The accompanying consolidated financial statements include the accounts of IPALCO, IPL and Mid-America. All significant intercompany amounts have been eliminated. The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for fair presentation, consisting of only normal recurring adjustments, have been included. 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. Certain amounts from prior year financial statements have been reclassified to conform to the current year presentation. These unaudited financial statements have been prepared in accordance with the accounting policies described in IPALCO's audited financial statements for the year ended December 31, 2003, included in its annual report on Form 10-K and should be read in conjunction therewith.

The preparation of financial statements in conformity with GAAP requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results may differ from those estimates.

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable interest entities ("VIE") and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and thus improve comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. In December 2003, the FASB issued a revision to the original Interpretation ("FIN 46-R") to codify both the proposed modifications and other decisions previously issued through certain FASB Staff Positions into one document. FIN 46-R currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 had to be adopted no later than the end of the first interim or annual reporting period ending after March 15, 2004. The application of FIN 46 and FIN 46-R did not have any impact on IPALCO's consolidated financial statements as neither IPALCO nor any of its consolidated subsidiaries obtained any interest in a VIE since January 31, 2003 or is the primary beneficiary in any VIE.

In May 2004, the FASB issued FASB Staff Position ("FSP") 106-2, which provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") for employers that sponsor postretirement health care plans that provide prescription drug benefits. The enactment of the Act does not have a significant effect on IPL's retirement plans. IPL's accumulated pension benefit obligation and net periodic postretirement benefit costs currently do not reflect any effect of the Act. The effects of the Act, which are not material, will be incorporated into the next measurement of plan obligations (November 30, 2004) as required by FSP 106-2.

IPALCO's operations are made up almost entirely of its ownership of IPL, its consolidated electric utility, which is a reportable business segment. In addition, IPALCO has outstanding $750 million of Senior Secured Notes (the "IPALCO Notes"); approximately $5.0 million and $2.5 million of nonutility cash and cash equivalents, as of September 30, 2004 and December 31, 2003, respectively; nonutility investments of $6.6 million and $6.1 million at September 30, 2004 and December 31, 2003, respectively; and income taxes and interest related to those items. There was no operating income for any nonutility activities during the periods covered by this report. Nonutility assets represented less than 1% of IPALCO's total assets as of September 30, 2004 and December 31, 2003 and there were no nonutility capital expenditures during the nine month periods ended September 30, 2004 and 2003.

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 and to reimburse IPL's treasury 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 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.

Also in July 2004, the Federal Energy Regulatory Commission ("FERC") issued an order renewing IPL's authority to issue up to $500 million of short-term indebtedness outstanding at any time through July 29, 2006.

In October 2004, IPL Funding Corporation extended the maturity of its Receivables Sale Agreement to October 26, 2005. The agreement provides for unrelated parties to purchase, on a revolving basis, up to $50.0 million of accounts receivable that IPL Funding purchased from IPL.

Employees' Retirement Plan: Most of IPL's employees are covered by the Employees' Retirement Plan of Indianapolis Power & Light Company (the "Defined Benefit Pension Plan.") The Defined Benefit Pension Plan is noncontributory and is funded through a trust. Benefits are based on each individual employee's pension band and years of service as opposed to their compensation. Pension bands are based primarily on job duties and responsibilities.

IPL's funding policy for the Defined Benefit Pension Plan is to contribute annually not less than the minimum required by applicable law, nor more than the maximum amount that can be deducted for federal income tax purposes.

Supplemental Retirement Plan: Additionally, a select group of former management employees of IPALCO and IPL who have terminated vested benefits are covered under a funded supplemental retirement plan.

The following table presents information relating to the Defined Benefit Pension Plan and supplemental retirement plan:

In April 2004, pension legislation was passed which decreased the present value of IPALCO's current pension fund liabilities and lowered IPALCO's pension funding requirements in the short- term. In August 2004, IPALCO contributed $6.0 million to the pension fund to achieve the desired funding level of 90% in 2004.

The Group Benefits Plan: IPL sponsors a group benefits plan which provides certain health care and life insurance benefits to active employees. Prior to October 20, 2000, the plan also provided certain health care and life insurance benefits to employees who retired from active service on or after attaining age 55 and had rendered at least 10 years of service. The postretirement benefit costs of this plan were funded through an independent voluntary employee beneficiary association ("VEBA") trust (the "VEBA Trust"). On April 30, 2001, all assets of the VEBA Trust and its obligations were formally spun-off to an independent trustee into a newly formed plan, the VEBA Plan (the "VEBA Plan") that provides postretirement medical and life benefits to retirees who retired from IPL or IPALCO before October 20, 2000. In addition, people who were employed by IPL or IPALCO on October 20, 2000, who subsequently retire from IPL or IPALCO and who meet the retirement requirements of age 55 or older and 10 or more years service are eligible for postretirement health care benefits under the VEBA Trust. The VEBA Plan is sponsored and administered by an independent VEBA committee.

In November 2002, IPL and one bargaining unit of the International Brotherhood of Electrical Workers union reached an agreement whereby IPL will provide postretirement health care benefits through the end of their current contract to unit members who were hired by IPL after October 20, 2000. The plan was amended accordingly.

The following table presents the components of period benefit costs for other postretirement benefits:

In December 2003, IPL reached agreements to sell approximately 4,000 acres of undeveloped property near Martinsville, Indiana divided between two purchasers for an aggregate price of $13.2 million. This land is presented on IPALCO's consolidated balance sheet as land held for sale at $6.6 million as of December 31, 2003. The sale to one of the purchasers was completed in February 2004 for $7.4 million net proceeds with a gain of $4.1 million and the other sale was completed in April 2004 with net proceeds of $4.3 million and a gain of $1.8 million. In accordance with regulatory accounting, these gains are included as a reduction of other operating expenses on IPALCO's consolidated statements of income.

During 2004, all non-union employees of IPL became eligible to participate in the AES Long Term Compensation Plan, a deferred compensation program. Participants are eligible to receive deferred compensation in the form of performance units payable in cash, AES restricted stock units and options to purchase shares of AES common stock. All three of such components granted to non- union employees of IPL vest in thirds over a three-year period and the terms of the AES restricted stock units also include a five-year minimum holding period. Total deferred compensation expense recorded during the three-month and nine-month periods ended September 30, 2004 was $0.4 million and $1.2 million, respectively, and was included in Other Operating Expenses on IPALCO's consolidated statements of income.

IPALCO and certain former officers and directors of IPALCO are named as defendants in class action lawsuits under the Employment Retirement Income Security Act ("ERISA") and the Federal securities laws (see below), respectively, each filed in the U.S. District Court for the Southern District of Indiana, and each making allegations regarding matters arising from the acquisition of IPALCO by AES. The ERISA suit alleges breach of fiduciary duties with respect to shares held in IPL's 401(k) thrift plan. While we cannot predict the outcomes, we do not believe that the suits will have a material adverse effect on IPALCO's consolidated financial statements.

In September 2002, IPALCO and certain of its former officers and directors were sued in the U.S. District Court for the Southern District of Indiana in connection with IPALCO's acquisition by AES. That suit has now been consolidated with other actions in that court with the result that the only remaining IPALCO defendants are three former officers who are insured under IPALCO's liability insurance policies. The lawsuit purports to be filed on behalf of all persons who exchanged their shares of IPALCO common stock for shares of AES common stock. The complaint alleges violations of Section 11 of the Securities Act; Sections 10(b), 14(a) and 20(a) of the Exchange Act and Rules 10b- 5 and 14a-9. We believe that the IPALCO defendants have meritorious defenses to the suit. While we cannot predict the outcome, we do not believe that the suit will have a material adverse effect on IPALCO's consolidated financial statements.

Since May 2003, IPALCO, IPL, AES and certain former directors and officers of IPALCO and/or IPL received subpoenas from the Securities Division of the Indiana Secretary of State seeking information focused largely on circumstances surrounding the acquisition of IPALCO by AES. The Secretary of State's inquiry is ongoing, as indicated in the Secretary of State's January 27, 2004 press release. IPALCO, IPL, AES and the individuals have produced various materials in response to the subpoenas. While we can not predict the outcome, we do not expect these matters will have a material adverse effect on IPALCO's consolidated financial statements.

In November 2002, IPL was sued in a Fair Labor Standards Act ("FLSA") collective action lawsuit filed in the U.S. District Court for the Southern District of Indiana. The complaint alleges that certain of IPL's current and former employees were not paid overtime pay at the rate required by the FLSA. We believe that IPL did not violate the FLSA. While we cannot predict the outcome, we do not believe the suit will have a material adverse effect on IPALCO's consolidated financial statements.

As of September 30, 2004, IPL is a defendant in approximately 100 pending lawsuits alleging personal injury or wrongful death stemming from exposure to asbestos and asbestos containing products formerly located in IPL power plants. IPL has been named as a "premises defendant" in that IPL did not mine, manufacture, distribute or install asbestos or asbestos containing products. These suits have been brought on behalf of persons who worked for contractors or subcontractors hired by IPL. IPL has insurance coverage for many of these claims; currently, these cases are being defended by counsel retained by various insurers who wrote policies applicable to the period of time during which much of the exposure has been alleged. Although we do not believe that any of the pending asbestos suits in which IPL is a named defendant will have a material adverse effect on IPALCO's business or operations, we are unable to predict the number or effect any additional suits may have. Accordingly, we cannot assure that the pending or any additional suits will not have a material adverse effect on IPALCO's consolidated financial statements.

In addition, IPALCO and IPL are involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, based upon advice of counsel, believes that the final outcome will not have a material adverse effect on IPALCO's consolidated financial statements.

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

National Ambient Air Quality Standards. In July 1997, the U.S. Environmental Protection Agency ("EPA") promulgated final rules tightening the National Ambient Air Quality Standards for ozone and creating a new fine particulate matter standard. In April 2004, the EPA designated Marion and Morgan counties as parts of the Greater Indianapolis nonattainment area for ozone, effective June 15, 2004. Indiana is now required to devise implementation plan revisions to attain and maintain the new ozone standards. Such revisions may require IPL to reduce emissions of ozone precursors, chiefly oxides of nitrogen, from its Harding Street and Eagle Valley generating stations.

In June 2004, the EPA wrote to the Governor of Indiana stating its intention to designate Marion, Morgan, and Pike Counties nonattainment for the fine particulate matter ambient air quality standard. The EPA stated that it intends to promulgate these designations in November 2004. The non attainment designation for both ozone and particulate matter will legally require the State of Indiana to modify its State Implementation Plan ("SIP") by 2008. The SIP will detail how the state will regain its compliance status. It is unclear at this time the potential impact of these new EPA designations on our generating stations.

NOx SIP Call. In October 1998, the EPA issued a final rule, referred to as the NO_x SIP call, which imposes more stringent limits on nitrous oxide ("NO_x") emissions from fossil fuel-fired steam electric generators. Capital expenditures for the NO_x SIP call were approximately $68 million during the first nine months of 2004 and IPL's current estimates are for additional capital expenditures of $14 million during the last three months of 2004 and $25 million during 2005 to achieve substantially all of the required NO_x emission reductions.

In connection with the sale of the Cleveland Energy Resources assets, Cleveland Thermal Energy Corporation and Cleveland District Cooling Corporation, both of which are subsidiaries of Mid-America, agreed to indemnify the buyer on an after-tax basis from and against all losses arising out of: any liabilities excluded from the sale; and certain litigation and environmental matters existing at the closing date, November 2, 2000. IPALCO guaranteed this indemnification up to $14.6 million. The indemnification and IPALCO's guarantee only apply to claims brought on or before November 2, 2004. Any claims made to date against this indemnification have not been, and are not expected to be, material to IPALCO.

IPL has capital leases expiring at various dates through 2010. Plant-in-service includes fixed assets under capital lease, net of accumulated depreciation, totaling $3.3 million at September 30, 2004. The interest component of capital leases as of September 30, 2004 is $0.1 million and the net present value of future minimum lease payments is $3.3 million. The current portion of this liability is recorded in other current liabilities and the noncurrent portion is recorded in miscellaneous on IPALCO's consolidated balance sheets. IPL also has operating leases expiring at various dates through 2009. Rental expense for the nine-month periods ended September 30, 2004 and 2003 was $0.8 million and $0.4 million, respectively. The following table shows fixed future minimum lease payments as of September 30, 2004 for all capital leases and for operating leases with remaining noncancelable lease terms in excess of one year (in thousands):

This Form 10-Q includes "forward-looking statements" including, in particular, the statements about our plans, strategies and prospects under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements express an expectation or belief and contain a projection, plan or assumption with regard to, among other things, our future revenues, income or capital structure. Such statements of future events or performance are not guarantees of future performance and involve estimates, assumptions and uncertainties. The words "could," "may," "predict," "anticipate," "would," "should," "believe," "estimate," "expect," "forecast," "project," "objective," and similar expressions are intended to identify forward-looking statements.

Some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to: our ownership by AES, changes in our credit ratings, performance of pension plan assets, fluctuations in customer growth and demand, weather and weather-related damage, fuel costs, generating unit availability and capacity, purchased power costs and availability, regulatory action, environmental matters, federal and state legislation, interest rates, availability and cost of capital, labor strikes, maintenance and capital expenditures, local economic conditions, the ultimate disposition of litigation, the specific needs of plants to perform unanticipated facility maintenance or repairs or outages, the timing of deregulation and competition, product development and technology changes. Most of these factors affect us through our consolidated subsidiary, IPL. These factors are difficult to predict, contain uncertainties that may materially affect actual results and are beyond our control. We undertake no obligation to publicly update or review any forward-looking information, future events or otherwise.

IPALCO Enterprises, Inc. is a holding company incorporated under the laws of the state of Indiana. Our principal subsidiary is Indianapolis Power & Light Company, 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., 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 September 30, 2004. Our business segments are electric and "all other."

IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to more than 455,000 customers in the city of Indianapolis and neighboring areas within the state of Indiana. IPL has an exclusive right to provide retail electric service to those customers. IPL owns and operates four generating stations, all within the state of Indiana. Approximately 99% of the total electricity produced by IPL is 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.

Material changes in our consolidated financial condition and results of operations, except where noted, are attributed to the operations of IPL. Consequently, the following discussion is centered on IPL.

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.

Our third quarter 2004 net income of $31.0 million increased $0.2 million from net income of $30.8 million in the third quarter of 2003. The following discussion highlights the significant factors contributing to this change.

Operating revenues increased by $7.8 million during the three months ended September 30, 2004 compared to the prior year as a result of the following (dollars in thousands):

The $1.3 million increase in miscellaneous revenues is primarily the result of $1.1 million of revenues from the Midwest Independent Transmission System Operator, Inc. ("Midwest ISO"). 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.

Operating expenses increased $5.2 million, or 3.1% during the three months ended September 30, 2004, as compared to the same period in 2003. Significant factors contributing to this increase include: a $2.7 million increase in real estate and property taxes; a $2.4 million increase in depreciation and amortization; a combined $2.3 million increase in fuel and purchased power costs; Midwest ISO costs of $0.9 million in 2004 and a $0.7 million increase in employee group insurance benefits, resulting from escalating premiums and additional employees; partially offset by a $6.1 million decrease in income taxes and a $1.8 million decrease in pension expenses. Substantially all of the increase in real estate and property taxes resulted from a change in the estimates of real estate and property tax liabilities resulting from changes in tax law during 2003. The increase in depreciation and amortization is primarily due to additional plant and distribution equipment being placed in service, excluding those designed to reduce NO_x emissions, because the approved ratemaking treatment provides for recovery of the depreciation expenses associated with these projects. The combined increase in fuel and purchased power of $2.3 million is primarily due to the outages described above, which made two of our low-cost, base-load, coal-fired units unavailable for periods of time and increased our dependence on the wholesale market, which experienced a 13.6% increase in the price per kWh since the comparable period in 2003. The decrease in income taxes is primarily the result of a decrease in the flow-through tax expense from depreciation of $4.5 million partially offset by an increase in pretax income. The decrease in pension expenses is primarily due to a $1.1 million increase in the estimated return on pension plan assets, which is primarily due to IPL's $96.1 million of pension funding contributions made in 2003. In accordance with FAS 87, we record pension costs throughout the year based upon estimates made at the actuarial evaluation performed on November 30^th of the previous year and adjust to actual costs during the fourth quarter of each year. Net recognized pension costs in the third quarter of 2003 were $0.6 million higher than actual pension costs as determined on the November 30, 2003 actuarial evaluation.

Primarily as a result of the foregoing, utility operating income increased $2.6 million or 5.1% during the third quarter of 2004 from the same period in 2003.

Other income and deductions decreased from income of $7.8 million in 2003 to $6.3 million in 2004, primarily due to a $0.9 million decrease in the allowance for equity funds used during construction, a $0.3 million increase in nonutility legal services, and a $0.3 million increase in charitable contributions, partially offset by a $0.3 million increase in our income tax benefit. The decrease in the allowance for equity funds used during construction resulted primarily from approximately $148 million of equipment being placed in service in 2004 related to the NOx compliance construction program.

Interest and other charges increased $1.1 million to $29.3 million in the third quarter of 2004 as compared to the same period in 2003. This increase is primarily the result of additional interest expense of $1.7 million and $0.7 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, partially offset by a $1.2 million decrease from the retirement of $80 million of first mortgage bonds at IPL on February 1, 2004.

Our net income during the nine month period ended September 30, 2004 increased $10.1 million to $90.1 million from net income of $80.0 million in the same period in 2003. The following discussion highlights the significant factors contributing to this change.

Operating revenues increased by $27.5 million during the nine-month period ended September 30, 2004 as compared to the prior year as a result of the following (dollars in thousands):

Operating expenses increased $10.5 million, or 2.1% during the nine months ended September 30, 2004, as compared to the same period in 2003, primarily due to an $11.0 million increase in fuel expenses. The increase in fuel expenses results primarily from a $6.4 million increase in the deferred fuel adjustments (which is the result of variances between estimated fuel costs in IPL's fuel adjustment clause and actual fuel costs), and a $4.4 million increase in the cost of coal used during the comparative periods. IPL is permitted to recover underestimated fuel costs in future rates through the fuel cost adjustment proceeding and therefore the costs are deferred and amortized into expense in the same period that IPL's rates are adjusted. The cost of coal used in 2004 was higher due to a 1.9% increase in the amount of coal burned and a 1.5% increase in the average price of such coal.

Other significant items included in the operating expense variance include a $5.9 million gain in 2004 on the sale of land held for sale; a $5.1 million decrease in pension expenses; a $3.5 million increase in salaries and wages included in other operating expenses; a $3.4 million decrease in maintenance expenses; a $2.8 million increase in real estate and property taxes; a $2.6 million decrease in income taxes; a $2.4 million decrease in gains on sales of sulfur dioxide ("SO₂") allowances; a $2.2 million decrease in purchased power; Midwest ISO costs of $2.0 million in 2004; and a $2.0 million increase in employee group insurance benefits, resulting from escalating premiums and additional employees (see below). In accordance with regulatory accounting, both the gain on the sale of land held for sale and the gain on sales of SO₂ allowances are included as reductions of other operating expenses on IPALCO's consolidated statements of income. The decrease in pension expenses is primarily due to a $3.3 million increase in the expected return on pension plan assets over the comparable periods, which is primarily due to IPL's $96.1 million of pension funding contributions made in 2003; and because net recognized pension costs in the nine months ended September 2003 were $1.6 million higher than actual pension costs as determined on the November 30, 2003 actuarial evaluation. The $3.5 million increase in salaries and wages included in other operating expenses is primarily the result of an 8.6% increase in fulltime employees from January 1, 2003 to September 30, 2004 and annual wage increases. The decrease in maintenance expenses results primarily from a reduction in tree trimming costs ($2.1 million) resulting from higher than average costs in 2003 and unusually high severe storm activity during the third quarter of 2003. Substantially all of the increase in real estate and property taxes resulted from a change in the estimates of real estate and property tax liabilities resulting from changes in tax law during 2003. The decrease in income taxes is primarily the result of a decrease in the flow-through tax expense from depreciation of $6.9 million partially offset by an increase in pretax income. The $2.2 million decrease in purchased power during the first nine months of 2004, as compared to the same period in 2003, was primarily due to higher than normal power purchases in March of 2003 totaling $4.5 million, which was $3.4 million higher than in March 2004. The high cost of power purchases in March of 2003 was the result of a combination of (i) a scheduled maintenance outage during March of 2003 on our largest base load coal fired unit (ii) colder than normal temperatures (iii) higher than normal wholesale energy prices and (iv) an unscheduled maintenance outage on another of our large coal fired units. The combination of these factors resulted in us purchasing more energy and at higher than normal prices.

As described above, a portion of the proceeds from sales of wholesale kWhs is attributed to the disposition of environmental allowances. Excluding such dispositions, we do not expect to sell our SO₂ allowances in the foreseeable future and therefore we do not expect to have gains at the levels we did in 2003. IPL projects to exceed the SO₂ EPA emissions allowance cap in 2004 and will rely on its allowance bank to meet SO₂ allowances as necessary to remain in compliance with EPA SO₂ regulations in 2004. For 2005 and 2006, IPL is currently projecting to meet its supplemental SO₂ allowance requirements via allowance purchases. Historically, the price of such allowances has been volatile and therefore it is difficult to predict what our cost may be in the future.

Primarily as a result of the foregoing, utility operating income increased $16.9 million or 12.2% during the nine months ended September 30, 2004 as compared to the same period in 2003.

Other income and deductions increased slightly from income of $21.4 million in 2003 to $21.5 million in 2004. The increase includes dividend income received in 2004 of $1.4 million, a $0.9 million gain on the sale of noncore real estate assets in 2004 and a $0.8 million loss in 2003 on the sale of one-third of our ownership interest in EnerTech, partially offset by a $1.5 million decrease in the allowance for equity funds used during construction and a $0.7 million increase in nonutility legal services. The decrease in the allowance for equity funds used during construction resulted primarily from approximately $148 million of equipment being placed in service in 2004 related to the NOx compliance construction program.

Interest and other charges increased $7.0 million to $87.8 million in the nine months ended September 30, 2004 as compared to the same period in 2003. This increase is primarily the result of additional interest expense of $4.8 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 the IPALCO Notes due to a 50 basis point increase, beginning May 15, 2003, in the interest rate charged as a result of ratings downgrades in 2003. These increases are partially offset by a $3.2 million decrease from the retirement of $80 million of first mortgage bonds at IPL on February 1, 2004.

As of September 30, 2004, IPALCO had cash and cash equivalents of $21.8 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 contractual obligations of AES and by financial covenant restrictions under their existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its committed credit facilities, refinance existing debt, issue an additional $30 million of long-term debt approved by the IURC and incur certain other indebtedness. We believe that existing cash balances, cash generated from operating activities and borrowing capacity on IPL's committed credit facilities will be adequate on a short-term and long- term basis to meet anticipated operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and pay dividends to AES. Sources for principal payments on outstanding indebtedness and nonrecurring capital expenditures are expected to be obtained from: (i) existing cash balances; (ii) cash generated from operating activities; (iii) borrowing capacity on IPL's committed credit facilities and (iv) additional debt financing.

In 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 and to reimburse IPL's treasury and 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 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.

In October 2004, IPL Funding Corporation extended the maturity of its Receivables Sale Agreement to October 26, 2005. The agreement provides for unrelated parties to purchase, on a revolving basis, up to $50.0 million of accounts receivable that IPL Funding purchased from IPL.

Capital Requirements. Our capital requirements are primarily related to IPL's construction expenditures needed to meet customers' needs for electricity and for environmental compliance. IPL's construction expenditures totaled $115.2 million during the nine months ended September 30, 2004. This represented an increase of $10.4 million from the comparable period in 2003, primarily due to expenditures associated with new environmental standards imposed by the EPA relating to NOx emission reductions. Construction expenditures during the first nine months of 2004 were financed primarily with internally generated cash provided by operations and borrowings on IPL's committed credit facilities. We estimate total capital expenditures of approximately $154 million in 2004, $127 million in 2005 and $183 million in 2006. These estimates include approximately $128 million for additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting facilities; $100 million for power plant related projects; $15 million primarily for miscellaneous office equipment, furniture and leasehold improvements; and $107 million for construction projects designed to reduce NOx emissions and $114 million for construction projects designed to reduce SO₂ and mercury emissions.

Pension Funding. In April 2004, pension legislation was passed which decreased the present value of our current pension fund liabilities and lowered our pension funding requirements in the short-term. In August 2004, IPALCO contributed $6.0 million to the pension fund to achieve the desired funding level of 90% in 2004.

Dividends. All of our outstanding common stock is held by AES. During the first nine months of 2004, we paid $81.0 million in dividends to AES. Future distributions will be determined at the discretion of our board of directors and will depend primarily on dividends received from IPL. Dividends from IPL are affected by IPL's results of operations, cash flows, financial condition, capital requirements, regulatory considerations, and such other factors as IPL's board of directors deems relevant.

Multipollutant Plan filing. In July 2004, IPL filed a multipollutant plan (the "Plan") with the IURC. The Plan provided estimated operating and capital costs over the next decade for equipment designed to reduce SO₂, NOx, and mercury emissions from our power plants and reduce the formation of ozone and fine particulate pollution in the atmosphere. The filing requests approval to construct certain portions of the Plan over the next several years and ratemaking treatment for those portions of the Plan similar to that which IPL received previously on its capital expenditures designed to reduce NOx emissions for the NOx SIP call. Such treatment includes a return on the investment and recovery of depreciation expenses and operation and maintenance expenses associated with these projects. IPL has also requested to add the approved return on its environmental projects to its authorized annual net operating income in subsequent fuel adjustment charge proceedings. In October 2004, IPL and the Office of Utility Consumer Counselor ("OUCC") filed a settlement agreement with the IURC whereby the OUCC supports IPL's Plan, subject to certain modifications. The IURC still must rule on the merits of the Plan and an order is expected later this year.

National Ambient Air Quality Standards. In July 1997, the EPA promulgated final rules tightening the National Ambient Air Quality Standards for ozone and creating a new fine particulate matter standard. In April 2004, the EPA designated Marion and Morgan counties as parts of the Greater Indianapolis nonattainment area for ozone, effective June 15, 2004. Indiana is now required to devise implementation plan revisions to attain and maintain the new ozone standards. Such revisions may require IPL to reduce emissions of ozone precursors, chiefly oxides of nitrogen, from its Harding Street and Eagle Valley generating stations.

In June 2004, the EPA wrote to the Governor of Indiana stating its intention to designate Marion, Morgan, and Pike Counties nonattainment for the fine particulate matter ambient air quality standard. The EPA stated that it intends to promulgate these designations in November 2004. The non attainment designation for both ozone and particulate matter will legally require the State of Indiana to modify its State Implementation Plan by 2008. The SIP will detail how the state will regain its compliance status. It is unclear at this time the potential impact of these new EPA designations on our generating stations.

Midwest ISO Energy Markets Tariff Filing. The Midwest ISO filed its revised Energy Markets Tariff with the FERC in March 2004, as part of the Midwest Market Initiative to standardize the structure and operation of competitive wholesale power markets, including plans to implement the market restructuring, including day-ahead and real-time energy markets. This restructuring could have an impact on the costs associated with IPL's energy service to its utility customers. In August 2004 FERC conditionally accepted Tariff Sheets to start the energy markets and established settlement judge procedures. In October 2004 the Midwest ISO submitted a compliance filing pursuant to FERC's August 2004 Order. In July 2004 IPL, PSI Energy, Inc., Northern Indiana Public Service Company, Inc., and Vectren Energy Delivery of Indiana, Inc., filed a Joint Petition with the Indiana Utility Regulatory Commission for approval of certain changes in operations that are likely to result from the Midwest ISO's implementation of energy markets, and for determination of the manner and timing of recovery of costs resulting from the energy markets. At this time, we cannot predict the effect these filings will have on our results of operations.

Final Report of the Joint U.S.-Canadian Blackout Task Force. In April 2004, the U.S.- Canadian Power System Outage Task Force filed its Final Report on the August 14, 2003 electric power blackout that occurred in large portions of the Midwest and Northeast United States and Ontario, Canada. The blackout did not include IPL's service territory. The Final Report contains findings and recommendations related to the blackout. The adoption of federal legislation regarding mandatory and enforceable reliability provisions is central to the recommendations of the task force. The Final Report sets forth 46 recommendations grouped into the following four general categories: institutional issues related to reliability; support of the North American Electric Reliability Council's ("NERC") actions of February 10, 2004 (in which NERC approved a series of actions and strategic and technical initiatives intended to protect the reliability of the North American bulk electric system); physical and cyber security of North American bulk power systems; and the Canadian nuclear power sector. At this time we cannot fully predict the effect any legislation or other implementation of the recommendations of the Task Force will have on IPL. However, we currently estimate an additional $3.3 million for transmission system monitoring and control equipment over the next two years in anticipation of new requirements that we believe are likely to be imposed on all transmission control areas.

In June 2004, IPL entered into an agreement with HWBP, 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. HWBP will administer the financial aspects of the group insurance program, receive all premium payments from the participating affiliates, and make all vendor payments. We believe that cost savings can be realized through participation in this group benefits program. Coverage for IPL employees through the group benefits program began on August 1, 2004.

(a) Exhibits

10.1  First Amendment, Dated as of October 27, 2004, to Amended and Restated
      Receivables Sale Agreement, Dated as of July 20, 2004.

31.1  Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-1

31.2  Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-1

  32  Certification required by Rule 13a-14(b) or 15d-14(b).