
the revolving credit facilities. In addition, JMG had commercial paper
outstanding in the amount of $20 million. This commercial paper is specifically
associated with the Gavin scrubber lease and is not supported by our credit
facilities. The maximum amount of commercial paper outstanding during the
quarter ended September 30, 2004 was $529 million. The weighted-average interest
rate for our commercial paper during the third quarter 2004 was 2.05%.

We generally use short-term borrowings to fund working capital needs, property
acquisitions and construction until long-term funding alternatives are arranged.
Sources of long-term funding include issuance of common stock, preferred stock
or long-term debt and sale-leaseback or leasing agreements.

<TABLE>
<CAPTION>

Operating Activities
--------------------                                                       Nine Months Ended September 30,
                                                                              2004                 2003            
                                                                              ----                 ----         
                                                                                   (in millions)
    <C>                                                                      <C>                 <C>  
    Net Income                                                                 $912                $872 
    Discontinued Operations                                                     (60)                 98
                                                                             -------             -------
    Income from Continuing Operations                                           852                 970 
    Noncash Items Included in Earnings                                        1,223               1,033 
    Changes in Assets and Liabilities                                           190                (247)
                                                                             -------             -------
    Net Cash Flows From Operating Activities                                 $2,265              $1,756
                                                                             =======             =======
</TABLE>


2004 Operating Cash Flow
------------------------

Our cash flows from operating activities were $2.3 billion for the first nine
months of 2004. We produced income from continuing operations of $852 million
during the period. Income from continuing operations for the period included
noncash expense items of $1.1 billion for depreciation, amortization and
deferred taxes. In addition, there is a current period favorable impact for a
net $89 million balance sheet change for risk management contracts that are
marked-to-market. These contracts have an unrealized earnings impact as market
prices move, and a cash impact upon settlement or upon disbursement or receipt
of premiums. The other changes in assets and liabilities represent items that
had a current period cash flow impact, such as changes in working capital, as
well as items that represent future rights or obligations to receive or pay
cash, such as regulatory assets and liabilities. The current period activity in
these asset and liability accounts relates to a number of items; the most
significant are an increase in the balance of fuel, materials and supplies of
$83 million and an increase in the balance of accrued taxes of $388 million.

2003 Operating Cash Flow
------------------------

Our cash flows from operating activities were $1.8 billion for the first nine
months of 2003. We produced income from continuing operations of $970 million
during the period. Income from continuing operations for the period included
noncash items of $1.2 billion for depreciation, amortization, and deferred
taxes, offset by $193 million related to the cumulative effect of accounting
changes. There was a current period unfavorable impact for a net $124 million
balance sheet change for risk management contracts that were marked-to-market.
These contracts have an unrealized earnings impact as market prices move, and a
cash impact upon settlement or upon disbursement or receipt of premiums. Other
activity in the asset and liability accounts related to the wholesale capacity
auction true-up asset (ECOM) of $169 million, an increase in customer deposits
and risk management collateral of $102 million and changes in accounts
receivable and accounts payable of $267 million.

Investing Activities
--------------------


<TABLE>
<CAPTION>

                                                                                       Nine Months Ended September 30,
                                                                                           2004              2003             
                                                                                           ----              ----          
                                                                                               (in millions)                     
    <C>                                                                                   <C>              <C>   
    Construction Expenditures                                                             $(1,034)           $(936)
    Change in Other Cash Deposits, Net                                                         27               36 
    Investment in Discontinued Operations, net                                                (59)            (686)
    Proceeds from Sales of Assets                                                           1,202               49 
    Other                                                                                      (6)              (3)
                                                                                          --------         --------
    Net Cash Flows From (Used for) Investing Activities                                      $130          $(1,540)
                                                                                          ========         ========


Our cash flows used for investing activities decreased $1.7 billion from the 
same period in the prior year primarily due to proceeds from the sales of assets
in 2004 and investments made in our U.K. operations during 2003 that did not 
recur during 2004.
</TABLE>


<TABLE>
<CAPTION>

Financing Activities
--------------------           
                                                                                       Nine Months Ended September 30,
                                                                                            2004             2003             
                                                                                            ----             ----          
                                                                                               (in millions)                     
    <C>                                                                                   <C>               <C>    
    Issuances of Common Stock                                                                 $13           $1,142 
    Issuances/Retirements of Debt, net                                                     (1,683)            (116)
    Retirement of Preferred Stock                                                              (4)              (2)
    Retirement of Minority Interest                                                             -             (225)
    Dividends                                                                                (415)            (479)
                                                                                          --------          -------
    Net Cash Flows From (Used for) Financing Activities                                   $(2,089)            $320
                                                                                          ========          =======

Our cash flow from financing activities in 2004 decreased $2.4 billion from the
$320 million net cash inflow recorded in 2003. During the first quarter of 2003,
we issued common stock for $1.1 billion and subsequent to the first quarter of 
2003, we reduced our dividend. This compares to only $13 million of cash 
proceeds from the issuance of common stock under our incentive compensation
plans in the first nine months of 2004.
</TABLE>



During the first nine months of 2004, we used approximately $1.9 billion of cash
to retire long-term debt. We also issued approximately $425 million of long-term
debt ($416 million net of issuance costs) including $222 million of pollution
control bonds (installment purchase contracts). These activities were supported
by the generation of $2.3 billion in cash flow from operations. See Note 10
"Financing Activities" for further information regarding issuances and
retirements of debt instruments during the first nine months of 2004.

Off-balance Sheet Arrangements
------------------------------

We enter into off-balance sheet arrangements for various business reasons
including accelerating cash collections, reducing operational expenses and
spreading risk of loss to third parties. Our current policy restricts the use of
off-balance sheet financing entities or structures, except for traditional
operating lease arrangements and sales of customer accounts receivable that we
enter in the normal course of business. Our off-balance sheet arrangements have
not changed significantly from year-end. For complete information on each of
these off-balance sheet arrangements see the "Minority Interest and Off-balance
Sheet Arrangements" in "Management's Financial Discussion and Analysis of
Results of Operations" section of the 2003 Annual Report.

Other
-----

Power Generation Facility
-------------------------

We have agreements with Juniper Capital L.P. (Juniper) under which Juniper
constructed and financed a non-regulated merchant power generation facility
(Facility) near Plaquemine, Louisiana and leased the Facility to us. We have
subleased the Facility to the Dow Chemical Company (Dow). The Facility is a
Dow-operated "qualifying cogeneration facility" for purposes of PURPA.
Commercial operation of the Facility as required by the agreements between
Juniper, AEP and Dow was achieved on March 18, 2004. The initial term of our
lease with Juniper (Juniper Lease) commenced on March 18, 2004 and terminates on
June 17, 2009. We may extend the term of the Juniper Lease for up to 30 years.
Our lease of the Facility is reported as an owned asset under a lease financing
transaction. Therefore, the asset and related liability for the debt and equity
of the facility are recorded on AEP's balance sheet.

Juniper is an unaffiliated limited partnership, formed to construct or otherwise
acquire real and personal property for lease to third parties, to manage
financial assets and to undertake other activities related to asset financing.

At September 30, 2004, Juniper's acquisition costs for the Facility totaled $520
million, and we estimate total costs for the completed Facility to be
approximately $525 million, funded through long-term debt financing of $494
million and equity of $31 million from investors with no relationship to AEP or
any of AEP's subsidiaries. For the initial 5-year lease term, the base lease
rental is equal to the interest on Juniper's debt financing at a variable rate
indexed to three-month LIBOR (1.975% on September 30, 2004) plus 100 basis
points, plus a fixed return on Juniper's equity investment in the Facility and
certain other fixed amounts. Consequently, as LIBOR increases, the base rental
payments under the Juniper Lease will also increase.

The Facility is collateral for Juniper's debt financing. Due to the treatment of
the Facility as a financing of an owned asset, we recognized all of Juniper's
obligations as a liability of $520 million. Upon expiration of the lease, our
actual cash obligation could range from $0 to $415 million based on the fair
value of the assets at that time. However, if we default under the Juniper
Lease, our maximum cash payment could be as much as $525 million.

Dow uses a portion of the energy produced by the Facility and sells the excess
energy. OPCo has agreed to purchase up to approximately 800 MW of such excess
energy from Dow. Because the Facility is a major steam supply for Dow, Dow is
expected to operate the Facility at certain minimum levels, and OPCo is
obligated to purchase the energy generated at those minimum operating levels
(expected to be approximately 270 MW).

OPCo has also agreed to sell up to approximately 800 MW of energy to Tractebel
Energy Marketing, Inc. (TEM) for a period of 20 years under a Power Purchase and
Sale Agreement dated November 15, 2000 (PPA) at a price that is currently in
excess of market. Beginning May 1, 2003, OPCo tendered replacement capacity,
energy and ancillary services to TEM pursuant to the PPA that TEM rejected as
non-conforming. Commercial operation for purposes of the PPA began April 2,
2004.

On September 5, 2003, TEM and AEP separately filed declaratory judgment actions
in the United States District Court for the Southern District of New York. We
allege that TEM has breached the PPA, and we are seeking a determination of our
rights under the PPA. TEM alleges that the PPA never became enforceable, or
alternatively, that the PPA has already been terminated as the result of AEP
breaches. If the PPA is deemed terminated or found to be unenforceable by the
court, we could be adversely affected to the extent we are unable to find other
purchasers of the power with similar contractual terms and to the extent we do
not fully recover claimed termination value damages from TEM. The corporate
parent of TEM (Tractebel SA) has provided a limited guaranty.

On November 18, 2003, the above litigation was suspended pending final
resolution in arbitration of all issues pertaining to the protocols relating to
the dispatching, operation, and maintenance of the Facility and the sale and
delivery of electric power products. In the arbitration proceedings, TEM argued
that in the absence of mutually agreed upon protocols there were no commercially
reasonable means to obtain or deliver the electric power products and therefore
the PPA is not enforceable. TEM further argued that the creation of the
protocols is not subject to arbitration. The arbitrator ruled in favor of TEM on
February 11, 2004 and concluded that the "creation of protocols" was not subject
to arbitration, but did not rule upon the merits of TEM's claim that the PPA is
not enforceable. Management believes the PPA is enforceable. The litigation is
now in the discovery phase.

On March 26, 2004, OPCo requested that TEM provide assurances of performance of
its future obligations under the PPA, but TEM refused to do so. As indicated
above, OPCo also gave notice to TEM and declared April 2, 2004 as the
"Commercial Operations Date." Despite OPCo's prior tenders of replacement
electric power products to TEM beginning May 1, 2003 and despite OPCo's tender
of electric power products from the Facility to TEM beginning April 2, 2004, TEM
refused to accept and pay for them under the terms of the PPA. On April 5, 2004,
OPCo gave notice to TEM that OPCo, (i) was suspending performance of its
obligations under the PPA, (ii) would be seeking a declaration from the New York
federal court that the PPA has been terminated and (iii) would be pursuing
against TEM, and Tractebel SA under the guaranty, damages and the full
termination payment value of the PPA.

SIGNIFICANT MATTERS
-------------------

Progress Made on Announced Divestitures
---------------------------------------

We are continuing with our announced plan to divest significant components of
our non-regulated assets, including certain domestic and international
unregulated generation, part of our gas pipeline and storage business, a coal
business and certain IPPs. In addition to the following discussion, see Note 7
of our Notes to Consolidated Financial Statements within this Form 10-Q.

Pushan Power Plant
------------------
In December 2003, we signed an agreement to sell our interest in the Pushan
Power Plant in Nanyang, China to our minority interest partner. The sale was
completed in March 2004 and the effect of the sale on our first quarter results
of operations was not significant.

Texas Generation
----------------
We made progress on our planned divestiture of certain Texas generation assets
by (1) announcing in June 2004 and September 2004 that we had signed agreements
to sell TCC's 7.81% share of the Oklaunion Power Station to two unaffiliated
co-owners of the plant for approximately $43 million, subject to closing
adjustments, (2) announcing in September 2004 that we had signed agreements to
sell TCC's 25.2% share of the STP nuclear plant to two unaffiliated co-owners of
the plant for approximately $333 million, subject to closing adjustments, and
(3) in July 2004 closing on the sale of TCC's remaining generation assets,
including eight natural gas plants, one coal-fired plant and one hydro-electric
plant for approximately $425 million, net of adjustments. We expect the sales of
Oklaunion and STP to be completed by in the first half of 2005. Nevertheless,
there could be potential delays in receiving necessary regulatory approvals and
clearances and there could be delays in resolving litigation with a third party
affecting Oklaunion which could delay the closings. We will file with the PUCT
to recover net stranded costs associated with the sales pursuant to Texas
restructuring legislation. Stranded costs will be calculated on the basis of all
generation assets, not individual plants.

AEP Coal
--------
As a result of our decision to exit our non-core businesses, we retained an
advisor in 2003 to facilitate the sale of AEP Coal. In March 2004, we reached an
agreement to sell assets, exclusive of certain reserves and related liabilities,
of the mining operations of AEP Coal. The sale closed in April 2004 and the
effect of the sale on second quarter 2004 results of operations was not
significant.

Gas Operations
--------------
In February 2004, we signed an agreement to sell LIG Pipeline Company, which
contained the pipeline and processing assets of Louisiana Intrastate Gas (LIG).
The sale was completed in early April 2004 and the impact on results of
operations in the second quarter of 2004 was not significant. In October 2004,
we completed the sale of Jefferson Island Storage & Hub, L.L.C., the remaining
LIG gas storage entity. The sale resulted in an additional $12.3 million pre-tax
loss ($2 million, net of tax) recorded in the third quarter 2004. We continue to
evaluate the merits of retaining or selling our interest in Houston Pipe Line
Company L.P., including the Bammel storage facility, which is part of our
Investments - Gas Operations segment.

IPP Investments
---------------
During the third quarter of 2003, we initiated an effort to sell four domestic
IPP investments. In accordance with accounting principles generally accepted in
the United States of America, we were required to measure the impairment of each
of these four investments individually. Based on studies using market
assumptions, which indicated that two of the facilities had market values in
excess of book value and two facilities had declines in fair value below book
value that were other than temporary in nature, we recorded an impairment of $70
million pre-tax ($45.5 million net of tax) in the third quarter of 2003. During
the fourth quarter of 2003, we distributed an information memorandum related to
the planned sale of our interest in these IPPs.

In March 2004, we entered into an agreement to sell the four domestic IPP
investments for a sales price of $156 million, subject to closing adjustments.
An additional pre-tax impairment of $1.6 million was recorded in June 2004 to
decrease the carrying value of the Colorado plant investments to their estimated
sales price, less selling expenses. We closed on the sale of the two Florida
investments and the Brush II plant in Colorado in July 2004, resulting in a
pre-tax gain of $104.6 million ($63.8 million, net of tax), generated primarily
from the sale of the two Florida IPPs which were not originally impaired. We
recorded the gain during July 2004. The sale of the Ft. Lupton, Colorado plant
closed in October 2004 and will not have a significant effect on results of
operations for the fourth quarter 2004.

UK Operations
-------------
In July 2004, we completed the sale of substantially all operations and assets
within our Investments - UK Operations segment for approximately $456 million.
The sale included Fiddler's Ferry, a coal-fired power plant in northwest
England, Ferrybridge, a coal-fired power plant in northeast England, related
coal inventories, and a number of related commodities and freight contracts. The
sale resulted in a pre-tax gain of $265.6 million ($127.6 million, net of tax).

South Coast Power Limited
-------------------------
In September 2004, we completed the sale of our 50% ownership in South Coast
Power Limited for $46.9 million, resulting in a $47.6 million net gain ($30.9
million, net of tax) in the third quarter 2004. The gain reflects improved
conditions in the U.K. power market.

Other
-----
We continue to have discussions with various parties on business alternatives
for certain of our other non-core investments, which may result in further
dispositions in the future.

The ultimate timing for a disposition of one or more of these assets will depend
upon market conditions and the value of any buyer's proposal. We believe our
non-core assets are stated at fair value. However, we may realize losses from
operations or losses or gains upon the eventual disposition of these assets
that, in the aggregate, could have a material impact on our results of
operations, cash flows and financial condition.

Texas Regulatory Activity
-------------------------

Texas Legislation enacted in 1999 provides the framework and timetable to allow
retail electricity competition.

The Texas Legislation, among other things:
 o  provides for the recovery of generation-related regulatory assets and
    other stranded generation costs through securitization and
    non-bypassable wires charges,
 o  requires each utility to structurally unbundle into a retail electric
    provider, a power generation company and a transmission and
    distribution (T&D) utility,
 o  provides for an earnings test for each of the years 1999 through 2001 and, 
 o  provides for a stranded cost True-up Proceeding after January 10, 2004.

The True-up Proceedings will determine the amount and recovery of:
 o  stranded generation plant costs and generation-related regulatory
    assets including any unrefunded accumulated excess earnings (net
    stranded generation costs),
 o  carrying charges on true-up-amounts from January 1, 2002 (the commencement
    date of retail competition), 
 o  a true-up of actual market prices determined  through legislatively-mandated
    capacity auctions to the power costs used in the PUCT's excess cost over 
    market (ECOM) model for 2002 and 2003 (wholesale capacity auction true-up), 
 o  final approved deferred fuel balance,
 o  excess of price-to-beat revenues over market prices subject to certain 
    conditions and limitations (retail clawback),
 o  and other true-up items.

TCC's recorded net regulatory asset for amounts subject to approval in the
True-up Proceeding is approximately $1.5 billion at September 30, 2004 of which
$1.3 billion represents net stranded generation costs.

In September 2004, the PUCT held true-up hearings for another utility,
CenterPoint Energy, Inc. (CenterPoint). In that case the PUCT is expected to
issue an order later in November 2004 addressing numerous items and that
decision may provide indications of possible PUCT actions in TCC's true-up
proceedings including:
 o  the methodology for calculating the recoverable carrying cost related to the
    True-up Proceedings, 
 o  whether to and how to modify the calculation of the wholesale capacity 
    auction true-up, and 
 o  whether the amount of depreciation in the ECOM model on generation assets 
    for 2002 and 2003 used to calculate the wholesale capacity auction true-up 
    is a recovery of net stranded generation costs and should reduce the 
    recoverable cost. The total TCC depreciation in the ECOM model for the 
    2002-2003 period was $238 million.

When TCC's True-up Proceeding is completed, TCC currently intends to file to
recover PUCT-approved net stranded generation costs and other recoverable
true-up amounts that are in excess of current securitized amounts, plus
appropriate carrying charges, through a non-bypassable competition transition
charge in the regulated T&D rates. TCC may seek to securitize the approved net
stranded generation costs plus related carrying costs. The annual costs of
securitization are recoverable through a non-bypassable transition charge
collected by the T&D utility over the term of the securitization bonds.

TCC will seek to recover in the True-up Proceeding an amount in excess of the
$1.5 billion recorded net true-up regulatory asset through September 30, 2004.
This is primarily due to TCC not having accrued a carrying cost on its net
regulatory asset due to litigation and uncertainties associated with the
treatment and measurement of such amounts by the PUCT. Management expects that
its review of the final order in the CenterPoint case will resolve numerous
uncertainties about applicable PUCT positions and that TCC will be able to
record a carrying cost in the fourth quarter of 2004.

Due to the preliminary nature of the pending CenterPoint proceedings and the
consequent uncertainty, differences between CenterPoint's and TCC's facts and
circumstances and the lack of direct applicability of the CenterPoint proceeding
to TCC's recorded assets, we cannot, at this time, determine whether
disallowances that may be applicable to CenterPoint would be applicable to TCC.
We believe that our recorded regulatory assets are in compliance with Texas
Legislation and we intend to seek vigorously recovery of all of these amounts.
If, however, we determine that it is probable TCC cannot recover a portion of
its recorded net true-up regulatory asset of $1.5 billion, and we are able to
estimate the amount of such non-recovery, we will record a provision for such
amount which could have a material adverse effect on future results of
operations, cash flows and possible financial condition. To the extent decisions
in the TCC True-up Proceeding differ from management expectations based in part
on our evaluation of the final CenterPoint decision, additional material
disallowances are possible.

In another matter before the PUCT, TCC has filed for an adjusted $41 million
base rate increase in its retail distribution rates. After hearing the case the
ALJ has recommended a reduction in existing rates of somewhere between $33 
million and $43 million depending on the final treatment of consolidated tax 
savings and other remanded issues. We defended vigorously the Company's 
requested increase and challenged the ALJ's recommendation in a brief. Hearings
were held on the consolidated tax savings remand issue in September 2004. The 
PUCT is expected to issue a decision in the fourth quarter of 2004.

See Notes 3 and 4 for further discussion of Texas Regulatory Activity.

Ohio Regulatory Activity
------------------------

The Ohio Electric Restructuring Act of 1999 (Ohio Act) provides for a Market
Development Period (MDP) during which retail customers can choose their electric
power suppliers or receive Default Service at frozen generation rates from the
incumbent utility. After the end of the MDP, January 1, 2006, customers were
scheduled to move to market prices for the supply of electricity.

The PUCO invited default service providers to propose an alternative to all
customers moving to market prices on January 1, 2006. On February 9, 2004, CSPCo
and OPCo filed rate stabilization plans with the PUCO addressing prices
following the end of the MDP. If approved by the PUCO, prices would be
established pursuant to CSPCo's and OPCo's plans for the period from January 1,
2006 through December 31, 2008. The plans are intended to provide price
stability and certainty for customers, facilitate the development of a
competitive retail market in Ohio, provide recovery of environmental, RTO costs
and other costs during the plan period and improve the environmental performance
of AEP's generation resources that serve Ohio customers. The plans include
annual, fixed increases in the generation component of all customers' bills (3%
annually for CSPCo and 7% annually for OPCo) in 2006, 2007 and 2008 and the
opportunity for additional generation-related increases upon PUCO review and
approval. Our Ohio Companies Rate Stabilization Plans also provide for the
deferral of environmental construction and in-service carrying costs plus PJM
RTO administrative fees in 2004 and 2005 for recovery through wires charges in
2006 through 2008. A non-affiliated utility received an order which rejected its
request for automatic increases and cost deferrals during the MDP period. The
PUCO has indicated in FirstEnergy companies' rate stabilization plans that these
plans are specific to a company's requirements and characteristics and the
PUCO's order in one case should not be considered a precedent for the plan of
another company's rate stabilization plan. Management cannot predict whether
CSPCo's and OPCo's plans will be approved as submitted nor can we predict the
ultimate impact these proceedings will have on revenues, results of operations
and cash flows. See Note 4 for further discussion of Ohio Regulatory Activity.

Oklahoma Regulatory Activity
----------------------------

PSO filed with the Corporation Commission of the State of Oklahoma (OCC) for
recovery of a $44 million under-recovery of fuel costs resulting from a
reallocation among AEP West electric operating companies of purchased power
costs for periods prior to January 1, 2002. The OCC has expanded the case to
include a full review of PSO's 2001 fuel and purchased power practices.
Intervenor and OCC Staff filings in the case recommended a disallowance of $18
million associated with the allocation of off-system sales margins. At a June
2004 prehearing conference, PSO questioned whether the issues in dispute were
under the jurisdiction of the OCC because they relate to FERC-approved
allocation agreements. As a result, the ALJ ordered that the parties brief the
jurisdictional issue. PSO filed its brief on September 1, 2004. Subject to the
OCC's decision as to jurisdiction, a hearing date has been set for January 2005.
Management believes that fuel costs have been prudently incurred consistent with
OCC rules, and that the allocation of off-system sales margins was made pursuant
to the FERC-approved allocation agreements. If the OCC determines that a portion
of PSO's unrecovered fuel and purchased power costs should not be recovered,
there will be, subject to the FERC jurisdictional question, an adverse effect on
PSO's results of operations, cash flows and possibly financial condition.

In February 2003, the OCC filed an application requiring PSO to file all
documents necessary for a general rate review. In October 2003 and June 2004,
PSO filed financial information and supporting testimony in response to the
OCC's requirements. PSO's response indicates that its annual revenues are $41
million less than costs. As a result, PSO is seeking OCC approval to increase
its base rates by that amount, which is a 3.9% increase over PSO's existing
revenues. A decision is not expected until second quarter 2005. Management is
unable to predict the ultimate effect of these proceedings on PSO's revenues,
results of operations, cash flows and financial condition.

FERC Order on Regional Through and Out Rates
-------------------------------------------- 

In July 2003, the FERC issued an order directing PJM and the Midwest Independent
System Operator (ISO) to make compliance filings for their respective OATTs to
eliminate the transaction-based charges for through and out (T&O) transmission
service on transactions where the energy is delivered within the proposed
Midwest ISO and PJM expanded regions (Combined Footprint). The elimination of
the T&O rates will reduce the transmission service revenues collected by the
RTOs and thereby reduce the revenues received by transmission owners under the
RTOs' revenue distribution protocols.

AEP and several other utilities in the Combined Footprint have filed a proposal
for new rates to become effective December 1, 2004. The AEP East companies
received approximately $157 million of T&O rate revenues for the twelve months
ended December 31, 2003. At this time, management is unable to predict whether
the rate design approved by the FERC will fully compensate the AEP East
companies for their lost T&O revenues and whether any resultant increase in
rates applicable to AEP's internal load will be recoverable on a timely basis
from state retail customers. Unless new replacement rates compensate AEP for its
lost revenues and any increase in AEP East Companies' transmission expenses from
these new rates are fully recovered in retail rates on a timely basis, future
results of operations, cash flows and financial condition will be adversely
affected.

Other Regulatory Activity
-------------------------

There are other significant regulatory risks not included above. See notes 3 and
4 for further discussions of these risks.

RTO Formation
-------------

The FERC's AEP-CSW merger approval and many of the settlement agreements with
the state regulatory commissions to approve the AEP-CSW merger required the
transfer of functional control of our subsidiaries' transmission systems to
RTOs. In addition, legislation in some of our states requires RTO participation.

Our AEP East companies joined PJM RTO on October 1, 2004. To minimize the credit
requirements and operating constraints when joining PJM, the AEP East Companies
as well as Wheeling Power Company and Kingsport Power Company, have agreed to a
netting of all payment obligations incurred by any of the AEP East companies
against all balances due the AEP East companies, and to hold PJM harmless from
actions that any one or more AEP East companies may take with respect to PJM.

AEP West companies are members of ERCOT or SPP. In February 2004, the FERC
granted RTO status to the SPP, subject to fulfilling specified requirements. In
October 2004, the FERC issued an order granting final RTO status to SPP subject
to certain filings. Regulatory activities concerning various RTO issues are
ongoing in Arkansas and Louisiana.

Litigation
----------

We continue to be involved in various litigation matters as described in the
"Significant Factors - Litigation" section of Management's Financial Discussion
and Analysis of Results of Operations in our 2003 Annual Report. The 2003 Annual
Report should be read in conjunction with this report in order to understand
other litigation matters that did not have significant changes in status since
the issuance of our 2003 Annual Report, but may have a material impact on our
future results of operations, cash flows and financial condition. Other matters
described in the 2003 Annual Report that did not have significant changes during
the first nine months of 2004, that should be read in order to gain a full
understanding of our current litigation include: (1) Bank of Montreal Claim, and
(2) Potential Uninsured Losses.

Federal EPA Complaint and Notice of Violation
---------------------------------------------

See discussion of New Source Review Litigation within "Significant Factors -
Environmental Matters."

Enron Bankruptcy
----------------

In 2002, certain of our subsidiaries filed claims against Enron and its
subsidiaries in the Enron bankruptcy proceeding pending in the U.S. Bankruptcy
Court for the Southern District of New York. At the date of Enron's bankruptcy,
certain of our subsidiaries had open trading contracts and trading accounts
receivables and payables with Enron. In addition, on June 1, 2001, we purchased
HPL from Enron. Various HPL related contingencies and indemnities from Enron
remained unsettled at the date of Enron's bankruptcy.

Enron Bankruptcy - Bammel storage facility and HPL indemnification matters - In
connection with the 2001 acquisition of HPL, we entered into a prepaid
arrangement under which we acquired exclusive rights to use and operate the
underground Bammel gas storage facility and appurtenant pipelines pursuant to an
agreement with BAM Lease Company. This exclusive right to use the referenced
facility is for a term of 30 years, with a renewal right for another 20 years.

In January 2004, we filed an amended lawsuit against Enron and its subsidiaries
in the U.S. Bankruptcy Court claiming that Enron did not have the right to
reject the Bammel storage facility agreement or the cushion gas use agreement,
described below. In April 2004, AEP and Enron entered into a settlement
agreement under which we will acquire title to the Bammel gas storage facility
and related pipeline and compressor assets, plus 10.5 billion cubic feet (BCF)
of natural gas currently used as cushion gas for $115 million. AEP and Enron
will mutually release each other from all claims associated with the Bammel
facility, including our indemnity claims. The settlement received Bankruptcy
Court approval on September 30, 2004 and is expected to close in the fourth
quarter 2004. The parties' respective trading claims and Bank of America's (BOA)
purported lien on approximately 55 BCF of natural gas in the Bammel storage
reservoir (as described below) are not covered by the settlement agreement.

Enron Bankruptcy - Right to use of cushion gas agreements - In connection with
the 2001 acquisition of HPL, we also entered into an agreement with BAM Lease
Company, which grants HPL the exclusive right to use approximately 65 BCF of
cushion gas (the 10.5 BCF and 55 BCF described in the preceding paragraph)
required for the normal operation of the Bammel gas storage facility. At the
time of our acquisition of HPL, BOA and certain other banks (the BOA Syndicate)
and Enron entered into an agreement granting HPL the exclusive use of 65 BCF of
cushion gas. Also at the time of our acquisition, Enron and the BOA Syndicate
also released HPL from all prior and future liabilities and obligations in
connection with the financing arrangement.

After the Enron bankruptcy, HPL was informed by the BOA Syndicate of a purported
default by Enron under the terms of the financing arrangement. In July 2002, the
BOA Syndicate filed a lawsuit against HPL in the state court of Texas seeking a
declaratory judgment that the BOA Syndicate has a valid and enforceable security
interest in gas purportedly in the Bammel storage reservoir. In December 2003,
the Texas state court granted partial summary judgment in favor of the BOA
Syndicate. HPL appealed this decision. In June 2004, BOA filed an amended
petition in a separate lawsuit in Texas state court seeking to obtain possession
of up to 55 BCF of storage gas in the Bammel storage facility or its fair value.
Following an adverse decision on its motion to obtain possession of this gas,
BOA voluntarily dismissed this action. In October 2004, BOA refiled this action.
HPL filed a motion to have the case assigned to the judge who heard the case
originally and that motion was granted. HPL intends to defend vigorously against
BOA's claims. 

In October 2003, AEP filed a lawsuit against BOA in the United States District
Court for the Southern District of Texas. BOA led a lending syndicate involving
the 1997 gas monetization that Enron and its subsidiaries undertook and the
leasing of the Bammel underground gas storage reservoir to HPL. The lawsuit
asserts that BOA made misrepresentations and engaged in fraud to induce and
promote the stock sale of HPL, that BOA directly benefited from the sale of HPL
and that AEP undertook the stock purchase and entered into the Bammel storage
facility lease arrangement with Enron and the cushion gas arrangement with Enron
and BOA based on misrepresentations that BOA made about Enron's financial
condition that BOA knew or should have known were false including that the 1997
gas monetization did not contravene or constitute a default of any federal,
state, or local statute, rule, regulation, code or any law. In February 2004,
BOA filed a motion to dismiss this Texas federal lawsuit. In September 2004, the
Magistrate Judge issued a Recommended Decision and Order recommending that BOA's
Motion to Dismiss be denied, that the five counts in the lawsuit seeking
declaratory judgments involving the Bammel reservoir and the right to use and
cushion gas consent agreements be transferred to the Southern District of New
York and that the four counts alleging breach of contract, fraud and negligent
misrepresentation proceed in the Southern District of Texas. BOA has objected to
the Magistrate Judge's decision and the matter is now before the District Judge.

In February 2004, in connection with BOA's dispute, Enron filed Notices of
Rejection regarding the cushion gas exclusive right to use agreement and other
incidental agreements. We have objected to Enron's attempted rejection of these
agreements.

Enron Bankruptcy - Commodity trading settlement disputes - In September 2003,
Enron filed a complaint in the Bankruptcy Court against AEPES challenging AEP's
offsetting of receivables and payables and related collateral across various
Enron entities and seeking payment of approximately $125 million plus interest
in connection with gas related trading transactions. AEP has asserted its right
to offset trading payables owed to various Enron entities against trading
receivables due to several AEP subsidiaries. The parties are currently in
non-binding court-sponsored mediation.

In December 2003, Enron filed a complaint in the Bankruptcy Court against AEPSC
seeking approximately $93 million plus interest in connection with a transaction
for the sale and purchase of physical power among Enron, AEP and Allegheny
Energy Supply, LLC during November 2001. Enron's claim seeks to unwind the
effects of the transaction. AEP believes it has several defenses to the claims
in the action being brought by Enron. The parties are currently in non-binding
court-sponsored mediation.

Enron Bankruptcy - Summary - The amount expensed in prior years in connection
with the Enron bankruptcy was based on an analysis of contracts where AEP and
Enron entities are counterparties, the offsetting of receivables and payables,
the application of deposits from Enron entities and management's analysis of the
HPL-related purchase contingencies and indemnifications. As noted above, Enron
has challenged our offsetting of receivables and payables and there is a dispute
regarding the cushion gas agreement. Although management is unable to predict
the outcome of these lawsuits, it is possible that their resolution could have
an adverse impact on our results of operations, cash flows or financial
condition.

Merger Litigation
-----------------

In 2002, the U.S. Court of Appeals for the District of Columbia ruled that the
SEC failed to adequately explain that the June 15, 2000 merger of AEP with CSW
meets the requirements of the PUHCA and sent the case back to the SEC for
further review. Specifically, the court told the SEC to revisit the basis for 
its conclusion that the merger met PUHCA requirements that utilities be 
"physically interconnected" and confined to a "single area or region." In August
2004, the SEC announced it would conduct hearings on this issue. The hearing is
scheduled for January 2005.

In its June 2000 approval of the merger, the SEC agreed with AEP that the
companies' systems are integrated because they have transmission access rights
to a single high-voltage line through Missouri and also met the PUHCA's single
region requirement. In its ruling, the appeals court said that the SEC failed to
support and explain its conclusions that the interconnection and single region
requirements are satisfied.

Management believes that the merger meets the requirements of the PUHCA and
expects the matter to be resolved favorably.

Texas Commercial Energy, LLP Lawsuit
------------------------------------

Texas Commercial Energy, LLP (TCE), a Texas Retail Electric Provider (REP),
filed a lawsuit in federal District Court in Corpus Christi, Texas, in July
2003, against us and four of our subsidiaries, certain unaffiliated energy
companies and ERCOT. The action alleges violations of the Sherman Antitrust Act,
fraud, negligent misrepresentation, breach of fiduciary duty, breach of
contract, civil conspiracy and negligence. The allegations, not all of which are
made against the AEP companies, range from anticompetitive bidding to
withholding power. TCE alleges that these activities resulted in price spikes
requiring TCE to post additional collateral and ultimately forced it into
bankruptcy when it was unable to raise prices to its customers due to fixed
price contracts. The suit alleges over $500 million in damages for all
defendants and seeks recovery of damages, exemplary damages and court costs. Two
additional parties, Utility Choice, LLC and Cirro Energy Corporation, have
sought leave to intervene as plaintiffs asserting similar claims. We filed a
Motion to Dismiss in September 2003. In February 2004, TCE filed an amended
complaint. We filed a Motion to Dismiss the amended complaint. In June 2004, the
Court dismissed all claims against the AEP companies. TCE has appealed the trial
court's decision to the United States Court of Appeals for the Fifth Circuit.

Energy Market Investigations
----------------------------

AEP and other energy market participants received data requests, subpoenas and
requests for information from the FERC, the SEC, the PUCT, the U.S. Commodity
Futures Trading Commission (CFTC), the U.S. Department of Justice and the
California attorney general during 2002. Management responded to the inquiries
and provided the requested information and has continued to respond to
supplemental data requests in 2003 and 2004.

On September 30, 2003, the CFTC filed a complaint against AEP and AEPES in
federal district court in Columbus, Ohio. The CFTC alleges that AEP and AEPES
provided false or misleading information about market conditions and prices of
natural gas in an attempt to manipulate the price of natural gas in violation of
the Commodity Exchange Act. The CFTC seeks civil penalties, restitution and
disgorgement of benefits. We responded to the complaint in September 2004. In
2003 we recorded a provision related to these matters. We have engaged in
settlement discussions with several agencies and are evaluating whether to
conclude settlements in order to put these investigations behind us even though
we believe we have meritorious legal positions and defenses. If we elect to
settle all matters, the payments could exceed the 2003 provision and could have
a material impact on our 2004 earnings and cash flows.

Shareholders' Litigation
------------------------

In 2002, lawsuits alleging securities law violations, a breach of fiduciary duty
for failure to establish and maintain adequate internal controls and violations
of the Employee Retirement Income Security Act were filed against us, certain
AEP executives, members of the Board of Directors and certain investment banking
firms. Certain of these actions were dismissed in September 2004. We intend to
defend vigorously against the remaining actions. See Note 5 for further
discussion.

Cornerstone Lawsuit
-------------------

In the third quarter of 2003, Cornerstone Propane Partners filed an action in
the United States District Court for the Southern District of New York against
forty companies, including AEP and AEPES seeking class certification and
alleging unspecified damages from claimed price manipulation of natural gas
futures and options on the NYMEX from January 2000 through December 2002.
Thereafter, two similar actions were filed in the same court against a number of
companies including AEP and AEPES making essentially the same claims as
Cornerstone Propane Partners and also seeking class certification. On December
5, 2003, the Court issued its initial Pretrial Order consolidating all related
cases, appointing co-lead counsel and providing for the filing of an amended
consolidated complaint. In January 2004, plaintiffs filed an amended
consolidated complaint. We and the other defendants filed a motion to dismiss
the complaint which the Court denied in September 2004. We intend to defend 
vigorously against these claims.

SWEPCo Notice of Enforcement and Notice of Citizen Suit
-------------------------------------------------------

On July 13, 2004, two special interest groups issued a notice of intent to
commence a citizen suit under the Clean Air Act for alleged violations of
various permit conditions in permits issued to SWEPCo's Welsh, Knox Lee, and
Pirkey plants. This notice was prompted by allegations made by a terminated AEP
employee. The allegations at the Welsh Plant concern compliance with emission
limitations on particulate matter and carbon monoxide, compliance with a
referenced design heat input value, and compliance with certain reporting
requirements. The allegations at the Knox Lee Plant relate to the receipt of an
off-specification fuel oil, and the allegations at Pirkey Plant relate to
testing and reporting of volatile organic compound emissions. No action can be
commenced until 60 days after the date of notice.

On July 19, 2004, the Texas Commission on Environmental Quality (TCEQ) issued a
Notice of Enforcement to SWEPCo relating to the Welsh Plant containing a summary
of findings resulting from a compliance investigation at the plant. The summary
includes allegations concerning compliance with certain recordkeeping and
reporting requirements, compliance with a referenced design heat input value in
the Welsh permit, compliance with a fuel sulfur content limit, and compliance
with emission limits for sulfur dioxide.

On August 13, 2004, TCEQ issued a Notice of Enforcement to SWEPCo relating to
the off-specification fuel oil deliveries at the Knox Lee Plant. On August 30,
2004, TCEQ issued a Notice of Enforcement to SWEPCo relating to the reporting of
volatile organic compound emissions at the Pirkey Plant.

SWEPCo has previously reported to the TCEQ, deviations related to the receipt of
off-specification fuel at Knox Lee, the volatile organic compound emissions at
Pirkey, and the referenced recordkeeping and reporting requirements and heat
input value at Welsh. We are preparing additional responses to the Notice of
Enforcement and the notice from the special interest groups. Management is
unable to predict the timing of any future action by TCEQ or the special
interest groups or the effect of such actions on results of operations, cash
flows or financial condition.

Carbon Dioxide Public Nuisance Claims
-------------------------------------

On July 21, 2004, attorneys general from eight states and the corporation
counsel for the City of New York filed an action in federal district court for
the Southern District of New York against AEP, AEPSC and four other unaffiliated
governmental and investor-owned electric utility systems. That same day, a
similar complaint was filed in the same court against the same defendants by the
Natural Resources Defense Council on behalf of three special interest groups.
The actions allege that carbon dioxide emissions from power generation
facilities constitute a public nuisance under federal common law due to impacts
associated with global warming, and seek injunctive relief in the form of
specific emission reduction commitments from the defendants. In September 2004,
the defendants, including AEP and AEPSC, filed a motion to dismiss the lawsuits.
Management believes the actions are without merit and intends to defend 
vigorously against the claims.

TEM Litigation
--------------

See discussion of TEM litigation within the "Power Generation Facility" section
of "Financial Condition - Other" within Management's Financial Discussion and
Analysis of Results of Operations.

Environmental Matters
---------------------

As discussed in our 2003 Annual Report, there are emerging environmental control
requirements that we expect will result in substantial capital investments and
operational costs. The sources of these future requirements include:

 o  Legislative and regulatory proposals to adopt stringent controls on
    sulfur dioxide (SO2), nitrogen oxide (NOx) and mercury emissions from
    coal-fired power plants,
 o  New Clean Water Act rules to reduce the impacts of water intake
    structures on aquatic species at certain of our power plants, and
 o  Possible future requirements to reduce carbon dioxide emissions to address
    concerns about global climatic change.

This discussion updates certain events occurring in 2004. You should also read
the "Significant Factors - Environmental Matters" section within Management's
Financial Discussion and Analysis of Results of Operations in our 2003 Annual
Report for a description of all material environmental matters affecting us,
including, but not limited to, (1) the current air quality regulatory framework,
(2) estimated air quality environmental investments, (3) Superfund and state
remediation, (4) global climate change, and (5) costs for spent nuclear fuel
disposal and decommissioning.

Future Reduction Requirements for SO2, NOx and Mercury
------------------------------------------------------

In 1997, the Federal EPA adopted new, more stringent national ambient air
quality standards for fine particulate matter and ground-level ozone. The
Federal EPA is in the process of developing final designations for fine
particulate matter non-attainment areas. The Federal EPA finalized designations
for ozone non-attainment areas on April 15, 2004. On the same day, the
Administrator of the Federal EPA signed a final rule establishing the elements
that must be included in state implementation plans (SIPs) to achieve the new
standards, and setting deadlines ranging from 2008 to 2015 for achieving
compliance with the final standard, based on the severity of non-attainment. All
or parts of 474 counties are affected by this new rule, including many urban
areas in the Eastern United States.

The Federal EPA identified SO2 and NOx emissions as precursors to the formation
of fine particulate matter. NOx emissions are also identified as a precursor to
the formation of ground-level ozone. As a result, requirements for future
reductions in emissions of NOx and SO2 from our generating units are highly
probable. In addition, the Federal EPA proposed a set of options for future
mercury controls at coal-fired power plants.

Regulatory Emissions Reductions
-------------------------------

On January 30, 2004, the Federal EPA published two proposed rules that would
collectively require reductions of approximately 70% each in emissions of SO2,
NOx and mercury from coal-fired electric generating units by 2015 (2018 for
mercury). This initiative has two major components:

 o  The Federal EPA proposed a Clean Air Interstate Rule (CAIR) to reduce
    SO2 and NOx emissions across the eastern half of the United States (29
    states and the District of Columbia) and make progress toward
    attainment of the new fine particulate matter and ground-level ozone
    national ambient air quality standards. These reductions could also
    satisfy these states' obligations to make reasonable progress towards
    the national visibility goal under the regional haze program.
 o  The Federal EPA proposed to regulate mercury emissions from coal-fired
    electric generating units.

The CAIR would require affected states to include, in their SIPs, a program to
reduce NOx and SO2 emissions from coal-fired electric utility units. SO2 and NOx
emissions would be reduced in two phases, which would be implemented through a
cap-and-trade program. Regional SO2 emissions would be reduced to 3.9 million
tons by 2010 and to 2.7 million tons by 2015. Regional NOx emissions would be
reduced to 1.6 million tons by 2010 and to 1.3 million tons by 2015. Rules to
implement the SO2 and NOx trading programs were proposed on June 10, 2004.

On April 15, 2004, the Federal EPA Administrator signed a proposed rule
detailing how states should analyze and include "Best Available Retrofit"
requirements for individual facilities in their SIPs to address regional haze.
The guidance applies to facilities built between 1962 and 1977 that emit more
than 250 tons per year of certain regulated pollutants in specific industrial
categories, including utility boilers. The Federal EPA included an alternative
"Best Available Retrofit" program based on emissions budgeting and trading
programs. For utility units that are affected by the CAIR, described above, the
Federal EPA proposed that participation in the trading program under the CAIR
would satisfy any applicable "Best Available Retrofit" requirements. However,
the guidance preserves the ability of a state to require site-specific
installation of pollution control equipment through the SIP for purposes of
abating regional haze.

To control and reduce mercury emissions, the Federal EPA published two
alternative proposals. The first option requires the installation of maximum
achievable control technology (MACT) on a site-specific basis. Mercury emissions
would be reduced from 48 tons to approximately 34 tons by 2008. The Federal EPA
believes, and the industry concurs, that there are no commercially available
mercury control technologies in the marketplace today that can achieve the MACT
standards for bituminous coals, but certain units have achieved comparable
levels of mercury reduction by installing conventional SO2 (scrubbers) and NOx
(SCR) emission reduction technologies. The proposed rule imposes significantly
less stringent standards on generating plants that burn sub-bituminous coal or
lignite. The proposed standards for sub-bituminous coals potentially could be
met without installation of mercury control technologies.

The Federal EPA recommends, and we support, a second mercury emission reduction
option. The second option would permit mercury emission reductions to be
achieved from existing sources through a national cap-and-trade approach. The
cap-and-trade approach would include a two-phase mercury reduction program for
coal-fired utilities. This approach would coordinate the reduction requirements
for mercury with the SO2 and NOx reduction requirements imposed on the same
sources under the CAIR. Coordination is significantly more cost-effective
because technologies like scrubbers and SCRs, which can be used to comply with
the more stringent SO2 and NOx requirements, have also proven effective in
reducing mercury emissions on certain coal-fired units that burn bituminous
coal. The second option contemplates reducing mercury emissions from 48 tons to
34 tons by 2010 and to 15 tons by 2018. A supplemental proposal including
unit-specific allocations and a framework for the emissions budgeting and
trading program preferred by the Federal EPA was published in the Federal
Register on March 16, 2004. We filed comments on both the initial proposal and
the supplemental notice in June 2004.

The Federal EPA's proposals are the beginning of a lengthy rulemaking process,
which will involve supplemental proposals on many details of the new regulatory
programs, written comments and public hearings, issuance of final rules, and
potential litigation. In addition, states have substantial discretion in
developing their rules to implement cap-and-trade programs, and will have 18
months after publication of the notice of final rulemaking to submit their
revised SIPs. As a result, the ultimate requirements may not be known for
several years and may depart significantly from the original proposed rules
described here.

While uncertainty remains as to whether future emission reduction requirements
will result from new legislation or regulation, it is certain under either
outcome that we will invest in additional conventional pollution control
technology on a major portion of our fleet of coal-fired power plants.
Finalization of new requirements for further SO2, NOx and/or mercury emission
reductions will result in the installation of additional scrubbers, SCR systems
and/or the installation of emerging technologies for mercury control. The cost
of such facilities could have an adverse effect on future results of operations,
cash flows and financial condition unless recovered from customers.

New Source Review Litigation
----------------------------

Under the Clean Air Act (CAA), if a plant undertakes a major modification that
directly results in an emissions increase, permitting requirements might be
triggered and the plant may be required to install additional pollution control
technology. This requirement does not apply to activities such as routine
maintenance, replacement of degraded equipment or failed components, or other
repairs needed for the reliable, safe and efficient operation of the plant.

The Federal EPA and a number of states have alleged APCo, CSPCo, I&M, OPCo and
other unaffiliated utilities modified certain units at coal-fired generating
plants in violation of the new source review requirements of the CAA. The
Federal EPA filed its complaints against our subsidiaries in U.S. District Court
for the Southern District of Ohio. The court also consolidated a separate
lawsuit, initiated by certain special interest groups, with the Federal EPA
case. The alleged modifications relate to costs that were incurred at our
generating units over a 20-year period.

On June 18, 2004, the Federal EPA issued a Notice of Violation (NOV) in order to
"perfect" its complaint in the pending litigation. The NOV expands the number of
alleged "modifications" undertaken at the Amos, Cardinal, Conesville, Kammer,
Muskingum River, Sporn and Tanners Creek plants during scheduled outages on
these units from 1979 through the present. Approximately one-third of the
allegations in the NOV are already contained in allegations made by the states
or the special interest groups in the pending litigation. The Federal EPA filed
a motion to amend its complaints and to expand the scope of the pending
litigation. The AEP subsidiaries opposed that motion. In September 2004, the
judge disallowed the addition of claims to the pending case. The judge also
granted motions to dismiss a number of allegations in the original filing.

We are unable to estimate the loss or range of loss related to any contingent
liability we might have for civil penalties under the CAA proceedings. We are
also unable to predict the timing of resolution of these matters due to the
number of alleged violations and the significant number of issues yet to be
determined by the Court. If we do not prevail, any capital and operating costs
of additional pollution control equipment that may be required, as well as any
penalties imposed, would adversely affect future results of operations, cash
flows and possibly financial condition unless such costs can be recovered
through regulated rates and market prices for electricity.

In September 2004, the Sierra Club filed a complaint under the citizen suit
provisions of the CAA in the United States District Court for the Southern
District of Ohio alleging that violations of the PSD and New Source Performance
Standards requirements of the CAA and the opacity provisions of the Ohio state
implementation plan occurred at the J.M. Stuart Station, and seeking injunctive
relief and civil penalties. Stuart Station is jointly owned by CSPCo (26%) and
two unaffiliated utilities. We believe the allegations in the complaint are
without merit, and intend to defend vigorously this action. Management is unable
to predict the timing of any future action by the special interest group or the
effect of such actions on future operations or cash flows.

Clean Water Act Regulation
--------------------------

On July 9, 2004, the Federal EPA published in the Federal Register a rule
pursuant to the Clean Water Act that will require all large existing,
once-through cooled power plants to meet certain performance standards to reduce
the mortality of juvenile and adult fish or other larger organisms pinned
against a plant's cooling water intake screens. All plants must reduce fish
mortality by 80% to 95%. A subset of these plants that are located on sensitive
water bodies will be required to meet additional performance standards for
reducing the number of smaller organisms passing through the water screens and
the cooling system. These plants must reduce the rate of smaller organisms
passing through the plant by 60% to 90%. Sensitive water bodies are defined as
oceans, estuaries, the Great Lakes, and small rivers with large plants. These
rules will result in additional capital and operation and maintenance expenses
to ensure compliance. The estimated capital cost of compliance for our
facilities, based on the Federal EPA's analysis in the rule, is $193 million.
Any capital costs associated with compliance activities to meet the new
performance standards would likely be incurred during the years 2008 through
2010. We have not independently confirmed the accuracy of the Federal EPA's
estimate. The rule has provisions to limit compliance costs. We may propose less
costly site-specific performance criteria if our compliance cost estimates are
significantly greater than the Federal EPA's estimates or greater than the
environmental benefits. The rule also allows us to propose mitigation (also
called restoration measures) that is less costly and has equivalent or superior
environmental benefits than meeting the criteria in whole or in part. Several
states, electric utilities (including our APCo subsidiary) and environmental
groups appealed certain aspects of the rule. We cannot predict the outcome of
the appeals.

Spent Nuclear Fuel Disposal
---------------------------

As a result of DOE's failure to make sufficient progress toward a permanent
repository or otherwise assume responsibility for SNF, AEP on behalf of I&M and
STP Nuclear Operating Company on behalf of TCC and the other STP owners, along
with a number of unaffiliated utilities and states, filed suit in the D.C.
Circuit Court requesting, among other things, that the D.C. Circuit Court order
DOE to meet its obligations under the law. The D.C. Circuit Court ordered the
parties to proceed with contractual remedies but declined to order DOE to begin
accepting SNF for disposal. DOE estimates its planned site for the nuclear waste
will not be ready until at least 2010. In 1998, AEP and I&M filed a complaint in
the U.S. Court of Federal Claims seeking damages in excess of $150 million due
to the DOE's partial material breach of its unconditional contractual deadline
to begin disposing of SNF generated by the Cook Plant. Similar lawsuits were
filed by other utilities. In August 2000, in an appeal of related cases
involving other unaffiliated utilities, the U.S. Court of Appeals for the
Federal Circuit held that the delays clause of the standard contract between
utilities and the DOE did not apply to DOE's complete failure to perform its
contract obligations, and that the utilities' suits against DOE may continue in
court. On January 17, 2003, the U.S. Court of Federal Claims ruled in favor of
I&M on the issue of liability. The case continued on the issue of damages owed
to I&M by the DOE. In May 2004, the U.S. Court of Federal Claims ruled against
I&M and denied damages. In July 2004, I&M appealed this ruling to the U.S. Court
of Appeals for the Federal Circuit. As long as the delay in the availability of
a government approved storage repository for SNF continues, the cost of both
temporary and permanent storage of SNF and the cost of decommissioning will
continue to increase. If such cost increases are not recovered on a timely basis
in regulated rates, future results of operations and cash flows could be
adversely affected.

Nuclear Decommissioning
-----------------------

As discussed in the 2003 Annual Report, decommissioning costs are accrued over
the service life of STP. The licenses to operate the two nuclear units at STP
expire in 2027 and 2028. TCC had estimated its portion of the costs of
decommissioning STP to be $289 million in 1999 nondiscounted dollars. TCC is
accruing and recovering these decommissioning costs through rates based on the
service life of STP at a rate of approximately $8 million per year.

In May 2004, an updated decommissioning study was completed for STP. The study
estimates TCC's share of the decommissioning costs of STP to be $344 million in
nondiscounted 2004 dollars. We are currently analyzing the STP study to
determine the effect on our asset retirement obligations (ARO) and will make any
appropriate adjustments to the ARO liability and related regulatory asset in the
fourth quarter 2004. TCC is in the process of selling its ownership interest in
STP to a non-affiliate, and upon completion of the sale it is anticipated that
TCC will no longer be obligated for nuclear decommissioning liabilities
associated with STP.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Management's Financial Discussion and
Analysis of Results of Operations" in the 2003 Annual Report for a discussion of
the estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

Other Matters
-------------

As discussed in our 2003 Annual Report, there are several "Other Matters"
affecting us. The current status of FERC's market power mitigation efforts is
described below.

FERC Market Power Mitigation
----------------------------

In April 2004, the FERC issued two orders concerning utilities' ability to sell
wholesale electricity at market-based rates. In the first order, the FERC
adopted two new interim screens for assessing potential generation market power
of applicants for wholesale market based rates, and described additional
analyses and mitigation measures that could be presented if an applicant does
not pass one of these interim screens. These two screening tests include a
"pivotal supplier" test which determines if the market load can be fully served
by alternative suppliers and a "market share" test which compares the amount of
surplus generation at the time of the applicant's minimum load. In July 2004,
the FERC issued an order on rehearing affirming its conclusions in the April
order and directing AEP and two unaffiliated utilities to file generation market
power analyses within 30 days. In the second order, the FERC initiated a
rulemaking to consider whether the FERC's current methodology for determining
whether a public utility should be allowed to sell wholesale electricity at
market-based rates should be modified in any way.

On August 9, 2004, AEP submitted its Market Power Analysis pursuant to the
FERC's Orders on Rehearing. The analysis focused on the three major areas in
which AEP serves load and owns generation resources, ECAR, SPP and ERCOT, and
the "first tier" control areas for each of those areas.

The pivotal supplier and market share screen analyses that AEP filed
demonstrated that AEP does not possess market power in any of the control areas
to which it is directly connected (first-tier markets). AEP passed both
screening tests in all of its "first tier" markets. In its three "home" control
areas, AEP easily passed the pivotal supplier test. AEP, as part of PJM, also
passes the market share screen for the PJM destination market. AEP also passed
the market share screen for ERCOT. AEP did not pass the market share screen as
designed by the FERC for the SPP control area. Consequently, AEP also submitted
substantial additional information, including historical purchase and sales data
that demonstrates that AEP does not possess market power in any of the "home"
destination markets. AEP requested that its existing market-based pricing
authorization in all markets be continued based on this analysis. AEP also
requested that the FERC rule without instituting a proceeding and without
setting a refund date. This case is pending.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
 -------------------------------------------------------------------------

Market Risks
------------

As a major power producer and marketer of wholesale electricity and natural gas,
we have certain market risks inherent in our business activities. These risks
include commodity price risk, interest rate risk, foreign exchange risk and
credit risk. They represent the risk of loss that may impact us due to changes
in the underlying market prices or rates.

We have established policies and procedures that allow us to identify, assess,
and manage market risk exposures in our day-to-day operations. Our risk policies
have been reviewed with our Board of Directors and approved by our Risk
Executive Committee. Our Chief Risk Officer administers our risk policies and
procedures. The Risk Executive Committee establishes risk limits, approves risk
policies, and assigns responsibilities regarding the oversight and management of
risk and monitors risk levels. Members of this committee receive daily, weekly,
and monthly reports regarding compliance with policies, limits and procedures.
Our committee meets monthly and consists of the Chief Risk Officer, Credit Risk
Management, Market Risk Oversight, and senior financial and operating managers.

We actively participate in the Committee of Chief Risk Officers (CCRO) to
develop standard disclosures for risk management activities around risk
management contracts. The CCRO is composed of the chief risk officers of major
electricity and gas companies in the United States. The CCRO adopted disclosure
standards for risk management contracts to improve clarity, understanding and
consistency of information reported. Implementation of the disclosures is
voluntary. We support the work of the CCRO and have embraced the disclosure
standards. The following tables provide information on our risk management
activities.

Mark-to-Market Risk Management Contract Net Assets (Liabilities)
----------------------------------------------------------------

This table provides detail on changes in our mark-to-market (MTM) net asset or
liability balance sheet position from one period to the next.


<TABLE>
<CAPTION>

                                          MTM Risk Management Contract Net Assets (Liabilities)
                                                 Nine Months Ended September 30, 2004

                                                                              Investments      Investments   
                                                                 Utility          Gas              UK  
                                                               Operations      Operations     Operations (i)      Consolidated
                                                               ----------      ----------     --------------      ------------
                                                                                       (in millions)                           
    <C>                                                           <C>             <C>              <C>                 <C>
    Total MTM Risk Management Contract Net Assets
      (Liabilities) at December 31, 2003                          $286              $5             $(246)               $45 
    (Gain) Loss from Contracts Realized/Settled
      During the Period (a)                                       (108)            (37)              254                109 
    Fair Value of New Contracts When Entered
      Into During the Period (b)                                     -               -                 -                  - 
    Net Option Premiums Paid/(Received) (c)                         (1)              3                 -                  2 
    Change in Fair Value Due to Valuation Methodology
      Changes (d)                                                    3               -                 -                  3 
    Changes in Fair Value of Risk Management
      Contracts (e)                                                 61              (6)              (10)                45 
    Changes in Fair Value of Risk Management Contracts
      Allocated to Regulated Jurisdictions (f)
                                                                    (3)              -                 -                 (3)
                                                                  -----           -----            ------              -----

    Total MTM Risk Management Contract   
      Net Assets (Liabilities) at September 30, 2004              $238            $(35)              $(2)               201 
                                                                  =====           =====            ======              -----
    Net Cash Flow Hedge Contracts (g)                                                                                  (152)
    Net Risk Management Liabilities
      Held for Sale, included in the totals above (h)                                                                     2
                                                                                                                       -----
    Ending Net Risk Management Assets at September 30, 2004
                                                                                                                        $51
                                                                                                                       =====
</TABLE>


    (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
        includes realized risk management contracts and related derivatives
        that settled during 2004 and were entered into prior to 2004.
    (b) The "Fair Value of New Contracts When Entered Into During the
        Period" represents the fair value at inception of long-term
        contracts entered into with customers during 2004. Most of the fair
        value comes from longer term fixed price contracts with customers
        that seek to limit their risk against fluctuating energy prices. The
        contract prices are valued against market curves associated with the
        delivery location.
    (c) "Net Option Premiums Paid/(Received)" reflects the net option
        premiums paid/(received) as they relate to unexercised and unexpired
        option contracts entered into in 2004.
    (d) "Change in Fair Value Due to Valuation Methodology Changes"
        represents the impact of AEP changes in methodology in regards to
        credit reserves on forward contracts.
    (e) "Changes in Fair Value of Risk Management Contracts" represents the
        fair value change in the risk management portfolio due to market
        fluctuations during the current period. Market fluctuations are
        attributable to various factors such as supply/demand, weather,
        storage, etc.
    (f) "Changes in Fair Value of Risk Management Contracts Allocated to
        Regulated Jurisdictions" relates to the net gains (losses) of those
        contracts that are not reflected in the Consolidated Statements of
        Operations. These net gains (losses) are recorded as regulatory
        liabilities/assets for those subsidiaries that operate in regulated
        jurisdictions.
    (g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed in detail
        within the following pages. 
    (h) See Note 7 for discussion of Assets Held for Sale. 
    (i) During 2004, we began to unwind our risk management contracts within the
        U.K. as part of our planned divestiture of our UK Operations. We 
        completed the sale of substantially all of our operations and assets in
        the Investments-UK Operations segment in July 2004.


<TABLE>
<CAPTION>

                           Detail on MTM Risk Management Contract Net Assets (Liabilities)
                                            As of September 30, 2004

                                                                    Investments
                                                      Utility           Gas         
                                                     Operations      Operations        Consolidated
                                                     ----------     -----------        ------------
                                                                    (in millions)
    <C>                                                  <C>             <C>              <C>  
    Current Assets                                       $590            $208               $798 
    Non Current Assets                                    382             143                525
                                                         -----           -----            -------
    Total Assets                                          972             351              1,323
                                                         -----           -----            -------

    Current Liabilities                                  (521)           (224)              (745)
    Non Current Liabilities                              (213)           (162)              (375)
                                                         -----           -----            -------
    Total Liabilities                                    (734)           (386)            (1,120)
                                                         -----           -----            -------

    Total Net Assets (Liabilities),
      excluding Cash Flow Hedges                         $238            $(35)              $203
                                                         =====           =====            =======
                                                     
</TABLE>


<TABLE>
<CAPTION>

                       Reconciliation of MTM Risk Management Contracts to
                                  Consolidated Balance Sheets
                                   As of September 30, 2004


                                           MTM Risk           PLUS:
                                          Management        Cash Flow
                                          Contracts(a)       Hedges         Consolidated (b)
                                          ------------      ---------       ----------------
                                                          (in millions)
   <C>                                        <C>             <C>                 <C>  
   Current Assets                               $798            $12                 $810 
   Non Current Assets                            525              2                  527
                                              -------         ------              -------
   Total MTM Derivative  
    Contract Assets                            1,323             14                1,337
                                              -------         ------              -------

   Current Liabilities                          (745)          (158)                (903)
   Non Current Liabilities                      (375)            (8)                (383)
                                              -------         ------              -------
   Total MTM Derivative  
    Contract Liabilities                      (1,120)          (166)              (1,286)
                                              -------         ------              -------

   Total MTM Derivative  
    Contract Net Assets  
    (Liabilities)                               $203          $(152)                 $51
                                              =======         ======              =======

   (a) Does not include Cash Flow Hedges and Assets Held for Sale.
   (b) Represents amount of total MTM derivative contracts recorded within
       Risk Management Assets, Long-term Risk Management Assets, Risk
       Management Liabilities and Long-term Risk Management Liabilities on our
       Consolidated Balance Sheets.
</TABLE>

     

Maturity and Source of Fair Value of MTM Risk Management Contract 
 Net Assets (Liabilities)
-----------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets (liabilities) provides two fundamental pieces of
information. 
 o  The source of fair value used in determining the carrying amount
    of our total MTM asset or liability (external sources or modeled
    internally).
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                        Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets (Liabilities)
                                        Fair Value of Contracts as of September 30, 2004

                                         Remainder                                                           After  
                                           2004          2005         2006          2007         2008       2008 (c)     Total (d)
                                         ---------       ----         ----          ----         ----       --------     ---------
                                                                            (in millions)
<C>                                       <C>            <C>           <C>         <C>           <C>          <C>         <C>
Utility Operations:
-------------------
Prices Actively Quoted - Exchange 
 Traded Contracts                           $-           $(76)          $2           $8           $-           $-         $(66)
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)             4            142           19            7            -            -          172 
Prices Based on Models and Other
 Valuation Methods (b)                       3             11           13           26           25           54          132
                                          -----          -----         ----        -----         ----         ----        -----
Total                                        7             77           34           41           25           54          238
                                          -----          -----         ----        -----         ----         ----        -----

Investments - Gas Operations:
-----------------------------
Prices Actively Quoted - Exchange
 Traded Contracts                           13             82           (3)           2            -            -           94 
Prices Provided by Other External 
 Sources - OTC Broker Quotes (a)           (55)           (56)           -            -            -            -         (111)
Prices Based on Models and Other
 Valuation Methods (b)                       -              2           (8)          (4)          (3)          (5)         (18)
                                          -----          -----         ----        -----         ----         ----        -----
Total                                      (42)            28          (11)          (2)          (3)          (5)         (35)
                                          -----          -----         ----        -----         ----         ----        -----

Investments - UK Operations (e):
--------------------------------
Prices Actively Quoted - Exchange 
 Traded Contracts                            -              -            -            -            -            -            - 
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)             4             (8)          (1)           -            -            -           (5)
Prices Based on Models and Other
 Valuation Methods (b)                       3              -            -                         -            -            3
                                          -----          -----         ----        -----         ----         ----        -----
Total                                        7             (8)          (1)                        -            -           (2)
                                          -----          -----         ----        -----         ----         ----        -----

Consolidated:
-------------
Prices Actively Quoted - Exchange
 Traded Contracts                           13              6           (1)          10            -            -           28 
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)           (47)            78           18            7            -            -           56 
Prices Based on Models and Other
 Valuation Methods (b)                       6             13            5           22           22           49          117
                                          -----          -----         ----        -----         ----         ----        -----
Total                                     $(28)           $97          $22          $39          $22          $49         $201
                                          =====          =====         ====        =====         ====         ====        =====

(a) Prices provided by other external sources - Reflects information obtained from over-the-counter brokers, industry services, or 
    multiple-party on-line platforms.
(b) Modeled - In the absence of pricing information from external sources, modeled information is derived using valuation models
    developed by the reporting entity, reflecting when appropriate, option pricing theory, discounted cash flow concepts, valuation
    adjustments, etc. and may require projection of prices for underlying commodities beyond the period that prices are available 
    from third-party sources. In addition, where external pricing information or market liquidity are limited, such valuations are
    classified as modeled.
(c) There is $20 million of mark-to-market value in 2009 and $19 million of mark-to-market value in 2010. 
(d) Amounts exclude Cash Flow Hedges. 
(e) The majority of these positions will either mature or be settled with the applicable counterparties during the fourth quarter 
    2004.
</TABLE>


The determination of the point at which a market is no longer liquid for placing
it in the Modeled category in the preceding table varies by market. The
following table reports an estimate of the maximum tenors (contract maturities)
of the liquid portion of each energy market.


<TABLE>
<CAPTION>

                                Maximum Tenor of the Liquid Portion of Risk Management Contracts
                                                    As of September 30, 2004
                                                                                                                         
           Domestic                  Transaction Class                 Market/Region                           Tenor
           --------                  -----------------                 -------------                           -----        
                                                                                                            (in months) 

        <C>                 <C>                                  <C>                                             <C>
        Natural Gas         Futures                              NYMEX Henry Hub                                 63
                            Physical Forwards                    Gulf Coast, Texas                               18
                            Swaps                                Gas East - Northeast, Mid-continent
                                                                   Gulf Coast, Texas                             18
                            Swaps                                Gas West - Rocky Mountains,
                                                                   West Coast                                    27
                            Exchange Option Volatility           NYMEX/Henry Hub                                 12

        Power               Futures                              PJM                                             27
                            Physical Forwards                    Cinergy                                         15
                            Physical Forwards                    First Energy                                    21
                            Physical Forwards                    PJM                                             27
                            Physical Forwards                    NYPP                                            27
                            Physical Forwards                    NEPOOL                                          15
                            Physical Forwards                    ERCOT                                           27
                            Physical Forwards                    TVA                                              -
                            Physical Forwards                    Com Ed                                          15
                            Physical Forwards                    Entergy                                          9
                            Physical Forwards                    PaloVerde                                       39
                            Physical Forwards                    North Path 15, South Path 15                    39
                            Physical Forwards                    Mid Columbia                                    39
                            Peak Power Volatility (Options)      Cinergy                                         12
                            Peak Power Volatility (Options)      PJM                                             12

        Crude Oil           Swaps                                West Texas Intermediate                         30

        Emissions           Credits                              SO2                                             51

        Coal                Physical Forwards                    PRB, NYMEX, CSX                                 27

        International
        -------------

        Power               Forwards and Options                 United Kingdom                                  42

        Coal                Forward Purchases and Sales          United Kingdom                                   -
                            Swaps                                Europe                                          39

        Freight             Swaps                                Europe                                          39
</TABLE>



Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power and gas operations. We monitor these risks on our future operations and
may employ various commodity instruments and cash flow hedges to mitigate the 
impact of these fluctuations on the future cash flows from assets. We do not 
hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. International subsidiaries use currency swaps to hedge exchange rate
fluctuations in forecasted foreign currency cashflows. We do not hedge all
foreign currency exposure.

The tables below provide detail on effective cash flow hedges under SFAS 133
included in our balance sheet. The data in the first table will indicate the
magnitude of SFAS 133 hedges we have in place. Under SFAS 133, only contracts
designated as cash flow hedges are recorded in AOCI. Therefore, economic hedge
contracts which are not designated as cash flow hedges are required to be
marked-to-market and are included in the previous risk management tables. This
table further indicates what portions of these hedges are expected to be
reclassified into net income in the next 12 months. The second table provides
the nature of changes from December 31, 2003 to September 30, 2004.

Information on energy merchant activities is presented separately from interest
rate and foreign currency risk management activities. In accordance with
accounting principles generally accepted in the United States of America, all
amounts are presented net of related income taxes.

      Cash Flow Hedges included in Accumulated Other Comprehensive Loss
               On the Balance Sheet as of September 30, 2004

                                                           Portion Expected to
                            Accumulated Other               be Reclassified to
                              Comprehensive                Earnings During the
                            Loss After Tax (a)              Next 12 Months (b)
                            ------------------             -------------------
                                               (in millions)
   Power and Gas                    $(77)                         $(73)  
   Foreign Currency                   -                              -  
   Interest Rate                     (25)                           (5)   
                                   ------                         -----

   Total                           $(102)                         $(78)  
                                   ======                         =====


<TABLE>
<CAPTION>

                                   Total Accumulated Other Comprehensive Income (Loss) Activity
                                             Nine Months Ended September 30, 2004

                                                                        Foreign
                                                    Power and Gas      Currency     Interest Rate     Consolidated
                                                    -------------      --------     -------------     ------------
                                                                             (in millions)
        <C>                                             <C>              <C>            <C>              <C> 
        Beginning Balance,
         December 31, 2003                              $(65)            $(20)           $(9)             $(94)
        Changes in Fair Value (c)                        (73)               -            (21)              (94) 
        Reclassifications from AOCI to Net
         Income (d)                                       61               20              5                86 
                                                        -----            -----          -----            ------
        Ending Balance,                                           
         September 30, 2004                             $(77)              $-           $(25)            $(102)
                                                        =====            =====          =====            ====== 
</TABLE>


(a) "Accumulated Other Comprehensive Loss After Tax" - Gains/losses are
    net of related income taxes that have not yet been included in the
    determination of net income; reported as a separate component of
    shareholders' equity on the balance sheet.
(b) "Portion Expected to be Reclassified to Earnings During the Next 12
    Months" - Amount of gains or losses (realized or unrealized) from
    derivatives used as hedging instruments that have been deferred and
    are expected to be reclassified into net income during the next 12
    months at the time the hedged transaction affects net income.
(c) "Changes in Fair Value" - Changes in the fair value of derivatives
    designated as cash flow hedges not yet reclassified into net income,
    pending the hedged items affecting net income. Amounts are reported
    net of related income taxes.
(d) "Reclassifications from AOCI to Net Income" - Gains or losses from
    derivatives used as hedging instruments in cash flow hedges that were
    reclassified into net income during the reporting period. Amounts are
    reported net of related income taxes above.

Credit Risk
-----------

We limit credit risk by assessing creditworthiness of potential counterparties
before entering into transactions with them and continue to evaluate their
creditworthiness after transactions have been initiated. Only after an entity
has met our internal credit rating criteria will we extend unsecured credit. We
use Moody's Investor Service, Standard and Poor's and qualitative and
quantitative data to assess the financial health of counterparties on an ongoing
basis. Our analysis, in conjunction with the rating agencies' information, is
used to determine appropriate risk parameters. We also require cash deposits,
letters of credit and parental/affiliate guarantees as security from
counterparties depending upon credit quality in our normal course of business.

We have risk management contracts with numerous counterparties. Since open risk
management contracts are valued based on changes in market prices of the related
commodities, our exposures change daily. Except for one non-investment grade
counterparty who has a net exposure of approximately $46 million, we believe
that credit exposure with any one counterparty is not material to our financial
condition at September 30, 2004. At September 30, 2004, our credit exposure net
of credit collateral to sub investment grade counterparties was approximately
19% expressed in terms of net MTM assets and net receivables. The concentration
in non-investment grade credit exposure is proportionately higher due to coal
exposures related to domestic MTM coal transactions. These exposures were driven
by the continued high levels of prices for coal. As of September 30, 2004, the
following table approximates our counterparty credit quality and exposure based
on netting across commodities and instruments:


<TABLE>
<CAPTION>

                                                                                          Number of          Net Exposure of
Counterparty                      Exposure Before        Credit          Net            Counterparties        Counterparties
Credit Quality                    Credit Collateral    Collateral      Exposure             > 10%                > 10%
--------------                    -----------------    ----------      --------         --------------        ---------------
                                                        (in millions, except number of counterparties)                     
<C>                                     <C>               <C>           <C>                     <C>                  <C>  
Investment Grade                          $924            $145            $779                  -                      $-   
Split Rating                                30               7              23                  3                      21   
Non-Investment Grade                       331             181             150                  3                      99   
No External Ratings:
  Internal Investment
    Grade                                  126               -             126                  1                      16   
  Internal Non-Investment
    Grade                                   69               4              65                  2                      43   
                                        -------           -----         -------                 --                   -----
Total                                   $1,480            $337          $1,143                  9                    $179   
                                        =======           =====         =======                 ==                   ===== 
</TABLE>


Generation Plant Hedging Information
------------------------------------

This table provides information on operating measures regarding the proportion
of output of our generation facilities (based on economic availability
projections) economically hedged, including both contracts designated as cash
flow hedges under SFAS 133 and contracts not designated as cash flow hedges.
This information is forward-looking and provided on a prospective basis through
December 31, 2006. Please note that this table is a point-in-time estimate,
subject to changes in market conditions and our decisions on how to manage
operations and risk. "Estimated Plant Output Hedged," represents the portion of
megawatthours of future generation/production for which we have sales
commitments or estimated requirement obligations to customers.

                      Generation Plant Hedging Information
                           Estimated Next Three Years
                            As of September 30, 2004

                                                 Remainder
                                                    2004       2005        2006
                                                    ----       ----        ----
Estimated Plant Output Hedged                       92%         88%        88%



VaR Associated with Risk Management Contracts
---------------------------------------------

We use a risk measurement model, which calculates Value at Risk (VaR) to measure
our commodity price risk in the risk management portfolio. The VaR is based on
the variance-covariance method using historical prices to estimate volatilities
and correlations and assumes a 95% confidence level and a one-day holding
period. Based on this VaR analysis, at September 30, 2004, a near term typical
change in commodity prices is not expected to have a material effect on our
results of operations, cash flows or financial condition.

The following table shows the end, high, average, and low market risk as
measured by VaR year-to-date:

                              VaR Model

        Nine Months Ended                       Twelve Months Ended
        September 30, 2004                       December 31, 2003   
        ------------------                      -------------------
          (in millions)                            (in millions)
    End    High    Average     Low           End    High   Average    Low
    ---    ----    -------     ---           ---    ----   -------    ---
     $1     $19      $6        $1            $11    $19       $7       $4

The 2004 High VaR was due to the wind-down of the London risk management
activities. These activities were concluded in March 2004. The 2004 High VaR,
excluding London activities, was approximately $8 million.

Our VaR model results are adjusted using standard statistical treatments to
calculate the CCRO VaR reporting metrics listed below.


<TABLE>
<CAPTION>

                                CCRO VaR Metrics

                                                              Average for
                                                             Year-to-Date       High for               Low for
                                       September 30, 2004        2004        Year-to-Date 2004     Year-to-Date 2004
                                       ------------------    ------------    -----------------     -----------------
                                                                     (in millions)                                          
<C>                                          <C>              <C>                  <C>                     <C>          
95% Confidence Level, Ten-Day
  Holding Period                             $5               $21                  $73                     $5            

99% Confidence Level, One-Day
  Holding Period                             $2                $9                  $30                     $2            

</TABLE>


We utilize a VaR model to measure interest rate market risk exposure. The
interest rate VaR model is based on a Monte Carlo simulation with a 95%
confidence level and a one-year holding period. The volatilities and
correlations were based on three years of daily prices. The risk of potential
loss in fair value attributable to our exposure to interest rates, primarily
related to long-term debt with fixed interest rates, was $755 million at
September 30, 2004 and $1.013 billion at December 31, 2003. We would not expect
to liquidate our entire debt portfolio in a one-year holding period. Therefore,
a near term change in interest rates should not materially affect our results of
operations, cash flows or consolidated financial position.

We are exposed to risk from changes in the market prices of coal and natural gas
used to generate electricity where generation is no longer regulated or where
existing fuel clauses are suspended or frozen. The protection afforded by fuel
clause recovery mechanisms has either been eliminated by the implementation of
customer choice in Ohio (effective January 1, 2001) and in the ERCOT area of
Texas (effective January 1, 2002) or frozen by a settlement agreement in West
Virginia. To the extent the fuel supply of the generating units in these states
is not under fixed-price long-term contracts, we are subject to market price
risk. We continue to be protected against market price changes by active fuel
clauses in Oklahoma, Arkansas, Louisiana, Kentucky, Virginia and the SPP area of
Texas. Fuel clauses are active again in Michigan and Indiana, effective January
1, 2004 and March 1, 2004, respectively. See Note 3 "Rate Matters" for further
discussion.

We employ risk management contracts including physical forward purchase and sale
contracts, exchange futures and options, over-the-counter options, swaps, and
other derivative contracts to offset price risk where appropriate. We engage in
risk management of electricity, gas and to a lesser degree other commodities,
principally coal and freight. As a result, we are subject to price risk. The
amount of risk taken is controlled by risk management operations and our Chief
Risk Officer and his staff. When risk management activities exceed certain
pre-determined limits, the positions are modified or hedged to reduce the risk
to be within the limits unless specifically approved by the Risk Executive
Committee.



<PAGE>

<TABLE>
<CAPTION>


                                   AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                               CONSOLIDATED STATEMENTS OF OPERATIONS
                                  For the Three and Nine Months Ended September 30, 2004 and 2003
                                             (in millions, except per-share amounts)
                                                            (Unaudited)

                                                                    Three Months Ended                    Nine Months Ended
                                                                  ----------------------                ---------------------       
                                                                  2004              2003                2004             2003
                                                                  ----              ----                ----             ---- 
<C>                                                              <C>                <C>                 <C>             <C>  
                       REVENUES
-----------------------------------------------------
Utility Operations                                               $2,909             $3,099              $7,989          $8,458  
Gas Operations                                                      762                707               2,191           2,278  
Other                                                                81                135                 281             440
                                                                 -------            -------             -------         ------- 
TOTAL                                                             3,752              3,941              10,461          11,176
                                                                 -------            -------             -------         ------- 
                       EXPENSES
-----------------------------------------------------
Fuel for Electric Generation                                        781                912               2,209           2,404  
Purchased Electricity for Resale                                    274                207                 444             577  
Purchased Gas for Resale                                            725                675               2,011           2,203  
Maintenance and Other Operation                                     843                904               2,679           2,739  
Depreciation and Amortization                                       333                329                 972             971  
Taxes Other Than Income Taxes                                       178                179                 538             524
                                                                 -------            -------             -------         ------- 
TOTAL                                                             3,134              3,206               8,853           9,418
                                                                 -------            -------             -------         ------- 

OPERATING INCOME                                                    618                735               1,608           1,758
                                                                 -------            -------             -------         ------- 

Other Income (Expense), Net                                         193                 31                 286             147
                                                                 -------            -------             -------         ------- 

Investment Value Losses                                               -                 70                   2              70
                                                                 -------            -------             -------         ------- 

             INTEREST AND OTHER CHARGES
-----------------------------------------------------
Interest                                                            193                216                 591             605  
Preferred Stock Dividend Requirements of Subsidiaries                 2                  1                   5               7  
Minority Interest in Finance Subsidiary                               -                  -                   -              17
                                                                 -------            -------             -------         ------- 
TOTAL                                                               195                217                 596             629
                                                                 -------            -------             -------         ------- 

INCOME BEFORE INCOME TAXES                                          616                479               1,296           1,206  
Income Taxes                                                        204                172                 444             429
                                                                 -------            -------             -------         ------- 
INCOME BEFORE DISCONTINUED OPERATIONS AND  
 CUMULATIVE EFFECT OF ACCOUNTING CHANGES                            412                307                 852             777  

DISCONTINUED OPERATIONS (Net of Tax)                                118                (50)                 60             (98) 

CUMULATIVE EFFECT OF ACCOUNTING CHANGES (Net of Tax)
-----------------------------------------------------
Accounting for Risk Management Contracts                              -                  -                   -             (49) 
Asset Retirement Obligations                                          -                  -                   -             242
                                                                 -------            -------             -------         ------- 
NET INCOME                                                         $530               $257                $912            $872
                                                                 =======            =======             =======         =======

WEIGHTED AVERAGE NUMBER OF SHARES
  OUTSTANDING                                                       396                395                 396             382
                                                                 =======            =======             =======         =======

                 EARNINGS PER SHARE
-----------------------------------------------------
Income Before Discontinued Operations and Cumulative
  Effect of Accounting Changes                                    $1.04              $0.78               $2.15           $2.03  
Discontinued Operations                                            0.30              (0.13)               0.15           (0.26) 
Cumulative Effect of Accounting Changes                               -                  -                   -            0.51
                                                                 -------            -------             -------         ------- 
TOTAL EARNINGS PER SHARE (BASIC AND DILUTED)                      $1.34              $0.65               $2.30           $2.28
                                                                 =======            =======             =======         =======

CASH DIVIDENDS PAID PER SHARE                                     $0.35              $0.35               $1.05           $1.30
                                                                 =======            =======             =======         =======

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                   AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                                   CONSOLIDATED BALANCE SHEETS
                                                             ASSETS
                                           September 30, 2004 and December 31, 2003
                                                           (Unaudited)

                                                                                               2004               2003      
                                                                                               ----               ---- 
                                                                                                    (in millions)                   

<C>                                                                                          <C>                 <C>   
                 CURRENT ASSETS
------------------------------------------------------
Cash and Cash Equivalents                                                                     $1,282                $976  
Other Cash Deposits                                                                              179                 206  
Accounts Receivable:
   Customers                                                                                     883               1,155  
   Accrued Unbilled Revenues                                                                     517                 596  
   Miscellaneous                                                                                  65                  83  
   Allowance for Uncollectible Accounts                                                         (132)               (124)
                                                                                             --------            -------- 
   Total Receivables                                                                           1,333               1,710
                                                                                             --------            -------- 
Fuel, Materials and Supplies                                                                   1,074                 991  
Risk Management Assets                                                                           810                 766  
Margin Deposits                                                                                  180                 119  
Other                                                                                            125                 129
                                                                                             --------            -------- 
TOTAL                                                                                          4,983               4,897
                                                                                             --------            -------- 

            PROPERTY, PLANT AND EQUIPMENT
------------------------------------------------------
Electric:
   Production                                                                                 15,829              15,112  
   Transmission                                                                                6,248               6,130  
   Distribution                                                                               10,197               9,902  
Other (including gas, coal mining and nuclear fuel)                                            3,488               3,572  
Construction Work in Progress                                                                    930               1,305
                                                                                             --------            -------- 
TOTAL                                                                                         36,692              36,021  
Less: Accumulated Depreciation and Amortization                                               14,398              14,004
                                                                                             --------            -------- 
TOTAL-NET                                                                                     22,294              22,017
                                                                                             --------            -------- 

              OTHER NON-CURRENT ASSETS
------------------------------------------------------
Regulatory Assets                                                                              3,480               3,548  
Securitized Transition Assets                                                                    656                 689  
Spent Nuclear Fuel and Decommissioning Trusts                                                  1,029                 982  
Investments in Power and Distribution Projects                                                   190                 212  
Goodwill                                                                                          78                  78  
Long-term Risk Management Assets                                                                 527                 494  
Other                                                                                            698                 733
                                                                                             --------            -------- 
TOTAL                                                                                          6,658               6,736
                                                                                             --------            -------- 

Assets of Discontinued Operations and Held for Sale                                              887               3,094  

TOTAL ASSETS                                                                                 $34,822             $36,744
                                                                                             ========            ========
See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                   AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                                   CONSOLIDATED BALANCE SHEETS
                                              LIABILITIES AND SHAREHOLDERS' EQUITY
                                            September 30, 2004 and December 31, 2003
                                                          (Unaudited)

                                                                                              2004                  2003
                                                                                              ----                  ----
                                                                                                    (in millions)                 

<C>                                                                                          <C>                  <C>
                             CURRENT LIABILITIES
---------------------------------------------------------------------------------
Accounts Payable                                                                              $1,033               $1,337 
Short-term Debt                                                                                  214                  326 
Long-term Debt Due Within One Year*                                                            1,598                1,779 
Risk Management Liabilities                                                                      903                  631 
Accrued Taxes                                                                                    583                  620 
Accrued Interest                                                                                 183                  207 
Customer Deposits                                                                                399                  379 
Other                                                                                            719                  703
                                                                                             --------             --------
TOTAL                                                                                          5,632                5,982
                                                                                             --------             --------

                            NON-CURRENT LIABILITIES
---------------------------------------------------------------------------------
Long-term Debt*                                                                               11,039               12,322 
Long-term Risk Management Liabilities                                                            383                  335 
Deferred Income Taxes                                                                          4,520                3,957 
Regulatory Liabilities and Deferred Investment Tax Credits                                     2,290                2,259 
Asset Retirement Obligations and Nuclear Decommissioning                                         696                  651 
Employee Benefits and Pension Obligations                                                        669                  667 
Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2                                      169                  176 
Cumulative Preferred Stocks of Subsidiaries Subject to Mandatory Redemption                       72                   76 
Deferred Credits and Other                                                                       622                  508
                                                                                             --------             --------
TOTAL                                                                                         20,460               20,951
                                                                                             --------             --------

Liabilities of Discontinued Operations and Held for Sale                                         386                1,876 

TOTAL LIABILITIES                                                                             26,478               28,809
                                                                                             --------             --------

Cumulative Preferred Stocks of Subsidiaries not Subject to Mandatory Redemption                   61                   61 

Commitments and Contingencies

                         COMMON SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------
Common Stock-Par Value $6.50:
                                         2004          2003
                                         ----          ----
Shares Authorized. . . . . . . . . . .600,000,000   600,000,000
Shares Issued. . . . . . . . . . . . .404,695,982   404,016,413
  (8,999,992 shares were held in treasury at September 30, 2004 and December 31,               2,630                2,626 
2003)
Paid-in Capital                                                                                4,197                4,184 
Retained Earnings                                                                              1,987                1,490 
Accumulated Other Comprehensive Income (Loss)                                                   (531)                (426)
                                                                                             --------             --------
TOTAL                                                                                          8,283                7,874
                                                                                             --------             --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                   $34,822              $36,744
                                                                                             ========             ========

* See Accompanying Schedule

See Notes to Consolidated Financial Statements.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                      AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            For the Nine Months Ended September 30, 2004 and 2003
                                                                 (Unaudited)

                                                                                                   2004                2003
                                                                                                   ----                ----
                                                                                                        (in millions)               
<C>                                                                                                <C>                <C>  
                    OPERATING ACTIVITIES
--------------------------------------------------------
Net Income                                                                                           $912               $872 
Plus:  (Income) Loss from Discontinued Operations                                                     (60)                98
                                                                                                   -------            -------
Income from Continuing Operations                                                                     852                970 
Adjustments for Noncash Items:
    Depreciation and Amortization                                                                     972                971 
    Deferred Income Taxes                                                                              88                214 
    Deferred Investment Tax Credits                                                                   (21)               (24)
    Cumulative Effect of Accounting Changes                                                             -               (193)
    Investment Value Losses                                                                             2                 70 
    Amortization of Deferred Property Taxes                                                            93                 89 
    Amortization of Cook Plant Restart Costs                                                            -                 30 
    Mark-to-Market of Risk Management Contracts                                                        89               (124)
Over/Under Fuel Recovery                                                                                5                131 
Gain on Sales of Assets                                                                              (156)               (40)
Change in Other Non-Current Assets                                                                   (101)               (51)
Change in Other Non-Current Liabilities                                                               130                (32)
Changes in Certain Components of Working Capital:
    Accounts Receivable, Net                                                                          379                141 
    Accounts Payable                                                                                 (313)              (408)
    Fuel, Materials and Supplies                                                                      (83)               (11)
    Customer Deposits                                                                                  19                102 
    Taxes Accrued                                                                                     388                 (4)
    Interest Accrued                                                                                  (25)                 4 
    Other Current Assets                                                                              (56)                29 
    Other Current Liabilities                                                                           3               (108)
                                                                                                   -------            -------
Net Cash Flows From Operating Activities                                                            2,265              1,756
                                                                                                   -------            -------

                   INVESTING ACTIVITIES
--------------------------------------------------------
Construction Expenditures                                                                          (1,034)              (936)
Change in Other Cash Deposits, Net                                                                     27                 36 
Investment in Discontinued Operations, Net                                                            (59)              (686)
Proceeds from Sales of Assets                                                                       1,202                 49 
Other                                                                                                  (6)                (3)
                                                                                                   -------            -------
Net Cash Flows From (Used For) Investing Activities                                                   130             (1,540)
                                                                                                   -------            -------

                   FINANCING ACTIVITIES
--------------------------------------------------------
Issuance of Common Stock                                                                               13              1,142 
Issuance of Long-term Debt                                                                            416              4,065 
Change in Short-term Debt, Net                                                                       (201)            (2,523)
Retirement of Long-term Debt                                                                       (1,898)            (1,658)
Retirement of Preferred Stock                                                                          (4)                (2)
Retirement of Minority Interest                                                                         -               (225)
Dividends Paid on Common Stock                                                                       (415)              (479)
                                                                                                   -------            -------
Net Cash Flows From (Used For) Financing Activities                                                (2,089)               320
                                                                                                   -------            -------
                                                                                            
Net Increase in Cash and Cash Equivalents                                                             306                536 
Cash and Cash Equivalents at Beginning of Period                                                      976              1,084
                                                                                                   -------            -------
Cash and Cash Equivalents at End of Period                                                         $1,282             $1,620
                                                                                                   =======            =======  

Net Decrease in Cash and Cash Equivalents from Discontinued Operations                                $(4)               $(7)
Cash and Cash Equivalents from Discontinued Operations - Beginning of Period                           13                 23
                                                                                                   -------            -------
Cash and Cash Equivalents from Discontinued Operations - End of Period                                 $9                $16
                                                                                                   =======            =======  

SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of capitalized amounts, was $576 million and $542 million in 2004 and 2003, respectively. Cash paid 
(received) for income taxes was $(112) million and $156 million in 2004 and 2003, respectively. Noncash acquisitions under 
capital leases were $76 million and $9 million in 2004 and 2003, respectively.

In connection with the disposition of AEP Coal in April 2004 the buyer assumed $11 million of non-current liabilities.

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                   AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                                    CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY AND
                                                        COMPREHENSIVE INCOME
                                       For the Nine Months Ended September 30, 2004 and 2003
                                                           (in millions)
                                                            (Unaudited)
                                                                                                          Accumulated
                                                                                                             Other
                                                            Common Stock        Paid-in      Retained     Comprehensive
                                                          Shares    Amount      Capital      Earnings     Income (Loss)      Total
                                                          ------    ------      -------      --------     -------------      -----
<C>                                                        <C>      <C>         <C>           <C>            <C>            <C>    
DECEMBER 31, 2002                                          348      $2,261      $3,413        $1,999         $(609)         $7,064 
 
Issuance of Common Stock                                    56         365         812                                       1,177 
Common Stock Dividends                                                                          (479)                         (479)
Common Stock Expense                                                               (36)                                        (36)
Other                                                                               (5)            1                            (4)
                                                                                                                            -------
TOTAL                                                                                                                        7,722
                                                                                                                            -------

               COMPREHENSIVE INCOME
--------------------------------------------------
Other Comprehensive Income (Loss), Net of Taxes:
     Foreign Currency Translation Adjustments                                                                   25              25 
     Cash Flow Hedges                                                                                         (177)           (177)
     Securities Available for Sale                                                                               1               1 
     Minimum Pension Liability                                                                                  15              15 
NET INCOME                                                                                       872                           872
                                                                                                                            -------
TOTAL COMPREHENSIVE INCOME                                                                                                     736
                                                           ----     -------     -------       -------        ------         -------

SEPTEMBER 30, 2003                                         404      $2,626      $4,184        $2,393         $(745)         $8,458
                                                           ====     =======     =======       =======        ======         =======


DECEMBER 31, 2003                                          404      $2,626      $4,184        $1,490         $(426)         $7,874 

Issuance of Common Stock                                     1           4           9                                          13 
Common Stock Dividends                                                                          (415)                         (415)
Other                                                                                4                                           4
                                                                                                                            -------
TOTAL                                                                                                                        7,476
                                                                                                                            -------

               COMPREHENSIVE INCOME
--------------------------------------------------
Other Comprehensive Income (Loss), Net of Taxes:
      Foreign Currency Translation Adjustments                                                                (113)           (113)
      Cash Flow Hedges                                                                                          (8)             (8)
      Minimum Pension Liability                                                                                 16              16 
NET INCOME                                                                                       912                           912
                                                                                                                            -------
TOTAL COMPREHENSIVE INCOME                                                                                                     807
                                                           ----     -------     -------       -------        ------         -------

SEPTEMBER 30, 2004                                         405      $2,630      $4,197        $1,987         $(531)         $8,283
                                                           ====     =======     =======       =======        ======         =======
See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


         AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                    SCHEDULE OF CONSOLIDATED LONG-TERM DEBT
                    September 30, 2004 and December 31, 2003
                                 (Unaudited)


                                                                          
                                                    2004              2003   
                                                    ----              ----  
                                                        (in millions)

    First Mortgage Bonds                            $536              $822 
    Defeased TCC First Mortgage Bonds (a)            112               118 
    Installment Purchase Contracts                 1,935             2,026 
    Notes Payable                                  1,049             1,518 
    Senior Unsecured Notes                         7,640             7,997 
    Securitization Bonds                             698               746 
    Notes Payable to Trust                           113               331 

    Equity Unit Senior Notes                         345               345 
    Long-term DOE Obligation (b)                     228               226 
    Other Long-term Debt                              22                21 
    Equity Unit Contract Adjustment Payments          12                19 
    Unamortized Discount (net)                       (53)              (68)
                                                 --------          --------

    TOTAL LONG-TERM DEBT OUTSTANDING              12,637            14,101 
    Less Portion Due Within One Year               1,598             1,779
                                                 --------          -------

    TOTAL LONG-TERM PORTION                      $11,039           $12,322
                                                 ========          =======

    (a) On May 7, 2004, we deposited cash and treasury securities of $125
    million with a trustee to defease all of TCC's outstanding First Mortgage
    Bonds. Trust fund assets related to this obligation of $100 million are
    included in Other Cash Deposits and $22 million are included in Other
    Non-current Assets in the Consolidated Balance Sheets at September 30, 2004.
    Trust fund assets are restricted for exclusive use in funding the interest
    and principal due on the First Mortgage Bonds.

    (b) Pursuant to the Nuclear Waste Policy Act of 1982, I&M (a nuclear
    licensee) has an obligation with the United States Department of Energy for
    spent nuclear fuel disposal. The obligation includes a one-time fee for
    nuclear fuel consumed prior to April 7, 1983. I&M is the only AEP subsidiary
    that generated electric power with nuclear fuel prior to that date. Trust
    fund assets of $261 million and $262 million related to this obligation are
    included in Spent Nuclear Fuel and Decommissioning Trusts in the
    Consolidated Balance Sheets at September 30, 2004 and December 31, 2003,
    respectively.

<PAGE>



          AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
               INDEX OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



           1. Significant Accounting Matters

           2. New Accounting Pronouncements

           3. Rate Matters

           4. Customer Choice and Industry Restructuring

           5. Commitments and Contingencies

           6. Guarantees

           7. Dispositions, Discontinued Operations and Assets Held for Sale

           8. Benefit Plans

           9. Business Segments

          10. Financing Activities



<PAGE>


          AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SIGNIFICANT ACCOUNTING MATTERS
    ------------------------------

General
-------

The accompanying unaudited interim financial statements should be read in
conjunction with the 2003 Annual Report as incorporated in and filed with our
2003 Form 10-K.

In the opinion of management, the unaudited interim financial statements reflect
all normal and recurring accruals and adjustments which are necessary for a fair
presentation of our results of operations for interim periods.

Other Income (Expense), Net
---------------------------

The following table provides the components of Other Income (Expense), Net as
presented on our Consolidated Statements of Operations:

<TABLE>
<CAPTION>

                                                                 Three Months Ended            Nine Months Ended
                                                                    September 30,                 September 30,
                                                                 2004          2003            2004           2003
                                                                 ----          ----            ----           ----
                                                                                   (in millions)          
<C>                                                              <C>            <C>            <C>            <C> 
Other Income:
-------------
Interest and Dividend Income                                       $6            $8             $17            $21 
Equity Earnings                                                     5             4              15              6 
Nonoperating Revenue                                               27            34              84            100 
Gain on Sale of IPPs (a)                                          105             -             105              - 
Gain on Sale of South Coast (a)                                    48             -              48              - 
Gain on Sale of REPs (Mutual Energy Companies)                      -             -               -             39 
Other                                                              39            34             124            134
                                                                 -----          ----           -----          -----
Total Other Income                                                230            80             393            300
                                                                 -----          ----           -----          -----

Other Expense:
--------------
Nonoperating Expenses                                              21            28              67             88 
Other                                                              16            21              40             65
                                                                 -----          ----           -----          -----
Total Other Expense                                                37            49             107            153
                                                                 -----          ----           -----          -----

Total Other Income (Expense), Net                                $193           $31            $286           $147
                                                                 =====          ====           =====          =====
(a) See Note 7 "Dispositions, Discontinued Operations and Assets Held for Sale." 

Components of Accumulated Other Comprehensive Income (Loss)
-----------------------------------------------------------

</TABLE>


The following table provides the components that constitute the balance sheet
amount in Accumulated Other Comprehensive Income (Loss):

<TABLE>
<CAPTION>

                                                                  
                                                              September 30,       December 31,                                 
Components                                                        2004               2003   
----------                                                    -------------       ------------            

                                                                        (in millions)

<C>                                                             <C>                 <C>  
Foreign Currency Translation Adjustments                          $(3)               $110 
Unrealized Losses on Securities Available for Sale                 (1)                 (1)
Unrealized Losses on Cash Flow Hedges                            (102)                (94)
Minimum Pension Liability                                        (425)               (441)
                                                                ------              ------
Total                                                           $(531)              $(426)
                                                                ======              ======
</TABLE>

                          

At September 30, 2004, we expect to reclassify approximately $78 million of net
losses from cash flow hedges in Accumulated Other Comprehensive Income (Loss) to
Net Income during the next twelve months at the time the hedged transactions
affect net income. Seventeen months is the maximum period over which an exposure
to a variability in future commodity related cash flows is hedged with SFAS 133
designated contracts. Approximately $1 million of the fair value of cash flow
hedges at September 30, 2004 are hedging interest rate variability on debt past
two years. The actual amounts that we reclassify from Accumulated Other
Comprehensive Income (Loss) to Net Income can differ due to market price
changes.

In addition, during the first quarter 2004, we reclassified $23 million from
Accumulated Other Comprehensive Income (Loss) related to minimum pension
liability to regulatory assets ($35 million) and deferred income taxes ($12
million) as a result of authoritative letters issued by the FERC and the
Arkansas and Louisiana commissions.

Accounting for Asset Retirement Obligations
-------------------------------------------

The following is a reconciliation of the beginning and ending aggregate carrying
amount of asset retirement obligations:

<TABLE>
<CAPTION>

                                                                                       U.K. Plants,
                                                                                        Wind Mills
                                             Nuclear                   Ash              and Mining
                                         Decommissioning              Ponds             Operations          Total
                                         ---------------              -----            ------------         ----- 
                                                                            (in millions)

 <C>                                          <C>                     <C>                   <C>             <C>
 Asset Retirement Obligation 
  Liability at January 1, 2004
  Including Held for Sale                     $770.9                  $75.4                 $53.1           $899.4  
 Accretion Expense                              41.9                    4.5                   2.4             48.8  
 Foreign Currency
   Translation                                     -                      -                   0.6              0.6  
 Liabilities Incurred                              -                      -                  17.7             17.7  
 Liabilities Settled                               -                   (0.4)                (56.9)           (57.3) 
 Revisions in Cash Flow Estimates                  -                      -                  15.0             15.0
                                              -------                 ------                ------          -------
 Asset Retirement Obligation 
  Liability at September 30, 2004  
  including Held for Sale                      812.8                   79.5                  31.9            924.2  

 Less Asset Retirement Obligation
  Liability Held for Sale:
   South Texas Project (a)                    (231.2)                     -                     -           (231.2)
                                              -------                 ------                ------          -------
 Asset Retirement Obligation
  Liability at September 30, 2004             $581.6                  $79.5                 $31.9           $693.0
                                              =======                 ======                ======          =======

 (a)   We have signed an agreement to sell TCC's share of South Texas Project (see Note 7 for additional information).
</TABLE>


Accretion expense is included in Maintenance and Other Operation expense in our
accompanying Consolidated Statements of Operations.

At September 30, 2004 and December 31, 2003, the fair value of assets that are
legally restricted for purposes of settling the nuclear decommissioning
liabilities totaled $902 million and $845 million, respectively, of which $768
million and $720 million relating to the Cook Plant was recorded in Spent
Nuclear Fuel and Decommissioning Trusts in our Consolidated Balance Sheets. The
fair value of assets that are legally restricted for purposes of settling the
nuclear decommissioning liabilities for the South Texas Project totaling $134
million and $125 million as of September 30, 2004 and December 31, 2003,
respectively, was classified as Assets of Discontinued Operations and Held for
Sale in our Consolidated Balance Sheets.

Reclassifications
-----------------

Certain prior period financial statement items have been reclassified to conform
to current period presentation. Such reclassifications had no impact on
previously reported Net Income.

2.  NEW ACCOUNTING PRONOUNCEMENTS
    -----------------------------

FASB Interpretation Number (FIN) 46 (revised December 2003)"Consolidation of 
 Variable Interest Entities" FIN 46R
----------------------------------------------------------------------------
We implemented FIN 46R, "Consolidation of Variable Interest Entities," effective
March 31, 2004 with no material impact to our financial statements. FIN 46R is a
revision to FIN 46 which interprets the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties.

FASB Staff Position No. FAS 106-2, Accounting  and  Disclosure  Requirements 
 Related to the Medicare Prescription  Drug Improvement and Modernization Act 
 of 2003
------------------------------------------------------------------------------

We implemented FASB Staff Position (FSP) FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," effective April 1, 2004, retroactive to January 1,
2004. The new disclosure standard provides authoritative guidance on the
accounting for any effects of the Medicare prescription drug subsidy under the
Act. It replaces the earlier FSP FAS 106-1, under which we previously elected to
defer accounting for any effects of the Act until the FASB issued authoritative
guidance on the accounting for the Medicare subsidy.

Under FSP FAS 106-2, the current portion of the Medicare subsidy for employers
who qualify for the tax-free subsidy is a reduction of ongoing FAS 106 cost,
while the retroactive portion is an actuarial gain to be amortized over the
average remaining service period of active employees, to the extent that the
gain exceeds FAS 106's 10 percent corridor. The Medicare subsidy reduced our FAS
106 accumulated postretirement benefit obligation (APBO) related to benefits
attributed to past service by $202 million. The tax-free subsidy reduced the
2004 year-to-date net periodic postretirement benefit cost, after adjustment to
capitalization of employee benefits costs as a cost of construction projects, by
a total of $20 million.

Future Accounting Changes
-------------------------

The FASB's standard-setting process is ongoing and until new standards have been
finalized and issued by FASB, we cannot determine the impact on the reporting of
our operations that may result from any such future changes. The FASB is
currently working on several projects including discontinued operations,
business combinations, liabilities and equity, revenue recognition, accounting
for share-based compensation, pension plans, asset retirement obligations,
earnings per share calculations, fair value measurements, accounting changes and
related tax impacts. We also expect to see more FASB projects as a result of
their desire to converge International Accounting Standards with those generally
accepted in the United States of America. The ultimate pronouncements resulting
from these and future projects could have an impact on our future results of
operations and financial position.

3.  RATE MATTERS
    ------------

As discussed in our 2003 Annual Report, our subsidiaries are involved in rate
and regulatory proceedings at the FERC and at several state commissions. The
Rate Matters note within our 2003 Annual Report should be read in conjunction
with this report in order to gain a complete understanding of material rate
matters still pending, without significant changes since year-end. The following
sections discuss current activities.

TNC Fuel Reconciliation
-----------------------

In 2002, TNC filed with the PUCT to reconcile fuel costs, requesting to defer
any unrecovered portion applicable to retail sales within its ERCOT service area
for inclusion in the True-up Proceeding. This reconciliation for the period from
July 2000 through December 2001 will be the final fuel reconciliation for TNC's
ERCOT service territory.

In March 2003, the ALJ in this proceeding filed a Proposal for Decision (PFD)
with a recommendation that TNC's under-recovered retail fuel balance be reduced.
In March 2003, TNC established a provision for probable disallowance of $13
million based on the recommendations in the PFD. In May 2003, the PUCT reversed
the ALJ on certain matters and remanded TNC's final fuel reconciliation to the
ALJ to consider two issues: (1) the sharing of off-system sales margins from
AEP's trading activities with customers for five years per the PUCT's
interpretation of the Texas AEP/CSW merger settlement and (2) the inclusion of
January 2002 fuel factor revenues and associated costs in the determination of
the under-recovery. The PUCT proposed that the sharing of off-system sales
margins for periods beyond the termination of the fuel factor should be
recognized in the final fuel reconciliation proceeding. This would result in the
sharing of margins for an additional three and one-half years after the end of
the Texas ERCOT fuel factor. While management believes that the Texas merger
settlement only provided for sharing of margins during the period fuel and
generation costs were regulated by the PUCT, an additional provision of $10
million was recorded in December 2003.

In December 2003, the ALJ issued a PFD in the remand phase of the TNC fuel
reconciliation recommending additional disallowances for the two remand issues.
TNC filed responses to the PFD, and the PUCT announced a final ruling in the
fuel reconciliation proceeding in January 2004 accepting the PFD. TNC received a
written order in March 2004 and increased its provision by $1.5 million. In
March 2004, various parties, including TNC, requested a rehearing of the PUCT's
ruling. In May 2004, the PUCT reversed its position on the inclusion of MTM
amounts in the allocation of system sales margins and remanded the case to the
ALJ. As a result, TNC recorded an additional provision of $12 million in the
second quarter of 2004 resulting in a provision for an over-recovery balance of
approximately $7 million.

On July 2, 2004, the parties to the MTM remand proceeding filed a "Stipulation
of Fact" in which all parties agreed to the quantification of the remanded
issue. With the amounts included in the "Stipulation of Fact," the over-recovery
balance would be $4 million. On October 13, 2004 the PUCT approved an order
which included the amounts contained in the "Stipulation of Fact." The PUCT
issued an order in the fuel reconciliation which reflected the "Stipulation of
Fact" in October 2004. TNC will seek rehearing of the PUCT's order regarding
issues other than the issue covered by the stipulation. TNC may appeal to the
Texas District Court the PUCT's decision once all motions for rehearing have
been adjudicated. Management expects to adjust its provision to an over-recovery
balance of $4 million when it receives a final order in the fourth quarter 2004.
Although management believes it has adequately provided for probable
disallowances, a final order from the PUCT disallowing amounts in excess of the
established provision could have a material adverse impact on future results of
operations and cash flows.

In February 2002, TNC received a final order from the PUCT in a previous fuel
reconciliation covering the period July 1997 through June 2000 and reflected the
order in its financial statements. This final order was appealed to the Travis
County District Court. In May 2003, the District Court upheld the PUCT's final
order. That order was appealed by certain cities (the Cities) to the Third Court
of Appeals. The Third Court of Appeals issued a ruling on September 23, 2004
upholding the District Court and the PUCT's final order. It is unknown at this
time if the Cities will appeal to the Texas Supreme Court or if the court will
hear the issue if they do.

TCC Fuel Reconciliation
-----------------------

In 2002, TCC filed its final fuel reconciliation with the PUCT to reconcile fuel
costs to be included in its deferred over-recovery balance in the True-up
Proceeding. This reconciliation covers the period from July 1998 through
December 2001.

Based on the PUCT ruling in the TNC proceeding related to similar issues, TCC
established a provision for probable adverse rulings of $81 million during 2003.
On February 3, 2004, the ALJ issued a PFD in the TCC case recommending that the
PUCT disallow $140 million in eligible fuel costs including some new items not
considered in the TNC case, and other items considered but not disallowed in the
TNC ruling. Based on an analysis of the ALJ's recommendations and the initial
final order in the TNC fuel reconciliation, TCC established an additional
provision of $13 million during the first quarter of 2004. In May 2004, the PUCT
accepted most of the ALJ's recommendations in the TCC case, however, the PUCT
rejected the ALJ's recommendation to impute capacity to certain energy-only
purchased power contracts and remanded the issue to the ALJ to determine if any
energy-only purchased power contracts during the reconciliation period include a
capacity component that is not recoverable in fuel revenues. In testimony filed
in the remand proceeding, TCC has asserted that its energy-only purchased power
contracts do not include any capacity component. Intervenors, including the
Office of Public Utility Counsel, have filed testimony recommending that $15
million to $30 million of TCC's purchased power costs reflect capacity costs
which are not recoverable in the fuel reconciliations. Hearings were held in
October 2004 on this remand issue. As a result of the PUCT's acceptance of most
of the ALJ's recommendations in TCC's case and the PUCT's remand decision in the
TNC case regarding the inclusion of MTM amounts in the allocation of AEP's net
system sales margins, TCC increased its provision by $47 million in the second
quarter of 2004. The over-recovery balance and the provisions for probable
disallowances totaled $210 million including interest at September 30, 2004.

At this time, management is unable to predict the outcome of this proceeding.
Management believes it has provided for all probable to-date disallowances
pending receipt of a final order. A final order has not yet been issued in TCC's
final fuel reconciliation. We will continue to challenge adverse decisions
vigorously, including appeals if necessary. An order from the PUCT, disallowing
amounts in excess of the established provision, could have a material adverse 
effect on future results of operations and cash flows. Additional information 
regarding the True-up Proceeding for TCC can be found in Note 4 "Customer 
Choice and Industry Restructuring."

SWEPCo Texas Fuel Reconciliation
--------------------------------

In June 2003, SWEPCo filed with the PUCT to reconcile fuel costs in the SPP.
This reconciliation covers the period from January 2000 through December 2002.
During the reconciliation period, SWEPCo incurred $435 million of Texas retail
eligible fuel expense. In November 2003, intervenors and the PUCT Staff
recommended fuel cost disallowances of more than $30 million. In December 2003,
SWEPCo agreed to a settlement in principle with all parties in the fuel
reconciliation. The settlement provides for a disallowance in fuel costs of $8
million which was recorded in December 2003. In April 2004 the PUCT approved the
settlement.

Virginia Fuel Factor Filing
---------------------------

On October 29, 2004 APCo filed with the Virginia SCC to increase its fuel factor
effective January 1, 2005. The requested factor is estimated to increase
revenues by approximately $19 million on an annual basis. This increase reflects
a continuing rise in the projected cost of coal in 2005. This fuel factor
adjustment will increase cash flows without impacting results of operations as
any over-recovery or under-recovery of fuel cost would be deferred as a
regulatory liability or a regulatory asset.

TCC Rate Case
-------------

On June 26, 2003, the City of McAllen, Texas requested that TCC provide
justification showing that its transmission and distribution rates should not be
reduced. Other municipalities served by TCC passed similar rate review
resolutions. In Texas, municipalities have original jurisdiction over rates of
electric utilities within their municipal limits. Under Texas law, TCC must
provide support for its rates to the municipalities. TCC filed the requested
support for its rates based on a test year ending June 30, 2003 with all of its
municipalities and the PUCT on November 3, 2003. TCC's proposal would decrease
its wholesale transmission rates by $2 million or 2.5% and increase its retail
energy delivery rates by $69 million or 19.2%.

In February 2004, eight intervening parties and the PUCT Staff filed testimony
recommending reductions to TCC's requested $67 million rate increase. The
recommendations ranged from a decrease in existing rates of approximately $100
million to an increase in TCC's current rates of approximately $27 million.
Hearings were held in March 2004. In May 2004, TCC agreed to a non-unanimous
settlement on cost of capital including capital structure and return on equity
with all but two parties in the proceeding. TCC agreed that the return on equity
should be established at 10.125% based upon a capital structure with 40% equity
resulting in a weighted cost of capital of 7.475%. The settlement and other
agreed adjustments reduced TCC's rate request from $67 million to $41 million.
The ALJs that heard the case issued their recommendations on July 2, 2004,
including a recommendation to approve the cost of capital settlement. The ALJs
recommended that an issue related to the allocation of consolidated tax savings
to the transmission and distribution utility be remanded for additional
evidence. On July 15, 2004, the PUCT remanded this issue to the ALJs. On August
19, 2004, in a separate ruling the PUCT remanded six other issues to the ALJs
requesting revisions to clarify and further support the recommendations in the
PFD. In addition, the PUCT ordered TCC to calculate its revenue requirements
based upon the recommendations of the ALJs. On July 21, 2004, TCC filed its
revenue requirements based upon the recommendations of the ALJs. According to
TCC's calculations, the ALJs' recommendations reduce TCC's existing rates by a
range of somewhere between $33 million and $43 million depending on the final 
resolution of the amount of consolidated tax savings. Hearings were held on the
consolidated tax savings remand issue in September. The PUCT is expected to 
issue its decision by the end of 2004. Management is unable to predict the 
ultimate effect of this proceeding on TCC's rates, revenues, results of 
operations, cash flows and financial condition.

On September 2, 2004, a group of intervenors, with subsequent support of the
PUCT Staff, filed a request that a $30 million temporary, or interim, rate
reduction be ordered subject to refund or surcharge. On September 24, 2004 the
PUCT issued an order denying the motion for reduced temporary rates.

Louisiana Compliance Filing
---------------------------

In October 2002, SWEPCo filed with the Louisiana Public Service Commission
(LPSC) detailed financial information typically utilized in a revenue
requirement filing, including a jurisdictional cost of service. This filing was
required by the LPSC as a result of its order approving the merger between AEP
and CSW. The LPSC's merger order also provides that SWEPCo's base rates are
capped at the present level through mid-2005. In April 2004, SWEPCo filed
updated financial information with a test year ending December 31, 2003 as
required by the LPSC. Both filings indicated that SWEPCo's current rates should
not be reduced. Subsequently, direct testimony was filed on behalf of the LPSC
recommending a $15.4 million reduction in SWEPCo's Louisiana jurisdictional base
rates. SWEPCo's rebuttal testimony is due December 15, 2004. At this time,
management is unable to predict the outcome of this proceeding. If a rate
reduction is ordered in the future, it would adversely impact results of
operations and cash flows.

Louisiana Fuel Audit
--------------------

The LPSC is performing an audit of SWEPCo's historical fuel costs. In addition,
five SWEPCo customers filed a suit in the Caddo Parish District Court in January
2003 and filed a complaint with the LPSC. The customers claim that SWEPCo has
overcharged them for fuel costs since 1975. The LPSC consolidated the customer
complaint and audit. A status conference is scheduled for December 16, 2004 to
schedule a hearing date. Although management believes that SWEPCo's fuel costs
were proper and fuel costs incurred prior to 1999 were approved by the LPSC, we
are unable to predict the outcome of these proceedings. If the actions of the
LPSC or the Court result in a material disallowance of SWEPCo's fuel recoveries,
it would have an adverse impact on results of operations and cash flows. The
LPSC Staff consultant made recommendations to reduce recoverable fuel expense
from SWEPCo's Louisiana retail customers. The consultant recommended that SWEPCo
be required to refund $3.9 million (through December 2002) stating the amount
should be recovered through base rates versus the fuel factor. An additional
amount of $1.4 million for the period of January 2003 through September 2004
would also be required to be refunded. In addition, the LPSC Staff contends that
SWEPCo's Pirkey Power Plant experienced poor performance during the years 1999,
2001 and 2002 and that the incremental cost of replacement power should be
refunded. The consultant did not provide an amount associated with this
recommendation, but management believes that the amount could be material. If
the LPSC adopts any of the consultant's recommendations, it would adversely
impact results of operations and cash flows.

PSO Fuel and Purchased Power
----------------------------

In 2002, PSO experienced a $44 million under-recovery of fuel costs resulting
from a reallocation among AEP West electric operating companies of purchased
power costs for periods prior to January 1, 2002. In July 2003, PSO filed with
the OCC seeking to recover these reallocated costs over a period of 18 months.
In August 2003, the OCC Staff filed testimony recommending PSO be granted
recovery of $42.4 million of the reallocation over three years. In September
2003, the OCC expanded the case to include a full review of PSO's 2001 fuel and
purchased power practices. PSO filed testimony in February 2004. An intervenor
and the OCC Staff filed testimony in April 2004. The intervenor suggested that
$8.8 million related to the 2002 reallocation not be recovered from customers.
The Attorney General of Oklahoma also filed a statement of position, indicating
allocated off-system sales margins between and among AEP operating companies
were inconsistent with the FERC-approved Operating Agreement and System
Integration Agreement and if corrected could more than offset the $44 million
2002 reallocation under-recovery. The intervenor and the OCC Staff also believed
off-system sales margins were allocated incorrectly and that a reallocation by
the intervenors of such margins would reduce PSO's recoverable fuel by an
additional $6.8 million for 2000 and $10.7 million for 2001, while under the OCC
Staff method, the reduction for 2001 would be $8.8 million. The intervenor and
the OCC Staff also recommend recalculation of fuel for years subsequent to 2001
using the same revised methods. At a June 2004 prehearing conference, PSO
questioned whether the issues in dispute were under the jurisdiction of the OCC
because they relate to FERC-approved allocation agreements. As a result, the ALJ
ordered that the parties brief the jurisdictional issue. PSO filed its brief on
September 1, 2004. Subject to the OCC's decision as to jurisdiction, a hearing
date has been set for January 2005. Management believes that fuel costs have
been prudently incurred consistent with OCC rules, and that the allocation of
off-system sales margins was made pursuant to the FERC-approved allocation
agreements. If the OCC determines that a portion of PSO's unrecovered fuel and
purchased power costs should not be recovered, there will be, subject to the
FERC jurisdictional question, an adverse effect on PSO's results of operations,
cash flows and possibly financial condition.

PSO Rate Review
---------------

In February 2003, the OCC filed an application requiring PSO to file all
documents necessary for a general rate review. In October 2003 and June 2004,
PSO filed financial information and supporting testimony in response to the
OCC's requirements. PSO's response indicates that its annual revenues are $41
million less than costs. As a result, PSO is seeking OCC approval to increase
its base rates by that amount, which is a 3.9% increase over PSO's existing
revenues. Hearings are scheduled to begin in February 2005 to address cost of
service, fuel procurement and resource planning issues.

On August 12, 2004, PSO filed a motion to amend the schedule to consider new
service quality and reliability requirements which took effect on July 1, 2004.
On August 30, 2004, the OCC approved a revised schedule. On October 4, 2004, PSO
filed supplemental information requesting consideration of approximately $55
million of additional annual operations and maintenance expenses and annual
capital costs to enhance system reliability. On November 4, 2004, PSO filed a 
plan with the OCC seeking interim rate relief to fund a portion of the costs 
to meet the new state service quality and reliability requirements pending 
the outcome of the current case. In the filing, PSO seeks interim approval to 
collect incremental distribution tree trimming costs of approximately $29 
million from its customers. The OCC Staff and intervenors are scheduled to 
file testimony regarding their recommendations on revenue requirement, fuel 
procurement, resource planning and vegetation management in December 2004. 
Rebuttal testimony is to be filed in January 2005 with hearings beginning in 
February 2005. A decision is not expected until second quarter 2005. 
Management is unable to predict the ultimate effect of these proceedings
on PSO's revenues, results of operations, cash flows and financial condition.

RTO Formation/Integration
-------------------------

Based on FERC approvals in response to non-affiliated companies' requests to
defer RTO formation costs, the AEP East companies deferred costs incurred under
FERC orders to originally form a new RTO (the Alliance RTO) or subsequently to
join an existing RTO (PJM). In July 2003, the FERC issued an order approving our
continued deferral of both Alliance RTO formation costs and PJM integration
costs including the deferral of a carrying charge thereon. The AEP East
companies have deferred approximately $35 million of RTO formation and
integration costs and related carrying charges through September 30, 2004. As a
result of the subsequent delay in the integration of AEP's East transmission
system into PJM, the FERC declined to rule, in its July 2003 order, on our
request to transfer the deferrals to regulatory assets, and to maintain such
deferrals until such time as the costs can be recovered from all users of AEP's
East transmission system.

In its July 2003 order, the FERC indicated that it would review the deferred
costs at the time they are transferred to a regulatory asset account and
scheduled for amortization and recovery in the open access transmission tariff
(OATT) to be charged by PJM. Management believes that the FERC will grant
permission for prudently incurred deferred RTO formation/integration costs to be
amortized and included in the OATT. Whether the amortized costs will be fully
recoverable depends upon the state regulatory commissions' treatment of the AEP
East companies' portion of the OATT as these companies file rate cases.
Presently, retail base rates are frozen or capped and cannot be increased for
retail customers of CSPCo and OPCo until 2006 and I&M until 2005.

In August 2004, we filed an application with the FERC dividing the RTO
formation/integration costs between PJM-billed integration costs including
related carrying charges, and all other RTO formation/integration costs. We
intend to file with the FERC to request that deferred PJM-billed integration
costs be recovered. The AEP East companies will be responsible for paying the 
amount allocated by the FERC to the AEP zone since it will be attributable to 
their internal load. In our August 2004 application, we requested permission 
to amortize approximately one-half of the deferred costs within the AEP zone 
over fifteen years beginning on January 1, 2005. We also requested to 
begin amortizing the deferred PJM-billed integration costs on January 1, 2005, 
but we did not propose an amortization period in the application.

In the first quarter of 2003, the state of Virginia enacted legislation
preventing APCo from joining an RTO prior to July 1, 2004 and thereafter only
with the approval of the Virginia SCC, but required APCo join an RTO by January
1, 2005. In January 2004, APCo filed with the Virginia SCC a cost/benefit study
covering the time period through 2014 as required by the Virginia SCC. The study
results show a net benefit of approximately $98 million for APCo over the
11-year study period from AEP's participation in PJM. In August 2004, the
Virginia SCC approved a stipulation that permits APCo to join PJM.

In July 2003, the KPSC denied KPCo's request to join PJM based in part on a lack
of evidence that it would benefit Kentucky retail customers. In August 2003,
KPCo sought and was granted a rehearing to submit additional evidence. In
December 2003, AEP filed with the KPSC a cost/benefit study showing a net
benefit of approximately $13 million for KPCo over the five-year study period
from AEP's participation in PJM. In May 2004, the KPSC approved a stipulation
that permits KPCo to join PJM and the FERC approved the stipulation in June
2004.

In September 2003, the IURC issued an order approving I&M's transfer of
functional control over its transmission facilities to PJM, subject to certain
conditions included in the order. The IURC's order stated that AEP shall request
and the IURC shall complete a review of Alliance formation costs before any
future recovery. I&M noted in its response to the IURC that it deferred such
costs under the July 2003 FERC order.

In November 2003, the FERC issued an order preliminarily finding that AEP must
fulfill its CSW merger condition to join an RTO by integrating into PJM
(transmission and markets) by October 1, 2004. The order was based on PURPA
205(a), which allows the FERC to exempt electric utilities from state law or
regulation in certain circumstances. The FERC set several issues for public
hearing before an ALJ. Those issues include whether the laws, rules, or
regulations of Virginia and Kentucky are preventing AEP from joining an RTO and
whether the exceptions under PURPA 205(a) apply. The FERC ALJ affirmed the
FERC's preliminary findings in March 2004. The FERC issued an order related to
this matter in June 2004 affirming its preliminary findings. In September 2004,
Virginia filed an offer of settlement with the FERC in which they agreed to
cease all attempts to obtain judicial relief from the June 2004 order on the
condition that the FERC vacate the order. The FERC has not ruled on Virginia's
settlement offer.

The AEP East companies integrated into PJM on October 1, 2004. The AEP East
state regulatory Commissions have approved our integration with PJM and FERC has
ordered us to defer our RTO formation/integration costs. Such costs will be
recovered on an amortization basis through an OATT tariff charged to users of
the system. The AEP East companies will also be charged by PJM for use of the
system. AEP plans to seek recovery for the portion of the deferred RTO costs
that are billed to the AEP East companies by PJM in future rate proceedings. The
AEP East companies will expense their portion of the costs billed by PJM.
Management is unable to predict whether the FERC will grant a long enough
amortization period to allow for the opportunity for recovery of the non-PJM
billed deferred RTO formation/integration costs in the AEP East state retail
jurisdictions, and whether the state regulatory Commissions will ultimately
permit recovery of such costs billed to the AEP East companies by PJM. If the
FERC ultimately decides not to approve an amortization period that would provide
us with the opportunity to include such costs in future retail rate filings or
the FERC or the state commissions deny recovery of our share of these costs,
future results of operations and cash flows could be adversely affected.

FERC Order on Regional Through and Out Rates
--------------------------------------------

In July 2003, the FERC issued an order directing PJM and the Midwest Independent
System Operator (ISO) to make compliance filings for their respective OATTs to
eliminate the transaction-based charges for through and out (T&O) transmission
service on transactions where the energy is delivered within the proposed
Midwest ISO and expanded PJM regions (Combined Footprint). The elimination of
the T&O rates will reduce the transmission service revenues collected by the
RTOs and thereby reduce the revenues received by transmission owners under the
RTOs' revenue distribution protocols. The order provided that affected
transmission owners could file to offset the elimination of these revenues by
increasing rates or utilizing a transitional rate mechanism to recover lost
revenues that result from the elimination of the T&O rates. The FERC also found
that the T&O rates of certain other companies that were then planning to join
either PJM or Midwest Independent System Operator (MISO) ("Former Alliance RTO
Participants"), including AEP, may be unjust, unreasonable, and unduly
discriminatory or preferential for energy delivered in the Combined Footprint.
The FERC also initiated an investigation and hearing in regard to these rates.

In November 2003, the FERC issued an order finding that the T&O rates of the
Former Alliance RTO Participants should also be eliminated for transactions
within the Combined Footprint. The order directed the RTOs and Former Alliance
RTO Participants, including AEP, to file compliance rates to eliminate T&O rates
prospectively within the Combined Footprint and simultaneously implement a
load-based transitional rate mechanism called the seams elimination cost
allocation (SECA), to mitigate the lost T&O revenues for a two-year transition
period beginning April 1, 2004. The FERC was expected to implement a new rate
design after the two-year period. As required by the FERC, AEP filed compliance
tariff changes in January 2004 to eliminate the T&O charges within the Combined
Footprint. Various parties raised issues with the SECA rate orders and the FERC
implemented settlement procedures before an ALJ.

In April 2004, the FERC approved a settlement that delayed elimination of T&O
rates until December 1, 2004 and provided principles and procedures for
development of a new rate design for the Combined Footprint, to be effective on
December 1, 2004. The settlement also provides that if the process did not
result in the implementation of a new rate design on December 1, then the SECA
rates will be implemented and will remain in effect until a new rate is
implemented by the FERC. If implemented, the SECA rate would not be effective
beyond March 31, 2006.

On September 16, 2004 the FERC Chief ALJ, acting as Settlement Judge, reported
to the FERC that attempts to settle the issues had failed, and at least two
competing long-term rate design proposals for the Combined Footprint were filed
on October 1, 2004. AEP and several other utilities in the Combined Footprint
have filed a proposal for new rates to become effective December 1, 2004.

The AEP East companies received approximately $157 million of T&O rate revenues
for the twelve months ended December 31, 2003. At this time, management is
unable to predict whether the rate design approved by the FERC will fully
compensate the AEP East companies for their lost T&O revenues and whether any
resultant increase in rates applicable to AEP's internal load will be
recoverable on a timely basis from state retail customers. Unless new
replacement rates compensate AEP for its lost revenues and any increase in AEP
East Companies' transmission expenses from these new rates are fully recovered
in retail rates on a timely basis, future results of operations, cash flows and
financial condition will be adversely affected.

Indiana Fuel Order
------------------

On August 27, 2003, the IURC ordered that certain parties must negotiate the
appropriate action on I&M's fuel cost recovery beginning March 1, 2004,
following the February 2004 expiration of a fixed fuel adjustment charge (fixed
pursuant to a prior settlement of the Cook Nuclear Plant outage issues). The
fixed fuel adjustment charge capped fuel recoveries. In an agreement in
connection with AEP's planned corporate separation, I&M agreed, contingent on
AEP implementing the corporate separation, to a fixed fuel adjustment charge
beginning March 2004 and continuing through December 2007. Although we have not
corporately separated, certain parties believe the fixed fuel adjustment charge
should continue beyond February 2004. Negotiations with the parties to resolve
this issue are ongoing. The IURC ordered that the fixed fuel adjustment charge
remain in place, on an interim basis, in March and April 2004.

In April 2004, the IURC issued an order that extended the interim fuel factor
for May through September 2004, subject to true-up to actual fuel costs
following the resolution of the issue regarding the corporate separation
agreement. The IURC also issued an order that reopened the corporate separation
docket to investigate issues related to the corporate separation agreement. In
July 2004, we filed for approval of a fuel factor for the period October 2004
through March 2005. On September 22, 2004, the IURC issued an order extending
the interim fuel factor for October 2004 through March 2005, subject to true-up
upon resolution of the corporation separation issues. At September 30, 2004, I&M
has over-recovered its fuel costs and has recorded a regulatory liability to
refund such over-recovery. However, if I&M's position should shift to a net
under-recovery, the fixed fuel adjustment factor, capping the fuel revenues,
could adversely affect results of operations and cash flows if recovery is
denied by the IURC.

Michigan 2004 Fuel Recovery Plan
--------------------------------

A 1999 Michigan Public Service Commission (MPSC) order approved a Settlement
Agreement regarding the extended outage of the Cook Plant and fixed I&M's Power
Supply Cost Recovery (PSCR) factors for the St. Joseph and Three Rivers rate
areas through December 2003. As required, I&M filed its 2004 PSCR Plan with the
MPSC on September 30, 2003 seeking new fuel and power supply recovery factors to
be effective in 2004. A public hearing was held on March 10, 2004. On June 4,
2004, the ALJ recommended that SO2 and NOx net credits be excluded from the fuel
recovery mechanism. I&M filed its exceptions in June 2004. A MPSC order is
expected during the fourth quarter of 2004. As allowed by Michigan law, the
proposed factors were effective on January 1, 2004, subject to review by the
MPSC and possible adjustment. When SO2 and NOx are a net cost exclusion from the
fuel cost recovery mechanism, it will adversely affect future results of
operations and cash flows. On September 30, 2004, I&M filed its 2005 PSCR Plan.

4.  CUSTOMER CHOICE AND INDUSTRY RESTRUCTURING
    ------------------------------------------

As discussed in our 2003 Annual Report, we are affected by customer choice
initiatives and industry restructuring. The Customer Choice and Industry
Restructuring note in our 2003 Annual Report should be read in conjunction with
this report in order to gain a complete understanding of material customer
choice and industry restructuring matters without significant changes since
year-end. The following paragraphs discuss significant current events related to
customer choice and industry restructuring.

OHIO RESTRUCTURING
------------------

The Ohio Electric Restructuring Act of 1999 (Ohio Act) provides for a Market
Development Period (MDP) during which retail customers can choose their electric
power suppliers or receive Default Service at frozen generation rates from the
incumbent utility. The MDP began on January 1, 2001 and is scheduled to
terminate no later than December 31, 2005. The Public Utilities Commission of
Ohio (PUCO) may terminate the MDP for one or more customer classes before that
date if it determines either that effective competition exists in the incumbent
utility's certified territory or that there is a twenty percent switching rate
of the incumbent utility's load by customer class. Following the MDP, retail
customers will receive cost-based regulated distribution and transmission
service from the incumbent utility whose distribution rates will be approved by
the PUCO and whose transmission rates will be approved by the FERC. Retail
customers will continue to have the right to choose their electric power
suppliers or receive Default Service, which must be offered by the incumbent
utility at market rates.

On December 17, 2003, the PUCO adopted a set of rules concerning the method by
which it will determine market rates for Default Service following the MDP. The
rules provide for a Market Based Standard Service Offer (MBSSO) which would be a
variable rate based on a transparent forward market, daily market, and/or hourly
market prices. The rules also require a fixed-rate Competitive Bidding Process
(CBP) for residential and small nonresidential customers and permits a
fixed-rate CBP for large general service customers and other customer classes.
Customers who do not switch to a competitive generation provider can choose
between the MBSSO and the CBP. Customers who make no choice will be served
pursuant to the CBP. The rules also required that electric distribution
utilities file an application for MBSSO and CBP by July 1, 2004. CSPCo and OPCo
were recently granted a waiver from making the required MBSSO/CBP filing,
pending the outcome of a rate stabilization plan they filed with the PUCO in
February 2004.

The PUCO invited default service providers to propose an alternative to all
customers moving to market prices on January 1, 2006. On February 9, 2004, CSPCo
and OPCo filed rate stabilization plans with the PUCO addressing prices
following the end of the MDP. If approved by the PUCO, prices would be
established pursuant to CSPCo's and OPCo's plans for the period from January 1,
2006 through December 31, 2008. The plans are intended to provide price
stability and certainty for customers, facilitate the development of a
competitive retail market in Ohio, provide recovery of environmental and other
costs during the plan period and improve the environmental performance of AEP's
generation resources that serve Ohio customers. The plans include annual, fixed
increases in the generation component of all customers' bills (3% annually for
CSPCo and 7% annually for OPCo) in 2006, 2007 and 2008 and the opportunity for
additional generation-related increases upon PUCO review and approval. For
residential customers, however, if the temporary 5% generation rate discount
provided by the Ohio Act were eliminated prior to December 31, 2005 as permitted
by the Ohio Act, the fixed increases would be adjusted downward to reflect the
effect of such elimination. Additionally, the plan includes the opportunity to
annually request an additional increase averaging 4% per year for both companies
in the event costs run beyond the level currently anticipated. The plans would
maintain distribution rates through the end of 2008 for CSPCo and OPCo at the
level effective on December 31, 2005. Such rates could be adjusted for specified
reasons. Transmission charges could also be adjusted to reflect applicable
charges approved by the FERC related to open access transmission, net
congestion, and ancillary services. The plans also provide for continued
amortization and recovery of stranded transition generation-related regulatory
assets and for the deferral as regulatory assets in 2004 and 2005 of RTO costs
and carrying charges on governmentally mandated, mainly environmental, capital
expenditures. Hearings were held in June 2004 on the Companies' proposed rate
stabilization plans. Briefs were submitted in July. The filings are pending
before the PUCO.

The PUCO, in a recent order involving a non-affiliated company's rate
stabilization plan, noted its reluctance to authorize automatic increases in any
portion of rates and required a PUCO determination in the future prior to
adjusting a rate component, instead of the automatic increases to the rate
component which had been proposed. It also held that deferral during the MDP of
certain expenses at issue in the case, for recovery after the MDP, would violate
the rate cap under the Ohio Act. The PUCO has been asked in that case to
reconsider these holdings and that request currently is pending. OPCo's and
CSPCo's rate plans and the record in its cases are distinct from the rate plan
and record considered by the PUCO in its recent order. In that regard, the PUCO
has indicated in FirstEnergy companies' rate stabilization plans that these
plans are specific to a company's requirements and characteristics and the
PUCO's order in one case should not be considered precedent for another
company's rate stabilization plan.

Management cannot predict whether CSPCo's and OPCo's plans will be approved as
submitted nor can we predict the ultimate impact these proceedings will have on
revenues, results of operations and cash flows.

As provided in stipulation agreements approved by the PUCO in 2000, we are
deferring customer choice implementation costs and related carrying costs that
are in excess of $40 million. The agreements provide for the deferral of these
costs as a regulatory asset until the next distribution base rate cases. Through
September 30, 2004, we incurred $75 million of such costs, and accordingly, we
deferred $35 million for probable future recovery in distribution rates.
Recovery of these regulatory assets will be subject to PUCO review in future
Ohio filings for new distribution rates. If the rate stabilization plan is
approved as filed, it would defer recovery of these amounts until the next
distribution rate filing. Management believes that its deferred customer choice
implementation costs were prudently incurred and should be recoverable in future
distribution rates. If the PUCO determines that any of the deferred costs are
unrecoverable, it would have an adverse impact on future results of operations
and cash flows.

TEXAS RESTRUCTURING
-------------------

Texas Legislation enacted in 1999 provides the framework and timetable to allow
retail electricity competition for all Texas customers. On January 1, 2002,
customer choice of electricity supplier began in the ERCOT area of Texas.
Customer choice has been delayed in the SPP area of Texas until at least January
1, 2007. TCC and TNC operate in ERCOT while SWEPCo and a small portion of TNC's
business is in SPP.

The Texas Legislation, among other things:
 o  provides for the recovery of stranded generation plant costs,
    generation-related regulatory assets and other generation true-up
    amounts through securitization and non-bypassable wires charges,
 o  requires each utility to structurally unbundle into a retail electric
    provider, a power generation company and a transmission and
    distribution (T&D) utility,
 o  provides for an earnings test for each of the years 1999 through 2001 and, 
 o  provides for a stranded cost True-up Proceeding after January 10, 2004.

The Texas Legislation also required vertically integrated utilities to legally
separate their generation and retail-related assets from their transmission and
distribution-related assets. Prior to 2002, TCC and TNC functionally separated
their operations. AEP formed new subsidiaries to act as affiliated REPs for TCC
and TNC effective January 1, 2002 (the start date of retail competition). In
December 2002, AEP sold its two affiliated price-to-beat REPs to an unaffiliated
company.

TEXAS TRUE-UP PROCEEDINGS
-------------------------

The True-up Proceedings will determine the amount and recovery of:
 o  stranded generation plant costs and generation-related regulatory
    assets including any unrefunded accumulated excess earnings (stranded
    generation costs),
 o  carrying charges on true-up amounts from January 1, 2002 (the commencement
    date of retail competition), 
 o  a true-up of actual market prices determined through legislatively-mandated
    capacity auctions to the power costs used in the PUCT's excess cost over 
    market (ECOM) model for 2002 and 2003 (wholesale capacity auction true-up),
 o  final approved deferred fuel balance, 
 o  excess of price-to-beat revenues over market prices subject to certain 
    conditions and limitations (retail clawback),
 o  and other true-up items.

The PUCT adopted a rule in 2003 regarding the timing of the True-up Proceedings
scheduling TCC's filing in September 2004 or 60 days after the completion of the
sale of TCC's generation assets, if later. TNC filed its true-up request in June
2004 and updated the filing in October 2004. Due to regulatory and contractual
delays in the sale of its generating assets, TCC has not filed its true-up
request.


<TABLE>
<CAPTION>

True-up Net Regulatory Asset (Liability) Recorded at September 30, 2004:
------------------------------------------------------------------------               TCC               TNC
                                                                                       ---               ---
                                                                                           (in millions)          
                            
<C>                                                                                  <C>                 <C> 
Components of Net Stranded Generation Costs:
Stranded Generation Plant Costs                                                      $1,079                $- 
Unsecuritized Transition Generation Regulatory Asset                                    249                 - 
Unrefunded Excess Earnings                                                              (15)                - 
Other                                                                                   (56)                -
                                                                                     -------             -----

Net Stranded Generation Costs                                                         1,257                 -
                                                                                     -------             -----

Components of Other Recoverable True-up Amounts:
Wholesale Capacity Auction True-up                                                      480                 - 
Retail Clawback (a)                                                                     (60)              (14)
Deferred Over-recovered Fuel Balance                                                   (210)               (7)
                                                                                     -------             -----

Other Recoverable True-up Amounts                                                       210               (21)
                                                                                     -------             -----

Total Recorded Net True-up Regulatory Asset (Liability)                              $1,467              $(21)
                                                                                     =======             =====

(a)  Only half of these amounts are actually recorded as regulatory liabilities, as the other half are the responsibility of the
     unaffiliated company that owns the affiliated price-to-beat REP.
 
 See discussion below of the above amounts.
</TABLE>


Net Stranded Generation Costs
-----------------------------

The Texas Restructuring Legislation required utilities with stranded generation
plant costs to use market-based methods to value certain generation assets for
determining stranded generation plant costs. TCC is the only AEP subsidiary that
has stranded generation plant costs under the Texas Legislation. TCC elected to
use the sale of assets method to determine the market value of TCC's generation
assets for determining stranded generation plant costs. For purposes of the
True-up Proceeding, the amount of stranded generation plant costs under this
market valuation methodology will be the amount by which the book value of TCC's
generation assets exceeds the market value of the generation assets as measured
by the net proceeds from the sale of the assets. Based on the prices established
by the generation asset sales, discussed below, TCC recorded a net regulatory
asset of $1.1 billion for its stranded generation plant costs from the sale of
TCC's generation assets as shown in the table above, before accrual of any
applicable carrying charges discussed below.

In June 2003, we began actively seeking buyers for 4,497 megawatts of TCC's
generation capacity in Texas. We received bids for all of TCC's generation
plants. In January 2004, TCC agreed to sell its 7.81% ownership interest in the
Oklaunion Power Station to an unaffiliated third party for approximately $43
million. In March 2004, TCC agreed to sell its 25.2% ownership interest in STP
for approximately $333 million and its other coal, gas and hydro plants for
approximately $430 million to unaffiliated entities. Each sale is subject to
specified price adjustments. TCC sent right of first refusal notices to the
co-owners of Oklaunion and STP. TCC filed for FERC approval of the sales of
Oklaunion, STP and the fossil and hydro plants. We received a notice from
co-owners of Oklaunion and STP exercising their right of first refusal;
therefore, SEC approval will be required. The original unaffiliated third party
purchaser of Oklaunion has petitioned for a court order declaring its contract
valid and the co-owners' rights of first refusal void. The sale of STP will also
require approval from the Nuclear Regulatory Commission. On July 1, 2004, TCC
completed the sale of the other coal, gas and hydro plants for approximately
$425 million, net of adjustments. The closings of the sales of STP and Oklaunion
plants are expected to occur in the first half of 2005, subject to clarification
of the rights of first refusal and the necessary regulatory approvals. In
addition, there could be delays in resolving litigation with a third party
affecting Oklaunion. In order to sell these assets, TCC defeased all of its
remaining outstanding first mortgage bonds in May 2004. In December 2003, we
recognized as a regulatory asset an estimated impairment from the sale of TCC's
generation assets. TCC is considering seeking a good cause exception to the
true-up rule to allow TCC to make its true-up filing prior to the closings of
the sales of all the generation assets.

In addition to its $1.1 billion of stranded generation plant costs, the Texas
legislation permits TCC to recover its remaining unsecuritized net transition
generation regulatory assets of $249 million less a regulatory liability for the
unrefunded excess earnings of $15 million, discussed below. With other
adjustments, TCC's recorded net stranded generation costs total $1.3 billion.

Unrefunded Excess Earnings
--------------------------

The Texas Legislation provides for the calculation of excess earnings for each
year from 1999 through 2001. The total excess earnings determined by the PUCT
for this three-year period were $3 million for SWEPCo, $47 million for TCC and
$19 million for TNC. TCC, TNC and SWEPCo challenged the PUCT's treatment of
fuel-related deferred income taxes and appealed the PUCT's final 2000 excess
earnings to the Travis County District Court which upheld the PUCT ruling. After
appealing the District Court ruling upholding the PUCT decision, the Third Court
of Appeals reversed the PUCT order and the District Court's judgment. The
District Court remanded to the PUCT an appeal of the same issue from the PUCT's
2001 order upon agreement of the parties after issuance of the Third Court of
Appeals decision. On September 14, 2004, the parties to the PUCT remand reached
an agreement, which changed the method for calculating excess earnings, which,
in turn, revised the calculation for 2000 and 2001 consistent with the ruling 
of the court. Revised excess earnings for the three-year period were 
approximately $3 million for SWEPCo, $42 million for TCC and $15 million for 
TNC. The PUCT issued a final order approving the agreement in October 2004. 
Since an expense and regulatory liability had been accrued in prior years in 
compliance with the PUCT orders, the companies reversed a portion of their 
regulatory liability for the years 2000 and 2001 consistent with the Appeals 
Court's decision and credited amortization expense during the third quarter of 
2003. Under the Texas legislation since TNC and SWEPCo do not have stranded 
generation plant cost, excess earnings have been applied to reduce T&D capital 
expenditures.

In 2001, the PUCT issued an order requiring TCC to return estimated excess
earnings by reducing distribution rates by approximately $55 million plus
accrued interest over a five-year period beginning January 1, 2002. Since excess
earnings amounts were expensed in 1999, 2000 and 2001, the order had no
additional effect on reported net income but reduces cash flows over the refund
period. The remaining $15 million to be refunded is recorded as a regulatory
liability at September 30, 2004 and can be included as a reduction to TCC's
stranded generation plant costs. Management believes that TCC has stranded costs
and that it was, therefore, inconsistent with the Texas restructuring
legislation for the PUCT to order a refund prior to TCC's True-up Proceeding.
TCC appealed the PUCT's premature refund of excess earnings to the Travis County
District Court. That court affirmed the PUCT's decision and further ordered that
the refunds be provided to ultimate customers. TCC has appealed the decision to
the Third Court of Appeals.

Carrying Charges on Recoverable Stranded Costs
----------------------------------------------

In December 2001, the PUCT issued a rule concerning stranded cost true-up
proceedings stating, among other things, that carrying costs on stranded costs
would begin to accrue on the date that the PUCT issued its final order in the
True-up Proceeding. TCC and one other Texas electric utility company filed a
direct appeal of the rule to the Texas Third Court of Appeals contending that
carrying costs should commence on January 1, 2002, the day that retail customer
choice began in ERCOT.

The Third Court of Appeals ruled against the utilities, who then appealed to the
Texas Supreme Court. On June 18, 2004, the Texas Supreme Court reversed the
decision of the Third Court of Appeals determining that a carrying cost should
be accrued beginning January 1, 2002 and remanded the proceeding to the PUCT for
further consideration. The Supreme Court determined that utilities with stranded
costs are not permitted to over-recover stranded costs and the PUCT should
address whether any portion of the 2002 and 2003 wholesale capacity auction
true-up regulatory asset includes a recovery of stranded costs or carrying costs
on stranded costs. A motion for rehearing with the Supreme Court was denied and
the ruling is final.

The PUCT in September 2004 considered the Supreme Court's decision in true-up
hearings held for another utility, CenterPoint Energy, Inc. (CenterPoint). In
that case while the PUCT has indicated preliminary positions regarding the
methodology to calculate recoverable carrying costs, uncertainties exist as to
the ultimate methodology that will be adopted by the PUCT in its final order.
The final order in the CenterPoint case is expected to be issued later in
November 2004. If the final order in the CenterPoint case resolves the existing
uncertainties, TCC will record a carrying cost back to January 1, 2002 in the
fourth quarter of 2004 as an increase to its net true-up regulatory asset. 
At this time we are unable to determine the amount of such carrying cost pending
receipt of the final CenterPoint order.

Wholesale Capacity Auction True-up
----------------------------------

The Texas Legislation required that electric utilities and their affiliated
power generation companies (PGC) offer for sale at auction, in 2002, 2003 and
thereafter, at least 15% of the PGC's Texas jurisdictional installed generation
capacity in order to promote competitiveness in the wholesale market through
increased availability of generation. Actual market power prices received in the
state-mandated auctions are used to calculate the wholesale capacity auction
true-up revenues for the True-up Proceeding. According to PUCT rules, the
wholesale capacity auction true-up is only applicable to the years 2002 and
2003. TCC recorded a $480 million regulatory asset and related revenues which
represent the quantifiable amount of the wholesale capacity auction true-up for
the years 2002 and 2003.

In the true-up proceeding of CenterPoint, while the PUCT has indicated
preliminary positions regarding modifications of the calculation of the
wholesale capacity auction true-up reflecting CenterPoint's specific facts and
circumstances, uncertainties exist as to the ultimate modifications and
calculations that will be adopted by the PUCT in its final order and if TCC's
facts and circumstances will result in similar results in its true-up
proceeding. Specifically, the PUCT is evaluating whether the amount of
depreciation in the ECOM model on generation assets for 2002 and 2003 used to
calculate the wholesale capacity auction true-up is a recovery of net stranded
generation costs and should reduce the recoverable cost. The total TCC
depreciation in the ECOM Model for the 2002-2003 period was $238 million. Upon
issuance of a final written order in the CenterPoint case, management will
evaluate the order and, if appropriate, record a provision for any amount that
is no longer probable of recovery as a result of final decisions in the order
which are applicable to TCC. The CenterPoint order is expected to be issued
later in November 2004.

Retail Clawback
---------------

The Texas Legislation provides for the affiliated price-to-beat (PTB) retail
electric providers (REPs) serving residential and small commercial customers to
refund to its T&D utility the excess of the PTB revenues over market prices
(subject to certain conditions and a limitation of $150 per customer). This is
the retail clawback. If, prior to January 1, 2004, 40% of the load for the
residential or small commercial classes is served by competitive REPs, the
retail clawback is not applicable for that class of customer. During 2003, TCC
and TNC filed to notify the PUCT that competitive REPs serve over 40% of the
load in the small commercial class. The PUCT approved TCC's and TNC's filings in
December 2003. In 2002, AEP had accrued a regulatory liability of approximately
$9 million for the small commercial retail clawback on its REP's books. When the
PUCT certified that the REP's in TCC and TNC service territories had reached the
40% threshold, the regulatory liability was no longer required for the small
commercial class and was reversed in December 2003. Based upon customer
information filed by the unaffiliated company which operates as the
price-to-beat REP for TCC and TNC, we updated the estimated residential retail
clawback regulatory liability in May 2004. At September 30, 2004, TCC's retail
clawback regulatory liability was $30 million and TNC's was $7 million.

Fuel Balance Recoveries
-----------------------

In 2002, TNC filed with the PUCT seeking to reconcile fuel costs and to
establish its deferred unrecovered fuel balance applicable to retail sales
within its ERCOT service area for inclusion in the True-up Proceeding. In
January 2004, the PUCT announced a final ruling in TNC's fuel reconciliation
case. The PUCT issued a written order in March 2004. Various parties, including
TNC, requested rehearing of the PUCT's order. In May 2004, the PUCT reversed
certain prior rulings which resulted in an over-recovered balance of $7 million.
In October 2004, the PUCT issued a final order which resulted in a reduction in
the over-recovery balance to $4 million. TNC filed an update to its true-up
filing to reflect the PUCT's final order in October 2004.

In 2002, TCC filed with the PUCT to reconcile fuel costs and to establish its
deferred over-recovery fuel balance for inclusion in the True-up Proceeding. In
May 2004, the PUCT remanded TCC's fuel proceeding to the ALJ to consider
additional evidence on one issue. TCC has provided for a $210 million
over-recovery balance at September 30, 2004. Management believes that TCC has
provided for all probable to-date disallowances pending the remand and receipt
of a final order. However, due to the remand, management is unable to predict
the amount of any additional disallowances of TCC's final fuel over-recovery
balance which will be included in its True-up Proceeding until the remand is
completed and a final order issued.

See TCC Fuel Reconciliation and TNC Fuel Reconciliation in Note 3 "Rate Matters"
for further discussion.

Stranded Cost Recovery
----------------------

When the True-up Proceeding is completed, TCC intends to file to recover
PUCT-approved net stranded generation costs and other true-up amounts, plus
appropriate carrying charges, through a non-bypassable competition transition
charge in the regulated T&D rates. TCC intends to seek to securitize the
approved net stranded generation costs plus related carrying costs. The annual
costs of securitization are recovered through a non-bypassable transition charge
collected by the T&D utility over the term of the securitization bonds. The
other approved net true-up items will be recovered or refunded through a
non-bypassable competition transition wires charge or credit.

TCC's recorded net regulatory asset for amounts subject to approval in the
True-up Proceeding is approximately $1.5 billion at September 30, 2004. We
expect that TCC's True-up Proceeding filing will seek to recover an amount in
excess of the total of its recorded net regulatory asset through September 30,
2004. This is primarily due to the fact that TCC has not been able to accrue a
carrying cost to date as a result of uncertainties that exist. Management
expects to be able to record a carrying cost in the fourth quarter of 2004 based
on the final order in the CenterPoint case.

Due to the preliminary nature of the pending CenterPoint proceedings and the
consequent uncertainty, differences between CenterPoint's and TCC's facts and
circumstances and the lack of direct applicability of the CenterPoint proceeding
to TCC's recorded assets, we cannot, at this time, determine whether
disallowances that may be applicable to CenterPoint would be applicable to TCC.
We believe that our recorded regulatory assets are in compliance with Texas
Legislation and we intend to seek vigorously recovery of all of these amounts.
If, however, we determine that it is probable TCC cannot recover a portion of
its recorded net true-up regulatory asset of $1.5 billion and we are able to
estimate the amount of such non-recovery, we will record a provision for such
amount which could have a material adverse effect on future results of
operations, cash flows and possibly financial condition. To the extent decisions
in the TCC True-up Proceeding differ from management expectations based in part
on our evaluation of the final CenterPoint decision, additional material
disallowances are possible.

TNC 2004 True-up Filing
-----------------------

In June 2004, TNC filed its True-up Proceeding including the fuel reconciliation
balance and the retail clawback calculation. The amount of the deferred over
recovered fuel balance recorded at September 30, 2004 was approximately $7
million. The retail clawback regulatory liability included in the filing was
adjusted in the second quarter of 2004 to $7 million (TNC's allocated portion of
the REPs' retail clawback) reflecting the number of customers served on January
1, 2004. TNC filed an update to the true-up filing to reflect the final order in
its fuel reconciliation proceeding in October 2004 which adjusted its
over-recovery balance to $4.7 million inclusive of interest.

VIRGINIA RESTRUCTURING
----------------------

In April 2004, the Governor of Virginia signed legislation which extends the
transition period for electricity restructuring, including capped rates, through
December 31, 2010. The legislation provides specified cost recovery
opportunities during the capped rate period, including two optional general base
rate changes and an opportunity for timely recovery, through a separate rate
mechanism, of certain incremental environmental and reliability costs incurred
on and after July 1, 2004.

5.  COMMITMENTS AND CONTINGENCIES
    -----------------------------

As discussed in the Commitments and Contingencies note within our 2003 Annual
Report, we continue to be involved in various legal matters. The 2003 Annual
Report should be read in conjunction with this report in order to understand the
other material nuclear and operational matters without significant changes since
our disclosure in the 2003 Annual Report. The material matters discussed in the
2003 Annual Report without significant changes in status since year-end include,
but are not limited to, (1) nuclear matters, (2) construction commitments, (3)
potential uninsured losses, (4) California lawsuits, (5) Bank of Montreal Claim,
and (6) FERC proposed Standard Market Design. See disclosure below for
significant matters with changes in status subsequent to the disclosure made in
our 2003 Annual Report.

Environmental
-------------

Federal EPA Complaint and Notice of Violation
---------------------------------------------

The Federal EPA and a number of states have alleged APCo, CSPCo, I&M, OPCo and
other unaffiliated utilities modified certain units at coal-fired generating
plants in violation of the new source review requirements of the Clean Air Act
(CAA). The Federal EPA filed its complaints against our subsidiaries in U.S.
District Court for the Southern District of Ohio. The court also consolidated a
separate lawsuit, initiated by certain special interest groups, with the Federal
EPA case. The alleged modifications relate to costs that were incurred at our
generating units over a 20-year period.

Under the CAA, if a plant undertakes a major modification that directly results
in an emissions increase, permitting requirements might be triggered and the
plant may be required to install additional pollution control technology. This
requirement does not apply to activities such as routine maintenance,
replacement of degraded equipment or failed components, or other repairs needed
for the reliable, safe and efficient operation of the plant. The CAA authorizes
civil penalties of up to $27,500 per day per violation at each generating unit
($25,000 per day prior to January 30, 1997). In 2001, the District Court ruled
claims for civil penalties based on activities that occurred more than five
years before the filing date of the complaints cannot be imposed. There is no
time limit on claims for injunctive relief.

On June 18, 2004, the Federal EPA issued a Notice of Violation (NOV) in order to
"perfect" its complaint in the pending litigation. The NOV expands the number of
alleged "modifications" undertaken at the Muskingum River, Cardinal, Conesville
and Tanners Creek plants during scheduled outages on these units from 1979
through the present. Approximately one-third of the allegations in the NOV are
already contained in allegations made by the states or the special interest
groups in the pending litigation. The Federal EPA filed a motion to amend its
complaint and to expand the scope of the pending litigation. The AEP
subsidiaries opposed that motion. In September 2004, the judge disallowed the
addition of claims to the pending case. The judge also granted motions to
dismiss a number of allegations in the original filing.

On August 7, 2003, the District Court issued a decision following a liability
trial in a case pending in the Southern District of Ohio against Ohio Edison
Company, an unaffiliated utility. The District Court held that replacements of
major boiler and turbine components that are infrequently performed at a single
unit, that are performed with the assistance of outside contractors, that are
accounted for as capital expenditures, and that require the unit to be taken out
of service for a number of months are not "routine" maintenance, repair, and
replacement. The District Court also held that a comparison of past actual
emissions to projected future emissions must be performed prior to any
non-routine physical change in order to evaluate whether an emissions increase
will occur, and that increased hours of operation that are the result of
eliminating forced outages due to the repairs must be included in that
calculation. Based on these holdings, the District Court ruled that all of the
challenged activities in that case were not routine, and that the changes
resulted in significant net increases in emissions for certain pollutants. A
remedy trial was scheduled for July 2004, but has been postponed until January
2005 to facilitate further settlement negotiations.

Management believes that the Ohio Edison decision fails to properly evaluate and
apply the applicable legal standards. The facts in our case also vary widely
from plant to plant. Further, the Ohio Edison decision is limited to liability
issues, and provides no insight as to the remedies that might ultimately be
ordered by the Court.

On August 26, 2003, the District Court for the Middle District of South Carolina
issued a decision on cross-motions for summary judgment prior to a liability
trial in a case pending against Duke Energy Corporation, an unaffiliated
utility. The District Court denied all the pending motions, but set forth the
legal standards that will be applied at the trial in that case. The District
Court determined that the Federal EPA bears the burden of proof on the issue of
whether a practice is "routine maintenance, repair, or replacement" and on
whether or not a "significant net emissions increase" results from a physical
change or change in the method of operation at a utility unit. However, the
Federal EPA must consider whether a practice is "routine within the relevant
source category" in determining if it is "routine." Further, the Federal EPA
must calculate emissions by determining first whether a change in the maximum
achievable hourly emission rate occurred as a result of the change, and then
must calculate any change in annual emissions holding hours of operation
constant before and after the change. The Federal EPA requested reconsideration
of this decision, or in the alternative, certification of an interlocutory
appeal to the Fourth Circuit Court of Appeals, and the District Court denied the
Federal EPA's motion. On April 13, 2004, the parties filed a joint motion for
entry of final judgment, based on stipulations of relevant facts that obviated
the need for a trial, but preserving plaintiffs' right to seek an appeal of the
federal prevention of significant deterioration (PSD) claims. On April 14, 2004,
the Court entered final judgment for Duke Energy on all of the PSD claims made
in the amended complaints, and dismissed all remaining claims with prejudice.
The United States subsequently filed a notice of appeal to the Fourth Circuit
Court of Appeals. The case was briefed in September 2004.

On June 24, 2003, the United States Court of Appeals for the 11th Circuit issued
an order invalidating the administrative compliance order issued by the Federal
EPA to the Tennessee Valley Authority for alleged CAA violations. The 11th
Circuit determined that the administrative compliance order was not a final
agency action, and that the enforcement provisions authorizing the issuance and
enforcement of such orders under the CAA are unconstitutional. The United States
filed a petition for certiorari with the United States Supreme Court and on May
3, 2004, that petition was denied.

On June 26, 2003, the United States Court of Appeals for the District of
Columbia Circuit granted a petition by the Utility Air Regulatory Group (UARG),
of which our subsidiaries are members, to reopen petitions for review of the
1980 and 1992 Clean Air Act rulemakings that are the basis for the Federal EPA
claims in our case and other related cases. On August 4, 2003, UARG filed a
motion to separate and expedite review of their challenges to the 1980 and 1992
rulemakings from other unrelated claims in the consolidated appeal. The Circuit
Court denied that motion on September 30, 2003. The central issue in these
petitions concerns the lawfulness of the emissions increase test, as currently
interpreted and applied by the Federal EPA in its utility enforcement actions. A
decision by the D. C. Circuit Court could significantly impact further
proceedings in our case. Briefing continues in this case and oral argument is
scheduled for January 2005.

On August 27, 2003, the Administrator of the Federal EPA signed a final rule
that defines "routine maintenance repair and replacement" to include
"functionally equivalent equipment replacement." Under the new final rule,
replacement of a component within an integrated industrial operation (defined as
a "process unit") with a new component that is identical or functionally
equivalent will be deemed to be a "routine replacement" if the replacement does
not change any of the fundamental design parameters of the process unit, does
not result in emissions in excess of any authorized limit, and does not cost
more than twenty percent of the replacement cost of the process unit. The new
rule is intended to have a prospective effect, and was to become effective in
certain states 60 days after October 27, 2003, the date of its publication in
the Federal Register, and in other states upon completion of state processes to
incorporate the new rule into state law. On October 27, 2003, twelve states, the
District of Columbia and several cities filed an action in the United States
Court of Appeals for the District of Columbia Circuit seeking judicial review of
the new rule. The UARG has intervened in this case. On December 24, 2003, the
Circuit Court granted a motion from the petitioners to stay the effective date
of this rule, which had been December 26, 2003.

We are unable to estimate the loss or range of loss related to any contingent
liability we might have for civil penalties under the CAA proceedings. We are
also unable to predict the timing of resolution of these matters due to the
number of alleged violations and the significant number of issues yet to be
determined by the Court. If we do not prevail, any capital and operating costs
of additional pollution control equipment that may be required, as well as any
penalties imposed, would adversely affect future results of operations, cash
flows and possibly financial condition unless such costs can be recovered
through regulated rates and market prices for electricity.

In December 2000, Cinergy Corp., an unaffiliated utility, which operates certain
plants jointly owned by CSPCo, reached a tentative agreement with the Federal
EPA and other parties to settle litigation regarding generating plant emissions
under the Clean Air Act. Negotiations are continuing between the parties in an
attempt to reach final settlement terms. Cinergy's settlement could impact the
operation of Zimmer Plant and W.C. Beckjord Generating Station Unit 6 (owned
25.4% and 12.5%, respectively, by CSPCo). Until a final settlement is reached,
CSPCo will be unable to determine the settlement's impact on its jointly owned
facilities and its future results of operations and cash flows.

On July 21, 2004, the Sierra Club issued a notice of intent to file a citizen
suit claim against DPL, Inc., Cinergy Corporation, CSPCo, and The Dayton Power &
Light Company for alleged violations of the New Source Review programs at the
Stuart Station. CSPCo owns a 26% share of the Stuart Station. On September 21,
2004, the Sierra Club filed a complaint under the citizen suit provisions of the
CAA in the United States District Court for the Southern District of Ohio
alleging that violations of the PSD and New Source Performance Standards
requirements of the CAA and the opacity provisions of the Ohio state
implementation plan occurred at the J.M. Stuart Station, and seeking injunctive
relief and civil penalties. We believe the allegations in the complaint are
without merit, and intend to defend vigorously this action. Management is unable
to predict the timing of any future action by the special interest group or the
effect of such actions on future operations or cash flows.

SWEPCo Notice of Enforcement and Notice of Citizen Suit
-------------------------------------------------------

On July 13, 2004, two special interest groups issued a notice of intent to
commence a citizen suit under the Clean Air Act for alleged violations of
various permit conditions in permits issued to SWEPCo's Welsh, Knox Lee, and
Pirkey plants. This notice was prompted by allegations made by a terminated AEP
employee. The allegations at the Welsh Plant concern compliance with emission
limitations on particulate matter and carbon monoxide, compliance with a
referenced design heat input value, and compliance with certain reporting
requirements. The allegations at the Knox Lee Plant relate to the receipt of an
off-specification fuel oil, and the allegations at Pirkey Plant relate to
testing and reporting of volatile organic compound emissions. No action can be
commenced until 60 days after the date of notice.

On July 19, 2004, the Texas Commission on Environmental Quality (TCEQ) issued a
Notice of Enforcement to SWEPCo relating to the Welsh Plant containing a summary
of findings resulting from a compliance investigation at the plant. The summary
includes allegations concerning compliance with certain recordkeeping and
reporting requirements, compliance with a referenced design heat input value in
the Welsh permit, compliance with a fuel sulfur content limit, and compliance
with emission limits for sulfur dioxide.

On August 13, 2004, TCEQ issued a Notice of Enforcement to SWEPCo relating to
the off-specification fuel oil deliveries at the Knox Lee Plant. On August 30,
2004, TCEQ issued a Notice of Enforcement to SWEPCo relating to the reporting of
volatile organic compound emissions at the Pirkey Plant.

SWEPCo has previously reported to the TCEQ, deviations related to the receipt of
off-specification fuel at Knox Lee, the volatile organic compound emissions at
Pirkey, and the referenced recordkeeping and reporting requirements and heat
input value at Welsh. We are preparing additional responses to the Notice of
Enforcement and the notice from the special interest groups. Management is
unable to predict the timing of any future action by TCEQ or the special
interest groups or the effect of such actions on results of operations,
financial condition or cash flows.

Carbon Dioxide Public Nuisance Claims
-------------------------------------

On July 21, 2004, attorneys general from eight states and the corporation
counsel for the City of New York filed an action in federal district court for
the Southern District of New York against AEP, AEPSC and four other unaffiliated
governmental and investor-owned electric utility systems. That same day, a
similar complaint was filed in the same court against the same defendants by the
Natural Resources Defense Council on behalf of two special interest groups. The
actions allege that carbon dioxide emissions from power generation facilities
constitute a public nuisance under federal common law due to impacts associated
with global warming, and seek injunctive relief in the form of specific emission
reduction commitments from the defendants. In September 2004, the defendants,
including AEP and AEPSC, filed a motion to dismiss the lawsuits. Management
believes the actions are without merit and intends to defend vigorously against
the claims.

Nuclear Decommissioning
-----------------------

As discussed in the 2003 Annual Report, decommissioning costs are accrued over
the service life of STP. The licenses to operate the two nuclear units at STP
expire in 2027 and 2028. TCC had estimated its portion of the costs of
decommissioning STP to be $289 million in 1999 nondiscounted dollars. TCC is
accruing and recovering these decommissioning costs through rates based on the
service life of STP at a rate of approximately $8 million per year.

In May 2004, an updated decommissioning study was completed for STP. The study
estimates TCC's share of the decommissioning costs of STP to be $344 million in
nondiscounted 2004 dollars. We are currently analyzing the STP study to
determine the effect on our asset retirement obligations (ARO) and will make any
appropriate adjustments to the ARO liability and related regulatory asset in the
fourth quarter 2004. As discussed in Note 7, TCC is in the process of selling
its ownership interest in STP to a non-affiliate, and upon completion of the
sale it is anticipated that TCC will no longer be obligated for nuclear
decommissioning liabilities associated with STP.

Operational
-----------

Power Generation Facility
-------------------------

We have agreements with Juniper Capital L.P. (Juniper) under which Juniper
constructed and financed a non-regulated merchant power generation facility
(Facility) near Plaquemine, Louisiana and leased the Facility to us. We have
subleased the Facility to the Dow Chemical Company (Dow). The Facility is a
Dow-operated "qualifying cogeneration facility" for purposes of PURPA.
Commercial operation of the Facility as required by the agreements between
Juniper, AEP and Dow was achieved on March 18, 2004. The initial term of our
lease with Juniper (Juniper Lease) commenced on March 18, 2004 and terminates on
June 17, 2009. We may extend the term of the Juniper Lease for up to 30 years.
Our lease of the Facility is reported as an owned asset under a lease financing
transaction. Therefore, the asset and related liability for the debt and equity
of the facility are recorded on our balance sheet.

Juniper is an unaffiliated limited partnership, formed to construct or otherwise
acquire real and personal property for lease to third parties, to manage
financial assets and to undertake other activities related to asset financing.

At September 30, 2004, Juniper's acquisition costs for the Facility totaled $520
million, and we estimate total costs for the completed Facility to be
approximately $525 million, funded through long-term debt financing of $494
million and equity of $31 million from investors with no relationship to AEP or
any of our subsidiaries. For the initial 5-year lease term, the base lease
rental is equal to the interest on Juniper's debt financing at a variable rate
indexed to three-month LIBOR (1.975% on September 30, 2004) plus 100 basis
points, plus a fixed return on Juniper's equity investment in the Facility and
certain other fixed amounts. Consequently, as LIBOR increases, the base rental
payments under the Juniper Lease will also increase.

The Facility is collateral for Juniper's debt financing. Due to the treatment of
the Facility as a financing of an owned asset, we recognized all of Juniper's
obligations as a liability of $520 million. Upon expiration of the lease, our
actual cash obligation could range from $0 to $415 million based on the fair
value of the assets at that time. However, if we default under the Juniper
Lease, our maximum cash payment could be as much as $525 million.

Dow uses a portion of the energy produced by the Facility and sells the excess
energy. OPCo has agreed to purchase up to approximately 800 MW of such excess
energy from Dow. Because the Facility is a major steam supply for Dow, Dow is
expected to operate the Facility at certain minimum levels, and OPCo is
obligated to purchase the energy generated at those minimum operating levels
(expected to be approximately 270 MW).

OPCo has also agreed to sell up to approximately 800 MW of energy to Tractebel
Energy Marketing, Inc. (TEM) for a period of 20 years under a Power Purchase and
Sale Agreement dated November 15, 2000, (PPA), at a price that is currently in
excess of market. Beginning May 1, 2003, OPCo tendered replacement capacity,
energy and ancillary services to TEM pursuant to the PPA that TEM rejected as
non-conforming. Commercial operation for purposes of the PPA began April 2,
2004.

On September 5, 2003, TEM and AEP separately filed declaratory judgment actions
in the United States District Court for the Southern District of New York. We
allege that TEM has breached the PPA, and we are seeking a determination of our
rights under the PPA. TEM alleges that the PPA never became enforceable, or
alternatively, that the PPA has already been terminated as the result of AEP's
breaches. If the PPA is deemed terminated or found to be unenforceable by the
court, we could be adversely affected to the extent we are unable to find other
purchasers of the power with similar contractual terms and to the extent we do
not fully recover claimed termination value damages from TEM. The corporate
parent of TEM (Tractebel SA) has provided a limited guaranty.

On November 18, 2003, the above litigation was suspended pending final
resolution in arbitration of all issues pertaining to the protocols relating to
the dispatching, operation, and maintenance of the Facility and the sale and
delivery of electric power products. In the arbitration proceedings, TEM argued
that in the absence of mutually agreed upon protocols there were no commercially
reasonable means to obtain or deliver the electric power products and therefore
the PPA is not enforceable. TEM further argued that the creation of the
protocols is not subject to arbitration. The arbitrator ruled in favor of TEM on
February 11, 2004 and concluded that the "creation of protocols" was not subject
to arbitration, but did not rule upon the merits of TEM's claim that the PPA is
not enforceable. Management believes the PPA is enforceable. The litigation is
now in the discovery phase.

On March 26, 2004, OPCo requested that TEM provide assurances of performance of
its future obligations under the PPA, but TEM refused to do so. As indicated
above, OPCo also gave notice to TEM and declared April 2, 2004 as the
"Commercial Operations Date." Despite OPCo's prior tenders of replacement
electric power products to TEM beginning May 1, 2003 and despite OPCo's tender
of electric power products from the Facility to TEM beginning April 2, 2004, TEM
refused to accept and pay for them under the terms of the PPA. On April 5, 2004,
OPCo gave notice to TEM that OPCo, (i) was suspending performance of its
obligations under the PPA, (ii) would be seeking a declaration from the New York
federal court that the PPA has been terminated and (iii) would be pursuing
against TEM, and Tractebel SA under the guaranty, damages and the full
termination payment value of the PPA.

Merger Litigation
-----------------

In 2002, the U.S. Court of Appeals for the District of Columbia ruled that the
SEC failed to adequately explain that the June 15, 2000 merger of AEP with CSW
meets the requirements of the PUHCA and sent the case back to the SEC for
further review. Specifically, the court told the SEC to revisit the basis for 
its conclusion that the merger met PUHCA requirements that utilities be 
"physically interconnected" and confined to a "single area or region." In August
2004 the SEC announced it would conduct hearings on this issue. The hearing is 
scheduled for January 2005.

In its June 2000 approval of the merger, the SEC agreed with AEP that the
companies' systems are integrated because they have transmission access rights
to a single high-voltage line through Missouri and also met the PUHCA's single
region requirement. In its ruling, the appeals court said that the SEC failed to
support and explain its conclusions that the interconnection and single region
requirements are satisfied.

Management believes that the merger meets the requirements of the PUHCA and
expects the matter to be resolved favorably.

Enron Bankruptcy
----------------

In 2002, certain of our subsidiaries filed claims against Enron and its
subsidiaries in the Enron bankruptcy proceeding pending in the U.S. Bankruptcy
Court for the Southern District of New York. At the date of Enron's bankruptcy,
certain of our subsidiaries had open trading contracts and trading accounts
receivables and payables with Enron. In addition, on June 1, 2001, we purchased
HPL from Enron. Various HPL related contingencies and indemnities from Enron
remained unsettled at the date of Enron's bankruptcy.

Enron Bankruptcy - Bammel storage facility and HPL indemnification matters - In
connection with the 2001 acquisition of HPL, we entered into a prepaid
arrangement under which we acquired exclusive rights to use and operate the
underground Bammel gas storage facility and appurtenant pipelines pursuant to an
agreement with BAM Lease Company. This exclusive right to use the referenced
facility is for a term of 30 years, with a renewal right for another 20 years.

In January 2004, we filed an amended lawsuit against Enron and its subsidiaries
in the U.S. Bankruptcy Court claiming that Enron did not have the right to
reject the Bammel storage facility agreement or the cushion gas use agreement,
described below. In April 2004, AEP and Enron entered into a settlement
agreement under which we will acquire title to the Bammel gas storage facility
and related pipeline and compressor assets, plus 10.5 billion cubic feet (BCF)
of natural gas currently used as cushion gas for $115 million. AEP and Enron
will mutually release each other from all claims associated with the Bammel
facility, including our indemnity claims. The settlement received Bankruptcy
Court approval on September 30, 2004 and is expected to close in the fourth
quarter 2004. The parties' respective trading claims and Bank of America's (BOA)
purported lien on approximately 55 BCF of natural gas in the Bammel storage
reservoir (as described below) are not covered by the settlement agreement.

Enron Bankruptcy - Right to use of cushion gas agreements - In connection with
the 2001 acquisition of HPL, we also entered into an agreement with BAM Lease
Company, which grants HPL the exclusive right to use approximately 65 BCF of
cushion gas (the 10.5 BCF and 55 BCF described in the preceding paragraph)
required for the normal operation of the Bammel gas storage facility. At the
time of our acquisition of HPL, BOA and certain other banks (the BOA Syndicate)
and Enron entered into an agreement granting HPL the exclusive use of 65 BCF of
cushion gas. Also at the time of our acquisition, Enron and the BOA Syndicate
also released HPL from all prior and future liabilities and obligations in
connection with the financing arrangement.

After the Enron bankruptcy, HPL was informed by the BOA Syndicate of a purported
default by Enron under the terms of the financing arrangement. In July 2002, the
BOA Syndicate filed a lawsuit against HPL in the state court of Texas seeking a
declaratory judgment that the BOA Syndicate has a valid and enforceable security
interest in gas purportedly in the Bammel storage reservoir. In December 2003,
the Texas state court granted partial summary judgment in favor of the BOA
Syndicate. HPL appealed this decision. In June 2004, BOA filed an amended
petition in a separate lawsuit in Texas state court seeking to obtain possession
of up to 55 BCF of storage gas in the Bammel storage facility or its fair value.
Following an adverse decision on its motion to obtain possession of this gas,
BOA voluntarily dismissed this action. In October 2004, BOA refiled this action.
HPL filed a motion to have the case assigned to the judge who heard the case
originally and that motion was granted. HPL intends to defend vigorously against
BOA's claims. 

In October 2003, AEP filed a lawsuit against BOA in the United States District
Court for the Southern District of Texas. BOA led a lending syndicate involving
the 1997 gas monetization that Enron and its subsidiaries undertook and the
leasing of the Bammel underground gas storage reservoir to HPL. The lawsuit
asserts that BOA made misrepresentations and engaged in fraud to induce and
promote the stock sale of HPL, that BOA directly benefited from the sale of HPL
and that AEP undertook the stock purchase and entered into the Bammel storage
facility lease arrangement with Enron and the cushion gas arrangement with Enron
and BOA based on misrepresentations that BOA made about Enron's financial
condition that BOA knew or should have known were false including that the 1997
gas monetization did not contravene or constitute a default of any federal,
state, or local statute, rule, regulation, code or any law. In February 2004,
BOA filed a motion to dismiss this Texas federal lawsuit. In September 2004, the
Magistrate Judge issued a Recommended Decision and Order recommending that BOA's
Motion to Dismiss be denied, that the five counts in the lawsuit seeking
declaratory judgments involving the Bammel reservoir and the right to use and
cushion gas consent agreements be transferred to the Southern District of New
York and that the four counts alleging breach of contract, fraud and negligent
misrepresentation proceed in the Southern District of Texas. BOA has objected to
the Magistrate Judge's decision and the matter is now before the District Judge.

In February 2004, in connection with BOA's dispute, Enron filed Notices of
Rejection regarding the cushion gas exclusive right to use agreement and other
incidental agreements. We have objected to Enron's attempted rejection of these
agreements.

Enron Bankruptcy - Commodity trading settlement disputes - In September 2003,
Enron filed a complaint in the Bankruptcy Court against AEPES challenging AEP's
offsetting of receivables and payables and related collateral across various
Enron entities and seeking payment of approximately $125 million plus interest
in connection with gas-related trading transactions. AEP has asserted its right
to offset trading payables owed to various Enron entities against trading
receivables due to several AEP subsidiaries. The parties are currently in
non-binding court-sponsored mediation.

In December 2003, Enron filed a complaint in the Bankruptcy Court against AEPSC
seeking approximately $93 million plus interest in connection with a transaction
for the sale and purchase of physical power among Enron, AEP and Allegheny
Energy Supply, LLC during November 2001. Enron's claim seeks to unwind the
effects of the transaction. AEP believes it has several defenses to the claims
in the action being brought by Enron. The parties are currently in non-binding
court-sponsored mediation.

Enron Bankruptcy - Summary - The amount expensed in prior years in connection
with the Enron bankruptcy was based on an analysis of contracts where AEP and
Enron entities are counterparties, the offsetting of receivables and payables,
the application of deposits from Enron entities and management's analysis of the
HPL related purchase contingencies and indemnifications. As noted above, Enron
has challenged our offsetting of receivables and payables and there is a dispute
regarding the cushion gas agreement. Although management is unable to predict
the outcome of these lawsuits, it is possible that their resolution could have
an adverse impact on our results of operations, cash flows or financial
condition.

Shareholder Lawsuits
--------------------

In the fourth quarter of 2002 and the first quarter of 2003, lawsuits alleging
securities law violations and seeking class action certification were filed in
federal District Court, Columbus, Ohio against AEP, certain AEP executives, and
in some of the lawsuits, members of the AEP Board of Directors and certain
investment banking firms. The lawsuits claim that we failed to disclose that
alleged "round trip" trades resulted in an overstatement of revenues, that we
failed to disclose that our traders falsely reported energy prices to trade
publications that published gas price indices and that we failed to disclose
that we did not have in place sufficient management controls to prevent "round
trip" trades or false reporting of energy prices. The plaintiffs sought recovery
of an unstated amount of compensatory damages, attorney fees and costs. The
Court appointed a lead plaintiff who filed a Consolidated Amended Complaint. We
filed a Motion to Dismiss the Consolidated Amended Complaint. Also, in the first
quarter of 2003, a lawsuit making essentially the same allegations and demands
was filed in state Common Pleas Court, Columbus, Ohio against AEP, certain
executives, members of the Board of Directors and our independent auditor. We
removed this case to federal District Court in Columbus and the Court denied
plaintiff's motion to remand the case to state court. In September 2004, the
U.S. District Court Judge dismissed the cases and expressly denied the
plaintiffs' request for an opportunity to file amended complaints with new or
revised allegations. Plaintiffs did not appeal this decision.

In the fourth quarter of 2002, two shareholder derivative actions were filed in
state court in Columbus, Ohio against AEP and its Board of Directors alleging a
breach of fiduciary duty for failure to establish and maintain adequate internal
controls over our gas trading operations. These cases have been stayed pending
the outcome of our Motion to Dismiss the Consolidated Amended Complaint in the
federal securities lawsuits. In October 2004 plaintiffs agreed to dismiss these
cases. Also, in the fourth quarter of 2002 and the first quarter of 2003, three 
putative class action lawsuits were filed against AEP, certain AEP executives 
and AEP's Employee Retirement Income Security Act (ERISA) Plan Administrator 
alleging violations of ERISA in the selection of AEP stock as an investment 
alternative and in the allocation of assets to AEP stock. The ERISA actions 
are pending in federal District Court, Columbus, Ohio. In these actions, the 
plaintiffs seek recovery of an unstated amount of compensatory damages, 
attorney fees and costs. We filed a Motion to Dismiss these actions, which the
Court denied. We have filed a Motion for Leave to file an interlocutory appeal
seeking review of part of the Court's decision. The cases are in the discovery
stage. We intend to continue to defend vigorously against these claims.

Cornerstone Lawsuit
-------------------

In the third quarter of 2003, Cornerstone Propane Partners filed an action in
the United States District Court for the Southern District of New York against
forty companies, including AEP and AEPES seeking class certification and
alleging unspecified damages from claimed price manipulation of natural gas
futures and options on the NYMEX from January 2000 through December 2002.
Thereafter, two similar actions were filed in the same court against a number of
companies including AEP and AEPES making essentially the same claims as
Cornerstone Propane Partners and also seeking class certification. On December
5, 2003, the Court issued its initial Pretrial Order consolidating all related
cases, appointing co-lead counsel and providing for the filing of an amended
consolidated complaint. In January 2004, plaintiffs filed an amended
consolidated complaint. We and the other defendants filed a motion to dismiss
the complaint which the Court denied in September 2004. We intend to defend 
vigorously against these claims.

Texas Commercial Energy, LLP Lawsuit
------------------------------------

Texas Commercial Energy, LLP (TCE), a Texas Retail Electric Provider (REP),
filed a lawsuit in federal District Court in Corpus Christi, Texas, in July
2003, against us and four of our subsidiaries, certain unaffiliated energy
companies and ERCOT. The action alleges violations of the Sherman Antitrust Act,
fraud, negligent misrepresentation, breach of fiduciary duty, breach of
contract, civil conspiracy and negligence. The allegations, not all of which are
made against the AEP companies, range from anticompetitive bidding to
withholding power. TCE alleges that these activities resulted in price spikes
requiring TCE to post additional collateral and ultimately forced it into
bankruptcy when it was unable to raise prices to its customers due to fixed
price contracts. The suit alleges over $500 million in damages for all
defendants and seeks recovery of damages, exemplary damages and court costs. Two
additional parties, Utility Choice, LLC and Cirro Energy Corporation, have
sought leave to intervene as plaintiffs asserting similar claims. We filed a
Motion to Dismiss in September 2003. In February 2004, TCE filed an amended
complaint. We filed a Motion to Dismiss the amended complaint. In June 2004, the
Court dismissed all claims against the AEP companies. TCE has appealed the trial
court's decision to the United States Court of Appeals for the Fifth Circuit.

Energy Market Investigation
---------------------------

AEP and other energy market participants received data requests, subpoenas and
requests for information from the FERC, the SEC, the PUCT, the U.S. Commodity
Futures Trading Commission (CFTC), the U.S. Department of Justice and the
California attorney general during 2002. Management responded to the inquiries
and provided the requested information and has continued to respond to
supplemental data requests in 2003 and 2004.

On September 30, 2003, the CFTC filed a complaint against AEP and AEPES in
federal district court in Columbus, Ohio. The CFTC alleges that AEP and AEPES
provided false or misleading information about market conditions and prices of
natural gas in an attempt to manipulate the price of natural gas in violation of
the Commodity Exchange Act. The CFTC seeks civil penalties, restitution and
disgorgement of benefits. We responded to the complaint in September 2004. In
2003 we recorded a provision related to these matters. We have engaged in
settlement discussions with several agencies and are evaluating whether to
conclude settlements in order to put these investigations behind us even though
we believe we have meritorious legal positions and defenses. If we elect to
settle all matters, the payments could exceed the 2003 provision and could have
a material impact on our 2004 earnings and cash flows.

FERC Market Power Mitigation
----------------------------

In April 2004, the FERC issued two orders concerning utilities' ability to sell
wholesale electricity at market-based rates. In the first order, the FERC
adopted two new interim screens for assessing potential generation market power
of applicants for wholesale market based rates, and described additional
analyses and mitigation measures that could be presented if an applicant does
not pass one of these interim screens. These two screening tests include a
"pivotal supplier" test which determines if the market load can be fully served
by alternative suppliers and a "market share" test which compares the amount of
surplus generation at the time of the applicant's minimum load. In July 2004,
the FERC issued an order on rehearing affirming its conclusions in the April
order and directing AEP and two unaffiliated utilities to file generation market
power analyses within 30 days. In the second order, the FERC initiated a
rulemaking to consider whether the FERC's current methodology for determining
whether a public utility should be allowed to sell wholesale electricity at
market-based rates should be modified in any way.

On August 9, 2004, AEP submitted its Market Power Analysis pursuant to the
FERC's Orders on Rehearing. The analysis focused on the three major areas in
which AEP serves load and owns generation resources -- ECAR, SPP and ERCOT, and
the "first tier" control areas for each of those areas.

The pivotal supplier and market share screen analyses that AEP filed
demonstrated that AEP does not possess market power in any of the control areas
to which it is directly connected (first-tier markets). AEP passed both
screening tests in all of its "first tier" markets. In its three "home" control
areas, AEP easily passed the pivotal supplier test. AEP, as part of PJM, also
passes the market share screen for the PJM destination market. AEP also passed
the market share screen for ERCOT. AEP did not pass the market share screen as
designed by the FERC for the SPP control area. Consequently, AEP also submitted
substantial additional information, including historical purchase and sales data
that demonstrates that AEP does not possess market power in any of the "home"
destination markets. AEP requested that its existing market-based pricing
authorization in all markets be continued based on this analysis. AEP also
requested that the FERC rule without instituting a proceeding and without
setting a refund date. This case is pending.

6.  GUARANTEES
    ----------

There are certain immaterial liabilities recorded for guarantees entered into
subsequent to December 31, 2002 in accordance with FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others." There is no collateral held in relation
to any guarantees in excess of our ownership percentages and there is no
recourse to third parties in the event any guarantees are drawn unless specified
below.

LETTERS OF CREDIT
-----------------

We have entered into standby letters of credit (LOC) with third parties. These
LOCs cover gas and electricity risk management contracts, construction
contracts, insurance programs, security deposits, debt service reserves and
credit enhancements for issued bonds. We issued all of these LOCs in our
ordinary course of business. At September 30, 2004, the maximum future payments
for all the LOCs were approximately $202 million with maturities ranging from
October 2004 to January 2011. As the parent of various subsidiaries, we hold all
assets of the subsidiaries as collateral. There is no recourse to third parties
in the event these LOCs are drawn.

GUARANTEES OF THIRD-PARTY OBLIGATIONS
-------------------------------------

CSW Energy and CSW International
--------------------------------

CSW Energy and CSW International, our subsidiaries, have guaranteed 50% of the
required debt service reserve of Sweeny Cogeneration L.P. (Sweeny), an IPP of
which CSW Energy is a 50% owner. The guarantee was provided in lieu of Sweeny
funding the debt reserve as a part of a financing. In the event that Sweeny does
not make the required debt payments, CSW Energy and CSW International have a
maximum future payment exposure of approximately $4 million, which expires in
June 2020.

SWEPCo
------

In connection with reducing the cost of the lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCo has agreed, under certain conditions, to
assume the capital lease obligations and term loan payments of the mining
contractor, Sabine Mining Company (Sabine). In the event Sabine defaults under
any of these agreements, SWEPCo's total future maximum payment exposure is
approximately $54 million with maturity dates ranging from June 2005 to February
2012.

As part of the process to receive a renewal of a Texas Railroad Commission
permit for lignite mining, SWEPCo has agreed to provide guarantees of mine
reclamation in the amount of approximately $85 million. Since SWEPCo uses
self-bonding, the guarantee provides for SWEPCo to commit to use its resources
to complete the reclamation in the event the work is not completed by a third
party miner. At September 30, 2004, the cost to reclaim the mine in 2035 is
estimated to be approximately $36 million. This guarantee ends upon depletion of
reserves estimated at 2035 plus 6 years to complete reclamation.

Effective July 1, 2003, SWEPCo consolidated Sabine due to the application of FIN
46. SWEPCo does not have an ownership interest in Sabine.

INDEMNIFICATIONS AND OTHER GUARANTEES
-------------------------------------

Contracts
---------

We entered into several types of contracts which require indemnifications.
Typically these contracts include, but are not limited to, sale agreements,
lease agreements, purchase agreements and financing agreements. Generally these
agreements may include, but are not limited to, indemnifications around certain
tax, contractual and environmental matters. With respect to sale agreements, our
exposure generally does not exceed the sale price. We cannot estimate the
maximum potential exposure for any of these indemnifications entered into prior
to December 31, 2002 due to the uncertainty of future events. In 2003 and during
the first nine months of 2004, we entered into several sale agreements. These
sale agreements include indemnifications with a maximum exposure of
approximately $963 million. There are no material liabilities recorded for any
indemnifications entered during 2003 or the first nine months of 2004. There are
no liabilities recorded for any indemnifications entered prior to December 31,
2002.

Master Operating Lease
----------------------

We lease certain equipment under a master operating lease. Under the lease
agreement, the lessor is guaranteed to receive up to 87% of the unamortized
balance of the equipment at the end of the lease term. If the fair market value
of the leased equipment is below the unamortized balance at the end of the lease
term, we have committed to pay the difference between the fair market value and
the unamortized balance, with the total guarantee not to exceed 87% of the
unamortized balance. At September 30, 2004, the maximum potential loss for this
lease agreement was approximately $43 million ($28 million, net of tax) assuming
the fair market value of the equipment is zero at the end of the lease term.

Railcar Lease
-------------

In June 2003, we entered into an agreement with an unrelated, unconsolidated
leasing company to lease 875 coal-transporting aluminum railcars. The lease has
an initial term of five years and may be renewed for up to three additional
five-year terms, for a maximum of twenty years.

Under the lease agreement, the lessor is guaranteed that the sale proceeds under
a return-and-sale option will equal a minimum lessee obligation amount specified
in the lease, which declines over the term from approximately 86% to 77% of the
projected fair market value of the equipment. At September 30, 2004, the maximum
potential loss was approximately $31.5 million ($20.5 million, net of tax)
assuming the fair market value of the equipment is zero at the end of the
current lease term. The railcars are subleased for one year terms to an
unaffiliated company under an operating lease. The sublessee has recently
renewed for an additional year and may renew the lease for up to three more
additional one-year terms.

7.  DISPOSITIONS, DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE 
    --------------------------------------------------------------
  
DISPOSITION COMPLETED DURING FIRST QUARTER 2004
-----------------------------------------------

Pushan Power Plant (Investments - Other segment)
------------------------------------------------

In the fourth quarter of 2002, we began active negotiations to sell our interest
in the Pushan Power Plant (Pushan) in Nanyang, China to our minority interest
partner. A purchase and sale agreement was signed in the fourth quarter of 2003.
The sale was completed in March 2004 for $60.7 million. An estimated loss on
disposal of $20 million pre-tax ($13 million after-tax) was recorded in December
2002, based on an indicative price expression at that time, and was classified
in Discontinued Operations. The effect of the sale on the first quarter 2004
results of operations was not significant.

Results of operations of Pushan have been reclassified as Discontinued
Operations. The assets and liabilities of Pushan have been included in Assets of
Discontinued Operations and Held for Sale and Liabilities of Discontinued
Operations and Held For Sale, respectively, on our Consolidated Balance Sheet at
December 31, 2003.

DISPOSITIONS COMPLETED DURING SECOND QUARTER 2004
-------------------------------------------------

LIG Pipeline Company and its Subsidiaries (Investments - Gas Operations segment)
--------------------------------------------------------------------------------

As a result of our 2003 decision to exit our non-core businesses, we actively
marketed LIG Pipeline Company which possesses approximately 2,000 miles of
natural gas gathering and transmission pipelines in Louisiana and five gas
processing facilities that straddle the system. For the year ended December 31,
2003, LIG's assets were classified as held for sale and their operations were
shown under Discontinued Operations. In January 2004, a decision was made to
sell LIG's pipeline and processing assets separate from LIG's gas storage
assets. After receiving and analyzing initial bids during the fourth quarter of
2003, we recorded a $133.9 million pre-tax ($99 million after-tax) impairment
loss; of this loss, $128.9 million pre-tax relates to the impairment of goodwill
and $5 million pre-tax relates to other charges. In February 2004, we signed a
definitive agreement to sell LIG Pipeline Company, which owned all of the
pipeline and processing assets of LIG. The sale of LIG Pipeline Company and its
assets for $76.2 million was completed in April 2004 and the impact on results
of operations in the second quarter of 2004 was not significant. The assets and
liabilities of LIG are classified as Assets of Discontinued Operations and Held
for Sale and Liabilities of Discontinued Operations and Held for Sale,
respectively on our Consolidated Balance Sheets at December 31, 2003. The
results of operations (including the above-mentioned impairments and other
related charges) are classified in Discontinued Operations in our Consolidated
Statements of Operations for the periods ending September 30, 2004 and 2003.

AEP Coal (Investments - Other segment)
--------------------------------------

In 2003, as a result of management's decision to exit our non-core businesses,
we retained an advisor to facilitate the sale of AEP Coal. In March 2004, an
agreement was reached to sell assets, exclusive of certain reserves and related
liabilities, of the mining operations of AEP Coal. We received approximately
$8.8 million cash and the buyer assumed an additional $11.1 million in future
reclamation liabilities. We retained an estimated $36.7 million in future
reclamation liabilities. The sale closed in April 2004 and the effect of the
sale on second quarter 2004 results of operations was not significant. The
assets and liabilities of AEP Coal have been included in Assets of Discontinued
Operations and Held for Sale and Liabilities of Discontinued Operations and Held
for Sale, respectively, in our Consolidated Balance Sheet at December 31, 2003.

DISPOSITIONS COMPLETED DURING THIRD QUARTER 2004
------------------------------------------------

Independent Power Producers (Investments - Other segment)
---------------------------------------------------------

During the third quarter of 2003, we initiated an effort to sell four domestic
Independent Power Producer (IPP) investments accounted for under the equity
method (two located in Colorado and two located in Florida). Our two Colorado
investments include a 47.75% interest in Brush II, a 68-megawatt, gas-fired,
combined cycle, cogeneration plant in Brush, Colorado and a 50% interest in
Thermo, a 272-megawatt, gas-fired, combined cycle, cogeneration plant located in
Ft. Lupton, Colorado. Our two Florida investments include a 46.25% interest in
Mulberry, a 120-megawatt, gas-fired, combined cycle, cogeneration plant located
in Bartow, Florida and a 50% interest in Orange, a 103-megawatt, gas-fired,
combined cycle, cogeneration plant located in Bartow, Florida. In accordance
with GAAP, we were required to measure the impairment of each of these four
investments individually. Based on indicative bids, it was determined that an
other than temporary impairment existed on the two equity method investments
located in Colorado. The $70.0 million pre-tax ($45.5 million, net of tax)
impairment recorded in September 2003 was the result of the measurement of fair
value that was triggered by our decision to sell these assets. This loss of
investment value was included in Investment Value Losses on our Consolidated
Statements of Operations for the periods ending September 30, 2003.

In March 2004, we entered into an agreement to sell the four domestic IPP
investments for a total sales price of $156 million, subject to closing
adjustments. An additional pre-tax impairment of $1.6 million was recorded in
June 2004 (recorded to Investment Value Losses) to decrease the carrying value
of the Colorado plant investments to their estimated sales price, less selling
expenses. We closed on the sale of the two Florida investments and the Brush II
plant in Colorado in July 2004, resulting in a pre-tax gain of $104.6 million
($63.8 million, net of tax), generated primarily from the sale of the two
Florida IPPs which were not originally impaired. The gain was recorded to Other
Income (Expense), Net in our Consolidated Statements of Operations in July 2004.
The sale of the Ft. Lupton, Colorado plant closed in October 2004 and will not
have a significant effect on results of operations for the fourth quarter 2004.
Prior to the completion of the sale of each of the four IPPs, the assets for
each of the four IPPs have been included in Investments in Power and
Distribution Projects.

U.K. Generation (Investments - UK Operations segment)
-----------------------------------------------------

In December 2001, we acquired two coal-fired generation plants (U.K. Generation)
in the U.K. for a cash payment of $942.3 million and assumption of certain
liabilities. Subsequently and continuing through 2002, wholesale U.K. electric
power prices declined sharply as a result of domestic over-capacity and static
demand. External industry forecasts and our own projections made during the
fourth quarter of 2002 indicated that this situation may extend many years into
the future. As a result, the U.K. Generation fixed asset carrying value at
year-end 2002 was substantially impaired. A December 2002 probability-weighted
discounted cash flow analysis of the fair value of our U.K. Generation indicated
a 2002 pre-tax impairment loss of $548.7 million ($414 million after-tax). This
impairment loss is included in 2002 Discontinued Operations on our Consolidated
Statements of Operations.

In the fourth quarter of 2003, the U.K. generation plants were determined to be
non-core assets and management engaged an investment advisor to assist in
determining the best methodology to exit the U.K. business. Based on information
received, we recorded a $577 million pre-tax charge ($375 after-tax), including
asset impairments of $420.7 million during the fourth quarter of 2003 to write
down the value of the assets to their estimated realizable value. Additional
charges of $156.7 million pre-tax were also recorded in December 2003 including
$122.2 million related to the net loss on certain cash flow hedges previously
recorded in Accumulated Other Comprehensive Income (Loss) that have been
reclassified into earnings as a result of management's determination that the
hedged event is no longer probable of occurring and $34.5 million related to a
first quarter 2004 sale of certain power contracts. All write downs related to
the U.K. that were booked in the fourth quarter 2003 were included in
Discontinued Operations of our Consolidated Statements of Operations for the
year ended 2003.

In July 2004, we completed the sale of substantially all operations and assets
within the U.K. The sale included our two coal-fired generation plants
(Fiddler's Ferry and Ferrybridge) that were held-for-sale as described above,
related coal assets, and a number of related commodities contracts for
approximately $456 million. The sale resulted in a pre-tax gain of $266 million
($127 million, net of tax). As a result of the sale, the buyer assumed an
additional $46.1 million in future reclamation liabilities and $10.2 million in
pension liabilities. The remaining assets and liabilities include certain
physical coal, power and capacity positions and financial coal and freight
swaps. The majority of these positions will either mature or be settled with the
applicable counterparties during the fourth quarter 2004. The assets and
liabilities of U.K. Generation have been classified as Assets of Discontinued
Operations and Held for Sale and Liabilities of Discontinued Operations and Held
for Sale, respectively, on our Consolidated Balance Sheets at September 30, 2004
and December 31, 2003. The results of operations and gain on sale are included
in Discontinued Operations on our Consolidated Statements of Operations for the
periods ending September 30, 2004 and 2003.

Texas Plants - TCC Generation Assets (Utility Operations segment)
-----------------------------------------------------------------

In December 2002, TCC filed a plan of divestiture with the PUCT proposing to
sell all of its power generation assets, including the eight gas-fired
generating plants that were either deactivated or designated as "reliability
must run" status.

During the fourth quarter of 2003, after receiving indicative bids from
interested buyers, we recorded a $938 million impairment loss and changed the
classification of the plant assets from plant in service to Assets of
Discontinued Operations and Held for Sale. In accordance with Texas legislation,
the $938 million impairment was offset by the establishment of a regulatory
asset, which is expected to be recovered through a wires charge, subject to the
final outcome of the True-up Proceeding. As a result of the True-up Proceeding,
if we are unable to recover all or a portion of our requested costs (see Note
4), any unrecovered costs could have a material adverse effect on our results of
operations, cash flows and possibly financial condition.

In March 2004, we signed an agreement to sell eight natural gas plants, one
coal-fired plant and one hydro plant to a non-related joint venture. The sale
was completed in July 2004 for approximately $425 million, net of adjustments.
The sale did not have a significant effect on our results of operations during
the periods ended September 30, 2004.

South Coast Power Limited (Investments - Other Segment)
-------------------------------------------------------

South Coast Power Limited (SCPL) is a 50% owned venture that was formed in 1996
to build, own and operate Shoreham Power Station, a 400-megawatt,
combined-cycle, gas turbine power station located in Shoreham, England. In 2002,
SCPL was subject to adverse wholesale electric power rates. A December 2002
projected cash flow estimate of the fair value of the investment indicated a
2002 pre-tax other than temporary impairment of the equity interest in the
amount of $63.2 million. This loss of investment value was included in
Investment Value and Other Impairment Losses in the 2002 Consolidated Statements
of Operations.

In the fourth quarter of 2003, management determined that our U.K. operations
were no longer part of our core business and as a result, a decision was made to
exit the U.K. market. In September 2004, we completed the sale of our 50%
ownership in SCPL for $46.9 million, resulting in an estimated $47.6 million net
gain ($30.9 million, net of tax) in the third quarter 2004. This gain was
recorded to Other Income (Expense), Net in our Consolidated Statements of
Operations for the periods ended September 30, 2004. The gain reflects improved
conditions in the U.K. power market.

DISPOSITIONS COMPLETED OR ANTICIPATED BEING COMPLETED DURING FOURTH QUARTER 2004
--------------------------------------------------------------------------------

Jefferson Island Storage & Hub, L.L.C. (Investments - Gas Operations segment)
-----------------------------------------------------------------------------

In August 2004, a definitive agreement was signed to sell the gas storage assets
of Jefferson Island Storage & Hub, L.L.C. (JISH). The sale of JISH and its
assets for $90.3 million was completed in October 2004. The sale resulted in an
additional $12.3 million pre-tax loss ($2 million, net of tax) which is
reflected in our third quarter 2004 Consolidated Statements of Operations. The
assets and liabilities of JISH are classified as Assets of Discontinued
Operations and Held for Sale and Liabilities of Discontinued Operations and Held
for Sale, respectively, on our Consolidated Balance Sheets as of September 30,
2004 and December 31, 2003. The results of operations and loss on sale of JISH
are classified as Discontinued Operations in our Consolidated Statements of
Operations for the periods ending September 30, 2004 and 2003.

Excess Real Estate (Investments - Other segment)
------------------------------------------------

In the fourth quarter of 2002, we began to market an under-utilized office
building in Dallas, Texas obtained through our merger with CSW in June 2000. One
prospective buyer executed an option to purchase the building. Sale of the
facility was projected by second quarter 2003 and an estimated 2002 pre-tax loss
on disposal of $15.7 million was recorded, based on the option sale price. The
estimated loss was included in Impairment Value and Other Impairment Losses in
our 2002 Consolidated Statements of Operations. We recorded an additional
pre-tax impairment of $6 million in Maintenance and Other Operation in our 2003
Consolidated Statements of Operations. The original prospective buyer did not
complete their purchase of the building by the end of 2003, and thus, the asset
no longer qualified for held for sale status. The building was then reclassified
to held and used status as of December 31, 2003.

In June 2004, we entered into negotiations to sell the Dallas office building.
This resulted in the asset again being classified as held for sale in the second
quarter of 2004. An additional pre-tax impairment of $2.5 million was recorded
in Maintenance and Other Operation expense during the second quarter of 2004 to
write down the value of the office building to the current estimated sales
price, less estimated selling expenses. In October 2004, we completed the sale
of the Dallas office building. We do not expect the sale to have a significant
effect on our results of operations. The property asset of $9.5 million at
September 30, 2004 and $12.0 million at December 31, 2003 has been classified on
our Consolidated Balance Sheets as Assets of Discontinued Operations and Held
for Sale.

DISPOSITIONS ANTICIPATED BEING COMPLETED DURING FIRST HALF 2005
---------------------------------------------------------------

Texas Plants - Oklaunion Power Station (Utility Operations segment)
-------------------------------------------------------------------

In January 2004, we signed an agreement to sell TCC's 7.81% share of Oklaunion
Power Station for approximately $43 million (subject to closing adjustments) to
an unrelated party. In May 2004, we received notice from the two unaffiliated
co-owners of the Oklaunion Power Station, announcing their decision to exercise
their right of first refusal, with terms similar to the original agreement. In
June 2004 and September 2004, we entered into sales agreements with both of our
unaffiliated co-owners for the sale of TCC's 7.81% ownership of the Oklaunion
Power Station. One of these agreements is currently being challenged in Dallas
County, Texas State District Court by the unrelated party with which we entered
into the original sales agreement. The unrelated party alleges that one co-owner
has exceeded its legal authority and that the second co-owner did not exercise
its right of first refusal in a timely manner. The unrelated party has requested
that the court declare the co-owners' exercise of their rights of first refusal
void. We cannot predict when these issues will be resolved. We do not expect the
sale to have a significant effect on our future results of operations. TCC's
assets and liabilities related to the Oklaunion Power Station have been
classified as Assets of Discontinued Operations and Held for Sale and
Liabilities of Discontinued Operations and Held for Sale, respectively, in our
Consolidated Balance Sheets at September 30, 2004 and December 31, 2003.

Texas Plants - South Texas Project (Utility Operations segment)
---------------------------------------------------------------

In February 2004, we signed an agreement to sell TCC's 25.2% share of the STP
nuclear plant to an unrelated party for approximately $333 million, subject to
closing adjustments. In June 2004, we received notice from co-owners of their
decisions to exercise their rights of first refusal, with terms similar to the
original agreement. In September 2004, we entered into sales agreements with two
of our unaffiliated co-owners for the sale of TCC's 25.2% share of the STP
nuclear plant. We do not expect the sale to have a significant effect on our
future results of operations. We expect the sale to close in the first six
months of 2005. TCC's assets and liabilities related to STP have been classified
as Assets of Discontinued Operations and Held for Sale and Liabilities of
Discontinued Operations and Held for Sale, respectively, in our Consolidated
Balance Sheets at September 30, 2004 and December 31, 2003.

DISCONTINUED OPERATIONS
-----------------------

Certain of our operations were determined to be discontinued operations and have
been classified as such for all periods presented. Results of operations of
these businesses have been reclassified for the three and nine month periods
ended September 30, 2004 and 2003, as shown in the following table:


<TABLE>
<CAPTION>

For the three months ended September 30, 2004 and 2003:
                                                                   Pushan   
                                                                   Power                      U.K.      
                                                        Eastex     Plant         LIG (a)   Generation       Total 
                                                        ------     ------        -------   ----------       -----
                                                                             (in millions)                                  
<C>                                                      <C>        <C>           <C>         <C>            <C> 
2004 Revenue                                             $-         $-             $1         $37            $38 
2004 Pre-tax Income (Loss)                                -          -            (13)        255            242 
2004 Income (Loss) After-Tax                              -          1             (3)        120 (b)        118 

2003 Revenue                                             12         14            165           4            195 
2003 Pre-tax Income (Loss)                               (1)         -              2         (76)           (75)
2003 Income (Loss) After-Tax                              -          -              2         (52)(c)        (50)

</TABLE>


<TABLE>
<CAPTION>
  
For the nine months ended September 30, 2004 and 2003:
                                                                   Pushan   
                                                                   Power                      U.K.      
                                                        Eastex     Plant         LIG (a)   Generation       Total 
                                                        ------     ------        -------   ----------       -----
                                                                             (in millions)                                  
<C>                                                     <C>        <C>           <C>         <C>            <C> 
2004 Revenue                                             $-        $10           $165        $112           $287 
2004 Pre-tax Income (Loss)                                -          9            (12)        156            153 
2004 Income (Loss) After-Tax                              -          6             (2)         56 (d)         60 

2003 Revenue                                             58         41            518         116            733 
2003 Pre-tax Income (Loss)                              (24)         -              8        (112)          (128)
2003 Income (Loss) After-Tax                            (15)         -              6         (89)(e)        (98)

     (a) Includes LIG Pipeline Company and subsidiaries and Jefferson Island Storage & Hub, L.L.C. 
     (b) Earnings per share related to the UK Operations was $0.30 
     (c) Earnings per share related to the UK Operations was $(0.13)
     (d) Earnings per share related to the UK Operations was $0.14 
     (e) Earnings per share related to the UK Operations was $(0.23)
</TABLE>



ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
---------------------------------------------------

The assets and liabilities of the entities that were classified as discontinued
operations or held for sale at September 30, 2004 and December 31, 2003 are as
follows:

<TABLE>
<CAPTION>
                                                                                                                                 
                                                                              U.K.       Texas    Excess Real  Jefferson 
September 30, 2004                                                        Generation     Plants     Estate      Island     Total  
------------------                                                        ----------     ------   ------------- -------    -----  
Assets:                                                                                          (in millions)              
-------
<C>                                                                          <C>         <C>         <C>         <C>        <C> 
Current Risk Management Assets                                                $85          $-         $-          $-         $85 
Other Current Assets                                                           81          24          -           2         107 
Property, Plant and Equipment, Net                                              -         398         10          70         478 
Regulatory Assets                                                               -          53          -           -          53 
Decommissioning Trusts                                                          -         134          -           -         134 
Goodwill                                                                        -           -          -          14          14 
Long-term Risk Management Assets                                                4           -          -           -           4 
Other                                                                           5           -          -           7          12
                                                                             -----       -----       ----        ----       -----
Total Assets of Discontinued   
   Operations and Held for Sale                                              $175        $609        $10         $93        $887
                                                                             =====       =====       ====        ====       =====

Liabilities:
------------
Current Risk Management Liabilities                                           $80          $-         $-          $-         $80 
Other Current Liabilities                                                      61           -          -           2          63 
Long-term Risk Management Liabilities                                          11           -          -           -          11 
Regulatory Liabilities                                                          -           1          -           -           1 
Asset Retirement Obligations                                                    -         231          -           -         231
                                                                             -----       -----       ----        ----       -----
Total Liabilities of Discontinued   
   Operations and Held for Sale                                              $152        $232         $-          $2        $386
                                                                             =====       =====       ====        ====       =====
</TABLE>


<TABLE>
<CAPTION>

                                                               LIG      
                                                           (excluding                             
December 31,  2003                   AEP        Pushan      Jefferson        U.K.       Texas    Excess Real   Jefferson
------------------                   Coal     Power Plant    Island)     Generation     Plants     Estate       Island     Total
                                     ----     -----------  ----------    ----------     ------     ------      ---------   -----
                                                                                   
<C>                                  <C>         <C>           <C>         <C>         <C>           <C>         <C>      <C>
Assets:                                                                    (in millions)
Current Risk Management Assets        $-           $-            $-          $560          $-         $-          $-        $560
Other Current Assets                   6           24            49           685          57          -           1         822
Property, Plant and                   13          142           109            99         797         12          62       1,234
Equipment, Net
Regulatory Assets                      -            -             -             -          49          -           -          49
Decommissioning Trusts                 -            -             -             -         125          -           -         125
Goodwill                               -            -             1             -           -          -          14          15
Long-term Risk Management Assets       -            -             -           274           -          -           -         274
Other                                  -            -             8             6           -          -           1          15
                                     ----        -----         -----       -------     -------       ----        ----     -------
Total Assets of Discontinued
  Operations and Held for Sale       $19         $166          $167        $1,624      $1,028        $12         $78      $3,094
                                     ====        =====         =====       =======     =======       ====        ====     =======

Liabilities:
Current Risk Management Liabilities   $-           $-           $15          $767          $-         $-          $-        $782
Other Current Liabilities              -           26            42           221           -          -           4         293
Long-term Debt                         -           20             -             -           -          -           -          20
Long-term Risk Managemen
   Liabilities                         -            -             -           435           -          -           -         435
Regulatory Liabilities                 -            -             -             -           9          -           -           9
Asset Retirement Obligations          11            -             -            29         219          -           -         259
Employee Pension Obligations           -            -             -            12           -          -           -          12
Deferred Credits and Other             3           57             6             -           -          -           -          66
                                     ----        -----         -----       -------     -------       ----        ----     -------
Total Liabilities of
 Discontinued Operations
 and Held for Sale                   $14         $103           $63        $1,464        $228         $-          $4      $1,876
                                     ====        =====         =====       =======     =======       ====         ===     =======
</TABLE>




8.  BENEFIT PLANS
    -------------

Components of Net Periodic Benefit Costs
----------------------------------------

The following table provides the components of our net periodic benefit cost
(credit) for the following plans for the three and nine months ended September
30, 2004 and 2003:


<TABLE>
<CAPTION>
                                                                                           
                                                                       U.S.                                U.S.                
                                                                     Pension                        Other Postretirement       
                                                                      Plans                            Benefit Plans    
                                                                -------------------               ----------------------            
                                                                2004           2003               2004               2003
                                                                ----           ----               ----               ----
    <C>                                                         <C>            <C>                <C>                <C>   
    Three Months ended September 30, 2004 and 2003:                                  (in millions)                         
    Service Cost                                                 $22            $20                $10                $10 
    Interest Cost                                                 57             58                 29                 33 
    Expected Return on Plan Assets                               (73)           (79)               (20)               (16)
    Amortization of Transition
      (Asset) Obligation                                           -             (2)                 7                  7 
    Amortization of Net Actuarial Loss                             4              3                  9                 13
                                                                -----          -----              -----              -----
    Net Periodic Benefit Cost                                    $10             $-                $35                $47
                                                                =====          =====              =====              =====

</TABLE>


<TABLE>
<CAPTION>
                                                                       U.S.                                U.S.                
                                                                     Pension                        Other Postretirement       
                                                                      Plans                            Benefit Plans    
                                                                -------------------               ----------------------            
                                                                2004           2003               2004               2003
                                                                ----           ----               ----               ----
    <C>                                                         <C>            <C>                <C>                <C>   
    Nine Months ended September 30, 2004 and 2003:                                   (in millions)                   
    Service Cost                                                 $65            $60                $30                $31 
    Interest Cost                                                171            175                 88                 98 
    Expected Return on Plan Assets                              (219)          (238)               (61)               (48)
    Amortization of Transition
      (Asset) Obligation                                           1             (6)                21                 21 
    Amortization of Prior Service Cost                             -             (1)                 -                  -
    Amortization of Net Actuarial Loss                            12              8                 27                 39
                                                                -----          -----              -----              -----
    Net Periodic Benefit Cost (Credit)                           $30            $(2)              $105               $141
                                                                =====          =====              =====              =====

</TABLE>


In accordance with our implementation of FASB Staff Position FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," in the second quarter 2004,
accounting for the Medicare subsidy reduced expected 2004 postretirement benefit
cost by $29 million. As a result, expected cash flows for 2004 employer
contributions to U.S. other postretirement benefit plans have been reduced by
$29 million from the $180 million disclosed at December 31, 2003. Including an
additional $19 million reduction related to refining earlier estimates, we
currently expect to contribute approximately $132 million to our U.S. other
postretirement benefit plans during 2004.

9.  BUSINESS SEGMENTS
    -----------------

Our segments and their related business activities are as follows:

Utility Operations
------------------
 o  Domestic generation of electricity for sale to retail and wholesale 
    customers
 o  Domestic electricity transmission and distribution

Investments - Gas Operations*
-----------------------------
 o  Gas pipeline and storage services

Investments - UK Operations**
-----------------------------
 o  International generation of electricity for sale to wholesale customers
 o  Coal procurement and transportation to our U.K. plants

Investments - Other***
----------------------
 o  Bulk commodity barging operations, windfarms, independent power producers 
    and other energy supply businesses

*   Operations of Louisiana Intrastate Gas, including Jefferson Island
    Storage, were classified as discontinued during 2003 and were sold during
    the third and fourth quarter 2004, respectively.
**  UK Operations were classified as discontinued during 2003 and were sold
    during third quarter 2004. 
*** Four independent power producers were sold during the third and fourth 
    quarter 2004.

The tables below present segment income statement information for the three and
nine months ended September 30, 2004 and 2003 and balance sheet information as
of September 30, 2004 and December 31, 2003. These amounts include certain
estimates and allocations where necessary. Prior year amounts have been
reclassified to conform to the current year's presentation.


<TABLE>
<CAPTION>

                                                               Investments
                                                  ----------------------------------
                                      Utility        Gas           UK                      All       Reconciling
                                     Operations   Operations    Operations     Other      Other*     Adjustments    Consolidated
                                     ----------   ----------    ----------     -----      ------     -----------    ------------
                                                                           (in millions)
<C>                                   <C>             <C>         <C>           <C>        <C>          <C>             <C> 
Three Months Ended September 30, 2004
-------------------------------------
Revenues from:
  External Customers                  $2,909          $762          $-          $81         $-           $-             $3,752 
  Other Operating Segments                37           (16)          -           17          1          (39)                 -
                                      -------         -----       -----         ----       ----         ----            -------
  Total Revenues                       2,946           746           -           98          1          (39)             3,752
                                      =======         =====       =====         ====       ====         ====            =======
Income (Loss) Before
  Discontinued Operations 
  and Cumulative Effect of
  Accounting Changes                     359           (28)          -           90         (9)           -                412 
Discontinued Operations, 
 Net of Tax                                -            (3)        120            1          -            -                118
                                      -------         -----       -----         ----       ----         ----            -------
Net Income (Loss)                       $359          $(31)       $120          $91        $(9)          $-               $530
                                      =======         =====       =====         ====       ====         ====            =======
As of September 30, 2004
------------------------
Total Assets                         $31,403        $2,099        $273       $1,447    $10,635     $(11,035)           $34,822 
Assets of Discontinued
  Operations and Held for Sale           609            93         175            -         10            -                887 

*  All Other includes interest, litigation and other miscellaneous parent company expenses, as well as the operations of a service 
   company subsidiary, which provides services at cost to the other operating segments.
</TABLE>


<TABLE>
<CAPTION>

                                                               Investments
                                                  ----------------------------------
                                      Utility        Gas           UK                      All       Reconciling
                                     Operations   Operations    Operations     Other      Other*     Adjustments    Consolidated
                                     ----------   ----------    ----------     -----      ------     -----------    ------------
                                                                           (in millions)
Three Months Ended September 30, 2003
-------------------------------------
<C>                                  <C>            <C>          <C>           <C>       <C>          <C>             <C>      
Revenues from:
  External Customers                  $3,099          $707           $-          $135         $-            $-         $3,941 
  Other Operating Segments                13            66            -            29          3          (111)             -
                                      -------         -----       ------         -----      -----         -----        -------
  Total Revenues                       3,112           773            -           164          3          (111)         3,941
                                      =======         =====       ======         =====      =====         =====        =======
Income (Loss) Before
  Discontinued Operations 
  and Cumulative Effect of
  Accounting Changes                     409           (21)           -           (45)       (36)            -            307  
Discontinued Operations, 
 Net of Tax                                -             2          (52)            -          -             -            (50)
                                      -------         -----       ------         -----      -----         -----        -------
Net Income (Loss)                       $409          $(19)        $(52)         $(45)      $(36)           $-           $257
                                      =======         =====       ======         =====      =====         =====        =======
As of December 31, 2003
-----------------------
Total Assets                         $30,790        $2,494       $1,629        $1,714    $12,281      $(12,164)       $36,744  
Assets of Discontinued
  Operations and Held for Sale         1,028           245        1,624           185         12             -          3,094  

*  All Other includes interest, litigation and other miscellaneous parent company expenses, as well as the operations of a service 
   company subsidiary, which provides services at cost to the other operating segments.
</TABLE>


<TABLE>
<CAPTION>

                                                               Investments
                                                  ----------------------------------
                                      Utility        Gas           UK                      All       Reconciling
                                     Operations   Operations    Operations     Other      Other*     Adjustments    Consolidated
                                     ----------   ----------    ----------     -----      ------     -----------    ------------
                                                                           (in millions)
Nine Months Ended September 30, 2004
------------------------------------
<C>                                  <C>            <C>           <C>         <C>       <C>          <C>              <C>     
Revenues from:
  External Customers                  $7,989        $2,191          $-          $281         $-            $-         $10,461 
  Other Operating Segments               106            23           -            67          5          (201)              -
                                      -------       -------        ----         -----      -----         -----        --------
  Total Revenues                       8,095         2,214           -           348          5          (201)         10,461
                                      =======       =======        ====         =====      =====         =====        ========  
Income (Loss) Before
  Discontinued Operations and
  Cumulative Effect of
  Accounting Changes                     845           (41)          -            91        (43)            -             852 
Discontinued Operations, 
 Net of Tax                                -            (2)         56             6          -             -              60
                                      -------       -------        ----         -----      -----        ------        --------
Net Income (Loss)                       $845          $(43)        $56           $97       $(43)           $-            $912
                                      =======       =======        ====         =====      =====        ======        ========  
As of September 30, 2004
------------------------
Total Assets                         $31,403        $2,099        $273        $1,447    $10,635      $(11,035)        $34,822 
Assets of Discontinued
  Operations and Held for Sale           609            93         175             -         10             -             887 

*  All Other includes interest, litigation and other miscellaneous parent company expenses, as well as the operations of a service 
   company subsidiary, which provides services at cost to the other operating segments.
</TABLE>


<TABLE>
<CAPTION>

                                                               Investments
                                                  ----------------------------------
                                      Utility        Gas           UK                        All       Reconciling
                                     Operations   Operations    Operations     Other        Other*     Adjustments    Consolidated
                                     ----------   ----------    ----------     -----        ------     -----------    ------------
                                                                           (in millions)
<C>                                   <C>            <C>          <C>         <C>         <C>         <C>               <C>
Nine Months Ended September 30, 2003
------------------------------------
Revenues from:
  External Customers                   $8,458        $2,278           $-        $440           $-           $-          $11,176   
  Other Operating Segments                 25           118            -          72           10         (225)               -   
                                       -------       -------       ------       -----         ----        -----         --------
  Total Revenues                        8,483         2,396            -         512           10         (225)          11,176   
                                       =======       =======       ======       =====         ====        =====         ========
Income (Loss) Before
 Discontinued Operations and
 Cumulative Effect of
 Accounting Changes                       940           (64)           -         (45)         (54)           -              777   
Discontinued Operations, 
 Net of Tax                                 -             6          (89)        (15)           -            -              (98)  
Cumulative Effect of
  Accounting Changes,
  Net of Tax                              236           (22)         (21)          -            -            -              193   
                                       -------       -------       ------       -----        ----          ----         --------
Net Income (Loss)                      $1,176          $(80)       $(110)       $(60)        $(54)          $-              872   
                                       =======       =======       ======       =====        ====          ====         ========

As of December 31, 2003
-----------------------
Total Assets                          $30,790        $2,494       $1,629      $1,714      $12,281     $(12,164)         $36,744  
Assets of Discontinued
  Operations and Held for Sale          1,028           245        1,624         185           12            -            3,094  

* All Other includes interest, litigation and other miscellaneous parent company expenses, as well as the operations of a service
  company subsidiary, which provides services at cost to the other operating segments.
</TABLE>



10.  FINANCING ACTIVITIES
     --------------------

Long-term debt and other securities issued and retired during the first nine
months of 2004 are shown in the table below.

<TABLE>
<CAPTION>

                                                                     Principal              Interest
Company                          Type of Debt                          Amount                 Rate              Due Date
-------                          ------------                        ---------              --------            --------      
                                                                   (in millions)               (%)
Issuances:
----------
<C>                         <C>                                       <C>                    <C>                  <C>
APCo                        Senior Unsecured Notes                    $125                   Variable             2007        
CSPCo                       Installment Purchase Contracts              49                   Variable             2038        
CSPCo                       Installment Purchase Contracts              44                   Variable             2038        
PSO                         Installment Purchase Contracts              34                   Variable             2014        
PSO                         Senior Unsecured Notes                      50                     4.70               2009        
SWEPCo                      Installment Purchase Contracts              54                   Variable             2019        
SWEPCo                      Installment Purchase Contracts              41                   Variable             2011        

Non-Registrant:
  AEP Subsidiary            Notes Payable                               23                   Variable             2009        
  AEP Subsidiaries          Other Debt                                   5                   Variable            Various      
                                                                      -----
Total Issuances                                                       $425 (a)    
                                                                      =====

(a) Amount indicated on statement of cash flows of $416 million is net of issuance costs.
</TABLE>


<TABLE>
<CAPTION>


                                                                    Principal              Interest
Company                          Type of Debt                         Amount                 Rate              Due Date
-------                          ------------                       ---------              --------            --------    
                                                                  (in millions)               (%)
Retirements:
------------
<C>                         <C>                                      <C>                     <C>                <C>        
AEP                         Senior Unsecured Notes                     $57                     5.25               2015       
AEP                         Senior Unsecured Notes                      10                     5.375              2010       
APCo                        First Mortgage Bonds                        21                     7.70               2004       
APCo                        First Mortgage Bonds                        45                     7.125              2024       
APCo                        Installment Purchase Contracts              40                     5.45               2019       
CSPCo                       First Mortgage Bonds                        11                     7.60               2024       
CSPCo                       Installment Purchase Contracts              49                     6.375              2020       
CSPCo                       Installment Purchase Contracts              44                     6.25               2020       
I&M                         First Mortgage Bonds                        30                     7.20               2024       
I&M                         First Mortgage Bonds                        25                     7.50               2024       
I&M                         Senior Unsecured Notes                     150                     6.875              2004       
OPCo                        Installment Purchase Contracts              50                     6.85               2022       
OPCo                        Notes Payable                                3                     6.27               2009       
OPCo                        Notes Payable                                4                     6.81               2008       
OPCo                        First Mortgage Bonds                        10                     7.30               2024       
OPCo                        Senior Unsecured Notes                     140                     7.375              2038       
OPCo                        Senior Unsecured Notes                     100                     6.75               2004       
OPCo                        Senior Unsecured Notes                      75                     7.00               2004       
PSO                         Notes Payable to Trust                      77                     8.00               2037       
PSO                         Installment Purchase Contracts               1                     5.90               2007       
PSO                         Installment Purchase Contracts              34                     4.875              2014       
SWEPCo                      Installment Purchase Contracts              12                     6.90               2004       
SWEPCo                      Installment Purchase Contracts              12                     6.00               2008       
SWEPCo                      Installment Purchase Contracts              17                     8.20               2011       
SWEPCo                      Installment Purchase Contracts              54                     7.60               2019       
SWEPCo                      First Mortgage Bonds                        80                     6.875              2025       
SWEPCo                      First Mortgage Bonds                        40                     7.75               2004       
SWEPCo                      Notes Payable                                5                     4.47               2011       
SWEPCo                      Notes Payable                                2                   Variable             2008       
TCC                         Notes Payable to Trust                     141                     8.00               2037       
TCC                         First Mortgage Bonds                         6                     6.625              2005       
TCC                         Securitization Bonds                        49                     3.54               2005       
TNC                         First Mortgage Bonds                        24                     6.125              2004       

Non-Registrant:
  AEP Subsidiaries          Notes Payable                               40                     6.73               2004       
  AEP Subsidiaries          Notes Payable and Other Debt               473                   Variable           2007-2026   
                                                                    -------
Total Retirements                                                   $1,931 (b)   

(b) Amount indicated on statement of cash flows of $1,898 million does not include $25 million related to retirement of debt of a 
discontinued operation, $5 million related to the reacquisition of TCC's notes payable to trust and $3 million related to the 
mark-to-market of risk management contracts.
</TABLE>


<TABLE>
<CAPTION>


                                                                     Principal              Interest
Company                          Type of Debt                          Amount                 Rate              Due Date
-------                          ------------                        ---------              --------            --------   
                                                                   (in millions)               (%)
Defeasance:
-----------
<C>                         <C>                                        <C>                    <C>                 <C>       
TCC                         First Mortgage Bonds                        $27                   7.25                2004      
TCC                         First Mortgage Bonds                         66                   6.625               2005      
TCC                         First Mortgage Bonds                         19                   7.125               2008      
                                                                       -----
Total Defeased                                                         $112  (c)    
                                                                       =====

(c)   Trust fund assets for defeasance of First Mortgage Bonds of $100 million are included in Other Cash Deposits and $22 million 
      are included in Other Non-current Assets in the Consolidated Balance Sheets at September 30, 2004. Trust fund assets are 
      restricted for exclusive use in funding the interest and principal due on the First Mortgage Bonds.
</TABLE>


<PAGE>










                             AEP GENERATING COMPANY















<PAGE>

                             AEP GENERATING COMPANY
            MANAGEMENT'S NARRATIVE FINANCIAL DISCUSSION AND ANALYSIS 
            --------------------------------------------------------

Results of Operations
---------------------

Operating revenues are derived from the sale of our share of Rockport Plant
energy and capacity to I&M and KPCo pursuant to FERC approved long-term unit
power agreements. The unit power agreements provide for a FERC approved rate of
return on common equity, a return on other capital (net of temporary cash
investments) and recovery of costs including operation and maintenance, fuel and
taxes.

Net Income increased $383 thousand for the third quarter of 2004 compared with
the third quarter of 2003 and increased $152 thousand for the nine months ended
September 30, 2004 compared with the nine months ended September 30, 2003. The
fluctuations in Net Income are a result of terms in the unit power agreements
which allow for the return on total capital of the Rockport Plant calculated and
adjusted monthly.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income increased $405 thousand for the third quarter of 2004 compared
with the third quarter of 2003. The largest variances related to:

 o  A $6 million increase in Operating Revenues as a result of increased 
    recoverable fuel expenses in accordance with the unit power agreements.
 o  A $5 million increase in Fuel for Electric  Generation  expenses.  
    This increase is primarily due to fewer outages during third quarter 2004 
    resulting in a 5% higher MWH output combined with increasing fuel prices.
 o  A $1 million increase in Taxes Other Than Income Taxes as a result of State
    of Indiana property tax re-appraisals. 
 o  A $1 million decrease in Maintenance expenses as a result of decreased 
    outages compared to the prior year period.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were (2.7)% and
(10.7)% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is primarily due to amortization of investment tax
credits, flow-through of book versus tax temporary differences, and state income
taxes. The increase in the effective tax rate is primarily due to higher pre-tax
income in 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income was down slightly over the prior year period. The largest
variances related to:

 o  An $8 million  decrease in Fuel for Electric Generation expenses.  This  
    decrease is primarily due to a 14% decrease in MWH generation as a result 
    of both planned and forced outages.
 o  A $4 million increase in Maintenance expenses as a result of increased 
    planned boiler inspections and forced repairs. 
 o  A $2 million decrease in Operating Revenues as a result of decreased 
    recoverable expenses in accordance with the unit power agreements. 
 o  A $1 million increase in Taxes Other Than Income Taxes as a result of 
    State of Indiana property tax re-appraisals.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were (8.9)%
and (14.1)% respectively. The difference in the effective income tax rate and
the federal statutory rate of 35% is primarily due to amortization of investment
tax credits, flow-through of book versus tax temporary differences, and state
income taxes. The increase in the effective tax rate is primarily due to higher
pre-tax income in 2004.

Off-balance Sheet Arrangements
------------------------------

In prior years, we entered into off-balance sheet arrangements. Our current
policy restricts the use of off-balance sheet financing entities or structures,
except for traditional operating lease arrangements. Our off-balance sheet
arrangement has not changed significantly from year-end 2003 and is comprised of
a sale and leaseback transaction entered into by AEGCo and I&M with an unrelated
unconsolidated trustee. For complete information on this off-balance sheet
arrangement see "Off-balance Sheet Arrangements" in "Management's Narrative
Financial Discussion and Analysis" section of our 2003 Annual Report.

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets and the impact of new accounting pronouncements.



<PAGE>

<TABLE>
<CAPTION>


                                                    AEP GENERATING COMPANY
                                                     STATEMENTS OF INCOME
                                  For the Three and Nine Months Ended September 30, 2004 and 2003
                                                         (Unaudited)

                                                                  Three Months Ended                       Nine Months Ended
                                                               ------------------------                -------------------------
                                                               2004                2003                2004                 2003
                                                               ----                ----                ----                 ----
                                                                                         (in thousands)            

<C>                                                           <C>                 <C>                 <C>                 <C>     
OPERATING REVENUES                                            $65,303             $59,008             $176,933            $179,004
                                                              --------            --------            ---------           ---------

             OPERATING EXPENSES
---------------------------------------
Fuel for Electric Generation                                   32,857              27,514               79,291              87,148 
Rent - Rockport Plant Unit 2                                   17,071              17,071               51,212              51,212 
Other Operation                                                 2,472               2,691                7,628               7,683 
Maintenance                                                     1,835               2,461               10,025               6,399 
Depreciation and Amortization                                   5,941               5,695               17,447              16,981 
Taxes Other Than Income Taxes                                   2,070               1,085                3,956               2,480 
Income Taxes                                                      843                 682                2,240               1,927
                                                              --------            --------            ---------           ---------
TOTAL                                                          63,089              57,199              171,799             173,830
                                                              --------            --------            ---------           ---------

OPERATING INCOME                                                2,214               1,809                5,134               5,174 

Nonoperating Income                                                -                    3                   43                  24 
Nonoperating Expenses                                              72                  44                  235                 286 
Nonoperating Income Tax Credits                                   905                 878                2,709               2,617 
Interest Charges                                                  643                 625                1,914               1,944
                                                              --------            --------            ---------           ---------

NET INCOME                                                     $2,404              $2,021               $5,737              $5,585
                                                              ========            ========            =========           =========
</TABLE>


<TABLE>
<CAPTION>


                                                    STATEMENTS OF RETAINED EARNINGS
                                    For the Three and Nine Months Ended September 30, 2004 and 2003
                                                              (Unaudited)

                                                                  Three Months Ended                       Nine Months Ended
                                                               ------------------------                -------------------------
                                                               2004                2003                2004                 2003
                                                               ----                ----                ----                 ----
                                                                                         (in thousands)            

<C>                                                           <C>                 <C>                  <C>                 <C>     
BALANCE AT BEGINNING OF PERIOD                                $22,251             $19,384              $21,441             $18,163 

Net Income                                                      2,404               2,021                5,737               5,585 

Cash Dividends Declared                                         1,262               1,172                3,785               3,515
                                                              --------            --------             --------            -------- 

BALANCE AT END OF PERIOD                                      $23,393             $20,233              $23,393             $20,233
                                                              ========            ========             ========            ========

The common stock of AEGCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                                        AEP GENERATING COMPANY
                                                            BALANCE SHEETS
                                                                ASSETS
                                               September 30, 2004 and December 31, 2003
                                                             (Unaudited)


                                                                                              2004                    2003
                                                                                              ----                    ----
                                                                                                     (in thousands)
<C>                                                                                          <C>                     <C>
                ELECTRIC UTILITY PLANT
--------------------------------------------------
Production                                                                                   $668,336                $645,251 
General                                                                                         3,826                   4,063 
Construction Work in Progress                                                                   5,348                  24,741
                                                                                             ---------               ---------
TOTAL                                                                                         677,510                 674,055 
Accumulated Depreciation                                                                      363,050                 351,062
                                                                                             ---------               ---------
TOTAL - NET                                                                                   314,460                 322,993
                                                                                             ---------               ---------

            OTHER PROPERTY AND INVESTMENTS
--------------------------------------------------
Non-Utility Property, Net                                                                         119                     119
                                                                                             ---------               ---------

                   CURRENT ASSETS
--------------------------------------------------
Accounts Receivable - Affiliated Companies                                                     22,161                  24,748 
Fuel                                                                                           18,837                  20,139 
Materials and Supplies                                                                          5,774                   5,419 
Prepayments                                                                                        11                       -
                                                                                             ---------               ---------
TOTAL                                                                                          46,783                  50,306
                                                                                             ---------               ---------

           DEFERRED DEBITS AND OTHER ASSETS
--------------------------------------------------
Regulatory Assets:
  Unamortized Loss on Reacquired Debt                                                           4,555                   4,733 
  Asset Retirement Obligations                                                                  1,069                     928 
Deferred Property Taxes                                                                         1,344                     502 
Other Deferred Charges                                                                            429                     464
                                                                                             ---------               ---------
TOTAL                                                                                           7,397                   6,627
                                                                                             ---------               ---------


TOTAL ASSETS                                                                                 $368,759                $380,045
                                                                                             =========               =========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                    AEP GENERATING COMPANY
                                                        BALANCE SHEETS
                                                 CAPITALIZATION AND LIABILITIES
                                           September 30, 2004 and December 31, 2003
                                                         (Unaudited)

                                                                                                     2004                2003
                                                                                                     ----                ----
                                                                                                         (in thousands)          
<C>                                                                                               <C>                 <C>  
                     CAPITALIZATION
------------------------------------------------------------
Common Shareholder's Equity:
   Common Stock - Par Value $1,000 per share:
     Authorized and Outstanding - 1,000 Shares                                                      $1,000              $1,000 
     Paid-in Capital                                                                                23,434              23,434 
     Retained Earnings                                                                              23,393              21,441
                                                                                                  ---------           --------- 
Total Common Shareholder's Equity                                                                   47,827              45,875 
Long-term Debt                                                                                      44,818              44,811
                                                                                                  ---------           --------- 
TOTAL                                                                                               92,645              90,686
                                                                                                  ---------           --------- 

                   CURRENT LIABILITIES
------------------------------------------------------------
Advances from Affiliates                                                                            15,497              36,892 
Accounts Payable:
   General                                                                                             543                 498 
   Affiliated Companies                                                                             12,991              15,911 
Taxes Accrued                                                                                       10,039               6,070 
Interest Accrued                                                                                       456                 911 
Obligations Under Capital Leases                                                                        62                  87 
Rent Accrued - Rockport Plant Unit 2                                                                23,427               4,963 
Other                                                                                                  108                   -
                                                                                                  ---------           --------- 
TOTAL                                                                                               63,123              65,332
                                                                                                  ---------           --------- 

           DEFERRED CREDITS AND OTHER LIABILITIES
------------------------------------------------------------
Deferred Income Taxes                                                                               23,843              24,329 
Regulatory Liabilities:
  Asset Removal Costs                                                                               25,414              27,822 
  Deferred Investment Tax Credits                                                                   47,087              49,589 
  SFAS 109 Regulatory Liability, Net                                                                14,003              15,505 
Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2                                        101,297             105,475 
Obligations Under Capital Leases                                                                       154                 182 
Asset Retirement Obligations                                                                         1,193               1,125
                                                                                                  ---------           --------- 
TOTAL                                                                                              212,991             224,027
                                                                                                  ---------           --------- 

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                              $368,759            $380,045
                                                                                                  =========           =========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                               AEP GENERATING COMPANY
                                              STATEMENTS OF CASH FLOWS
                                 For the Nine Months Ended September 30, 2004 and 2003
                                                    (Unaudited)

                                                                                              2004             2003     
                                                                                              ----             ----  
                                                                                                 (in thousands)             
<C>                                                                                         <C>              <C>
                  OPERATING ACTIVITIES
------------------------------------------------------------
Net Income                                                                                   $5,737           $5,585 
Adjustments to Reconcile Net Income to Net Cash Flows From  
 Operating Activities:
   Depreciation and Amortization                                                             17,447           16,981 
   Deferred Income Taxes                                                                     (1,987)          (3,268)
   Deferred Investment Tax Credits                                                           (2,502)          (2,503)
   Deferred Property Taxes                                                                     (842)            (795)
   Amortization of Deferred Gain on Sale and Leaseback -
     Rockport Plant Unit 2                                                                   (4,178)          (4,178)
Changes in Certain Assets and Liabilities:
   Accounts Receivable                                                                        2,587           (2,027)
   Fuel, Materials and Supplies                                                                 947            5,165 
   Accounts Payable, Net                                                                     (2,875)          (1,757)
   Taxes Accrued                                                                              3,969            2,033 
Rent Accrued - Rockport Plant Unit 2                                                         18,464           18,464 
Change in Other Assets                                                                        2,395            1,383 
Change in Other Liabilities                                                                  (2,734)            (558)
                                                                                            --------         -------- 
Net Cash Flows From Operating Activities                                                     36,428           34,525
                                                                                            --------         -------- 

                  INVESTING ACTIVITIES
------------------------------------------------------------
Construction Expenditures                                                                   (11,248)          (9,855)
                                                                                            --------         -------- 
Net Cash Flows Used For Investing Activities                                                (11,248)          (9,855)
                                                                                            --------         -------- 

                  FINANCING ACTIVITIES
------------------------------------------------------------
Change in Advances from Affiliates                                                          (21,395)         (21,155)
Dividends Paid                                                                               (3,785)          (3,515)
                                                                                            --------         -------- 
Net Cash Flows Used For Financing Activities                                                (25,180)         (24,670)
                                                                                            --------         -------- 
                                                                                       
Net Decrease in Cash and Cash Equivalents                                                         -                - 
Cash and Cash Equivalents at Beginning of Period                                                  -                -
                                                                                            --------         -------- 
Cash and Cash Equivalents at End of Period                                                       $-               $-
                                                                                            ========         ========

SUPPLEMENTAL DISCLOSURE:                               
Cash paid for interest net of capitalized amounts was $2,170,000 and $2,200,000 and for income taxes was $87,000 and $5,939,000 
in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>



                             AEP GENERATING COMPANY
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to AEGCo's financial statements are combined with the notes to
financial statements for other subsidiary registrants. Listed below are the
notes that apply to AEGCo.

                                                                Footnote
                                                                Reference
                                                                ---------

Significant Accounting Matters                                  Note 1

New Accounting Pronouncements                                   Note 2

Commitments and Contingencies                                   Note 5

Guarantees                                                      Note 6

Business Segments                                               Note 9

Financing Activities                                            Note 10




<PAGE>









                    AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY



<PAGE>



                    AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
                 ----------------------------------------------

Results of Operations
---------------------

Net Income decreased $122 million for 2004 year-to-date and $23 million for the
third quarter. The three major factors driving the year-to-date decline are
decreased revenues associated with establishing regulatory assets in Texas and
the provision for refunds of fuel charges, offset in part by the cessation of
deprecation on plants held for sale. The major factors driving the decline for
the quarter are decreased revenues associated with establishing regulatory
assets in Texas offset in part by the cessation of deprecation on plants held
for sale and increased delivery revenues. The sale of several of our generation
plants in July 2004 affected numerous line items on the income statement.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the three months ended September 30, 2004 decreased $17
million from the prior year period primarily due to:

 o  A $61 million decrease in revenues associated with establishing regulatory
    assets in Texas in 2003 (see "Texas  Restructuring" in Note 4). These 
    revenues did not continue after 2003.
 o  A $60 million decrease in Reliability Must Run (RMR) revenues from ERCOT.  
    This amount includes both a fixed cost component decrease of $7 million and
    a fuel recovery decrease of $53 million primarily due to the sale of 
    certain generation plants.
 o  A $22 million decrease in system sales, including those to Retail Electric 
    Providers (REP), primarily due to lower KWH sales of 32%. The lower KWH 
    sales are due to customer choice in Texas and the sale of certain 
    generation plants.
 o  A $3 million decrease in margins resulting from risk management activities.
 o  A $3 million increase in Other Operation expenses primarily due to a $5 
    million increase of ERCOT-related transmission expenses and affiliated 
    ancillary services and $3 million in customer-related expenses. These 
    increases were partially offset by decreased production expenses primarily 
    due to the sale of certain generation plants.

The decrease in Operating Income for the third quarter of 2004 was partially
offset by:

 o  A $91 million net decrease in fuel and purchased power expenses. KWHs 
    purchased decreased 9% while the per unit cost increased 18%. Although 
    the KWHs generated decreased 57%, generating costs decreased 91% 
    attributable mostly to the sale of certain generation units.
 o  A $13 million decrease in Depreciation and Amortization expenses primarily 
    due to the cessation of depreciation on plants classified as held for sale 
    (see Note 7 "Dispositions and Assets Held for Sale").
 o  A $9 million increase in retail delivery revenues primarily driven by an
    increase in cooling degree-days of 5%. 
 o  A $7 million decrease in Income Taxes. See Income Taxes section below for 
    further discussion. 
 o  A $4 million decrease in Maintenance expenses primarily due to the sale of 
    certain generation plants.
 o  A $3 million  increase in other electric  revenue  primarily due to 
    Qualified Scheduling  Entity (QSE) fees, rent from electric property and 
    miscellaneous service revenue.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $18 million primarily as a result of risk
management activities.

Interest Charges decreased $4 million primarily due to the defeasance of $112
million of First Mortgage Bonds, the deferral of the interest cost as a
regulatory asset related to the cost of the sale of certain generation assets,
redemption of the 8% Notes Payable to Trust and other financing activities.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 28.0% and
32.0% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to lower pre-tax income in 2004 and consolidated tax
savings from parent.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 decreased $126
million from the prior year period primarily due to:

 o  A $188 million decrease in system sales, including those to REPs, primarily
    due to lower KWH sales of 33%. The decrease in KWH sales is due to customer
    choice in Texas and the sale of certain generation plants. There was also 
    a small decrease in the overall average price per KWH.
 o  A $169 million decrease in revenues associated with establishing regulatory
    assets in Texas in 2003 (see "Texas Restructuring" in Note 4). 
 o  A $69 million decrease in RMR revenues from ERCOT which includes both a 
    fuel recovery decrease of $61 million and a fixed cost component decrease 
    of $8 million.
 o  A $22 million increase in provisions for rate refunds due to fuel 
    reconciliation issues (see "TCC Fuel Reconciliation" in Note 3).
 o  A $20 million increase in Other Operation expenses primarily due to 
    $13 million increase of ERCOT-related transmission expense and affiliated 
    ancillary services; $1 million increase in production expenses including 
    emission allowances; $3 million increase in customer related expenses; and 
    a $3 million increase in administrative and support expenses.
 o  An $18 million decrease in margins from risk management activities.
 o  A $13 million decrease in retail delivery revenues driven by a decrease in 
    KWH of 1% due in large part to a decrease in heating and cooling degree-days
    of 7%.
 o  A $6 million decrease in QSE fees primarily due to one REP not using TCC as
    their QSE in 2004. 
 o  A $3 million decrease in revenues from ERCOT for various services including 
    balancing energy.
 o  A $2 million increase in Taxes Other Than Income Taxes primarily due to an 
    increase of $3 million related to property taxes attributable to changes 
    in property values, property tax rates, net fixed asset decreases - which 
    includes the sale of certain generation plants, accrual update adjustments 
    and timing of prior period adjustments offset in part by lower franchise 
    taxes of $1 million.

The decrease in Operating Income was partially offset by:

 o  A $254 million net decrease in fuel and purchased power expenses. KWHs 
    purchased decreased 59% while the per unit cost increased 17%. Per unit 
    generation costs decreased 25% and KWHs generated decreased 11% due to the 
    sale of certain generation plants.
 o  A $68 million decrease in Income Taxes. See Income Taxes section below for
    further discussion.
 o  A $55 million decrease in Depreciation and Amortization expenses primarily 
    due to the cessation of depreciation on plants classified as held for sale 
    (see Note 7 "Dispositions and Assets Held for Sale").
 o  A $13 million  increase in  transmission  revenue  primarily due to 
    affiliated  OATT  (including a $7.6 million  true-up for prior years 
    recorded in 2004) and ancillary services.
 o  A $3 million decrease in Maintenance expenses primarily due to the sale of 
    certain generation plants.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $12 million primarily as a result of risk
management activities of $9 million and $6 million in lower non-utility revenues
associated with energy-related construction projects for third parties offset in
part by a $2 million increase attributed to higher allowance for funds used
during construction and interest income.

Nonoperating Expenses decreased $3 million primarily due to lower non-utility
expenses associated with energy-related construction projects for third parties.

Interest Charges decreased $6 million primarily due to the defeasance of $112
million of First Mortgage Bonds, the deferral of the interest cost as a
regulatory asset related to the cost of the sale of generation assets, the
redemption of the 8% Notes Payable to Trust and other financing activities.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 24.3%
and 33.6% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to lower pre-tax income in 2004 and consolidated tax
savings from parent.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Our current ratings are
as follows:

                                         Moody's       S&P         Fitch
                                         -------       ---         -----
      First Mortgage Bonds               Baa1          BBB         A
      Senior Unsecured Debt              Baa2          BBB         A-

Cash Flow
---------

Cash flows for the nine months ended September 30, 2004 and 2003 were as
follows:

                                                          2004           2003
                                                          ----           ----
                                                             (in thousands)
 Cash and cash equivalents at beginning of period          $760           $808
                                                       ---------      ---------
 Cash flow from (used for):
   Operating activities                                 193,107        239,370
   Investing activities                                 258,422        (49,653)
   Financing activities                                (450,529)      (187,220)
                                                       ---------      ---------
 Net increase in cash and cash equivalents                1,000          2,497
                                                       ---------      ---------
 Cash and cash equivalents at end of period              $1,760         $3,305
                                                       =========      =========

Operating Activities
--------------------

Our cash flows from operating activities were $193 million for the first nine
months of 2004. We produced income of $72 million during the period including
noncash expense items of $93 million for depreciation, amortization and $(121)
million for deferred income taxes. The other changes in assets and liabilities
represent items that had a current period cash flow impact, such as changes in
working capital, as well as items that represent future rights or obligations to
receive or pay cash, such as regulatory assets and liabilities. The current
period activity in these asset and liability accounts relates to a number of
items; the most significant are an increase in the balance of taxes accrued of
$147 million and a decrease in interest accrued of $20 million.

Investing Activities
--------------------

Cash Flows From Investing Activities were $258 million in 2004 primarily due to
proceeds from the sale of several of our generation plants offset in part by $72
million in construction expenditures and $118 million in cash deposits for
future long-term debt retirement. For the remainder of 2004, we expect our
Construction Expenditures to be approximately $63 million.

Financing Activities
--------------------

Cash Flows Used for Financing Activities of $451 million in 2004 were due to
retirements of long-term debt, payment of dividends and increased Advances to
Affiliates.

Financing Activity
------------------

Long-term debt issuances, retirements and defeasance during the first nine
months of 2004 were:

Issuances
---------

    None

Retirements
-----------
                                    Principal        Interest           Due
        Type of Debt                 Amount            Rate             Date  
        ------------                ---------        --------           ----
                                  (in thousands)        (%)

    First Mortgage Bonds            $ 6,195            6.625            2005
    Securitization Bonds             48,551            3.540            2005
    Notes Payable to Trust          140,889            8.00             2037

Defeasance
----------
                                    Principal        Interest           Due
        Type of Debt                 Amount            Rate             Date  
        ------------                ---------        --------           ----
                                  (in thousands)        (%)

    First Mortgage Bonds            $27,400            7.25             2004
    First Mortgage Bonds             65,763            6.625            2005
    First Mortgage Bonds             18,581            7.125            2008

Liquidity
---------

We have solid investment grade ratings which provide us ready access to capital
markets in order to refinance long-term debt maturities. In addition, we 
participate in the AEP Utility Money Pool, which provides access to the 
liquidity of the AEP System. Finally, we expect to receive asset sale proceeds 
of approximately $376 million in the first half of 2005. These proceeds may be 
used to reduce current portions of long-term debt outstanding.

Significant Factors
-------------------

We made progress on our planned divestiture of all of our generation assets by
(1) announcing in June 2004 and September 2004 that we had signed agreements to
sell our 7.81% share of the Oklaunion Power Station to two unaffiliated
co-owners of the plant for approximately $43 million, subject to closing
adjustments, (2) announcing in September 2004 that we had signed agreements to
sell our 25.2% share of the South Texas Project nuclear plant to two
unaffiliated co-owners of the plant for approximately $333 million, subject to
closing adjustments, and (3) in July 2004 closing on the sale of our remaining
generation assets, including eight natural gas plants, one coal-fired plant and
one hydro plant for approximately $425 million, net of adjustments. We expect
the sales of Oklaunion and South Texas Project to be completed in the first half
of 2005. Nevertheless, there could be potential delays in receiving necessary
regulatory approvals and clearances, which could delay the closings. We will
file with the Public Utility Commission of Texas to recover net stranded costs
associated with the sales pursuant to Texas restructuring legislation. Stranded
costs will be calculated on the basis of all generation assets not individual
plants.

Nuclear Decommissioning
-----------------------

As discussed in the 2003 Annual Report, decommissioning costs are accrued over
the service life of STP. The licenses to operate the two nuclear units at STP
expire in 2027 and 2028. TCC had estimated its portion of the costs of
decommissioning STP to be $289 million in 1999 nondiscounted dollars. TCC is
accruing and recovering these decommissioning costs through rates based on the
service life of STP at a rate of approximately $8 million per year.

In May 2004, an updated decommissioning study was completed for STP. The study
estimates TCC's share of the decommissioning costs of STP to be $344 million in
nondiscounted 2004 dollars. We are currently analyzing the STP study to
determine the effect on our asset retirement obligations (ARO) and will make any
appropriate adjustments to the ARO liability and related regulatory asset in the
fourth quarter 2004. As discussed in Note 7, TCC is in the process of selling
its ownership interest in STP to a non-affiliate, and upon completion of the
sale it is anticipated that TCC will no longer be obligated for nuclear
decommissioning liabilities associated with STP.

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect.

MTM Risk Management Contract Net Liabilities
--------------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.


<TABLE>
<CAPTION>

                                          MTM Risk Management Contract Net Liabilities
                                             Nine Months Ended September 30, 2004
                                                         (in thousands)

<C>                                                                                                            <C>       
Total MTM Risk Management Contract Net Assets at December 31, 2003                                             $11,942  
(Gain) Loss from Contracts Realized/Settled During the Period (a)                                               (4,555) 
Fair Value of New Contracts When Entered Into During the Period (b)                                                  -  
Net Option Premiums Paid/(Received) (c)                                                                            (98) 
Change in Fair Value Due to Valuation Methodology Changes (d)                                                      110  
Changes in Fair Value of Risk Management Contracts (e)                                                             552  
Changes in Fair Value of Risk Management Contracts Allocated to Regulated Jurisdictions (f)                          -     
                                                                                                               --------
Total MTM Risk Management Contract Net Assets                                                                    7,951  
Net Cash Flow Hedge Contracts (g)                                                                              (10,832)
                                                                                                               --------
Total MTM Risk Management Contract Net Liabilities at September 30, 2004                                       $(2,881)
                                                                                                               ========

</TABLE>


(a) "(Gain) Loss from Contracts Realized/Settled During the Period"
    includes realized risk management contracts and related derivatives
    that settled during 2004 that were entered into prior to 2004.
(b) The "Fair Value of New Contracts When Entered Into During the
    Period" represents the fair value of long- term contracts entered
    into with customers during 2004. The fair value is calculated as of
    the execution of the contract. Most of the fair value comes from
    longer term fixed price contracts with customers that seek to limit
    their risk against fluctuating energy prices. The contract prices
    are valued against market curves associated with the delivery
    location.
(c) "Net Option Premiums Paid/(Received)" reflects the net option
    premiums paid/(received) as they relate to unexercised and
    unexpired option contracts that were entered into in 2004.
(d) "Change in Fair Value Due to Valuation Methodology Changes"
    represents the impact of AEP changing methodology in regards to
    credit reserves on forward contracts.
(e) "Changes in Fair Value of Risk Management Contracts" represents the
    fair value change in the risk management portfolio due to market
    fluctuations during the current period. Market fluctuations are
    attributable to various factors such as supply/demand, weather,
    etc.
(f) "Changes in Fair Value of Risk Management Contracts Allocated to
    Regulated Jurisdictions" relates to the net gains (losses) of those
    contracts that are not reflected in the Statements of Income. These
    net gains (losses) are recorded as regulatory liabilities/assets
    for those subsidiaries that operate in regulated jurisdictions.
(g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
    Accumulated Other Comprehensive Income (Loss).

               Reconciliation of MTM Risk Management Contracts to
                           Consolidated Balance Sheets
                          As of September 30, 2004

                                    MTM Risk                   
                                   Management       Cash Flow
                                 Contracts (a)       Hedges    Consolidated (b)
                                 -------------      ---------  ----------------
                                                (in thousands)
Current Assets                      $17,277             $193        $17,470 
Non Current Assets                    8,373               59          8,432
                                    --------        ---------       --------
Total MTM Derivative   
 Contract Assets                     25,650              252         25,902
                                    --------        ---------       --------

Current Liabilities                 (13,774)         (10,684)       (24,458)
Non Current Liabilities              (3,925)            (400)        (4,325)
                                    --------        ---------       --------
Total MTM Derivative  
 Contract Liabilities               (17,699)         (11,084)       (28,783)
                                    --------        ---------       --------

Total MTM Derivative Contract 
 Net Assets (Liabilities)            $7,951         $(10,832)       $(2,881)
                                    ========        =========       ========
(a) Does not include Cash Flow Hedges.
(b) Represents amount of total MTM derivative contracts recorded
    within Risk Management Assets, Long-term Risk Management Assets,
    Risk Management Liabilities and Long-term Risk Management
    Liabilities on our Consolidated Balance Sheets.

Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.
                   

<TABLE>
<CAPTION>


                                                Maturity and Source of Fair Value of MTM
                                                  Risk Management Contract Net Assets
                                           Fair Value of Contracts as of September 30, 2004

                                                Remainder                                                   After   
                                                  2004          2005       2006         2007       2008    2008 (c)    Total (d)
                                                ---------       ----       ----         ----       ----    --------    ---------
                                                                                   (in thousands)                           
<C>                                             <C>           <C>          <C>          <C>        <C>       <C>        <C>
Prices Actively Quoted - Exchange
 Traded Contracts                                 $618        $(1,849)       $8         $585         $-          $-      $(638)
Prices Provided by Other External 
  Sources - OTC Broker Quotes (a)               (2,381)         4,313       385            -          -           -      2,317 
Prices Based on Models and Other 
 Valuation Methods (b)                           2,496            891       186          (49)       672       2,076      6,272
                                                -------       --------     -----        -----      -----     -------    -------

Total                                             $733         $3,355      $579         $536       $672      $2,076     $7,951
                                                =======       ========     =====        =====      =====     =======    =======

</TABLE>


(a) "Prices Provided by Other External Sources - OTC Broker Quotes" reflects 
    information obtained from over-the- counter brokers, industry services, 
    or multiple-party on-line platforms. 
(b) "Prices Based on Models and Other Valuation Methods" is in absence of 
    pricing information from external sources. Modeled information is derived 
    using valuation models developed by the reporting entity, reflecting when
    appropriate, option pricing theory, discounted cash flow concepts, 
    valuation adjustments, etc. and may require projection of prices for 
    underlying commodities beyond the period that prices are available from 
    third-party sources. In addition, where external pricing information or
    market liquidity are limited, such valuations are classified as modeled.
    The determination of the point at which a market is no longer liquid for
    placing it in the modeled category varies by market.
(c) There is mark-to-market value in excess of 10 percent of our total
    mark-to-market value in individual periods beyond 2008, of which $813
    thousand of this mark-to-market value is in 2009.
(d) Amounts exclude Cash Flow Hedges.

Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.
                                           
          Total Accumulated Other Comprehensive Income (Loss) Activity
                      Nine Months Ended September 30, 2004

                                                              Power
                                                              -----
                                                          (in thousands)
        Beginning Balance December 31, 2003                   $(1,828)
        Changes in Fair Value (a)                              (6,134)
        Reclassifications from AOCI to Net
          Income (b)                                            1,004
                                                              --------
        Ending Balance September 30, 2004                     $(6,958)
                                                              ========

(a) "Changes in Fair Value" shows changes in the fair value of derivatives
    designated as hedging instruments in cash flow hedges during the
    reporting period not yet reclassified into net income, pending the
    hedged item's affecting net income. Amounts are reported net of related
    income taxes.
(b) "Reclassifications from AOCI to Net Income" represents gains or losses
    from derivatives used as hedging instruments in cash flow hedges that
    were reclassified into net income during the reporting period. Amounts
    are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $6,736 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Management Contracts
----------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

          Nine Months Ended                    Twelve Months Ended
         September 30, 2004                     December 31, 2003            
  ---------------------------             ---------------------------
           (in thousands)                        (in thousands)
  End    High   Average   Low              End   High   Average   Low
  ---    ----   -------   ---              ---   ----   -------   ---
  $86    $479    $223     $78             $189   $733    $307     $73

VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$131 million and $206 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>



                                               AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                                                  CONSOLIDATED STATEMENTS OF INCOME
                                  For the Three and Nine Months Ended September 30, 2004 and 2003
                                                             (Unaudited)

                                                                           Three Months Ended                Nine Months Ended
                                                                         ----------------------             --------------------
                                                                           2004            2003             2004            2003
                                                                           ----            ----             ----            ----
                                                                                              (in thousands)
<C>                                                                     <C>              <C>              <C>           <C>
               OPERATING REVENUES
----------------------------------------------------
Electric Generation, Transmission and Distribution                      $347,013         $443,578         $872,835      $1,264,757  
Sales to AEP Affiliates                                                    7,596           41,551           38,622         131,176
                                                                        ---------        ---------        ---------     -----------
TOTAL                                                                    354,609          485,129          911,457       1,395,933
                                                                        ---------        ---------        ---------     -----------

               OPERATING EXPENSES
----------------------------------------------------
Fuel for Electric Generation                                               6,967           24,475           50,879          73,244  
Fuel from Affiliates for Electric Generation                               1,707           72,776          101,883         155,976  
Purchased Electricity for Resale                                         114,371          116,562          140,925         305,338  
Purchased Electricity from AEP Affiliates                                     54              273            6,065          19,045  
Other Operation                                                           74,780           72,185          228,198         207,863  
Maintenance                                                               12,215           16,657           51,328          54,567  
Depreciation and Amortization                                             34,884           48,158           92,860         148,105  
Taxes Other Than Income Taxes                                             23,814           24,747           69,028          67,509  
Income Taxes                                                              18,027           24,794           23,645          91,171
                                                                        ---------        ---------        ---------     -----------
TOTAL                                                                    286,819          400,627          764,811       1,122,818
                                                                        ---------        ---------        ---------     -----------

OPERATING INCOME                                                          67,790           84,502          146,646         273,115  

Nonoperating Income                                                        6,783           25,006           30,946          43,069  
Nonoperating Expenses                                                      3,628            3,647           11,384          14,479  
Nonoperating Income Tax Expense (Credit)                                  (1,336)           6,319             (476)          7,117  
Interest Charges                                                          29,269           33,321           94,609         100,343
                                                                        ---------        ---------        ---------     -----------

Income Before Cumulative Effect of Accounting Change                      43,012           66,221           72,075         194,245
  
Cumulative Effect of Accounting Change (Net of Tax)                            -                -                -             122
                                                                        ---------        ---------        ---------     -----------

NET INCOME                                                                43,012           66,221           72,075         194,367  

Preferred Stock Dividend Requirements                                         60               60              181             181
                                                                        ---------        ---------        ---------     -----------

EARNINGS APPLICABLE TO COMMON STOCK                                      $42,952          $66,161          $71,894        $194,186
                                                                        =========        =========        =========     ===========

The common stock of TCC is owned by a wholly-owned subsidiary of AEP.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                             AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                               EQUITY AND COMPREHENSIVE INCOME
                                      For the Nine Months Ended September 30, 2004 and 2003
                                                      (in thousands)
                                                       (Unaudited)

                                                                                                     
                                                                                                Accumulated Other
                                                  Common          Paid-in        Retained         Comprehensive 
                                                   Stock          Capital        Earnings         Income (Loss)        Total
                                                  ------          -------        --------       -----------------      -----
                                                                                               
<C>                                                 <C>           <C>             <C>                <C>           <C>             
DECEMBER 31, 2002                                   $55,292       $132,606          $986,396         $(73,160)     $1,101,134 

Common Stock Dividends                                                               (90,601)                         (90,601)
Preferred Stock Dividends                                                               (181)                            (181)
                                                                                                                   -----------
TOTAL                                                                                                               1,010,352
                                                                                                                   -----------

       COMPREHENSIVE INCOME
--------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                       337             337 
NET INCOME                                                                           194,367                          194,367
                                                                                                                   -----------
TOTAL COMPREHENSIVE INCOME                                                                                            194,704
                                                    --------      ---------       -----------        ---------     -----------

SEPTEMBER 30, 2003                                  $55,292       $132,606        $1,089,981         $(72,823)     $1,205,056
                                                    ========      =========       ===========        =========     ===========


DECEMBER 31, 2003                                   $55,292       $132,606        $1,083,023         $(61,872)     $1,209,049 

Common Stock Dividends                                                              (148,000)                        (148,000)
Preferred Stock Dividends                                                               (181)                            (181)
                                                                                                                   -----------
TOTAL                                                                                                               1,060,868
                                                                                                                   -----------

       COMPREHENSIVE INCOME
--------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                    (5,130)         (5,130)
   Minimum Pension Liability                                                                           (3,471)         (3,471)
NET INCOME                                                                            72,075                           72,075
                                                                                                                   -----------
TOTAL COMPREHENSIVE INCOME                                                                                             63,474
                                                    --------      ---------       -----------        ---------     -----------
SEPTEMBER 30, 2004                                  $55,292       $132,606        $1,006,917         $(70,473)     $1,124,342
                                                    ========      =========       ===========        =========     ===========

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                           AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                                                CONSOLIDATED BALANCE SHEETS
                                                          ASSETS
                                           September 30, 2004 and December 31, 2003
                                                        (Unaudited)

                                                                                                  2004                   2003
                                                                                                  ----                   ----
                                                                                                          (in thousands)    
<C>                                                                                             <C>                    <C>  
             ELECTRIC UTILITY PLANT
----------------------------------------------
Production                                                                                              $-                     $- 
Transmission                                                                                       782,006                767,970 
Distribution                                                                                     1,420,683              1,376,761 
General                                                                                            231,533                221,354 
Construction Work in Progress                                                                       42,098                 58,953
                                                                                                -----------            -----------
TOTAL                                                                                            2,476,320              2,425,038 
Accumulated Depreciation and Amortization
                                                                                                   724,408                695,359
                                                                                                -----------            -----------
TOTAL - NET
                                                                                                 1,751,912              1,729,679
                                                                                                -----------            -----------

        OTHER PROPERTY AND INVESTMENTS
----------------------------------------------
Non-Utility Property, Net                                                                            1,584                  1,302 
Bond Defeasance Funds                                                                               21,945                      - 
Other Investments                                                                                        -                  4,639
                                                                                                -----------            -----------
TOTAL                                                                                               23,529                  5,941
                                                                                                -----------            -----------

               CURRENT ASSETS
----------------------------------------------
Cash and Cash Equivalents                                                                            1,760                    760 
Other Cash Deposits                                                                                139,254                 65,122 
Advances to Affiliates                                                                             172,051                 60,699 
Accounts Receivable:
   Customers                                                                                       140,184                146,630 
   Affiliated Companies                                                                             74,742                 78,484 
   Accrued Unbilled Revenues                                                                        24,457                 23,077 
   Allowance for Uncollectible Accounts                                                             (3,406)                (1,710)
Materials and Supplies                                                                              12,557                 11,708 
Risk Management Assets                                                                              17,470                 22,051 
Margin Deposits                                                                                      1,142                  3,230 
Prepayments and Other Current Assets                                                                 5,176                  6,770
                                                                                                -----------            -----------
TOTAL                                                                                              585,387                416,821
                                                                                                -----------            -----------

       DEFERRED DEBITS AND OTHER ASSETS
----------------------------------------------
Regulatory Assets:
  SFAS 109 Regulatory Asset, Net                                                                     3,516                  3,249 
  Wholesale Capacity Auction True-up                                                               480,000                480,000 
  Unamortized Loss on Reacquired Debt                                                               12,108                  9,086 
  Designated for Securitization                                                                  1,273,912              1,259,714 
  Deferred Debt - Restructuring                                                                     11,952                 12,015 
  Other                                                                                            108,877                127,488 
Securitized Transition Assets                                                                      656,556                689,399 
Long-term Risk Management Assets                                                                     8,432                  7,627 
Deferred Charges                                                                                    57,978                 55,554
                                                                                                -----------            -----------
TOTAL                                                                                            2,613,331              2,644,132
                                                                                                -----------            -----------

Assets Held for Sale - Texas Generation Plants                                                     608,759              1,028,134
                                                                                                -----------            -----------

TOTAL ASSETS                                                                                    $5,582,918             $5,824,707
                                                                                                ===========            ===========
See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>






<PAGE>

<TABLE>
<CAPTION>

 
                                               AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                   CAPITALIZATION AND LIABILITIES
                                               September 30, 2004 and December 31, 2003
                                                             (Unaudited)
                                                                                                      2004                2003
                                                                                                      ----                ----
                                                                                                           (in thousands)        

<C>                                                                                                <C>                 <C> 
                      CAPITALIZATION
----------------------------------------------------------------
Common Shareholder's Equity:
  Common Stock - $25 Par Value:
    Authorized - 12,000,000 Shares
    Outstanding - 2,211,678 Shares                                                                    $55,292             $55,292 
    Paid-in Capital                                                                                   132,606             132,606 
    Retained Earnings                                                                               1,006,917           1,083,023 
    Accumulated Other Comprehensive Income (Loss)                                                     (70,473)            (61,872)
                                                                                                   -----------         -----------
Total Common Shareholder's Equity                                                                   1,124,342           1,209,049 
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                          5,940               5,940
                                                                                                   -----------         -----------
Total Shareholders' Equity                                                                          1,130,282           1,214,989 
Long-term Debt                                                                                      1,541,450           2,053,974
                                                                                                   -----------         -----------
TOTAL                                                                                               2,671,732           3,268,963
                                                                                                   -----------         -----------

                       CURRENT LIABILITIES
----------------------------------------------------------------
Long-term Debt Due Within One Year                                                                    554,842             237,651 
Accounts Payable:
  General                                                                                              95,179              90,004 
  Affiliated Companies                                                                                 62,686              74,209 
Customer Deposits                                                                                       6,289               1,517 
Taxes Accrued                                                                                         214,269              67,018 
Interest Accrued                                                                                       23,161              43,196 
Risk Management Liabilities                                                                            24,458              17,888 
Obligation Under Capital Leases                                                                           417                 407 
Other                                                                                                  17,254              23,248
                                                                                                   -----------         -----------
TOTAL                                                                                                 998,555             555,138
                                                                                                   -----------         -----------

               DEFERRED CREDITS AND OTHER LIABILITIES
----------------------------------------------------------------
Deferred Income Taxes                                                                               1,126,802           1,244,912 
Long-term Risk Management Liabilities                                                                   4,325               2,660 
Regulatory Liabilities:
  Asset Removal Costs                                                                                 102,996              95,415 
  Deferred Investment Tax Credits                                                                     108,809             112,479 
  Over Recovery of Fuel Costs                                                                          69,026              69,026 
  Retail Clawback                                                                                      29,824              45,527 
  Other                                                                                                41,196              56,984 
Obligation Under Capital Leases                                                                           497                 636 
Deferred Credits and Other                                                                            196,857             144,833
                                                                                                   -----------         -----------
TOTAL                                                                                               1,680,332           1,772,472
                                                                                                   -----------         -----------

Liabilities Held for Sale - Texas Generation Plants                                                   232,299             228,134
                                                                                                   -----------         -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                               $5,582,918          $5,824,707
                                                                                                   ===========         ===========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>




                                                 AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
                                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           For the Nine Months Ended September 30, 2004 and 2003
                                                                (Unaudited)

                                                                                                   2004              2003        
                                                                                                   ----              ---- 
                                                                                                        (in thousands)         
<C>                                                                                              <C>                <C>  
                OPERATING ACTIVITIES
--------------------------------------------------------
Net Income                                                                                        $72,075           $194,367   
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
   Cumulative Effect of Accounting Change                                                               -               (122)  
   Depreciation and Amortization                                                                   92,860            148,105   
   Deferred Income Taxes                                                                         (121,111)            36,386   
   Deferred Investment Tax Credits                                                                 (3,670)            (3,905)  
   Deferred Property Taxes                                                                         (5,996)           (10,050)  
   Mark-to-Market of Risk Management Contracts                                                      3,991            (13,426)  
   Wholesale Capacity Auction True-up                                                                   -           (169,000)  
Changes in Certain Assets and Liabilities:
   Accounts Receivable, Net                                                                        10,504            (52,502)  
   Fuel, Materials and Supplies                                                                    (7,494)            17,060   
   Accounts Payable, Net                                                                           (6,348)            71,815   
   Taxes Accrued                                                                                  147,251             24,043   
   Interest Accrued                                                                               (20,035)           (26,738)  
Change in Other Assets                                                                             (2,572)            13,562   
Change in Other Liabilities                                                                        33,652              9,775
                                                                                                 ---------          ---------
Net Cash Flows From Operating Activities                                                          193,107            239,370
                                                                                                 ---------          ---------

                  INVESTING ACTIVITIES
--------------------------------------------------------
Construction Expenditures                                                                         (72,341)           (95,425)  
Proceeds from Sale of Property and Other Assets                                                   426,566                 -    
Change in Other Cash Deposits, Net                                                                (74,132)            45,165   
Change in Bond Defeasance Funds and Other                                                         (21,671)               607
                                                                                                 ---------          ---------
Net Cash Flows From (Used For) Investing Activities                                               258,422            (49,653)
                                                                                                 ---------          ---------

                  FINANCING ACTIVITIES
--------------------------------------------------------
Change in Short-term Debt - Affiliates                                                                  -           (650,000)  
Issuance of Long-term Debt                                                                              -            792,027   
Retirement of Long-term Debt                                                                     (190,996)           (85,427)  
Change in Advances to Affiliates                                                                 (111,352)          (153,038)  
Dividends Paid on Common Stock                                                                   (148,000)           (90,601)  
Dividends Paid on Cumulative Preferred Stock                                                         (181)              (181)
                                                                                                 ---------          ---------
Net Cash Flows Used For Financing Activities                                                     (450,529)          (187,220)
                                                                                                 ---------          ---------

Net Increase in Cash and Cash Equivalents                                                           1,000              2,497   
Cash and Cash Equivalents at Beginning of Period                                                      760                808
                                                                                                 ---------          ---------
Cash and Cash Equivalents at End of Period                                                         $1,760             $3,305
                                                                                                 =========          =========


SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $108,791,000 and $117,427,000 and for income taxes was 
$(1,058,000) and $42,901,000 in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>



                    AEP TEXAS CENTRAL COMPANY AND SUBSIDIARY
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to TCC's consolidated financial statements are combined with the notes
to financial statements for other subsidiary registrants. Listed below are the
notes that apply to TCC.

                                                                    Footnote
                                                                    Reference
                                                                    ---------

Significant Accounting Matters                                      Note 1

New Accounting Pronouncements                                       Note 2

Rate Matters                                                        Note 3

Customer Choice and Industry Restructuring                          Note 4

Commitments and Contingencies                                       Note 5

Guarantees                                                          Note 6

Dispositions and Assets Held for Sale                               Note 7

Benefit Plans                                                       Note 8

Business Segments                                                   Note 9

Financing Activities                                                Note 10





<PAGE>








                             AEP TEXAS NORTH COMPANY




<PAGE>


                            AEP TEXAS NORTH COMPANY
             MANAGEMENT'S NARRATIVE FINANCIAL DISCUSSION AND ANALYSIS
             --------------------------------------------------------

Results of Operations  
---------------------

Net Income decreased $7 million for 2004 year-to-date and $0.5 million for the
third quarter. The year-to-date decrease was primarily driven by lower margins
from risk management activities and a 2003 Cumulative Effect of Accounting
Changes.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the three months ended September 30, 2004 increased $4
million from the prior year period primarily due to:

 o  A $30 million increase in system sales, including those to Retail Electric 
    Providers (REP), primarily due to higher KWH sales of 53%.
 o  A $5 million increase in revenues from ERCOT for various services,  
    including balancing energy and prior year's adjustments made by ERCOT 
    recorded in 2003 and 2004.
 o  A $2 million increase in margins from risk management activities.
 o  A $2 million increase in transmission revenue primarily due to affiliated
    ancillary services.

The increase in Operating Income was partially offset by:

 o  A $29 million net increase in fuel and purchased power expenses. KWH 
    generation decreased 6% while the generation cost per KWH increased 20% 
    primarily due to increases in the price of natural gas. KWH's purchased 
    increased 137% and the average cost per KWH purchased increased 6%.
 o  A $2 million increase in Depreciation and Amortization expenses resulting 
    mainly from the prior year adjustment to the excess earnings accruals 
    related to Texas Legislation (see "Texas Restructuring" in Note 4).
 o  A $1 million decrease in Reliability Must Run (RMR) revenues from ERCOT 
    which includes a fuel recovery component and a fixed cost component. 
 o  A $1 million increase in Taxes Other Than Income Taxes primarily due to 
    higher accrued property taxes attributable to changes in property values, 
    property tax rates, net fixed asset increases, accrual update adjustments
    and timing of prior period adjustments.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $15 million as a result of a $9 million decrease
in non-utility revenues associated with energy-related construction projects for
third parties and a $6 million decrease related to risk management activities.

Nonoperating Expenses decreased $7 million primarily due to lower non-utility
expenses associated with energy-related construction projects for third parties.

Income Taxes
------------
The effective tax rates for the third quarter of 2004 and 2003 were 33.1% and
36.8% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to lower state income taxes and federal income tax return
adjustments.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 decreased $1
million from the prior year period primarily due to:

 o  A $14 million  decrease in system sales,  including  those to REPs,  
    primarily  due to both lower KWH sales of 2% due to customer  choice in 
    Texas and a small decrease in the overall average price per KWH.
 o  A $7 million decrease in margins from risk management activities.
 o  A $5 million decrease in other electric revenue primarily due to Qualified 
    Scheduling Entity fees and miscellaneous service revenue.
 o  A $3 million increase in Depreciation and Amortization expenses primarily 
    due to the prior year adjustment for excess earnings accruals related to 
    the Texas Legislation (see "Texas Restructuring" in Note 4).
 o  A $2 million decrease in retail delivery revenues due partly to a 16% 
    decline in heating and cooling degree-days.
 o  A $2 million increase in Taxes Other Than Income Taxes primarily due to 
    higher accrued property taxes attributable to changes in property values, 
    property tax rates, net fixed asset increases, accrual update adjustments 
    and timing of prior period adjustments.
 o  A $1 million increase in provision for rate refunds due to fuel 
    reconciliation issues in 2003 (see "TNC Fuel Reconciliation" in Note 3).

The decrease in Operating Income was partially offset by:

 o  A $7 million net decrease in fuel and purchased power expenses. KWH's 
    purchased increased 7% while the average cost per KWH purchased decreased 
    25%. KWH generation increased 1% while the generation cost per KWH 
    increased 12% primarily due to increases in the price of natural gas.
 o  A $10 million increase in transmission revenue primarily due to prior year 
    adjustments recorded in 2004 for affiliated OATT and ancillary services 
    resulting from revised data received from ERCOT for the years 2001-2003.
 o  A $5 million decrease in Income Taxes. See Income Taxes section below for
    further discussion.
 o  A $4 million increase in revenues from ERCOT for various services, 
    including  balancing energy and prior year adjustments made by ERCOT and 
    recorded in 2003 and 2004.
 o  A $3 million increase in RMR revenues from ERCOT which include a fuel  
    recovery increase of $6 million and a fixed cost decrease of $3 million. 
 o  A $3 million decrease in Other Operation expenses primarily due to 
    proceeds of $1 million for the sale of emission allowances; decreased 
    production expenses of approximately $1 million due to the elimination of 
    the RMR status for the San Angelo Power Station - Unit 1; decreased
    transmission related expenses of $2 million offset in part by increased 
    employee-related expenses.
 o  A $1 million increase in wholesale revenues due to higher fuel revenue 
    which is part of average fuel cost pricing.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $17 million primarily as a result of a $14 million
decrease in non-utility revenue associated with energy-related construction
projects for third parties and a decrease of $3 million related to risk
management activities.

Nonoperating Expenses decreased $13 million primarily due to lower non-utility
expenses associated with energy-related construction projects for third parties.

The Cumulative Effect of Accounting Changes is due to a one-time after-tax
impact of adopting SFAS 143, "Accounting for Asset Retirement Obligations,"
(SFAS 143) effective January 1, 2003.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 33.4%
and 37.0% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to lower state income taxes and federal income tax return
adjustments.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Our current ratings are
as follows:

                                         Moody's       S&P         Fitch
                                         -------       ---         -----
      First Mortgage Bonds               A3            BBB         A
      Senior Unsecured Debt              Baa1          BBB         A-

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

 Issuances
 ---------

              None.

 Retirements
 -----------                 
                                    Principal         Interest        Due
           Type of Debt              Amount             Rate          Date  
           ------------             ---------         --------        ----
                                 (in thousands)          (%)

       First Mortgage Bonds          $24,036            6.125         2004

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.
         
Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effects.

MTM Risk Management Contract Net Liabilities
--------------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.


<TABLE>
<CAPTION>

                             MTM Risk Management Contract Net Liabilities
                                Nine Months Ended September 30, 2004
                                          (in thousands)

<C>                                                                                                  <C>     
Total MTM Risk Management Contract Net Assets at December 31, 2003                                   $4,620  
(Gain) Loss from Contracts Realized/Settled During the Period (a)                                    (1,728) 
Fair Value of New Contracts When Entered Into During the Period (b)                                      -   
Net Option Premiums Paid/(Received) (c)                                                                 (43) 
Change in Fair Value Due to Valuation Methodology Changes (d)                                            45  
Changes in Fair Value of Risk Management Contracts (e)                                                  408  
Changes in Fair Value of Risk Management Contracts Allocated to Regulated Jurisdictions (f)               -  
                                                                                                     -------
Total MTM Risk Management Contract Net Assets                                                         3,302  
Net Cash Flow Hedge Contracts (g)                                                                    (3,770) 
                                                                                                     -------
Total MTM Risk Management Contract Net Liabilities at September 30, 2004                              $(468)   
                                                                                                     =======
</TABLE>


 (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
     includes realized risk management contracts and related derivatives
     that settled during 2004 that were entered into prior to 2004.
 (b) The "Fair Value of New Contracts When Entered Into During the
     Period" represents the fair value of long-term contracts entered
     into with customers during 2004. The fair value is calculated as of
     the execution of the contract. Most of the fair value comes from
     longer term fixed price contracts with customers that seek to limit
     their risk against fluctuating energy prices. The contract prices
     are valued against market curves associated with the delivery location.
 (c) "Net Option Premiums Paid/(Received)" reflects the net option
     premiums paid/(received) as they relate to unexercised and
     unexpired option contracts that were entered into in 2004.
 (d) "Change in Fair Value Due to Valuation Methodology Changes"
     represents the impact of AEP changing methodology in regards to
     credit reserves on forward contracts.
 (e) "Changes in Fair Value of Risk Management Contracts" represents the
     fair value change in the risk management portfolio due to market
     fluctuations during the current period. Market fluctuations are
     attributable to various factors such as supply/demand, weather,
     etc.
 (f) "Changes in Fair Value of Risk Management Contracts Allocated to
     Regulated Jurisdictions" relates to the net gains (losses) of those
     contracts that are not reflected in the Statements of Income. These
     net gains (losses) are recorded as regulatory liabilities/assets
     for those subsidiaries that operate in regulated jurisdictions.
 (g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in 
     Accumulated Other Comprehensive Income (Loss).



               Reconciliation of MTM Risk Management Contracts to
                                 Balance Sheets
                            As of September 30, 2004


                                MTM Risk   
                               Management       Cash Flow     
                              Contracts (a)       Hedges          Total (b)  
                              -------------     ---------         ---------     
                                              (in thousands)
Current Assets                   $7,221              $83           $7,304 
Non Current Assets                3,619               25            3,644
                                 -------         --------         --------
Total MTM Derivative 
 Contract Assets                 10,840              108           10,948
                                 -------         --------         --------

Current Liabilities              (5,842)          (3,705)          (9,547)
Non Current Liabilities          (1,696)            (173)          (1,869)
                                 -------         --------         --------
Total MTM Derivative 
 Contract Liabilities            (7,538)          (3,878)         (11,416)
                                 -------         --------         --------

Total MTM Derivative  
 Contract Net Assets 
 (Liabilities)                   $3,302          $(3,770)           $(468)
                                 =======         ========         ========

(a)   Does not include Cash Flow Hedges.
(b)   Represents amount of total MTM derivative contracts recorded
      within Risk Management Assets, Long-term Risk Management Assets,
      Risk Management Liabilities and Long-term Risk Management
      Liabilities on our Balance Sheets.

Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                                              Maturity and Source of Fair Value of MTM
                                                 Risk Management Contract Net Assets
                                         Fair Value of Contracts as of September 30, 2004

                                               Remainder                                                     After
                                                 2004           2005         2006        2007     2008      2008(c)     Total (d)
                                               ---------        ----         ----        ----     ----      -------     ---------
                                                                                    (in thousands)
<C>                                               <C>          <C>            <C>        <C>      <C>          <C>      <C>
Prices Actually Quoted - Exchange 
 Traded Contracts                                 $267          $(799)         $3        $253       $-          $-       $(276)  
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)                  (918)         1,864         166           -        -           -       1,112   
Prices Based on Models and Other
 Valuation Methods (b)                             835            385          80         (21)     290          897      2,466   
                                                  -----        -------        -----      -----    -----        -----    -------

Total                                             $184         $1,450         $249       $232     $290         $897     $3,302   
                                                  =====        =======        =====      =====    =====        =====    =======
</TABLE>



(a) "Prices Provided by Other External Sources - OTC Broker Quotes" reflects 
    information obtained from over-the-counter brokers, industry services, 
    or multiple-party on-line platforms. 
(b) "Prices Based on Models and Other  Valuation Methods" is in absence of 
    pricing information from external sources. Modeled information is derived 
    using valuation models developed by the reporting entity, reflecting when 
    appropriate, option pricing theory, discounted cash flow concepts, 
    valuation adjustments, etc. and may require projection of prices for 
    underlying commodities beyond the period that prices are available from 
    third-party sources. In addition, where external pricing information or 
    market liquidity are limited, such valuations are classified as modeled. 
    The determination of the point at which a market is no longer liquid for 
    placing it in the modeled category varies by market.
(c) There is mark-to-market value in excess of 10 percent of our total
    mark-to-market value in individual periods beyond 2008, of which $351
    thousand of this mark-to-market value is in 2009.
(d) Amounts exclude Cash Flow Hedges.

Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.

        Total Accumulated Other Comprehensive Income (Loss) Activity
                   Nine Months Ended September 30, 2004

                                                          Power
                                                          -----
                                                      (in thousands)

         Beginning Balance December 31, 2003              $(601)
         Changes in Fair Value (a)                       (2,140)
         Reclassifications from AOCI to Net
          Income (b)                                        320
                                                        --------
         Ending Balance September 30, 2004              $(2,421)
                                                        ========

(a) "Changes in Fair Value" shows changes in the fair value of derivatives
    designated as hedging instruments in cash flow hedges during the
    reporting period not yet reclassified into net income, pending the
    hedged item's affecting net income. Amounts are reported net of related
    income taxes.
(b) "Reclassifications from AOCI to Net Income" represents gains or losses
    from derivatives used as hedging instruments in cash flow hedges that
    were reclassified into net income during the reporting period. Amounts
    are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $2,326 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------
The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

       Nine Months Ended                             Twelve Months Ended
      September 30, 2004                               December 31, 2003 
----------------------------                    -----------------------------
        (in thousands)                                  (in thousands)
End    High   Average    Low                    End    High    Average    Low
---    ----   -------    ---                    ---    ----    -------    ---
$37    $207     $96      $34                    $76    $294     $123      $29


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$13 million and $33 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore, a near term change in interest rates should
not negatively affect our results of operation or financial position.



<PAGE>

<TABLE>
<CAPTION>


                                                     AEP TEXAS NORTH COMPANY
                                                       STATEMENTS OF INCOME
                                   For the Three and Nine Months Ended September 30, 2004 and 2003
                                                           (Unaudited)

                                                                      Three Months Ended                  Nine Months Ended
                                                                    ---------------------               ---------------------
                                                                    2004             2003               2004             2003
                                                                    ----             ----               ----             ----
                                                                                        (in thousands)

<C>                                                               <C>              <C>                <C>              <C> 
                  OPERATING REVENUES
--------------------------------------------------
Electric Generation, Transmission and Distribution                $139,905         $104,104           $317,585         $320,733 
Sales to AEP Affiliates                                             12,599           10,351             39,344           46,790
                                                                  ---------        ---------          ---------        ---------
TOTAL                                                              152,504          114,455            356,929          367,523
                                                                  ---------        ---------          ---------        ---------

                  OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                        11,357            9,457             29,518           29,196 
Fuel from Affiliates for Electric Generation                        15,497           14,390             39,263           31,392 
Purchased Electricity for Resale                                    51,517           22,933             92,822           74,434 
Purchased Electricity from AEP Affiliates                              309            2,486              4,385           38,280 
Other Operation                                                     23,213           23,394             63,150           66,378 
Maintenance                                                          4,544            4,552             15,177           14,705 
Depreciation and Amortization                                        9,448            7,132             28,994           26,387 
Taxes Other Than Income Taxes                                        6,476            5,281             16,873           14,746 
Income Taxes                                                         8,248            7,411             16,730           21,478
                                                                  ---------        ---------          ---------        ---------
TOTAL                                                              130,609           97,036            306,912          316,996
                                                                  ---------        ---------          ---------        ---------

OPERATING INCOME                                                    21,895           17,419             50,017           50,527 

Nonoperating Income                                                  8,637           23,572             38,025           54,877 
Nonoperating Expenses                                                8,230           15,211             31,128           43,892 
Nonoperating Income Tax Expense                                         83            2,707              2,186            3,188 
Interest Charges                                                     5,366            5,726             17,028           16,290
                                                                  ---------        ---------          ---------        ---------

Income Before Cumulative Effect of Accounting Changes               16,853           17,347             37,700           42,034 
Cumulative Effect of Accounting Changes (Net of Tax)                     -                -                  -            3,071
                                                                  ---------        ---------          ---------        ---------

NET INCOME                                                          16,853           17,347             37,700           45,105 

Preferred Stock Dividend Requirements                                   26               26                 78               78
                                                                  ---------        ---------          ---------        ---------

EARNINGS APPLICABLE TO COMMON STOCK                                $16,827          $17,321            $37,622          $45,027
                                                                  =========        =========          =========        =========

The common stock of TNC is owned by a wholly-owned subsidiary of AEP.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>



                                                        AEP TEXAS NORTH COMPANY
                                             STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                                    EQUITY AND COMPREHENSIVE INCOME
                                       For the Nine Months Ended September 30, 2004 and 2003
                                                           (in thousands)
                                                             (Unaudited)
                                                                                                     
                                                                                                     Accumulated Other  
                                                       Common          Paid-in        Retained         Comprehensive   
                                                       Stock           Capital        Earnings         Income (Loss)        Total
                                                       ------          -------        --------       -----------------      -----
                                                                                                 
<C>                                                  <C>               <C>             <C>                <C>             <C>  
DECEMBER 31, 2002                                    $137,214          $2,351          $71,942            $(30,763)       $180,744 

Common Stock Dividends                                                                  (4,970)                             (4,970)
Preferred Stock Dividends                                                                  (78)                                (78)
Capital Stock Gain                                                                           3                                   3
                                                                                                                          ---------
TOTAL                                                                                                                      175,699
                                                                                                                          ---------

           COMPREHENSIVE INCOME
----------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                            130             130 
   Minimum Pension Liability                                                                                    (7)             (7)
NET INCOME                                                                              45,105                              45,105
                                                                                                                          ---------
TOTAL COMPREHENSIVE INCOME                                                                                                  45,228
                                                     ---------         -------        ---------           ---------       ---------

SEPTEMBER 30, 2003                                   $137,214          $2,351         $112,002            $(30,640)       $220,927
                                                     =========         =======        =========           =========       =========


DECEMBER 31, 2003                                    $137,214          $2,351         $125,428            $(26,718)       $238,275 

Common Stock Dividends                                                                  (2,000)                             (2,000)
Preferred Stock Dividends                                                                  (78)                                (78)
                                                                                                                          ---------
TOTAL                                                                                                                      236,197
                                                                                                                          ---------

           COMPREHENSIVE INCOME
----------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                         (1,820)         (1,820)
NET INCOME                                                                              37,700                              37,700
                                                                                                                          ---------
TOTAL COMPREHENSIVE INCOME                                                                                                  35,880
                                                     ---------         -------        ---------           ---------       ---------

SEPTEMBER 30, 2004                                   $137,214          $2,351         $161,050            $(28,538)       $272,077
                                                     =========         =======        =========           =========       =========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


 
                                                  AEP TEXAS NORTH COMPANY
                                                      BALANCE SHEETS
                                                          ASSETS
                                           September 30, 2004 and December 31, 2003
                                                       (Unaudited)

                                                                                                2004                    2003
                                                                                                ----                    ----
                                                                                                       (in thousands)
<C>                                                                                          <C>                     <C>  
             ELECTRIC UTILITY PLANT
-------------------------------------------
Production                                                                                     $362,115                $360,463   
Transmission                                                                                    278,017                 268,695   
Distribution                                                                                    469,891                 456,278   
General                                                                                         120,781                 117,792   
Construction Work in Progress                                                                    25,669                  30,199
                                                                                             -----------             -----------
TOTAL                                                                                         1,256,473               1,233,427   
Accumulated Depreciation and Amortization                                                       479,764                 460,513
                                                                                             -----------             -----------
TOTAL - NET                                                                                     776,709                 772,914
                                                                                             -----------             -----------

         OTHER PROPERTY AND INVESTMENTS
-------------------------------------------
Non-Utility Property, Net                                                                         1,164                   1,286
                                                                                             -----------             -----------

                CURRENT ASSETS
-------------------------------------------
Cash and Cash Equivalents                                                                           146                       -   
Other Cash Deposits                                                                               2,597                   2,863   
Advances to Affiliates                                                                           54,495                  41,593   
Accounts Receivable:
  Customers                                                                                      69,684                  56,670   
  Affiliated Companies                                                                           27,961                  28,910   
  Accrued Unbilled Revenues                                                                       3,611                   4,871   
  Miscellaneous                                                                                     546                   3,411   
  Allowance for Uncollectible Accounts                                                             (770)                   (175)  
Fuel Inventory                                                                                    7,052                  10,925   
Materials and Supplies                                                                            8,298                   8,866   
Risk Management Assets                                                                            7,304                  10,340   
Margin Deposits                                                                                     494                   1,285   
Prepayments and Other                                                                             1,666                   1,834
                                                                                             -----------             -----------
TOTAL                                                                                           183,084                 171,393
                                                                                             -----------             -----------

       DEFERRED DEBITS AND OTHER ASSETS
-------------------------------------------
Regulatory Assets:
  Under Recovery of Fuel Costs                                                                   26,680                  26,680   
  Deferred Debt - Restructuring                                                                   6,214                   6,579   
  Unamortized Loss on Reacquired Debt                                                             2,489                   3,929   
  Other                                                                                           2,757                   3,332   
Long-term Risk Management Assets                                                                  3,644                   3,106   
Deferred Charges                                                                                 37,457                  20,290
                                                                                             -----------             -----------
TOTAL                                                                                            79,241                  63,916
                                                                                             -----------             -----------

TOTAL ASSETS                                                                                 $1,040,198              $1,009,509
                                                                                             ===========             ===========
See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                     AEP TEXAS NORTH COMPANY
                                                         BALANCE SHEETS
                                                 CAPITALIZATION AND LIABILITIES
                                             September 30, 2004 and December 31, 2003
                                                          (Unaudited)

                                                                                              2004                    2003
                                                                                              ----                    ----
                                                                                                      (in thousands)
<C>                                                                                       <C>                     <C>    
                       CAPITALIZATION
--------------------------------------------------------------
Common Shareholder's Equity:
   Common Stock - $25 Par Value:
     Authorized - 7,800,000 Shares
     Outstanding - 5,488,560 Shares                                                         $137,214                $137,214   
      Paid-in Capital                                                                          2,351                   2,351   
      Retained Earnings                                                                      161,050                 125,428   
      Accumulated Other Comprehensive Income (Loss)                                          (28,538)                (26,718)
                                                                                          -----------             -----------
Total Common Shareholder's Equity                                                            272,077                 238,275   
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                 2,357                   2,357   
                                                                                          -----------             -----------
Total Shareholders' Equity                                                                   274,434                 240,632   
Long-term Debt                                                                               314,333                 314,249   
                                                                                          -----------             -----------
TOTAL                                                                                        588,767                 554,881   
                                                                                          -----------             -----------
 
                      CURRENT LIABILITIES
--------------------------------------------------------------
Long-term Debt Due Within One Year                                                            18,469                  42,505   
Accounts Payable:
  General                                                                                     22,846                  28,190   
  Affiliated Companies                                                                        41,952                  40,601   
Customer Deposits                                                                              1,503                     161   
Taxes Accrued                                                                                 39,756                  22,877   
Interest Accrued                                                                               4,076                   6,038   
Risk Management Liabilities                                                                    9,547                   8,658   
Obligations Under Capital Leases                                                                 198                     203   
Other                                                                                          7,162                   9,419   
                                                                                          -----------             -----------
TOTAL                                                                                        145,509                 158,652   
                                                                                          -----------             -----------

             DEFERRED CREDITS AND OTHER LIABILITIES
--------------------------------------------------------------
Deferred Income Taxes                                                                        113,021                 113,019   
Long-term Risk Management Liabilities                                                          1,869                   1,094   
Regulatory Liabilities:                                                                                                        
  Asset Removal Costs                                                                         80,233                  76,740   
  Deferred Investment Tax Credits                                                             19,016                  19,990   
  Retail Clawback                                                                              6,837                  11,804   
  Excess Earnings                                                                             13,394                  14,262   
  SFAS 109 Regulatory Liability, Net                                                          12,431                  13,655   
  Other                                                                                        1,668                   1,826   
Obligations Under Capital Leases                                                                 260                     270   
Deferred Credits and Other                                                                    57,193                  43,316   
                                                                                          -----------             -----------
TOTAL                                                                                        305,922                 295,976   
                                                                                          -----------             -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                      $1,040,198              $1,009,509   
                                                                                          ===========             =========== 
See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                              AEP TEXAS NORTH COMPANY
                                                             STATEMENTS OF CASH FLOWS
                                               For the Nine Months Ended September 30, 2004 and 2003
                                                                     (Unaudited)

                                                                                                     2004                2003
                                                                                                     ----                ----
                                                                                                           (in thousands)
<C>                                                                                                 <C>                 <C>   
               OPERATING ACTIVITIES
-----------------------------------------------------
Net Income                                                                                          $37,700             $45,105 
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
   Cumulative Effect of Accounting Changes                                                                -              (3,071)
   Depreciation and Amortization                                                                     28,994              26,387 
   Deferred Income Taxes                                                                             (1,980)                231 
   Deferred Investment Tax Credits                                                                     (974)             (1,140)
   Deferred Property Taxes                                                                           (4,023)             (3,323)
   Mark-to-Market of Risk Management Contracts                                                        1,318              (4,786)
Changes in Certain Assets and Liabilities:
   Accounts Receivable, Net                                                                          (7,345)             10,804 
   Fuel, Materials and Supplies                                                                       4,441               2,658 
   Accounts Payable, Net                                                                             (3,993)            (40,548)
   Taxes Accrued                                                                                     16,879               8,072 
Change in Other Assets                                                                              (15,653)            (11,412)
Change in Other Liabilities                                                                          10,350               8,172
                                                                                                    --------            --------
Net Cash Flows From Operating Activities                                                             65,714              37,149
                                                                                                    --------            --------

               INVESTING ACTIVITIES
-----------------------------------------------------
Construction Expenditures                                                                           (27,328)            (33,136)
Change in Other Cash Deposits, Net                                                                      266              (1,442)
Other                                                                                                   510                 595
                                                                                                    --------            --------
Net Cash Flows Used For Investing Activities                                                        (26,552)            (33,983)
                                                                                                    --------            --------

                FINANCING ACTIVITIES
-----------------------------------------------------
Change in Short-term Debt - Affiliates                                                                    -            (125,000)
Issuance of Long-term Debt                                                                                -             222,455 
Retirement of Long-term Debt                                                                        (24,036)                  - 
Retirement - Preferred Stock                                                                              -                 (10)
Change in Advances to Affiliates                                                                    (12,902)            (95,482)
Dividends Paid on Common Stock                                                                       (2,000)             (4,970)
Dividends Paid on Cumulative Preferred Stock                                                            (78)                (78)
                                                                                                    --------            --------
Net Cash Flows Used For Financing Activities                                                        (39,016)             (3,085)
                                                                                                    --------            --------

Net Increase in Cash and Cash Equivalents                                                               146                  81 
Cash and Cash Equivalents at Beginning of Period                                                          -                  62
                                                                                                    --------            --------
Cash and Cash Equivalents at End of Period                                                             $146                $143
                                                                                                    ========            ========


SUPPLEMENTAL DISCLOSURE:
Cash paid for interest net of capitalized amounts was $17,290,000 and $12,990,000 and for income taxes was $6,905,000 and 
$16,410,000 in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>


                             AEP TEXAS NORTH COMPANY
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to TNC's financial statements are combined with the notes to financial
statements for other subsidiary registrants. Listed below are the notes that
apply to TNC. 

                                                                     Footnote
                                                                     Reference
                                                                     ---------

Significant Accounting Matters                                       Note 1

New Accounting Pronouncements                                        Note 2

Rate Matters                                                         Note 3

Customer Choice and Industry Restructuring                           Note 4

Commitments and Contingencies                                        Note 5

Guarantees                                                           Note 6

Benefit Plans                                                        Note 8

Business Segments                                                    Note 9

Financing Activities                                                 Note 10



<PAGE>








                            APPALACHIAN POWER COMPANY
                                AND SUBSIDIARIES




<PAGE>

                   APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
                 ----------------------------------------------

Results of Operations
---------------------

Net Income for the third quarter of 2004 decreased $7 million from the prior
year period primarily due to increases in Other Operation and Maintenance
expenses coupled with a decrease in Nonoperating Income related to unfavorable
results from risk management activities. The unfavorable impacts in Net Income
were partially offset by decreased Income Taxes.

Net Income for the nine months ended September 30, 2004 decreased $91 million
from the prior year period primarily due to the Cumulative Effect of Accounting
Changes of $77 million recorded in 2003. In addition, increases in Other
Operation, Maintenance and Depreciation and Amortization expenses were partially
offset by decreased Interest Charges and increased Nonoperating Income related
to favorable results from risk management activities.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the third quarter of 2004 decreased $4 million from the
prior year period primarily due to:

 o  A $7 million increase in Other Operation expense primarily due to increased
    administrative and support expenses and increased insurance premiums 
    partially offset by reduced employee-related benefits costs in 2004.
 o  A $4 million increase in Maintenance expense caused by boiler plant 
    maintenance at Amos, Glen Lyn, Mountaineer and Sporn plants in 2004.
 o  A net $3 million increase in fuel and purchased electricity expenses 
    including a $5 million increase in Fuel for Electric Generation expense 
    partially offset by decreased purchased electricity expenses. The $5 
    million increase in Fuel for Electric Generation expense was primarily due 
    to increased cost of coal consumed partially offset by decreases in 
    deferred fuel expense and coal pile inventory survey adjustments.
 o  A $2 million increase in Depreciation and Amortization expense relating to 
    a greater depreciable base in 2004 including the addition of capitalized 
    software costs partially offset by reduced amortization for Virginia's
    transition generation regulatory assets. The reduced amortization is 
    related to the extension of the transition period for electricity 
    restructuring.

The decrease in Operating Income for the third quarter of 2004 was partially
offset by:

 o  An $8 million decrease in Income Taxes. See Income Taxes section below for
    further discussion. 
 o  A $4 million increase in Sales to AEP Affiliates reflecting a higher 
    average price in MWH.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $7 million in the third quarter of 2004 compared
to the prior year period primarily due to unfavorable results from risk
management activities.

Nonoperating Expenses decreased $2 million in the third quarter of 2004 compared
to the prior year period due to a charitable donation in 2003 and decreased
expenses of inactive coal companies.

Interest charges decreased $1 million in the third quarter of 2004 compared to
the prior year period due to reduced interest rates from refinancing higher cost
debt.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 29.6% and
35.4%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The decrease in the effective tax rate is
primarily due to federal income tax return adjustments.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 in comparison to
the prior year period decreased $33 million primarily due to:

 o  A $29 million increase in Maintenance expenses caused by boiler plant 
    maintenance at Amos, Clinch River, Glen Lyn and Kanawha River plants. 
 o  A $17 million increase in Other Operation expenses primarily due to 
    increased administrative and support expenses, increased insurance premiums
    and increased removal costs.  These increases were partially offset by 
    reduced labor costs in 2004.
 o  A $15 million increase in Depreciation and Amortization expense primarily 
    due to reduced expense in 2003 attributable to the adoption of SFAS 143 
    for regulated operations and to a lesser degree, a greater depreciable 
    base in 2004, which included the addition of capitalized software costs 
    partially offset by reduced amortization of Virginia's transition 
    generation regulatory assets. The reduced amortization is related to the 
    extension of the transition period for electricity restructuring.
 o  A $4 million decrease in Sales to AEP Affiliates relating to decreased 
    power available for sale caused by planned plant outages in 2004.

The decrease in Operating Income for the nine months ended September 30, 2004
was partially offset by:

 o  A $17 million increase in Electric Generation, Transmission and Distribution
    revenues primarily resulting from a 28% increase in cooling degree days in 
    2004 in comparison to the prior year period.
 o  A $10 million decrease in Income Taxes. See Income Taxes section below for
    further discussion.
o   A net $4 million decrease in fuel and purchased electricity expenses 
    including a $19 million decrease in Fuel for Electric Generation expenses 
    partially offset by a $15 million increase in purchased electricity 
    expenses. The decrease in Fuel for Electric Generation expenses was 
    primarily due to decreased generation and deferred fuel expense partially 
    offset by the increased cost of coal used in generation. Purchased 
    electricity expenses increased due to lower generation caused by planned 
    outages partially offset by decreased capacity charges.

Other Impacts on Earnings
-------------------------

Nonoperating Income increased $6 million in the nine months ended September 30,
2004 compared to the prior year period primarily due to favorable results from
risk management activities.

Nonoperating Expenses decreased $3 million in the nine months ended September
30, 2004 compared to the prior year period due to decreased expenses of inactive
coal companies.

Nonoperating Income Tax Credit decreased $4 million. See Income Taxes section
below for further discussion.

Interest Charges decreased $13 million in the nine months ended September 30,
2004 compared to the prior year period due to reduced interest rates from
refinancing higher cost debt and increased construction-related capitalized
interest.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 37.3%
and 36.7%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The effective tax rates remained relatively flat
for the comparative period.

Cumulative Effect of Accounting Changes
---------------------------------------

The Cumulative Effect of Accounting Changes of $77 million is due to the
implementation of SFAS 143 and EITF 02-3 in 2003.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                         Moody's       S&P         Fitch
                                         -------       ---         -----
      First Mortgage Bonds               Baa1          BBB         A-
      Senior Unsecured Debt              Baa2          BBB         BBB+

Cash Flow
---------

Cash flows for the nine months ended September 30, 2004 and 2003 were as
follows:


<TABLE>
<CAPTION>

<C>                                                                      <C>               <C>        
                                                                          2004              2003       
                                                                          ----              ----    
                                                                              (in thousands)         

Cash and cash equivalents at beginning of period                          $4,561            $4,133
                                                                        ---------         ---------
Cash flow from (used for):
  Operating activities                                                   397,919           409,707
  Investing activities                                                  (261,198)         (187,977)
  Financing activities                                                  (137,784)         (220,755)
                                                                        ---------         ---------
Net increase (decrease) in cash and cash equivalents                      (1,063)              975
                                                                        ---------         ---------
Cash and cash equivalents at end of period                                $3,498            $5,108
                                                                        =========         =========
</TABLE>


Operating Activities
--------------------

Net Cash Flows From Operating Activities for the nine months ended September 30,
2004 were $398 million. We produced income of $126 million that included noncash
expense items of $191 million for depreciation, amortization and deferred taxes.
The other changes in assets and liabilities primarily represent items that had a
current period cash flow impact such as changes in working capital, the largest
of which were affiliated accounts receivable.

Investing Activities
--------------------

Net Cash Flows Used For Investing Activities for the nine months ended September
30, 2004 were $261 million. Current year construction expenditures of $305
million were focused primarily on projects to improve service reliability for
transmission and distribution, as well as environmental upgrades. In addition,
Changes in Other Cash Deposits, Net of $41 million consisted primarily of monies
set aside in 2003 for the retirement of the Installment Purchase Contracts in
2004. For the remainder of 2004, we expect our Construction Expenditures to be
approximately $105 million.

Financing Activities
--------------------

For the nine months ended September 30, 2004, we issued $126 million of Senior
Unsecured Notes and we retired $66 million of First Mortgage Bonds and $40
million of Installment Purchase Contracts. In addition, we repaid $83 million of
advances from affiliates and advanced $24 million to our affiliates and we paid
$50 million in common dividends.

Liquidity
---------

We have solid investment grade ratings which provide us ready access to capital 
markets in order to refinance long-term debt maturities. In addition, we 
participate in the AEP Utility Money Pool, which provides us access to 
liquidity of the AEP System.

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

 Issuances
 ---------
                                         Principal       Interest          Due
                Type of Debt              Amount           Rate            Date
                ------------             ---------       --------          ----
                                       (in thousands)       (%)

          Senior Unsecured Notes          $125,000       Variable          2007


 Retirements
 -----------
                                         Principal       Interest          Due
                Type of Debt              Amount           Rate            Date
                ------------             ---------       --------          ----
                                       (in thousands)       (%)

          First Mortgage Bonds             $45,000         7.125           2024
          Installment Purchase Contracts    40,000         5.45            2019
          First Mortgage Bonds              21,000         7.70            2004

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.


    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect on this specific registrant.

MTM Risk Management Contract Net Assets
---------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.


<TABLE>
<CAPTION>

                               MTM Risk Management Contract Net Assets
                                 Nine Months Ended September 30, 2004
                                                                                                         (in thousands)      

<C>                                                                                                         <C>      
Total MTM Risk Management Contract Net Assets at December 31, 2003                                          $68,066 
(Gain) Loss from Contracts Realized/Settled During the Period (a)                                           (32,269)
Fair Value of New Contracts When Entered Into During the Period (b)                                               - 
Net Option Premiums Paid/(Received) (c)                                                                        (345)
Change in Fair Value Due to Valuation Methodology Changes (d)                                                   835 
Changes in Fair Value of Risk Management Contracts (e)                                                        4,229 
Changes in Fair Value Risk Management Contracts Allocated to Regulated Jurisdictions (f)                      2,907
                                                                                                            --------
Total MTM Risk Management Contract Net Assets                                                                43,423 
Net Cash Flow Hedge Contracts (g)                                                                           (21,364)
DETM Assignment (h)                                                                                         (25,781)
                                                                                                            --------
Total MTM Risk Management Contract Net Liabilities at September 30, 2004                                    $(3,722)
                                                                                                            ========
</TABLE>


(a) "(Gain) Loss from Contracts Realized/Settled During the Period"
    includes realized risk management contracts and related derivatives
    that settled during 2004 that were entered into prior to 2004.
(b) The "Fair Value of New Contracts When Entered Into During the
    Period" represents the fair value of long-term contracts entered
    into with customers during 2004. The fair value is calculated as of
    the execution of the contract. Most of the fair value comes from
    longer term fixed price contracts with customers that seek to limit
    their risk against fluctuating energy prices. The contract prices
    are valued against market curves associated with the delivery
    location.
(c) "Net Option Premiums Paid/(Received)" reflects the net option
    premiums paid/(received) as they relate to unexercised and unexpired
    option contracts that were entered into in 2004.
(d) "Change in Fair Value Due to Valuation Methodology Changes"
    represents the impact of AEP changes in methodology in regards to
    credit reserves on forward contracts.
(e) "Changes in Fair Value of Risk Management Contracts" represents the
    fair value change in the risk management portfolio due to market
    fluctuations during the current period. Market fluctuations are
    attributable to various factors such as supply/demand, weather, etc.
(f) "Changes in Fair Value of Risk Management Contracts Allocated to
    Regulated Jurisdictions" relates to the net gains (losses) of those
    contracts that are not reflected in the Consolidated Statements of
    Income. These net gains (losses) are recorded as regulatory
    liabilities/assets for those subsidiaries that operate in regulated
    jurisdictions.
(g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
    Accumulated Other Comprehensive Income (Loss).
(h) See Note 17 "Related Party Transactions" in the 2003 Annual Report.


<TABLE>
<CAPTION>

                         Reconciliation of MTM Risk Management Contracts to
                                   Consolidated Balance Sheets
                                    As of September 30, 2004


                                          MTM Risk  
                                         Management       Cash Flow         DETM    
                                        Contracts(a)        Hedges       Assignment (b)  Consolidated (c)
                                        ------------      ---------      --------------  ----------------
                                                                      (in thousands)         
<C>                                      <C>              <C>             <C>               <C>     
Current Assets                            $87,524           $1,560              $-           $89,084 
Non Current Assets                         81,202              207                -           81,409
                                         ---------        ---------       ---------         ---------
Total MTM Derivative  
 Contract Assets                          168,726            1,767                -          170,493
                                         ---------        ---------       ---------         ---------

Current Liabilities                       (80,289)         (21,485)        (10,624)         (112,398)
Non Current Liabilities                   (45,014)          (1,646)        (15,157)          (61,817)
                                         ---------        ---------       ---------         ---------
Total MTM Derivative  
 Contract Liabilities                    (125,303)         (23,131)        (25,781)         (174,215)
                                         ---------        ---------       ---------         ---------

Total MTM Derivative  
 Contract Net Assets
 (Liabilities)                            $43,423         $(21,364)       $(25,781)          $(3,722)
                                         =========        =========       =========         =========
</TABLE>


(a) Does not include Cash Flow Hedges.
(b) See Note 17 "Related Party Transactions" in the 2003 Annual Report.
(c) Represents amount of total MTM derivative contracts recorded within
    Risk Management Assets, Long-term Risk Management Assets, Risk
    Management Liabilities and Long-term Risk Management Liabilities on our
    Consolidated Balance Sheets.

Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                                                 Maturity and Source of Fair Value of MTM
                                                   Risk Management Contract Net Assets
                                             Fair Value of Contracts as of September 30, 2004

                                              Remainder                                                     After  
                                                2004         2005         2006       2007         2008     2008 (c)  Total (d) 
                                              ---------      ----         ----       ----         ----     --------  --------- 
                                                            (in thousands)                                                       
<C>                                            <C>         <C>          <C>         <C>         <C>        <C>        <C>
Prices Actively Quoted - Exchange
 Traded Contracts                              $2,180      $(6,524)        $28      $2,066          $-         $-     $(2,250) 
Prices Provided by Other External 
 Sources - OTC Broker Quotes (a)               (3,024)      12,677       3,296       2,095           -          -      15,044  
Prices Based on Models and Other 
 Valuation Methods (b)                            769        3,196       4,231       3,527       5,832      13,074     30,629  
                                               -------     --------     -------     ------      -------    --------   --------

Total                                            $(75)      $9,349      $7,555      $7,688      $5,832     $13,074    $43,423  
                                               =======     ========     =======     ======      =======    ========   ========
</TABLE>



(a) "Prices Provided by Other External Sources - OTC Broker Quotes"
    reflects information obtained from over-the-counter brokers, industry
    services, or multiple-party on-line platforms.
(b) "Prices Based on Models and Other Valuation Methods" is in absence of
    pricing information from external sources. Modeled information is derived
    using valuation models developed by the reporting entity, reflecting when
    appropriate, option pricing theory, discounted cash flow concepts,
    valuation adjustments, etc. and may require projection of prices for
    underlying commodities beyond the period that prices are available from
    third-party sources. In addition, where external pricing information or
    market liquidity are limited, such valuations are classified as modeled.
    The determination of the point at which a market is no longer liquid for
    placing it in the modeled category varies by market. 
(c) There is mark-to-market value in excess of 10 percent of our total 
    mark-to-market value in individual periods beyond 2008. $5.9 million of this
    mark-to-market value is in 2009 and $5.8 million of this mark-to-market is
    in 2010.
(d) Amounts exclude Cash Flow Hedges.

Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.


<TABLE>
<CAPTION>

                     Total Accumulated Other Comprehensive Income (Loss) Activity
                              Nine Months Ended September 30, 2004

                                                                Foreign                                    
                                                   Power        Currency          Interest Rate       Consolidated
                                                   -----        --------          -------------       ------------   
                                                                           (in thousands)
                                             
<C>                                               <C>            <C>                <C>                <C>        
Beginning Balance December 31, 2003                  $359        $(183)              $(1,745)           $(1,569)   
Changes in Fair Value (a)                          (2,658)          -                (10,622)           (13,280)   
Reclassifications from AOCI to Net
 Income (b)                                        (1,363)           5                   272             (1,086)   
                                                  --------       ------             ---------          ---------
Ending Balance September 30, 2004                 $(3,662)       $(178)             $(12,095)          $(15,935)   
                                                  ========       ======             =========          =========

</TABLE>

                                                                        
(a) "Changes in Fair Value" shows changes in the fair value of derivatives
    designated as hedging instruments in cash flow hedges during the
    reporting period not yet reclassified into net income, pending the
    hedged item's affecting net income. Amounts are reported net of related
    income taxes.
(b) "Reclassifications from AOCI to Net Income" represents gains or losses
    from derivatives used as hedging instruments in cash flow hedges that
    were reclassified into net income during the reporting period. Amounts
    are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $3,876 thousand loss.

Credit Risk
-----------

Counterparty credit quality and exposure is generally consistent with that of
AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

       Nine Months Ended                        Twelve Months Ended
      September 30, 2004                         December 31, 2003              
 -----------------------------            -----------------------------
        (in thousands)                            (in thousands)
 End    High    Average    Low            End    High    Average    Low
 ---    ----    -------    ---            ---    ----    -------    ---
 $304  $1,690    $786     $274            $596  $2,314    $969     $230


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$109 million and $102 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period; therefore, a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>



                                            APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF INCOME
                                For the Three and Nine Months Ended September 30, 2004 and 2003
                                                          (Unaudited)

                                                                         Three Months Ended               Nine Months Ended
                                                                         -------------------            ---------------------
                                                                         2004           2003            2004             2003
                                                                         ----           ----            ----             ----
                                                                                         (in thousands)         
<C>                                                                   <C>             <C>            <C>              <C>  
                   OPERATING REVENUES
----------------------------------------------------
Electric Generation, Transmission and Distribution                    $428,689        $428,667       $1,314,647       $1,297,255 
Sales to AEP Affiliates                                                 58,726          54,944          163,655          167,335
                                                                      ---------       ---------      -----------      -----------
TOTAL                                                                  487,415         483,611        1,478,302        1,464,590
                                                                      ---------       ---------      -----------      -----------

                  OPERATING EXPENSES
----------------------------------------------------
Fuel for Electric Generation                                           117,841         113,274          327,246          345,819 
Purchased Electricity for Resale                                        19,727          18,365           54,157           50,745 
Purchased Electricity from AEP Affiliates                               90,257          92,857          268,537          257,382 
Other Operation                                                         70,725          64,065          209,393          192,806 
Maintenance                                                             36,240          31,855          130,493          101,420 
Depreciation and Amortization                                           48,877          46,501          144,021          128,574 
Taxes Other Than Income Taxes                                           22,995          23,232           69,947           70,583 
Income Taxes                                                            18,063          26,328           78,339           88,387
                                                                      ---------       ---------      -----------      -----------
TOTAL                                                                  424,725         416,477        1,282,133        1,235,716
                                                                      ---------       ---------      -----------      -----------

OPERATING INCOME                                                        62,690          67,134          196,169          228,874 

Nonoperating Income                                                        636           7,502            9,336            2,878 
Nonoperating Expenses                                                    1,497           3,910            7,239           10,219 
Nonoperating Income Tax Credit                                          (1,899)         (1,307)          (3,524)          (7,491)
Interest Charges                                                        25,269          26,318           76,169           89,520
                                                                      ---------       ---------      -----------      -----------

Income Before Cumulative Effect of Accounting Changes                   38,459          45,715          125,621          139,504 
Cumulative Effect of Accounting Changes (Net of Tax)                         -               -                -           77,257
                                                                      ---------       ---------      -----------      -----------

NET INCOME                                                              38,459          45,715          125,621          216,761 

Preferred Stock Dividend Requirements 
 (Including Capital Stock Expense)                                         796             703            2,417            2,671
                                                                      ---------       ---------      -----------      -----------

EARNINGS APPLICABLE TO COMMON STOCK                                    $37,663         $45,012         $123,204         $214,090
                                                                      =========       =========      ===========      ===========

The common stock of APCo is wholly-owned by AEP.
See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                              APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                                   EQUITY AND COMPREHENSIVE INCOME
                                       For the Nine Months Ended September 30, 2004 and 2003
                                                          (in thousands)
                                                            (Unaudited)

                                                                                            
                                                                                                 Accumulated Other
                                                    Common       Paid-in        Retained           Comprehensive 
                                                    Stock        Capital        Earnings           Income (Loss)      Total
                                                    ------       -------        --------         -----------------    -----      
                                                                                                   
<C>                                               <C>            <C>             <C>                 <C>            <C>        
DECEMBER 31, 2002                                 $260,458       $717,242        $260,439            $(72,082)      $1,166,057 

Common Stock Dividends                                                            (96,200)                             (96,200)
Preferred Stock Dividends                                                            (801)                                (801)
Capital Stock Expense                                               1,870          (1,870)                                   -  
SFAS 71 Reapplication                                                 162                                                  162
                                                                                                                    -----------
TOTAL                                                                                                                1,069,218
                                                                                                                    -----------

        COMPREHENSIVE INCOME
-------------------------------------
Other Comprehensive Income (Loss),
 Net of  Taxes:
  Cash Flow Hedges                                                                                        772              772 
NET INCOME                                                                        216,761                              216,761
                                                                                                                    -----------
TOTAL COMPREHENSIVE INCOME                                                                                             217,533
                                                  ---------      ---------       ---------           ---------      -----------

SEPTEMBER 30, 2003                                $260,458       $719,274        $378,329            $(71,310)      $1,286,751
                                                  =========      =========       =========           =========      ===========


DECEMBER 31, 2003                                 $260,458       $719,899        $408,718            $(52,088)      $1,336,987 

Common Stock Dividends                                                            (50,000)                             (50,000)
Preferred Stock Dividends                                                            (600)                                (600)
Capital Stock Expense                                               1,817          (1,817)                                   -
                                                                                                                    -----------
TOTAL                                                                                                                1,286,387
                                                                                                                    -----------

        COMPREHENSIVE INCOME
-------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
  Cash Flow Hedges                                                                                    (14,366)         (14,366)
NET INCOME                                                                        125,621                              125,621
                                                                                                                    -----------
TOTAL COMPREHENSIVE INCOME                                                                                             111,255
                                                  ---------      ---------       ---------           ---------      -----------

SEPTEMBER 30, 2004                                $260,458       $721,716        $481,922            $(66,454)      $1,397,642
                                                  =========      =========       =========           =========      ===========


See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>





<PAGE>

<TABLE>
<CAPTION>



                                               APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                               ASSETS
                                               September 30, 2004 and December 31, 2003
                                                             (Unaudited)

                                                                                           2004                     2003
                                                                                           ----                     ----
                                                                                                   (in thousands)                 
<C>                                                                                      <C>                     <C>  
               ELECTRIC UTILITY PLANT
----------------------------------------------
Production                                                                               $2,488,089              $2,287,043   
Transmission                                                                              1,251,486               1,240,889   
Distribution                                                                              2,051,936               2,006,329   
General                                                                                     307,207                 294,786   
Construction Work in Progress                                                               302,750                 311,884   
                                                                                         -----------             -----------
TOTAL                                                                                     6,401,468               6,140,931   
Accumulated Depreciation and Amortization                                                 2,413,097               2,321,360   
                                                                                         -----------             -----------
TOTAL - NET                                                                               3,988,371               3,819,571   
                                                                                         -----------             -----------

           OTHER PROPERTY AND INVESTMENTS
----------------------------------------------
Non-Utility Property, Net                                                                    20,619                  20,574   
Other Investments                                                                            21,337                  26,668
                                                                                         -----------             -----------
TOTAL                                                                                        41,956                  47,242
                                                                                         -----------             -----------

                  CURRENT ASSETS
----------------------------------------------
Cash and Cash Equivalents                                                                     3,498                   4,561   
Other Cash Deposits                                                                             707                  41,320   
Advances to Affiliates, Net                                                                  23,779                       -   
Accounts Receivable:
  Customers                                                                                 125,478                 133,717   
  Affiliated Companies                                                                       95,975                 137,281   
  Accrued Unbilled Revenues                                                                  31,582                  35,020   
  Miscellaneous                                                                               1,076                   3,961   
  Allowance for Uncollectible Accounts                                                       (5,951)                 (2,085)  
Fuel Inventory                                                                               48,511                  42,806   
Materials and Supplies                                                                       87,932                  71,978   
Risk Management Assets                                                                       89,084                  71,189   
Margin Deposits                                                                               5,421                  11,525   
Prepayments and Other                                                                        14,776                  13,301   
                                                                                         -----------             -----------
TOTAL                                                                                       521,868                 564,574   
                                                                                         -----------             -----------

        DEFERRED DEBITS AND OTHER ASSETS
----------------------------------------------
Regulatory Assets:
  Transition Regulatory Assets                                                               26,528                  30,855   
  SFAS 109 Regulatory Asset, Net                                                            324,032                 325,889   
  Unamortized Loss on Reacquired Debt                                                        18,774                  19,005   
  Other                                                                                      41,512                  41,447   
Long-term Risk Management Assets                                                             81,409                  70,900   
Deferred Property Taxes                                                                      20,769                  35,343   
Other Deferred Charges                                                                       23,552                  22,185   
                                                                                         -----------             -----------
TOTAL                                                                                       536,576                 545,624   
                                                                                         -----------             -----------

TOTAL ASSETS                                                                             $5,088,771              $4,977,011   
                                                                                         ===========             ===========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                             APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                   CAPITALIZATION AND LIABILITIES
                                              September 30, 2004 and December 31, 2003
                                                             (Unaudited)

                                                                                                                   
                                                                                                    2004                2003
                                                                                                    ----                ----
                                                                                                         (in thousands)
<C>                                                                                             <C>                 <C>  
                         CAPITALIZATION
------------------------------------------------------------------------
Common Shareholder's Equity:
  Common Stock - No Par Value:
    Authorized - 30,000,000 Shares
    Outstanding - 13,499,500 Shares                                                               $260,458            $260,458   
    Paid-in Capital                                                                                721,716             719,899   
    Retained Earnings                                                                              481,922             408,718   
    Accumulated Other Comprehensive Income (Loss)                                                  (66,454)            (52,088)  
                                                                                                -----------         -----------
Total Common Shareholder's Equity                                                                1,397,642           1,336,987   
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                      17,784              17,784   
                                                                                                -----------         -----------
Total Shareholders' Equity                                                                       1,415,426           1,354,771   
Liability for Cumulative Preferred Stock Subject to Mandatory Redemption                             5,360               5,360   
Long-term Debt                                                                                   1,254,921           1,703,073   
                                                                                                -----------         -----------
TOTAL                                                                                            2,675,707           3,063,204   
                                                                                                -----------         -----------

                       CURRENT LIABILITIES
------------------------------------------------------------------------
Long-term Debt Due Within One Year                                                                 630,009             161,008   
Advances from Affiliates, Net                                                                            -              82,994   
Accounts Payable:
  General                                                                                          132,417             140,497   
  Affiliated Companies                                                                              60,150              81,812   
Customer Deposits                                                                                   45,867              33,930   
Taxes Accrued                                                                                       80,616              50,259   
Interest Accrued                                                                                    38,820              22,113   
Risk Management Liabilities                                                                        112,398              51,430   
Obligations Under Capital Leases                                                                     7,179               9,218   
Other                                                                                               53,785              60,289   
                                                                                                -----------         -----------
TOTAL                                                                                            1,161,241             693,550   
                                                                                                -----------         -----------

             DEFERRED CREDITS AND OTHER LIABILITIES
------------------------------------------------------------------------
Deferred Income Taxes                                                                              825,347             803,355   
Regulatory Liabilities:
  Asset Removal Costs                                                                               98,139              92,497   
  Deferred Investment Tax Credits                                                                   31,546              30,545   
  Over-Recovery of Fuel Cost                                                                        65,036              68,704   
  Other Regulatory Liabilities                                                                      20,423              17,326   
Long-term Risk Management Liabilities                                                               61,817              54,327   
Obligations Under Capital Leases                                                                    13,679              16,134   
Asset Retirement Obligation                                                                         22,635              21,776   
Deferred Credits and Other                                                                         113,201             115,593   
                                                                                                -----------         -----------
TOTAL                                                                                             1,251,823           1,220,257   
                                                                                                -----------         -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                            $5,088,771          $4,977,011   
                                                                                                ===========         ===========
See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                          APPALACHIAN POWER COMPANY AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     For the Nine Months Ended September 30, 2004 and 2003
                                                          (Unaudited)

                                                                                                2004                  2003
                                                                                                ----                  ----
                                                                                                      (in thousands)                
<C>                                                                                           <C>                   <C>  
                OPERATING ACTIVITIES
------------------------------------------------------
Net Income                                                                                    $125,621              $216,761 
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
    Cumulative Effect of Accounting Changes                                                         -                (77,257)
    Depreciation and Amortization                                                              144,021               128,574 
    Deferred Income Taxes                                                                       31,596                 3,394 
    Deferred Investment Tax Credits                                                              1,001                (1,940)
    Deferred Property Taxes                                                                     14,574                15,008 
    Deferred Power Supply Costs, Net                                                            (3,668)               71,815 
    Mark to Market of Risk Management Contracts                                                 18,137                33,727 
Changes in Certain Assets and Liabilities:
    Accounts Receivable, Net                                                                    59,734                68,673 
    Fuel, Materials and Supplies                                                               (21,659)                6,202 
    Accounts Payable, Net                                                                      (29,742)              (57,931)
    Customer Deposits                                                                           11,937                 5,590 
    Taxes Accrued                                                                               30,357                18,001 
    Interest Accrued                                                                            16,707                20,354 
    Incentive Plan Accrued                                                                      (1,151)               (8,789)
Rate Stabilization Deferral                                                                         -                (75,601)
Change in Other Assets                                                                           3,294                 6,162 
Change in Other Liabilities                                                                     (2,840)               36,964
                                                                                              ---------             ---------
Net Cash Flows From Operating Activities                                                       397,919               409,707
                                                                                              ---------             ---------

              INVESTING ACTIVITIES
------------------------------------------------------
Construction Expenditures                                                                     (305,055)             (190,047)
Proceeds from Sale of Property and Other                                                         3,244                 2,078 
Change in Other Cash Deposits, Net                                                              40,613                    (8)
                                                                                              ---------             ---------
Net Cash Flows Used For Investing Activities                                                  (261,198)             (187,977)
                                                                                              ---------             ---------

               FINANCING ACTIVITIES
------------------------------------------------------
Issuance of Long-term Debt                                                                     125,595               495,122 
Retirement of Long-term Debt                                                                  (106,006)             (545,237)
Change in Advances to/from Affiliates, Net                                                    (106,773)              (73,639)
Dividends Paid on Common Stock                                                                 (50,000)              (96,200)
Dividends Paid on Cumulative Preferred Stock                                                      (600)                 (801)
                                                                                              ---------             ---------
Net Cash Flows Used For Financing Activities                                                  (137,784)             (220,755)
                                                                                              ---------             ---------

Net Increase (Decrease) in Cash and Cash Equivalents                                            (1,063)                  975 
Cash and Cash Equivalents at Beginning of Period                                                 4,561                 4,133
                                                                                              ---------             ---------
Cash and Cash Equivalents at End of Period                                                      $3,498                $5,108
                                                                                              =========             =========

SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $53,622,000 and $63,481,000 and for income taxes was $(831,000) 
and $47,419,000 in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>


                   APPALACHIAN POWER COMPANY AND SUBSIDIARIES
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to APCo's consolidated financial statements are combined with the
notes to financial statements for other subsidiary registrants. Listed below are
the notes that apply to APCo.

                                                                Footnote
                                                                Reference
                                                                ---------

Significant Accounting Matters                                  Note 1

New Accounting Pronouncements                                   Note 2

Rate Matters                                                    Note 3

Customer Choice and Industry Restructuring                      Note 4

Commitments and Contingencies                                   Note 5

Guarantees                                                      Note 6

Benefit Plans                                                   Note 8

Business Segments                                               Note 9

Financing Activities                                            Note 10




<PAGE>








                         COLUMBUS SOUTHERN POWER COMPANY
                                AND SUBSIDIARIES




<PAGE>

                COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
            MANAGEMENT'S NARRATIVE FINANCIAL DISCUSSION AND ANALYSIS 
            --------------------------------------------------------

Results of Operations
---------------------

The decrease in Net Income of $10 million in third quarter 2004 was primarily
due to decreases in operating revenues and nonoperating risk management
activities.

The decrease in year-to-date Net Income of $29 million in 2004 was primarily due
to a $27 million net-of-tax Cumulative Effect of Accounting Changes in the first
quarter of 2003.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income decreased $6 million primarily due to:

 o  A $6 million decrease in retail electric revenues resulting from decreased 
    weather-based demand from residential customers and decreased industrial 
    sales due to a declining number of customers.
 o  A $3 million increase in Other Operation expenses primarily relating to 
    lime expenses for pollution control and increases in steam power expenses 
    and administrative and support expenses.
 o  A $3 million increase in Depreciation and Amortization expenses due to a 
    greater depreciable base in 2004, including capitalized software costs and 
    the increased amortization of transition generation regulatory assets due 
    to normal operating adjustments.

The decrease in Operating Income was partially offset by:

 o  A $6 million decrease in Income Taxes expense.  See Income Taxes section 
    below for further discussion.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $2 million due to unfavorable results from risk
management activities.

Interest Charges increased $2 million due to the write-off of costs related to
reacquired debt that was refinanced at lower interest rates.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 31.5% and
32.7% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The effective tax rates remained relatively flat
for the comparative period.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income decreased $5 million primarily due to:

 o  A $12 million decrease in non-affiliated wholesale energy sales due to lower
    sales volume and the expiration of municipal contracts.
 o  An $11 million increase in Other Operation expenses primarily relating to 
    lime expenses for pollution control and increases in steam power expenses 
    and administrative and support expenses.
 o  A $10 million increase in Depreciation and Amortization expenses due to a 
    greater depreciable base in 2004, including capitalized software costs and 
    the increased amortization of transition generation regulatory assets due 
    to normal operating adjustments.
 o  A $7 million increase in fuel expenses due to higher coal costs.
 o  A $3 million increase in Maintenance expenses due primarily to boiler 
    overhaul work from scheduled and forced outages.

The decrease in Operating Income was partially offset by:

 o  A $24 million increase in retail electric revenues resulting primarily from
    increased weather-related demand from residential and commercial customers 
    during the second quarter 2004.
 o  A $9 million increase in operating revenues related to favorable results 
    from risk management activities. 
 o  A $6 million decrease in Income Taxes expense. See Income Taxes section 
    below for further discussion.

Other Impacts on Earnings
-------------------------

Nonoperating Income increased $10 million due to favorable results from risk
management activities.

Nonoperating Income Tax Credit decreased $5 million. See Income Taxes section
below for further discussion.

Interest Charges increased $3 million due to the write-off of costs related to
reacquired debt that was refinanced at lower interest rates.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 33.6%
and 33.4% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The effective tax rates remained relatively flat
for the comparative period.

Cumulative Effect of Accounting Changes
---------------------------------------

The Cumulative Effect of Accounting Changes is due to the one-time, after-tax
impact of adopting SFAS 143 and implementing the requirements of EITF 02-3.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                     Moody's       S&P         Fitch
                                     -------       ---         -----

  Senior Unsecured Debt              A3            BBB         A-

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

 Issuances
 ---------

                                        Principal         Interest         Due
           Type of Debt                   Amount            Rate           Date
           ------------                 ---------         --------         ----
                                      (in thousands)         (%)

   Installment Purchase Contracts         $43,695          Variable        2038
   Installment Purchase Contracts          48,550          Variable        2038
   Notes Payable - Affiliates             100,000            4.64          2010


  Retirements
  -----------

                                         Principal         Interest        Due
           Type of Debt                    Amount            Rate          Date
           ------------                  ---------         --------        ----
                                      (in thousands)         (%)

   First Mortgage Bonds                   $11,000            7.60          2024
   Installment Purchase Contracts          43,695            6.25          2020
   Installment Purchase Contracts          48,550            6.375         2020

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect on this specific registrant.

MTM Risk Management Contract Net Assets
---------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.


<TABLE>
<CAPTION>

                                    MTM Risk Management Contract Net Assets
                                     Nine Months Ended September 30, 2004
                                              (in thousands)

 <C>                                                                                                       <C>     
 Total MTM Risk Management Contract Net Assets at December 31, 2003                                        $38,337 
 (Gain) Loss from Contracts Realized/Settled During the Period (a)                                         (18,594)
 Fair Value of New Contracts When Entered Into During the Period (b)                                             - 
 Net Option Premiums Paid/(Received) (c)                                                                      (200)
 Change in Fair Value Due to Valuation Methodology Changes (d)                                                 898 
 Changes in Fair Value of Risk Management Contracts (e)                                                      4,469 
 Changes in Fair Value Risk Management Contracts Allocated to Regulated Jurisdictions (f)                        -    
                                                                                                           --------
 Total MTM Risk Management Contract Net Assets                                                              24,910 
 Net Cash Flow Hedge Contracts (g)                                                                          (3,273)
 DETM Assignment (h)                                                                                       (14,888)
                                                                                                           --------
 Total MTM Risk Management Contract Net Assets at September 30, 2004                                        $6,749
                                                                                                           ========
</TABLE>


 (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
     includes realized risk management contracts and related derivatives
     that settled during 2004 that were entered into prior to 2004.
 (b) The "Fair Value of New Contracts When Entered Into During the
     Period" represents the fair value of long-term contracts entered
     into with customers during 2004. The fair value is calculated as of
     the execution of the contract. Most of the fair value comes from
     longer term fixed price contracts with customers that seek to limit
     their risk against fluctuating energy prices. The contract prices
     are valued against market curves associated with the delivery
     location.
 (c) "Net Option Premiums Paid/(Received)" reflects the net option
     premiums paid/(received) as they relate to unexercised and unexpired
     option contracts that were entered into in 2004.
 (d) "Change in Fair Value Due to Valuation Methodology Changes"
     represents the impact of AEP changes in methodology in regards to
     credit reserves on forward contracts.
 (e) "Changes in Fair Value of Risk Management Contracts" represents the
     fair value change in the risk management portfolio due to market
     fluctuations during the current period. Market fluctuations are
     attributable to various factors such as supply/demand, weather, etc.
 (f) "Changes in Fair Value of Risk Management Contracts Allocated to
     Regulated Jurisdictions" relates to the net gains (losses) of those
     contracts that are not reflected in the Consolidated Statements of
     Income. These net gains (losses) are recorded as regulatory
     liabilities/assets for those subsidiaries that operate in regulated
     jurisdictions.
 (g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
     Accumulated Other Comprehensive Income (Loss). 
 (h) See Note 17 "Related Party Transactions" in the 2003 Annual Report.


<TABLE>
<CAPTION>

                            Reconciliation of MTM Risk Management Contracts to
                                      Consolidated Balance Sheets
                                       As of September 30, 2004


                                         MTM Risk  
                                         Management        Cash Flow        DETM       
                                        Contracts(a)         Hedges     Assignment (b)     Consolidated (c)
                                        ------------       ---------    --------------     ----------------
                                                                (in thousands)         
<C>                                       <C>              <C>            <C>                 <C>     
Current Assets                            $50,378             $393              $-            $50,771 
Non Current Assets                         46,895              119               -             47,014
                                          --------         --------       ---------           --------
Total MTM Derivative  
 Contract Assets                           97,273              512               -             97,785
                                          --------         --------       ---------           --------

Current Liabilities                       (46,368)          (2,969)         (6,135)           (55,472)
Non Current Liabilities                   (25,995)            (816)         (8,753)           (35,564)
                                          --------         --------       ---------           --------
Total MTM Derivative  
 Contract Liabilities                     (72,363)          (3,785)        (14,888)           (91,036)
                                          --------         --------       ---------           --------

Total MTM Derivative  
 Contract Net Assets  
 (Liabilities)
                                          $24,910          $(3,273)       $(14,888)            $6,749
                                          ========         ========       =========           ========
</TABLE>


(a) Does not include Cash Flow Hedges.
(b) See Note 17 "Related Party Transactions" in the 2003 Annual Report.
(c) Represents amount of total MTM derivative contracts recorded within
    Risk Management Assets, Long-term Risk Management Assets, Risk Management 
    Liabilities and Long-term Risk Management Liabilities on our Consolidated 
    Balance Sheets.

Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                                                Maturity and Source of Fair Value of MTM
                                                  Risk Management Contract Net Assets
                                             Fair Value of Contracts as of September 30, 2004

                                               Remainder                                                         After  
                                                2004           2005         2006          2007        2008      2008 (c)  Total (d) 
                                          --------------     --------     --------      --------    --------    --------  --------- 
                                                             (in thousands)                                                        
<C>                                              <C>         <C>           <C>          <C>         <C>          <C>       <C>
Prices Actively Quoted - Exchange
 Traded Contracts                                $1,259      $(3,767)         $16       $1,193          $-         $-      $(1,299)
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)                 (1,746)       7,153        1,904        1,210           -          -        8,521 
Prices Based on Models and Other
 Valuation Methods (b)                              441        1,847        2,443        2,037       3,369       7,551      17,688
                                                 -------     --------      -------      -------     -------      -------   --------

Total                                              $(46)      $5,233       $4,363       $4,440      $3,369       $7,551    $24,910
                                                 =======     ========      =======      =======     =======      =======   ========

</TABLE>

(a)  "Prices Provided by Other External Sources - OTC Broker Quotes" reflects
     information obtained from over-the-counter brokers, industry services, or
     multiple-party on-line platforms.
(b)  "Prices Based on Models and Other Valuation Methods" if there is absence of
     pricing information from external sources. Modeled information is derived
     using valuation models developed by the reporting entity, reflecting when
     appropriate, option pricing theory, discounted cash flow concepts,
     valuation adjustments, etc. and may require projection of prices for
     underlying commodities beyond the period that prices are available from
     third-party sources. In addition, where external pricing information or
     market liquidity are limited, such valuations are classified as modeled.
     The determination of the point at which a market is no longer liquid for
     placing it in the modeled category varies by market.
(c)  There is mark-to-market value in excess of 10 percent of our total
     mark-to-market value in individual periods beyond 2008. $3.4 million of
     this mark-to-market value is in 2009 and $3.3 million of this
     mark-to-market is in 2010.
(d)  Amounts exclude Cash Flow Hedges.


Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.

          Total Accumulated Other Comprehensive Income (Loss) Activity
                      Nine Months Ended September 30, 2004

                                                                    Power      
                                                                    -----      
                                                                (in thousands)
    Beginning Balance December 31, 2003                              $202 
    Changes in Fair Value (a)                                      (1,473)
    Reclassifications from AOCI to Net Income (b)                    (844)
                                                                  --------
    Ending Balance September 30, 2004                             $(2,115)
                                                                  ========

(a) "Changes in Fair Value" shows changes in the fair value of derivatives
    designated as hedging instruments in cash flow hedges during the
    reporting period not yet reclassified into net income, pending the
    hedged item's affecting net income. Amounts are reported net of related
    income taxes.
(b) "Reclassifications from AOCI to Net Income" represents gains or losses
    from derivatives used as hedging instruments in cash flow hedges that
    were reclassified into net income during the reporting period. Amounts
    are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $1,662 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Energy and Gas Risk Management Contracts
------------------------------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

        Nine Months Ended                      Twelve Months Ended
       September  30, 2004                      December 31, 2003              
  -----------------------------          -----------------------------
          (in thousands)                        (in thousands)
  End     High    Average   Low           End   High    Average    Low
  ---     ----    -------   ---           ---   ----    -------    ---
 $176     $976     $454    $158          $336  $1,303    $546     $130


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$78 million and $98 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>



                                              COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
                                                     CONSOLIDATED STATEMENTS OF INCOME
                                      For the Three and Nine Months Ended September 30, 2004 and 2003
                                                        (Unaudited)

                                                                           Three Months Ended                Nine Months Ended
                                                                          --------------------             --------------------
                                                                          2004            2003             2004            2003
                                                                          ----            ----             ----            ----
                                                                                           (in thousands)
<C>                                                                     <C>             <C>            <C>             <C>
                OPERATING REVENUES
-----------------------------------------------------
Electric Generation, Transmission and Distribution                      $369,192        $375,936       $1,049,671      $1,027,732 
Sales to AEP Affiliates                                                   21,796          21,719           61,748          62,199
                                                                        ---------       ---------      -----------     -----------
TOTAL                                                                    390,988         397,655        1,111,419       1,089,931
                                                                        ---------       ---------      -----------     -----------

                OPERATING EXPENSES
-----------------------------------------------------
Fuel for Electric Generation                                              49,732          42,473          142,528         127,937 
Fuel From Affiliates for Electric Generation                                   -           7,882           10,603          18,485 
Purchased Electricity for Resale                                           5,389           5,688           14,839          13,898 
Purchased Electricity from AEP Affiliates                                 96,193          93,486          263,614         263,225 
Other Operation                                                           60,520          57,348          176,797         166,027 
Maintenance                                                               17,417          19,630           60,187          56,801 
Depreciation and Amortization                                             37,933          34,442          111,196         101,478 
Taxes Other Than Income Taxes                                             34,017          34,970          102,069         101,532 
Income Taxes                                                              24,525          30,543           65,187          70,787
                                                                        ---------       ---------      -----------     -----------
TOTAL                                                                    325,726         326,462          947,020         920,170
                                                                        ---------       ---------      -----------     -----------

OPERATING INCOME                                                          65,262          71,193          164,399         169,761 

Nonoperating Income (Loss)                                                 1,808           3,778            7,656          (2,587)
Nonoperating Expenses                                                        444             159            2,037           2,944 
Nonoperating Income Tax Credit                                               383              84               92           5,231 
Interest Charges                                                          14,439          12,071           41,666          38,946
                                                                        ---------       ---------      -----------     -----------

Income Before Cumulative Effect of Accounting Changes                     52,570          62,825          128,444         130,515 
Cumulative Effect of Accounting Changes (Net of Tax)                           -               -                -          27,283
                                                                        ---------       ---------      -----------     -----------

NET INCOME                                                                52,570          62,825          128,444         157,798 

Preferred Stock - Capital Stock Expense                                      254             254              762             762
                                                                        ---------       ---------      -----------     -----------

EARNINGS APPLICABLE TO COMMON  STOCK                                     $52,316         $62,571         $127,682        $157,036
                                                                        =========       =========      ===========     ===========

The common stock of CSPCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                     COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                            EQUITY AND COMPREHENSIVE INCOME
                                  For the Nine Months Ended September 30, 2004 and 2003
                                                    (in thousands)
                                                     (Unaudited)

                                                                                                     
                                                                                                   Accumulated Other 
                                                    Common       Paid-in          Retained          Comprehensive  
                                                    Stock        Capital          Earnings          Income (Loss)      Total
                                                    ------       -------          --------         -----------------   -----
                                                                                                                     
<C>                                                <C>           <C>              <C>                 <C>             <C>      
DECEMBER 31, 2002                                  $41,026       $575,384         $290,611            $(59,357)       $847,664 

Common Stock Dividends Declared                                                   (124,932)                           (124,932)
Capital Stock Expense                                                 762             (762)                                  -
                                                                                                                      ---------
TOTAL                                                                                                                  722,732
                                                                                                                      ---------

           COMPREHENSIVE INCOME
-------------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                        755             755 
 NET INCOME                                                                        157,798                             157,798
                                                                                                                      ---------
 TOTAL COMPREHENSIVE INCOME                                                                                            158,553
                                                   --------      ---------        ---------           ---------       ---------

SEPTEMBER 30, 2003                                 $41,026       $576,146         $322,715            $(58,602)       $881,285
                                                   ========      =========        =========           =========       =========

DECEMBER 31, 2003                                  $41,026       $576,400         $326,782            $(46,327)       $897,881 

Common Stock Dividends Declared                                                    (93,750)                            (93,750)
Capital Stock Expense                                                 762             (762)                                  -
                                                                                                                      ---------
TOTAL                                                                                                                  804,131
                                                                                                                      ---------

           COMPREHENSIVE INCOME
-------------------------------------------
Other Comprehensive Income (Loss), 
  Net of Taxes:
    Cash Flow Hedges                                                                                    (2,317)         (2,317)
 NET INCOME                                                                        128,444                             128,444
                                                                                                                      ---------
 TOTAL COMPREHENSIVE INCOME                                                                                            126,127
                                                   --------      ---------        ---------           ---------       ---------

SEPTEMBER 30, 2004                                 $41,026       $577,162         $360,714            $(48,644)       $930,258
                                                   ========      =========        =========           =========       =========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                        COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
                                                  CONSOLIDATED BALANCE SHEETS
                                                           ASSETS
                                            September 30, 2004 and December 31, 2003
                                                        (Unaudited)

                                                                                                 2004                    2003   
                                                                                                 ----                    ----   
                                                                                                      (in thousands)
<C>                                                                                           <C>                     <C>  
                ELECTRIC UTILITY PLANT
--------------------------------------------------
Production                                                                                    $1,652,487              $1,610,888 
Transmission                                                                                     431,021                 425,512 
Distribution                                                                                   1,291,414               1,253,760 
General                                                                                          171,576                 166,002 
Construction Work in Progress                                                                    107,284                 114,281
                                                                                              -----------             -----------
TOTAL                                                                                          3,653,782               3,570,443 
Accumulated Depreciation and Amortization                                                      1,454,558               1,389,586
                                                                                              -----------             -----------
TOTAL - NET                                                                                    2,199,224               2,180,857
                                                                                              -----------             -----------

           OTHER PROPERTY AND INVESTMENTS
--------------------------------------------------
Non-Utility Property, Net                                                                         22,309                  22,417 
Other Investments                                                                                  6,065                   8,663
                                                                                              -----------             -----------
TOTAL                                                                                             28,374                  31,080
                                                                                              -----------             -----------

                  CURRENT ASSETS
--------------------------------------------------
Cash and Cash Equivalents                                                                          3,313                   3,377 
Other Cash Deposits                                                                                   99                     765 
Advances to Affiliates                                                                           158,371                      -  
Accounts Receivable:
  Customers                                                                                       39,945                  47,099 
  Affiliated Companies                                                                            53,568                  68,168 
  Accrued Unbilled Revenues                                                                       26,201                  23,723 
  Miscellaneous                                                                                      554                   5,257 
  Allowance for Uncollectible Accounts                                                              (794)                   (531)
Fuel                                                                                              27,423                  14,365 
Materials and Supplies                                                                            70,891                  44,377 
Risk Management Assets                                                                            50,771                  40,095 
Margin Deposits                                                                                    3,185                   6,636 
Prepayments and Other                                                                             12,937                  12,444
                                                                                              -----------             -----------
TOTAL                                                                                            446,464                 265,775
                                                                                              -----------             -----------

          DEFERRED DEBITS AND OTHER ASSETS
--------------------------------------------------
Regulatory Assets:
  SFAS 109 Regulatory Assets, Net                                                                 16,371                  16,027 
  Transition Regulatory Assets                                                                   164,434                 188,532 
  Unamortized Loss on Reacquired Debt                                                             13,346                  13,659 
  Other                                                                                           30,227                  24,966 
Long-term Risk Management Assets                                                                  47,014                  39,932 
Deferred Property Taxes                                                                           15,750                  62,262 
Deferred Charges                                                                                  17,469                  15,276
                                                                                              -----------             -----------
TOTAL                                                                                            304,611                 360,654
                                                                                              -----------             -----------

TOTAL ASSETS                                                                                  $2,978,673              $2,838,366
                                                                                              ===========             ===========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                            COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
                                                       CONSOLIDATED BALANCE SHEETS
                                                     CAPITALIZATION AND LIABILITIES
                                                September 30, 2004 and December 31, 2003
                                                               (Unaudited)
                                                                                                  2004                    2003
                                                                                                  ----                    ----
                                                                                                         (in thousands)       
<C>                                                                                           <C>                      <C>  
                   CAPITALIZATION
---------------------------------------------------
Common Shareholder's Equity:
  Common Stock - No Par Value:
     Authorized - 24,000,000 Shares
     Outstanding - 16,410,426 Shares                                                             $41,026                  $41,026 
     Paid-in Capital                                                                             577,162                  576,400 
     Retained Earnings                                                                           360,714                  326,782 
     Accumulated Other Comprehensive Income (Loss)                                               (48,644)                 (46,327)
                                                                                              -----------              -----------
Total Common Shareholder's Equity                                                                930,258                  897,881 
Long-term Debt:
     Nonaffiliated                                                                               887,560                  886,564 
     Affiliated                                                                                  100,000                        -
                                                                                              -----------              -----------
Total Long-term Debt                                                                             987,560                  886,564
                                                                                              -----------              -----------
TOTAL                                                                                          1,917,818                1,784,445
                                                                                              -----------              -----------

               CURRENT LIABILITIES
---------------------------------------------------
Long-term Debt Due Within One Year                                                                     -                   11,000 
Advances from Affiliates, Net                                                                          -                    6,517 
Accounts Payable:
  General                                                                                         49,721                   58,220 
  Affiliated Companies                                                                            46,536                   53,572 
Customer Deposits                                                                                 26,412                   19,727 
Taxes Accrued                                                                                    134,968                  132,853 
Interest Accrued                                                                                   7,888                   16,528 
Risk Management Liabilities                                                                       55,472                   28,966 
Obligations Under Capital Leases                                                                   4,126                    4,221 
Other                                                                                             22,555                   25,364
                                                                                              -----------              -----------
TOTAL                                                                                            347,678                  356,968
                                                                                              -----------              -----------

       DEFERRED CREDITS AND OTHER LIABILITIES
---------------------------------------------------
Deferred Income Taxes                                                                            467,804                  458,498 
Regulatory Liabilities:
  Asset Removal Costs                                                                            103,112                   99,119 
  Deferred Investment Tax Credits                                                                 28,664                   30,797 
Long-term Risk Management Liabilities                                                             35,564                   30,598 
Obligations Under Capital Leases                                                                   8,892                   11,397 
Asset Retirement Obligations                                                                       9,262                    8,740 
Deferred Credits and Other                                                                        59,879                   57,804
                                                                                              -----------              -----------
TOTAL                                                                                            713,177                  696,953
                                                                                              -----------              -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                          $2,978,673               $2,838,366
                                                                                              ===========              ===========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                         COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      For the Nine Months Ended September 30, 2004 and 2003
                                                           (Unaudited)

                                                                                                2004                   2003       
                                                                                                ----                   ---- 
                                                                                                      (in thousands)
<C>                                                                                            <C>                    <C>  
               OPERATING ACTIVITIES
------------------------------------------------------
Net Income                                                                                     $128,444              $157,798  
Adjustments to Reconcile Net Income to Net Cash Flows
   From Operating Activities:
     Cumulative Effect of Accounting Changes                                                          -               (27,283) 
     Depreciation and Amortization                                                              111,196               101,478  
     Deferred Income Taxes                                                                       10,210                (3,942) 
     Deferred Investment Tax Credits                                                             (2,133)               (2,288) 
     Deferred Property Taxes                                                                     46,512                46,478  
     Mark-to-Market of Risk Management Contracts                                                 10,130                29,056  
Changes in Certain Assets and Liabilities:
     Accounts Receivable, Net                                                                    24,242                27,106  
     Fuel, Materials and Supplies                                                               (39,572)                3,326  
     Accounts Payable                                                                           (15,535)              (74,407) 
     Taxes Accrued                                                                                2,115               (33,868) 
     Interest Accrued                                                                            (8,640)               (2,054) 
Change in Other Assets                                                                           (6,865)              (12,532) 
Change in Other Liabilities                                                                       9,225                (2,347) 
                                                                                               ---------              --------
Net Cash Flows From Operating Activities                                                        269,329               206,521  
                                                                                               ---------              --------

               INVESTING ACTIVITIES
------------------------------------------------------
Construction Expenditures                                                                      (101,656)              (98,032) 
Proceeds from Sale of Property and Other                                                          3,423                   190  
Change in Other Cash Deposits, Net                                                                  666                    16  
                                                                                               ---------              --------
Net Cash Flows Used For Investing Activities                                                    (97,567)              (97,826) 
                                                                                               ---------              --------

               FINANCING ACTIVITIES
------------------------------------------------------
Issuance of Long-term Debt - Nonaffiliated                                                       90,057               494,350  
Issuance of Long-term Debt - Affiliated                                                         100,000                     -  
Change in Advances to/from Affiliates, Net                                                     (164,888)              182,832  
Retirement of Long-term Debt - Nonaffiliated                                                   (103,245)             (207,500) 
Retirement of Long-term Debt - Affiliated                                                             -              (160,000) 
Change in Short-term Debt - Affiliates                                                                -              (290,000) 
Dividends Paid on Common Stock                                                                  (93,750)             (124,932) 
                                                                                               ---------              --------
Net Cash Flows Used For Financing Activities                                                   (171,826)             (105,250) 
                                                                                               ---------              --------

Net Increase (Decrease) in Cash and Cash Equivalents                                                (64)                3,445  
Cash and Cash Equivalents at Beginning of Period                                                  3,377                   697  
                                                                                               ---------              --------
Cash and Cash Equivalents at End of Period                                                       $3,313                $4,142  
                                                                                               =========              ========

SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $46,034,000 and $39,804,000 and for income taxes was $(5,282,000) 
and $48,955,000 in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>


<PAGE>

                COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to CSPCo's consolidated financial statements are combined with the
notes to financial statements for other subsidiary registrants. Listed below are
the notes that apply to CSPCo. 

                                                              Footnote
                                                              Reference
                                                              ---------

Significant Accounting Matters                                Note 1

New Accounting Pronouncements                                 Note 2

Rate Matters                                                  Note 3

Customer Choice and Industry Restructuring                    Note 4

Commitments and Contingencies                                 Note 5

Guarantees                                                    Note 6

Benefit Plans                                                 Note 8

Business Segments                                             Note 9

Financing Activities                                          Note 10



<PAGE>









                         INDIANA MICHIGAN POWER COMPANY
                                AND SUBSIDIARIES




<PAGE>

                 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
                 ----------------------------------------------

Results of Operations
---------------------

Net Income increased $14 million for the third quarter of 2004 and $58 million
for the first nine months of 2004. The increases in Net Income reflect
improvement in retail sales, the end of amortization of Cook Plant outage
settlements and reduced financing charges in both the quarter and year-to-date
periods and favorable results from risk management activities for the
year-to-date period.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income increased $11 million primarily due to:

 o  A $17 million increase in Electric Generation, Transmission and Distribution
    revenues primarily due to an increase in commercial and industrial sales 
    reflecting the economic recovery and the end of amortization of Cook outage
    settlements.
 o  A $9 million decrease in Other Operation expenses reflecting the end of 
    amortization of Cook Plant outage settlements.
 o  A $5 million decrease in Maintenance expenses primarily due to the end of
    amortization of Cook Plant outage settlements and decreased storm damage
    expenses. 
 o  A $5 million decrease in Taxes Other Than Income Taxes primarily due to 
    prior year accrual adjustments for Indiana real and personal property taxes
    related to reassessed property values and tax rates.
 o  A $3 million increase in Sales to AEP Affiliates reflecting increased 
    availability of Cook Plant units.

The increase in Operating Income was partially offset by:

 o  A $13 million increase in Income Taxes. See Income Taxes section below for
    further discussion. 
 o  A $7 million increase in Fuel for Electric Generation expenses due to 
    increased generation and higher fuel costs.
 o  A $6 million increase in Purchased Electricity from AEP Affiliates 
    reflecting increased generation and higher fuel costs for power acquired 
    under an AEGCo unit power agreement.

Other Impacts on Earnings
-------------------------

Nonoperating Income Tax Expense decreased $2 million. See Income Taxes section
below for further discussion.

Interest Charges decreased $3 million primarily due to a reduction in
outstanding long-term debt and lower interest rates from refunding higher cost
debt.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 34.5% and
29.5% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The increase in the effective tax rate is
primarily due to permanent differences related to tax-exempt interest income,
offset by federal income tax return adjustments.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income increased $33 million primarily due to:

 o  A $44 million increase in Electric Generation, Transmission and
    Distribution revenues due to an increase in commercial and industrial 
    sales reflecting the economic recovery and the end of amortization of Cook 
    Plant outage settlements.
 o  A $13 million decrease in Other Operation expenses including the end of 
    amortization of Cook Plant outage settlements.
 o  A $5 million decrease in Purchased Electricity from AEP Affiliates 
    primarily due to an 8% increase in net generation that reduced our need to 
    purchase power from affiliates.
 o  A $4 million decrease in Taxes Other Than Income Taxes primarily due to 
    prior year accrual adjustments for Indiana real and personal property taxes
    related to reassessed property values and tax rates.
 o  A $2 million decrease in Fuel for Electric Generation expenses reflecting 
    a change in fuel mix as nuclear generation increased 32% and coal-fired
    generation declined 12% due to generating unit availability.

The increase in Operating Income was partially offset by:

 o  A $26 million increase in Income Taxes. See Income Taxes section below for
    further discussion.
 o  A $6 million  increase in  Maintenance expenses primarily due to both 
    planned and forced outages at Rockport and Tanners Creek plants, 
    increased costs for distribution right of way, line maintenance and cost 
    of storm damage.
 o  A $3 million decrease in Sales to AEP Affiliates due to lower capacity 
    revenues partially offset by increased energy sales to our affiliates.

Other Impacts on Earnings
-------------------------

Nonoperating Income increased $18 million primarily due to favorable results
from risk management activities and increased barging revenues.

Nonoperating Expenses increased $3 million primarily due to increased costs for
barging activities.

Nonoperating Income Tax Expense increased $6 million. See Income Taxes section
below for further discussion.

Interest Charges decreased $13 million primarily due to a reduction in
outstanding long-term debt and lower interest rates from refunding higher cost
debt.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 36.1%
and 35.5% respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The effective tax rates remained relatively flat
for the comparative period.

Cumulative Effect of Accounting Change
--------------------------------------

The Cumulative Effect of Accounting Change is due to the implementation of the
requirements of EITF 02-3 related to mark-to-market accounting for risk
management contracts that are not derivatives.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                       Moody's       S&P         Fitch
                                       -------       ---         -----

    Senior Unsecured Debt              Baa2          BBB         BBB

Cash Flow
---------

Cash flows for the first nine months of 2004 and 2003 were as follows:


<TABLE>
<CAPTION>

                                                                             2004            2003
                                                                             ----            ----
                                                                                (in thousands)
   <C>                                                                    <C>             <C>   
   Cash and cash equivalents at beginning of period                         $3,899          $3,251
                                                                          ---------       ---------
   Cash flow from (used for):
     Operating activities                                                  407,169         191,018    
     Investing activities                                                 (121,913)       (106,574)   
     Financing activities                                                 (286,774)        (83,634)
                                                                          ---------       ---------
   Net increase (decrease) in cash and cash equivalents                     (1,518)            810
                                                                          ---------       ---------
   Cash and cash equivalents at end of period                               $2,381          $4,061
                                                                          =========       =========
</TABLE>


Operating Activities
--------------------

Our cash flows from operating activities were $407 million for the first nine
months of 2004. We produced income of $122 million during the period including
noncash expense items of $126 million for depreciation, amortization and
deferred income taxes. In addition, there is a current period impact for a net
$11 million balance sheet change for risk management contracts that are
marked-to-market. These contracts have an unrealized earnings impact as market
prices move, and a cash impact upon settlement or upon disbursement or receipt
of premiums. The other changes in assets and liabilities represent items that
had a current period cash flow impact, such as changes in working capital, as
well as items that represent future rights or obligations to receive or pay
cash, such as regulatory assets and liabilities. The current period activity in
these asset and liability accounts relates to a number of items; the most
significant are increases in the balance of fuel, materials and supplies of $20
million and the balance of accrued taxes of $55 million and a net change in
accounts receivable and payable of $18 million.

Investing Activities
--------------------

Cash Flows Used For Investing Activities during 2004 were $122 million due to
construction expenditures. Construction expenditures for nuclear and coal
generation, transmission and distribution assets were incurred to upgrade or
replace equipment and improve reliability. For the remainder of 2004, we expect
our Construction Expenditures to be approximately $49 million.

Financing Activities
--------------------

During the first nine months of 2004, we used cash of $205 million to retire
long-term debt and $79 million to pay common dividends. These activities were
supported by the generation of $407 million in cash flow from operations.

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

  Issuances
  ---------
          None.


  Retirements
  -----------
                                     Principal         Interest           Due
            Type of Debt              Amount             Rate             Date  
            ------------             ---------         --------           ----
                                                    (in thousands)        (%)

       First Mortgage Bonds          $30,000             7.20             2024
       First Mortgage Bonds           25,000             7.50             2024
       Senior Unsecured Notes        150,000             6.875            2004

We anticipate issuing long-term debt during the fourth quarter.

Off-Balance Sheet Arrangements
------------------------------

We enter into off-balance sheet arrangements for various reasons including
accelerating cash collections, reducing operational expenses and spreading risk
of loss to third parties. Our current policy restricts the use of off-balance
sheet financing entities or structures, except for traditional operating lease
arrangements and sales of customer accounts receivable that are entered in the
normal course of business. Our off-balance sheet arrangements have not changed
significantly since year-end. For complete information on our off-balance sheet
arrangements see "Off-balance Sheet Arrangements" in "Management's Financial
Discussion and Analysis" section of our 2003 Annual Report.

Spent Nuclear Fuel Disposal
---------------------------

As a result of DOE's failure to make sufficient progress toward a permanent
repository or otherwise assume responsibility for spent nuclear fuel (SNF), we
and South Texas Project Nuclear Operating Company, along with a number of
unaffiliated utilities and states, filed suit in the D.C. Circuit Court
requesting, among other things, that the D.C. Circuit Court order DOE to meet
its obligations under the law. The D.C. Circuit Court ordered the parties to
proceed with contractual remedies but declined to order DOE to begin accepting
SNF for disposal. DOE estimates its planned site for the nuclear waste will not
be ready until at least 2010. In 1998, we filed a complaint in the U.S. Court of
Federal Claims seeking damages in excess of $150 million due to the DOE's
partial material breach of its unconditional contractual deadline to begin
disposing of SNF generated by the Cook Plant. Similar lawsuits were filed by
other utilities. In August 2000, in an appeal of related cases involving other
unaffiliated utilities, the U.S. Court of Appeals for the Federal Circuit held
that the delays clause of the standard contract between utilities and the DOE
did not apply to DOE's complete failure to perform its contract obligations, and
that the utilities' suits against DOE may continue in court. On January 17,
2003, the U.S. Court of Federal Claims ruled in our favor on the issue of
liability. The case continued on the issue of damages owed to us by the DOE. In
May 2004, the U.S. Court of Federal Claims ruled against us and denied damages.
In July 2004, we appealed this ruling to the U.S. Court of Appeals for the
Federal Circuit. As long as the delay in the availability of the government
approved storage repository for SNF continues, the cost of both temporary and
permanent storage of SNF and the cost of decommissioning will continue to
increase. If such cost increases are not recovered on a timely basis in
regulated rates, future results of operations and cash flows could be adversely
affected.

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect on this specific registrant.

MTM Risk Management Contract Net Assets
---------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.


<TABLE>
<CAPTION>

                                 MTM Risk Management Contract Net Assets
                                  Nine Months Ended September 30, 2004
                                            (in thousands)

<C>                                                                                                       <C>        
Total MTM Risk Management Contract Net Assets at December 31, 2003                                        $41,995    
(Gain) Loss from Contracts Realized/Settled During the Period (a)                                         (15,341)   
Fair Value of New Contracts When Entered Into During the Period (b)                                            -     
Net Option Premiums Paid/(Received) (c)                                                                      (222)   
Change in Fair Value Due to Valuation Methodology Changes                                                      -     
Changes in Fair Value of Risk Management Contracts (d)                                                      2,215    
Changes in Fair Value Risk Management Contracts Allocated to Regulated Jurisdictions (e)                     (761)  
                                                                                                          --------
Total MTM Risk Management Contract Net Assets                                                              27,886    
Net Cash Flow Hedge Contracts (f)                                                                         (13,236)   
DETM Assignment (g)                                                                                       (16,583)   
                                                                                                          --------
Total MTM Risk Management Contract Net Liabilities at September 30, 2004                                  $(1,933)   
                                                                                                          ========

</TABLE>


(a) "(Gain) Loss from Contracts Realized/Settled During the Period"
    includes realized risk management contracts and related derivatives
    that settled during 2004 that were entered into prior to 2004.
(b) The "Fair Value of New Contracts When Entered Into During the
    Period" represents the fair value of long-term contracts entered
    into with customers during 2004. The fair value is calculated as of
    the execution of the contract. Most of the fair value comes from
    longer term fixed price contracts with customers that seek to limit
    their risk against fluctuating energy prices. The contract prices
    are valued against market curves associated with the delivery
    location.
(c) "Net Option Premiums Paid/(Received)" reflects the net option
    premiums paid/(received) as they relate to unexercised and unexpired
    option contracts that were entered into in 2004.
(d) "Changes in Fair Value of Risk Management Contracts" represents the
    fair value change in the risk management portfolio due to market
    fluctuations during the current period. Market fluctuations are
    attributable to various factors such as supply/demand, weather, etc.
(e) "Changes in Fair Value of Risk Management Contracts Allocated to
    Regulated Jurisdictions" relates to the net gains (losses) of those
    contracts that are not reflected in the Consolidated Statements of
    Income. These net gains (losses) are recorded as regulatory
    liabilities/assets for those subsidiaries that operate in regulated
    jurisdictions.
(f) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
    Accumulated Other Comprehensive Income (Loss). (g) See Note 17 "Related
    Party Transactions" in the 2003 Annual Report.


<TABLE>
<CAPTION>

                                Reconciliation of MTM Risk Management Contracts to
                                          Consolidated Balance Sheets
                                            As of September 30, 2004


                                            MTM Risk   
                                           Management       Cash Flow           DETM      
                                          Contracts (a)       Hedges        Assignment (b)    Consolidated (c)
                                          -------------     ---------       --------------    ----------------
                                                                   (in thousands)         
    <C>                                       <C>                 <C>               <C>             <C>     
    Current Assets                            $56,305             $696              $-              $57,001 
    Non Current Assets                         52,232              133               -               52,365
                                              --------        ---------       ---------            ---------
    Total MTM Derivative  
     Contract Assets                          108,537              829               -              109,366
                                              --------        ---------       ---------            ---------

    Current Liabilities                       (51,645)         (12,998)         (6,833)             (71,476)
    Non Current Liabilities                   (29,006)          (1,067)         (9,750)             (39,823)
                                              --------        ---------       ---------            ---------
    Total MTM Derivative  
     Contract Liabilities                     (80,651)         (14,065)        (16,583)            (111,299)
                                              --------        ---------       ---------            ---------

    Total MTM Derivative  
     Contract Net Assets  
     (Liabilities)                            $27,886         $(13,236)       $(16,583)             $(1,933)
                                              ========        =========       =========            =========
</TABLE>



    (a) Does not include Cash Flow Hedges.
    (b) See Note 17 "Related Party Transactions" in the 2003 Annual Report.
    (c) Represents amount of total MTM derivative contracts recorded within
        Risk Management Assets, Long-term Risk Management Assets, Risk
        Management Liabilities and Long-term Risk Management Liabilities on our
        Consolidated Balance Sheets.

Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information: 
 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally).
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                                               Maturity and Source of Fair Value of MTM
                                                  Risk Management Contract Net Assets
                                           Fair Value of Contracts as of September 30, 2004

                                                  Remainder                                                      After  
                                                     2004         2005         2006       2007        2008      2008 (c)  Total (d)
                                                  ---------       ----         ----       ----        ----      --------  ---------
                                                                                     (in thousands)                         
<C>                                                  <C>         <C>          <C>         <C>        <C>        <C>        <C>
Prices Actively Quoted - Exchange
 Traded Contracts                                    $1,402      $(4,196)        $18      $1,329         $-         $-     $(1,447) 
Prices Provided by Other External  
 Sources - OTC Broker Quotes (a)                     (1,752)       7,967       2,120       1,348          -          -       9,683  
Prices Based on Models and Other 
 Valuation Methods (b)                                  441        2,056       2,721       2,269      3,752      8,411      19,650  
                                                     -------     --------     -------     -------    -------    -------    --------

Total                                                   $91       $5,827      $4,859      $4,946     $3,752     $8,411     $27,886  
                                                     =======     ========     =======     =======    =======    =======    ========
                                                                                                                                    
</TABLE>


(a) "Prices Provided by Other External Sources - OTC Broker Quotes" reflects 
    information obtained from over-the-counter brokers, industry services, or
    multiple-party on-line platforms.
(b) "Prices Based on Models and Other Valuation Methods" is in absence of
    pricing information from external sources. Modeled information is
    derived using valuation models developed by the reporting entity,
    reflecting when appropriate, option pricing theory, discounted cash flow
    concepts, valuation adjustments, etc. and may require projection of
    prices for underlying commodities beyond the period that prices are
    available from third-party sources. In addition, where external pricing
    information or market liquidity are limited, such valuations are
    classified as modeled. The determination of the point at which a market
    is no longer liquid for placing it in the modeled category varies by
    market.
(c) There is  mark-to-market value in excess of 10 percent of our total  
    mark-to-market  value in individual periods beyond 2008.  $3.8 million of 
    this mark-to-market value is in 2009 and $3.7 million of this mark-to-market
    is in 2010.
(d) Amounts exclude Cash Flow Hedges.

Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.


<TABLE>
<CAPTION>

                  Total Accumulated Other Comprehensive Income (Loss) Activity
                            Nine Months Ended September 30, 2004

                                                                              Interest
                                                               Power            Rate      Consolidated
                                                               -----          --------    ------------
                                                                          (in thousands)                 
 <C>                                                         <C>              <C>            <C>  
 Beginning Balance December 31, 2003                            $222               $-           $222 
 Changes in Fair Value (a)                                    (1,650)          (6,188)        (7,838)
 Reclassifications from AOCI to Net Income (b)                  (927)               -           (927)
                                                             --------         --------       --------
 Ending Balance September 30, 2004                           $(2,355)         $(6,188)       $(8,543)
                                                             ========         ========       ========
</TABLE>


(a) "Changes in Fair Value" shows changes in the fair value of derivatives
    designated as hedging instruments in cash flow hedges during the
    reporting period not yet reclassified into net income, pending the
    hedged item's affecting net income. Amounts are reported net of related
    income taxes.
(b) "Reclassifications from AOCI to Net Income" represents gains or losses
    from derivatives used as hedging instruments in cash flow hedges that
    were reclassified into net income during the reporting period. Amounts
    are reported net of related income taxes.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $2,393 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

       Nine Months Ended                         Twelve Months Ended
       September 30, 2004                         December 31, 2003
  ---------------------------                 --------------------------  
         (in thousands)                            (in thousands)
  End    High   Average   Low                 End    High   Average  Low
  ---    ----   -------   ---                 ---    ----   -------  ---
 $196   $1,087   $505     $176                $368  $1,429   $598    $142


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$89 million and $79 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>


                                        INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF INCOME
                               For the Three and Nine Months Ended September 30, 2004 and 2003
                                                        (Unaudited)
  
                                                                            Three Months Ended              Nine Months Ended
                                                                           --------------------           --------------------
                                                                           2004            2003           2004            2003     
                                                                           ----            ----           ----            ---- 
                                                                                            (in thousands)        
<C>                                                                      <C>             <C>           <C>             <C>  
                  OPERATING REVENUES
--------------------------------------------------
Electric Generation, Transmission and Distribution                       $372,558        $356,003      $1,065,830      $1,022,296 
Sales to AEP Affiliates                                                    70,378          67,001         193,048         196,212
                                                                         ---------       ---------     -----------     -----------
TOTAL                                                                     442,936         423,004       1,258,878       1,218,508
                                                                         ---------       ---------     -----------     -----------

                  OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                               75,086          67,588         204,709         206,445 
Purchased Electricity for Resale                                           10,063           9,058          22,617          22,375 
Purchased Electricity from AEP Affiliates                                  74,498          68,653         203,291         207,904 
Other Operation                                                           100,537         109,106         306,187         319,019 
Maintenance                                                                33,737          38,518         118,055         112,480 
Depreciation and Amortization                                              43,170          43,453         128,581         130,020 
Taxes Other Than Income Taxes                                              10,291          15,698          40,979          44,668 
Income Taxes                                                               28,072          14,688          67,169          41,136
                                                                         ---------       ---------     -----------     -----------
TOTAL                                                                     375,454         366,762       1,091,588       1,084,047
                                                                         ---------       ---------     -----------     -----------

OPERATING INCOME                                                           67,482          56,242         167,290         134,461 

Nonoperating Income                                                        20,248          20,723          60,857          42,670 
Nonoperating Expenses                                                      20,754          19,518          52,936          50,395 
Nonoperating Income Tax Expense (Credit)                                     (953)            821           1,538          (4,479)
Interest Charges                                                           16,381          19,510          52,087          64,603
                                                                         ---------       ---------     -----------     -----------

Net Income Before Cumulative Effect of Accounting Change                   51,548          37,116         121,586          66,612 
Cumulative Effect of Accounting Change (Net of Tax)                             -               -               -          (3,160)
                                                                         ---------       ---------     -----------     -----------

NET INCOME                                                                 51,548          37,116         121,586          63,452 

Preferred Stock Dividend Requirements (Including Capital  
 Stock Expense)                                                               119             118             356           2,390
                                                                         ---------       ---------     -----------     -----------

EARNINGS APPLICABLE TO COMMON STOCK                                       $51,429         $36,998        $121,230         $61,062
                                                                         =========       =========     ===========     ===========

The common stock of I&M is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>





                                           INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                                  EQUITY AND COMPREHENSIVE INCOME
                                       For the Nine Months Ended September 30, 2004 and 2003
                                                         (in thousands)
                                                           (Unaudited)

                                                                                                    
                                                                                                   Accumulated Other
                                                       Common       Paid-in        Retained          Comprehensive  
                                                       Stock        Capital        Earnings          Income (Loss)         Total
                                                       ------       -------        --------        -----------------       -----
                                                                                                      
<C>                                                    <C>           <C>             <C>               <C>              <C>        
DECEMBER 31, 2002                                      $56,584       $858,560        $143,996          $(40,487)        $1,018,653 
Common Stock Dividends                                                                (30,000)                             (30,000)
Preferred Stock Dividends                                                              (2,289)                              (2,289)
Capital Stock Expense                                                     101            (101)                                   -
                                                                                                                        -----------
                                                                                                                           986,364
                                                                                                                        -----------
          COMPREHENSIVE INCOME
---------------------------------------
Other Comprehensive Income (Loss),
  Net of Taxes:
   Cash Flow Hedges                                                                                         821                821 
NET INCOME                                                                             63,452                               63,452
                                                                                                                        -----------
TOTAL COMPREHENSIVE INCOME                                                                                                  64,273
                                                       --------      ---------       ---------         ---------        -----------

SEPTEMBER 30, 2003                                     $56,584        $858,661       $175,058          $(39,666)        $1,050,637
                                                       ========      =========       =========         =========        ===========

DECEMBER 31, 2003                                      $56,584        $858,694       $187,875          $(25,106)        $1,078,047 
Common Stock Dividends                                                                (79,293)                             (79,293)
Preferred Stock Dividends                                                                (255)                                (255)
Capital Stock Expense                                                      107           (101)                                   6
                                                                                                                        -----------
                                                                                                                           998,505
                                                                                                                        -----------
          COMPREHENSIVE INCOME
---------------------------------------
Other Comprehensive Income (Loss),
  Net of Taxes:
   Cash Flow Hedges                                                                                      (8,765)            (8,765)
NET INCOME                                                                            121,586                              121,586
                                                                                                                        -----------
TOTAL COMPREHENSIVE INCOME                                                                                                 112,821
                                                       --------      ---------       ---------         ---------        -----------

SEPTEMBER 30, 2004                                     $56,584       $858,801        $229,812          $(33,871)        $1,111,326
                                                       ========      =========       =========         =========        ===========

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                         INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                                                   CONSOLIDATED BALANCE SHEETS
                                                            ASSETS
                                            September 30, 2004 and December 31, 2003
                                                          (Unaudited)

                                                                                                2004                   2003
                                                                                                ----                   ----
                                                                                                      (in thousands)               
<C>                                                                                          <C>                    <C>  
                 ELECTRIC UTILITY PLANT
--------------------------------------------------------
Production                                                                                   $2,963,158             $2,878,051 
Transmission                                                                                  1,005,455              1,000,926 
Distribution                                                                                    979,690                958,966 
General (including nuclear fuel)                                                                275,941                274,283 
Construction Work in Progress                                                                   171,792                193,956
                                                                                             -----------            ----------
TOTAL                                                                                         5,396,036              5,306,182 
Accumulated Depreciation and Amortization                                                     2,579,039              2,490,912
                                                                                             -----------            ----------
TOTAL - NET                                                                                   2,816,997              2,815,270
                                                                                             -----------            ----------

            OTHER PROPERTY AND INVESTMENTS
--------------------------------------------------------
Nuclear Decommissioning and Spent Nuclear Fuel
 Disposal Trust Funds                                                                         1,029,112                982,394 
Non-Utility Property, Net                                                                        50,480                 52,303 
Other Investments                                                                                29,499                 43,797
                                                                                             -----------            ----------
TOTAL                                                                                         1,109,091              1,078,494
                                                                                             -----------            ----------

                    CURRENT ASSETS
--------------------------------------------------------
Cash and Cash Equivalents                                                                         2,381                  3,899 
Other Cash Deposits                                                                                  46                     15 
Accounts Receivable:
  Customers                                                                                      52,841                 63,084 
  Affiliated Companies                                                                           93,282                124,826 
  Miscellaneous                                                                                   4,176                  4,498 
  Allowance for Uncollectible Accounts                                                              (46)                  (531)
Fuel                                                                                             31,350                 33,968 
Materials and Supplies                                                                          128,156                105,328 
Risk Management Assets                                                                           57,001                 44,071 
Margin Deposits                                                                                   3,529                  7,245 
Prepayments and Other                                                                             9,159                 10,673
                                                                                             -----------            ----------
TOTAL                                                                                           381,875                397,076
                                                                                             -----------            ----------

             DEFERRED DEBITS AND OTHER ASSETS
--------------------------------------------------------
Regulatory Assets:
  SFAS 109 Regulatory Asset, Net                                                                138,575                151,973 
  Incremental Nuclear Refueling Outage Expenses, Net                                             26,131                 57,326 
  Other                                                                                          69,489                 66,978 
Long-term Risk Management Assets                                                                 52,365                 43,768 
Deferred Property Taxes                                                                          11,896                 21,916 
Deferred Charges and Other Assets                                                                35,674                 26,270
                                                                                             -----------            ----------
TOTAL                                                                                           334,130                368,231
                                                                                             -----------            ----------

TOTAL ASSETS                                                                                 $4,642,093             $4,659,071
                                                                                             ===========            ==========
See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                       INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
                                               CAPITALIZATION AND LIABILITIES
                                          September 30, 2004 and December 31, 2003
                                                         (Unaudited)

                                                                                                2004                     2003
                                                                                                ----                     ----
                                                                                                       (in thousands)               
<C>                                                                                          <C>                     <C>  
                        CAPITALIZATION
-----------------------------------------------------------
Common Shareholder's Equity:
  Common Stock - No Par Value:
     Authorized - 2,500,000 Shares
     Outstanding - 1,400,000 Shares                                                             $56,584                 $56,584 
     Paid-in Capital                                                                            858,801                 858,694 
     Retained Earnings                                                                          229,812                 187,875 
     Accumulated Other Comprehensive Income (Loss)                                              (33,871)                (25,106)
                                                                                             -----------             -----------
Total Common Shareholder's Equity                                                             1,111,326               1,078,047 
Cumulative Preferred Stock - Not Subject to Mandatory Redemption                                  8,084                   8,101
                                                                                             -----------             -----------
Total Shareholders' Equity                                                                    1,119,410               1,086,148 
Liability for Cumulative Preferred Stock - Subject to Mandatory
  Redemption                                                                                     61,445                  63,445 
Long-term Debt                                                                                1,137,189               1,134,359
                                                                                             -----------             -----------
TOTAL                                                                                         2,318,044               2,283,952
                                                                                             -----------             -----------

                      CURRENT LIABILITIES
-----------------------------------------------------------
Long-term Debt Due Within One Year                                                                    -                 205,000 
Advances from Affiliates                                                                         98,762                  98,822 
Accounts Payable:
   General                                                                                       88,262                 101,776 
   Affiliated Companies                                                                          37,114                  47,484 
Customer Deposits                                                                                31,070                  21,955 
Taxes Accrued                                                                                    97,266                  42,189 
Interest Accrued                                                                                 20,705                  17,963 
Risk Management Liabilities                                                                      71,476                  31,898 
Obligations Under Capital Leases                                                                  5,984                   6,528 
Other                                                                                            80,790                  57,675
                                                                                             -----------             -----------
TOTAL                                                                                           531,429                 631,290
                                                                                             -----------             -----------

           DEFERRED CREDITS AND OTHER LIABILITIES
-----------------------------------------------------------
Deferred Income Taxes                                                                           321,376                 337,376 
Regulatory Liabilities:
  Asset Removal Costs                                                                           274,281                 263,015 
  Deferred Investment Tax Credits                                                                84,782                  90,278 
  Excess ARO for Nuclear Decommissioning                                                        232,569                 215,715 
  Other                                                                                          65,012                  61,268 
Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2                                      67,398                  70,179 
Long-term Risk Management Liabilities                                                            39,823                  33,537 
Obligations Under Capital Leases                                                                 35,966                  31,315 
Asset Retirement Obligations                                                                    582,827                 553,219 
Deferred Credits and Other                                                                       88,586                  87,927
                                                                                             -----------             -----------
TOTAL                                                                                         1,792,620               1,743,829
                                                                                             -----------             -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                         $4,642,093              $4,659,071
                                                                                             ===========             ===========
See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                        INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     For the Nine Months Ended September 30 2004 and 2003
                                                        (Unaudited)

                                                                                              2004                 2003
                                                                                              ----                 ----
                                                                                                    (in thousands)           
<C>                                                                                         <C>                 <C>  
                 OPERATING ACTIVITIES
-----------------------------------------------------
Net Income                                                                                  $121,586             $63,452 
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
     Cumulative Effect of Accounting Change                                                        -               3,160 
     Depreciation and Amortization                                                           128,581             130,020 
     Deferred Income Taxes                                                                     2,772             (17,767)
     Deferred Investment Tax Credits                                                          (5,496)             (5,504)
     Deferred Property Taxes                                                                  10,020               9,930 
     Amortization (Deferral) of Incremental Nuclear 
      Refueling Outage Expenses, Net                                                          31,195              (4,049)
     Unrecovered Fuel and Purchased Power Costs                                                  452              28,126 
     Amortization of Nuclear Outage Costs                                                          -              30,000 
     Mark-to-Market of Risk Management Contracts                                              10,760              30,661 
Changes in Certain Assets and Liabilities:
     Accounts Receivable, Net                                                                 41,624              68,914 
     Fuel, Materials and Supplies                                                            (20,210)             (2,488)
     Accounts Payable, Net                                                                   (23,884)            (95,624)
     Customer Deposits                                                                         9,115               3,874 
     Taxes Accrued                                                                            55,077             (28,144)
       Rent Accrued - Rockport Plant Unit 2                                                   18,464              18,464 
Change in Other Assets                                                                        (2,377)            (34,012)
Change in Other Liabilities                                                                   29,490              (7,995)
                                                                                            ---------           ---------
Net Cash Flows From Operating Activities                                                     407,169             191,018
                                                                                            ---------           ---------

                INVESTING ACTIVITIES
-----------------------------------------------------
Construction Expenditures                                                                   (122,756)           (108,201)
Other                                                                                            874               1,655 
Change in Other Cash Deposits, Net                                                               (31)                (28)
                                                                                            ---------           ---------
Net Cash Flows Used For Investing Activities                                                (121,913)           (106,574)
                                                                                            ---------           ---------

                FINANCING ACTIVITIES
-----------------------------------------------------
Retirement of Cumulative Preferred Stock                                                      (2,011)             (1,500)
Retirement of Long-term Debt - Nonaffiliated                                                (205,155)           (255,000)
Change in Advances to/from Affiliates, Net                                                       (60)            205,155 
Dividends Paid on Common Stock                                                               (79,293)            (30,000)
Dividends Paid on Cumulative Preferred Stock                                                    (255)             (2,289)
                                                                                            ---------           ---------
Net Cash Flows Used For Financing Activities                                                (286,774)            (83,634)
                                                                                            ---------           ---------

Net Increase (Decrease) in Cash and Cash Equivalents                                          (1,518)                810 
Cash and Cash Equivalents at Beginning of Period                                               3,899               3,251
                                                                                            ---------           ---------
Cash and Cash Equivalents at End of Period                                                    $2,381              $4,061
                                                                                            =========           =========

SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $46,694,000 and $59,359,000 and for income taxes was $(4,725,000) 
and $79,880,000 in 2004 and 2003, respectively. Noncash acquisitions under capital leases were $5,303,000 in 2004. There were no 
noncash capital lease acquisitions in 2003.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>



<PAGE>


                 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to I&M's consolidated financial statements are combined with the notes
to financial statements for other subsidiary registrants. Listed below are the
notes that apply to I&M. 

                                                                    Footnote
                                                                    Reference
                                                                    ---------

Significant Accounting Matters                                      Note 1

New Accounting Pronouncements                                       Note 2

Rate Matters                                                        Note 3

Customer Choice and Industry Restructuring                          Note 4

Commitments and Contingencies                                       Note 5

Guarantees                                                          Note 6

Benefit Plans                                                       Note 8

Business Segments                                                   Note 9

Financing Activities                                                Note 10



<PAGE>








                             KENTUCKY POWER COMPANY




<PAGE>



                                     
                             KENTUCKY POWER COMPANY
            MANAGEMENT'S NARRATIVE FINANCIAL DISCUSSION AND ANALYSIS
            --------------------------------------------------------

Results of Operations
---------------------

Net Income for the third quarter of 2004 decreased $341 thousand from the prior
year period as increased retail revenues were offset by increased Fuel for
Electric Generation expenses and decreased Nonoperating Income (Loss) due to
unfavorable risk management activities.

Net Income for the nine months ended September 30, 2004 increased $1 million
from the prior year period primarily due to the Cumulative Effect of Accounting
Change recorded in 2003.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the third quarter of 2004 increased slightly from the prior
year period primarily due to the following:

 o  A $7 million increase in Electric Generation, Transmission and Distribution 
    revenues primarily relating to increased retail revenues. The retail 
    revenues increased primarily due to an increase in industrial sales related 
    to improvements in the economy as well as the recovery of increased fuel 
    costs.
 o  A $3 million increase in Sales to AEP Affiliates relating to a 5% increase 
    in Rockport plant generation enabling us to sell additional power to 
    affiliates in comparison to the prior year period.
 o  A $2 million decrease in Income Taxes. See Income Taxes section below for 
    further discussion.

The increase in Operating Income for the third quarter of 2004 compared to the
prior year period was partially offset by the following:

 o  A $10 million increase in Fuel for Electric Generation expenses
    primarily resulting from an increase in the cost of coal consumed and an 
    unfavorable impact of recording a liability for over-collection of fuel 
    costs. This over-collection will be refunded to customers over the twelve 
    months beginning November 2004.
 o  A $2 million increase in Purchased Electricity from AEP Affiliates resulting
    from purchases in accordance with the unit power agreement with AEGCo 
    reflecting the 5% increase in generation at the Rockport plant. Our energy 
    purchases from the Rockport plant are based on plant availability, as 
    required by the unit power agreement with AEGCo, an affiliated company. The 
    unit power agreement with AEGCo provides for our purchase of 15% of the 
    total output of the two unit 2,600 MW capacity Rockport plant.

Other Impacts on Earnings
-------------------------

Nonoperating Income (Loss) decreased $1 million in the third quarter of 2004
compared to the prior year period primarily due to unfavorable results from risk
management activities.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 11.4% and
36.4%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, amortization of investment tax credits and state income
taxes. The decrease in the effective tax rate is primarily due to federal income
tax return adjustments and changes in flow-through temporary differences.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 increased slightly
from the prior year period primarily due to:

 o  A $20 million increase in Electric Generation, Transmission and Distribution
    revenues primarily related to increased retail revenues. The retail revenues
    increased primarily due to an environmental surcharge increase in July 2003,
    a 24% increase in cooling degree days, and an increase in industrial sales 
    due to the recovering economy.
 o  A $6 million decrease in Purchased Electricity from AEP Affiliates resulting
    from a 19% increase in Big Sandy's generation in 2004 related to planned 
    outages in 2003 for the installation of emission control equipment. The 
    2004 increase in generation from the Big Sandy plant reduced our need to 
    purchase additional power from AEP affiliates.
 o  A $5 million decrease in Income Taxes. See Income Taxes section below for 
    further discussion. 
 o  A $3 million increase in Sales to AEP Affiliates reflecting recovery of
    increased fuel expenses.

The increase in Operating Income for the nine months ended September 30, 2004
was partially offset by:

 o  A $23 million increase in Fuel for Electric Generation expenses resulting 
    from a 19% increase in generation for 2004 over 2003 and an increase in the 
    average cost per ton of fuel consumed in the same period. In addition, Fuel 
    for Electric Generation expense was unfavorably affected due to the impact 
    of recording a liability for over-collection of fuel costs. This over-
    collection will be refunded over the twelve months beginning November 2004.
 o  A $4 million increase in Depreciation and Amortization expense in 2004 
    primarily resulting from the installation of emission control equipment 
    at the Big Sandy plant in mid-2003.
 o  A $3 million increase in Maintenance expenses relating to planned outages 
    for boiler overhauls in 2004. 
 o  A $3 million increase in Other Operation expenses for 2004 relating to 
    increased administrative and support expenses.

Other Impacts on Earnings
-------------------------

Nonoperating Income (Loss) increased $3 million in the nine months ended
September 30, 2004 compared to the prior year period primarily due to favorable
results from risk management activities.

Interest Charges increased $1 million in the nine months ended September 30,
2004 compared to the prior year period primarily due to reduced capitalized
interest as well as increased long-term debt outstanding.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 27.4%
and 35.5%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, amortization of investment tax credits and state income
taxes. The decrease in the effective tax rate is primarily due to federal income
tax return adjustments, changes in flow-through temporary differences, and lower
state income taxes.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                            Moody's       S&P         Fitch
                                            -------       ---         -----
         Senior Unsecured Debt               Baa2         BBB          BBB


Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

   Issuances
   ---------
                                     Principal        Interest           Due
    Type of Debt                      Amount            Rate             Date 
    ------------                    ---------         --------           ----
                                   (in thousands)        (%)

    Notes Payable - Affiliated       $20,000            5.25             2015


   Retirements
   ----------- 
     None

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
   -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect on this specific registrant.

MTM Risk Management Contract Net Assets
---------------------------------------

<TABLE>
<CAPTION>

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.

                                                   MTM Risk Management Contract Net Assets
                                                    Nine Months Ended September 30, 2004
                                                              (in thousands)
        <C>                                                                                                             <C>       
        Total MTM Risk Management Contract Net Assets at December 31, 2003                                              $15,490 
        (Gain) Loss from Contracts Realized/Settled During the Period (a)                                                (5,552)
        Fair Value of New Contracts When Entered Into During the Period (b)                                                   - 
        Net Option Premiums Paid/(Received) (c)                                                                             (81)
        Change in Fair Value Due to Valuation Methodology Changes                                                             - 
        Changes in Fair Value of Risk Management Contracts (d)                                                              686 
        Changes in Fair Value Risk Management Contracts Allocated to Regulated Jurisdictions (e)                           (344)
                                                                                                                        --------
        Total MTM Risk Management Contract Net Assets                                                                    10,199 
        Net Cash Flow Hedge Contracts (f)                                                                                  (409)
        DETM Assignment (g)                                                                                              (6,051)
                                                                                                                        -------- 
        Total MTM Risk Management Contract Net Assets at September 30, 2004                                              $3,739
                                                                                                                        ========
</TABLE>

                                                                         
         (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
             includes realized risk management contracts and related derivatives
             that settled during 2004 that were entered into prior to 2004.
         (b) The "Fair Value of New Contracts When Entered Into During the
             Period" represents the fair value of long-term contracts entered
             into with customers during 2004. The fair value is calculated as of
             the execution of the contract. Most of the fair value comes from
             longer term fixed price contracts with customers that seek to limit
             their risk against fluctuating energy prices. The contract prices
             are valued against market curves associated with the delivery
             location.
         (c) "Net Option Premiums Paid/(Received)" reflects the net option
             premiums paid/(received) as they relate to unexercised and
             unexpired option contracts that were entered into in 2004.
         (d) "Changes in Fair Value of Risk Management Contracts" represents the
             fair value change in the risk management portfolio due to market
             fluctuations during the current period. Market fluctuations are
             attributable to various factors such as supply/demand, weather,
             etc.
         (e) "Changes in Fair Value of Risk Management Contracts Allocated to
             Regulated Jurisdictions" relates to the net gains (losses) of those
             contracts that are not reflected in the Statements of Income. These
             net gains (losses) are recorded as regulatory liabilities/assets
             for those subsidiaries that operate in regulated jurisdictions.
         (f) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
             Accumulated Other Comprehensive Income (Loss). 
         (g) See Note 17 "Related Party Transactions" in the 2003 Annual Report.


<TABLE>
<CAPTION>

                                        Reconciliation of MTM Risk Management Contracts to
                                                       Balance Sheets
                                                  As of September 30, 2004


                                                 MTM Risk  
                                                Management         Cash Flow         DETM        
                                               Contracts(a)          Hedges       Assignment(b)     Total(c)
                                               ------------         ---------     -------------     --------        
                                                                        (in thousands)
  <C>                                             <C>               <C>            <C>               <C>                      
  Current Assets                                  $20,549             $996              $-           $21,545 
  Non Current Assets                               19,057              133               -            19,190
                                                  --------          -------        --------          --------
  Total MTM Derivative Contract Assets             39,606            1,129               -            40,735
                                                  --------          -------        --------          --------

  Current Liabilities                             (18,843)          (1,207)         (2,493)          (22,543)
  Non Current Liabilities                         (10,564)            (331)         (3,558)          (14,453)
                                                  --------          -------        --------          --------
  Total MTM Derivative Contract Liabilities       (29,407)          (1,538)         (6,051)          (36,996)
                                                  --------          -------        --------          --------

  Total MTM Derivative Contract Net
   Assets (Liabilities)                           $10,199            $(409)        $(6,051)           $3,739
                                                  ========          =======        ========          ========
                                                
        
        (a) Does not include Cash Flow Hedges.
        (b) See Note 17 "Related Party Transactions" in the 2003 Annual Report.
        (c) Represents amount of total MTM derivative contracts recorded within
            Risk Management Assets, Long-term Risk Management Assets, Risk
            Management Liabilities and Long-term Risk Management Liabilities on 
            our Balance Sheets.
</TABLE>



Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.



<PAGE>


                    Maturity and Source of Fair Value of MTM
                       Risk Management Contract Net Assets
                Fair Value of Contracts as of September 30, 2004
                ------------------------------------------------

<TABLE>
<CAPTION>

                                                 Remainder                                                        After
                                                   2004           2005         2006        2007        2008      2008 (c)  Total (d)
                                                   ----           ----         ----        ----        ----      --------  ---------
                                                                                     (in thousands)
<C>                                                <C>          <C>           <C>         <C>        <C>         <C>       <C>   
                                                     
Prices Actively Quoted - Exchange
 Traded Contracts                                  $512         $(1,531)          $7        $485          $-         $-      $(527) 
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)                   (709)          2,982          774         492           -          -      3,539  
Prices Based on Models and Other
 Valuation Methods (b)                              180             750          993         827       1,369      3,068      7,187  
                                                   -----        --------      -------     -------    -------     -------   --------

Total                                              $(17)         $2,201       $1,774      $1,804     $1,369      $3,068    $10,199  
                                                   =====        ========      =======     =======    =======     =======   ========
                                                      
</TABLE>


 (a)  "Prices Provided by Other External Sources - OTC Broker Quotes" reflects 
      information obtained from over-the-counter brokers, industry services, or 
      multiple-party on-line platforms.
 (b)  "Prices Based on Models and Other Valuation Methods" is in absence of
      pricing information from external sources. Modeled information is derived 
      using valuation models developed by the reporting entity, reflecting when 
      appropriate, option pricing theory, discounted cash flow concepts, 
      valuation adjustments, etc. and may require projection of prices for 
      underlying commodities beyond the period that prices are available from 
      third-party sources. In addition, where external pricing information or 
      market liquidity are limited, such valuations are classified as modeled. 
      The determination of the point at which a market is no longer liquid for 
      placing it in the modeled category varies by market.
(c)   There is mark-to-market value in excess of 10 percent of our total mark-
      to-market value in individual periods beyond 2008. $1.4 million of this 
      mark-to-market value is in 2009 and $1.4 million of this mark-to-market
      is in 2010.
(d)   Amounts exclude Cash Flow Hedges.


Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.




<PAGE>

<TABLE>
<CAPTION>


                                   Total Accumulated Other Comprehensive Income (Loss) Activity
                                              Nine Months Ended September 30, 2004
                                   ------------------------------------------------------------



                                                                 Power             Interest Rate               Total
                                                                 -----             -------------               -----
                                                                                   (in thousands) 
     <C>                                                         <C>                    <C>                    <C>   
                                                                 
     Beginning Balance December 31, 2003                           $82                  $338                    $420    
     Changes in Fair Value (a)                                    (618)                    -                    (618)   
     Reclassifications from AOCI to Net
      Income (b)                                                  (322)                  (65)                   (387)   
                                                                 ------                 -----                  -------
     Ending Balance September 30, 2004                           $(858)                 $273                   $(585)   
                                                                 ======                 =====                  =======
                                                                 
</TABLE>



 (a)  "Changes in Fair Value" shows changes in the fair value of derivatives
      designated as hedging instruments in cash flow hedges during the reporting
      period not yet reclassified into net income, pending the hedged item's 
      affecting net income. Amounts are reported net of related income taxes.
 (b)  "Reclassifications from AOCI to Net Income" represents gains or losses
      from derivatives used as hedging instruments in cash flow hedges that were
      reclassified into net income during the reporting period. Amounts are 
      reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $590 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:


<TABLE>
<CAPTION>

                      Nine Months Ended                                                             Twelve Months Ended
                      September 30, 2004                                                             December 31, 2003            
           --------------------------------------                                        -------------------------------------
                        (in thousands)                                                                 (in thousands)
           <S>        <C>        <C>          <C>                                        <C>         <C>        <C>        <C>
           End        High       Average      Low                                         End        High       Average    Low
           ---        ----       -------      ---                                         ---        ----       -------    ---
           $71        $397        $184        $64                                         $136       $527        $220      $52

</TABLE>


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$25 million and $29 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or financial position.



<PAGE>

<TABLE>
<CAPTION>


                                                      KENTUCKY POWER COMPANY
                                                       STATEMENTS OF INCOME
                                For the Three and Nine Months Ended September 30, 2004 and 2003
                                                           (Unaudited)

                                                                    Three Months Ended                 Nine Months Ended
                                                                   --------------------               ---------------------
                                                                   2004            2003               2004             2003
                                                                   ----            ----               ----             ---- 
                                                                                       (in thousands)
<C>                                                             <C>               <C>                <C>             <C>      
                                                                
                OPERATING REVENUES
--------------------------------------------------
Electric Generation, Transmission and Distribution              $100,393          $93,500           $301,328         $281,755 
Sales to AEP Affiliates                                           13,111           10,193             32,096           29,496
                                                                ----------        --------           --------        ---------
TOTAL                                                            113,504          103,693            333,424          311,251
                                                                ----------        --------           --------        ---------

              OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                      29,380           19,608             75,498           52,994 
Purchased Electricity from AEP Affiliates                         37,725           35,461            102,848          109,008 
Other Operation                                                   12,848           12,519             39,128           36,351 
Maintenance                                                        5,925            6,671             23,464           20,597 
Depreciation and Amortization                                     11,004           10,693             32,768           28,653 
Taxes Other Than Income Taxes                                      2,208            2,300              6,931            6,742 
Income Taxes                                                         935            3,344              8,489           13,011
                                                                ----------        --------           --------        ---------
TOTAL                                                            100,025           90,596            289,126          267,356
                                                                ----------        --------           --------        ---------

OPERATING INCOME                                                  13,479           13,097             44,298           43,895 

Nonoperating Income (Loss)                                          (137)           1,309              1,297           (1,636)
Nonoperating Expenses                                                168              192              1,755              554 
Nonoperating Income Tax Expense (Credit)                            (144)             370               (238)          (1,114)
Interest Charges                                                   7,158            7,343             22,239           21,202
                                                                ----------        --------           --------        ---------

Income Before Cumulative Effect of Accounting Change               6,160            6,501             21,839           21,617 
Cumulative Effect of Accounting Change (Net of Tax)                    -                -                  -           (1,134)
                                                                ----------        --------           --------        ---------

NET INCOME                                                         $6,160          $6,501            $21,839          $20,483
                                                                ==========        ========           ========        =========
                                                                

The common stock of KPCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>






<PAGE>

<TABLE>
<CAPTION>


                                                    KENTUCKY POWER COMPANY
                                        STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                               EQUITY AND COMPREHENSIVE INCOME
                                   For the Nine Months Ended September 30, 2004 and 2003
                                                        (in thousands)
                                                          (Unaudited)

                                                                                         
                                                                                          Accumulated Other
                                                Common        Paid-in         Retained      Comprehensive
                                                 Stock        Capital         Earnings      Income (Loss)     Total 
                                                ------        -------         --------    -----------------   -----    
<C>                                             <C>           <C>              <C>            <C>           <C>    
                                                
DECEMBER 31, 2002                               $50,450       $208,750         $48,269        $(9,451)      $298,018 

Common Stock Dividends                                                         (16,448)                      (16,448)
                                                                                                            ---------
TOTAL                                                                                                        281,570
                                                                                                            ---------

        COMPREHENSIVE INCOME
------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                              235             235 
NET INCOME                                                                      20,483                        20,483
                                                                                                            ---------
TOTAL COMPREHENSIVE INCOME                                                                                    20,718
                                                --------      ---------        --------       ---------     ---------

SEPTEMBER 30, 2003                              $50,450       $208,750         $52,304        $(9,216)      $302,288
                                                ========      =========        ========       =========     =========

DECEMBER 31, 2003                               $50,450       $208,750         $64,151        $(6,213)      $317,138 

Common Stock Dividends                                                         (16,000)                      (16,000)
                                                                                                            ---------
TOTAL                                                                                                        301,138
                                                                                                            ---------

        COMPREHENSIVE INCOME
------------------------------------
Other Comprehensive Income (Loss),
  Net of Taxes:
   Cash Flow Hedges                                                                            (1,005)        (1,005)
NET INCOME                                                                      21,839                        21,839
                                                                                                            ---------
TOTAL COMPREHENSIVE INCOME                                                                                    20,834
                                                --------      ---------        --------       ---------     ---------

SEPTEMBER 30, 2004                              $50,450       $208,750         $69,990        $(7,218)      $321,972
                                                ========      =========        ========       =========     =========
                                                

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                                   KENTUCKY POWER COMPANY
                                                       BALANCE SHEETS
                                                          ASSETS
                                           September 30, 2004 and December 31, 2003
                                                        (Unaudited)

                                                                                                   2004                   2003
                                                                                                   ----                   ----
                                                                                                       (in thousands)          
                    ELECTRIC UTILITY PLANT
-----------------------------------------------------------
<C>                                                                                            <C>                    <C>     
Production                                                                                       $461,980               $457,341 
Transmission                                                                                      384,401                381,354 
Distribution                                                                                      436,768                425,688 
General                                                                                            59,662                 68,041 
Construction Work in Progress                                                                      13,539                 17,322
                                                                                               -----------            -----------
TOTAL                                                                                           1,356,350              1,349,746 
Accumulated Depreciation and Amortization                                                         395,216                381,876
                                                                                               -----------            -----------
TOTAL - NET                                                                                       961,134                967,870
                                                                                               -----------            -----------

                OTHER PROPERTY AND INVESTMENTS
------------------------------------------------------------ 
Non-Utility Property, Net                                                                           5,440                  5,423 
Other Investments                                                                                     398                  1,022
                                                                                               -----------            -----------
TOTAL                                                                                               5,838                  6,445
                                                                                               -----------            -----------

                       CURRENT ASSETS
------------------------------------------------------------ 
Cash and Cash Equivalents                                                                             642                    863 
Other Cash Deposits                                                                                    12                     23 
Advances to Affiliates                                                                             37,779                      - 
Accounts Receivable:
  Customers                                                                                        18,426                 21,177 
  Affiliated Companies                                                                             19,630                 25,327 
  Accrued Unbilled Revenues                                                                         3,461                  5,534 
  Miscellaneous                                                                                        90                     97 
  Allowance for Uncollectible Accounts                                                                (25)                  (736)
Fuel                                                                                                6,873                  9,481 
Materials and Supplies                                                                             19,309                 16,585 
Risk Management Assets                                                                             21,545                 16,200 
Margin Deposits                                                                                     1,277                  2,660 
Prepayments and Other                                                                               2,261                  1,696
                                                                                               -----------            -----------
TOTAL                                                                                             131,280                 98,907
                                                                                               -----------            -----------

               DEFERRED DEBITS AND OTHER ASSETS
------------------------------------------------------------ 
Regulatory Assets:
  SFAS 109 Regulatory Asset, Net                                                                  103,749                 99,828 
  Other Regulatory Assets                                                                          15,779                 13,971 
Long-term Risk Management Assets                                                                   19,190                 16,134 
Deferred Property Taxes                                                                             1,756                  6,847 
Other Deferred Charges                                                                             11,884                 11,632
                                                                                               -----------            -----------
TOTAL                                                                                             152,358                148,412
                                                                                               -----------            -----------

TOTAL ASSETS                                                                                   $1,250,610             $1,221,634
                                                                                               ===========            ===========
                                                                                               

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                                  KENTUCKY POWER COMPANY
                                                      BALANCE SHEETS
                                               CAPITALIZATION AND LIABILITIES
                                          September 30, 2004 and December 31, 2003
                                                        (Unaudited)

                                                                                               2004                 2003     
                                                                                               ----                 ----  
                                                                                                     (in thousands)
                     CAPITALIZATION
---------------------------------------------------------
<C>                                                                                        <C>                  <C>  
Common Shareholder's Equity:
  Common Stock - $50 Par Value:
    Authorized - 2,000,000 Shares
    Outstanding - 1,009,000 Shares                                                            $50,450              $50,450  
    Paid-in Capital                                                                           208,750              208,750  
    Retained Earnings                                                                          69,990               64,151  
    Accumulated Other Comprehensive Income (Loss)                                              (7,218)              (6,213)
                                                                                           -----------          -----------
Total Common Shareholder's Equity                                                             321,972              317,138
                                                                                           -----------          -----------
Long-term Debt:
    Nonaffiliated                                                                             428,592              427,602  
    Affiliated                                                                                 80,000               60,000
                                                                                           -----------          -----------
Total Long-term Debt                                                                          508,592              487,602
                                                                                           -----------          -----------
TOTAL                                                                                         830,564              804,740
                                                                                           -----------          -----------

                     CURRENT LIABILITIES
---------------------------------------------------------
Advances from Affiliates                                                                            -               38,096  
Accounts Payable:
  General                                                                                      28,198               22,802  
  Affiliated Companies                                                                         23,913               22,648  
Customer Deposits                                                                              12,722                9,894  
Taxes Accrued                                                                                  11,341                7,329  
Interest Accrued                                                                                9,074                6,915  
Risk Management Liabilities                                                                    22,543               11,704  
Obligations Under Capital Leases                                                                1,618                1,743  
Other                                                                                           8,224                8,628
                                                                                           -----------          -----------
TOTAL                                                                                         117,633              129,759
                                                                                           -----------          -----------

          DEFERRED CREDITS AND OTHER LIABILITIES
---------------------------------------------------------
Deferred Income Taxes                                                                         222,036              212,121  
Regulatory Liabilities:
  Asset Removal Costs                                                                          27,403               26,140  
  Deferred Investment Tax Credits                                                               7,078                7,955  
  Other Regulatory Liabilities                                                                 14,765               10,591  
Long-term Risk Management Liabilities                                                          14,453               12,363  
Obligations Under Capital Leases                                                                2,987                3,549  
Deferred Credits and Other                                                                     13,691               14,416
                                                                                           -----------          -----------
TOTAL                                                                                         302,413              287,135
                                                                                           -----------          -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                       $1,250,610           $1,221,634
                                                                                           ===========          ===========
                                                                                          

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>




<PAGE>

<TABLE>
<CAPTION>


                                                       KENTUCKY POWER COMPANY
                                                      STATEMENTS OF CASH FLOWS
                                         For the Nine Months Ended September 30, 2004 and 2003
                                                            (Unaudited)

                                                                                                   2004                 2003
                                                                                                   ----                 ----
                                                                                                         (in thousands)
                      OPERATING ACTIVITIES
---------------------------------------------------------------
<C>                                                                                               <C>                  <C>
Net Income                                                                                        $21,839              $20,483    
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
   Cumulative Effect of Accounting Change                                                               -                1,134    
   Depreciation and Amortization                                                                   32,768               28,653    
   Deferred Income Taxes                                                                            6,536               16,020    
   Deferred Investment Tax Credits                                                                   (877)                (880)   
   Deferred Property Taxes                                                                          5,091                4,698    
   Deferred Fuel Costs, Net                                                                         1,886                 (772)   
   Loss on Sale of Assets                                                                           1,062                    -    
   Mark-to-Market of Risk Management Contracts                                                      3,994                9,950    
Changes in Certain Assets and Liabilities:
   Accounts Receivable, Net                                                                         9,817               13,326    
   Fuel, Materials and Supplies                                                                      (116)                (613)   
   Accounts Payable, Net                                                                            6,661              (39,620)   
   Taxes Accrued                                                                                    4,012                1,455    
Change in Other Assets                                                                             (6,344)              (6,753)   
Change in Other Liabilities                                                                        10,621                  (61)
                                                                                                  --------             --------
Net Cash Flows From Operating Activities                                                           96,950               47,020
                                                                                                  --------             --------

                       INVESTING ACTIVITIES
---------------------------------------------------------------
Construction Expenditures                                                                         (26,845)             (71,154)   
Proceeds from Sales of Property and Other                                                           1,538                  967    
Change in Other Cash Deposits, Net                                                                     11                   (4)
                                                                                                  --------             --------
Net Cash Flow Used for Investing Activities                                                       (25,296)             (70,191)
                                                                                                  --------             --------

                       FINANCING ACTIVITIES
---------------------------------------------------------------
Issuance of Long-term Debt - Affiliated                                                            20,000               74,263    
Retirement of Long-term Debt - Nonaffiliated                                                            -              (40,000)   
Retirement of Long-term Debt - Affiliated                                                               -              (15,000)   
Change in Advances to/from Affiliates, Net                                                        (75,875)              18,809    
Dividends Paid                                                                                    (16,000)             (16,448)
                                                                                                  --------             --------
Net Cash Flows From (Used For) Financing Activities                                               (71,875)              21,624
                                                                                                  --------             --------

Net Decrease in Cash and Cash Equivalents                                                            (221)              (1,547)   
Cash and Cash Equivalents at Beginning of Period                                                      863                2,285
                                                                                                  --------             --------
Cash and Cash Equivalents at End of Period                                                           $642                 $738
                                                                                                  ========             ========


SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $19,198,000 and $17,925,000 and for income taxes was $(3,233,000) 
and $(7,605,000) in 2004 and 2003, respectively.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>







<PAGE>



                             KENTUCKY POWER COMPANY
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES
        -----------------------------------------------------------------

The notes to KPCo's financial statements are combined with the notes to
financial statements for other subsidiary registrants. Listed below are the
notes that apply to KPCo.

                                                                      Footnote
                                                                      Reference
                                                                      ---------

Significant Accounting Matters                                          Note 1

New Accounting Pronouncements                                           Note 2

Rate Matters                                                            Note 3

Commitments and Contingencies                                           Note 5

Guarantees                                                              Note 6

Benefit Plans                                                           Note 8

Business Segments                                                       Note 9

Financing Activities                                                    Note 10










<PAGE>





                         OHIO POWER COMPANY CONSOLIDATED




<PAGE>



                                     
                         OHIO POWER COMPANY CONSOLIDATED
                 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
                 ----------------------------------------------

Results of Operations
---------------------

Net Income decreased $20 million for the quarter primarily due to an $11 million
decrease in retail revenues driven by lower residential and commercial sales and
a $9 million favorable adjustment recorded in September 2003 for decreased costs
associated with coal companies sold prior to 2003.

Net Income decreased $150 million year-to-date primarily due to a $125 million
Cumulative Effect of Accounting Changes in the first quarter of 2003. Income
Before Cumulative Effect decreased $25 million year-to-date primarily due to a
decrease in sales for resale.

Effective July 1, 2003, we consolidated JMG Funding, LP (JMG) as a result of the
implementation of FIN 46. We record depreciation, interest and other operating
expenses of JMG and eliminate JMG's revenues against our operating lease
expenses. While there was no effect to net income as a result of consolidation,
some individual income statement captions are affected.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the third quarter of 2004 decreased $13 million from the
prior year period due to:

 o  An $11 million decrease in retail sales resulting from decreased weather-
    related demand from residential and commercial customers.
 o  A $9 million  increase in Fuel for Electric Generation primarily due to a 
    12% increase in the cost of coal consumed and a $4 million favorable coal 
    survey adjustment recorded in September 2003.
 o  A $2 million increase in Purchased Electricity from AEP Affiliates due to a
    9% increase in MWHs purchased as a result of forced generating unit outages.
 o  A $2 million increase in Maintenance due to increases in scheduled and 
    forced boiler, electric and steam plant maintenance partially offset by a 
    reduction in costs associated with maintaining overhead lines.
 o  A $4 million increase in Depreciation and Amortization primarily associated 
    with a greater depreciable base in 2004, including capitalized software 
    costs and the increased amortization of transition generation regulatory 
    assets due to normal operating adjustments.

The decrease in Operating Income for the third quarter of 2004 was partially
offset by:

 o  A $6 million increase in operating revenues related to risk management
    activities. 
 o  A $4 million decrease in Other Operation expense primarily due to gains on 
    disposition of allowances. 
 o  A $7 million decrease in Income Taxes. See Income Taxes section below for 
    further discussion.

Other Impacts of Earnings
-------------------------

Nonoperating Income for the third quarter of 2004 increased $27 million from the
prior year period primarily due to:

 o  $36 million in sales of excess energy purchased from Dow at the Plaquemine, 
    Louisiana plant (see Note 5) including the effects of a related affiliate 
    agreement which eliminates our market exposure related to the purchases from
    Dow. There was no change in overall net income due to the agreement with 
    Dow. These sales in 2004 were offset by a $9 million favorable adjustment 
    recorded in September 2003 for decreased costs associated with coal 
    companies sold prior to 2003.

Nonoperating Expenses for the third quarter of 2004 increased $43 million from
the prior year period primarily due to:

 o  $38 million from the agreement to purchase excess energy from Dow at the 
    Plaquemine,  Louisiana plant (see Note 5). There was no change in overall 
    net income due to the agreement with Dow.
 o  $4 million of unfavorable risk management activities.

Nonoperating Income Tax Expense decreased $4 million. See Income Taxes section
below for further discussion.

Interest charges for the third quarter of 2004 decreased $5 million from the
prior year period primarily due to redemption of higher cost First Mortgage
Bonds and Senior Unsecured Notes replaced with Affiliated Notes Payable at lower
interest rates.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 32.3% and
33.3%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax 
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The effective tax rates remained relatively flat
for the comparative period.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 decreased $20
million compared to the prior year period due to:

 o  A $9 million decrease in non-affiliated wholesale energy sales due to a 
    lower sales volume. 
 o  A $12 million decrease in non-affiliated system sales due to a 12% decrease 
    in MWHs sold.
 o  A $9 million  decrease in Sales to AEP  Affiliates.  The decrease is 
    primarily the result of an 8.6%  decrease in MWH for  affiliated  system 
    sales  partially offset by a $5 million increase in capacity credit.
 o  A $7 million decrease in other operating revenue primarily due to the
    expiration of a contract with Buckeye Power. 
 o  A $14 million increase in Fuel for Electric Generation due to higher coal 
    cost. 
 o  A $4 million increase in Maintenance due primarily to boiler overhaul work 
    from scheduled and forced outages and turbine repairs.
 o  A $25 million increase in Depreciation and Amortization primarily
    associated with the consolidation of JMG. Depreciation expense
    related to the assets owned by JMG were consolidated effective
    July 1, 2003 (there was no change in overall net income due to the
    consolidation of JMG). In addition, the increase is a result of a
    greater depreciable base in 2004, including capitalized software
    and the increased amortization of transition generation regulatory
    assets due to normal operating adjustments.

The decrease in Operating Income for the nine months ended September 30, 2004
was partially offset by:

 o  A $6 million increase in retail electric revenues resulting from increased
    demand from industrial customers. 
 o  A $15 million increase in operating revenues related to favorable risk 
    management activities.
 o  An $11 million decrease in Purchased Electricity for Resale primarily due to
    cessation of the Buckeye Transmission agreement on June 30, 2003. Prior to 
    this date, Ohio Edison interchange expenses were recorded in Purchased 
    Electricity for Resale. An associated offsetting decrease in Ohio Edison 
    revenue occurred in non affiliated sales for resale; therefore, there was 
    no effect to net income. In addition, the DOE Settlement Capacity Surcharge 
    was included in rates through April 30, 2003, which is no longer in effect 
    for 2004.
 o  A $29 million decrease in Income Taxes. See Income Taxes section below for
    further discussion.

Other Impacts of Earnings
-------------------------

Nonoperating Income increased $95 million primarily due to sales of excess
energy purchased from Dow at the Plaquemine, Louisiana plant (see Note 5)
including the effects of a related affiliate agreement which eliminates our
market exposure related to the purchases from Dow. There was no change in
overall net income due to the agreement with Dow. In addition, income from
nonoperating risk management contributed to this increase.

Nonoperating Expense increased $82 million primarily due to the agreement to
purchase excess energy from Dow at the Plaquemine, Louisiana plant (see Note 5).
There was no change in overall net income due to the agreement with Dow.

Interest charges increased $17 million primarily due to the consolidation of JMG
and its associated debt along with issuance of additional long-term debt in July
2003. There was no change in overall net income due to the consolidation of JMG.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 34.3%
and 37.5%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to flow-through of book versus tax
temporary differences, permanent differences, amortization of investment tax
credits and state income taxes. The decrease in the effective tax rate is
primarily due to lower state income taxes and federal income tax return
adjustments.

Cumulative Effect of Accounting Changes
---------------------------------------

The Cumulative Effect of Accounting Changes during 2003 of $125 million was due
to the one-time after-tax impact of adopting SFAS 143 and implementing the
requirements of EITF 02-3.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                             Moody's       S&P         Fitch
                                             -------       ---         -----   
          Senior Unsecured Debt                A3          BBB          BBB+

Cash Flow
---------

Cash flows for the nine months ended September 30, 2004 and 2003 were as
follows:

                                                              2004        2003
                                                              ----        ----
                                                                (in thousands)

 Cash and cash equivalents at beginning of period            $7,233      $5,275
                                                           ---------   ---------
 Cash flows from (used for):
   Operating activities                                     447,996     225,658
   Investing activities                                    (151,809)   (160,295)
   Financing activities                                    (299,977)    (63,986)
                                                           ---------   ---------
 Net increase (decrease) in cash and cash equivalents
                                                             (3,790)      1,377
                                                           ---------   ---------

 Cash and cash equivalents at end of period                  $3,443      $6,652
                                                           =========   =========

Operating Activities
--------------------

Cash Flows From Operating Activities for the nine months ended September 30,
2004 increased $222 million compared to the prior year period. This is primarily
due to significant reductions in Accounts Payable balances during the second
quarter of 2003 partially associated with a wind-down of risk management
activities in that year.

Investing Activities
--------------------

Cash Flows Used For Investing Activities were $152 million during the nine
months ended September 30, 2004 primarily due to new expenditures for
Generation, Transmission, Distribution and Environmental offset by a Change in
Other Cash Deposits, Net primarily as a result of monies set aside in 2003 for
the retirement of Installment Purchase Contracts in 2004. For the remainder of
2004, we expect our Construction Expenditures to be approximately $107 million.

Financing Activities
--------------------

Cash Flows For Financing Activities used $300 million in the nine months ended
September 30, 2004 and $64 million in the prior year period. This is primarily
due to a decrease in the change in Advances to/from Affiliates, Net, during 2004
as a result of becoming a net lender as opposed to a net borrower.

Financing Activity
------------------

Long-term debt issuances and retirements during the nine months ended September
30, 2004 were:

  Issuances
  ---------
                                     Principal        Interest          Due
     Type of Debt                     Amount            Rate            Date
     ------------                    ---------        ---------         ---- 
                                  (in thousands)         (%)

     Notes Payable - Affiliates      $200,000           5.25            2015
     Notes Payable - Affiliates       200,000           3.32            2006

  Retirements
  -----------  
                                     Principal        Interest          Due
     Type of Debt                     Amount            Rate            Date
     ------------                    ---------        ---------         ---- 
                                  (in thousands)         (%)

     Installment Purchase Contracts   $50,000           6.85             2022
     Notes Payable                      3,000           6.27             2009
     Notes Payable                      4,390           6.81             2008
     First Mortgage Bonds              10,000           7.30             2024
     Senior Unsecured Notes           140,000           7.375            2038
     Senior Unsecured Notes           100,000           6.75             2004
     Senior Unsecured Notes            75,000           7.00             2004

Other
-----

Power Generation Facility
-------------------------

AEP has agreements with Juniper Capital L.P. (Juniper) under which Juniper
constructed and financed a non-regulated merchant power generation facility
(Facility) near Plaquemine, Louisiana and leased the Facility to AEP. AEP has
subleased the Facility to the Dow Chemical Company (Dow). The Facility is a
Dow-operated "qualifying cogeneration facility" for purposes of PURPA.
Commercial operation of the Facility as required by the agreements between
Juniper, AEP and Dow was achieved on March 18, 2004.

Dow uses a portion of the energy produced by the Facility and sells the excess
energy. OPCo has agreed to purchase up to approximately 800 MW of such excess
energy from Dow. Because the Facility is a major steam supply for Dow, Dow is
expected to operate the Facility at certain minimum levels, and OPCo is
obligated to purchase the energy generated at those minimum operating levels
(expected to be approximately 270 MW).

OPCo has also agreed to sell up to approximately 800 MW of energy to Tractebel
Energy Marketing, Inc. (TEM) for a period of 20 years under a Power Purchase and
Sale Agreement dated November 15, 2000 (PPA) at a price that is currently in
excess of market. Beginning May 1, 2003, OPCo tendered replacement capacity,
energy and ancillary services to TEM pursuant to the PPA that TEM rejected as
non-conforming. Commercial operation for purposes of the PPA began April 2,
2004.

On September 5, 2003, TEM and OPCo separately filed declaratory judgment actions
in the United States District Court for the Southern District of New York. OPCo
alleges that TEM has breached the PPA, and is seeking a determination of OPCo's
rights under the PPA. TEM alleges that the PPA never became enforceable, or
alternatively, that the PPA has already been terminated as the result of OPCo's
breaches. If the PPA is deemed terminated or found to be unenforceable by the
court, OPCo could be adversely affected to the extent it is unable to find other
purchasers of the power with similar contractual terms and to the extent OPCo
does not fully recover claimed termination value damages from TEM. However, OPCo
has entered into an agreement with an affiliate that eliminates OPCo's market
exposure related to the PPA. The corporate parent of TEM (Tractebel SA) has
provided a limited guaranty.

On November 18, 2003, the above litigation was suspended pending final
resolution in arbitration of all issues pertaining to the protocols relating to
the dispatching, operation, and maintenance of the Facility and the sale and
delivery of electric power products. In the arbitration proceedings, TEM argued
that in the absence of mutually agreed upon protocols there were no commercially
reasonable means to obtain or deliver the electric power products and therefore
the PPA is not enforceable. TEM further argued that the creation of the
protocols is not subject to arbitration. The arbitrator ruled in favor of TEM on
February 11, 2004 and concluded that the "creation of protocols" was not subject
to arbitration, but did not rule upon the merits of TEM's claim that the PPA is
not enforceable. Management believes the PPA is enforceable. The litigation is
now in the discovery phase.

On March 26, 2004, OPCo requested that TEM provide assurances of performance of
its future obligations under the PPA, but TEM refused to do so. As indicated
above, OPCo also gave notice to TEM and declared April 2, 2004 as the
"Commercial Operations Date." Despite OPCo's prior tenders of replacement
electric power products to TEM beginning May 1, 2003 and despite OPCo's tender
of electric power products from the Facility to TEM beginning April 2, 2004, TEM
refused to accept and pay for them under the terms of the PPA. On April 5, 2004,
OPCo gave notice to TEM that OPCo (i) was suspending performance of its
obligations under PPA, (ii) would be seeking a declaration from the New York
federal court that the PPA has been terminated and (iii) would be pursuing
against TEM, and Tractebel SA under the guaranty, damages and the full
termination payment value of the PPA.

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
-------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect on this specific registrant.


<TABLE>
<CAPTION>


Roll-Forward of MTM Risk Management Contract Net Assets
-------------------------------------------------------

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.

                     MTM Risk Management Contract Net Assets
                      Nine Months Ended September 30, 2004
                                 (in thousands)

        <C>                                                                                                               <C>  
        Total MTM Risk Management Contract Net Assets at December 31, 2003                                                $53,938 
        (Gain) Loss from Contracts Realized/Settled During the Period (a)                                                 (25,715)
        Fair Value of New Contracts When Entered Into During the Period (b)                                                     - 
        Net Option Premiums Paid/(Received) (c)                                                                              (277)
        Change in Fair Value Due to Valuation Methodology Changes (d)                                                       1,189 
        Changes in Fair Value of Risk Management Contracts (e)                                                              9,825 
        Changes in Fair Value of Risk Management Contracts Allocated to Regulated Jurisdictions (f)                             -   
                                                                                                                          --------
        Total MTM Risk Management Contract Net Assets                                                                      38,960 
        Net Cash Flow Hedge Contracts (g)                                                                                  (4,744)
        DETM Assignment (h)                                                                                               (20,709)
                                                                                                                          --------
        Total MTM Risk Management Contracts Net Assets at September 30, 2004                                              $13,507
                                                                                                                          ========

        (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
            includes realized risk management contracts and related derivatives
            that settled during 2004 that were entered into prior to 2004.
        (b) The "Fair Value of New Contracts When Entered Into During the
            Period" represents the fair value of long-term contracts entered 
            into with customers during 2004. The fair value is calculated as of 
            the execution of the contract. Most of the fair value comes from 
            longer term fixed price contracts with customers that seek to limit 
            their risk against fluctuating energy prices. The contract prices 
            are valued against market curves associated with the delivery 
            location.
        (c) "Net Option Premiums Paid/(Received)" reflects the net option
            premiums paid/(received) as they relate to unexercised and unexpired
            option contracts that were entered into in 2004.
        (d) "Change in Fair Value Due to Valuation Methodology Changes"
            represents the impact of AEP changes in methodology in regards to
            credit reserves on forward contracts.
        (e) "Changes in Fair Value of Risk Management Contracts" represents the
            fair value change in the risk management portfolio due to market
            fluctuations during the current period. Market fluctuations are
            attributable to various factors such as supply/demand, weather,
            storage, etc.
        (f) "Changes in Fair Value of Risk Management Contracts Allocated to
            Regulated Jurisdictions" relates to the net gains (losses) of those
            contracts that are not reflected in the Consolidated Statements of
            Income. These net gains (losses) are recorded as regulatory
            liabilities/assets for those subsidiaries that operate in regulated
            jurisdictions.
        (g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in 
            Accumulated Other Comprehensive Income (Loss).
        (h) See Note 17  "Related Party Transactions" in the 2003 Annual Report.


</TABLE>



<TABLE>
<CAPTION>


                                           Reconciliation of MTM Risk Management Contracts to
                                                    Consolidated Balance Sheets
                                                      As of September 30, 2004

                                                 MTM Risk  
                                                 Management     Cash Flow           DETM         
                                                Contracts(a)      Hedges         Assignment(b)    Consolidated (c)
                                                ------------    ---------        -------------    ----------------
                                                                      (in thousands)   
        <C>                                      <C>             <C>              <C>               <C>    
                                                 
        Current Assets                            $80,477         $1,282                $-           $81,759 
        Non Current Assets                         68,558            452                 -            69,010
                                                 ---------       --------         ---------         ---------
        Total MTM Derivative Contract
         Assets                                   149,035          1,734                 -           150,769
                                                 ---------       --------         ---------         ---------

        Current Liabilities                       (71,669)        (5,329)           (8,534)          (85,532)
        Non Current Liabilities                   (38,406)        (1,149)          (12,175)          (51,730)
                                                 ---------       --------         ---------         ---------
        Total MTM Derivative Contract
         Liabilities                             (110,075)        (6,478)          (20,709)         (137,262)
                                                 ---------       --------         ---------         ---------

        Total MTM Derivative Contract Net
         Assets (Liabilities)                     $38,960        $(4,744)         $(20,709)          $13,507
                                                 =========       ========         =========         =========
                                                 
        (a) Does not include Cash Flow Hedges.
        (b) See Note 17 "Related Party Transactions" in the 2003 Annual Report.
        (c) Represents amount of total MTM derivative contracts recorded within
            Risk Management Assets, Long-term Risk Management Assets, Risk
            Management Liabilities and Long-term Risk Management Liabilities on
            our Consolidated Balance Sheets.

</TABLE>


Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:

 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>
                                                 Maturity and Source of Fair Value of MTM
                                                    Risk Management Contract Net Assets
                                             Fair Value of Contracts as of September 30, 2004



                                             Remainder                                                         After  
                                               2004           2005        2006        2007         2008       2008 (c)    Total (d)
                                               ----           ----        ----        ----         ----       --------    ---------
                                                                              (in thousands)
                                              <C>          <C>          <C>          <C>         <C>         <C>         <C>   
                                               
Prices Actively Quoted - Exchange
 Traded Contracts                             $1,751       $(5,240)        $22       $1,660          $-           $-     $(1,807) 
Prices Provided by Other External
 Sources - OTC Broker Quotes (a)              (2,174)       13,544       2,869        2,243           -            -      16,482  
Prices Based on Models and Other
 Valuation Methods (b)                           630         2,168       3,506        2,794       4,685       10,502      24,285
                                              -------      --------     -------      -------     -------     --------    -------- 

Total                                           $207       $10,472      $6,397       $6,697      $4,685      $10,502     $38,960
                                              =======      ========     =======      =======     =======     ========    ========
                                               


</TABLE>



 (a)  "Prices Provided by Other External Sources - OTC Broker Quotes"
      reflects information obtained from over-the-counter brokers, industry
      services, or multiple-party on-line platforms.
 (b)  "Prices Based on Models and Other Valuation Methods" is in absence of
      pricing information from external sources. Modeled information is
      derived using valuation models developed by the reporting entity,
      reflecting when appropriate, option pricing theory, discounted cash
      flow concepts, valuation adjustments, etc. and may require projection
      of prices for underlying commodities beyond the period that prices are
      available from third-party sources. In addition, where external pricing
      information or market liquidity are limited, such valuations are
      classified as modeled. The determination of the point at which a market
      is no longer liquid for placing it in the modeled category varies by
      market.
 (c)  There is mark-to-market value in excess of 10 percent of our total
      mark-to-market value in individual periods beyond 2008. $4.8 million of
      this mark-to-market value is in 2009 and $4.6 million of this
      mark-to-market is in 2010.
 (d)  Amounts exclude Cash Flow Hedges.


Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, economic hedge contracts which are not
designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.


<TABLE>
<CAPTION>

          Total Accumulated Other Comprehensive Income (Loss) Activity
                      Nine Months Ended September 30, 2004

                                                                          Foreign    
                                                        Power             Currency        Consolidated
                                                        -----             --------        ------------
                                                                        (in thousands)                           
    <C>                                                <C>                 <C>              <C>                         
    Beginning Balance December 31, 2003                   $268             $(371)             $(103)    
    Changes in Fair Value (a)                           (2,270)               -              (2,270)    
    Reclassifications from AOCI to Net
     Income (b)                                         (1,120)               10             (1,110)
                                                       --------            ------           --------
    Ending Balance September 30, 2004                  $(3,122)            $(361)           $(3,483)
                                                       ========            ======           ========
                                                      

 (a)  "Changes in Fair Value" shows changes in the fair value of derivatives
      designated as hedging instruments in cash flow hedges during the
      reporting period not yet reclassified into net income, pending the
      hedged item's affecting net income. Amounts are reported net of related
      income taxes.
 (b)  "Reclassifications from AOCI to Net Income" represents gains or losses
      from derivatives used as hedging instruments in cash flow hedges that
      were reclassified into net income during the reporting period. Amounts
      are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $2,683 thousand loss.

</TABLE>


Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:


<TABLE>
<CAPTION>

                      Nine Months Ended                                                             Twelve Months Ended
                      September 30, 2004                                                             December 31, 2003        
           --------------------------------------                                         ------------------------------------   
                        (in thousands)                                                                 (in thousands)
           <C>       <C>         <C>         <C>                                          <C>       <C>          <C>       <C>

           End        High       Average      Low                                         End        High       Average    Low
           ---        ----       -------      ---                                         ---        ----       -------    ---
           $244      $1,357       $631       $220                                         $444      $1,724       $722      $172
</TABLE>



VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$167 million and $214 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period; therefore, a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>


                                                   OHIO POWER COMPANY CONSOLIDATED
                                                  CONSOLIDATED STATEMENTS OF INCOME
                                     For the Three and Nine Months Ended September 30, 2004 and 2003
                                                              (Unaudited)


                                                                       Three Months Ended              Nine Months Ended
                                                                      --------------------            --------------------
                                                                      2004            2003            2004            2003
                                                                      ----            ----            ----            ----
                                                                                         (in thousands)        
                OPERATING REVENUES
--------------------------------------------------
<C>                                                                  <C>             <C>           <C>             <C>         
Electric Generation, Transmission and Distribution                   $410,514        $418,083      $1,251,377      $1,256,862 
Sales to AEP Affiliates                                               147,602         147,235         429,503         438,473
                                                                     ---------       ---------     -----------     -----------
TOTAL                                                                 558,116         565,318       1,680,880       1,695,335
                                                                     ---------       ---------     -----------     -----------

                OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                          164,353         155,222         476,127         462,316 
Purchased Electricity for Resale                                       14,456          15,219          40,794          52,064 
Purchased Electricity from AEP Affiliates                              26,007          23,693          68,479          70,905 
Other Operation                                                        87,981          92,376         272,900         269,998 
Maintenance                                                            41,047          38,598         131,831         127,466 
Depreciation and Amortization                                          71,857          67,365         214,027         189,140 
Taxes Other Than Income Taxes                                          44,681          45,582         135,517         132,350 
Income Taxes                                                           26,897          33,465          89,099         118,597
                                                                     ---------       ---------     -----------     -----------
TOTAL                                                                 477,279         471,520       1,428,774       1,422,836
                                                                     ---------       ---------     -----------     -----------

OPERATING INCOME                                                       80,837          93,798         252,106         272,499 

Nonoperating Income                                                    46,362          19,255         116,174          21,354 
Nonoperating Expenses                                                  50,809           7,528         108,109          26,569 
Nonoperating Income Tax Expense (Credit)                               (2,660)          1,646            (693)         (1,446)
Interest Charges                                                       28,365          33,512          91,232          73,736
                                                                     ---------       ---------     -----------     -----------

Income Before Cumulative Effect of Accounting Changes                  50,685          70,367         169,632         194,994 
Cumulative Effect of Accounting Changes (Net of Tax)                        -               -               -         124,632
                                                                     ---------       ---------     -----------     -----------

NET INCOME                                                             50,685          70,367         169,632         319,626 

Preferred Stock Dividend Requirements                                     184             286             550             915
                                                                     ---------       ---------     -----------     -----------

EARNINGS APPLICABLE TO COMMON STOCK                                   $50,501         $70,081        $169,082        $318,711
                                                                     =========       =========     ===========     ===========
                                                                     

The common stock of OPCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                               OHIO POWER COMPANY CONSOLIDATED
                  CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
                                    For the Nine Months Ended September 30, 2004 and 2003
                                                        (in thousands)
                                                          (Unaudited)

                                                                                                     
                                                                                       Accumulated Other
                                             Common        Paid-in        Retained       Comprehensive
                                             Stock         Capital        Earnings       Income (Loss)        Total
                                             ------        -------        --------     ------------------     -----

<C>                                          <C>            <C>             <C>             <C>            <C>    
DECEMBER 31, 2002                            $321,201       $462,483        $522,316        $(72,886)      $1,233,114 

Common Stock Dividends                                                      (125,800)                        (125,800)
Preferred Stock Dividends                                                       (915)                            (915)
Capital Stock Gains                                                1                                                1
                                                                                                           ----------- 
TOTAL                                                                                                       1,106,400
                                                                                                           ----------- 

       COMPREHENSIVE INCOME
----------------------------------
Other Comprehensive Income (Loss),
  Net of Taxes:
    Cash Flow Hedges                                                                           1,016            1,016 
    Minimum Pension Liability                                                                  5,625            5,625 
NET INCOME                                                                   319,626                          319,626
                                                                                                           ----------- 
TOTAL COMPREHENSIVE INCOME                                                                                    326,267
                                             ---------      ---------       ---------       ----------     ----------- 

SEPTEMBER 30, 2003                           $321,201       $462,484        $715,227        $(66,245)      $1,432,667
                                             =========      =========       =========       ==========     ===========

DECEMBER 31, 2003                            $321,201       $462,484        $729,147        $(48,807)      $1,464,025 

Common Stock Dividends                                                      (144,114)                        (144,114)
Preferred Stock Dividends                                                       (550)                            (550)
                                                                                                           ----------- 
TOTAL                                                                                                       1,319,361
                                                                                                           ----------- 

       COMPREHENSIVE INCOME
----------------------------------
Other Comprehensive Income (Loss),
  Net of Taxes:
    Cash Flow Hedges                                                                          (3,380)          (3,380)
    Minimum Pension Liability                                                                 (3,942)          (3,942)
NET INCOME                                                                   169,632                          169,632
                                                                                                           ----------- 
TOTAL COMPREHENSIVE INCOME                                                                                    162,310
                                             ---------      ---------       ---------       ----------     ----------- 

SEPTEMBER 30, 2004                           $321,201       $462,484        $754,115        $(56,129)      $1,481,671
                                             =========      =========       =========       ==========     ===========
                                             
</TABLE>


See Notes to Financial Statements of Registrant Subsidiaries.





<PAGE>

<TABLE>
<CAPTION>


                                                      OHIO POWER COMPANY CONSOLIDATED
                                                        CONSOLIDATED BALANCE SHEETS
                                                                  ASSETS
                                                  September 30, 2004 and December 31, 2003
                                                                (Unaudited)

                                                                                                    2004                   2003
                                                                                                    ----                   ----
                                                                                                           (in thousands)      

                    ELECTRIC UTILITY PLANT
--------------------------------------------------------------
<S>                                                                                             <C>                     <C>   
Production                                                                                      $4,102,622              $4,029,515 
Transmission                                                                                       969,848                 938,805 
Distribution                                                                                     1,191,189               1,156,886 
General                                                                                            251,720                 245,434 
Construction Work in Progress                                                                      162,450                 142,951
                                                                                                -----------             -----------
Total                                                                                            6,677,829               6,513,591 
Accumulated Depreciation and Amortization                                                        2,582,823               2,485,947
                                                                                                -----------             -----------
TOTAL - NET                                                                                      4,095,006               4,027,644
                                                                                                -----------             -----------

                OTHER PROPERTY AND INVESTMENTS
--------------------------------------------------------------
Non-Utility Property, Net                                                                           45,788                  47,015 
Other                                                                                               58,550                  24,264
                                                                                                -----------             -----------
TOTAL                                                                                              104,338                  71,279
                                                                                                -----------             -----------

                        CURRENT ASSETS
--------------------------------------------------------------
Cash and Cash Equivalents                                                                            3,443                   7,233 
Other Cash Deposits                                                                                     50                  51,017 
Advances to Affiliates                                                                             232,212                  67,918 
Accounts Receivable:
   Customers                                                                                        99,840                 100,960 
   Affiliated Companies                                                                            112,234                 120,532 
   Accrued Unbilled Revenues                                                                         8,597                  17,221 
   Miscellaneous                                                                                       679                     736 
   Allowance for Uncollectible Accounts                                                               (581)                   (789)
Fuel                                                                                                81,785                  77,725 
Materials and Supplies                                                                              97,480                  92,136 
Risk Management Assets                                                                              81,759                  56,265 
Margin Deposits                                                                                      4,962                   9,296 
Prepayments and Other                                                                               15,520                  15,883
                                                                                                -----------             -----------
TOTAL                                                                                              737,980                 616,133
                                                                                                -----------             -----------

                DEFERRED DEBITS AND OTHER ASSETS
--------------------------------------------------------------
Regulatory Assets:
   SFAS 109 Regulatory Asset, Net                                                                  171,328                 169,605 
   Transition Regulatory Assets                                                                    246,472                 310,035 
   Unamortized Loss on Reacquired Debt                                                              11,225                  10,172 
   Other                                                                                            24,101                  22,506 
Long-term Risk Management Assets                                                                    69,010                  52,825 
Deferred Property Taxes                                                                             20,665                  67,469 
Deferred Charges and Other Assets                                                                   38,951                  26,850
                                                                                                -----------             -----------
TOTAL                                                                                              581,752                 659,462
                                                                                                -----------             -----------

TOTAL ASSETS                                                                                    $5,519,076              $5,374,518
                                                                                                ===========             ===========
                                                                                               

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>








<PAGE>

<TABLE>
<CAPTION>


                                                  OHIO POWER COMPANY CONSOLIDATED
                                                    CONSOLIDATED BALANCE SHEETS
                                                   CAPITALIZATION AND LIABILITIES
                                               September 30, 2004 and December 31, 2003
                                                            (Unaudited)

                                                                                                   2004                    2003
                                                                                                   ----                    ----
                                                                                                           (in thousands)
                             CAPITALIZATION
------------------------------------------------------------------------                                                        
<C>                                                                                           <C>                     <C>    
Common Shareholder's Equity:
  Common Stock - No Par Value:
     Authorized - 40,000,000 Shares
     Outstanding - 27,952,473 Shares                                                             $321,201                $321,201 
    Paid-in Capital                                                                               462,484                 462,484 
    Retained Earnings                                                                             754,115                 729,147 
    Accumulated Other Comprehensive Income (Loss)                                                 (56,129)                (48,807)
                                                                                               -----------             -----------
Total Common Shareholder's Equity                                                               1,481,671               1,464,025 
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                     16,644                  16,645
                                                                                               -----------             -----------
Total Shareholders' Equity                                                                      1,498,315               1,480,670 
Liability for Cumulative Preferred Stock Subject to Mandatory Redemption                            5,000                   7,250 
Long-term Debt:
    Nonaffiliated                                                                               1,600,056               1,608,086 
    Affiliated                                                                                    400,000                      -
                                                                                               -----------             -----------
Total Long-term Debt                                                                            2,000,056               1,608,086
                                                                                               -----------             -----------
TOTAL                                                                                           3,503,371               3,096,006
                                                                                               -----------             -----------

Minority Interest                                                                                  14,676                  16,314
                                                                                               -----------             -----------

                          CURRENT LIABILITIES
------------------------------------------------------------------------
Short-term Debt - General                                                                          19,562                  25,941 
Long-term Debt Due Within One Year - Nonaffiliated                                                 60,354                 431,854 
Accounts Payable:
  General                                                                                         119,404                 104,874 
  Affiliated Companies                                                                             90,555                 101,758 
Customer Deposits                                                                                  27,908                  17,308 
Taxes Accrued                                                                                     184,503                 132,793 
Interest Accrued                                                                                   26,339                  45,679 
Risk Management Liabilities                                                                        85,532                  38,318 
Obligations Under Capital Leases                                                                    8,760                   9,624 
Other                                                                                              71,807                  71,642
                                                                                               -----------             -----------
TOTAL                                                                                             694,724                 979,791
                                                                                               -----------             -----------

                 DEFERRED CREDITS AND OTHER LIABILITIES
------------------------------------------------------------------------
Deferred Income Taxes                                                                             933,443                 933,582 
Regulatory Liabilities:
  Asset Removal Costs                                                                             104,974                 101,160 
  Deferred Investment Tax Credits                                                                  13,357                  15,641 
  Other                                                                                                 -                       3 
Long-term Risk Management Liabilities                                                              51,730                  40,477 
Deferred Credits                                                                                   26,225                  23,222 
Obligations Under Capital Leases                                                                   32,899                  25,064 
Asset Retirement Obligations                                                                       45,204                  42,656 
Other                                                                                              98,473                 100,602
                                                                                               -----------             -----------
TOTAL                                                                                           1,306,305               1,282,407
                                                                                               -----------             -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                           $5,519,076              $5,374,518
                                                                                               ===========             ===========
                                                                                               

See Notes to Financial Statements of Registrant Subsidiaries. 

</TABLE>




<PAGE>

<TABLE>
<CAPTION>



                                                     OHIO POWER COMPANY CONSOLIDATED
                                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            For the Nine Months Ended September 30, 2004 and 2003
                                                                (Unaudited)

                                                                                                         2004              2003
                                                                                                         ----              ----
                                                                                                           (in thousands)
                     OPERATING ACTIVITIES
------------------------------------------------------------
<C>                                                                                                    <C>               <C>      
Net Income                                                                                             $169,632          $319,626 
Adjustments to Reconcile Net Income to Net Cash Flows
   From Operating Activities:
      Cumulative Effect of Accounting Changes                                                                 -          (124,632)
      Depreciation and Amortization                                                                     214,027           189,140 
      Deferred Income Taxes                                                                               2,080             4,139 
      Deferred Investment Tax Credits                                                                    (2,283)           (2,288)
      Deferred Property Taxes                                                                            46,804            46,491 
      Mark-to-Market of Risk Management Contracts                                                        11,632            40,283 
Changes in Certain Assets and Liabilities:
      Accounts Receivable, Net                                                                           17,891            37,799 
      Fuel, Materials and Supplies                                                                       (9,404)            4,515 
      Prepayments and Other Current Assets                                                                4,697            (9,030)
      Accounts Payable, Net                                                                               3,327          (215,012)
      Customer Deposits                                                                                  10,600             3,579 
      Taxes Accrued                                                                                      51,710           (17,682)
      Interest Accrued                                                                                  (19,340)            9,516 
Change in Other Assets                                                                                  (51,835)           (2,859)
Change in Other Liabilities                                                                              (1,542)          (57,927)
                                                                                                       ---------         ---------
Net Cash Flows From Operating Activities                                                                447,996           225,658
                                                                                                       ---------         ---------

                     INVESTING ACTIVITIES
------------------------------------------------------------
Construction Expenditures                                                                              (205,752)         (163,864)
Change in Other Cash Deposits, Net                                                                       50,967               (51)
Proceeds from Sale of Property and Other                                                                  2,976             3,620
                                                                                                       ---------         ---------
Net Cash Flows Used For Investing Activities                                                           (151,809)         (160,295)
                                                                                                       ---------         ---------

                     FINANCING ACTIVITIES
------------------------------------------------------------
Issuance of Long-term Debt - Nonaffiliated                                                                    -           938,914 
Issuance of Long-term Debt - Affiliated                                                                 400,000                 - 
Change in Advances to/from Affiliates, Net                                                             (164,294)         (272,872)
Change in Short-term Debt, Net                                                                           (6,379)            2,039 
Change in Short-term Debt - Affiliates, Net                                                                   -          (275,000)
Retirement of Long-term Debt - Nonaffiliated                                                           (382,390)          (29,850)
Retirement of Long-term Debt - Affiliated                                                                     -          (300,000)
Retirement of Cumulative Preferred Stock                                                                 (2,250)             (502)
Dividends Paid on Common Stock                                                                         (144,114)         (125,800)
Dividends Paid on Cumulative Preferred Stock                                                               (550)             (915)
                                                                                                       ---------         ---------
Net Cash Flows Used For Financing Activities                                                           (299,977)          (63,986)
                                                                                                       ---------         ---------

Net Increase (Decrease) in Cash and Cash Equivalents                                                     (3,790)            1,377 
Cash and Cash Equivalents at Beginning of Period                                                          7,233             5,275
                                                                                                       ---------         ---------
Cash and Cash Equivalents at End of Period                                                               $3,443            $6,652
                                                                                                       =========         =========
                                                                                                       

SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for interest net of capitalized amounts was $107,177,000 and $57,517,000 and for income taxes was 
$(21,600,000) and $74,858,000 in 2004 and 2003, respectively. Noncash acquisitions under capital leases were $12,749,000 in 2004. 
There were no noncash capital lease acquisitions in 2003.

See Notes to Financial Statements of Registrant Subsidiaries.


</TABLE>



<PAGE>



                         OHIO POWER COMPANY CONSOLIDATED
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES
        -----------------------------------------------------------------

The notes to OPCo's consolidated financial statements are combined with the
notes to financial statements for other subsidiary registrants. Listed below are
the notes that apply to OPCo.

                                                                      Footnote
                                                                      Reference
                                                                      ---------

Significant Accounting Matters                                        Note 1

New Accounting Pronouncements                                         Note 2

Rate Matters                                                          Note 3

Customer Choice and Industry Restructuring                            Note 4

Commitments and Contingencies                                         Note 5

Guarantees                                                            Note 6

Benefit Plans                                                         Note 8

Business Segments                                                     Note 9

Financing Activities                                                  Note 10









<PAGE>






                       PUBLIC SERVICE COMPANY OF OKLAHOMA




<PAGE>



                                     
                       PUBLIC SERVICE COMPANY OF OKLAHOMA
            MANAGEMENT'S NARRATIVE FINANCIAL DISCUSSION AND ANALYSIS
            --------------------------------------------------------

Results of Operations
---------------------

Net Income for the nine months ended September 30, 2004 decreased $19 million
from the prior year period due to increased operations and maintenance expenses
for power plant maintenance, transmission and tree trimming. Net Income
increased $1 million for the third quarter.

Fluctuations occurring in the retail portion of fuel and purchased power expense
generally do not impact operating income, as they are offset in revenues due to
the functioning of the fuel clause adjustment in Oklahoma.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income for the third quarter of 2004 increased $4 million from the
prior year period primarily due to:

 o  A $9 million increase in system sales margins.
 o  A $1 million decrease in Maintenance expenses primarily due to lower power
    plant expenses.

The increase in Operating Income for the third quarter of 2004 was partially
offset by:

 o  A $4 million decrease in retail base revenue primarily due to a 19% decrease
    in cooling degree-days.
 o  A $3 million increase in Other Operation expenses primarily due to customer 
    related expenses and administrative and general expenses.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $6 million in the third quarter of 2004 compared
to the prior year period primarily due to a gain on the disposition of land
recorded in 2003.

Interest Charges decreased $2 million in the third quarter of 2004 compared to
the prior year period due to reduced interest rates from refinancing higher cost
debt.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 37.6% and
40.5%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to lower state income taxes.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income for the nine months ended September 30, 2004 in comparison to
the prior year period decreased $20 million primarily due to:

 o  A $20 million increase in Other Operation expenses. Transmission expense 
    increased $9 million primarily related to prior years true-up for OATT 
    transmission recorded in 2004 resulting from revised data from ERCOT for the
    years 2001-2003. Distribution expenses increased $5 million resulting mainly
    from a labor settlement and various inventory and tracking system upgrades.
 o  A $13 million increase in Maintenance expenses primarily due to increased 
    power plant maintenance and tree trimming along with increased repairs of 
    storm damage.
 o  A $3 million decrease in transmission revenues primarily due to non-
    affiliated transactions.
 o  A $1 million increase in Taxes Other Than Income Taxes primarily due to 
    increased  property  taxes  attributable  to  changes in  property  values 
    and employee-related taxes offset in part by lower franchise taxes.

The decrease in Operating Income for the nine months ended September 30, 2004
was partially offset by:

 o  A $4 million increase in system sales margins due to the end of merger 
    related mitigation sales losses in 2003.
 o  A $4 million increase in retail base revenue primarily due to increased KWH
    sales of 3%. Customer usage increased primarily from our industrial class 
    and number of customers offset in part by a decrease in heating and cooling
    degree-days of 13%.

Other Impacts on Earnings
-------------------------

Nonoperating Income decreased $6 million in the nine months ended September 30,
2004 compared to the prior year period primarily due to a gain on the
disposition of land recorded in 2003.

Interest Charges decreased $7 million in the nine months ended September 30,
2004 compared to the prior year period due to reduced interest rates from
refinancing higher cost debt.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 32.2%
and 34.1%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                             Moody's       S&P         Fitch
                                             -------       ---         -----
          First Mortgage Bonds                 A3           A-           A
          Senior Unsecured Debt               Baa1         BBB           A-

In July 2004, Standard and Poor's upgraded the credit rating of the First
Mortgage Bonds from BBB to A- due to a change in rating methodology. The
principal amount of First Mortgage Bonds currently outstanding is $100 million.

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

  Issuances
  ---------
                                      Principal        Interest           Due
    Type of Debt                       Amount            Rate             Date
    ------------                      ---------        --------           ----  
                                    (in thousands)       (%)

    Installment Purchase Contracts     $33,700          Variable          2014
    Senior Unsecured Notes              50,000            4.70            2009
        
  Retirements
  -----------
                                      Principal         Interest          Due
    Type of Debt                        Amount            Rate            Date
    ------------                      ---------         --------          ----  
                                    (in thousands)        (%)

    Notes Payable to Trust              $77,320           8.00            2037
    Installment Purchase Contracts       33,700           4.875           2014
    Installment Purchase Contracts        1,000           5.90            2007

Significant Factors
-------------------

Oklahoma Regulatory Activity
----------------------------

We filed with the Corporation Commission of the State of Oklahoma (OCC) for
recovery of a $44 million under-recovery of fuel costs resulting from a
reallocation among AEP West electric operating companies of purchased power
costs for periods prior to January 1, 2002. The OCC has expanded the case to
include a full review of our 2001 fuel and purchased power practices. Intervenor
and OCC Staff filings in the case recommended a disallowance of $18 million
associated with the allocation of off-system sales margins. At a June 2004 
prehearing conference, we questioned whether the issues in dispute were under 
the jurisdiction of the OCC because they relate to FERC-approved allocation
agreements. As a result, the ALJ ordered that the parties brief the
jurisdictional issue. We filed our brief on September 1, 2004. Subject to the
OCC's decision as to jurisdiction, a hearing date has been set for January 2005.
Management believes that fuel costs have been prudently incurred consistent with
OCC rules, and that the allocation of off-system sales margins was made pursuant
to the FERC-approved allocation agreements. If the OCC determines that a portion
of unrecovered fuel and purchased power costs should not be recovered, there 
will be, subject to the FERC jurisdictional question, an adverse effect on 
results of operations, cash flows and possibly financial condition.

In February 2003, the OCC filed an application requiring us to file all
documents necessary for a general rate review. In October 2003 and June 2004, we
filed financial information and supporting testimony in response to the OCC's
requirements. The response indicates that annual revenues are $41 million less
than costs. As a result, we are seeking OCC approval to increase base rates by
that amount, which is a 3.9% increase over existing revenues. A decision is not
expected until second quarter 2005. Management is unable to predict the ultimate
effect of these proceedings on revenues, results of operations, cash flows and
financial condition.

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of other factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect.

MTM Risk Management Contract Net Assets
---------------------------------------

<TABLE>
<CAPTION>

This table provides detail on changes in our MTM net asset or liability balance
sheet position from one period to the next.

                     MTM Risk Management Contract Net Assets
                      Nine Months Ended September 30, 2004
                                 (in thousands)

     <C>                                                                                                              <C>    
     
     Total MTM Risk Management Contract Net Assets at December 31, 2003                                               $14,057  
     (Gain) Loss from Contracts Realized/Settled During the Period (a)                                                   (980) 
     Fair Value of New Contracts When Entered Into During the Period (b)                                                    -  
     Net Option Premiums Paid/(Received) (c)                                                                             (149) 
     Change in Fair Value Due to Valuation Methodology Changes                                                              -  
     Changes in Fair Value of Risk Management Contracts (d)                                                                 -  
     Changes in Fair Value of Risk Management  Contracts Allocated to Regulated Jurisdictions (e)                      (2,905)   
                                                                                                                      --------
     Total MTM Risk Management Contract Net Assets                                                                     10,023  
     Net Cash Flow Hedge Contracts (f)                                                                                 (3,588) 
                                                                                                                      --------
     Total MTM Risk Management Contract Net Assets at September 30, 2004                                               $6,435  
                                                                                                                      ========

     (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
         includes realized risk management contracts and related derivatives 
         that settled during 2004 that were entered into prior to 2004.
     (b) The "Fair Value of New Contracts When Entered Into During the Period"
         represents the fair value of long-term contracts entered into with
         customers during 2004. The fair value is calculated as of the execution
         of the contract. Most of the fair value comes from longer term fixed
         price contracts with customers that seek to limit their risk against
         fluctuating energy prices. The contract prices are valued against 
         market curves associated with the delivery location.
     (c) "Net Option Premiums Paid/(Received)" reflects the net option premiums
         paid/(received) as they relate to unexercised and unexpired option
         contracts that were entered into in 2004.
     (d) "Changes in Fair Value of Risk Management Contracts" represents the
         fair value change in the risk management portfolio due to market
         fluctuations during the current period. Market fluctuations are
         attributable to various factors such as supply/demand, weather, 
         storage, etc.
     (e) "Changes in Fair Value of Risk Management Contracts Allocated to
         Regulated Jurisdictions" relates to the net gains (losses) of those
         contracts that are not reflected in the Statements of Income. These net
         gains (losses) are recorded as regulatory liabilities/assets for those
         subsidiaries that operate in regulated jurisdictions.
     (f) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
         Accumulated Other Comprehensive Income (Loss).

</TABLE>



<TABLE>
<CAPTION>

                        Reconciliation of MTM Risk Management Contracts to
                                        Balance Sheets
                                  As of September 30, 2004

                                                  MTM Risk  
                                                 Management         Cash Flow
                                                Contracts(a)         Hedges          Total (b)     
                                                ------------        ---------        ---------     
                                                                 (in thousands)
        <C>                                       <C>                 <C>             <C>  

        Current Assets                            $22,508             $293            $22,801 
        Non Current Assets                         12,749               89             12,838
                                                  --------         --------           --------
        Total MTM Derivative Contract
         Assets                                    35,257              382             35,639
                                                  --------         --------           --------

        Current Liabilities                       (19,258)          (3,361)           (22,619)
        Non Current Liabilities                    (5,976)            (609)            (6,585)
                                                  --------         --------           --------
        Total MTM Derivative Contract
         Liabilities                              (25,234)          (3,970)           (29,204)
                                                  --------         --------           --------

        Total MTM Derivative Contract Net
         Assets (Liabilities)                     $10,023          $(3,588)            $6,435
                                                  ========         ========           ========
                                                  

        (a) Does not include Cash Flow Hedges.
        (b) Represents amount of total MTM derivative contracts recorded within 
            Risk Management Assets, Long-term Risk Management Assets, Risk 
            Management Liabilities and Long-term Risk Management Liabilities on 
            our Balance Sheets.

</TABLE>


Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information:
 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.


<TABLE>
<CAPTION>

                                                   Maturity and Source of Fair Value of MTM
                                                      Risk Management Contract Net Assets
                                                Fair Value of Contracts as of September 30, 2004
                                                -------------------------------------------------

                                          Remainder                                                         After 
                                            2004           2005          2006        2007       2008       2008 (c)   Total (d)
                                            ----           ----          ----        ----       ----       --------   ---------
                                                                            (in thousands)
 <C>                                        <C>          <C>             <C>         <C>       <C>          <C>        <C>       
 Prices Actively Quoted -
  Exchange Traded Contracts                   $940       $(2,814)         $12        $891          $-           $-       $(971)
 Prices Provided by Other External
  Sources - OTC Broker Quotes (a)           (1,909)        6,566          586           -           -            -       5,243 
 Prices Based on Models and Other
  Valuation Methods (b)                          2         1,357          283         (75)      1,023        3,161       5,751
                                            -------      --------        -----       -----     -------      -------    --------

 Total                                       $(967)       $5,109         $881        $816      $1,023       $3,161     $10,023
                                            =======      ========        =====       =====     =======      =======    ========
                                           


 (a)  "Prices Provided by Other External Sources - OTC Broker Quotes"
      reflects information obtained from over-the-counter brokers, industry
      services, or multiple-party on-line platforms.
 (b)  "Prices Based on Models and Other Valuation Methods" is in absence of
      pricing information from external sources. Modeled information is derived 
      using valuation models developed by the reporting entity, reflecting when 
      appropriate, option pricing theory, discounted cash flow concepts, 
      valuation adjustments, etc. and may require projection of prices for 
      underlying commodities beyond the period that prices are available from 
      third-party sources. In addition, where external pricing information or 
      market liquidity are limited, such valuations are classified as modeled. 
      The determination of the point at which a market is no longer liquid for 
      placing it in the modeled category varies by market.
 (c)  There is mark-to-market value in excess of 10 percent of our total mark-
      to-market value in individual periods beyond 2008.  $1.2 million of this 
      mark-to-market value is in 2009.
 (d)  Amounts exclude Cash Flow Hedges.
</TABLE>



Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, economic hedge contracts which are not
designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.

          Total Accumulated Other Comprehensive Income (Loss) Activity
                      Nine Months Ended September 30, 2004

                                          Power   Interest Rate  Consolidated
                                          -----   -------------  ------------  
                                                 (in thousands) 
                      
    Beginning Balance December 31, 2003     $156         $-          $156     
    Changes in Fair Value (a)             (1,462)         -        (1,462)    
    Reclassifications from AOCI to Net
     Income (b)                             (274)      (743)       (1,017)
                                         --------     ------      --------
    Ending Balance September 30, 2004    $(1,580)     $(743)      $(2,323)
                                         ========     ======      ========

 (a)  "Changes in Fair Value" shows changes in the fair value of derivatives
      designated as hedging instruments in cash flow hedges during the
      reporting period not yet reclassified into net income, pending the
      hedged item's affecting net income. Amounts are reported net of related
      income taxes.
 (b)  "Reclassifications from AOCI to Net Income" represents gains or losses
      from derivatives used as hedging instruments in cash flow hedges that
      were reclassified into net income during the reporting period. Amounts
      are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $1,298 thousand loss.

Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------


<TABLE>
<CAPTION>

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

                      Nine Months Ended                                                           Twelve Months Ended
                     September 30, 2004                                                            December 31, 2003             
          ---------------------------------------                                        -------------------------------------
                       (in thousands)                                                                (in thousands)
          <C>         <C>        <C>         <C>                                         <C>        <C>         <C>        <C>

           End        High       Average      Low                                         End        High       Average    Low
           ---        ----       -------      ---                                         ---        ----       -------    ---
          $131        $729        $339       $118                                        $258       $1,004       $420      $100

</TABLE>


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$35 million and $66 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or financial position.



<PAGE>

<TABLE>
<CAPTION>


                                                 PUBLIC SERVICE COMPANY OF OKLAHOMA
                                                       STATEMENTS OF INCOME
                                  For the Three and Nine Months Ended September 30, 2004 and 2003
                                                          (Unaudited)


                                                                        Three Months Ended               Nine Months Ended
                                                                       --------------------             -------------------
                                                                       2004            2003             2004           2003
                                                                       ----            ----             ----           ----
                                                                                           (in thousands)      
                 OPERATING REVENUES
--------------------------------------------------
<C>                                                                 <C>              <C>              <C>             <C>   
Electric Generation, Transmission and Distribution                  $355,260         $355,064         $787,956        $860,544 
Sales to AEP Affiliates                                                1,371            3,511            7,467          17,929
                                                                    ---------        ---------        ---------       ---------
TOTAL                                                                356,631          358,575          795,423         878,473
                                                                    ---------        ---------        ---------       ---------

                 OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                         139,712          177,162          315,803         415,731 
Purchased Electricity for Resale                                      41,059           11,524           55,810          30,878 
Purchased Electricity from AEP Affiliates                             24,083           24,132           79,182          94,515 
Other Operation                                                       36,882           33,765          117,045          97,067 
Maintenance                                                           11,777           12,763           47,774          34,523 
Depreciation and Amortization                                         22,762           21,715           67,097          64,568 
Taxes Other Than Income Taxes                                          9,483            9,526           29,027          27,611 
Income Taxes                                                          23,671           24,461           18,767          28,192
                                                                    ---------        ---------        ---------       ---------
TOTAL                                                                309,429          315,048          730,505         793,085
                                                                    ---------        ---------        ---------       ---------

OPERATING INCOME                                                      47,202           43,527           64,918          85,388 

Nonoperating Income                                                      640            6,691            1,011           7,413 
Nonoperating Expense                                                     356              304            1,660             467 
Nonoperating Income Tax Expense (Credit)                                (162)           1,488           (1,021)          1,133 
Interest Charges                                                       8,668           10,336           27,922          34,493
                                                                    ---------        ---------        ---------       ---------

NET INCOME                                                            38,980           38,090           37,368          56,708 

Preferred Stock Dividend Requirements                                     53               53              159             159
                                                                    ---------        ---------        ---------       ---------

EARNINGS APPLICABLE TO COMMON STOCK                                  $38,927          $38,037          $37,209         $56,549
                                                                    =========        =========        =========       =========
                                                                  

The common stock of PSO is owned by a wholly-owned subsidiary of AEP.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>




<PAGE>

<TABLE>
<CAPTION>


                                                     PUBLIC SERVICE COMPANY OF OKLAHOMA
                                               STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                                      EQUITY AND COMPREHENSIVE INCOME
                                           For the Nine Months Ended September 30, 2004 and 2003
                                                               (in thousands)
                                                                 (Unaudited)

                                                                                                    
                                                                                            Accumulated Other
                                             Common         Paid-in         Retained         Comprehensive
                                              Stock         Capital         Earnings          Income (Loss)       Total
                                             ------         -------         --------        -----------------     -----    
<C>                                         <C>            <C>              <C>                <C>              <C>   
DECEMBER 31, 2002                           $157,230       $180,016         $116,474           $(54,473)        $399,247 

Capital Contribution from Parent                             50,000                                               50,000 
Common Stock Dividends                                                       (15,000)                            (15,000)
Preferred Stock Dividends                                                       (159)                               (159)
Distribution of Investment in AEMT, Inc.
  Preferred Shares to Parent                                                    (548)                               (548)
                                                                                                                ---------
TOTAL                                                                                                            433,540
                                                                                                                ---------

        COMPREHENSIVE INCOME
--------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                                 (59)             (59)
   Minimum Pension Liability                                                                        435              435 
NET INCOME                                                                    56,708                              56,708
                                                                                                                ---------
TOTAL COMPREHENSIVE INCOME                                                                                        57,084
                                            ---------      ---------        ---------          ---------        ---------

SEPTEMBER 30, 2003                          $157,230       $230,016         $157,475           $(54,097)        $490,624
                                            =========      =========        =========          =========        =========


DECEMBER 31, 2003                           $157,230       $230,016         $139,604           $(43,842)        $483,008 

Common Stock Dividends                                                       (26,250)                            (26,250)
Preferred Stock Dividends                                                       (159)                               (159)
Gain on Reacquired Preferred Stock                                                 2                                   2
                                                                                                                ---------
TOTAL                                                                                                            456,601
                                                                                                                ---------

       COMPREHENSIVE INCOME
--------------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
   Cash Flow Hedges                                                                              (2,479)          (2,479)
NET INCOME                                                                    37,368                              37,368
                                                                                                                ---------
TOTAL COMPREHENSIVE INCOME                                                                                        34,889
                                            ---------      ---------        ---------          ---------        ---------

SEPTEMBER 30, 2004                          $157,230       $230,016         $150,565           $(46,321)        $491,490
                                            =========      =========        =========          =========        =========
                                                                                                                

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                                       PUBLIC SERVICE COMPANY OF OKLAHOMA
                                                                BALANCE SHEETS
                                                                    ASSETS
                                                     September 30, 2004 and December 31, 2003
                                                                 (Unaudited)

                                                                                               2004                    2003         
                                                                                               ----                    ----   
                                                                                                      (in thousands)

                     ELECTRIC UTILITY PLANT
---------------------------------------------------------------
<C>                                                                                        <C>                     <C>            
Production                                                                                 $1,070,014              $1,065,408     
Transmission                                                                                  455,065                 458,577     
Distribution                                                                                1,080,856               1,031,229     
General                                                                                       209,774                 203,756     
Construction Work in Progress                                                                  42,777                  54,711     
                                                                                           -----------             -----------
TOTAL                                                                                       2,858,486               2,813,681     
Accumulated Depreciation and Amortization                                                   1,111,748               1,069,216     
                                                                                           -----------             -----------
TOTAL - NET                                                                                 1,746,738               1,744,465     
                                                                                           -----------             -----------

                 OTHER PROPERTY AND INVESTMENTS
---------------------------------------------------------------
Non-Utility Property, Net                                                                       4,402                   4,631     
Other Investments                                                                                   -                   2,320     
                                                                                           -----------             -----------
TOTAL                                                                                           4,402                   6,951     
                                                                                           -----------             -----------

                       CURRENT ASSETS
---------------------------------------------------------------
Cash and Cash Equivalents                                                                       3,510                   3,738     
Other Cash Deposits                                                                                 -                  10,520     
Accounts Receivable:
  Customers                                                                                    26,953                  28,515     
  Affiliated Companies                                                                         26,674                  19,852     
  Miscellaneous                                                                                 1,486                       -     
  Allowance for Uncollectible Accounts                                                            (29)                    (37)    
Fuel Inventory                                                                                 17,788                  18,331     
Materials and Supplies                                                                         38,946                  38,125     
Regulatory Asset for Under-recovered Fuel Costs                                                26,044                  24,170     
Risk Management Assets                                                                         22,801                  18,586     
Margin Deposits                                                                                 1,739                   4,351     
Prepayments and Other                                                                           2,073                   2,655     
                                                                                           -----------             -----------
TOTAL                                                                                         167,985                 168,806     
                                                                                           -----------             -----------

                DEFERRED DEBITS AND OTHER ASSETS
---------------------------------------------------------------
Regulatory Assets:
  Unamortized Loss on Reacquired Debt                                                          15,268                  14,357     
  Other                                                                                        17,557                  14,342     
Long-term Risk Management Assets                                                               12,838                  10,379     
Deferred Charges                                                                               27,245                  18,017     
                                                                                           -----------             -----------
TOTAL                                                                                          72,908                  57,095     
                                                                                           -----------             -----------

TOTAL ASSETS                                                                               $1,992,033              $1,977,317     
                                                                                           ===========             ===========
                                                                                          

See Notes to Financial Statements of Registrant Subsidiaries.


</TABLE>




<PAGE>

<TABLE>
<CAPTION>


                                                     PUBLIC SERVICE COMPANY OF OKLAHOMA
                                                               BALANCE SHEETS
                                                       CAPITALIZATION AND LIABILITIES
                                                   September 30, 2004 and December 31, 2003
                                                                 (Unaudited)

                                                                                                  2004                   2003     
                                                                                                  ----                   ----  
                                                                                                         (in thousands)

                        CAPITALIZATION
--------------------------------------------------------------
<C>                                                                                           <C>                     <C>
Common Shareholder's Equity:
  Common Stock - $15 Par Value:
    Authorized Shares: 11,000,000
    Issued Shares: 10,482,000
    Outstanding Shares: 9,013,000                                                               $157,230                $157,230    
    Paid-in Capital                                                                              230,016                 230,016    
    Retained Earnings                                                                            150,565                 139,604    
    Accumulated Other Comprehensive Income (Loss)                                                (46,321)                (43,842)
                                                                                              -----------             -----------
Total Common Shareholder's Equity                                                                491,490                 483,008    
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                     5,262                   5,267    
                                                                                              -----------             -----------
Total Shareholders' Equity                                                                       496,752                 488,275    
Long-term Debt                                                                                   446,057                 490,598    
                                                                                              -----------             -----------
TOTAL                                                                                            942,809                 978,873    
                                                                                              -----------             -----------

                     CURRENT LIABILITIES
--------------------------------------------------------------
Long-term Debt Due Within One Year                                                               100,000                  83,700    
Advances from Affiliates                                                                          19,259                  32,864    
Accounts Payable:
  General                                                                                         58,650                  48,808    
  Affiliated Companies                                                                            41,390                  57,206    
Customer Deposits                                                                                 34,476                  26,547    
Taxes Accrued                                                                                     54,520                  27,157    
Interest Accrued                                                                                   3,633                   3,706    
Risk Management Liabilities                                                                       22,619                  11,067    
Obligations Under Capital Leases                                                                     478                     452    
Other                                                                                             22,250                  35,234    
                                                                                              -----------             -----------
TOTAL                                                                                            357,275                 326,741    
                                                                                              -----------             -----------

            DEFERRED CREDITS AND OTHER LIABILITIES
--------------------------------------------------------------
Deferred Income Taxes                                                                            346,444                 335,434    
Long-Term Risk Management Liabilities                                                              6,585                   3,602    
Regulatory Liabilities:
  Asset Removal Costs                                                                            221,057                 214,033    
  Deferred Investment Tax Credits                                                                 29,067                  30,411    
  SFAS 109 Regulatory Liability, Net                                                              23,112                  24,937    
  Other                                                                                           17,254                  15,406    
Obligations Under Capital Leases                                                                     597                     558    
Deferred Credits and Other                                                                        47,833                  47,322    
                                                                                              -----------             -----------
TOTAL                                                                                            691,949                 671,703    
                                                                                              -----------             -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                          $1,992,033              $1,977,317    
                                                                                              ===========             ===========
                                                                                              

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                                    PUBLIC SERVICE COMPANY OF OKLAHOMA
                                                         STATEMENTS OF CASH FLOWS
                                            For the Nine Months Ended September 30, 2004 and 2003
                                                                (Unaudited)

                                                                                                    2004                   2003
                                                                                                    ----                   ----
                                                                                                          (in thousands)
                 OPERATING ACTIVITIES
-----------------------------------------------------
<C>                                                                                               <C>                    <C>    
Net Income                                                                                         $37,368                $56,708   
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
   Depreciation and Amortization                                                                    67,097                 64,568   
   Deferred Income Taxes                                                                            10,519                  6,536   
   Deferred Investment Tax Credits                                                                  (1,343)                (1,343)  
   Deferred Property Taxes                                                                          (8,648)                (8,239)  
   Mark-to-Market of Risk Management Contracts                                                       4,034                 (9,783)  
Changes in Certain Assets and Liabilities:
   Accounts Receivable, Net                                                                         (6,754)                (6,010)  
   Fuel, Materials and Supplies                                                                       (278)                 1,353   
   Accounts Payable, Net                                                                            (5,974)                 9,463   
   Taxes Accrued                                                                                    27,363                 12,342   
   Fuel Recovery                                                                                    (1,874)                32,862   
Changes in Other Assets                                                                            (12,326)                (7,492)  
Changes in Other Liabilities                                                                         4,447                 12,430
                                                                                                  ---------              ---------
Net Cash Flows From Operating Activities                                                           113,631                163,395
                                                                                                  ---------              ---------

                  INVESTING ACTIVITIES
-----------------------------------------------------
Construction Expenditures                                                                          (55,929)               (59,263)  
Proceeds from Sale of Property and Other                                                               458                  2,664   
Change in Other Cash Deposits, Net                                                                  10,520                 (2,916)
                                                                                                  ---------              ---------
Net Cash Flows Used For Investing Activities                                                       (44,951)               (59,515)
                                                                                                  ---------              ---------

                   FINANCING ACTIVITIES
-----------------------------------------------------
Capital Contributions from Parent                                                                        -                 50,000   
Change in Advances to/from Affiliates, Net                                                         (13,605)              (189,558)  
Retirement of Long-term Debt                                                                      (112,020)              (100,000)  
Issuance of Long-term Debt                                                                          83,129                148,734   
Reacquired Preferred Stock                                                                              (3)                     -
Dividends Paid on Common Stock                                                                     (26,250)               (15,000)  
Dividends Paid on Cumulative Preferred Stock                                                          (159)                  (159)
                                                                                                  ---------              ---------
Net Cash Flows Used For Financing Activities                                                       (68,908)              (105,983)
                                                                                                  ---------              ---------

Net Decrease in Cash and Cash Equivalents                                                             (228)                (2,103)  
Cash and Cash Equivalents at Beginning of Period                                                     3,738                  9,543
                                                                                                  ---------              ---------
Cash and Cash Equivalents at End of Period                                                          $3,510                 $7,440
                                                                                                  =========              =========
                                                                                                  

SUPPLEMENTAL DISCLOSURE:
Cash paid for interest net of capitalized amounts was $24,518,000 and $31,572,000 and for income taxes was $2,387,000 and 
$33,658,000 in 2004 and 2003, respectively.

There was a non-cash distribution of $548,000 in preferred shares in AEMT, Inc. to PSO's Parent Company in 2003.

See Notes to Financial Statements of Registrant Subsidiaries.


</TABLE>








<PAGE>


                       PUBLIC SERVICE COMPANY OF OKLAHOMA
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES
        -----------------------------------------------------------------

The notes to PSO's financial statements are combined with the notes to financial
statements for other subsidiary registrants. Listed below are the notes that
apply to PSO.

                                                                    Footnote
                                                                    Reference
                                                                    ---------

Significant Accounting Matters                                      Note 1

New Accounting Pronouncements                                       Note 2

Rate Matters                                                        Note 3

Commitments and Contingencies                                       Note 5

Guarantees                                                          Note 6

Benefit Plans                                                       Note 8

Business Segments                                                   Note 9

Financing Activities                                                Note 10











<PAGE>






                SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED




<PAGE>


                                     
                SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
                 ----------------------------------------------

Results of Operations
---------------------

Net Income decreased $2 million for 2004 year-to-date and increased $5 million
for the third quarter. The year-to-date decrease is primarily due to the $9
million (net of tax) Cumulative Effect of Accounting Changes recorded in 2003.
For the third quarter the increase is primarily due to favorable risk management
activities.

Fluctuations occurring in the retail portion of fuel and purchased power expense
generally do not impact operating income, as they are offset in revenues and/or
operations expense due to the functioning of the fuel adjustment clauses in the
states in which we serve.

Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------

Operating Income
----------------

Operating Income increased by $1 million primarily due to:

 o  A $4 million increase in margins from risk management activities.
 o  A $1 million increase in the portion of margin the company retains primarily
    due to increased realization of off-system sales.
 
The increase in Operating Income was partially offset by:

 o  A $3 million increase in Other Operation expenses primarily due to
    transmission expenses.
 o  A $3 million increase in Depreciation and Amortization expenses resulting 
    from the amortization of a regulatory asset for the recovery of fuel related
    costs in Arkansas and adjustments to excess earnings accruals per the Texas 
    Legislation (see "Texas Restructuring" in Note 4).
 o  A $2 million increase in provision for rate refund primarily due to a 
    wholesale fuel refund.

Fuel and Purchased Power
------------------------

For the third quarter of 2004 compared to third quarter 2003, purchased power
expenses increased primarily due to an increase in KWH purchases of 35% and
a cost per KWH increase of 32%. Fuel expenses decreased 30% due to lower KWH
generation of 7% and lower cost per KWH of 14%. As discussed above, these items
have no impact on Operating Income.

Other Impacts on Earnings
-------------------------

Interest Charges decreased $4 million as a result of refinancing higher interest
rate debt and notes payable to trust with lower interest rate debt and notes
payable to trust.

Income Taxes
------------

The effective tax rates for the third quarter of 2004 and 2003 were 32.8% and
36.3%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to federal income tax return adjustments and permanent
differences relating to book depletion and Medicare subsidy.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended 
 September 30, 2003
------------------------------------------------------------------

Operating Income
----------------

Operating Income increased by $1 million primarily due to:
 o  An $11 million increase in retail base revenues due to an increased number 
    of customers and their average usage, offset in part by milder weather. 
    Heating and Cooling degree-days decreased 7%.
 o  A $9 million refund of capacity payments not recoverable through the fuel 
    clause for prior periods for purchased power.

The increase in Operating Income was partially offset by:

 o  A $10 million increase in Other Operation expenses primarily related to a 
    prior year true-up for OATT transmission recorded in 2004 resulting from 
    revised data from ERCOT for the years 2001-2003 offset in part by the sale 
    of emission allowances.
 o  An $8 million increase in Depreciation and Amortization expenses primarily 
    due to the amortization of a regulatory asset for the recovery of fuel 
    related costs in Arkansas and adjustments to excess earnings accruals per 
    the Texas Legislation (see "Texas Restructuring" in Note 4).
 o  A $7 million increase in Maintenance expenses primarily due to scheduled 
    power plant maintenance,  as well as increased overhead line maintenance,  
    partly due to increased storm damage.
 o  A $5 million decrease in margins from risk management activities.
 o  A $4 million increase in provision for rate refund primarily due to a 
    wholesale fuel refund.
 o  A $3 million increase in Taxes Other Than Income Taxes primarily due to 
    higher property taxes and state and local franchise taxes. 
 o  A $2 million decrease in the portion of margin the company retains from off-
    system sales primarily due to decreased realization of off-system sales.

Fuel and Purchased Power
------------------------

For the nine month comparison, purchased power expense decreased primarily due
to KWH purchases declining 1%, the cost per KWH declining 2% and decreased
capacity purchases. Fuel expense also decreased 19% primarily due to lower KWH
generation of 6% and lower cost per KWH of 10%.

Other Impacts on Earnings
-------------------------

Interest Charges decreased $7 million as a result of refinancing higher interest
rate debt and notes payable to trust with lower interest rate debt and notes
payable to trust.

Minority Interest loss of $2 million is a result of consolidating Sabine Mining
Company (Sabine) effective July 1, 2003, due to implementation of FIN 46. We now
record the depreciation, interest and other operating expenses of Sabine and
eliminate Sabine's revenues against our fuel expenses. While there was no effect
to net income as a result of consolidation, some individual income statement
lines were affected.

The Cumulative Effect of Accounting Changes is due to a one-time after-tax
impact of adopting SFAS 143 and EITF 02-3 in 2003.

Income Taxes
------------

The effective tax rates for the first nine months of 2004 and 2003 were 31.4%
and 35.0%, respectively. The difference in the effective income tax rate and the
federal statutory rate of 35% is due to permanent differences, amortization of
investment tax credits and state income taxes. The decrease in the effective tax
rate is primarily due to federal income tax return adjustments and permanent
differences relating to book depletion and Medicare subsidy.

Financial Condition
-------------------

Credit Ratings
--------------

The rating agencies currently have us on stable outlook. Current ratings are as
follows:

                                            Moody's       S&P         Fitch
                                            -------       ---         -----
         First Mortgage Bonds                 A3           A-           A
         Senior Unsecured Debt               Baa1         BBB           A-

In July 2004, Standard and Poor's upgraded the credit rating of the First
Mortgage Bonds from BBB to A- due to a change in rating methodology. The
principal amount of First Mortgage Bonds currently outstanding is $96 million.

Cash Flow
---------

Cash flows for the nine months ended September 30, 2004 and 2003 were as
follows:

                                                            2004         2003
                                                            ----         ----
                                                           
  Cash and cash equivalents at beginning of period         $5,676           $-
                                                         ---------    ---------
  Cash flows from (used for):
    Operating activities                                  214,943      209,157 
    Investing activities                                  (63,557)     (81,126)
    Financing activities                                 (153,738)    (117,234)
                                                         ---------    ---------
  Net increase (decrease) in cash and cash equivalents     (2,352)      10,797 
                                                         ---------    ---------
  Cash and cash equivalents at end of period               $3,324      $10,797 
                                                         =========    =========
                                                         

Operating Activities
--------------------

Cash Flows From Operating Activities were $215 million primarily due to Net
Income, Fuel, Materials and Supplies, Fuel Recovery and Taxes Accrued offset in
part by Accounts Receivable, Net, Accounts Payable and Other Assets and
Liabilities.

Investing Activities
--------------------

Cash Flows Used for Investing Activities were primarily for construction
projects for improved transmission and distribution service reliability. For the
remainder of 2004, we expect our Construction Expenditures to be approximately
$34 million.

Financing Activities
--------------------

Cash Flows Used For Financing Activities were for retiring higher interest rate
long-term debt with lower interest rate long-term debt and advances from
affiliates.

Financing Activity
------------------

Long-term debt issuances and retirements during the first nine months of 2004
were:

  Issuances
  ---------
                                         Principal         Interest       Due
    Type of Debt                           Amount            Rate         Date
    ------------                         ---------         --------       ----  
                                       (in thousands)        (%)

    Installment Purchase Contracts         $53,500         Variable       2019
    Installment Purchase Contracts          41,135         Variable       2011
    Notes Payable - Affiliates              50,000           4.45         2010

  Retirements
  -----------
                                          Principal         Interest      Due
    Type of Debt                            Amount            Rate        Date
    ------------                          ---------         --------      ---- 
                                       (in thousands)         (%)
           
    Installment Purchase Contracts         $53,500            7.60        2019
    Installment Purchase Contracts          12,290            6.90        2004
    Installment Purchase Contracts          12,170            6.00        2008
    Installment Purchase Contracts          17,125            8.20        2011
    First Mortgage Bonds                    80,000            6.875       2025
    First Mortgage Bonds                    40,000            7.75        2004
    Notes Payable                            5,122            4.47        2011
    Notes Payable                            2,250          Variable      2008

Significant Factors
-------------------

See the "Registrant Subsidiaries' Combined Management's Discussion and Analysis"
section for additional discussion of factors relevant to us.

Critical Accounting Estimates
-----------------------------

See "Critical Accounting Policies" in "Registrants' Combined Management's
Discussion and Analysis" in the 2003 Annual Report for a discussion of the
estimates and judgments required for revenue recognition, the valuation of
long-lived assets, the accounting for pension benefits and the impact of new
accounting pronouncements.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT ACTIVITIES
    -------------------------------------------------------------------------

Market Risks
------------

Our risk management policies and procedures are instituted and administered at
the AEP consolidated level. See complete discussion within AEP's "Quantitative
and Qualitative Disclosures About Risk Management Activities" section. The
following tables provide information about our risk management activities'
effect.

MTM Risk Management Contract Net Assets
---------------------------------------

<TABLE>
<CAPTION>

This table provides detail on changes in our MTM net asset or liability balance 
sheet position from one period to the next.

                                                 MTM Risk Management Contract Net Assets
                                                  Nine Months Ended September 30, 2004
                                                             (in thousands)
<C>                                                                                                                      <C>    

        Total MTM Risk Management Contract Net Assets at December 31, 2003                                               $16,606   
        (Gain) Loss from Contracts Realized/Settled During the Period (a)                                                 (4,354)  
        Fair Value of New Contracts When Entered Into During the Period (b)                                                    -   
        Net Option Premiums Paid/(Received) (c)                                                                             (177)  
        Change in Fair Value Due to Valuation Methodology Changes (d)                                                         62   
        Changes in Fair Value of Risk Management Contracts (e)                                                             1,703   
        Changes in Fair Value of Risk Management Contracts Allocated to Regulated Jurisdictions (f)                       (1,946)  
                                                                                                                         --------
        Total MTM Risk Management Contract Net Assets                                                                     11,894   
        Net Cash Flow Hedge Contracts (g)                                                                                 (6,621)  
                                                                                                                         --------
        Total MTM Risk Management Contract Net Assets at September 30, 2004                                               $5,273   
                                                                                                                         ========

         (a) "(Gain) Loss from Contracts Realized/Settled During the Period"
             includes realized risk management contracts and related derivatives
             that settled during 2004 that were entered into prior to 2004.
         (b) The "Fair Value of New Contracts When Entered Into During the
             Period" represents the fair value of long- term contracts entered
             into with customers during 2004. The fair value is calculated as of
             the execution of the contract. Most of the fair value comes from
             longer term fixed price contracts with customers that seek to limit
             their risk against fluctuating energy prices. The contract prices
             are valued against market curves associated with the delivery
             location.
         (c) "Net Option Premiums Paid/(Received)" reflects the net option
             premiums paid/(received) as they relate to unexercised and
             unexpired option contracts that were entered into in 2004.
         (d) "Change in Fair Value Due to Valuation Methodology Changes"
             represents the impact of AEP changes in methodology in regards to
             credit reserves on forward contracts.
         (e) "Changes in Fair Value of Risk Management Contracts" represents the
             fair value change in the risk management portfolio due to market
             fluctuations during the current period. Market fluctuations are
             attributable to various factors such as supply/demand, weather,
             etc.
         (f) "Changes in Fair Value of Risk Management Contracts Allocated to
             Regulated Jurisdictions" relates to the net gains (losses) of those
             contracts that are not reflected in the Consolidated Statements of
             Income. These net gains (losses) are recorded as regulatory
             liabilities/assets for those subsidiaries that operate in regulated
             jurisdictions.
         (g) "Net Cash Flow Hedge Contracts" (pre-tax) are discussed below in
             Accumulated Other Comprehensive Income (Loss).

</TABLE>



<TABLE>
<CAPTION>

                                  Reconciliation of MTM Risk Management Contracts to
                                             Consolidated Balance Sheets
                                               As of September 30, 2004
                                 

                                                MTM Risk  
                                                Management        Cash Flow
                                               Contracts (a)        Hedges        Consolidated (b)
                                               -------------      ---------       ----------------
                                                                (in thousands)
        <C>                                       <C>              <C>                <C>

        Current Assets                            $26,708             $348            $27,056 
        Non Current Assets                         15,128              106             15,234
                                                  --------         --------           --------
        Total MTM Derivative Contract
         Assets                                    41,836              454             42,290
                                                  --------         --------           --------

        Current Liabilities                       (22,851)          (6,071)           (28,922)
        Non Current Liabilities                    (7,091)          (1,004)            (8,095)
                                                  --------         --------           --------
        Total MTM Derivative Contract
         Liabilities                              (29,942)          (7,075)           (37,017)
                                                  --------         --------           --------

        Total MTM Derivative Contract Net
         Assets (Liabilities)                     $11,894          $(6,621)            $5,273
                                                  ========         ========           ========

        (a)  Does not include Cash Flow Hedges.
        (b)  Represents amount of total MTM derivative contracts recorded
             within Risk Management Assets, Long-term Risk Management Assets,
             Risk Management Liabilities and Long-term Risk Management 
             Liabilities on our Consolidated Balance Sheets.

</TABLE>


Maturity and Source of Fair Value of MTM Risk Management Contract Net Assets
----------------------------------------------------------------------------

<TABLE>
<CAPTION>

The table presenting maturity and source of fair value of MTM risk management
contract net assets provides two fundamental pieces of information: 
 o  The source of fair value used in determining the carrying amount of our 
    total MTM asset or liability (external sources or modeled internally). 
 o  The maturity, by year, of our net assets/liabilities, giving an indication 
    of when these MTM amounts will settle and generate cash.

                                               Maturity and Source of Fair Value of MTM
                                                 Risk Management Contract Net Assets
                                          Fair Value of Contracts as of September 30, 2004

                                                Remainder                                                      After  
                                                   2004       2005        2006         2007         2008      2008 (c)   Total (d) 
                                                   ----       ----        ----         ----         ----      --------   --------- 
                                                                                    (in thousands)                                 
<C>                                             <C>         <C>         <C>          <C>          <C>         <C>        <C>
Prices Actively Quoted - Exchange  
 Traded Contracts                                $1,116     $(3,340)       $14       $1,058           $-          $-     $(1,152) 
Prices Provided by Other External  
 Sources - OTC Broker Quotes (a)                 (2,265)      7,791        696            -            -           -       6,222  
Prices Based on Models and Other
 Valuation Methods (b)                                2       1,610        336          (89)       1,214       3,751       6,824  
                                                --------    --------    -------      -------      -------     -------    --------

Total                                           $(1,147)     $6,061     $1,046         $969       $1,214      $3,751     $11,894  
                                                ========    ========    =======      =======      =======     =======    ========

                                               

"Prices Provided by Other External Sources - OTC Broker Quotes" reflects
information obtained from over-the-counter brokers, industry services, or
multiple-party on-line platforms. 
 (a)  "Prices Based on Models and Other Valuation Methods" is in absence of 
      pricing information from external sources.  Modeled information is derived
      using valuation models developed by the reporting entity, reflecting when
      appropriate, option pricing theory, discounted cash flow concepts,
      valuation adjustments, etc. and may require projection of prices for
      underlying commodities beyond the period that prices are available from
      third-party sources. In addition, where external pricing information or
      market liquidity are limited, such valuations are classified as modeled. 
      The determination of the point at which a market is no longer liquid for 
      placing it in the modeled category varies by market.
 (b)  There  is  mark-to-market  value in excess of 10  percent  of our total  
      mark-to-market  value in  individual  periods  beyond  2008.  $1.5  
      million of this mark-to-market value is in 2009.
 (c)  Amounts exclude Cash Flow Hedges.

</TABLE>


Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) 
 (AOCI) on the Balance Sheet
--------------------------------------------------------------------------

We are exposed to market fluctuations in energy commodity prices impacting our
power operations. We monitor these risks on our future operations and may employ
various commodity instruments to mitigate the impact of these fluctuations on
the future cash flows from assets. We do not hedge all commodity price risk.

We employ cash flow hedges to mitigate changes in interest rates or fair values
on short and long-term debt when management deems it necessary. We do not hedge
all interest rate risk.

We employ forward contracts as cash flow hedges to lock-in prices on certain
transactions which have been denominated in foreign currencies where deemed
necessary. We do not hedge all foreign currency exposure.

The table provides detail on effective cash flow hedges under SFAS 133 included
in the balance sheet. The data in the table will indicate the magnitude of SFAS
133 hedges we have in place. Under SFAS 133 only contracts designated as cash
flow hedges are recorded in AOCI, therefore, economic hedge contracts which are
not designated as cash flow hedges are required to be marked-to-market and are
included in the previous risk management tables. In accordance with GAAP, all
amounts are presented net of related income taxes.


<TABLE>
<CAPTION>

                           Total Accumulated Other Comprehensive Income (Loss) Activity
                                      Nine Months Ended September 30, 2004

                                                        Power           Interest Rate       Consolidated
                                                        -----           -------------       ------------
                                                                        (in thousands)
    <C>                                                <C>                 <C>                <C>                              
    Beginning Balance December 31, 2003                   $184                  $-               $184    
    Changes in Fair Value (a)                           (1,735)                  -             (1,735)  
    Reclassifications from AOCI to Net
     Income (b)                                           (323)             (2,006)            (2,329)
                                                       --------            --------           --------
    Ending Balance September 30, 2004                  $(1,874)            $(2,006)           $(3,880)
                                                       ========            ========           ========
                                                       


 (a)  "Changes in Fair Value" shows changes in the fair value of derivatives
      designated as hedging instruments in cash flow hedges during the
      reporting period not yet reclassified into net income, pending the
      hedged item's affecting net income. Amounts are reported net of related
      income taxes.
 (b)  "Reclassifications from AOCI to Net Income" represents gains or losses
      from derivatives used as hedging instruments in cash flow hedges that
      were reclassified into net income during the reporting period. Amounts
      are reported net of related income taxes above.

The portion of cash flow hedges in AOCI expected to be reclassified to earnings
during the next twelve months is a $1,519 thousand loss.

</TABLE>


Credit Risk
-----------

Our counterparty credit quality and exposure is generally consistent with that
of AEP.

VaR Associated with Risk Management Contracts
---------------------------------------------

<TABLE>
<CAPTION>

The following table shows the end, high, average, and low market risk as
measured by VaR for the period indicated:

                         Nine Months Ended                                                      Twelve Months Ended
                         September 30, 2004                                                      December 31, 2003           
             --------------------------------------                                    -------------------------------------
                          (in thousands)                                                           (in thousands)
             <C>        <C>        <C>          <C>                                    <C>        <C>        <C>        <C>
             End        High       Average      Low                                    End        High       Average    Low
             ---        ----       -------      ---                                    ---        ----       -------    ---
             $156       $865        $402        $140                                   $304       $1,182      $495      $118

</TABLE>


VaR Associated with Debt Outstanding
------------------------------------

The risk of potential loss in fair value attributable to our exposure to
interest rates primarily related to long-term debt with fixed interest rates was
$50 million and $57 million at September 30, 2004 and December 31, 2003,
respectively. We would not expect to liquidate our entire debt portfolio in a
one-year holding period, therefore a near term change in interest rates should
not negatively affect our results of operation or consolidated financial
position.



<PAGE>

<TABLE>
<CAPTION>


                                               SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                                                     CONSOLIDATED STATEMENTS OF INCOME
                                       For the Three and Nine Months Ended September 30, 2004 and 2003
                                                                (Unaudited)

                                                                             Three Months Ended              Nine Months Ended
                                                                            --------------------            -------------------
                                                                            2004            2003            2004           2003
                                                                            ----            ----            ----           ----
                                                                                               (in thousands)        
                  OPERATING REVENUES
--------------------------------------------------
<C>                                                                        <C>            <C>             <C>            <C>  
Electric Generation, Transmission and Distribution                         $315,482       $347,672        $780,661       $835,193 
Sales to AEP Affiliates                                                      14,888         13,950          54,597         63,013
                                                                           ---------      ---------       ---------      ---------
TOTAL                                                                       330,370        361,622         835,258        898,206
                                                                           ---------      ---------       ---------      ---------

                  OPERATING EXPENSES
--------------------------------------------------
Fuel for Electric Generation                                                109,468        155,853         292,536        360,471 
Purchased Electricity for Resale                                             18,958          6,567          20,884         29,499 
Purchased Electricity from AEP Affiliates                                     6,685         10,055          21,105         35,706 
Other Operation                                                              45,628         43,091         140,168        129,702 
Maintenance                                                                  15,350         15,959          55,009         47,707 
Depreciation and Amortization                                                33,676         30,381          96,940         89,284 
Taxes Other Than Income Taxes                                                16,544         16,517          48,259         45,558 
Income Taxes                                                                 23,443         23,970          38,013         39,418
                                                                           ---------      ---------       ---------      ---------
TOTAL                                                                       269,752        302,393         712,914        777,345
                                                                           ---------      ---------       ---------      ---------

OPERATING INCOME                                                             60,618         59,229         122,344        120,861 

Nonoperating Income                                                             704          1,364           2,899          2,711 
Nonoperating Expenses                                                           669            577           2,735          1,453 
Nonoperating Income Tax Expense (Credit)                                       (398)            18          (1,295)           (37)
Interest Charges                                                             12,944         16,981          41,034         48,058 
Minority Interest                                                              (898)          (836)         (2,592)          (836)
                                                                           ---------      ---------       ---------      ---------

Income Before Cumulative Effect of Accounting Changes                        47,209         42,181          80,177         73,262 
Cumulative Effect of Accounting Changes (Net of Tax)                              -              -               -          8,517
                                                                           ---------      ---------       ---------      ---------

NET INCOME                                                                   47,209         42,181          80,177         81,779 

Preferred Stock Dividend Requirements                                            57             57             172            172
                                                                           ---------      ---------       ---------      ---------

EARNINGS APPLICABLE TO COMMON STOCK                                         $47,152        $42,124         $80,005        $81,607
                                                                           =========      =========       =========      =========
                                                                           


The common stock of SWEPCo is owned by a wholly-owned subsidiary of AEP.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                                              SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                                         CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S
                                                      EQUITY AND COMPREHENSIVE INCOME
                                           For the Nine Months Ended September 30, 2004 and 2003
                                                             (in thousands)
                                                               (Unaudited)

                                                                                                     
                                                                                          Accumulated Other
                                             Common         Paid-in         Retained        Comprehensive
                                             Stock          Capital         Earnings        Income (Loss)          Total
                                             ------         -------         ---------      -----------------       -----
<C>                                        <C>             <C>              <C>                <C>               <C>   
DECEMBER 31, 2002                          $135,660        $245,003         $334,789           $(53,683)         $661,769 

Common Stock Dividends                                                       (54,596)                             (54,596)
Preferred Stock Dividends                                                       (172)                                (172)
                                                                                                                 ---------
TOTAL                                                                                                             607,001
                                                                                                                 ---------
       COMPREHENSIVE INCOME
----------------------------------           
Other Comprehensive Income (Loss),
 Net of Taxes:
  Cash Flow Hedges                                                                                  510               510 
NET INCOME                                                                    81,779                               81,779
                                                                                                                 ---------
TOTAL COMPREHENSIVE INCOME                                                                                         82,289
                                           ---------       ---------        ---------          ----------        ---------

SEPTEMBER 30, 2003                         $135,660        $245,003         $361,800           $(53,173)         $689,290
                                           =========       =========        =========          ==========        =========


DECEMBER 31, 2003                          $135,660        $245,003         $359,907           $(43,910)         $696,660 

Common Stock Dividends                                                       (45,000)                             (45,000)
Preferred Stock Dividends                                                       (172)                                (172)
                                                                                                                 ---------
TOTAL                                                                                                             651,488
                                                                                                                 ---------

        COMPREHENSIVE INCOME
----------------------------------
Other Comprehensive Income (Loss),
 Net of Taxes:
  Cash Flow Hedges                                                                               (4,064)           (4,064)
  Minimum Pension Liability                                                                      23,066            23,066 
NET INCOME                                                                    80,177                               80,177
                                                                                                                 ---------
TOTAL COMPREHENSIVE INCOME                                                                                         99,179
                                           ---------       ---------        ---------          ----------        ---------

SEPTEMBER 30, 2004                         $135,660        $245,003         $394,912           $(24,908)         $750,667
                                           =========       =========        =========          ==========        =========

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                          SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                                                   CONSOLIDATED BALANCE SHEETS
                                                             ASSETS
                                              September 30, 2004 and December 31, 2003
                                                          (Unaudited)

                                                                                                 2004                   2003
                                                                                                 ----                   ----
                                                                                                        (in thousands)           

                  ELECTRIC UTILITY PLANT
-----------------------------------------------------------
<C>                                                                                             <C>                   <C>   
Production                                                                                      $1,660,575            $1,622,498  
Transmission                                                                                       631,169               615,158  
Distribution                                                                                     1,110,441             1,078,368  
General                                                                                            443,001               423,427  
Construction Work in Progress                                                                       33,651                60,009
                                                                                                -----------           -----------
TOTAL                                                                                            3,878,837             3,799,460  
Accumulated Depreciation and Amortization                                                        1,700,023             1,617,846
                                                                                                -----------           -----------
TOTAL - NET                                                                                      2,178,814             2,181,614
                                                                                                -----------           -----------

               OTHER PROPERTY AND INVESTMENTS
-----------------------------------------------------------
Non-Utility Property, Net                                                                            4,050                 3,808  
Other Investments                                                                                    4,675                 4,710
                                                                                                -----------           -----------
TOTAL                                                                                                8,725                 8,518
                                                                                                -----------           -----------

                     CURRENT ASSETS
-----------------------------------------------------------
Cash and Cash Equivalents                                                                            3,324                 5,676  
Other Cash Deposits                                                                                  5,243                 6,048  
Advances to Affiliates                                                                              95,026                66,476  
Accounts Receivable:
  Customers                                                                                         39,881                41,474  
  Affiliated Companies                                                                              19,112                10,394  
  Miscellaneous                                                                                      7,849                 4,682  
  Allowance for Uncollectible Accounts                                                              (2,573)               (2,093) 
Fuel Inventory                                                                                      48,242                63,881  
Materials and Supplies                                                                              34,928                33,775  
Regulatory Asset for Under-recovered Fuel Costs                                                      3,778                11,394  
Risk Management Assets                                                                              27,056                19,715  
Margin Deposits                                                                                      2,063                 5,123  
Prepayments and Other                                                                               19,197                19,078
                                                                                                -----------           -----------
TOTAL                                                                                              303,126               285,623
                                                                                                -----------           -----------

              DEFERRED DEBITS AND OTHER ASSETS
-----------------------------------------------------------
Regulatory Assets:
  SFAS 109 Regulatory Asset, Net                                                                     6,475                 3,235  
  Unamortized Loss on Reacquired Debt                                                               21,463                19,331  
  Minimum Pension Liability                                                                         35,487                     -  
  Other                                                                                             18,638                15,859  
Long-term Risk Management Assets                                                                    15,234                12,178  
Deferred Charges                                                                                    61,081                55,605
                                                                                                -----------           -----------
TOTAL                                                                                              158,378               106,208
                                                                                                -----------           -----------

TOTAL ASSETS                                                                                    $2,649,043            $2,581,963
                                                                                                ===========           ===========
                                                                                              

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>





<PAGE>

<TABLE>
<CAPTION>


                                           SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                                                     CONSOLIDATED BALANCE SHEETS
                                                    CAPITALIZATION AND LIABILITIES
                                                September 30, 2004 and December 31, 2003
                                                              (Unaudited)

                                                                                                2004                  2003
                                                                                                ----                  ----
                                                                                                       (in thousands)               
                       CAPITALIZATION
--------------------------------------------------------------
<C>                                                                                           <C>                   <C>    
Common Shareholder's Equity:
  Common Stock - $18 Par Value:
     Authorized - 7,600,000 Shares
     Outstanding - 7,536,640 Shares                                                             $135,660              $135,660 
     Paid-in Capital                                                                             245,003               245,003 
     Retained Earnings                                                                           394,912               359,907 
     Accumulated Other Comprehensive Income (Loss)                                               (24,908)              (43,910)
                                                                                              -----------           -----------
Total Common Shareholder's Equity                                                                750,667               696,660 
Cumulative Preferred Stock Not Subject to Mandatory Redemption                                     4,700                 4,700
                                                                                              -----------           -----------
Total Shareholders' Equity                                                                       755,367               701,360 
Long-term Debt:
  Nonaffiliated                                                                                  547,160               741,594 
  Affiliated                                                                                      50,000                     - 
                                                                                              -----------           -----------
Total Long-term Debt                                                                             597,160               741,594
                                                                                              -----------           -----------
TOTAL                                                                                          1,352,527             1,442,954
                                                                                              -----------           -----------

Minority Interest                                                                                  1,043                 1,367
                                                                                              -----------           -----------

                        CURRENT LIABILITIES
--------------------------------------------------------------
Long-term Debt Due Within One Year                                                               209,974               142,714 
Accounts Payable:
  General                                                                                         27,336                37,646 
  Affiliated Companies                                                                            25,061                35,138 
Customer Deposits                                                                                 32,133                24,260 
Taxes Accrued                                                                                     92,231                28,691 
Interest Accrued                                                                                  11,967                16,852 
Risk Management Liabilities                                                                       28,922                11,361 
Obligations Under Capital Leases                                                                   3,695                 3,159 
Regulatory Liability for Over-recovered Fuel                                                       8,866                 4,178 
Other                                                                                             36,060                53,753
                                                                                              -----------           -----------
TOTAL                                                                                            476,245               357,752
                                                                                              -----------           -----------

             DEFERRED CREDITS AND OTHER LIABILITIES
--------------------------------------------------------------
Deferred Income Taxes                                                                            355,368               349,064 
Long-term Risk Management Liabilities                                                              8,095                 4,667 
Reclamation Reserve                                                                                7,740                16,512 
Regulatory Liabilities:
  Asset Removal Costs                                                                            248,686               236,409 
  Deferred Investment Tax Credits                                                                 36,620                39,864 
  Excess Earnings                                                                                  3,167                 2,600 
  Other                                                                                           17,868                18,779 
Asset Retirement Obligations                                                                      27,043                 8,429 
Obligations Under Capital Leases                                                                  31,302                18,383 
Deferred Credits and Other                                                                        83,339                85,183
                                                                                              -----------           -----------
TOTAL                                                                                            819,228               779,890
                                                                                              -----------           -----------

Commitments and Contingencies (Note 5)

TOTAL CAPITALIZATION AND LIABILITIES                                                          $2,649,043            $2,581,963
                                                                                              ===========           ===========
                                                                                             

See Notes to Financial Statements of Registrant Subsidiaries.
</TABLE>




<PAGE>

<TABLE>
<CAPTION>


                                          SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
                                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         For the Nine Months Ended September 30, 2004 and 2003
                                                            (Unaudited)

                                                                                             2004                  2003
                                                                                             ----                  ----
                                                                                                   (in thousands)
                  OPERATING ACTIVITIES
-----------------------------------------------------
<C>                                                                                        <C>                   <C>    
Net Income                                                                                  $80,177               $81,779 
Adjustments to Reconcile Net Income to Net Cash Flows
 From Operating Activities:
    Cumulative Effect of Accounting Changes                                                       -                (8,517)
    Depreciation and Amortization                                                            96,940                89,284 
    Deferred Income Taxes                                                                    (7,303)                  421 
    Deferred Investment Tax Credits                                                          (3,244)               (3,245)
    Deferred Property Taxes                                                                  (9,687)               (9,315)
    Mark-to-Market of Risk Management Contracts                                               4,712               (11,497)
Changes in Certain Assets and Liabilities:
    Accounts Receivable, Net                                                                 (9,812)               (8,862)
    Fuel, Materials and Supplies                                                             14,486                10,095 
    Accounts Payable                                                                        (20,387)              (18,773)
    Taxes Accrued                                                                            63,540                42,396 
    Fuel Recovery                                                                            12,304               (13,750)
Change in Other Assets                                                                       (4,163)               (1,901)
Change in Other Liabilities                                                                  (2,620)                61,042
                                                                                           ---------             ---------
Net Cash Flows From Operating Activities                                                    214,943               209,157
                                                                                           ---------             ---------

                   INVESTING ACTIVITIES
-----------------------------------------------------
Construction Expenditures                                                                   (68,238)              (86,488)
Proceeds from Sale of Assets and Other                                                        3,876                 9,085 
Change in Other Cash Deposits, Net                                                              805                (3,723)
                                                                                           ---------             ---------
Net Cash Flows Used For Investing Activities                                                (63,557)              (81,126)
                                                                                           ---------             ---------

                   FINANCING ACTIVITIES
-----------------------------------------------------
Issuance of Long-term Debt                                                                   92,441               143,041 
Issuance of Long-term Debt - Affiliated                                                      50,000                     - 
Retirement of Long-term Debt                                                               (222,457)              (58,478)
Change in Advances to/from Affiliates, Net                                                  (28,550)             (147,029)
Dividends Paid on Common Stock                                                              (45,000)              (54,596)
Dividends Paid on Cumulative Preferred Stock                                                   (172)                 (172)
                                                                                           ---------             ---------
Net Cash Flows Used For Financing Activities                                               (153,738)             (117,234)
                                                                                           ---------             ---------

Net Increase (Decrease) in Cash and Cash Equivalents                                         (2,352)               10,797 
Cash and Cash Equivalents at Beginning of Period                                              5,676                     -
                                                                                           ---------             ---------
Cash and Cash Equivalents at End of Period                                                   $3,324               $10,797
                                                                                           =========             =========
                                                                                          

SUPPLEMENTAL DISCLOSURE:
Cash paid for interest net of capitalized amounts was $40,136,000 and $45,211,000 and for income taxes was $11,326,000 and 
$26,166,000 in 2004 and 2003, respectively. Noncash acquisitions under capital leases were $14,226,000 in 2004. There were no 
noncash capital lease acquisitions in 2003.

See Notes to Financial Statements of Registrant Subsidiaries.

</TABLE>



<PAGE>


                SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
        INDEX TO NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES
        -----------------------------------------------------------------

The notes to SWEPCo's consolidated financial statements are combined with the
notes to financial statements for other subsidiary registrants. Listed below are
the notes that apply to SWEPCo.

                                                                   Footnote
                                                                   Reference
                                                                   ---------

Significant Accounting Matters                                     Note 1

New Accounting Pronouncements                                      Note 2

Rate Matters                                                       Note 3

Customer Choice and Industry Restructuring                         Note 4

Commitments and Contingencies                                      Note 5

Guarantees                                                         Note 6

Benefit Plans                                                      Note 8

Business Segments                                                  Note 9

Financing Activities                                               Note 10



<PAGE>


            NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES
            --------------------------------------------------------

The notes to financial statements that follow are a combined presentation for
AEP's registrant subsidiaries. The following list indicates the registrants to
which the footnotes apply:


<TABLE>
<CAPTION>

<C> <C>                              <C>    


1.  Significant Accounting Matters   AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

2.  New Accounting Pronouncements    AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

3.  Rate Matters                     APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

4.  Customer Choice and              APCo, CSPCo, I&M, OPCo, SWEPCo, TCC, TNC
     Industry Restructuring

5.  Commitments and Contingencies    AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

6.  Guarantees                       AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

7.  Dispositions and Assets Held     TCC
     for Sale

8.  Benefit Plans                    APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

9.  Business Segments                AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

10. Financing Activities             AEGCo, APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC, TNC

</TABLE>




<PAGE>

1.  SIGNIFICANT ACCOUNTING MATTERS
    ------------------------------

General
-------

The accompanying unaudited interim financial statements should be read in
conjunction with the 2003 Annual Report as incorporated in and filed
with our 2003 Form 10-K.

In the opinion of management, the unaudited interim financial statements
reflect all normal and recurring accruals and adjustments which are
necessary for a fair presentation of the results of operations for
interim periods.

Components of Accumulated Other Comprehensive Income (Loss)
-----------------------------------------------------------

Accumulated Other Comprehensive Income (Loss) is included on the balance
sheet in the equity section. The components of Accumulated Other
Comprehensive Income (Loss) for AEP registrant subsidiaries is shown in
the following table.

                                        September 30,       December 31,
   Components                               2004                2003   
   -----------                              ----                ----   
                                                 (in thousands)
   Cash Flow Hedges:
   -----------------

           APCo                          $(15,935)            $(1,569)
           CSPCo                           (2,115)                202 
           I&M                             (8,543)                222 
           KPCo                              (585)                420 
           OPCo                            (3,483)               (103)
           PSO                             (2,323)                156 
           SWEPCo                          (3,880)                184 
           TCC                             (6,958)             (1,828)
           TNC                             (2,421)               (601)

   Minimum Pension Liability:
   --------------------------

           APCo                          $(50,519)           $(50,519)
           CSPCo                          (46,529)            (46,529)
           I&M                            (25,328)            (25,328)
           KPCo                            (6,633)             (6,633)
           OPCo                           (52,646)            (48,704)
           PSO                            (43,998)            (43,998)
           SWEPCo                         (21,028)            (44,094)
           TCC                            (63,515)            (60,044)
           TNC                            (26,117)            (26,117)

During the first quarter of 2004, SWEPCo reclassified $23 million from
Accumulated Other Comprehensive Income (Loss) related to minimum pension
liability to Regulatory Assets ($35 million) and Deferred Income Taxes
($12 million) as a result of authoritative letters issued by the FERC
and the Arkansas and Louisiana commissions.

Accounting for Asset Retirement Obligations
-------------------------------------------

We implemented SFAS 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003, which requires entities to record a liability
at fair value for any legal obligations for asset retirements in the
period incurred. Upon establishment of a legal liability, SFAS 143
requires a corresponding asset to be established which will be
depreciated over its useful life.

The following is a reconciliation of beginning and ending aggregate
carrying amounts of asset retirement obligations by registrant
subsidiary following the adoption of SFAS 143:


<TABLE>
<CAPTION>

                          Balance At                                                                Balance at
                          January 1,                           Liabilities         Liabilities     September 30,
                            2004            Accretion           Incurred            Settled            2004
                          ----------         ---------         -----------         -----------     -------------

<C>                        <C>                 <C>                <C>                 <C>              <C>         
AEGCo (a)                   $1.1               $0.1                 $-                  $-              $1.2        
APCo (a)                    21.7                1.3                  -                (0.4)             22.6        
CSPCo (a)                    8.7                0.6                  -                   -               9.3        
I&M (b)                    553.2               29.6                  -                   -             582.8        
OPCo (a)                    42.7                2.5                  -                   -              45.2        
SWEPCo (c)                   8.4                0.9               17.7                   -              27.0        
TCC (d)                    218.8               12.4                  -                   -             231.2        

 (a)  Consists of asset retirement obligations related to ash ponds.
 (b)  Consists of asset retirement obligations related to ash ponds 
      ($1.2 million at September 30, 2004) and nuclear
      decommissioning costs for the Cook Plant ($581.6 million at
      September 30, 2004).
 (c)  Consists of asset retirement obligations related to Sabine
      Mining and Dolet Hills.
 (d)  Consists of asset retirement obligations related to nuclear
      decommissioning costs for STP included in Liabilities Held
      for Sale - Texas Generation Plants on TCC's Consolidated
      Balance Sheets.
</TABLE>


Accretion expense is included in Other Operation expense in the
respective income statements of the individual subsidiary registrants.

As of September 30, 2004 and December 31 2003, the fair value of assets
that are legally restricted for purposes of settling the nuclear
decommissioning liabilities totaled $902 million ($768 million for I&M
and $134 million for TCC) and $845 million ($720 million for I&M and
$125 million for TCC), respectively, recorded in Nuclear Decommissioning
and Spent Nuclear Fuel Disposal Trust Funds on I&M's Consolidated
Balance Sheets and in Assets Held for Sale - Texas Generation Plants on
TCC's Consolidated Balance Sheets.

Reclassification
----------------

Certain prior period financial statement items have been reclassified to
conform to current period presentation. Such reclassifications had no
impact on previously reported Net Income (Loss).

2.  NEW ACCOUNTING PRONOUNCEMENTS
    -----------------------------

FIN 46 (revised December 2003)"Consolidation of Variable Interest 
 Entities" FIN 46R
-----------------------------------------------------------------

We implemented FIN 46R, "Consolidation of Variable Interest Entities,"
effective March 31, 2004 with no material impact to our financial
statements. FIN 46R is a revision to FIN 46 which interprets the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties.

FASB Staff  Position  No. FAS  106-2,  Accounting  and  Disclosure  
 Requirements  Related  to the  Medicare  Prescription  Drug Improvement 
 and Modernization Act of 2003
------------------------------------------------------------------------

APCo, CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC and TNC implemented FASB
Staff Position (FSP) FAS 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003," effective April 1, 2004, retroactive to January 1, 2004.
The new disclosure standard provides authoritative guidance on the
accounting for any effects of the Medicare prescription drug subsidy
under the Act. It replaces the earlier FSP FAS 106-1, under which APCo,
CSPCo, I&M, KPCo, OPCo, PSO, SWEPCo, TCC and TNC previously elected to
defer accounting for any effects of the Act until the FASB issued
authoritative guidance on the accounting for the Medicare subsidy.

Under FSP FAS 106-2, the current portion of the Medicare subsidy for
employers who qualify for the tax-free subsidy is a reduction of ongoing
FAS 106 cost, while the retroactive portion is an actuarial gain to be
amortized over the average remaining service period of active employees,
to the extent that the gain exceeds FAS 106's 10 percent corridor. The
Medicare subsidy reduced the FAS 106 accumulated postretirement benefit
obligation (APBO) related to benefits attributed to past service by $202
million. The tax-free subsidy reduced AEP's 2004 year-to-date net
periodic postretirement benefit cost, after adjustment to capitalization
of employee benefits costs as of a cost of construction, by a total of
$20 million.

The following table provides the reduction in the net periodic
postretirement benefit cost for the nine months ended September 30, 2004
for the AEP registrant subsidiaries:

                                      Postretirement Benefit
                                          Cost Reduction
                                      ----------------------
                                          (in thousands) 

APCo                                          $3,146
CSPCo                                          1,575
I&M                                            2,267
KPCo                                             466
OPCo                                           2,697
PSO                                            1,041
SWEPCo                                         1,076
TCC                                            1,251
TNC                                              528

Future Accounting Changes
-------------------------

The FASB's standard-setting process is ongoing and until new standards
have been finalized and issued by FASB, we cannot determine the impact
on the reporting of our operations that may result from any such future
changes. The FASB is currently working on several projects including
discontinued operations, business combinations, liabilities and equity,
revenue recognition, accounting for share-based compensation, pension
plans, asset retirement obligations, earnings per share calculations,
fair value measurements, accounting changes and related tax impacts. We
also expect to see more FASB projects as a result of their desire to
converge International Accounting Standards with those generally
accepted in the United States of America. The ultimate pronouncements
resulting from these and future projects could have an impact on our
future results of operations and financial position.

3.  RATE MATTERS
    ------------

As discussed in our 2003 Annual Report, rate and regulatory proceedings
at the FERC and at several state commissions are ongoing. The Rate
Matters note within our 2003 Annual Report should be read in conjunction
with this report in order to gain a complete understanding of material
rate matters still pending, without significant changes since year-end.
The following sections discuss current activities.

TNC Fuel Reconciliation - Affecting  TNC
----------------------------------------

In 2002, TNC filed with the PUCT to reconcile fuel costs, requesting to
defer any unrecovered portion applicable to retail sales within its
ERCOT service area for inclusion in the True-up Proceeding. This
reconciliation for the period from July 2000 through December 2001 will
be the final fuel reconciliation for TNC's ERCOT service territory.

In March 2003, the ALJ in this proceeding filed a Proposal for Decision
(PFD) with a recommendation that TNC's under-recovered retail fuel
balance be reduced. In March 2003, TNC established a provision for
probable disallowance of $13 million based on the recommendations in the
PFD. In May 2003, the PUCT reversed the ALJ on certain matters and
remanded TNC's final fuel reconciliation to the ALJ to consider two
issues: (1) the sharing of off-system sales margins from AEP's trading
activities with customers for five years per the PUCT's interpretation
of the Texas AEP/CSW merger settlement and (2) the inclusion of January
2002 fuel factor revenues and associated costs in the determination of
the under-recovery. The PUCT proposed that the sharing of off-system
sales margins for periods beyond the termination of the fuel factor
should be recognized in the final fuel reconciliation proceeding. This
would result in the sharing of margins for an additional three and
one-half years after the end of the Texas ERCOT fuel factor. While
management believes that the Texas merger settlement only provided for
sharing of margins during the period fuel and generation costs were
regulated by the PUCT, an additional provision of $10 million was
recorded in December 2003.

In December 2003, the ALJ issued a PFD in the remand phase of the TNC
fuel reconciliation recommending additional disallowances for the two
remand issues. TNC filed responses to the PFD, and the PUCT announced a
final ruling in the fuel reconciliation proceeding in January 2004
accepting the PFD. TNC received a written order in March 2004 and
increased its provision by $1.5 million. In March 2004, various parties,
including TNC, requested a rehearing of the PUCT's ruling. In May 2004,
the PUCT reversed its position on the inclusion of MTM amounts in the
allocation of system sales margins and remanded the case to the ALJ. As
a result, TNC recorded an additional provision of $12 million in the
second quarter of 2004 resulting in a provision for an over-recovery
balance of approximately $7 million.

On July 2, 2004, the parties to the MTM remand proceeding filed a
"Stipulation of Fact" in which all parties agreed to the quantification
of the remanded issue. With the amounts included in the "Stipulation of
Fact," the over-recovery balance would be $4 million. On October 13,
2004 the PUCT approved an order which included the amounts contained in
the "Stipulation of Fact." The PUCT issued an order in the fuel
reconciliation which reflected the "Stipulation of Fact" in October
2004. TNC will seek rehearing of the PUCT's order regarding issues other
than the issue covered by the stipulation. TNC may appeal to the Texas
District Court the PUCT's decision once all motions for rehearing have
been adjudicated. Management expects to adjust its provision to an
over-recovery balance of $4 million when it receives a final order in
the fourth quarter 2004. Although management believes it has adequately
provided for probable disallowances, a final order from the PUCT
disallowing amounts in excess of the established provision could have a
material adverse impact on TNC's future results of operations and cash
flows.

In February 2002, TNC received a final order from the PUCT in a previous
fuel reconciliation covering the period July 1997 through June 2000 and
reflected the order in its financial statements. This final order was
appealed to the Travis County District Court. In May 2003, the District
Court upheld the PUCT's final order. That order was appealed by certain
cities (the Cities) to the Third Court of Appeals. The Third Court of
Appeals issued a ruling on September 23, 2004 upholding the District
Court and the PUCT's final order. It is unknown at this time if the
Cities will appeal to the Texas Supreme Court or if the court will hear
the issue if they do.

TCC Fuel Reconciliation  - Affecting  TCC
-----------------------------------------

In 2002, TCC filed its final fuel reconciliation with the PUCT to
reconcile fuel costs to be included in its deferred over-recovery
balance in the True-up Proceeding. This reconciliation covers the period
from July 1998 through December 2001.

Based on the PUCT ruling in the TNC proceeding related to similar
issues, TCC established a provision for probable adverse rulings of $81
million during 2003. On February 3, 2004, the ALJ issued a PFD in the
TCC case recommending that the PUCT disallow $140 million in eligible
fuel costs including some new items not considered in the TNC case, and
other items considered but not disallowed in the TNC ruling. Based on an
analysis of the ALJ's recommendations and the initial final order in the
TNC fuel reconciliation, TCC established an additional provision of $13
million during the first quarter of 2004. In May 2004, the PUCT accepted
most of the ALJ's recommendations in the TCC case, however, the PUCT
rejected the ALJ's recommendation to impute capacity to certain
energy-only purchased power contracts and remanded the issue to the ALJ
to determine if any energy-only purchased power contracts during the
reconciliation period include a capacity component that is not
recoverable in fuel revenues. In testimony filed in the remand
proceeding, TCC has asserted that its energy-only purchased power
contracts do not include any capacity component. Intervenors, including
the Office of Public Utility Counsel, have filed testimony recommending
that $15 million to $30 million of TCC's purchased power costs reflect
capacity costs which are not recoverable in the fuel reconciliations.
Hearings were held in October 2004 on this remand issue. As a result of
the PUCT's acceptance of most of the ALJ's recommendations in TCC's case
and the PUCT's remand decision in the TNC case regarding the inclusion
of MTM amounts in the allocation of AEP's net system sales margins, TCC
increased its provision by $47 million in the second quarter of 2004.
The over-recovery balance and the provisions for probable disallowances
totaled $210 million including interest at September 30, 2004.

At this time, management is unable to predict the outcome of this
proceeding. Management believes it has provided for all probable to-date
disallowances pending receipt of a final order. A final order has not
yet been issued in TCC's final fuel reconciliation. Management will continue
to challenge adverse decisions vigorously, including appeals if necessary.
An order from the PUCT, disallowing amounts in excess of the established 
provision, couldhave a material adverse effect on TCC's future results of 
operations and cash flows. Additional information regarding the True-up 
Proceeding for TCC can be found in Note 4 "Customer Choice and Industry 
Restructuring."


SWEPCo Texas Fuel Reconciliation - Affecting SWEPCo
---------------------------------------------------

In June 2003, SWEPCo filed with the PUCT to reconcile fuel costs in the
SPP. This reconciliation covers the period from January 2000 through
December 2002. During the reconciliation period, SWEPCo incurred $435
million of Texas retail eligible fuel expense. In November 2003,
intervenors and the PUCT Staff recommended fuel cost disallowances of
more than $30 million. In December 2003, SWEPCo agreed to a settlement
in principle with all parties in the fuel reconciliation. The settlement
provides for a disallowance in fuel costs of $8 million which was
recorded in December 2003. In April 2004, the PUCT approved the
settlement.

Virginia Fuel Factor Filing - Affecting APCo
--------------------------------------------

On October 29, 2004 APCo filed with the Virginia SCC to increase its
fuel factor effective January 1, 2005. The requested factor is estimated
to increase revenues by approximately $19 million on an annual basis.
This increase reflects a continuing rise in the projected cost of coal
in 2005. This fuel factor adjustment will increase cash flows without
impacting results of operations as any over-recovery or under-recovery
of fuel costs would be deferred as a regulatory liability or a
regulatory asset.

TCC Rate Case - Affecting TCC
-----------------------------

On June 26, 2003, the City of McAllen, Texas requested that TCC provide
justification showing that its transmission and distribution rates
should not be reduced. Other municipalities served by TCC passed similar
rate review resolutions. In Texas, municipalities have original
jurisdiction over rates of electric utilities within their municipal
limits. Under Texas law, TCC must provide support for its rates to the
municipalities. TCC filed the requested support for its rates based on a
test year ending June 30, 2003 with all of its municipalities and the
PUCT on November 3, 2003. TCC's proposal would decrease its wholesale
transmission rates by $2 million or 2.5% and increase its retail energy
delivery rates by $69 million or 19.2%.

In February 2004, eight intervening parties and the PUCT Staff filed
testimony recommending reductions to TCC's requested $67 million rate
increase. The recommendations ranged from a decrease in existing rates
of approximately $100 million to an increase in TCC's current rates of
approximately $27 million. Hearings were held in March 2004. In May
2004, TCC agreed to a non-unanimous settlement on cost of capital
including capital structure and return on equity with all but two
parties in the proceeding. TCC agreed that the return on equity should
be established at 10.125% based upon a capital structure with 40% equity
resulting in a weighted cost of capital of 7.475%. The settlement and
other agreed adjustments reduced TCC's rate request from $67 million to
$41 million. The ALJs that heard the case issued their recommendations
on July 2, 2004, including a recommendation to approve the cost of
capital settlement. The ALJs recommended that an issue related to the
allocation of consolidated tax savings to the transmission and
distribution utility be remanded for additional evidence. On July 15,
2004, the PUCT remanded this issue to the ALJs. On August 19, 2004, in a
separate ruling the PUCT remanded six other issues to the ALJs
requesting revisions to clarify and further support the recommendations
in the PFD. In addition, the PUCT ordered TCC to calculate its revenue
requirements based upon the recommendations of the ALJs. On July 21,
2004, TCC filed its revenue requirements based upon the recommendations
of the ALJs. According to TCC's calculations, the ALJs' recommendations
reduce TCC's existing rates by somewhere between $33 million and $43 million
depending on the final resolution of the amount of consolidated tax
savings. Hearings were held on the consolidated tax savings remand issue
in September. The PUCT is expected to issue its decision by the end of
2004. Management is unable to predict the ultimate effect of this
proceeding on TCC's rates, revenues, results of operations, cash flows
and financial condition.

On September 2, 2004, a group of intervenors, with subsequent support of
the PUCT Staff, filed a request that a $30