IPALCO Enterprises, Inc. ("IPALCO") is a holding company incorporated under the laws of the state of Indiana on September 14, 1983. Our principal subsidiary is Indianapolis Power & Light Company ("IPL"), a regulated electric utility with its customer base concentrated in Indianapolis, Indiana. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL. Our other direct subsidiary, Mid-America Capital Resources, Inc. ("Mid-America") is the holding company for our unregulated activities. Mid-America's only significant investment is a small minority ownership interest in EnerTech Capital Partners II L.P., a venture capital fund, valued at $4.1 million, as of December 31, 2004. Throughout this document, the terms "we", "us" and "our" refer to IPALCO and its consolidated subsidiaries. IPALCO is wholly-owned by The AES Corporation ("AES"). Our total electric revenues and net income for the fiscal year ended December 31, 2004 were $885 million and $125 million, respectively. The book value of our total assets as of December 31, 2004 is $2.5 billion. All of our operations are conducted within the United States of America and primarily within the state of Indiana. Please refer to Note 14 in the audited consolidated financial statements of IPALCO included in this report for segment reporting.

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 460,000 retail 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 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 3,370 megawatts and net summer capability is 3,252 megawatts. IPL's generation, transmission and distribution facilities are further described under "Item 2. Properties." There have been no significant changes in the services rendered by IPL, or in IPL's markets, during 2004.

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 2000 through 2004 are set forth in the table of statistical information included at the end of this section.

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 also "Management's Discussion and Analysis of Financial Condition and Results of Operations- Industry Changes - FERC-Midwest ISO ".

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 and - Industry Changes" for a more comprehensive discussion of regulatory matters impacting IPL and IPALCO.

IPL's tariff 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, and 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 operating and maintenance expenditures, 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 customers' 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. In addition, IPL's rate authority provides for a return on IPL's investment and recovery of the depreciation and operation and maintenance expenses associated with the nitrogen oxide ("NO_x") compliance construction program and the Multipollutant Plan (See Environmental Matters). 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 2 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 business. 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 2004, approximately 99.9% of the total kWhs 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 existing long-term coal contracts provide for approximately 84% of its current projected requirements through the year 2006 and approximately 68% through 2009. The long-term coal agreements are with two suppliers. Substantially all of the coal is currently mined in the state of Indiana. Approximately 64% 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:

                                                Year Ended December 31,
                                   -------------------------------------------------
                                     2004      2003      2002      2001      2000
                                   --------- --------- --------- --------- ---------
Operating Revenues (In Thousands):
Residential                        $314,018  $300,735  $292,855  $289,779  $285,000
Small commercial and industrial     137,820   129,790   130,642   127,863   130,482
Large commercial and industrial     354,325   336,136   335,436   334,387   337,725
Public lighting                      11,118    11,022    10,926    10,415    10,249
Miscellaneous                        15,092    21,921    13,657    10,385    12,425
                                   --------- --------- --------- --------- ---------
   Revenues - retail customers      832,373   799,604   783,516   772,829   775,881
Wholesale - REMC                      1,433     1,330     1,402     1,367     1,222
Wholesale - other                    51,667    37,231    38,160    56,951    57,112
                                   --------- --------- --------- --------- ---------
   Total electric revenues         $885,473  $838,165  $823,078  $831,147  $834,215
                                   ========= ========= ========= ========= =========
Kilowatt-hour Sales (In Millions):
Residential                           4,984     4,917     4,939     4,717     4,614
Small commercial and industrial       2,028     1,986     2,018     1,955     1,990
Large commercial and industrial       7,489     7,370     7,417     7,337     7,432
Public lighting                          89        83        72        72        71
                                   --------- --------- --------- --------- ---------
   Sales - retail customers          14,590    14,356    14,446    14,081    14,107
Wholesale - REMC                         47        44        47        46        42
Wholesale - other                     1,568     1,307     1,691     2,129     2,272
                                   --------- --------- --------- --------- ---------
   Total kilowatt-hours sold         16,205    15,707    16,184    16,256    16,421
                                   ========= ========= ========= ========= =========
Retail Customers at End of Year:
Residential                         410,998   405,549   400,130   394,793   391,086
Small commercial and industrial      45,208    44,833    44,428    43,767    43,078
Large commercial and industrial       4,389     4,327     4,337     4,283     4,195
Public lighting                         676       666       655       622       574
                                   --------- --------- --------- --------- ---------
   Total retail customers           461,271   455,375   449,550   443,465   438,933
                                   ========= ========= ========= ========= =========

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, suspension or revocation of permits 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. 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.

On November 30, 2004, in response to a petition we filed, the IURC issued an Order approving up to $182 million of capital expenditures to install pollution control technology at two of our power plants. These capital expenditures are projected to address required sulfur dioxide ("SO₂") and mercury emissions reductions from our power plants and to reduce fine particulate pollution in the atmosphere. The Order also approves ratemaking treatment for such expenditures, including a return on the investment and recovery of depreciation expenses and operation and maintenance expenses associated with these projects. The Order also granted IPL the authority to add the approved return on its environmental projects to IPL's authorized annual jurisdictional net operating income in subsequent fuel adjustment charge proceedings (See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Environmental Matters"). We believe these expenditures are necessary to reliably and economically achieve a level of emission reductions that complies with the Clean Air Interstate Rule and the Clean Air Mercury Rule (the "Clean Air Rules of 2005") (See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Environmental Matters"). We cannot assure that all costs to comply with the Clean Air Rules of 2005 will be covered by the IURC Order.

In November 2002, the IURC issued a Certificate of Public Convenience and Necessity for the construction and use of clean coal technology ("CCT") to allow us to meet the NO_x emission limits imposed pursuant to the EPA's NO_x State Implementation Plan ("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 the depreciation expenses and operation and maintenance expenses associated with these projects. Such costs are deferred as regulatory assets on IPALCO's balance sheets until recovered through periodic rate adjustments. 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 our CCT construction projects. IPL may add the approved return on its CCT projects to its authorized annual jurisdictional 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. These ECCRA filings have collectively added $6.7 million to IPL's authorized annual jurisdictional net operating income through December 31, 2004.

Through December 31, 2004, IPL spent approximately $185 million on NO_x emissions reduction projects. Further expenditures are estimated to be approximately $27 million in 2005 to substantially meet the required NO_x SIP Call reductions.

IPL has received IURC approval for the recovery of certain MISO costs and is currently seeking IURC approval for certain changes in operations and for determination of the manner and timing of recovery of other costs. See "Management's Discussion and Analysis of Financial condition and Results of Operations - Industry Changes" for a discussion of the Midwest ISO.

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. 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 have enacted laws to allow more competition and customer choice in the retail energy markets within their respective states. Indiana has not done so.

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

The Midwest ISO is completing market trials and testing for the Midwest Market Initiative scheduled to begin April 1, 2005. This will change our interface with the wholesale energy markets, particularly with respect to day-ahead and real-time transactions. See also, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Changes" for information about our participation in the Midwest ISO that will impact both revenues and costs associated with our energy service to utility customers beginning in 2005. This section also discusses our filing with the IURC related to the Midwest ISO referenced above.

As of December 31, 2004, IPL had 1,414 employees of whom 1,384 were full time. Of these employees, 957 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, 2004, 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 3,370 MW and net summer capability is 3,252 MW. IPL's highest recorded winter and summer peak loads are 2,671 MW and 3,003 MW, respectively.

IPL's sources of electric generation are as follows:

Net electrical generation during 2004, at the Petersburg, Harding Street and Eagle Valley plants accounted for approximately 67.7%, 24.0% and 8.3%, 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 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'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 4,259 circuit miles underground primary and secondary cables and 5,914 circuit miles of overhead primary and secondary wire. Underground street lighting facilities include 671 circuit miles of underground cable. Also included in the system are 75 bulk power substations and 88 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 the rights to 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 21, 2005. 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 12 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 2004 and 2003, we paid dividends to AES totaling $119.1 million and $126.9 million, respectively. 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. In order for us to make any dividend payments to AES, we must, at the time and as a result of such dividends, either maintain certain credit ratings on our $750 million of Senior Secured Notes or be in compliance with leverage and interest coverage ratios contained in the Indenture for our $750 million of Senior Secured Notes. 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.

                                                        Year Ended December 31,
                                         -------------------------------------------------------
                                            2004       2003       2002       2001     2000 (1)
                                         -------------------------------------------------------
                                                              (IN THOUSANDS)
Operating Data:
Total utility operating revenues           $885,473   $838,165   $823,078   $831,147   $861,795
Termination benefit agreement costs (2)          --         --         --    (74,765)        --
Voluntary early retirement program
  benefits costs (3)                             --         --         --    (23,751)   (62,007)
Utility operating income                    214,334    186,583    200,586    130,641    136,223
Allowance for funds used during
  construction                                3,769      6,539      5,738      1,974      3,034
Income before extraordinary loss            124,994    103,265    124,946     77,947    158,842
Extraordinary loss on early
  retirement of debt                              --        --         --         --     (4,259)
Net income                                  124,994    103,265    124,946     77,947    154,583

Balance Sheet Data (end of period):
Utility plant - net                       2,142,852  2,096,563  2,028,144  1,984,313  1,947,708
Total assets                              2,467,348  2,397,810  2,360,169  2,331,312  2,283,150
Common shareholder's equity (deficit)      (108,082)  (121,778)   (92,449)     4,229    730,148
Cumulative preferred stock of subsidiary     59,135     59,135     59,135     59,135     59,135
Long-term debt (less current maturities)  1,502,064  1,482,011  1,372,006  1,371,930    621,863
Long-term capital lease obligations           4,148        747         --         --         --

Other Data:
Utility capital expenditures                146,785    156,855     94,709    126,517     75,712

1. In November 2000, IPL sold its steam operations and used a portion of the net proceeds to retire debt specifically assignable to the assets sold. In connection with the retirement, IPL incurred make-whole payments and wrote off debt issuance costs of $4.3 million, which was recorded as an extraordinary loss on early retirement of debt.
2. Termination benefits represents costs related to the termination of certain employees as a result of our acquisition by AES. The pretax expenses included $59.4 million related to termination benefit agreements and severance, $9.2 million in supplemental retirement costs and $6.2 million in restricted stock expense.
3. Voluntary Early Retirement Program benefit costs for 2000 represented $56.8 million pre-tax non- cash pension and $5.2 million other postretirement benefit costs. In 2001 we recognized $19.2 million in pre-tax non-cash pension and $4.6 million other postretirement benefit costs associated with the VERP plans implemented in 2001.

The following discussion and analysis should be read in conjunction with our audited financial statements and the notes thereto included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. Please see "Cautionary Note Regarding Forward - Looking Statements" at the beginning of this Form 10-K.

IPALCO Enterprises, Inc. ("IPALCO") is a holding company incorporated under the laws of the state of Indiana. Our principal subsidiary is Indianapolis Power & Light Company ("IPL"), a regulated utility operating in the state of Indiana. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL. Our other direct subsidiary, Mid-America Capital Resources, Inc. ("Mid- America"), is the holding company for our unregulated activities. Mid-America's only significant investment is a small minority ownership interest in EnerTech Capital Partners II L.P. ("EnerTech"), a venture capital fund, valued at $4.1 million, as of December 31, 2004. Our business segments are electric and "all other."

IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to more than 460,000 retail customers in the city of Indianapolis and neighboring areas within the state of Indiana. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates four generating stations, all within the state of Indiana. Historically, approximately 99% of the total electricity produced by IPL was generated from coal. Natural gas and fuel oil combined to provide the remaining kWh generation (primarily for peaking capacity). IPL's net electric generation capability for winter and summer is 3,370 and 3,252 megawatts, respectively. Our overall corporate mission is to serve our community's need for electric power in ways that benefit all of our stakeholders, to build long-term value for our shareholder, and to assure sustained excellence in performance for our owner, our people, and other individuals and organizations which depend upon our company.

The most important matters on which we focus in evaluating IPALCO's financial condition and operating performance and allocating our resources include: (i) recurring factors which have significant impacts on operating performance such as; regulatory action, environmental matters, weather and weather-related damage in IPL's service area, the wholesale price of electricity, generating unit availability and capacity, and the local economy; (ii) our progress on performance improvement strategies designed to maintain high standards in several operating areas (including safety, environmental, reliability, and customer service) simultaneously, (iii) our short-term and long-term financial and operating strategies. For a discussion of how we are impacted by regulation and environmental matters, please see Regulatory Matters and Environmental Matters later in this section.

Weather and weather-related damage in IPL's service area. Extreme high and low temperatures in our service area have a significant impact on revenues as many of our retail customers use electricity to power air conditioners, electric furnaces and heat pumps. To illustrate, during the first fiscal quarter of 2003, when IPL's service territory experienced a 24% increase in heating degree days as compared to the same period in 2002, IPL realized an $18.1 million, or 10% increase in retail revenues, primarily due to the colder winter temperatures. Conversely, during the third fiscal quarter of 2003, when IPL's service territory experienced a 33% decrease in cooling degree days as compared to the same period in 2002, IPL realized a $6.4 million, or 3% decrease in retail revenues, primarily due to the milder summer temperatures, and partially offset by an increase in heating degree days during the comparative periods. In addition, because extreme temperatures have the effect of increasing demand for electricity, the wholesale price for electricity generally increases during periods of extreme hot or cold weather and, therefore, if IPL has excess capacity, it can generate additional income by selling power on the wholesale market (see below).

Storm activity can also have an adverse effect on our operating performance. Severe storms often damage transmission and distribution equipment, which can cause power outages, which reduces revenues and increases repair costs.

Wholesale price of electricity. 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. During the past five years, wholesale revenues represented an average of approximately 5.9% of IPL's total electric revenues. 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. The price of wholesale power can be volatile and therefore IPL's revenues from wholesale sales can fluctuate significantly from year to year. During 2004, the estimated average hourly market price at which we could buy or sell wholesale power increased 22% from 2003. The weighted average price of wholesale kWhs IPL sold increased approximately 15% in 2004 as compared to 2003.

In 2005, the Midwest ISO's Midwest Market Initiative will change IPL's interface with the wholesale energy markets, particularly with respect to day-ahead and real-time transactions. See also, "Industry Changes" for information about our participation in the Midwest ISO that will impact both revenues and costs associated with IPL's energy service to its utility customers beginning in 2005.

Generating unit availability and capacity. Currently, IPL's plants generally have enough capacity to meet the needs of IPL's retail customers when all of its coal-fired units are available. As described above, IPL can, at times, generate additional revenues by selling excess energy on the wholesale market when prices are favorable to do so. From time to time, IPL must shut generating units down to perform maintenance or repairs. Generally, maintenance is scheduled during the spring and fall months when demand for power is lowest. Occasionally, it is necessary to shut units down for maintenance or repair during periods of high power demand. In addition, occasionally during periods of peak demand IPL's coal-fired generating capacity is not available or sufficient to meet its retail load. On these occasions, IPL may generate power using more costly gas or oil fired generating units or purchase power on the wholesale market to meet its retail demand. This can cause a loss of wholesale revenues and increased operating costs.

Local economy. Increases in commercial and industrial productivity in IPL's service area generally lead to increased use of electricity. During 2004, 40% of our revenues came from large commercial and industrial customers. During the past 10 years, IPL's retail kWh sales have grown at a compound annual rate of 1.4%.

Performance improvement program. Our objective is to achieve top industry performance in the United States by focusing on performance in seven key areas: safety, environmental performance, customer service, reliability (production and delivery), financial performance (retail rates and shareholder value), employee commitment and corporate philanthropy and by balancing them in a way and to a degree necessary to ensure a sustainable level of excellence in all these areas simultaneously as compared to our peers. We monitor our performance in these areas and where practical and meaningful compare performance in some areas to peer utilities. We have implemented numerous initiatives in order to meet our performance goals. The result was improved overall operational performance during 2004, including a significant improvement in both safety and power delivery reliability.

Short-term and long-term financial and operating strategies. Our financial management plan is closely integrated with our operating strategies. Our objective is to maintain stand-alone credit statistics at IPL that are comparable to investment grade credit ratings. Key aspects of our financial planning include rigorous budgeting and analysis, maintaining sufficient levels of liquidity and a prudent dividend policy at both our subsidiary and holding company levels. This strategy allows us to remain flexible in the face of evolving environmental legislation and regulatory initiatives in our industry.

General. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period presented. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions. Significant accounting policies used in the preparation of the consolidated financial statements in Item 8 of this Form 10-K are described in Note 2 Significant Accounting Policies thereto. This section addresses only those accounting policies involving amounts material to our financial statements that require the most estimation, judgment or assumptions and should be read in conjunction with Note 2 of IPALCO's audited consolidated financial statements.

Regulation. As a regulated utility, IPL applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," which gives recognition to the ratemaking and accounting practices of the Indiana Utility Regulatory Commission (the "IURC") and the Federal Energy Regulatory Commission ("FERC"). In accordance with SFAS 71, IPL has recognized as regulatory assets, deferred costs totaling $132.0 million that have been included as allowable costs for ratemaking purposes, as authorized by the IURC. Specific regulatory assets are disclosed in Note 5 to IPALCO's audited consolidated financial statements. The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific Orders from the IURC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Substantially all of IPL's regulatory assets have been approved by specific Order of the IURC.

Revenue Recognition. Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making our estimates of unbilled revenue, we use complex models that consider various factors including daily generation volumes, estimated customer usage by class, weather factors, line losses and applicable customer rates based on regression analyses reflecting significant historical trends and experience. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. As part of the estimation of unbilled revenues, we estimate line losses on a monthly basis. The effect on 2004 revenues and ending unbilled revenues of a one percentage point increase and decrease in the estimated line losses for the month of December 2004 is ($0.4 million) and $0.4 million, respectively. At December 31, 2004, customer accounts receivable include unbilled energy revenues of $36.2 million on a base of annual revenue of $885.5 million.

A fuel adjustment charge provision, which is established after public hearing, applies to most of IPL's rate schedules and permits the billing or crediting of estimated fuel costs above or below the estimated levels included in IPL's basic rates. Actual fuel costs in excess of or under estimated fuel costs billed are deferred or accrued, respectively. IPL files quarterly with the IURC for fuel cost adjustments.

Pension Costs. Most of IPL's employees participate in the Employees' Retirement Plan of Indianapolis Power & Light (the "Defined Benefit Pension Plan"). Reported expenses relevant to Defined Benefit Pension Plan are dependant upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets and employee demographics, including age, job responsibilities and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates used in determining the projected benefit obligation and pension costs. Pension expense, net of amounts capitalized, for the years ended December 31, 2004, 2003 and 2002 were $5.6 million, $9.7 million and $5.9 million, respectively.

Previously, federal law required employers to use the 30-year Treasury bond rate for a variety of pension calculations, including plan liability determinations, funding requirements and premiums plan sponsors pay to the Pension Benefit Guarantee Corporation ("PBGC") for insurance. In 2001, the Treasury Department discontinued the 30-year bond, and yields began to drop. This inflated pension liabilities, which in turn forced employers to increase contributions and insurance premium payments. Congress passed temporary relief for the years 2002 and 2003 which allowed companies to use a higher maximum fluctuation above the weighted average 30-year Treasury bond rate. In April 2004, Congress passed additional temporary relief replacing the 30-year bond with a temporary corporate long-term bond rate replacement. That relief expires December 31, 2005 and Congress is working to find a replacement. In the event the temporary relief is not continued, it could materially increase our pension liabilities and funding requirements. It is possible that Congress may try to enact broad pension funding reforms fueled by the need to permanently replace the 30-year Treasury rate. Broad pension reform may address, among other things, funding rules, plan designs, disclosures and premium payments to the PBGC. We are not able to predict the effect any such pension legislation will have on our business or results of operations.

Pension plan assets consist of investments in equity, real estate, fixed income securities and cash. Differences between actual portfolio returns and expected returns may result in increased or decreased pension costs in future periods. Pension costs are determined on November 30 for the following year based on the market value of pension plan assets, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets. For 2004, we determined expense using a discount rate of 6.0% and an assumed long-term rate of return on plan assets of 8.5%.

In determining the discount rate to use for valuing liabilities we use a rate of return on high quality fixed income investments, adjusting for liability duration differences. In establishing our expected long-term rate of return assumption, we consider historical returns, as well as, the expected future weighted-average returns for each asset class based on the target asset allocation. Our expected long-term rate of return on pension plan assets is based on our targeted asset allocation assumption of approximately 55% equity investments, 40% fixed income investments and 5% real estate investments. As of November 30, 2004, the discount rate remained constant at 6.00% and we reduced the expected long-term rate of return on assets from 8.50% to 8.00%. These assumptions affected the pension expense determined for 2005. The effect on 2005 total pension expense of a one percentage point increase and decrease in the assumed discount rate of the projected benefit obligation is ($3.3 million) and $3.9 million, respectively. The effect on 2005 total pension expense of a one percentage point increase and decrease in the expected long-term rate of return on plan assets is ($3.2 million) and $3.2 million, respectively.

Impairment of Long-lived Assets. Accounting principles generally accepted in the United States of America require that we measure long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The book value of IPL's utility plant assets was $2.1 billion at December 31, 2004. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover additional investment in the assets, such as nitrogen oxide ("NO_x") expenditures; the anticipated demand and relative pricing of retail electricity in our service territory and wholesale electricity in the region; and the cost of fuel.

Income Taxes.We are subject to federal and state of Indiana income taxes. Our income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. We are currently under examination by the Internal Revenue Service for the period 1996 through 2001. We regularly assess the potential outcome of these examinations when determining the adequacy of our income tax provisions. Tax reserves have been established, which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While we believe that the amount of the tax estimates are reasonable, it is possible that the ultimate outcome of current or future examinations may exceed current reserves in amounts that could be material. A range of these amounts cannot be reasonably estimated as of December 31, 2004, as they are primarily unasserted claims.

Contingencies. We accrue for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations, and are involved in certain legal proceedings. If our actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our operating results and financial condition.

See also, the statistical information table on page 6 for additional revenue data such as kWh sales and number of customers by customer class.

In 2004, IPL sold approximately 4,000 acres of undeveloped property near Martinsville, Indiana divided between two purchasers for an aggregate price of $13.2 million. The net sale proceeds were $11.7 million and the net gain was $5.9 million. This land is presented on IPALCO's consolidated balance sheet as land held for sale at $6.6 million as of December 31, 2003. In accordance with regulatory accounting, these gains are included as a reduction of other operating expenses on IPALCO's consolidated statements of income.

Utility operating revenues increased in 2004 from the prior year by $47.3 million, which resulted from the following (dollars in thousands):

                                2004       2003               Percentage
Utility Operating Revenues    Revenues   Revenues    Change     Change
                             ---------- ---------- ---------- ----------
Retail Revenues               $817,281   $777,683    $39,598        5.1%
Wholesale Revenues              53,100     38,561     14,539       37.7%
Miscellaneous Revenues          15,092     21,921     (6,829)     (31.2%)
                             ---------- ---------- ----------
Total Utility
 Operating Revenues           $885,473   $838,165    $47,308        5.6%
                             ========== ========== ==========
Heating Degree Days              5,065      5,502       (437)      (7.9%)
Cooling Degree Days                952        890         62        7.0%

The 5.1% increase in retail revenues was primarily due to a 3.4% increase in the weighted average price per kWh sold (approximately $26.5 million) and a 1.6% increase in the quantity of kWhs sold at retail (approximately $13.1 million). The price variance is primarily due to increased rate revenues ($15.7 million) from costs IPL recovered from its retail customers associated with its NO_x compliance construction program and increases in fuel costs charged to retail customers in 2004 (approximately $8.8 million). The quantity of retail kWhs sold increased moderately for residential, commercial and industrial customers. We believe the residential increase is primarily the result of a 1.3% increase in the number of residential customers from December 31, 2003 to December 31, 2004 and the 7.0% increase in cooling degree days, partially offset by the 7.9% decrease in heating degree days during the comparative periods. We believe the increase in commercial and industrial kWh sales is primarily due to economic growth in our service territory during 2004.

The 37.7% increase in wholesale revenues was primarily due to a 19.5% increase in the quantity of wholesale kWhs sold (approximately $8.7 million) and a 15.2% increase (approximately $5.9 million) in the weighted average price per wholesale kWh sold. The estimated average hourly market price at which we could buy or sell wholesale power increased approximately 22% in 2004 as compared to 2003.

The $6.8 million decrease in miscellaneous revenues is primarily the result of a $3.8 million decrease in gains on sales of environmental air emissions allowances and a $3.0 million decrease in revenues from the Midwest Independent Transmission System Operator, Inc. ("Midwest ISO"). We do not expect to sell our environmental air emissions allowances in the foreseeable future as we will rely, in part, on our bank of allowances to remain in compliance with the U.S. Environmental Protection Agency's ("EPA") sulfur dioxide ("SO₂") regulations. 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 an added transmission cost on its retail load and a fee for each wholesale transaction. A portion of the additional transmission cost 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 historical Midwest ISO revenues and expenses are not necessarily indicative of future revenues and expenses from the Midwest ISO which will be impacted by the implementation of the Midwest Market Initiative, which is scheduled to be in place on April 1, 2005. (See also, "Industry Changes - FERC - Midwest ISO".)

The following table illustrates the primary operating expense changes from 2003 to 2004 for IPALCO (in millions):

In addition to these variances, the net income tax provision on utility operating income decreased only slightly from $96.8 million to $96.0 million, but was primarily the net result of an $8.5 million increase in the tax provision resulting from a $21.0 million increase in pretax operating income, offset by a decrease in the flow-through tax expense from depreciation ($5.2 million) and a reversal of previously expensed tax amounts ($5.7 million).

Also, in 2004, we relied on our allowance bank and the purchase of $0.3 million of SO₂ air emissions allowances to remain in compliance with EPA SO₂ regulations. For 2005 and 2006, we are again projecting to meet our supplemental SO₂ air emissions allowance requirements by relying on our allowance bank and the purchase of allowances. Recently, the price of such allowances has been volatile and therefore it is difficult to predict what our cost may be in the future, but we do expect our costs to escalate in 2005 and 2006. The price per ton of SO₂ air emissions allowances has increased from approximately $150 on January 1, 2003 to over $700 in December 2004.

Other income and deductions increased from income of $26.4 million in 2003 to $28.2 million in 2004. This increase is primarily due to a $2.2 million increase in nonoperating income tax benefits, dividend income received in 2004 of $1.4 million, a $0.9 million gain on the sale of noncore real estate assets in 2004, losses of $1.6 million in 2003 related to our investment in EnerTech and losses on the sales of other nonutility investments in 2003 totaling $0.8 million, partially offset by a $2.5 million decrease in the allowance for equity funds used during construction and a $1.4 million increase in nonutility legal services. The $2.2 million increase in nonoperating income tax benefits is primarily the result of adjustments made during 2004 ($1.8 million) to adjust the estimated tax provision for 2003 and from a $2.2 million decrease in pretax nonoperating income ($0.9 million). The decrease in the allowance for equity funds used during construction resulted primarily from approximately $156.9 million of equipment being placed in service in 2004 related to the NO_x compliance construction program.

Interest and other charges increased $7.9 million to $117.6 million in 2004 as compared to 2003. This increase is primarily the result of additional interest on long-term debt of $6.4 million and $4.2 million on the issuances of $100 million and $110 million of first mortgage bonds by IPL on January 13, 2004 and August 6, 2003, respectively, and a $1.9 million increase in interest expense on $750 million of Senior Secured Notes issued by IPALCO in November 2001 (the "IPALCO Notes") due to a 50 basis point increase, beginning May 15, 2003, in the interest rate charged on the notes as a result of ratings downgrades in 2003. These increases are partially offset by a $4.4 million decrease from the retirement of $80 million of first mortgage bonds at IPL on February 1, 2004.

Utility operating revenues increased in 2003 from the prior year by $15.1 million, which resulted from the following changes (dollars in thousands):

The $15.1 million increase in revenues in 2003 was primarily due to a $7.8 million increase in revenues charged to residential customers and $7.1 million of Midwest ISO revenues recognized in 2003. While kWhs used by IPL's residential customers remained substantially constant, the overall rate charged to those customers increased 1.7%. 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 kWhs per month and over a third receive an additional 27.0% decrease after 1,000 kWhs 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 2.5%, it is the result of a 22.2% decrease in wholesale kWh sales and a 25.4% increase in the average price per wholesale kWh sold during the periods. The decrease in kWh sales was due to a combination of plant outages during 2003 for construction that limited our ability to sell kWhs in the wholesale market. The estimated average hourly market price at which we could buy or sell wholesale power increased more than 27% in 2003 as compared to 2002. This increase can be attributed to improvements in the economy, unusually cold temperatures in the first few months of 2003, which increased the demand for wholesale kWhs and a decrease in supply as many utilities had generating units offline while they made capital improvements to reduce NO_x emissions.

The $8.3 million increase in miscellaneous revenues is primarily the result of $7.1 million of revenues from the Midwest ISO (see "- Industry Changes - FERC - Midwest ISO ").

The following table illustrates the primary operating expense changes from 2002 to 2003 for IPALCO (in millions):

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 2002 by $1.1 million. The increase in salaries and wages included in other operating expenses is primarily due to a net additional 73 employees hired by IPL during 2003 and base wage increases during 2003. 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 increase in pension costs is primarily the result of actuarial losses ($2.6 million) and increased service costs and service cost amortization ($1.7 million). 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. 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 4.5% 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 decrease in real estate and property taxes results primarily from decreases in IPL's assessed values.

In addition, while power purchased expenses decreased only $1.1 million, it was the net result of a 21.2% decrease in the number of kWhs purchased and a 17.7% increase in the weighted average price paid per kWh during the comparative periods.

As of December 31, 2004, we had cash and cash equivalents of $16.0 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 approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 29, 2006. IPL and IPALCO also have restrictions on the amount of new debt that may be issued due to financial covenant restrictions under their existing debt obligations and by contractual obligations of AES. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its committed credit facilities, refinance existing debt, issue an additional $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 to pay dividends to AES. We believe those sources, along with additional debt financing, will be adequate to fund principal payments on outstanding indebtedness and nonrecurring capital expenditures.

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.

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, 2004, 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, 2004 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, 2004, 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.

In January 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 1, 2004, to reimburse IPL's treasury, and to pay down IPL's committed credit facilities for expenditures previously incurred in connection with its capital expenditure program.

In May 2004, IPL renewed its $45 million committed line of credit. The new agreement has substantially the same terms as the previous agreement and matures May 19, 2005. In June 2004, IPL amended another credit agreement which includes a $30 million committed line of credit and a $40.6 million liquidity facility (related to $40.0 million of IPL variable rate bonds, which are remarketed weekly) to extend the maturity to May 31, 2005.

In July 2004, Standard & Poor's raised its ratings on the utility first mortgage bonds of 20 utility companies, based on an updated analysis of ultimate recovery prospects. As a result, all of IPL's first mortgage bonds were upgraded from BB+ to BBB-. The upgrade did not affect the interest rates on any of IPL's existing debt.

On February 12, 2003 and April 16, 2003, the IURC issued Orders (collectively 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 capital expenditure program during 2003-2005, and the refinancing of up to approximately $211 million of long-term debt. 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 refinanced (see above). The IURC 2003 Financing Order also set forth a process whereby, prior to declaring or paying common stock dividends, IPL must file a report with the IURC which includes certain specific historical and pro forma financial information including, among other things, information relating to dividends proposed, dividends paid in the prior twelve months, capitalization and retained earnings. The IURC 2003 Financing Order states that IPL is not to pay any common stock dividends until after twenty calendar days have passed after IPL has filed its report, or after the IURC approves the common stock dividend after initiating a proceeding to explore the implications of a proposed dividend. 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.

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. Management continues to believe that IPL will not be prevented from paying future dividends in the ordinary course of prudent business operations.

Our principal sources of funds in 2004 were net cash provided by operating activities of $237.6 million and net proceeds of approximately $98.9 million from the sale of IPL first mortgage bonds. Net cash provided by operating activities is net of cash paid for interest of $109.6 million and pension funding of $6.1 million. The principal uses of funds in 2004 included capital expenditures of $146.8 million, dividends to AES of $119.1 million, and the retirement of $80.0 million of first mortgage bonds that matured February 1, 2004. 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, 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, 2004 are set forth below:

1. Excludes payments for interest or other fees.
2. We have not included purchase orders or normal purchases for goods or services: (1) for which there is not also an enforceable contract; or (2) which does not specify all significant terms, including fixed or minimum quantities. We have not included contractual commitments that can be terminated by us without penalty on notice of 90 days or less.
3. Some fuel purchase contracts contain price re-opener provisions that may be exercised upon mutual agreement of the parties or upon unilateral action by a party. Obligations reflected above do not include obligations past the date of a re-opener provision. Not all transportation costs are currently under contract and this table includes only those that are under contract. Subsequent to December 31, 2004, we executed an agreement to purchase a minimum of $2.5 million of coal in 2005. One of our coal agreements may be terminated by us on 10 days notice and is not included in these totals.
4. Mid-America received a capital call from Enertech of $800,000 in February 2005, which has been paid and is included in the Less than 1 Year column. The remaining obligation of $2.2 million is included in years 1 to 3 as our best estimate of the timing of this obligation.
5. Represents the midpoint of estimated potential pension funding of zero and $25 million. We have not included an estimate of pension funding past 2005.

We spent approximately $146.8 million and $156.9 million on capital expenditures in 2004 and 2003, respectively. Capital expenditures during these periods were financed using internally generated cash provided by operations, IPL's credit facilities and the net proceeds from the sales of 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 capital expenditure program for the three-year period 2005-2007 is currently estimated to cost approximately $473 million. The estimated cost of the overall program by year is $129 million in 2005, $183 million in 2006 and $161 million in 2007. It includes approximately $132 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 capital expenditure program also includes approximately $27 million for construction projects designed to reduce NO_x emissions; $206 million for construction projects designed to reduce SO₂ and mercury emissions; $96 million for power plant related projects; and $12 million primarily for miscellaneous office equipment, furniture and leasehold improvements. See "-Environmental Matters- NO_x SIP Call" and "-Environmental Matters - Multipollutant Plan Filing" below, regarding the IURC ratemaking treatment providing for recovery of our NO_x, SO₂ and mercury emissions compliance costs.

All of our outstanding common stock is held by AES. During 2004 and 2003, we paid $119.1 million and $126.9 million, respectively, in dividends to AES. Future distributions will be determined in the discretion of our board of directors and will depend primarily on dividends received from IPL. Dividends from IPL 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 IPL's board of directors deems relevant.

Total cash contributed to the Defined Benefit Pension Plan and supplemental retirement plan (the "Pension Plans") was $6.1 million in 2004 and $96.1 million in 2003. Depending on the timing of contributions, pending legislation, and other factors related to our funding strategy, we estimate potential cash contributions to the Pension Plans up to $25 million in 2005, but we may elect not to make any contributions since none are anticipated to be required to meet our minimum funding targets. This estimate is based on actuarial assumptions using a discount rate of 6.0% and an assumed long-term rate of return on plan assets of 8.0%.

In June 2004, IPL entered into an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits, in which AES and other AES subsidiaries also participate. Health and Welfare Benefit Plans LLC will administer the financial aspects of the group insurance program, receive all premium payments from the participating affiliates, and make all vendor payments. Health insurance costs have risen significantly during the last few years. We believe that, though our insurance costs will likely continue to rise, cost savings can be realized through participation in this group benefits program with AES. During 2004, IPL paid $7.3 million for six months coverage under this program beginning August 1, 2004.

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. The cost of coverage under this program, which began September 1, 2003, was approximately $3.0 million and $1.0 million in 2004 and 2003, respectively.

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.

We also participate with AES and other AES affiliates in global sourcing initiatives intended to provide cost savings to us. Any agreements we enter into as a result of the global sourcing initiatives comply with the terms of the Stipulation and Settlement Agreement discussed under Regulatory Matters in this section.

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 generally provide for the recovery of fuel costs in the ordinary course of prudent business operations related to serving IPL's jurisdictional customers above or below the levels included in its 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 as of March 21, 2005 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.

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 2004, this agreement was extended through October 26, 2005. As of December 31, 2004, 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 $1.1 million, $1.0 million and $1.1 million for the years ended December 31, 2004, 2003 and 2002, 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 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 "- Industry Changes-FERC-Midwest ISO"). Additionally, there is increased activity by environmental regulators. (See Environmental Matters.)

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 operating and maintenance expenditures, 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 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. In addition, IPL's rate authority provides for a return on IPL's investment and recovery of the depreciation and operation and maintenance expenses associated with the NO_x compliance construction program and the Multipollutant Plan (See Environmental Matters).

IPL is generally allowed to recover, through its fuel adjustment charge, the fuel portion of purchased power costs incurred to meet jurisdictional retail load. Purchased power costs below an established benchmark are presumed to be fuel costs. Under a settlement agreement approved by the IURC, which expires March 31, 2005, the benchmark for IPL is established at $77.50 per MWh. The settlement also generally provides for recovery of 85% of power purchased up to $700/MWh to replace capacity losses for certain full forced outages and environmental derates for power purchases up to the first 11% of IPL's total rated summer capacity in any hour and full recovery for power purchases exceeding 11% of IPL's total rated summer capacity in any hour. IPL has a new settlement agreement pending at the IURC which would continue the recovery mechanism and establish a prospective benchmark each month related to the forward price for oil or natural gas.

In 1998, the IURC approved a plan (the "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, 2004, approximately 1% of IPL's retail customers were included in the Elect Plan. Customers who do not choose one of the Elect Plan options receive electric service under existing tariffs. 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:

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 jurisdictional 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 jurisdictional 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 filings (see below) of $6.7 million as of December 31, 2004. During the four quarterly measurement dates in 2004, the IURC found that IPL's rolling annual jurisdictional retail electric operating income was less than the authorized annual jurisdictional net operating income. 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 jurisdictional net operating income by $13.5 million and $1.8 million at January and April, respectively, and was less than the authorized annual jurisdictional 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, 2004, IPL had a cumulative net operating income deficiency of $748.7 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. Based on our current assumptions, we do not anticipate our rolling annual jurisdictional retail electric operating income to be greater than the authorized annual jurisdictional net operating income for the measurement periods in 2005.

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 jurisdictional 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.

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 certain ongoing performance measures for system reliability and 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 credits totaling $1.16 million to certain residential customers whose service was interrupted in July 2001 following severe storms in our service area. The system reliability performance measures are assessed quarterly based on a twelve-month rolling average. IPL has been subject to the quarterly measures for system reliability and customer call center performance since the second fiscal quarter of 2002. To date, IPL has paid penalties totaling $1.8 million for failing to meet certain of the performance measures. The Stipulation and Settlement Agreement expires March 31, 2005.

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 common stock dividends. Please see "Liquidity and Capital Resources" for more information relating to that Order.

Please see "Environmental Matters" for a discussion of our IURC filings related to our proposed capital expenditures for environmental compliance.

In recent years, various forms of proposed industry-restructuring legislation and/or rulemakings have been introduced at the federal level. 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 have enacted laws to allow more competition and customer choice in the retail energy markets within their respective states. Indiana has not done so. A discussion of the legislative and regulatory initiatives most likely to affect IPL follows:

Background. IPL's participation in the wholesale power and transmission markets is subject to FERC requirements. IPL filed its open access transmission service tariff and request for the authority to sell wholesale power at market-based rates on January 6, 2000. FERC accepted IPL's tariff and made effective its market-based rate authority on April 29, 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.

FERC Notice of Proposed Rulemaking - Standard Market Design. 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 ("MMI"), which is scheduled to be in place on April 1, 2005. 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. FERC has not taken action on this NOPR, and at this time we cannot determine what, if any, impact the final SMD rule will have on IPL.

Midwest ISO's Open Access Transmission and Energy Markets Tariff. The Midwest ISO filed its revised Open Access Transmission and Energy Markets Tariff with the FERC in March 2004, as part of the MMI to standardize the structure and operation of competitive wholesale power markets. The MMI proposes non-discriminatory transmission services, reliable grid operation, and the purchase and sale of electric energy in a competitive, efficient and non-discriminatory manner. This initiative includes a market-based transmission congestion management system that relies on locational marginal pricing, i.e., pricing for energy at a given location based on a market clearing price that takes into account physical limitations, generation and demand throughout the Midwest ISO region. 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.

Subsequent Orders issued by FERC accepted and suspended the proposed Open Access Transmission and Energy Markets Tariff and permitted it to become effective March 1, 2005, subject to conditions and further Orders on specific issues. Subsequent Orders addressed the treatment of certain grandfathered agreements, which does not have a material affect on IPL or its agreements, and directed the Midwest ISO to implement additional safeguards during the startup and transition to fully-functioning energy markets. On January 27, 2005, the Midwest ISO announced it will proceed to implement its energy market but settlements under the Open Access Transmission and Energy Markets Tariff would not be financially binding during March for parties participating in the energy market until April 1, 2005.

Market Based Rates and Market Power. In April 2004, the FERC issued two Orders concerning the ability of a utility to sell wholesale electricity at ma