Our principal executive offices are located at One Monument Circle, Indianapolis, Indiana 46204, and our telephone number is (317) 261-8261. Our internet website address is www.IPALCO.com.

We own all of the outstanding common stock of IPL. IPL was incorporated under the laws of the state of Indiana in 1926. IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to more than 455,000 customers in the city of Indianapolis and neighboring areas within the state of Indiana; the most distant point being about 40 miles from Indianapolis. IPL has an exclusive right to provide retail electric service to those customers. IPL owns and operates four generating stations. Two of the generating stations are primarily coal-fired stations. The third station has a combination of units that use coal (base load capacity) and natural gas and/or oil (peaking capacity) for fuel to produce electricity. The fourth station is a small peaking station that uses gas-fired combustion turbine technology for the production of electricity. IPL's net electric generation capability for winter is 3,356 megawatts and net summer capability is 3,238 megawatts. There have been no significant changes in the services rendered by IPL, or in their markets or methods of distribution, during 2003.

The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by month during the year. IPL's business is not dependent on any single customer or group of customers. IPL's electricity sales for 1999 through 2003 are set forth in the table of statistical information included at the end of this section.

IPL's generation, transmission and distribution facilities are described under "Item 2. Properties." IPL's electric system is directly interconnected with the electric systems of Indiana Michigan Power Company, Southern Indiana Gas and Electric Company, Hoosier Energy Rural Electric Cooperative, Inc., and the electric system jointly owned by PSI Energy, Inc., Indiana Municipal Power Agency and Wabash Valley Power Association, Inc.

IPL is also a member of the East Central Area Reliability Council ("ECAR"). ECAR members cooperate under the East Central Area Reliability Coordination Agreement to augment the reliability of its members' electricity supply systems in the nine-state ECAR region through coordination of the planning and operation of the members' generation and transmission facilities. Smaller electric utility systems, independent power producers and power marketers participate as associate members. In addition, IPL's transmission operations are integrated with those of the Midwest Independent Transmission System Operator, Inc. ("Midwest ISO") and IPL is a transmission owner of the Midwest ISO. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Matters-Wholesale Energy Market".

IPL is subject to regulation by the Indiana Utility Regulatory Commission (the "IURC") as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of public utility properties or securities and certain other matters.

In addition, IPL is subject to the jurisdiction of the Federal Energy Regulatory Commission with respect to short-term borrowing not regulated by the IURC, the sale of electricity at wholesale and the transmission of electric energy in interstate commerce, the classification of accounts, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from those accounting methods required to be used by nonregulated entities.

IPL is also affected by the regulatory jurisdiction of the U.S. Environmental Protection Agency ("EPA"), at the federal level and the Indiana Department of Environmental Management, at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the U.S. Department of Labor and the Indiana Occupational Safety and Health Administration.

Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Matters" for a more comprehensive discussion of regulatory matters impacting IPL and IPALCO.

IPL's tariffed rates for electric service to retail customers (basic rates and charges) are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the staff of the IURC, the Indiana Office of Utility Consumer Counselor, as well as other interested consumer groups and customers. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all utilities at least once every four years. In Indiana, basic rates and charges are determined after giving consideration, on a pro- forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual maintenance and capital expenditures, fuel costs, generating unit availability and purchased power costs and availability can affect the return realized. During 1998, in an order resulting from an IPL initiated proceeding, the IURC declined to exercise its jurisdiction in part over IPL customers who voluntarily select service under IPL's Elect Plan (see "Management's Discussion and Analysis of Financial Condition and Results of Operations- Regulatory Matters") options. Under two of these options, the customer's prices are not adjusted for changes in fuel costs or other factors. The Elect Plan was extended by an IURC order through December 31, 2006. Substantially all other IPL customers are served pursuant to retail tariffs that provide for the monthly billing or crediting to customers of increases or decreases, respectively, in the actual costs of fuel consumed from estimated fuel costs embedded in basic rates, subject to certain restrictions on the level of operating income. IPL maintains its books and records consistent with accounting principles generally accepted in the United States of America reflecting the impact of regulation. See Note 3 to the Consolidated Financial Statements of IPALCO included in this Form 10-K.

Future events, including the advent of retail competition within IPL's service territory, could result in the deregulation of part of IPL's existing regulated businesses. Upon deregulation, adjustments to IPL's accounting records may be required to eliminate the historical impact of regulatory accounting. Such adjustments, as required by Statement of Financial Accounting Standards ("SFAS") No. 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of SFAS No. 71," could eliminate the effects of any actions of regulators that have been recognized as assets and liabilities. Required adjustments could include the expensing of any unamortized net regulatory assets, the elimination of certain tax liabilities, and a write down of any impaired utility plant balances. We expect IPL to meet the criteria for the application of SFAS No. 71 for the foreseeable future.

In 2003, approximately 99% of the total kWh's produced by IPL was generated from coal. Natural gas and fuel oil combined to provide the remaining kWh generation. Natural gas is used in IPL's newer combustion turbines. Fuel oil is used for start up and flame stabilization in coal-fired generating units, as primary fuel in oil-fired steam turbine generating units and three older combustion turbines, and as an alternate fuel in two newer combustion turbines.

IPL's long-term coal contracts provide for approximately 70% of its requirements through the year 2005 and approximately 60% through 2009. The long-term coal agreements are with two suppliers. All of the coal is currently mined in the state of Indiana. Approximately 50% of IPL's coal is from one supplier. IPL has entered into three contracts with this supplier for the provision of coal from three separate mines. It is presently believed that all coal used by IPL will be mined by others. IPL normally carries fuel oil and a 30-60 day system supply of coal to offset unforeseen occurrences such as equipment breakdowns and transportation or mine delays.

The following table of statistical information presents additional data on IPL's electric operations:

We are subject to various federal, state and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We believe that we operate in material compliance with environmental laws, regulations and permits and health and safety laws. We cannot assure, however, that we have been or will be at all times in full compliance with such laws, regulations and permits.

On November 14, 2002, the IURC issued a Certificate of Public Convenience and Necessity for the construction and use of clean coal technology ("CCT") to allow IPL to meet the nitrogen oxide ("NO_x") emission limits imposed pursuant to the EPA's NO_x SIP call. The CCT constitutes qualified pollution control property as defined in Ind. Code section 8-1-2-6.6 and the IURC has approved ratemaking treatment applicable to such property through an Environmental Compliance Cost Recovery Adjustment ("ECCRA"). The ratemaking treatment provided for in the IURC order includes a return on the investment in IPL's planned CCT projects under construction. After the projects have been placed in service, the approved ratemaking treatment provides for a return on the investment and recovery of depreciation expenses and operation and maintenance expenses associated with these projects. The ratemaking treatment also provides for recovery of expenditures related to the purchase of NO_x emission allowances, should such expenditures be made to supplement IPL's CCT construction projects. IPL may add the approved return on its CCT projects to its authorized annual net operating income in subsequent fuel adjustment charge proceedings. The increase in the amount of rate revenues and authorized net operating income resulting from IPL's CCT plan will be determined in periodic filings to the IURC to be made at intervals of no more often than every 6 months and will depend on the amount of cumulative investment, depreciation expenses, operation and maintenance expenses and actual NO_x emission allowance purchases at the time of each of the filings. IPL's first ECCRAs were approved on August 20, 2003, and February 18, 2004.

In 2003, IPL spent approximately $94.2 million on NO_x projects. Further expenditures are estimated to be approximately $81 million and $28 million in 2004 and 2005, respectively, to substantially meet the required NO_x reductions. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Environmental Matters" for a more comprehensive discussion of environmental matters impacting IPL and IPALCO.

IPL has an exclusive right to provide electric service to its retail customers. In recent years, various forms of proposed industry-restructuring legislation and/or rulemakings have been introduced at the federal level and in several states. Generally, the intent of these initiatives is to encourage an increase in competition within the regulated electric utility industry. While federal rulemaking to date has addressed only the electric wholesale market, various state legislatures are considering or have enacted new laws impacting the retail energy markets within their respective states.

At times, IPL will purchase power on the wholesale markets, and at other times IPL will have electric generation capacity available for sale on the wholesale market in competition with other utilities and power generators. IPL's ability to compete in the wholesale market for the sale of its excess generation is dependent on the price, terms and conditions of the sale.

In 2002, the utility industry and, as a consequence, the wholesale markets, experienced significant change and uncertainty. The industry was faced with the instability of the California electricity markets, the bankruptcy of Enron Corp., historically an influential energy trader, and a generally sluggish economy. Another factor contributing to the uncertainty was the downgrading of utility company credit by the rating agencies, which influences credit issues on the wholesale market, and also limits access to the capital markets. In the Midwest, another factor contributing to the changes in the wholesale market was the increase in the supply of electricity on the wholesale market.

During 2003, we believe the wholesale market began to turn around. The overall economy improved and the average price paid for wholesale kWh's in the United States increased over 27% from 2002. This was partially due to a very cold winter in 2003, which increased demand, and a decrease in supply as many utilities had generating units offline while they made capital improvements to reduce NO_x emissions.

As of December 31, 2003, IPL had 1,371 employees of whom 1,341 were full time. Of these employees, 947 were represented by the International Brotherhood of Electrical Workers ("IBEW") in two bargaining units: a physical unit and a clerical-technical unit. In November 2002, the membership of the IBEW physical unit ratified a labor agreement that remains in effect until December 19, 2005. In February 2004, the membership of the IBEW clerical-technical unit ratified a labor agreement that remains in effect until February 19, 2007. As of December 31, 2003, neither IPALCO nor any of its subsidiaries other than IPL had any employees.

Our executive offices are located at One Monument Circle, Indianapolis, Indiana. This facility and the remainder of our material properties in our business and operations are owned directly by IPL. The following is a description of these material properties.

IPL owns two distribution service centers in Indianapolis at 1230 West Morris Street and 3600 North Arlington Avenue. IPL also owns the building in Indianapolis which houses its customer service center located at 2102 North Illinois Street.

IPL owns and operates four generating stations. Two of the generating stations are primarily coal-fired stations. The third station has a combination of units that use coal (base load capacity) and natural gas and/or oil (peaking capacity) for fuel to produce electricity. The fourth station is a small peaking station that uses gas-fired combustion turbine technology for the production of electricity. For electric generation, the net winter capability is 3,356 MW and net summer capability is 3,238 MW. IPL set new summer peak and winter peak load records of 3,003 MW and 2,653 MW in July 2002 and January 2003, respectively.

IPL's sources of electric generation are as follows:

Net electrical generation during 2003, at the Petersburg, Harding Street and Eagle Valley plants accounted for approximately 67.2%, 24.1% and 8.7%, respectively, of IPL's total net generation.

Included in the above totals are three gas turbine units at the Harding Street plant added in 1973, one gas turbine added in each of 1994, 1995 and 2002 with a combined nameplate rating of 374 MW. Also included is one diesel unit each at Eagle Valley and Harding Street plants and three diesel units at Petersburg station, all added in 1967. Each diesel unit has a nameplate rating of 3 MW.

IPL's transmission system includes 457 circuit miles of 345,000 volt lines, 363 circuit miles of 138,000 volt lines and 269 circuit miles of 34,500 volt lines. The distribution system consists of 4,110 circuit miles underground primary and secondary cables and 3,712 circuit miles of overhead primary and secondary wire. Underground street lighting facilities include 656 circuit miles of underground cable. Also included in the system are 75 bulk power substations and 87 distribution substations.

IPL holds an option to purchase suitable acreage of land in Switzerland County, Indiana to use as a potential power plant site. In addition, IPL owns coal and other minerals underlying 798 acres of land in Sullivan County, Indiana, and coal underlying approximately 6,215 acres in Pike and Gibson Counties, Indiana.

All critical facilities owned by IPL are well maintained, in good condition and meet the present needs of IPL.

The mortgage and deed of trust of IPL, together with the supplemental indentures to the mortgage, secure first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a direct first mortgage lien in the amount of $692.7 million at March 1, 2004. In addition, IPALCO has $750 million principal amount of indebtedness outstanding, which is secured by its pledge of all of the outstanding common stock of IPL.

Please refer to Note 14 of the attached audited consolidated financial statements of IPALCO for a summary of significant legal proceedings involving IPALCO and/or IPL. We are also subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations.

Not applicable pursuant to General Instruction I of the Form 10-K.

All of the outstanding common stock of IPALCO is owned by AES, and as a result is not listed for trading on any stock exchange.

Dividends. During 2003 and 2002, we paid quarterly dividends to AES totaling $126.9 million and $180.5 million, respectively. In addition to distributions of operating income, the 2002 dividends included income tax refunds of $53.7 million. Future distributions will be determined in the discretion of the Board of Directors of IPALCO and will depend primarily on dividends received from IPL and such other factors as the Board of Directors of IPALCO deems relevant. Please refer to the Liquidity and Capital Resources section of Item 7 of this report for a discussion of limitations on dividends from IPL. IPALCO must be in compliance with leverage and interest coverage ratios contained in the Indenture for the $750 million of Senior Secured Notes issued by IPALCO prior to paying any dividends to AES. We do not believe this requirement will be a limiting factor in paying dividends in the ordinary course of prudent business operations.

The following table presents our selected consolidated financial data, which should be read in conjunction with our audited consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." IPALCO is a wholly-owned subsidiary of AES and therefore does not report earnings or dividends on a per-share basis. Other data management believes is important in understanding trends in IPALCO's business is also included in this table.

The $14.3 million increase in revenues in 2003 was primarily due to a $7.9 million increase in revenues charged to residential customers and $7.1 million of Midwest ISO revenues (see below) recognized in 2003. While kWh's used by IPL's residential customers remained substantially constant, the overall rate charged to those customers increased 3.2%. This increase resulted primarily from increases in fuel costs charged to residential customers in 2003 (approximately $4.2 million) and because the unusually hot summer temperatures in 2002 resulted in a lower per kWh rate for customers as they experienced volume discounts on kWh usage. All of IPL's residential customers receive a 34.9% decrease in the price per kWh used after a usage of 500 kWh's per month and over a third receive an additional 27.0% decrease after 1,000 kWh's of usage per month. In addition, 2003 included a $0.8 million decrease in service quality credits that IPL was required to refund to its customers (see "-Regulatory Matters-Stipulation and Settlement Agreement") and $0.5 million in increased rate revenues IPL was permitted to charge its customers to recover costs associated with its NO_x compliance construction program. In addition, IPL increased its retail customer base by 5,825 customers or 1.3%. While wholesale revenues decreased only 2.4%, wholesale kWh sales decreased 22.2%. This is because the average price per wholesale kWh sold during the periods increased 25.5%. The average market price for wholesale kWh's sold in the United States increased more than 27% in 2003 as compared to 2002. This increase can be attributed to improvements in the United States economy, unusually cold temperatures in the first few months of 2003, which increased the demand for wholesale kWh's and a decrease in supply as many utilities had generating units offline while they made capital improvements to reduce NO_x emissions.

The $7.4 million increase in miscellaneous revenues is primarily the result of $7.1 million of revenues from the Midwest Independent Transmission System Operator, Inc. ("Midwest ISO") (see also "-Regulatory Matters-Wholesale Energy Market"). The Midwest ISO was established as a non- profit organization to maintain functional control over the combined transmission systems of its members. As a transmission owner, IPL receives a portion of the transmission service revenues from all wholesale kWh sales on the Midwest ISO network based on its percentage of transmission system investment within the Midwest ISO footprint. In addition, IPL pays the Midwest ISO a transmission cost adder on its retail load and a fee for each wholesale transaction. A portion of the transmission cost adder paid to the Midwest ISO is deferred as a regulatory asset and the remaining transmission costs, along with all transaction fees, are expensed in other operating expenses. Our revenues from the Midwest ISO for 2004 are expected to be approximately $3 million to $4 million dollars.

Utility operating expenses increased $28.3 million, or 4.6% during 2003 as compared to 2002. The primary drivers for this increase are a $22.1 million increase in maintenance expenses; and a $13.7 million, or 15.1% increase in wages and benefits, which includes a $1.6 million increase in maintenance salaries and wages; partially offset by a $10.3 million decrease in operating income taxes. Other significant factors contributing to the increase include a $5.4 million increase in fuel costs, $3.8 million of Midwest ISO expenses (see above) in 2003 and a $2.7 million decrease in taxes other than income taxes. In addition, while power purchased expenses decreased $1.1 million, or 5.9%, it was the net result of a 21.2% decrease in the number of kWh's purchased and a 17.7% increase in the weighted average price paid per kWh during the comparative periods.

The maintenance expense increase is primarily the result of increased outages in 2003, which were planned to coincide with our NO_x compliance construction program, $1.9 million spent in the third quarter of 2003 to repair damage caused by severe storms, and an insurance settlement, which reduced maintenance expenses in the third quarter of 2002 by $1.1 million. The increase in wages and benefits was made up of an $8.6 million or 12.2% increase in salaries and wages and a $5.1 million increase in benefits, of which $4.6 million is additional pension and other postretirement benefits expenses. Of this increase $12.0 million, $1.6 million and $0.1 million is included in other operating expenses, maintenance, and fuel, respectively, on IPALCO's audited consolidated statements of income. The salaries and wages increase is primarily due to a net additional 73 employees hired by IPL during 2003 and base wage increases during 2003. The decrease in operating income taxes-net is primarily the result of an $11.6 million decrease in deferred federal income tax expense and a $7.7 million decrease in current federal income tax expense, partially offset by an $11.3 million increase in current state income tax expense, which is primarily due to the increase in the Indiana corporate income tax rate from 4.0% to 8.5%. The decrease in current federal income tax expense is due to a decrease in federal taxable income, including the deduction for state income taxes. The decrease in deferred federal income taxes is primarily due to a $38.3 million decrease in property related deferred taxes, primarily from depreciation, partially offset by a $27.3 million increase in deferred taxes related to pensions and other employee benefits. The increase in fuel cost is primarily due to a steadier demand for electricity in 2002, which allowed IPL to produce a greater proportion of electricity from its low-cost, base-load, coal-fired units than from less efficient peaking unit resources, and increased scheduled outages in 2003, which made some of our low-cost, base-load, coal-fired units unavailable for periods of time. The $2.7 million decrease in taxes other than income taxes results primarily from a $5.2 million decrease in property taxes, resulting primarily from decreases in IPL's assessed values, partially offset by a $2.0 million increase in state utility receipts taxes in 2003 over gross receipts taxes in 2002. Effective January 1, 2003, the state of Indiana no longer imposes a 1.2% gross receipts tax, but does require utilities to pay a utility receipts tax based primarily on 1.4% of retail energy sales.

As a result of the foregoing, utility operating income decreased $14.0 million or 7.0% from $200.6 million to $186.6 million during 2003 as compared to 2002.

Utility operating revenues decreased in 2002 from the prior year by $10.1 million, which resulted from the following changes in electric operating revenues (dollars in thousands):

Utility operating expenses decreased $80.0 million, or 11.5% during 2002 as compared to 2001. This decrease was primarily the result of $54.5 million of termination benefit agreement costs in 2001 in connection with the AES Acquisition; a charge of $23.8 million taken in the third quarter of 2001 relating to two additional VERP's offered in connection with the AES Acquisition; a $27.2 million decrease in other operating expenses; a $15.7 million decrease in maintenance expenses; and a $9.4 million decrease in fuel costs, partially offset by a $47.4 million increase in income taxes- net resulting from an increase in pretax operating income. The decrease in other operating expenses includes $11.2 million of supplemental retirement expense incurred in 2001, $6.2 million of restricted stock paid in 2001 and an $8.0 million decrease in power generation operating expenses. The $8.0 million decrease in power generation operating expenses includes $4.0 million in 2001 for rents related to electricity generators, which were no longer needed after IPL placed a new gas turbine in service in 2002 and a $4.6 million decrease in expenses, primarily labor, related to the production of steam for electricity generation. The decrease in fuel cost is primarily due to a steadier demand for electricity in 2002, which allowed IPL to produce a greater proportion of electricity from our low-cost, base-load, coal-fired units than from less efficient peaking unit resources. This decrease is partially offset by a $1.1 million increase in power purchased. The maintenance expense decrease is primarily the result of the timing of major generating unit overhauls.

As a result of the foregoing, utility operating income increased $69.9 million or 53.5% during 2002 as compared to 2001.

Other income and deductions increased from income of $12 thousand in 2001 to income of $26.5 million in 2002. This was primarily a result of the following: net income tax benefits increased by $8.8 million, primarily due to an increase in interest expense from IPALCO's November 2001 issuance of $750 million of Senior Secured Notes (the "IPALCO Notes"); our expensing of $6.3 million of merger costs in 2001 related to the AES Acquisition; termination benefit agreement costs of $4.7 million recognized in 2001 associated with non-utility officer termination costs as a result of the AES Acquisition; gains of $4.4 million recognized in 2002 related to the sales of noncore real estate assets; and a $2.6 million increase in the allowance for equity funds used during construction, primarily due to a gas combustion turbine placed in service in 2002 with a total installed cost of approximately $63 million. At December 31, 2001 the turbine was included in Other investments and is now included in Utility plant in service on IPALCO's consolidated balance sheets. Included in Other-net in 2002 is our $2.2 million share of losses in EnerTech. In 2001, Other-net includes a $1.8 million impairment provision on the carrying amounts of the CER assets.

Interest and other charges increased $49.4 million in 2002 as compared to 2001. This increase was primarily the result of a $49.8 million increase in interest and a $0.5 million increase in debt cost amortization from the November 2001 issuance of the IPALCO Notes. These increases were partially offset by a $1.2 million increase in the allowance for borrowed funds used during construction, which was primarily due to the gas combustion turbine placed in service in 2002, as described above, and a $1.0 million decrease in other interest resulting from the December 2001 termination of our commercial paper program.

As of December 31, 2003, we had cash and cash equivalents of $14.0 million. In addition, IPL has available borrowing capacity of $74.3 million, after existing letters of credit, under its $75.0 million committed credit facilities. All long-term borrowings by IPL must first be approved by the IURC and the aggregate amount of IPL's short-term borrowings must be approved by FERC. IPL has obtained approval from FERC to borrow the amounts available on its existing credit facilities. Also, IPL and IPALCO have restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under their existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its committed credit facilities, refinance existing debt, issue the remaining $30 million of long-term debt approved by the IURC (see below) and incur certain other indebtedness. We believe that existing cash balances, cash generated from operating activities and borrowing capacity on IPL's committed credit facilities will be adequate on a short-term and long-term basis to meet anticipated operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and pay dividends to AES. Sources for principal payments on outstanding indebtedness and nonrecurring capital expenditures are expected to be obtained from: (i) existing cash balances; (ii) cash generated from operating activities; (iii) borrowing capacity on IPL's committed credit facilities and (iv) additional debt financing.

In May 2003, IPL extended the maturity of its $45 million committed line of credit to May 21, 2004. In June 2003, IPL executed an agreement which combined its existing $40.6 million liquidity facility (see "-Market Risk Disclosure-Remarketing Agreement and Liquidity Facility" for more information relating to the $40.6 million liquidity facility) and its $30 million committed line of credit into one two-tranche agreement. Under the new agreement, these facilities mature on June 3, 2004.

On August 6, 2003, IPL issued $110 million of 6.30% first mortgage bonds due July 1, 2013. The net proceeds of approximately $109 million were used primarily to finance a portion of IPL's capital expenditure program, to reimburse its treasury for expenditures previously incurred in connection with the capital expenditure program and to repay amounts outstanding on its credit lines.

We are a holding company, and accordingly substantially all of our cash is generated by the operating activities of our subsidiaries, principally IPL. None of our subsidiaries, including IPL, is obligated under or has guaranteed the IPALCO Notes, however, all of IPL's common stock is pledged under the IPALCO Notes. Accordingly, our ability to make payments on the IPALCO Notes depends on the ability of our subsidiaries to generate cash and distribute it to us.

On January 13, 2004, IPL issued $100 million of 6.60% first mortgage bonds due January 1, 2034. The net proceeds of approximately $99 million were used to retire $80 million of 6.05% first mortgage bonds due February 2004 and to reimburse IPL's treasury for expenditures previously incurred in connection with its capital expenditure program.

On February 12, 2003, the IURC issued an order (the "IURC 2003 Financing Order"), approving IPL's 2003-2006 financing program, including, among other things, the issuance of up to $160 million of additional long-term debt to pay, in part, for its construction program during 2003-2005, and the refinancing of $80 million of long-term debt, which matured in February 2004. To date, $130 million of additional long-term debt has since been issued and the $80 million of long-term debt due in February 2004 has been retired (see above). The IURC 2003 Financing Order also set forth a process whereby, prior to declaring or paying a dividend, IPL must file a report with the IURC that sets forth: (i) the amount of any proposed dividend, (ii) the amount of dividends distributed during the prior twelve months, (iii) an income statement for the same twelve-month period, (iv) the most recent balance sheet, and (v) IPL's capitalization as of the close of the preceding month, as well as a pro forma capitalization giving effect to the proposed dividend, with sufficient detail to indicate the amount of unappropriated retained earnings. If within twenty calendar days the IURC does not initiate a proceeding to further explore the implications of the proposed dividend, the proposed dividend will be deemed approved. The IURC 2003 Financing Order stated that such process should continue in effect during the term of the financing authority, which expires December 31, 2006.

On February 28, 2003, IPL filed a petition for reconsideration, or in the alternative, for rehearing with the IURC. This petition sought clarification of certain provisions of the IURC 2003 Financing Order. In addition, the petition requested that the IURC establish objective criteria in connection with the reporting process related to IPL's long term debt capitalization ratio. On March 14, 2003, IPL filed a Notice of Appeal of the IURC 2003 Financing Order in the Indiana Court of Appeals. IPL subsequently dismissed that appeal.

On April 16, 2003, the IURC issued its order in response to IPL's petition for reconsideration. The IURC declined to provide objective criteria relating to the dividend reporting process, and did not set a definitive time frame within which an investigation of a proposed dividend would be concluded. The IURC did make certain requested clarifications and corrections with regard to the IURC 2003 Financing Order, including the following: (i) the dividend reporting process applies only to dividends on IPL's common stock, not on its preferred stock; (ii) a confidentiality process is established to maintain confidentiality of information filed under the dividend reporting process until such information has been publicly released and is no longer confidential; (iii) dividends are not to be paid until after the twenty calendar days have passed, or the IURC approves the dividend after initiating a proceeding to explore the implications of a proposed dividend; and (iv) certain technical corrections.

The reports filed to date with the IURC under the dividend reporting process were all deemed approved after twenty calendar days had elapsed and the IURC did not initiate any proceedings to explore the implications of the proposed dividends. We continue to believe that IPL will not be prevented from paying future dividends in the ordinary course of prudent business operations.

IPL's mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL's ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, IPL is restricted in the declaration and payment of dividends, or other distribution on shares of its capital stock of any class, or in the purchase or redemption of such shares, to the aggregate of its net income, as defined in the mortgage, after December 31, 1939. The amount which these mortgage provisions would have permitted IPL to declare and pay as dividends at December 31, 2003, exceeded IPL's retained earnings at that date. In addition, pursuant to IPL's articles, no dividends may be paid or accrued and no other distribution may be made on IPL's common stock unless dividends on all outstanding shares of IPL preferred stock have been paid or declared and set apart for payment.

IPL is also restricted in its ability to pay dividends under the terms of its credit facilities if it is not in compliance with certain financial covenants. These covenants require IPL to maintain a ratio of earnings before interest and taxes to interest expense not less than of 2.5 to 1, and a ratio of total debt to total capitalization not in excess of .60 to 1, in order to pay dividends. As of December 31, 2003 and as of the filing of this report, IPL and IPALCO were in compliance with all financial covenants and no event of default existed.

IPL's amended articles of incorporation also require that, so long as any shares of preferred stock are outstanding, the net income of IPL, as specified in the articles, be at least one and one- half times the total interest on the funded debt and the pro forma dividend requirements on the outstanding, and any proposed, preferred stock before any additional preferred stock is issued. The mortgage requires that net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. As of December 31, 2003, the requirements would not materially restrict IPL's ability to issue additional preferred stock or first mortgage bonds in the ordinary course of prudent business operations.

Net cash provided by operating activities was $165.5 million, $271.0 million and $191.9 million for the fiscal years ended December 31, 2003, 2002 and 2001, respectively. Net cash used in investing activities was $165.0 million, $87.2 million and $156.2 million for the fiscal years ended December 31, 2003, 2002 and 2001, respectively. Net cash used in financing activities was $18.0 million, $181.3 million and $75.4 million for the fiscal years ended December 31, 2003, 2002 and 2001, respectively.

Our principal sources of funds in 2003 were net cash provided by operating activities of $165.5 million and proceeds of approximately $108.9 million from the sale of IPL first mortgage bonds. Net cash provided by operating activities is net of cash paid for interest of $100.5 million. The principal uses of funds in 2003 included $126.9 million in dividends to AES, construction expenditures of $156.9 million and pension plan funding of $96.1 million. We believe our future principal uses of net cash provided by operating activities, net of required pension contributions, will be capital expenditures and distributions to our parent, AES.

While we believe that our sources of liquidity will be adequate to meet our needs, this belief is based on a number of material assumptions, including, without limitation, assumptions about weather, economic conditions, our credit ratings and those of AES and IPL, regulatory constraints and environmental pronouncements and pension obligations. If and to the extent these assumptions prove to be inaccurate, our sources of liquidity may be affected. Moreover, changes in these factors or in the bank or other credit markets could reduce available credit or our ability to renew existing liquidity facilities on acceptable terms. The absence of adequate liquidity could adversely affect our ability to operate our business, and our results of operations and financial condition.

Our non-contingent contractual obligations as of December 31, 2003 are set forth below:

1. Excludes payments for interest or other fees.
2. We have not included purchase orders for goods or services for which there is not also an enforceable contract. For contracts that include minimums, maximums or other variables we have included our best estimate regarding our liability under those contracts based on historical data.
3. Represents the midpoint of estimated pension funding of $35 million to $55 million. We have not estimated pension funding past 2004. Does not include deferred income taxes, investment tax credits, regulatory liabilities or IPL's interest-rate swap liabilities.

In addition, as of December 31, 2003, we had a contractual obligation to invest additional capital of up to $3.8 million in EnerTech if and when EnerTech makes capital calls.

We spent approximately $156.9 million and $94.7 million on capital expenditures in 2003 and 2002, respectively. Construction expenditures during these periods were financed using internally generated cash provided by operations, IPL's credit facilities and, with respect to 2003 only, a portion of the net proceeds from the sale of IPL's $110 million first mortgage bonds. IPL's construction program is composed of capital expenditures necessary for prudent utility operations and compliance with environmental laws and regulations, along with discretionary investments designed to improve overall performance. Our construction program for the three-year period 2004- 2006 is currently estimated to cost approximately $319 million. The estimated cost of the overall program by year is $152 million in 2004, $98 million in 2005 and $69 million in 2006. It includes approximately $127 million for additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting facilities. The construction program also includes approximately $71 million for power plant related projects, $12 million primarily for miscellaneous office equipment, furniture and leasehold improvements and $109 million for construction associated with new environmental standards imposed by the U.S. Environmental Protection Agency ("EPA") relating to NO_x emission reductions. See "-Environmental Matters-NO_x SIP Call," below, regarding the IURC ratemaking treatment providing for recovery of our NO_x compliance costs.

All of our outstanding common stock is held by AES. During 2003 and 2002, we paid $126.9 million and $180.5 million, respectively, in dividends to AES. In addition to distributions of operating income, the 2002 dividends included income tax refunds of $53.7 million. Future distributions will be determined in the discretion of our board of directors and will depend primarily on dividends received from IPL, which are affected by IPL's actual results of operations, cash flows, financial condition, capital requirements, regulatory considerations (including compliance with the IURC 2003 Financing Order described above), and such other factors as our board of directors deems relevant.

Total pension program-related cash contributions were $96.1 million, $15.2 million and $11.6 million for 2003, 2002 and 2001, respectively. Depending on the timing of contributions, pending legislation, and other factors, to meet our funding target, IPL anticipates additional program- related cash contributions by IPL for pension benefits of approximately $35 million to $55 million in 2004. This estimate is based on actuarial assumptions using a weighted average discount rate range of 5.51% to 6.01%.

Pension plan assets consist of investments in equity, real estate, fixed income securities and cash. Funding for the qualified defined benefit pension plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, as well as targeted funding levels necessary to qualify under standards of the Pension Benefit Guaranty Corporation for exemption from certain administrative requirements.

Effective September 1, 2003, IPALCO and IPL entered into a property insurance program in which AES and other AES subsidiaries also participate. The program includes a policy issued by a third party insurance company for funding losses of the participants up to a total aggregate amount of $20 million. Funds to pay claims within this limit will be derived from premiums paid to this third party carrier by the participants and will be deposited into a trust fund owned by AES Global Insurance Company, a wholly-owned subsidiary of AES, but controlled by the third party carrier. Claims above the $20 million aggregate will be covered by separate insurance policies issued by a syndicate of third party carriers. These policies will provide coverage of $600 million per occurrence. We believe that the combined cost of these policies is less than comparable insurance in the marketplace. During 2003, we paid approximately $1.5 million for seven months coverage under this program beginning September 1, 2003.

AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income.

In December 2003, IPL reached agreements to sell approximately 4,000 acres of undeveloped property near Martinsville, Indiana divided between two purchasers for an aggregate price of $13.2 million. The sale to one of the purchasers was finalized in February 2004 and IPL expects to close the other sale in the first half of 2004. The site was being held as a possible site for a future power plant. IPL holds an option to purchase suitable acreage at a more optimal location to use as a potential power plant site.

Recent inflation rates have not materially impacted our liquidity or financial condition. Our exposure to fluctuations in the price of coal is limited because IURC regulations provide for the recovery of fuel costs above or below the levels included in IPL's rate schedules. This recovery is accomplished through a fuel cost adjustment filing with the IURC. In addition, under Indiana law the IURC is required to set jurisdictional retail rates that allow IPL the opportunity to earn a reasonable rate of return on the fair value of its property. IPL is also allowed to recover purchased power costs up to a benchmark for most retail service (See -Regulatory Matters-Retail Ratemaking for details).

Our ability to borrow money and the interest rates at which we can borrow money are both affected by our credit ratings. During 2002 and 2003, certain of IPALCO and IPL's credit ratings were downgraded. On each of November 15, 2002 and May 15, 2003, the interest rates on the IPALCO Notes were increased by 50 basis points, as a result of the downgrades. In addition, certain other fees related to IPL's credit lines have increased due to such downgrades. These downgrades did not impact the interest rates on IPL's existing long-term debt. Any further reductions in the credit ratings of AES, IPALCO or IPL would not impact the interest rates on IPALCO or IPL's outstanding debt, but improvements in IPALCO's credit ratings could reduce the interest rates on the IPALCO Notes.

The credit ratings of IPALCO and IPL at February 1, 2004 are as follows:

We cannot assure you that our current credit ratings or the credit ratings of IPL will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. Any downgrade or withdrawal of these credit ratings may affect our and IPL's ability to borrow and may increase financing costs, which may decrease earnings. We and IPL will also incur higher interest expense if we replace maturing debt with new debt bearing higher interest rates.

IPL formed IPL Funding Corporation ("IPL Funding") in 1996 to purchase, on a revolving basis, up to $50 million of the retail accounts receivable and related collections of IPL in exchange for a note payable. IPL Funding is not consolidated by IPL or IPALCO since it meets requirements set forth in SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to be considered a qualified special-purpose entity. IPL Funding has entered into a purchase facility with unrelated parties (the "Purchasers") pursuant to which the Purchasers agree to purchase from IPL Funding, on a revolving basis, up to $50.0 million of the receivables purchased from IPL. During 2003, this agreement was extended through October 27, 2004. As of December 31, 2003, the aggregate amount of receivables IPL has sold to IPL Funding and IPL Funding has sold to the Purchasers was $50.0 million. Accounts receivable on IPALCO's balance sheets are stated net of the $50 million sold.

The net cash flows between IPL and IPL Funding are limited to cash payments made by IPL to IPL Funding for interest charges and processing fees. These payments totaled approximately $1.0 million, $1.1 million and $2.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. IPL retains servicing responsibilities through its role as a collection agent for the amounts due on the purchased receivables. IPL and IPL Funding provide certain indemnities to the Purchasers, including indemnification in the event that there is a breach of representations and warranties made with respect to the purchased receivables. IPL Funding and IPL each have agreed to indemnify the Purchasers on an after-tax basis for any and all damages, losses, claims, liabilities, penalties, taxes, costs and expenses at any time imposed on or incurred by the indemnified parties arising out of or otherwise relating to the purchase facility, subject to certain limitations as defined in the purchase facility. The transfers of receivables to IPL Funding are recorded as sales however no gain or loss is recorded on the sale.

Under the receivables purchase facility, if IPL fails to maintain certain financial covenants regarding interest coverage and debt-to-capital ratios, it would constitute a "termination event." IPL is in compliance with such covenants.

As a result of IPL's current credit rating, the facility agent has the ability to (i) replace IPL as the collection agent; and (ii) declare a "lock-box" event. Under a lock-box event or a termination event, the facility agent has the ability to require all proceeds of purchased receivables of IPL to be directed to lock-box accounts within 45 days of notifying IPL. A termination event would also (i) give the facility agent the option to take control of the lock-box account, and (ii) give the Purchasers the option to discontinue the purchase of new receivables and cause all proceeds of the purchased receivables to be used to reduce the Purchaser's investment and to pay other amounts owed to the Purchasers and the facility agent. This would have the effect of reducing the operating capital available to IPL by the aggregate amount of such purchased receivables (currently $50 million).

IPL is a regulated public utility and is principally engaged in providing electric service to the Indianapolis metropolitan area. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from accounting methods required to be used by nonregulated entities.

IPL is subject to extensive regulation at both the federal and state level. IPL is substantially affected by the regulatory jurisdiction of the EPA and the FERC at the federal level; and the Indiana Department of Environmental Management ("IDEM") and the IURC at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the U.S. Department of Labor and the Indiana Occupational Safety and Health Administration. The regulatory power of the IURC over IPL is both comprehensive and typical of the economic regulation generally imposed by state public utility commissions.

An inherent business risk facing any regulated public utility is that of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Indiana, as elsewhere. Therefore, IPL attempts to work cooperatively with regulators and those who participate in the regulatory process, while remaining vigilant in protecting or asserting IPL's legal rights in the regulatory process. IPL takes an active role in addressing regulatory policy issues in the current regulatory environment. Current federal initiatives include FERC's efforts to deregulate the wholesale energy markets (discussed below under "-Regulatory Matters-Wholesale Energy Market"). Additionally, there is increased activity by environmental regulators.

IPL's tariffed rates for electric service to retail customers (basic rates and charges) are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, and potentially the staff of the IURC, the Indiana Office of Utility Consumer Counselor, as well as other interested consumer groups and customers. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all utilities at least once every four years. In Indiana, basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual maintenance and capital expenditures, generating unit availability and purchased power costs and availability can affect the return realized. During 1998, in an order resulting from an IPL initiated proceeding, the IURC declined to exercise its jurisdiction in part over IPL customers who voluntarily select service under IPL's Elect Plan (see below). We assume fuel and purchase power cost risk for Elect Plan customers. Substantially all other IPL customers are served pursuant to retail tariffs that provide for the monthly billing or crediting to customers of increases or decreases, respectively, in the actual costs of fuel consumed from estimated fuel costs embedded in basic rates, subject to certain restrictions on the level of operating income.

IPL is allowed to recover purchased power costs up to a benchmark for most retail service. If the cost per kWh of power purchases is not greater than the benchmark, then the purchased power costs should be considered net energy costs that are presumed fuel costs included in purchased power. If the average cost per kWh of power purchases is greater than the benchmark, then 85% of the costs are recoverable if IPL demonstrates the reasonableness of those purchases to the IURC and meets certain other conditions.

In 1998, the IURC approved a plan ("Elect Plan") that allows IPL to offer customers with less than 2,000 kilowatts of demand an opportunity to choose from optional payment or service plans. As of December 31, 2003, approximately 1% of IPL's customers were included in the Elect Plan. IPL's authority to offer these options will expire on December 31, 2006 unless a subsequent plan is approved by the IURC.

Under the Elect Plan, eligible IPL customers may enter into written contracts for:

Additionally, residential customers may choose a "Sure Bill" option, paying the same bill each month for 12 months, regardless of how much electricity is used. Customers not choosing one of these options continue to receive electric service under existing tariffs.

Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in fuel adjustment charges. Additionally, customer refunds may result if the utilities' rolling 12-month operating income, determined at quarterly measurement dates, exceeds the utilities' authorized annual net operating income and cannot be offset by applicable cumulative net operating income deficiencies. In such a circumstance, the required customer refund for the quarterly measurement period is calculated to be one-fourth of the excess annual net operating income grossed up for federal and state taxes.

IPL's authorized annual jurisdictional net operating income, for purposes of quarterly operating income tests, is $163 million, as established in IPL's last base rate case, plus additional returns authorized in the ECCRA (see below) of $0.9 million as of December 31, 2003. During the four quarterly measurement dates in 2003, the IURC found that IPL's rolling annual jurisdictional retail electric operating income was greater than the authorized annual net operating income by $13.5 million and $1.8 million at January and April, respectively, and was less than the authorized annual net operating income at July and October of 2003. Because IPL has a cumulative net operating income deficiency, we were not required to make customer refunds for any of these periods. As of IPL's quarterly measurement date on October 31, 2003, IPL had a cumulative net operating income deficiency of $695 million. The deficiency is calculated by summing the quarterly measurement period annual results from the date of the last rate order. Because of the deficiency, IPL can, for a period of time, earn above the authorized annual electric jurisdictional retail net operating income without being required to make customer refunds.

The IURC approved an Environmental Compliance Cost Recovery Adjustment ("ECCRA") pertaining to equipment being installed to allow IPL to meet the NO_x emission limits imposed pursuant to the EPA's NO_x SIP call. A return on IPL's clean coal technology ("CCT") investments is included in this ratemaking treatment. IPL may add the approved return on its CCT projects to its authorized annual net operating income in subsequent fuel adjustment charge proceedings. The additional amount of return will be dependent on the cumulative amount of CCT investment that has been made at the time IPL files a request for approval of an increase in the ECCRA. Such requests can be made no more often than every 6 months.

In recent years, various forms of proposed industry-restructuring legislation and/or rulemakings have been introduced at the federal level and in several states. Generally, the intent of these initiatives is to encourage an increase in competition within the regulated electric utility industry. While federal rulemaking to date has addressed only the electric wholesale market, various state legislatures are considering or have enacted new laws impacting the retail energy markets within their respective states. A discussion of the legislative and regulatory initiatives most likely to affect IPL follows:

IPL's participation in the wholesale power and transmission markets is subject to FERC requirements. As directed by Order Nos. 888 and 889 IPL filed its open access transmission service tariff on January 6, 2000. Subsequently, IPL joined the Midwest ISO and sought FERC and IURC approval of the transfer of functional control of its transmission facilities to the Midwest ISO. Upon agency approval, IPL's transmission operations were integrated with those of the Midwest ISO on February 1, 2002. Additionally, IPL sought from FERC the authority to sell wholesale power at market-based rates. FERC granted this authority effective on April 29, 2000.

On July 31, 2002, FERC issued a Notice of Proposed Rulemaking regarding Standard Market Design ("SMD"), which proposed to standardize the structure and operation of competitive wholesale power markets nationally. With respect to IPL, the SMD proposal would modify the terms and conditions under which the Midwest ISO would provide transmission service over IPL's transmission facilities. The SMD proposal would also be incorporated as part of the Midwest ISO's Midwest Market Initiative, which is proposed to be in place in late 2004. This initiative includes a market-based transmission congestion management system that relies on locational marginal pricing, i.e., pricing for transmission service at a given location will be based on a market clearing price that takes into account physical limitations and demand at that location. Market participants will be able to hedge their exposure to these congestion costs by acquiring certain financial transmission rights with which they may receive compensation for, or be required to pay, congestion-related charges. This initiative could change IPL's interface with wholesale energy markets. FERC subsequently issued on April 28, 2003, its White Paper entitled "Wholesale Power Market Platform." It has also indicated it will continue to consider comments, maintain outreach to states and stakeholders, and monitor pending legislation in Congress as it prepares the final rule, the timing of which is uncertain. At this time we cannot determine what, if any, impact the final SMD rule will have on IPL.

The legislatures of several states have enacted, and many other states are considering, new laws that would allow various forms of competition for retail sales of electric energy. While each state proposal is different, most provide for some recovery of a utility's stranded costs and require an extended transition period before competition is fully effective. Additionally, a few states have implemented programs that experiment with allowing some form of customer choice of electricity suppliers.

In Indiana, competition among electric energy providers for sales has focused primarily on the sale of bulk power to other public and municipal utilities. Indiana law provides for electricity suppliers to have exclusive retail service areas.

In 1995, the Indiana General Assembly, anticipating increasing competitive forces in the regulated public utility industry, enacted Ind. Code chapter 8-1-2.5. This law enables the IURC to consider and approve, on an individual utility basis, utility-initiated proposals wherein the IURC declines to exercise jurisdiction over the whole or any part of the utility, or its retail energy service or both. The Elect Plan was approved by the IURC under this law.

During 1997, the Indiana General Assembly authorized a legislative study committee to assess the issue of electric utility competition and restructuring. Comprehensive restructuring bills were introduced in the Indiana Senate in 1998, 1999 and 2000, but failed to pass. There was no restructuring legislation submitted in Indiana in 2001, 2002 or 2003.

Over the last several years there have been several mergers or acquisitions of parent companies of Indiana utilities or utility holding companies by entities located outside Indiana. Such transactions included the acquisition of IPALCO by AES. Pursuant to a decision by the Supreme Court of Indiana construing current Indiana statutes, the IURC was without jurisdiction to approve or reject such mergers effected via stock transactions. In addition, the IURC believes it has insufficient authority to adequately fine utilities which they determine are not meeting their statutory obligations to provide reasonably adequate service and facilities. Representatives of the IURC have advocated statutory changes to correct perceived deficiencies. In 2002 and 2003, legislation which would have given the IURC authority to approve most holding company mergers and acquisitions and to levy substantial fines on utilities was submitted but failed to pass. Such proposed legislation also contained provisions beneficial to utilities, such as sections allowing prompt recovery of governmentally mandated costs without a rate case. It is impossible to predict the content, scope and impact of legislation which may ultimately be passed into law.

During 2002, the IURC issued an order approving a Stipulation and Settlement Agreement entered into by IPL, the Indiana Office of Utility Consumer Counselor, and two intervening parties. The Stipulation and Settlement Agreement requires IPL to: meet eight ongoing performance measures, including six for system reliability and two for customer call center performance or pay penalties of up to $1.75 million per quarter; file quarterly reports regarding service reliability and call center performance; file reports following major storm events; upgrade or replace its Outage Management System and Energy Management System at a cost of approximately $6 million; and issue a $100 credit to certain residential customers whose service was interrupted in July 2001 for 36 to 48 hours following severe storms in our service area (the "July 2001 Storms"). The system reliability performance measures are assessed quarterly based on a twelve-month rolling average. In addition IPL was required to hire an independent auditor to review its quarterly reports to the IURC. During 2002, IPL issued credits of approximately $1.16 million to customers whose service was interrupted for 36 to 48 hours following the July 2001 Storms, which satisfied its remaining liability for the July 2001 Storms.

IPL has been subject to the quarterly measures for system reliability and customer call center performance since the second fiscal quarter of 2002. IPL met both of the customer call center performance measures in each of those quarterly periods. However, IPL was required to issue credits to customers of $0.5 million in the third quarter of 2003 and $0.5 million and $0.8 million for the second and third quarters of 2002, respectively for failing to meet certain of the six service reliability standards. IPL has made progress towards compliance with these measures and expects to reduce the penalties going forward. However, failure to meet the reliability and performance measures could result in reduced income and cash flows for IPL and IPALCO.

On February 12, 2003, the IURC issued an Order which approved IPL's 2003-2006 financing program and set forth a process whereby IPL must file a report with the IURC, prior to declaring or paying a dividend. Please see "Liquidity and Capital Resources" for more information relating to that Order.

We are subject to various federal, state and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We believe that we operate in material compliance with environmental laws, regulations and permits and health and safety laws. We cannot assure, however, that we have been or will be at all times in full compliance with such laws, regulations and permits.

Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at our past or present facilities and at third party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to such contamination or other hazardous substances or for other environmental damage. We cannot assure that our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances will not adversely affect our business, results of operations or financial condition.

In late 1990, Congress passed the Clean Air Act Amendments of 1990 (the "Clean Air Act"), which affect both new and existing facilities. The Clean Air Act and many state laws require significant reductions in sulfur dioxide ("SO₂"), particulate matter, and NO_x emissions that result from burning fossil fuels. The following is a discussion of specific areas that affect our business, primarily under or related to the Clean Air Act.

On October 27, 1998, the EPA issued a final rule, referred to as the NO_x SIP call, calling for Indiana, along with 21 other states in the eastern third of the United States and the District of Columbia, to impose more stringent limits on NO_x emissions from fossil fuel- fired steam electric generators, including those operated by IPL.

The EPA's NO_x SIP call requires operators of coal-fired electric utility boilers in the affected states and the District of Columbia to limit NO_x emissions to 0.15 pounds per million BTUs of heat input as a system-wide average during the annual ozone season, which extends from the beginning of May through the end of September of each year (except for 2004, which runs from May 31^st through September 30^th). That limit called for a reduction of about 85% from 1990 average emissions from coal-fired electric utility boilers, and a reduction during the ozone season of about 57% from our previous emissions. In 2001, the Indiana Air Pollution Control Board adopted rules requiring fossil fuel-fired electric generating units, including IPL's, to adhere to the requirements of the EPA's NO_x SIP call which becomes effective on May 31, 2004. IPL intends to comply with the NO_x SIP call requirements through a combination of our NO_x controls construction program and, if necessary, purchases of NO_x emissions allowances in the market.

On November 14, 2002, the IURC issued a Certificate of Public Convenience and Necessity for the construction and use of CCT to allow IPL to meet the NO_x emission limits imposed pursuant to the EPA's NO_x SIP call. The CCT constitutes qualified pollution control property as defined in Ind. Code section 8-1-2-6.6 and the IURC has approved ratemaking treatment applicable to such property through an ECCRA. The ratemaking treatment provided for in the IURC order includes a return on the investment in IPL's planned CCT projects under construction. After the projects have been placed in service, the approved ratemaking treatment provides for a return on the investment and recovery of the depreciation expenses associated and operation and maintenance expenses associated with these projects. The ratemaking treatment also provides for recovery of expenditures related to the purchase of NO_x emission allowances, should such expenditures be made to supplement IPL's CCT construction projects. IPL may add the approved return on its CCT projects to its authorized annual net operating income in subsequent fuel adjustment charge proceedings. The increase in the amount of rate revenues and authorized net operating income resulting from IPL's CCT plan will be determined in periodic filings to the IURC to be made at intervals of no more often than every 6 months and will depend on the amount of cumulative investment, depreciation expenses, operation and maintenance expenses and actual NO_x emission allowance purchases at the time of each of the filings. Our first ECCRAs were approved on August 20, 2003, and February 18, 2004.

In 2003, IPL spent approximately $94.2 million on NO_x reduction projects. Further expenditures are estimated to be approximately $81 million and $28 million in 2004 and 2005, respectively, to substantially meet the required NO_x reductions.

On July 16, 1997, the EPA promulgated final rules tightening the National Ambient Air Quality Standards for ozone and creating new fine particulate matter standard. In February 2001, the United States Supreme Court upheld the ozone and particulate matter standards, but held that the EPA's policy of implementing the new ozone standard in non-attainment areas was unlawful. If the EPA develops an interpretation of this standard with respect to non-attainment areas that is consistent with the Supreme Court's decision, and if Marion County, Morgan County, Pike County and/or its neighboring counties are designated as non-attainment areas for ozone, IPL's plants may be faced with