CSW

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                       Central and South West Corporation

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                            1999 CSW FINANCIAL REPORT







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TABLE OF CONTENTS


Management's Discussion and Analysis of Financial Condition and Results
 of Operations.................................................................1


Consolidated Statements of Income.............................................35


Consolidated Statements of Stockholders' Equity...............................36


Consolidated Balance Sheets...................................................37


Consolidated Statements of Cash Flows.........................................39


Notes to Consolidated Financial Statements....................................40


Reports of Independent Public Accountants.....................................88


Report of Management..........................................................91


Glossary of Terms.............................................................92




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FORWARD-LOOKING INFORMATION

This report made by CSW contains  forward-looking  statements within the meaning
of Section 21E of the Exchange Act.  Although CSW believes that its expectations
are based on reasonable  assumptions,  any such  statements may be influenced by
factors that could cause actual outcomes and results to be materially  different
from those  projected.  Important  factors  that could cause  actual  results to
differ materially from those in the forward-looking  statements include, but are
not limited to:

- increased competition and electric utility industry restructuring in the
  United States,
- the impact of the proposed AEP Merger, including any regulatory conditions
  imposed on the merger or the inability to consummate the AEP Merger, or other
  merger and acquisition activity,
- federal and state regulatory developments and changes in law which may have a
  substantial adverse impact on the value of CSW System assets,
- the impact of general economic changes in the United States and in countries
  in which CSW either currently has made or in the future may make investments,
- timing and adequacy of rate relief,
- adverse changes in electric load and customer growth,
- climatic changes or unexpected changes in weather patterns,
- changing fuel prices,  generating plant and distribution facility performance,
- decommissioning costs associated with nuclear generating  facilities,
- costs associated with any year 2000 computer-related failure(s) either within
  the CSW System or supplier failures that adversely affect the CSW System,
- uncertainties in foreign operations and foreign laws affecting CSW's
  investments in those countries,
- the effects of retail competition in the natural gas and electricity
  distribution  and supply businesses in the United Kingdom, and
- the timing and success of efforts to develop domestic and international power
  projects.

In the  non-utility  area,  the  previously  mentioned  factors  apply  and also
include, but are not limited to:

- the ability to compete effectively in new areas, including telecommunications
  and  other energy-related services, and
- evolving federal and state regulatory legislation and policies that may
  adversely  affect  those  industries  generally  or  the  CSW  System's
  business in areas in which it operates.


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

      Reference is made to CSW's Consolidated  Financial  Statements and related
Notes to Consolidated  Financial  Statements.  The information contained therein
should be read in  conjunction  with,  and is  essential in  understanding,  the
following discussion and analysis.  The RESULTS OF OPERATIONS of CSW precede its
financial statements.


OVERVIEW

      The electric  utility  industry is changing rapidly as it is becoming more
competitive.  In anticipation of increasing  competition and fundamental changes
in the industry,  CSW's  management is implementing a strategic plan designed to
help position CSW to be competitive in this rapidly changing  environment and in
developing a global energy business.

      CSW has undertaken key initiatives in the  implementation  of this overall
strategy.  The  centerpiece of these  initiatives is the proposed merger between
AEP and CSW that was  announced  in  December  1997  pursuant to which CSW would
become a wholly owned  subsidiary  of AEP.  The  proposed  merger would join two
companies which are low cost providers of electricity and is expected to achieve
greater  economies  of scale than either  company  could  achieve on its own. In
addition,  CSW  International  continues to make  investments  in South America.
These  initiatives  are  discussed  in more detail  below and  elsewhere in this
report.  See RECENT  DEVELOPMENTS  AND  TRENDS -  PROPOSED  AEP MERGER and OTHER
INITIATIVES - DIVERSIFIED ELECTRIC.

      Most states  have  considered  the  adoption  of various  legislative  and
regulatory  initiatives to restructure the electric  utility  industry and enact
retail competition,  and several states,  like Texas and Arkansas,  have already
passed  legislation  that  requires  the  implementation  of retail  access  for
customers. In response to these changes, the CSW System is developing strategies
to  appropriately  deal with the changing  environment.  For example,  the Texas
Electric Operating  Companies have recently filed an unbundling plan in response
to legislation  recently enacted in Texas. See RECENT  DEVELOPMENTS AND TRENDS -
Industry Restructuring Initiatives in Arkansas,  Oklahoma,  Louisiana and Texas,
Texas  Business   Separation  Plan  and  Securitization  of   Generation-related
Regulatory Assets and Stranded Costs.

      CSW believes that compared to other electric utilities,  the CSW System is
well   positioned  to  capitalize  on  the   opportunities   resulting  from  an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity. The CSW System should benefit from economies of
scale by virtue of its size and is a reliable and relatively  low-cost  provider
of electric power in its service area.  Specifically,  CSW will seek competitive
advantages through its diverse and stable customer base,  competitive prices for
electricity,  diversified  fuel mix,  extensive  transmission  interconnections,
diversity of regulation and financial  flexibility.  See RECENT DEVELOPMENTS AND
TRENDS  for  additional   information.   (The  foregoing   discussion   contains
forward-looking  statements  within the meaning of Section  21E of the  Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).


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LIQUIDITY AND CAPITAL RESOURCES

      Overview of Operating, Investing and Financing Activities
      Net cash inflows from operating  activities decreased $139 million to $803
million for the twelve month period ended December 31, 1999 compared to the same
period last year due primarily to increased  payments on accounts payable,  less
favorable fuel recovery positions and higher levels of fuel inventories  related
to year 2000 contingency plans.  Partially offsetting the decrease in cash flows
from operating  activities was a lower change in accounts  receivable balance in
1999  compared  to 1998.  Further  offsetting  the  decrease  in cash flows from
operating  activities  was the absence in 1999 of a refund paid to CPL customers
in 1998.

      Net cash outflows from investing activities increased $123 million to $758
million  during the twelve  months ended  December 31, 1999 compared to the same
period a year ago. The increase in net cash outflows from  investing  activities
was due primarily to higher levels of construction  spending in 1999 at the U.S.
Electric Operating Companies and SEEBOARD.  Also contributing to the increase in
cash outflows from investing  activities were two transactions  that occurred in
1998: (1) the sale of a portion of C3 Communication's interest in ChoiceCom and,
(2)  the  payment  by CSW  International's  Altamira  partner,  Alpek,  of a 50%
obligation related to the power plant project. The increase in net cash outflows
from investing  activities was partially  offset by cash inflows  related to the
sale of a 50% interest in CSW Energy's Sweeny plant.  Also partially  offsetting
the increase in cash outflows from investing  activities was the absence in 1999
of CSW International loans to Vale.

      Net cash inflows from  financing  activities  for the twelve  months ended
December 31, 1999 were $71 million,  a $296 million increase  compared to a cash
outflow of $225  million for the same period in 1998.  The  increase in net cash
flows from financing  activities  was due primarily to higher  proceeds from the
issuance of long-term debt and a higher level of change in short-term debt. Also
contributing  to the increase in cash inflows from financing  activities was the
absence in 1999 of the repayment of a $60 million variable rate bank loan at CSW
Services  and the  redemption  of $28  million  of  preferred  stock at  SWEPCO.
Partially  offsetting  the  increase in net cash  inflows was a higher  level of
long-term debt maturities and reacquisitions in 1999 compared to 1998 as well as
the redemption of $160 million of preferred stock at CPL.

      The non-cash  impacts of exchange rate  differences on the  translation of
foreign currency  denominated assets and liabilities were recorded on a separate
line on the cash flow statement.

      Internally Generated Funds
      Internally  generated  funds,  which consist of cash flows from  operating
activities  less common and preferred stock  dividends,  should meet most of the
capital requirements of the CSW System.  However,  CSW's strategic  initiatives,
including  expanding  CSW's core  electric  utility and  non-utility  businesses
through acquisitions or otherwise,  may require additional capital from external
sources.  For a description  of certain  restrictions  on CSW's ability to raise
capital  from  external  sources,  see MD&A,  PROPOSED  AEP  MERGER and NOTE 15.
PROPOSED  AEP MERGER.  Productive  investment  of net funds from  operations  in
excess of capital expenditures and dividend payments is necessary to enhance the
long-term value of CSW for its investors. CSW is continually evaluating the best
use of internally generated funds, which totaled $426 million,  $564 million and
$343 million for 1999, 1998 and 1997, respectively.

      On December 2, 1999,  OFGEM  published its final price  proposals from its
United  Kingdom  electricity  distribution  review.  OFGEM has proposed  revenue
reductions in SEEBOARD's  distribution  business of 21%. In addition,  OFGEM has
proposed  the  reallocation  of  a  further  12%  of  costs  out  of  SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999,  and will take effect on April 1, 2000,  and remain in effect
for five years.  OFGEM's  proposals  will reduce net income for  SEEBOARD in the

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year 2000 by approximately $40 million, dependent upon the level of further cost
reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A.,  its United Kingdom business segment,  was $113
million for the twelve months ended December 31, 1999.

      OFGEM's price  proposals for SEEBOARD will have a material  adverse effect
on the future results of operations of CSW, but are not be expected to adversely
affect the financial condition of CSW.

      Capital Expenditures
      The CSW System's need for capital results  primarily from its construction
of  facilities  to  provide  reliable  electric  service to its  customers.  The
historical  capital  requirements  of the CSW System have been primarily for the
construction  of electric  utility plant.  However,  current  projected  capital
expenditures are expected to be primarily for existing production,  transmission
and  distribution  systems and for  various  non-utility  investments.  The U.S.
Electric Operating  Companies maintain a continuing  construction  program,  the
nature and extent of which is based upon current and  estimated  future  demands
upon  the  system.  Planned  construction  expenditures  for the  U.S.  Electric
Operating Companies for the next three years are primarily to improve and expand
production, transmission and distribution facilities. These improvements will be
required to meet the  anticipated  needs of new  customers and the growth in the
requirements of existing customers.  These improvements will be funded primarily
through  internally  generated  funds.  However,  some long-term  financing will
likely be required.

      CSW regularly  evaluates its capital spending policies and generally seeks
to fund only those projects and investments that management  believes will offer
satisfactory returns in the current environment.  Consistent with this strategy,
the CSW  System  is  likely  to  continue  to  make  additional  investments  in
energy-related and non-utility  businesses and will continue to search for other
electric  utility  properties to acquire.  Primary  sources of capital for these
expenditures are long-term debt, trust preferred  securities and preferred stock
issued by the U.S. Electric Operating  Companies,  long-term and short-term debt
issued by CSW, as well as internally generated funds. Historically, the issuance
of common  stock by CSW has also been a source of  capital.  CSW  Energy and CSW
International  typically use various forms of non-recourse  project financing to
provide a portion of the capital required for their respective  projects as well
as utilizing long-term debt for other investments.  Although CSW and each of the
U.S.  Electric  Operating  Companies  expect  to  fund  the  majority  of  their
respective  capital  expenditures  for their existing  utility  systems  through
internally  generated  funds,  for any  significant  investment or  acquisition,
additional funds from the capital markets may be required.  For a description of
certain restrictions on CSW's ability to make investments and raise capital from
external  sources,  including  through the  issuance of common  stock,  see MD&A
PROPOSED AEP MERGER and NOTE 15. PROPOSED AEP MERGER.

      The  historical  and estimated  capital  expenditures  for the CSW System,
including the U.S. Electric Operating  Companies,  SEEBOARD and other operations
are shown in the CAPITAL  EXPENDITURES  table. The amounts include  construction
expenditures  for the U.S.  Electric  Operating  Companies and, for SEEBOARD and
CSW's other operations,  construction  expenditures and net equity  investments.
The  majority  of the  capital  expenditures  for the  U.S.  Electric  Operating
Companies  for 1997 through  1999 were spent on  transmission  and  distribution
facilities.  It is  anticipated  that  the  majority  of the  estimated  capital
expenditures  for 2000 through  2002 will be for  production,  transmission  and
distribution  facilities.  For a description  of certain  restrictions  on CSW's
ability to make capital  expenditures,  including through the issuance of common
stock,  see  PROPOSED  AEP  MERGER.  (The  table and  statements  below  contain
forward-looking  information  within the meaning of Section 21E of the  Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).

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                              CAPITAL EXPENDITURES
                                                    Estimated Expenditures
                1997      1998      1999           2000       2001      2002
              ------------------------------    --------------------------------
                                 (millions including AFUDC)

CSW             $901      $669      $774        $1,071       $817       $643

      Estimated capital expenditures for 2000 - 2002 do not include expenditures
      for acquisition-type investments.

      Although CSW does not believe that the U.S. Electric  Operating  Companies
will require substantial  additions of generating capacity over the next several
years, the U. S. Electric's  internal  resource plan presently  anticipates that
any  additional  capacity  needs will come from a variety  of sources  including
power purchases.

      Inflation
      Annual  inflation  rates,  as measured by the U. S. Consumer  Price Index,
have averaged approximately 2.0% during the three years ended December 31, 1999.
CSW believes that  inflation,  at this level,  does not materially  affect CSW's
results of operations or financial position.  However, under existing regulatory
practice,  only the historical cost of plant is recoverable from customers. As a
result,  cash flows designed to provide  recovery of historical  plant costs may
not be adequate to replace plant in future years.

      Financial Structure, Shelf Registrations and Credit Ratings As of December
      31, 1999, the capitalization ratios of CSW were 47% common stock
equity,  4% Trust Preferred  Securities and 49% long-term debt. CSW is committed
to maintaining  financial  flexibility  through a strong  capital  structure and
favorable    securities   ratings   in   order   to   access   capital   markets
opportunistically or when required. CSW continually monitors the capital markets
for opportunities to lower its cost of capital through  refinancing  activities.
The estimated  embedded  cost of long-term  debt for CSW at December 31, 1999 is
7.0%.

      CSW can issue common stock,  either through the purchase and reissuance of
shares from the open  market or by issuing  original  shares,  to fund its LTIP,
stock  option plan,  PowerShare  plan and  Retirement  Savings  Plan.  CSW began
funding  these plans  through open market  purchases  on April 1, 1997.  CPL has
shelf  registration  statements on file for the issuance of up to $60 million of
FMBs and up to $75  million of  preferred  stock.  PSO has a shelf  registration
statement on file for the issuance of up to $35 million of senior notes.  SWEPCO
has a shelf  registration  statement  on file  for  the  issuance  of up to $250
million of senior  notes,  of which $150 million was issued in the first quarter
of 2000.  For a description  of certain  restrictions  on CSW's ability to raise
capital from external sources, see PROPOSED AEP MERGER.

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      The current securities ratings for each of the Registrants is presented in
the following  table,  including the  securities  rating on the Trust  Preferred
Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.

                                       Moody's  Duff & Phelps  Standard & Poor's
                                       ---------------------------------------
CPL
           First mortgage bonds            A3         A             A
           Senior unsecured               Baa1        A-            A-
           Preferred stock                Baa1       BBB+          BBB+
           Trust preferred (CPL
             Capital I)                   Baa1       BBB+          BBB+
           Junior subordinated
             deferrable Interest
             debentures                   Baa2        --            --

PSO
           First mortgage bonds            A1         AA-           AA-
           Senior unsecured                A2         A+             A
           Preferred stock                 a3         A+            A-
           Trust preferred (PSO
             Capital I)                    a2         A+            A-
           Junior subordinated
             deferrable Interest
             debentures                    A3         --            --

SWEPCO
           First mortgage bonds           Aa3         AA            AA-
           Senior unsecured                A1         AA-            A
           Preferred stock                 a1         AA-           A-
           Trust preferred (SWEPCO
             Capital I)                   aa3         AA-           A-
           Junior subordinated
             deferrable Interest
             debentures                    A2         --            --
WTU
           First mortgage bonds            A2         A+             A
           Senior unsecured                A3         --            A-
           Preferred stock                 a3          A           BBB+
CSW
           Commercial paper               P-2         D-2           A-2

These  securities  ratings  may be revised or  withdrawn  at any time,  and each
rating should be evaluated independently of any other rating.

      Long-Term Financing
      On May 1, 1999, $100 million of CPL's 7.50% Series JJ FMBs matured, and on
December 1, 1999,  $25 million of CPL's 7.125% Series DD FMBs  matured.  In June
1999, CPL reacquired $25 million of its 7.50% Series II FMBs, due April 1, 2023,
and in November  and December  1999,  CPL called $75 million of its money market
preferred  stock and $85 million of its Series A and Series B  preferred  stock,
each at par.

      In November 1999, CPL issued $200 million of unsecured floating rate notes
maturing  November 23, 2001 and callable at par November 23, 2000.  The interest
rate will reset quarterly at the then current three-month LIBOR plus 0.60%.

      The reacquisition,  redemptions and maturities were funded with short-term
debt and with proceeds from the issuance of the floating rate notes.

      In November and December 1999,  Matagorda County Navigation District No. 1
(Texas) sold for the benefit of CPL $111.7 million of 4.90% Series 1999A and $50
million of 4.95% Series 1999B  unsecured tax exempt  PCRBs.  The bonds mature in
2030 but will be subject to remarketing and an interest rate reset in two years.
The proceeds were used to refund $111.7 million  aggregate  principal  amount of

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outstanding  7.50% Series T due December 15, 2014 and will be used to refund $50
million aggregate  principal amount of outstanding 7.50% Series AA due March 21,
2020.

      On January 1, 1999, $25 million of PSO's 7.25% Series K, FMBs matured.  In
July 1999, the Oklahoma  Development  Finance  Authority sold for the benefit of
PSO $33.7  million of 4.875%  unsecured  tax exempt  PCRBs.  The bonds mature in
fifteen years but will be subject to  remarketing  and an interest rate reset in
five years.  In August  1999,  the proceeds  were used to refund  $33.7  million
aggregate  principal  amount  of  outstanding  Oklahoma   Environmental  Finance
Authority 5.9% Series A bonds due December 1, 2007.

      On  September  1, 1999,  $40  million  of  SWEPCO's  6.125%  Series W FMBs
matured.

      On February 16, 2000,  CPL sold $150  million of unsecured  floating  rate
notes.  The bonds will have a two-year  final maturity of February 22, 2002, but
may be redeemed at par after one year. The interest rate will reset quarterly at
the then current  three-month  LIBOR plus 0.45%. The initial rate, which was set
February 18,  2000,  was 6.56%.  Net proceeds of $149.6  million will be used to
refund  $100  million  of FMBs  maturing  April 1, 2000 and  repay a portion  of
short-term  debt. CPL is replacing FMBs with unsecured debt, which provides more
financial flexibility as CPL unbundles its electric operations.

      In the first  quarter  of 2000,  SWEPCO  sold $150  million  of  unsecured
floating rate notes.  The notes will have a two-year  final maturity at March 1,
2002,  but may be redeemed at par after one year.  The interest  rate will reset
quarterly at the then current  three-month  LIBOR plus 0.23%.  The initial rate,
which was set March 1, 2000,  was 6.34%.  Net proceeds of $149.6 million will be
used to refund $45 million of FMBs  maturing  April 1, 2000 and  repayment  of a
portion of outstanding short-term indebtedness.

      Short-Term Financing and Accounts Receivable Factoring
      The CSW  System uses  short-term debt, primarily commercial paper, to meet
fluctuations  in working capital  requirements  and other interim capital needs.
CSW has established a system money pool to coordinate  short-term borrowings for
certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In
addition,  CSW  also  incurs  borrowings  for  other  subsidiaries  that are not
included in the money pool. As of December 31, 1999,  CSW had  revolving  credit
facilities  totaling $1.4 billion to back up its commercial  paper  program.  At
December 31, 1999, CSW had $1.3 billion  outstanding  in short-term  borrowings.
The maximum amount of short-term  borrowings  outstanding during the year, which
had a weighted  average  interest  yield for the year of 5.5%,  was $1.4 billion
during December 1999.

      CSW Credit  purchases,  without recourse,  the accounts  receivable of the
U.S. Electric Operating  Companies and certain  non-affiliated  electric utility
companies.  The sale of accounts receivable provides the U.S. Electric Operating
Companies with cash  immediately,  thereby  reducing  working  capital needs and
revenue  requirements.  In addition,  CSW Credit's  capital  structure  contains
greater leverage than that of the U.S. Electric  Operating  Companies,  so CSW's
cost of  capital is  lowered.  CSW Credit  issues  commercial  paper to meet its
financing  needs. At December 31, 1999, CSW Credit had a $1.2 billion  revolving
credit agreement,  secured by the assignment of its receivables,  to back up its
commercial paper program,  which had $754 million outstanding.  The $1.2 billion
facility  will expire on June 23, 2000.  The maximum  amount of such  commercial
paper  outstanding  during the year, which had a weighted average interest yield
for the year of 5.3%, was $1.0 billion during August 1999.

      CSW Energy and CSW International
      CSW Energy has  authority  from the SEC to expend up to $250  million  for
general development  activities related to qualifying facilities and independent
power  facilities.  CSW Energy may seek specific  authority to spend  additional
amounts on certain projects  subject to limitations  contained in the AEP merger

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agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES,  for a discussion
of CSW's  investments  and  commitments  in CSW Energy  projects at December 31,
1999.

      In January  1997,  CSW received  authority  from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated  retained  earnings on
EWG or FUCO  investments,  subject to certain  restrictions.  As of December 31,
1999, CSW had invested an amount equal to 54% of consolidated retained earnings,
as defined by Rule 53 of the Holding  Company Act, on EWG and FUCO  investments.
For a  description  of  certain  restrictions  on the  ability  of CSW  and  its
subsidiaries  to make  capital  expenditures  in respect of QFs and  independent
power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.


RECENT DEVELOPMENTS AND TRENDS

PROPOSED AEP MERGER

      On December 22, 1997, CSW and AEP announced that their boards of directors
had  approved a  definitive  merger  agreement  for a tax-free,  stock-for-stock
transaction. The combined company would serve more than 4.7 million customers in
11 states and  approximately 4 million  customers  outside the United States. On
May 27, 1998, AEP shareholders approved the issuance of the additional shares of
stock  required  to complete  the  merger.  On May 28,  1998,  CSW  stockholders
approved the merger.  On December 16, 1999, the merger  agreement was amended to
extend the term of the agreement to June 30, 2000.  After June 30, 2000,  either
party may terminate the merger agreement if the merger has not been consummated.

      AEP is subject  to the  information  requirements  of the  Securities  and
Exchange Act of 1934, as amended, and in accordance therewith, files reports and
other information with the SEC. For additional  information  related to AEP, see
AEP's Current  Reports on Form 8-K, its  Quarterly  Reports on Form 10-Q and its
Annual Report on Form 10-K and the documents referenced therein.

      Under the AEP merger agreement, each common share of CSW will be converted
into 0.6 share of AEP common stock. CSW stockholders  will own approximately 40%
of the combined  company.  CSW plans to continue to pay  dividends on its common
stock  until the closing of the AEP Merger at  approximately  the same times and
rates  per  share as in 1999,  subject  to the  continuing  evaluation  of CSW's
earnings, financial condition and other factors by the CSW board of directors.

      Under the AEP merger  agreement,  there will be no changes  required  with
respect to the public debt issues, the outstanding  preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.

      AEP and CSW anticipate net savings related to the merger of  approximately
$2  billion  over a  10-year  period  from the  elimination  of  duplication  in
corporate and administrative  programs,  greater  efficiencies in operations and
business processes, increased purchasing efficiencies and the combination of the
two work forces.  As a result of the approved  settlement and agreement with the
state commissions in CSW and AEP's respective service  territories,  AEP and CSW
have agreed to guarantee that  approximately 55% of those savings will be passed
through to their  customers.  AEP and CSW  continue  to seek  opportunities  for
additional  savings and expect to realize  significant  additional savings based
upon the work of the  merger  transitions  teams  over the last two  years.  The
preceding discussion constitutes  forward-looking information within the meaning
of Section 21E of the Exchange Act.  Actual results may differ  materially  from
such projected information. See FORWARD-LOOKING INFORMATION.

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      The  electric  systems of AEP and CSW will  operate on an  integrated  and
coordinated  basis as required by the Holding  Company  Act. AEP and CSW project
fuel savings of  approximately  $98 million over a 10-year period resulting from
the coordinated operation of the combined company,  which will be passed through
to customers.

      The AEP merger agreement  contains  covenants and agreements that restrict
the manner in which the parties may operate their  respective  businesses  until
the time of closing of the merger.  In  particular,  without  the prior  written
consent of AEP, CSW may not engage in a number of  activities  that could affect
its sources  and uses of funds.  Pending  closing of the  merger,  CSW's and its
subsidiaries'  strategic investment activity,  capital expenditures and non-fuel
operating  and  maintenance  expenditures  are limited to  specific  agreed upon
projects and in agreed upon amounts.  In addition,  prior to consummation of the
merger, CSW and its subsidiaries are restricted from:

-  Issuing shares of common stock other than pursuant to employee benefit plans;

-  Issuing  shares  of  preferred  stock or  similar  securities  other  than to
   refinance  existing  obligations or to fund  permitted  investment or capital
   expenditures; and

-  Incurring indebtedness other than pursuant to existing credit facilities,  in
   the ordinary  course of business,  or to fund  permitted  projects or capital
   expenditures. These limitations do not preclude CSW and its subsidiaries from
   making investments and expenditures in amounts previously budgeted.

      Cook Nuclear Plant
      On June 25, 1999, AEP announced a  comprehensive  plan to restart the idle
Cook  nuclear  power  plant.  Unit 2 is  scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement  follows a comprehensive  systems  readiness review of all
operating  systems at Cook nuclear  power plant and a  cost/benefit  analysis of
whether  to  restart  the  plant  or shut it down  completely.  Plant  officials
originally shut down both units of the facility, located in Bridgman,  Michigan,
in September 1997 because of questions raised during a design  inspection by the
NRC.  AEP  estimated  that  its  costs  to  restart  the idle  plant  should  be
approximately  $574  million,  of which  $373  million  has been  spent  through
December 31, 1999.

      On February 24,  2000,  AEP  announced a  three-week  delay in the planned
April 1, 2000 restart.  The delay is due to issues encountered during testing of
equipment necessary for core reload and power operations of its Cook Unit 2. The
testing process  continues and may still encounter  additional  items that could
extend the delay.

      Merger Regulatory Approvals
      The merger is  conditioned,  among  other  things,  upon the  approval  of
several state and federal  regulatory  agencies.  Some of the merger  conditions
cannot be waived.

      State Regulatory Commissions
      The U.S.  Electric  Operating  Companies  have  received  approval for the
merger  from  their  respective   state  regulatory   commissions  in  Arkansas,
Louisiana, Oklahoma and Texas.

      FERC
      On April 30, 1998,  AEP and CSW jointly  filed a request with the FERC for
approval of their proposed  merger.  On May 25, 1999, AEP and CSW announced they
had reached a settlement  with the FERC trial staff  resolving  competition  and
rate issues that related to the proposed  merger.  On July 13, 1999, AEP and CSW
reached an  additional  settlement  with the FERC trial staff  resolving  energy

                                       8
<PAGE>

exchange  pricing  issues.  The  settlements  were  submitted  to the  FERC  for
approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999,
the ALJ who presided over the FERC merger hearing issued a recommendation to the
FERC that the merger be approved  and found that the  proposed  merger is in the
public interest.

      On March 15, 2000, the FERC conditionally approved the merger.  Conditions
placed on the merger include:

-        Transfer  operational  control  of AEP's  east  and  west  transmission
         systems to a  fully-functioning,  FERC-approved  regional  transmission
         organization  by December  15, 2001,  which is the same  implementation
         date  included in the FERC's  general  order for regional  transmission
         organizations that applies to all transmission-owning utilities.

-        Two interim  transmission-related  mitigation  measures  consisting  of
         market monitoring and independent  calculation and posting of available
         transmission   capacity  to  monitor  the   operation   of  AEP's  east
         transmission system.

-        Divestiture  of 550 MW of  generating  capacity  comprised of 300 MW of
         capacity in SPP and 250 MW of capacity in ERCOT.  The FERC will require
         AEP and CSW to divest their entire ownership interest in the generating
         facilities  that  are to be  divested.  Alternatively,  AEP and CSW may
         choose to divest the same or greater  amount of capacity from different
         generating  plants in their entirety.  However,  such generating plants
         must be of similar  cost,  operation  and location  characteristics  of
         generating plants AEP and CSW originally proposed.

-        AEP and CSW must complete  divestiture  of the ERCOT  capacity by March
         15, 2001 and divestiture of the SPP capacity by July 1, 2002.

      The  FERC  found  that  certain  energy  sales in SPP and  ERCOT  would be
reasonable and effective  interim  mitigation  measures until  completion of the
required SPP and ERCOT divestitures.  The FERC will require the proposed interim
energy sales to be in effect when the merger is consummated.

      AEP and CSW must notify the FERC by March 30, 2000 whether they accept the
condition  that  they  transfer   operational   control  of  their  transmission
facilities  to  a   fully-functioning,   FERC-approved   regional   transmission
organization  by  December  15,  2001 and the  condition  requiring  the interim
mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must
make a compliance  filing at least 60 days prior to  consummation  of the merger
describing their plan to implement the interim mitigation measures.  AEP and CSW
intend to make this compliance  filing on a date that would permit completion of
the merger in the second  quarter of 2000.  AEP and CSW believe they can address
the conditions.

      NRC
      On June 19, 1998, CPL filed a license  transfer  application  with the NRC
requesting  the NRC's  consent  to the  indirect  transfer  of  control of CPL's
interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue
to own its  25.2%  interest  in STP,  and  CPL's  name  would  remain on the NRC
operating  license.  On November 5, 1998, the NRC approved the license  transfer
application  with a condition  that the merger must be completed by December 31,
1999. The NRC has extended the condition relating to completion of the merger to
June 30, 2000.

      Other Federal
      On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger.  The SEC merger filing requests approval of
the merger and related  transactions and outlines the expected  combined company
benefits of the merger to AEP and CSW  customers and  shareholders.  Since then,

                                       9
<PAGE>

AEP and CSW have filed several  amendments to the  application.  Several parties
have filed petitions opposing the proposed merger at the SEC which have not been
withdrawn.

      On July 29, 1999,  applications  were made with the FCC to  authorize  the
transfer  of control of  licenses  of several  CSW  entities to AEP. In February
2000,  the FCC  authorized  the  transfer  which  will  be  effective  upon  the
completion of the proposed merger.

      On July 26,  1999,  AEP and CSW  submitted  filings to the  Department  of
Justice  under the  Hart-Scott-Rodino  Antitrust  Improvements  Act of 1976.  On
February 2, 2000,  AEP and CSW announced  that their  proposed  merger  received
antitrust clearance from the Department of Justice.

      United Kingdom
      CSW  has a 100%  interest  in  SEEBOARD,  and AEP  has a 50%  interest  in
Yorkshire.  The proposed merger of CSW into AEP would result in common ownership
of these United  Kingdom  entities.  On January 25, 2000,  the United  Kingdom's
Department  of Trade and Industry  approved  the common  ownership of the United
Kingdom entities that would result from the proposed merger,  subject to certain
conditions  concerning the separate  operation of their respective  distribution
and supply businesses.

      Other
      On April 20,  1999,  AEP reached a  settlement  with the  Indiana  Utility
Regulatory  Commission staff addressing  matters  pertinent to Indiana regarding
the proposed  merger.  The Indiana Utility  Regulatory  Commission  approved the
settlement  on  April  26,  1999.  The  settlement  agreement  resulted  from an
investigation  of the  proposed  merger  between  AEP and CSW  initiated  by the
Indiana Utility Regulatory Commission.

      On April 21, 1999,  AEP and CSW announced  that they had reached  separate
settlements  with six wholesale  customers  that address  issues  related to the
proposed merger.

      On April 28, 1999,  AEP and CSW announced  that they ratified a settlement
agreement with local unions of the IBEW  representing  employees of AEP and CSW.
The  settlement  agreement  covered issues related to the pending merger between
AEP and CSW. As part of the  settlement,  the IBEW local  unions have  withdrawn
their opposition to the merger.

      On May 26, 1999,  AEP and CSW announced that they had reached a settlement
agreement  with the  Kentucky  Attorney  General and several  AEP  customers  in
Kentucky  addressing  matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky  Public  Service  Commission  has approved the
settlement.

      On August  6,  1999,  AEP  announced  that it had  ratified  a  settlement
agreement  with local  unions of the UWUA  representing  employees  of AEP.  The
settlement agreement covered issues raised in the pending merger between AEP and
CSW.  As part of the  settlement,  the UWUA  local  unions  will not  oppose the
merger.

      On October  21,  1999,  the Public  Utility  Commission  of Ohio  issued a
decision  stating  that it will notify the FERC that it is no longer  opposed to
AEP's proposed merger with CSW and that it will no longer seek conditions to the
merger.

      AEP and CSW also have reached settlements with the Missouri Public Service
Commission,  the  Michigan  Public  Service  Commission  and  various  wholesale
customers and intervenors in the FERC merger proceeding.

                                       10
<PAGE>

      Completion of the Merger
      AEP and CSW have  targeted  consummation  of the AEP  Merger in the second
quarter  of 2000.  The  merger is  conditioned,  among  other  things,  upon the
approval  of  several  state  and  federal  regulatory  agencies.  All  of  such
approvals, except from the SEC, have been obtained. The transaction must satisfy
many  conditions,  including  the  condition  that it must be accounted for as a
pooling of interests.  The parties may not waive some of these  conditions.  AEP
and CSW continue the process of seeking regulatory  approvals,  but there can be
no assurance as to when, on what terms or whether the required approvals will be
received.  After  June 30,  2000,  either  CSW or AEP may  terminate  the merger
agreement  if all of the  conditions  to its  obligation  to close have not been
satisfied. There can be no assurance that the AEP Merger will be consummated.

      Merger Costs
      As of December 31, 1999,  CSW had deferred $43 million in costs related to
the AEP  Merger on its  consolidated  balance  sheet,  which  will be charged to
expense if AEP and CSW do not complete their proposed  merger.  If the merger is
consummated,  such costs would be recovered in rates  pursuant to merger sharing
provisions contained in the state settlement agreements.

      See NOTE 15. PROPOSED AEP MERGER.

COMPETITION AND INDUSTRY CHALLENGES

      Competitive  forces at work in the electric utility industry are affecting
the CSW System and other electric utilities,  generally.  Increased  competition
facing  electric  utilities  is  driven  by  complex  economic,   political  and
technological factors. These factors have resulted in legislative and regulatory
initiatives  that are likely to result in even greater  competition  at both the
wholesale  and retail  levels in the  future.  As  competition  in the  industry
increases,  the U.S. Electric  Operating  Companies will have the opportunity to
seek new customers and at the same time be at risk of losing  customers to other
competitors.  Additionally,  the U.S. Electric Operating Companies will continue
to compete with suppliers of alternative  forms of energy,  such as natural gas,
fuel oil and coal, some of which may be less expensive than electricity.  In the
United  Kingdom,  the  franchised  electricity  supply  business  opened to full
competition on a phased-in basis beginning  October 1998. As a result,  SEEBOARD
is able to seek new customers  while  risking the loss of existing  customers to
other competitors.  CSW believes that,  overall,  its prices for electricity and
the quality and  reliability of its service  currently place it in a position to
compete  effectively  in  the  energy  marketplace.   (The  foregoing  statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange  Act.  Actual  results  may  differ   materially  from  such  projected
information due to changes in the underlying  assumptions.  See  FORWARD-LOOKING
INFORMATION).  See RATES AND  REGULATORY  MATTERS  for a  discussion  of several
current issues affecting the CSW System.

      Electric industry  restructuring and the development of competition in the
generation and sale of electric power requires  resolution of several  important
issues, including, but not limited to:

-     Who  will  bear  the  costs  of  prudent  utility  investments  or past
      commitments incurred under traditional  cost-of-service regulation that
      will not be economically viable in a competitive environment, sometimes
      referred to as stranded costs;

-     Whether all customers have access to the benefits of competition;

-     How, and by whom, the rules of competition will be established;

                                       11
<PAGE>

-     What the impact of deregulation will be on conservation, environmental
      protection and other regulator-imposed programs; and

-     How transmission system reliability will be ensured.

      The  degree  of  risk to CSW and the  U.S.  Electric  Operating  Companies
associated  with  various  federal and state  restructuring  proposals  aimed at
resolving  any or all of these  issues  will  vary  depending  on many  factors,
including the proposals'  competitive position and treatment of stranded utility
investment,  primarily at CPL,  resulting from such proposals.  In CSW's service
territory,  the states of Arkansas and Texas have passed legislation  addressing
most of these issues  while work  continues on the  remaining  issues.  The U.S.
Electric  Operating  Companies  believe  they  are  in  a  position  to  compete
effectively in a deregulated,  more competitive marketplace.  However, if events
and  circumstances  arise in the future that would indicate all costs previously
incurred are not recoverable from customers,  then the U.S.  Electric  Operating
Companies  may  be  required  by  existing  accounting  standards  to  recognize
potentially  significant losses from unrecovered costs. (The foregoing statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange  Act.  Actual  results  may  differ   materially  from  such  projected
information due to changes in the underlying  assumptions.  See  FORWARD-LOOKING
INFORMATION).  See Regulatory Accounting for additional information. See NOTE 2.
LITIGATION  AND  REGULATORY   PROCEEDINGS  -  Electric   Utility   Restructuring
Legislation for information on electric utility restructuring.

      Wholesale Electric Competition in the United States
      The Energy Policy Act,  which was enacted in 1992,  significantly  altered
the way in which  electric  utilities  compete.  The Energy  Policy Act  created
exemptions from regulation under the Holding Company Act and permits  utilities,
including registered utility holding companies and non-utility companies, to own
EWGs.

      EWGs are  wholesale  power  producers  that are free from most federal and
state regulation,  including  restrictions  under the Holding Company Act. These
provisions  enable broader  participation in wholesale power markets by reducing
regulatory hurdles to such participation.

      The Energy  Policy Act also allows the FERC, on a  case-by-case  basis and
with certain restrictions,  to order wholesale  transmission access and to order
electric utilities to enlarge their transmission systems. A FERC order requiring
a transmitting  utility to provide wholesale  transmission  service must include
provisions  generally that permit the utility to recover from the FERC applicant
all of the costs incurred in connection with the  transmission  services and any
enlargement of the transmission system and associated services.

      Wholesale  energy  markets,  including the market for  wholesale  electric
power, have been  increasingly  competitive since enactment of the Energy Policy
Act. The U.S. Electric Operating  Companies must compete in the wholesale energy
markets  with other public  utilities,  cogenerators,  QFs,  EWGs and others for
sales of electric power.  While CSW believes the Energy Policy Act will continue
to make the wholesale markets more competitive, CSW is unable to predict how the
Energy Policy Act will ultimately impact the U.S. Electric Operating Companies.

      FERC Orders No. 888 and No. 889
      The FERC issued Order No. 888 in 1996,  which is the final comparable open
access  transmission  service rule. The provisions of FERC Order No. 888 provide
for comparable  transmission  service between  utilities and their  transmission

                                       12
<PAGE>

customers by requiring  utilities to take transmission  service under their open
access tariffs for wholesale  sales and purchases and by requiring  utilities to
rely on the same transmission information that their transmission customers rely
on to make wholesale purchases and sales.

      In addition,  the Texas Commission  adopted amendments to its transmission
rule in 1999 that  requires  100% postage  stamp pricing in ERCOT which began in
September  1999.  Postage  stamp  pricing is fixed rate  pricing  regardless  of
transmission  distance  traveled.  CPL  and  WTU  began  recording  transmission
revenues and expenses in  accordance  with the Texas  Commission's  transmission
rule on January 1, 1997.

      In 1996, the FERC issued Order No. 889 requiring transmitting utilities to
establish and operate an OASIS for the  dissemination  of information  regarding
available transfer  capability for their respective  transmission  systems.  The
OASIS is an on-line  information system that provides the same information about
the  utility's  transmission  system  to all  transmission  customers.  The U.S.
Electric Operating  Companies utilize,  and participate in the OASIS systems for
ERCOT and SPP.  FERC Order No. 889 also created  standards of conduct  requiring
utilities to operate any wholesale  power sales business  separately  from their
transmission  operations.  The  standards of conduct are designed to ensure that
utilities and their  affiliates,  as sellers of power, do not have  preferential
access to information about wholesale transmission prices and availability.

      Independent System Operators
      On  December 20, 1999,  the FERC issued Order No.  2000 relating to  RTOs.
FERC Order No. 2000  describes  the  characteristics  that an RTO should have as
well as the functions an RTO should perform.  Every jurisdictional  utility must
file at the FERC either:

-  A proposal to participate in an RTO;

-  A petition asking whether a proposed transmission entity would qualify as an
   RTO, or

-  An alternative  filing  describing the utility's efforts to participate in an
   RTO and the reasons those efforts were unsuccessful.

      Such filings must be made by October 15, 2000 for  utilities  that are not
members of a FERC  approved ISO.  Utilities  that are members of a FERC approved
ISO have until January 15, 2001, to file with the FERC demonstrating  compliance
of their ISOs with FERC Order 2000.  On December 30, 1999,  the SPP filed at the
FERC a proposal for recognition as an ISO and an RTO. In addition,  on September
7, 1999, the SPP submitted various tariff revisions to the FERC that resulted in
an SPP open access  tariff  offering all of the services  required by FERC Order
No. 888 as of February 1, 2000.

      Retail Electric Competition in the United States
      Most states  have  considered  the  adoption  of various  legislative  and
regulatory  initiatives to restructure the electric  utility  industry and enact
retail  competition,  and several  states have already passed  legislation  that
requires the implementation of retail access for customers.

      Industry Restructuring Initiatives in Arkansas, Oklahoma, Louisiana and
      Texas
      Several initiatives to restructure the electric utility industry and enact
retail competition  legislation have been undertaken in the four states in which
the U.S. Electric Operating Companies operate. Arkansas, Oklahoma and Texas have
enacted restructuring legislation.

                                       13
<PAGE>


      Arkansas
      In April 1999,  legislation was enacted for electric utility restructuring
in Arkansas. Some major provisions of that legislation include:

-        Retail competition begins January 1, 2002. The Arkansas  Commission can
         delay implementation, but not beyond June 30, 2003.

-        Companies with transmission lines must operate those facilities through
         a transmission organization approved by FERC.

-        A one-year  rate freeze after  restructuring  will be  implemented  for
         default  service  customers of companies that do not apply for stranded
         cost  recovery.  A  three-year  rate  freeze  will be  implemented  for
         companies with stranded costs.

-        The Arkansas Commission has authority to address market power issues.

      Oklahoma
      In  1997,  the  Oklahoma  legislature  passed  restructuring   legislation
 providing  for retail  access by July 1, 2002.  That  legislation  called for a
 number of  studies  to be  completed  on a  variety  of  restructuring  issues,
 including  independent system operator,  technical,  financial,  transition and
 consumer issues.  The study on independent system operator issues was completed
 in January 1998.

      In  1998,  the  Oklahoma   Legislature   passed  Senate  Bill  888,  which
 accelerated  the schedule for  completion of the  remaining  studies to October
 1999. Those studies were conducted under the direction of the Legislative Joint
 Electric  Utility Task Force.  The task force  organized  the study effort into
 several working groups,  which were directed to evaluate  assigned  issues.  On
 October  1,  1999,  the  task  force  completed  its  report  to  the  Oklahoma
 Legislature  based on the work  performed by these working  groups.  The report
 primarily  is a  compilation  of the  positions  taken by the  various  parties
 participating  in the  working  groups.  The  information,  in the  report,  is
 expected  to be used in the  development  of  additional  industry  legislation
 during the 2000 legislative session.

      Several additional  electric industry  restructuring bills have been filed
 in  the  2000  Oklahoma  Legislative  session.  The  proposed  bills  generally
 supplement  the  industry  restructuring   legislation  previously  enacted  in
 Oklahoma. CSW is unable to predict what, if any, additional legislation will be
 passed on industry restructuring.

      Louisiana
      In 1998, a special  legislative  committee created by the Louisiana Senate
 studied  the  impact  of  retail  competition  on the  state of  Louisiana.  No
 legislation  was enacted as a result of that effort.  In addition,  during 1998
 and  1999,   the   Louisiana   Commission   conducted  a  proceeding  to  study
 restructuring  and retail  competition.  Since the  Louisiana  Commission  is a
 constitutionally  created body, it can implement industry  restructuring on its
 own without additional  legislation.  Parties submitted comments,  and hearings
 were held on a number of specific restructuring topics. Also, as a part of that
 proceeding,  utilities  filed rate  unbundling  information  with the Louisiana
 Commission staff.

      As a result of those hearings, the Louisiana Commission staff released its
 report on  industry  restructuring,  including  its  recommendations  regarding
 retail competition in Louisiana.  In its report, the Louisiana Commission staff
 recommended  that electric  industry  restructuring  should not proceed at this

                                       14
<PAGE>

 time  because  it is  not  in  the  public  interest.  However,  the  Louisiana
 Commission staff proposed a restructuring plan as an alternative,  in the event
 the  Louisiana  Commission  decides  to move  forward  with  electric  industry
 restructuring  and  competition.   The  Louisiana  Commission  voted  to  begin
 additional study and analysis of the issues  associated with  restructuring and
 has adopted a  procedural  schedule  that will result in a final  restructuring
 plan by January 1, 2001.

      Texas
      On June 18,  1999,  legislation  was  signed  into law in Texas  that will
restructure the electric utility industry in that state. The new law gives Texas
customers of  investor-owned  utilities the opportunity to choose their electric
provider  beginning January 1, 2002. The legislation also provides a rate freeze
until  that date  followed  by a 6% rate  reduction  for  residential  and small
commercial customers,  additional rate reductions for low income customers and a
number of  customer  protections.  Rural  electric  cooperatives  and  municipal
electric systems can choose whether to participate in retail competition.

      Some of the key provisions of the legislation include:

-     Each utility must unbundle its business activities into a retail electric
      provider, a power generation company and a transmission and distribution
      utility.  Beginning January 1, 2002, retail customers of investor-owned
      electric companies will be able to choose their retail electric provider.
      The affiliated retail  electric provider of the utility that serves the
      customer on December 31, 2001 will serve the customer unless the customer
      chooses another retail electric provider.  Delivery of the electricity
      will continue to be the responsibility of  the transmission and
      distribution utility company at regulated prices.

-     Retail electric  cooperatives and municipal electric systems can choose
      whether to participate in retail competition.

-     Investor-owned utilities must freeze their rates effective September 1,
      1999,   through   the  start  of   competition   on  January  1,  2002.
      Investor-owned  utilities  at  January  1,  2002 will  lower  rates for
      residential and small commercial  customers by 6%. This reduced rate is
      known  as the  "Price  to  Beat,"  which  will be  available  to  those
      customers for five years.

-     The  legislation  establishes  a system  benefit  fund  for  low-income
      customer  assistance,  customer  education and to offset  reductions in
      school property tax revenues.  The fund will be funded through a charge
      on retail electric providers that can be set by the Texas Commission up
      to $0.65 per MWH.

-     Electric utilities are allowed to recover all of their net, verifiable,
      non-mitigable  stranded  costs that otherwise may not be recoverable in
      the future  competitive  market. A majority of those regulatory  assets
      and stranded costs can be recovered through securitization,  which is a
      financing to recover generation-related  regulatory assets and stranded
      costs  through the use of debt that lowers the carrying  cost of assets
      compared to conventional utility financing methods.

-     Each year during the 1999  through 2001 rate freeze  period,  utilities
      with stranded costs are required to apply any earnings in excess of the
      most  recently  approved cost of capital (if issued on or after January
      1, 1992) to reduce stranded  costs.  Utilities  without  stranded costs
      must  either  flow  such  amounts  back to  customers  or make  capital
      expenditures to improve  transmission or distribution  facilities or to
      improve air quality.

                                       15
<PAGE>

-     The affiliated power generation  company of the utility that serves the
      customer on December 31, 2001 will be required to auction  entitlements
      to at least 15% of its generating  capacity for five years or until 40%
      of the residential and small  commercial  consumption of electricity in
      the utility's service area is provided by nonaffiliated retail electric
      providers.

-     Grandfathered   power   plants,   those  built  or  started   prior  to
      implementation  of the  Texas  Clean  Air  Act  of  1972,  must  reduce
      emissions  of  nitrogen  oxide by 50% and sulfur  dioxide by 25% by May
      2003. The law also requires an additional  2,000 MW of renewable  power
      generation in Texas by 2009 from retail electric providers, municipally
      owned utilities and electric cooperatives.

-     A legislative  oversight  committee will monitor the implementation and
      effectiveness    of   electric   utility    restructuring    and   make
      recommendations for any necessary further legislative action.

      The  Texas  Commission  has  established  numerous  rulemakings  and other
processes  to  address  various  issues   associated   with  the   restructuring
legislation and to provide for further guidance regarding  implementation of the
restructuring.

      Restructuring Readiness
      CSW  has  initiated  a  restructuring  readiness  effort  to  prepare  for
competition in the states served by the U.S. Electric Operating Companies.  This
effort includes the development and implementation of a business separation plan
and the system and process  changes  required to prepare  for  competition.  The
business  separation plan filed with the Texas  Commission in January,  2000, is
discussed  below.  An analysis of the  processes  and systems in place and those
needed in the future has been completed, and CSW is beginning the implementation
phase of the restructuring readiness effort.

      Texas Business Separation Plan
      On January 10,  2000,  CSW filed with the Texas  Commission  its  business
separation  plan  required  by  the  Texas   Legislation  on  electric   utility
restructuring.  The business  separation plan describes the approach proposed by
CSW to unbundle the business  activities of each of its Texas Electric Operating
Companies  into  three  entities:  the  PGC,  the EDC and the REP.  Under  CSW's
business  separation  plan, all three new entities would continue to be owned by
CSW.  The PGC would own a CPL PGC and a WTU PGC.  The EDC would own CPL, WTU and
SWEPCO EDCs. Although the plan is directed to meet the requirements of the Texas
Legislation,  CSW expects the plan will also meet the restructuring requirements
anticipated to be enacted in Arkansas, Louisiana and Oklahoma.

      As a result of rulings by the Texas  Commission  on March 16, 2000,  CSW's
unbundling will include full  structural  separations for CPL and WTU by January
1, 2002.  This includes the structural  separation of the management and control
of the EDCs from the PGCs as well as the creation of a separate REP. For CPL and
WTU,  unbundling will require that legal  ownership of generation,  transmission
and  distribution  assets will be separated and  transferred to or vested in new
entities,  the CPL and WTU PCGs  and  EDCs,  respectively.  The CPL and WTU EDCs
would be regulated utilities under Texas law. Office systems,  computer systems,
accounting  systems and similar  equipment  would be segregated  and an employee
code of conduct would restrict  information  exchanges  between employees of the
regulated  entities  and  the  other  business  units.  Because  SWEPCO  also is
regulated in Arkansas and Louisiana,  the Texas Commission deferred its decision
on the  appropriate  separation  for SWEPCO  until  interested  parties  have an
opportunity to discuss issues that could result in a separation  plan acceptable
in each state.  CSW believes that its total cost to restructure  the CSW System,
which includes costs for the EDC, PGC and REP in implementing retail competition
in its service territory is approximately  $200 million,  including  refinancing
costs  of  approximately  $70  million.   Recognition  in  rates  of  the  Texas

                                       16
<PAGE>

jurisdictional  EDC portion of these costs will be sought in the Texas  Electric
Operating  Companies'  cost  unbundling  filings to establish  new EDC regulated
rates during the year 2000.

      Code of Conduct Under Customer Choice
      Legislation  was enacted in Arkansas and Texas in 1999 to restructure  the
electric utility  industry in those states.  These two new laws require that the
CSW System begin to operate its utilities as separate power generation entities,
retail electric  providers and  transmission and  distribution  entities.  Power
generation  entities  and  retail  electric  providers  will  be  non-regulated;
transmission  and  distribution  entities will  continue to be regulated.  On or
before  September  1,  2000,  the Texas  operations  portion of each of the U.S.
Electric  Operating  Companies will  functionally  separate their  regulated and
non-regulated utility activities.

      The  purpose of these  laws and the  separation  they  impose is to create
financial  and  informational  firewalls  between  regulated  and  non-regulated
activities of the CSW System so that competitive sensitive information cannot be
shared by regulated and non-regulated entities.

      In order to comply with the new Arkansas and Texas laws,  the  Registrants
will follow a "code of  conduct,"  which  requires  the  non-regulated  business
activities to be separate from the regulated  activities.  Transactions  between
the regulated and non-regulated activities are subject to an information-sharing
"firewall" and the requirement to act on an arm's-length basis.

      Other
      Management   cannot  predict  the  ultimate  outcome  of  the  initiatives
concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma
and  Texas,  or their  ultimate  impact  on  results  of  operations,  financial
condition,  or  competitive  position  of CSW and the  U.S.  Electric  Operating
Companies.

      Holding Company Act and Electric Industry Restructuring Legislation
      In 1995, the SEC issued a report to the U.S. Congress advocating repeal of
the Holding  Company Act, which  restricts  certain  activities of CSW and other
registered holding companies,  finding the Holding Company Act anachronistic and
duplicative of other federal and state regulatory regimes.

      HR 2944, "The Electricity  Competition and Reliability  Act," was reported
by the House Commerce  Subcommittee  on Energy and Power on October 27, 1999. If
enacted,  the  legislation  would repeal the Holding  Company Act twelve  months
after the bill is signed into law and  clarifies  that states have the authority
to order retail competition without a federal mandate.

      The U.S. Congress  continues to consider  legislative  initiatives,  which
provide  for the  restructuring  and/or  deregulating  of the  electric  utility
industry. Several similar bills have been introduced in the 106th Congress. Most
of the bills seek to clarify state  authority to mandate retail  choice,  repeal
the Holding  Company Act, repeal the Public Utility  Regulatory  Policies Act of
1978,  expand FERC authority over public power  entities,  address  transmission
reliability and other issues.  Management cannot predict the ultimate outcome of
any legislative initiatives.

      Regulatory Accounting
      Consistent with industry practice and the provisions of SFAS No. 71, which
allows for the recognition of regulatory  assets,  the U.S.  Electric  Operating
Companies have recognized  significant  regulatory assets and liabilities.  As a
result of  legislation  passed in  Arkansas  and Texas,  the retail  electricity
generation  business of CPL, SWEPCO and WTU, in those  jurisdictions,  no longer
meets the criteria to apply SFAS No. 71.  Instead,  the  principles  of SFAS No.

                                       17
<PAGE>

101, as interpreted by EITF 97-4,  have been applied.  Management  believes that
CPL,  SWEPCO and WTU currently  meet the criteria for following  SFAS No. 71 for
the remainder of their electric utility business.

      Additional  non-cash write-offs of regulatory assets and liabilities would
be required if additional  portions of the electric utility business of the U.S.
Electric  Operating  Companies no longer meet the criteria for applying SFAS No.
71, absent a means of recovering such assets or settling such  liabilities.  For
additional  information  regarding regulatory  accounting,  reference is made to
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

      Securitization of Generation-related Regulatory Assets and Stranded Costs
      Electric  utilities under  the Texas  Legislation are  allowed to  recover
generation-related  regulatory  assets and stranded costs that otherwise may not
be  recoverable  in the future  competitive  market.  All or a majority of those
costs can be refinanced through  securitization,  which is a financing structure
designed  to  provide  lower  financing  costs  than is  available  through  the
conventional  utility cost of capital model.  The  securitized  amounts are then
recovered through a non-bypassable  wires charge. On October 18, 1999, CPL filed
an  application  with the Texas  Commission  to securitize  approximately  $1.27
billion of its retail generation-related regulatory assets and approximately $47
million in other qualified costs. The Texas Commission held hearings on December
7 and 8, 1999 on CPL's securitization application.

      On  February  10,  2000,  the  Texas  Commission  tentatively  approved  a
settlement,  which will permit CPL to securitize  approximately  $764 million of
regulatory  assets.  The Texas Commission is expected to grant final approval by
March 27, 2000. If approval is received from the Texas  Commission,  CPL expects
to issue the  securitization  bonds in 2000,  depending on market conditions and
the timing of any appeals of the Texas Commission order.

      The  settlement  calls  for  CPL  to  reduce  its  proposed  amount  to be
securitized  from $1.27  billion to  approximately  $764  million of  regulatory
assets plus an estimated $29 million of other  qualified  costs.  The settlement
also calls for $290 million of the amount originally requested to be included in
the  calculation  of  stranded  costs  in  CPL's  April  2000  transmission  and
distribution  cost filing.  This filing will establish  stranded costs, of which
75% can be securitized and 25% can be recovered through a competitive transition
charge.

      The  securitization  amount was  reduced by $186  million  from the amount
originally  requested to reflect customer  benefits  associated with accumulated
deferred  income taxes.  CPL previously had proposed to flow these benefits back
to customers over a 14-year term of the bonds.

      CPL could issue the bonds associated with securitization as early as April
2000,  depending on timing of receipt of a  non-appealable  financing order from
the Texas  Commission  and  depending  on market  conditions.  A second phase of
securitization  could  occur  when  the  Texas  Commission  makes a  preliminary
determination of stranded costs,  currently  expected to occur in the first half
of 2001. CPL's stranded costs are subject to a final  determination by the Texas
Commission in 2004.

      Under the provisions of EITF 97-4, CPL's generation-related net regulatory
assets were  transferred to the  transmission  and  distribution  portion of the
business  and  will be  amortized  as they  are  recovered  through  charges  to
customers.  Management  currently  believes  all  generation-related  regulatory
assets for CPL will be recovered  as provided  under the Texas  Legislation.  If
future  events were to occur that made the  recovery  of these  assets no longer
probable,  CPL would write-off any  non-recoverable  portion of such assets as a
non-cash charge to earnings.

                                       18
<PAGE>

      CPL believes it will also have stranded costs, which are the excess of net
book  value of  generation  assets as  defined  over the  market  value of those
assets.  CPL's amount of regulatory  assets and stranded  costs are subject to a
final  determination  by the Texas  Commission  in 2004.  The Texas  Legislation
provides  that all such finally  determined  stranded  costs will be  recovered.
Since  SWEPCO  and  WTU  are  not  expected  to have  net  stranded  costs,  all
generation-related  non-recoverable  net regulatory  assets were written off and
are reflected on their  statements of income as an  extraordinary  loss in 1999.
See NOTE 16. EXTRAORDINARY ITEMS.

      CPL,  SWEPCO  and WTU  performed  an  accounting  impairment  analysis  of
generation  assets under SFAS No. 121 at September 30, 1999, and concluded there
was no  impairment of  generation  assets at that time.  An impairment  analysis
involves  estimating  future net cash flows arising from the use of an asset. If
the net cash flows  exceed  the net book  value of the  asset,  then there is no
impairment  of the asset  for  accounting  purposes.  CPL,  SWEPCO  and WTU will
continue to review their assets for potential impairment if events or changes in
circumstances indicate the carrying cost of an asset may not be recoverable.

      Beginning  January  1,  2002,  fuel  costs  will not be  subject  to Texas
Commission fuel reconciliation proceedings.  Consequently,  CPL, SWEPCO, and WTU
will file a final fuel reconciliation with the Texas Commission reconciling fuel
costs  through the period  December 31, 2001.  These final fuel balances will be
included in each company's true-up proceeding in 2004.

      CPL - Wholesale Customers
      Certain  CPL  wholesale  customers  have given  notice of their  intent to
terminate  their  contracts when they expire in 2001 through 2004.  During 1999,
these customers represented 3% of CPL's total electric operating revenues.

      PSO Union Negotiations
      In  March  1999,  PSO and its  Local  Union  1002 of the IBEW  reached  an
agreement for contract negotiations, which began in July 1996. In December 1996,
PSO had  implemented  portions of its then final  proposal  after  declaring  an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry  restructuring bill. The law mandates the implementation of
retail  competition to begin on July 1, 2002.  Following the passage of the law,
PSO negotiated a new contract with the union.  The new contract allows PSO to be
in a better position to compete in a deregulated environment. The effective date
of the new  agreement  was April 4,  1999,  and it will  remain in effect  until
September 30, 2000. As a result of the  agreement,  the union agreed to withdraw
its opposition to the AEP Merger proceedings.

      In October  1998,  PSO  received an adverse  ruling from a NLRB ALJ on the
union's  unfair labor  practice  charge  against PSO. The ALJ ruled that PSO did
negotiate  in good faith but that PSO's  position  on some issues was too harsh,
and  therefore  the December 1996  implementation  of PSO's then final  proposal
should be rolled back and  employees  made whole from that date.  The ALJ upheld
PSO's  right  to  cease  collecting  union  dues  through  payroll   deductions.
Additionally,  the ALJ ruled that PSO improperly solicited employees to withdraw
from the union.  In December 1998, PSO appealed the ALJ's ruling to the NLRB. In
June  1999,  PSO made a  settlement  offer to the union to resolve  the  pending
charges  against PSO. The union  rejected this offer and indicated it would wait
for a ruling from the NLRB before deciding on further action. Should PSO receive
an adverse  ruling  from the NLRB,  PSO will have the option of  appealing  that
decision  to a circuit  court.  At this  time,  management  cannot  predict  the
ultimate outcome of the NLRB matter.  However,  management believes that it will
not have a material  adverse  effect on CSW's results of operations or financial
condition.  The preceding  discussion  constitutes  forward-looking  information

                                       19
<PAGE>

within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.

      WTU Changes in Operations
      On February 22, 2000,  WTU  announced  that as a result of an  operational
review,  the WTU Merchandise  Program was being discontinued as of September 30,
2000,  since the  merchandise  program no longer fits WTU's  business  strategy.
Under the merchandise  program,  WTU sold electric appliances and other items at
local offices across the WTU service territory.

      WTU also announced that as part of the operational  review,  bill payments
and other traditional customer transactions would no longer be accepted at local
offices as of September 30, 2000. Due to improvements in technology,  WTU offers
bill payment service through the Internet as well as other  alternative  payment
programs.

      WTU  estimates  that 65  employees  will be  affected  by the  changes  in
operations,  including 49 merchandise employees.  Although WTU has not completed
its  analysis,  the cost of these  changes  is not  expected  to have a material
adverse effect on CSW's results of operations or financial condition.

      SEEBOARD - Third Party Pension Litigation
      In the U.K.,  National  Grid and National  Power PLC have been involved in
continuing  litigation  regarding their use of actuarial  surpluses disclosed in
the 1992 and 1995 valuations of the electricity industry's  occupational pension
plan, the ESPS. A High Court decision in favor of the National Grid and National
Power PLC was  appealed.  On February 10, 1999,  the U.K.  Court of Appeal ruled
that the particular  arrangements made by these  corporations to dispose of part
of the surplus  were  invalid  due to  procedural  defects.  This  decision  was
confirmed at a later hearing of the U.K.  Court of Appeal held in May 1999.  The
National Grid has appealed to the House of Lords, the highest court of appeal in
the U.K.,  and a decision  is  expected  in late 2000 or early  2001.  The final
outcome of this appeal cannot presently be determined.

      SEEBOARD  employees are members of the ESPS, and SEEBOARD has made similar
use of  actuarial  surpluses  disclosed  in the 1992 and 1995  valuations.  As a
result of subsequent  legal  clarification  of certain  issues  arising from the
hearing  held in May 1999,  the  potential  impact of the ruling on SEEBOARD has
increased.  The amount of the payments  cancelled by SEEBOARD in  recognition of
these  surpluses  amounts to  approximately  $78 million,  excluding any accrued
interest.

      The U.K. Court of Appeal did not order the National Grid or National Power
PLC to make payment into the ESPS, and the court  indicated that any requirement
to make such  payments  would be harsh since the  relevant  sections of the ESPS
already  have a surplus.  In the event the court  decides a payment by  SEEBOARD
into the ESPS is  necessary,  such a payment  is  likely  to  create  additional
pension  fund  surplus,  which  SEEBOARD  would be able to utilize over the next
several years to reduce pension expense.

      Management  is unable  currently to predict the amount of any payment that
it may be required to make to ESPS,  but the payment  should not have a material
adverse affect on CSW's results of operations or financial condition.

      The foregoing discussion  constitutes  forward-looking  information within
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ
materially from such projected information. See FORWARD - LOOKING INFORMATION.

                                       20
<PAGE>

RATES AND REGULATORY MATTERS

U.S. ELECTRIC

      CPL Rate Review - Docket No 14965
      In  November  1995,  CPL filed  with the  Texas  Commission  a request  to
increase  its retail base rates by $71 million.  On October 16, 1997,  the Texas
Commission  issued the CPL 1997 Final Order which lowered the annual retail base
rates of CPL by  approximately  $19  million,  or 2.5%,  from  CPL's  rate level
existing  prior to May 1996. The Texas  Commission  also included a "glide path"
rate  methodology  in the CPL 1997 Final Order  pursuant  to which CPL's  annual
rates  were  reduced by $13  million  beginning  May 1, 1998 with an  additional
reduction of $13 million on May 1, 1999.

      CPL  filed an  appeal of the CPL 1997  Final  Order to the State  District
Court of Travis County to raise  several  issues  related to the rate case.  The
primary  issues  include:  (i) the  classification  of $800  million of invested
capital in STP as ECOM which was also  assigned  a lower  return on equity  than
non-ECOM  property;  (ii) the Texas  Commission's  use of the "glide  path" rate
reduction  methodology applied on May 1, 1998 and May 1, 1999; and (iii) the $18
million of  disallowed  affiliate  expenses  from CSW  Services.  As part of the
appeal, CPL sought a temporary  injunction to prohibit the Texas Commission from
implementing the "glide path" rate reduction  methodology.  The court denied the
temporary  injunction and the "glide path" rate reduction was implemented in May
1998 and May 1999.  Hearings on the appeal were held during the third quarter of
1998, and a judgment was issued in February 1999 affirming the Texas  Commission
order,  except for a consolidated  tax issue in the amount of $6 million,  which
was  remanded to the Texas  Commission.  CPL filed an appeal of this most recent
order to the Third  District of Texas Court of Appeals and  management is unable
to predict how the final resolution of these issues will ultimately affect CSW's
results of operations and financial condition.

      On May 4, 1999,  AEP and CSW announced  that they had reached a stipulated
agreement with the General Counsel of the Texas Commission and other intervenors
in the state of Texas related to the AEP/CSW merger case.  The Texas  Commission
approved the AEP Merger in early  November 1999. If the AEP Merger is ultimately
consummated,  CSW will withdraw its appeal with respect to the "glide path" rate
reduction  methodology  as  discussed  above as issue  "(ii)" but will  continue
seeking the appeal of issues "(i) and (iii)" as  discussed  above.  See NOTE 15.
PROPOSED AEP MERGER for a discussion of the stipulated agreement.

      See NOTE 2.  LITIGATION AND REGULATORY  PROCEEDINGS for information on the
CPL 1997 Final Order.

      SWEPCO Louisiana Rate Review
      In December  1997,  the  Louisiana  Commission  announced  it would review
SWEPCO's  rates  and  service.  In  October  1999,  SWEPCO  and the staff of the
Louisiana  Commission  reached an Agreement and Stipulation,  which was filed on
October 14, 1999. The  significant  provisions of the Agreement and  Stipulation
are as follows:

-     SWEPCO's Louisiana retail  jurisdictional  revenues were reduced by $11
      million, effective with the December 1999 billing cycle;

-     SWEPCO is allowed to earn an 11.1% return on common equity;

-     SWEPCO is allowed to recover certain regulatory assets totaling $7.1
      million;

                                       21
<PAGE>

-     SWEPCO will be subject to a two-year base rate freeze, which includes
      force majeure provisions; and

-     SWEPCO will be allowed to increase depreciation rates for transmission,
      distribution and generation plant.

      The  Louisiana  Commission  approved  the  Agreement  and  Stipulation  in
 November 1999 which was implemented in December 1999.

      SWEPCO Arkansas Rate Review
      In July 1998, the Arkansas Commission began a review of SWEPCO's earnings.
On July 30, 1999,  SWEPCO  entered into a settlement  agreement with the general
staff of the Arkansas Commission and the Arkansas Attorney General's Office. The
settlement  agreement  reduces SWEPCO's Arkansas annual revenues by $5.4 million
or 3%.  Additionally,  the stipulation and settlement  agreement  provides for a
10.75%  return on common  equity,  an increase  in  depreciation  rates,  and an
agreement by SWEPCO not to seek recovery of generation-related stranded costs.

      On September 23, 1999, the Arkansas  Commission  issued an order approving
the  stipulation  and settlement  agreement.  On October 25, 1999,  SWEPCO filed
compliance rate tariffs with the Arkansas Commission,  which are consistent with
the Arkansas  Commission order. The provisions of the settlement  agreement were
implemented in December 1999.

      Other
      Reference is made to NOTE 2.  LITIGATION  AND REGULATORY  PROCEEDINGS  for
information regarding fuel proceedings at CPL, SWEPCO and WTU.


U.K. ELECTRIC

      SEEBOARD Recent Regulatory Actions
      Following the commencement of the phased-in  opening of the United Kingdom
domestic and small business  electricity market to competition,  since September
1998, many customers are now able to choose their electricity supplier. SEEBOARD
competes  for  customers in its own area as well as  throughout  the rest of the
United  Kingdom.  The DGEGS has  allowed a  significant  portion  of the  system
development  costs  associated  with  the  introduction  of  competition  to  be
recovered  by  the  regional  electricity  companies  through  a  charge  to all
customers  over the  next  five  years.  The  DGEGS  has  also  announced  price
restraints which set a maximum amount that existing electricity supply companies
can charge their domestic and small business customers,  taking into account its
view of future electricity purchase costs. For SEEBOARD,  these price restraints
reduced  prices in real terms by 6% for the  regulatory  year  ending  March 31,
1999, and a further 3% for the following regulatory year ending March 31, 2000.

       Regulatory Price Proposal for SEEBOARD
      On December 2, 1999,  OFGEM  published its final price  proposals from its
United  Kingdom  electricity  distribution  review.  OFGEM has proposed  revenue
reductions in SEEBOARD's  distribution  business of 21%. In addition,  OFGEM has
proposed  the  reallocation  of  a  further  12%  of  costs  out  of  SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999,  and will take effect on April 1, 2000,  and remain in effect
for five years.  OFGEM's  proposals  will reduce net income for  SEEBOARD in the
year 2000 by approximately $40 million, dependent upon the level of further cost

                                       22
<PAGE>

reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A.,  its United Kingdom business segment,  was $113
million for the twelve months ended December 31, 1999.

      OFGEM's price  proposals for SEEBOARD will have a material  adverse effect
on the future results of operations of CSW, but are not be expected to adversely
affect the financial condition of CSW.

      OFGEM also published the final price proposals for the electricity  supply
price review.  OFGEM has  recommended  that the price cap for charges  levied to
electricity  supply domestic and small business customers should be extended for
two years from April 1, 2000.  Overall,  these  proposals are expected to have a
broadly neutral effect on the results of CSW.

      In the  fourth  quarter of 1999,  a rating  agency  downgraded  SEEBOARD's
credit rating to BBB+ due to recent U.K. regulatory action.

      The foregoing discussion  constitutes  forward-looking  information within
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.


OTHER INITIATIVES

      As described in OVERVIEW,  a vital part of CSW's future strategy  involves
initiatives  that are outside of the traditional  United States electric utility
industry due to increasing competition and fundamental changes in this industry.
In addition, lower anticipated growth rates in CSW's core United States electric
utility business  combined with the previously  mentioned  industry factors have
resulted in CSW  pursuing  other  initiatives.  These  initiatives  have taken a
variety of forms; however, they are all consistent with the overall plan for CSW
to develop a global energy business.  CSW has restrictions on the amounts it may
invest under the AEP merger agreement.  While CSW believes that such initiatives
are necessary to maintain its  competitiveness  and to supplement  its growth in
the  future,  the  Holding  Company  Act may  impede  or delay  its  ability  to
successfully  pursue such initiatives.  (The foregoing  statement  constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual  results may differ  materially  from such projected  information  due to
changes in the underlying  assumptions.  See FORWARD-LOOKING  INFORMATION).  See
OVERVIEW and RECENT DEVELOPMENTS AND TRENDS.


      DIVERSIFIED ELECTRIC

      CSW Energy
      CSW Energy  presently  owns  interests in seven  operating  power projects
totaling 1,308 MW which are located in Colorado,  Florida and Texas. In addition
to  these  projects,  CSW  Energy  has  other  projects  in  various  stages  of
development.

      CSW Energy  began  construction  in August  1998 of a 500 MW power  plant,
known as Frontera,  in the Rio Grande Valley,  near the city of Mission,  Texas.
The natural  gas-fired  facility began simple cycle  operation of 330 MW in July
1999 and is  scheduled  to  commence  combined  cycle  operation  in early 2000.
Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the
state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera
upon completion of the merger. See PROPOSED AEP MERGER and NOTE 15. PROPOSED AEP
MERGER for additional information.

                                       23
<PAGE>

      CSW Energy  also has  entered  into an  agreement  with  Eastman  Chemical
Company to  construct  and operate a 440 MW  cogeneration  facility in Longview,
Texas.  This  facility  will  be  known  as  the  Eastex  Cogeneration  Project.
Construction  of the facility began in the fourth quarter of 1999, with expected
operation in early 2001. Excess electricity  generated by the plant will be sold
by CSW Energy in the wholesale electricity market.

      In October 1999, GE Capital  Structured Finance Group purchased 50% of the
equity  ownership  of Sweeny  Cogeneration  Limited  Partnership.  CSW  Energy's
after-tax  earnings from the proceeds of the transaction were  approximately $33
million and were recorded in the fourth quarter of 1999.  The agreement  between
CSW Energy and GE Capital  Structured Finance Group also provides for additional
payments to CSW Energy,  subject to  completion  of a planned  expansion  of the
Sweeny cogeneration facility,  which may be operational in the fourth quarter of
2000.

      The preceding discussion contains  forward-looking  information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected  information  due to changes in the underlying  assumptions.
See FORWARD-LOOKING INFORMATION.

      CSW International
      CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently  holds  investments  in the United  Kingdom,  Mexico and
South America.

      CSW  International  and its 50% partner,  Scottish  Power plc have entered
into a joint venture to construct and operate the South Coast power  project,  a
400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed  approximately  (pound)19 million of the (pound)190
million  construction  financing.   Both  the  guarantee  and  the  construction
financing are  denominated in pounds  sterling.  The U.S.  dollar  equivalent at
December  31, 1999 would be $31 million and $308 million  respectively,  using a
conversion  rate  of  (pound)1.00  equals  $1.62.  The  permanent  financing  is
unconditionally guaranteed by the project.  Construction of the project began in
March 1999, and commercial operation is expected to begin in late 2000.

      Through  November  1999,  CSW  International  had  purchased  a 36% equity
interest in Vale for $80 million.  CSW International  also extended $100 million
of debt  convertible  into  equity  in Vale  in  1998.  In  December  1999,  CSW
International  converted  $69 million of that $100 million into equity,  thereby
raising  its  equity  interest  in Vale to 44%.  CSW  International  anticipates
converting the remaining debt into equity over the next two years.

      In  January  1999,  amid  market  instability,  the  Brazilian  government
abandoned its policy of pegging the  Brazilian  Real in a range against the U.S.
dollar.  This action resulted in a 49% devaluation of the Brazilian  currency by
the end of December 1999.  Vale is unfavorably  affected by the  devaluation due
primarily to the revaluation of foreign denominated debt.

      CSW International has a put option, which, if exercised,  requires Vale to
purchase CSW  International  shares at a minimum price equal to the U.S.  dollar
equivalent  of the  purchase  price  for  Vale.  As a result  of the put  option
arrangement,  CSW International's investment carrying amount will not be reduced
below the put option value unless there is deemed to be a permanent  impairment.
Pursuant  to  this  arrangement,   CSW  International  will  not  recognize  its
proportionate  share of any future earnings until its proportionate share of any
losses of Vale is  recognized.  At December  31,  1999,  CSW  International  had
deferred  losses,  after tax, of  approximately  $21 million related to its Vale
investment.  CSW  International  views  its  investment  in Vale as a  long-term

                                       24
<PAGE>

investment,  which has significant long-term value.  Management will continue to
closely  evaluate  the  changes in the  Brazilian  economy and its impact on CSW
International's investment in Vale.

      As of December 31, 1999,  CSW  International  had invested $110 million in
common stock of a Chilean  electric  company.  The  investment  is classified as
securities available for sale and accounted for by the cost method. Based on the
current market value of the shares and the year-end  foreign  exchange rate, the
value of the  investment at December 31, 1999 was $62 million.  The reduction in
the carrying value of this investment has been reflected in Other  Comprehensive
Income in CSW's  Consolidated  Statements of  Stockholders'  Equity.  Management
views its  investment in Chile as a long-term  investment  strategy and believes
this  investment  continues to have  significant  long-term value and that it is
recoverable.  Management  will  continue to closely  evaluate the changes in the
South American economy and its impact on CSW  International's  investment in the
Chilean electric company.

      In addition to these projects, CSW Energy and CSW International have other
projects in various stages of development. CSW, CSW Energy and CSW International
have provided  letters of credit and  guarantees on behalf of CSW Energy and CSW
International  projects  of  approximately  $62  million,  $41  million and $233
million, respectively, as of December 31, 1999.

      The preceding discussion contains  forward-looking  information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected  information  due to changes in the underlying  assumptions.
See FORWARD-LOOKING INFORMATION.


      ENERGY SERVICES

      C3 Communications
      C3  Communications  has two active  business  units,  C3  Networks  and C3
Utility  Automation.  C3 Networks  offers  wholesale,  high capacity,  long-haul
regional and metropolitan fiber and collocation  services to  telecommunications
carriers and Internet service providers in Texas and Louisiana.

      C3 Networks has  approximately  1,500 miles of fiber  network in Texas and
Louisiana  and offers  collocation  services to carriers  and  Internet  service
providers through sites in Dallas,  Houston,  Austin, San Antonio,  Abilene, San
Angelo,  Corpus  Christi,  Harlingen,  Laredo,  and  McAllen,  Texas and  Tulsa,
Oklahoma.

      In 1999, C3 Utility Automation launched a new energy information  service,
PurView(TM).  In addition,  EnerACT(TM)  advisory  services was transferred from
EnerShop to better align  products and  marketing.  PurView(TM) is a service for
collecting  meter data and  interactively  viewing,  manipulating  and analyzing
consumption information over the Internet.  EnerACT(TM) is an energy information
and advisory service for multi-site building owners and managers.

      C3  Communications  believes that electric utility industry  restructuring
will continue to fuel interest in its energy information services. Evaluation of
partnerships  and  acquisitions  will also be a key  element  of  growth  for C3
Communications  in 2000. The foregoing  statement  constitutes a forward-looking
statement  within the meaning of Section 21E of the Exchange Act. Actual results
may differ  materially  from such  projected  information  due to changes in the
underlying assumptions. See FORWARD-LOOKING INFORMATION.

                                       25
<PAGE>


      EnerShop
      EnerShop's  two product  lines in 1999 were  performance  contracting  and
EnerACT(TM)   advisory   services  until  August  1999,  when   EnerACT(TM)  was
transferred to C3 Communications to better align products and marketing.

      EnerShop  continues to provide  energy  services to customers in Texas and
Louisiana that help reduce  customers'  operating costs through increased energy
efficiencies and improved equipment operations.  EnerShop utilizes the skills of
local  trade  allies in  offering  services  that  include  energy and  facility
analysis,  project  management,  engineering design,  equipment  procurement and
construction and performance monitoring.

      Business Ventures
      The CSW Services'  Business Ventures is comprised of companies that pursue
energy-related businesses. Projects include providing energy management systems,
electric  substation  automation  software and the marketing and distribution of
electric bikes and associated accessories under the TotalEV name.

      In late 1997,  CSW Energy  Services  was  launched to explore the electric
utility industry's  emerging retail supply markets as they were deregulated on a
state-by-state basis. In January 1999, CSW Energy Services announced that it was
ceasing its business as a retail electric  supplier and that it would assign its
existing  electricity  supply contracts to other suppliers or terminate them. In
the fourth quarter of 1999, the CSW Business  Ventures group's  investment in an
energy-related  company that provides staffing services for nuclear power plants
was transferred from PSO to CSW Energy Services.


SOUTH TEXAS PROJECT

      CPL owns 25.2% of STP, a two-unit nuclear power plant that is located near
Bay City,  Texas.  Reliant Energy Resources  Corporation owns 30.8%, the City of
San Antonio owns 28.0%, and the City of Austin owns 16.0% of STP. STP Unit 1 was
placed in service in August  1988,  and STP Unit 2 was placed in service in June
1989. In November 1997,  STPNOC assumed the duties of STP operator.  Each of the
four STP co-owners are represented on the STPNOC board of directors.

      STP Unit 1 and Unit 2 were removed  temporarily  from service  during 1999
for scheduled refueling and ten-year  inspection  outages.  During 1999, Units 1
and 2 operated at net capacity factors of 88.0% and 89.4%, respectively.

      For  additional  information  regarding  STP  and  the  accounting for the
decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT  ACCOUNTING  POLICIES
and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.


ENVIRONMENTAL MATTERS

      The  operations of the CSW System,  like those of other  utility  systems,
generally  involve the use and disposal of substances  subject to  environmental
laws.  CERCLA,  the  federal  "Superfund"  law,  addresses  the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions  regardless of fault or the legality of past disposal  activities.  PRPs
include  owners and  operators of  contaminated  sites and  transporters  and/or
generators of hazardous substances.  Many states have similar laws. Legally, any

                                       26
<PAGE>

one PRP can be held  responsible  for the  entire  cost of a  cleanup.  Usually,
however, cleanup costs are allocated among PRPs.

      The U.S.  Electric  Operating  Companies  are  subject to various  pending
claims  alleging  that they are PRPs under  federal or state  remedial  laws for
investigating  and  cleaning  up  contaminated   property.   CSW  believes  that
resolution of these claims,  individually  or in the aggregate,  will not have a
material  adverse  effect  on  CSW's or any U.S.  Electric  Operating  Company's
results of  operations  or  financial  condition.  Although the reasons for this
expectation  differ  from  site to  site,  factors  that are the  basis  for the
expectation for specific sites include the volume and/or type of waste allegedly
contributed by the U.S.  Electric  Operating  Company,  the estimated  amount of
costs allocated to the U.S. Electric  Operating Company and the participation of
other parties. (The foregoing statements constitute  forward-looking  statements
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially  from such  projected  information  due to changes in the  underlying
assumptions.  See  FORWARD-LOOKING  INFORMATION).  See  NOTE 2.  LITIGATION  AND
REGULATORY  PROCEEDINGS and NOTE 3.  COMMITMENTS AND CONTINGENT  LIABILITIES for
additional discussion regarding environmental matters.

      The EPA recently promulgated  revised,  more stringent ambient air quality
standards  for ozone and  particulates.  While  these  standards  do not mandate
emission constraints or reductions for facilities such as electricity generating
power plants,  they may result in more areas being designated as  non-attainment
for these two  pollutants.  States  will be required  to develop  strategies  to
achieve  compliance in these areas,  strategies  that may include lower emission
levels for electricity  generating power plants,  possibly including  facilities
within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.

      At the Kyoto,  Japan  Conference on Global  Warming held in December 1997,
U.S.  representatives  agreed to a treaty which could require new limitations on
"greenhouse  gases"  from  power  plants.  CSW and the U.S.  Electric  Operating
Companies could be affected if this treaty,  in its present form, is approved by
the United  States  Congress.  The impact,  if any, on CSW or the U.S.  Electric
Operating  Companies  cannot be determined  because most of the  greenhouse  gas
emission  reduction  would  come  from coal  generation  that  would  have to be
switched  to natural  gas or  retired.  During  1999,  50% of the U.S.  Electric
Operating  Companies' MWH generation of which,  at December 31, 1999, 33% of its
installed generating capacity was coal and lignite.

RISK MANAGEMENT

      In 1997,  CSW's board of directors  adopted a risk  management  resolution
authorizing CSW to engage in currency, interest rate and energy spot and forward
transactions and related  derivative  transactions on behalf of CSW with foreign
and domestic  parties as deemed  appropriate  by executive  officers of CSW. The
risk  management  program  is  necessary  to meet the  growing  demands of CSW's
customers for competitive  prices and price stability,  to enable CSW to compete
in a deregulated  power industry,  to manage the risks  associated with domestic
and  foreign   investments  and  to  take  advantage  of  strategic   investment
opportunities.

      The U.S. Electric Operating Companies experience commodity price exposures
related to the purchase of fuel supplies for the generation of  electricity  and
for the purchase of power and energy from other  generation  sources.  Contracts
that  provide for the future  delivery of these  commodities  can be  considered
forward  contracts  which  contain  pricing  and/or  volume  terms  designed  to
stabilize the cost of the commodity.  Consequently,  the U.S. Electric Operating

                                       27
<PAGE>

Companies  manage their price exposure for the benefit of customers by balancing
their commodity  purchases  through a combination of long-term and short-term or
spot market agreements.

      In response  to the  development  of a more  competitive  electric  energy
market, CSW has received regulatory approval, which authorizes the U.S. Electric
Operating  Companies to conduct a pilot program  offering power sales agreements
at tariffed  rates with a fixed fuel cost.  To offset the  commodity  price risk
associated with these contracts, CSW has purchased natural gas swaps and futures
contracts.  These arrangements cover estimated natural gas deliveries  beginning
in January 2000 and  continuing  for the remainder of 2000.  Natural gas volumes
purchased  to serve these  contracts,  for which CSW has secured swap or futures
contracts, represents approximately 1% of annual natural gas purchases.

      Based on year-end contractual  commitments,  CSW's natural gas futures and
swap contracts and electricity  forward  contracts that are sensitive to changes
in commodity  prices  include fair value of assets of $157,260 and fair value of
liabilities  of $396,440.  These swap and future  contracts  hedge their related
commodity price exposure for 2000.  Cash outflows on the swap agreements  should
be offset by increased  margins on electricity sales to customers under tariffed
rates with fixed fuel costs. The electricity  forward  contracts hedge a portion
of CSW's energy  requirements  through February 2000. The average contract price
for forward  purchases is $30 per MWH and $2.32 per MMbtu. The average price for
natural gas futures contracts is $2.47 per MMbtu and $2.37 per MMbtu for swaps.

      SEEBOARD has entered into contracts for  differences to reduce exposure to
fluctuations  in the price of electricity  purchased  from the United  Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's  electric  industry  for  the  bulk  trading  of  electricity  between
generators  and  suppliers.  At  December  31,  1999,  the  gross  value of such
contracts for differences was  approximately 83% of the expected power purchases
for 2000.

      CSW has, at times,  been exposed to currency and interest rate risks which
reflect the floating  exchange rate that exists between the U.S.  dollar and the
British pound.  CSW has utilized certain risk management tools to manage adverse
changes in exchange  rates and to facilitate  financing  transactions  resulting
from CSW's  acquisition of SEEBOARD.  At December 31, 1999, CSW had positions in
two cross currency swap  contracts.  The following  table  presents  information
relating to these  contracts.  The fair value of cross  currency  swaps  reflect
third party valuations  calculated using  proprietary  pricing models.  Based on
these  valuations,  CSW's position in these cross currency swaps  represented an
unrealized  loss of $41.8 million at December 31, 1999.  This unrealized loss is
offset by unrealized gains related to the underlying  transactions being hedged.
CSW expects to hold these contracts to maturity. At current exchange rates, this
liability is included in long-term debt on CSW's consolidated balance sheet at a
carrying value of approximately $418 million.

                                               Expected          Expected Cash
                                             Cash Inflows          Outflows
Contract                 Maturity Date     (Maturity Value)     (Market Value)
--------------------------------------------------------------------------------
                                                        (millions)
Cross currency swaps    August 1, 2001           $200                $213
Cross currency swaps    August 1, 2006           $200                $229

      For  information  related  to  currency  risk in South  America see  OTHER
INITIATIVES, DIVERSIFIED ELECTRIC, CSW International and NOTE 18. SOUTH AMERICAN
INVESTMENTS.  For  information  on  commodity  contracts  see NOTE 7.  FINANCIAL
INSTRUMENTS.

                                       28
<PAGE>

OTHER MATTERS

      Year 2000
      On a system-wide  basis, CSW initiated and implemented a year 2000 project
to prepare  internal  computer systems and applications for the year 2000. These
systems and applications  include  management  information  systems that support
business   operations  such  as  customer   billing,   payroll,   inventory  and
maintenance.    Other   systems   with    computer-based    controls   such   as
telecommunications,  elevators,  building  environmental  management,  metering,
plant, transmission,  distribution and substations were included in this project
as well.

      Cost to Address Year 2000 Issues
      As of December 31, 1999, cost incurred for the year 2000 project  amounted
to  approximately  $33  million,   including  $21  million  in  1999.  Remaining
activities are expected to cost an additional $3 million in the first quarter of
2000.

      In the first  quarter  of 1999,  a  software  version  upgrade  to provide
contract management features to the materials management  information system was
deferred  until 2000 in order to minimize  risk.  The  financial  impact of this
deferral was minimal,  as minor  enhancements  to the current design provided an
alternative,  interim solution for the needed functionality. The deferred system
upgrade is now  scheduled  for  implementation  in the May to November 2000 time
frame. No other planned CSW computer  information  system projects were affected
by the year 2000 project,  even though a moratorium was  implemented  during the
month of December 1999 to further  minimize risk.  Accordingly,  no estimate was
made for the financial  impact of any future projects  foregone due to resources
allocated to the year 2000 project.

      Contingency Plans
      Contingency plans have been in place in CSW's domestic electric  operation
for years to address problems  resulting from weather.  These plans were updated
to  include  year 2000  issues.  Contingency  planning  is  engineered  into the
transmission and  distribution  systems as it is designed with the capability to
bypass  failed  equipment.  A margin of power  generation  reserve above what is
needed is normally maintained. This reserve is a customary operating contingency
plan that allows CSW to operate  normally  even when a power plant  unexpectedly
quits operating.  Backup supplies of fuels are normally  maintained at CSW power
plants.  Natural  gas plants  have fuel oil as a backup and  multiple  pipelines
provide redundant supplies.  At coal plants about 40 to 45 days of extra coal is
kept on hand.

      SEEBOARD also has well established  contingency  plans to address problems
resulting  from  weather.   These  plans  are  covered  effectively  within  the
distribution  and customer  service  business  areas and were updated to include
year 2000 scenarios.

      Transition Results to Date
      The results of the readiness  activities  described in the foregoing  have
all been positive. The CSW System completed the year 2000 transition without any
year 2000 related electric system problems. The business support systems in each
of CSW and its  subsidiaries  also made the transition from 1999 to 2000 without
any year 2000 related  impact on the  operations  they support or the  customers
they serve.  CSW continues to closely monitor its electric and business  support
systems.

      Portions of the preceding discussion contain  forward-looking  information
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially  from such  projected  information  due to changes in the  underlying
assumptions. See FORWARD-LOOKING INFORMATION.

                                       29
<PAGE>


NEW ACCOUNTING STANDARDS

      SFAS No. 133 as amended by SFAS No. 137
      SFAS No.  133 as amended by SFAS No.  137 is  effective  for fiscal  years
beginning  after June 15, 2000 or January 1, 2001,  for calendar year  entities.
SFAS No.  133  replaces  existing  pronouncements  and  practices  with a single
integrated  accounting  framework for  derivatives  and hedging  activities  and
eliminates previous inconsistencies in generally accepted accounting principles.
SFAS No. 133 expands the accounting definition of derivatives, which had focused
on  freestanding  contracts  (futures,  forwards,  options and swaps) to include
embedded  derivatives  and many commodity  contracts.  All  derivatives  will be
reported on the balance  sheet either as an asset or liability  measured at fair
value.  Changes in a  derivative's  fair value will be  recognized  currently in
earnings unless specific hedge accounting  criteria are met. CSW has established
a project team to implement SFAS No. 133. CSW has not yet quantified the effects
of adopting SFAS No. 133 on its financial  statements,  although  application of
SFAS No. 133 could  increase  volatility  in  earnings  and other  comprehensive
income. See NOTE 17. NEW ACCOUNTING STANDARDS.


                                       30
<PAGE>



CENTRAL AND SOUTH WEST CORPORATION
RESULTS OF OPERATIONS

      Reference is made to CSW's  Consolidated  Financial  Statements,  Notes to
Consolidated  Financial  Statements  and  Selected  Financial  Data.  Referenced
information   should  be  read  in   conjunction   with,  and  is  essential  to
understanding,  the following discussion and analysis.  CSW's results fluctuate,
in part, with the weather. Also, other than certain one-time items, as discussed
throughout  the results of  operations,  CSW's income  statement line items as a
percentage  of total  revenues  remain fairly  consistent,  due primarily to the
regulatory  environment in which CSW operates. The preceding discussion contains
forward-looking  information  within the meaning of Section 21E of the  Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998

      CSW's  earnings  increased  to $455  million in 1999 from $440  million in
1998.  CSW's return on average common stock equity was 12.8% in 1999 compared to
12.4% in 1998. The primary  reason for the higher  earnings and higher return on
average common stock equity was the previously planned sale of 50% of CSW's 100%
equity  ownership  interest  in  a  cogeneration  partnership.  CSW's  after-tax
earnings  recorded  in the  fourth  quarter  of 1999  from the  proceeds  of the
transaction were $33 million. Earnings also increased due to the absence in 1999
of a charge for  accelerated  capital  recovery  of STP and the absence of asset
write-offs at several of CSW's business segments recorded in 1998.

      Partially  offsetting  the  higher  earnings  was  higher  operations  and
maintenance  expense at  SEEBOARD,  CSW Energy and the U.S.  Electric  Operating
Companies.  Also  partially  offsetting  the  higher  earnings  was a charge  to
earnings  at CPL,  SWEPCO and WTU that was made to reflect  the excess  earnings
provision of the Texas  Legislation  enacted in 1999.  Another factor  partially
offsetting  higher 1999  earnings  was the  extraordinary  loss  resulting  from
legislation enacted in Texas and Arkansas under which the electricity generation
portion of CPL's,  SWEPCO's  and WTU's  business in those states no longer meets
the   criteria   to  apply   SFAS  No.  71.   See  MD&A  -   Securitization   of
Generation-related  Regulatory  Assets and Stranded Cost, NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation and NOTE 16.
EXTRAORDINARY ITEMS for additional information.

Operating  revenues  increased $55 million in 1999 compared to 1998. The revenue
variances are shown in the following table.

                             1999 REVENUE VARIANCES
                  Increase (decrease) from prior year, millions

                  U.S. Electric
                       KWH Sales, Weather-Related        $(64)
                       KWH Sales, Growth and Usage         65
                       Fuel Revenue                        37
                       Sales for Resale                    22
                       Other Electric                     (24)
                                                       -------
                                                           36
                  United Kingdom                          (64)
                  Other Diversified                        83
                                                       -------
                                                          $55
                                                       -------
                                       31
<PAGE>

      U.S.  Electric revenues  increased $36 million,  or 1% in 1999 compared to
1998. Retail U.S.  Electric revenues  increased due to higher customer usage and
growth and higher  off-system  sales. An increase in fuel revenues due to higher
fuel prices and purchased power expense,  discussed  below,  also contributed to
the higher  revenues.  Milder weather in 1999 when compared to the previous year
partially  offset  the  increase  in  revenues.  MWH  sales  decreased  1.5% due
primarily to a decrease in sales to the  residential  customer class as a result
of the milder weather.

      United Kingdom revenues decreased $64 million in 1999 compared to 1998 due
to lower sales volumes in the business market and the loss of domestic customers
following  the  opening  of  the  electricity   market  to   competition.   Also
contributing  to the  decrease  in U.K.  electric  revenues  were the absence in
revenues in 1999 from SEEBOARD's  retail business,  which was sold in June 1998,
and unfavorable  British pound to U.S.  dollar  exchange rate  movements.  Other
diversified  revenues  increased  $83  million  in 1999  compared  to  1998  due
primarily to increased business activity at CSW Energy.

      During 1999 and 1998, the U.S. Electric Operating  Companies generated 86%
and 92% of their electric energy requirements,  respectively. U.S. Electric fuel
expense  decreased  $14 million in 1999  compared to 1998 due primarily to a $41
million  decrease in the recovery of deferred  fuel costs that  resulted  from a
significant  difference  in fuel  factors  used to  recover  fuel  expense  from
customers at PSO. The decrease in fuel expense was offset in part by an increase
in fuel  prices to $1.78 per  MMbtu in 1999 from  $1.67 per MMbtu in 1998.  U.S.
Electric purchased power expense increased $46 million,  or 41% due primarily to
an increase in economy energy purchases.

      United  Kingdom cost of sales  decreased  $71 million in 1999  compared to
1998 due primarily to a lower level of sales of  electricity  and the absence in
1999 of cost of sales for SEEBOARD's  retail  business and a lower British pound
to U.S. dollar exchange rate compared to 1998.

      Other operating expense increased $27 million in 1999 compared to 1998 due
in part to increased  expenses at SEEBOARD.  Expenses increased at SEEBOARD as a
result of additional  operating costs from SEEBOARD's Powerlink joint venture to
operate and  maintain the  electricity  assets for the London  Underground  Rail
System  as  well  as  increased  expenses   associated  with  operating  in  the
competitive  electricity  market in the United Kingdom.  CSW Energy's  operating
expenses also increased as a result of increased business activity at several of
its  plants.  Operating  expenses  increased  at  the  U.S.  Electric  Operating
Companies due primarily to a settlement with a transmission service provider and
increased power plant operating costs. Maintenance expense increased $31 million
due primarily to increased  expenses  associated with the 10-year  inspection of
STP Unit 1 and 2, higher scheduled  maintenance at other CSW System power plants
and higher tree trimming expenses.

      Depreciation  and amortization  expense  increased $31 million in 1999 due
primarily  to  accelerated  capital  cost  recovery  under the  excess  earnings
provisions  of the  Texas  Legislation,  as well  as  increases  in  depreciable
property.

      Other  income and  deductions  increased  to $59  million in 1999 from $42
million in 1998 due primarily to gains from the sale of  investments at SEEBOARD
and interest income  recognized by CSW Energy related to the Sweeny power plant.
The gain was offset,  in part,  by the absence in 1999 of the gain from the sale
of  investments  by  C3  Communications  in  1998.  Long-term  interest  expense
decreased $11 million in 1999 due primarily to the maturity and reacquisition of
long-term debt.

      The extraordinary losses resulted from legislation enacted in Arkansas and
Texas under which the  electricity  generation  portion of CPL's,  SWEPCO's  and
WTU's business in those states no longer meet the criteria to apply SFAS No. 71.
These legislative  changes resulted in an extraordinary  loss at SWEPCO and WTU,

                                       32
<PAGE>

which had a cumulative  effect of decreasing  net income by $8.0 million.  These
legislative  changes also resulted in an extraordinary loss at CPL of $6 million
associated with a loss on reacquired debt and the discontinuance of SFAS No. 71.
See MD&A - Securitization of  Generation-related  Regulatory Assets and Stranded
Costs.and  NOTE 2.  LITIGATION  AND  REGULATORY  PROCEEDINGS - Electric  Utility
Restructuring  Legislation,  and NOTE 16.  EXTRAORDINARY  ITEMS  for  additional
information.


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

      CSW's  earnings  increased  to $440  million in 1998 from $153  million in
1997.  CSW's return on average common stock equity was 12.4% in 1998 compared to
4.2% in 1997.  The primary  reason for the higher  earnings and higher return on
average  common  stock  equity was the  absence  in 1998 of the  accrual of $176
million for the one-time United Kingdom windfall profits tax. Hotter than normal
summer  weather and  increased  customer  growth and usage at the U.S.  Electric
Operating  Companies  were also factors in the  increase in earnings  over 1997.
Additionally,  the sale of a telecommunications partnership interest in 1998 and
a decrease in the United Kingdom  corporate tax rate contributed to the earnings
increase. The absence of the impact of CSW's final settlement of litigation with
El Paso in 1997  contributed  to the increase in earnings in 1998 as well.  Also
contributing  to the  increase in earnings was the absence in 1998 of the effect
of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See
NOTE 2. LITIGATION AND REGULATORY  PROCEEDINGS for additional information on the
CPL 1997 Final Order and the PSO 1997 Rate  Settlement  Agreement.  See NOTE 16.
EXTRAORDINARY  ITEMS for  additional  information  on the windfall  profits tax.
Partially  offsetting the higher earnings was a charge for  accelerated  capital
recovery of STP and asset write-offs at several of CSW's business segments.

Operating  revenues increased $214 million in 1998 compared to 1997. The revenue
variances are shown in the following table.

                             1998 REVENUE VARIANCES
                 Increase (decrease) from prior year, millions

                 U.S. Electric
                      KWH Sales, Weather-Related           $72
                      KWH Sales, Growth and Usage           53
                      Fuel Revenue                          31
                      Sales for Resale                       6
                      Other Electric                         5
                                                     -----------
                                                           167
                 United Kingdom                           (101)
                 Other Diversified                         148
                                                     -----------
                                                          $214
                                                     -----------

      U.S. Electric revenues increased $167 million,  or 5%, in 1998 compared to
1997. Retail MWH sales increased 6% with increases in all customer classes. U.S.
Electric  revenues  increased due primarily to higher MWH sales  resulting  from
hotter than normal summer weather and increased  customer  usage and growth.  An
increase in fuel revenues due to an increase in fuel expense,  discussed  below,
also contributed to the higher revenues.  United Kingdom revenues decreased $101
million,  or 5%, in 1998 compared to 1997 due to the loss of revenues associated
with the sale of its retail stores in the second  quarter of 1998 and the effect
of price control on the supply business.  Other diversified  revenues  increased
$148 million in 1998 compared to 1997 due  primarily to increased  revenues from
CSW Energy, CSW Credit and EnerShop.

                                       33
<PAGE>

      During 1998 and 1997 the U.S. Electric Operating  Companies  generated 92%
and 93% of their electric energy requirements,  respectively. U.S. Electric fuel
expense  increased  $13  million  in 1998  compared  to 1997  due  primarily  to
increased  generation  offset in part by a decrease  in fuel prices to $1.67 per
MMbtu  in 1998  from  $1.83  per  MMbtu in 1997.  United  Kingdom  cost of sales
decreased  $87 million in 1998  compared to 1997 due  primarily to lower cost of
sales associated with the sale of SEEBOARD's retail stores and a decrease in the
cost of purchased power reflecting lower business volumes.

      Other operating expense increased $48 million in 1998 compared to 1997 due
in part to a CSW Energy power plant that went into service in February 1998. The
increase in other operating expense was offset in part by the absence in 1998 of
the  settlement  of  litigation  with El Paso which  increased  other  operating
expense $35 million in 1997.  Further offsetting the increase in other operating
expense in 1998 was the absence of the $12 million  impact of the CPL 1997 Final
Order and the $4 million impact of the PSO 1997 Rate Settlement  Agreement.  See
NOTE 2. LITIGATION AND REGULATORY  PROCEEDINGS for additional information on the
CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement.  Also partially
offsetting the increase in other  operating  expense was reduced pension expense
in 1997  resulting  from  changes  made to the pension  plan for CSW's  domestic
employees.  See NOTE 5. BENEFIT PLANS for additional  information related to the
changes in the pension plan.

      Depreciation and amortization expense increased $24 million, or 5% in 1998
due primarily to accelerated  recovery of ECOM property recorded in 1998 related
to the CPL 1997 Final Order, a charge for accelerated  capital  recovery of STP,
as well as increases in depreciable  property.  Income tax expense increased $52
million due primarily to higher pre-tax income.

      Other  income and  deductions  increased  to $42  million in 1998 from $32
million in 1997 due  primarily to the sale of a  telecommunications  partnership
interest. Long-term interest expense decreased $22 million in 1998 due primarily
to the prepayment of a $60 million variable rate bank loan due December 1, 2001;
the  maturity of $200  million of CPL FMBs on October 1, 1997 and $28 million of
CPL FMBs on  January  1,  1998;  and the  redemption  of $91  million of FMBs of
certain of the U.S. Electric Operating  Companies on September 1, 1998. See NOTE
8.  LONG-TERM  DEBT  for  additional  information  on the  redemption  of  these
securities.  Short-term  debt was used to prepay the variable  rate bank loan in
two $30 million installments on January 28, 1998 and April 27, 1998.  Short-term
borrowings  and internal cash  generation  were used to fund the  maturities and
redemption of the  previously  mentioned  FMBs.  Short-term  and other  interest
expense  increased  $35 million in 1998 when  compared to 1997 due  primarily to
higher  levels  of  short-term  borrowings.  Distributions  on  Trust  Preferred
Securities  increased  interest  and other  charges by $10 million in 1998.  The
Trust  Preferred  Securities were  outstanding for all of 1998,  while they were
outstanding for only part of 1997. See NOTE 10. TRUST  PREFERRED  SECURITIES for
additional information on these securities.




                                       34
<PAGE>
CSW
Consolidated Statements of Income
Central and South West Corporation
--------------------------------------------------------------------------------
                                               For the Years Ended December 31,
                                               ---------------------------------
                                                1999       1998     1997
                                               --------   -------  --------
                                           ($ in millions, except share amounts)
Operating Revenues
    U.S. Electric                              $ 3,524    $ 3,488  $ 3,321
    United Kingdom                               1,705      1,769    1,870
    Other diversified                              308        225       77
                                               --------   -------  --------
                                                 5,537      5,482    5,268
                                               --------   -------  --------
Operating Expenses and Taxes
    U.S. Electric fuel                           1,176      1,190    1,177
    U.S. Electric purchased power                  157        111       89
    United Kingdom cost of sales                 1,133      1,204    1,291
    Other operating                              1,056      1,029      981
    Maintenance                                    200        169      152
    Depreciation and amortization                  552        521      497
    Taxes, other than income                       193        189      195
    Income taxes                                   204        203      151
                                               --------    ------- --------
                                                 4,671      4,616    4,533
                                               --------    ------- --------
Operating Income                                   866        866      735
                                               --------    ------- --------

Other Income and Deductions
    Other                                           78         60       26
    Non-operating income taxes                     (19)       (18)       6
                                               --------    ------- --------
                                                    59         42       32
                                               --------    ------- --------
Income Before Interest and Other Charges           925        908      767
                                               --------    ------- --------

Interest and Other Charges
    Interest on long-term debt                     300        311      333
    Distributions on Trust Preferred Securities     27         27       17
    Interest on short-term debt and other          119        121       86
    Preferred dividend requirements of subsidiaries  7          8       12
    Gain (Loss) on reacquired preferred stock        3          1      (10)
                                               --------    ------- --------
                                                   456        468      438
                                               --------    ------- --------

Income before Extraordinary Items                  469       440       329
                                               --------   -------  --------

Extraordinary loss - Discontinuance of SFAS
  No. 71(net of tax of $5)                          (8)       --        --
Extraordinary loss - Loss on Reacquired Debt
  (net of tax of $3)                                (6)       --        --
Extraordinary loss - United Kingdom windfall
  profits tax                                       --        --      (176)
                                               --------   -------  --------

Net Income for Common Stock                      $ 455      $ 440    $ 153
                                               ========    ======= ========

Average Common Shares Outstanding                212.6      212.4    212.1

Basic and Diluted EPS before Extraordinary Items $2.21      $2.07    $1.55
Basic and Diluted EPS from Extraordinary Items   (0.07)        --    (0.83)
                                               --------    ------- --------
Basic and Diluted EPS                            $2.14      $2.07    $0.72
                                               ========    ======= ========

Dividends Paid per Share of Common Stock         $1.74      $1.74    $1.74
                                               ========    ======= ========

  The accompanying notes to consolidated financial statements are an integral
                            part of these statements.


                                      35
<PAGE>
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
(millions)
<TABLE>
<CAPTION>

                                                                      Accumulated
                                                 Additional              Other
                                        Common    Paid-in   Retained  Comprehensive
                                         Stock    Capital   Earnings   Income(Loss)     Total
                                        --------------------------------------------   -------
<S>                                     <C>      <C>        <C>       <C>               <C>

Beginning Balance -- January 1, 1997      $740     $1,022    $1,967          $73       $3,802
   Sale of common stock                      3         17        --           --           20
   Common stock dividends                   --         --      (369)          --         (369)
                                                                                       -------
                                                                                        3,453
   Comprehensive Income:
      Foreign currency translation adjustment
        (net of tax of $23)                 --         --        --          (48)         (48)
      Unrealized loss on securities
        (net of tax of $0.3)                --         --        --           (1)          (1)
      Minimum pension liability (net of
         tax of $0.3)                       --         --        --           (1)          (1)
      Net Income                            --         --       153           --          153
                                                                                       -------
         Total comprehensive income                                                       103
                                         ------------------------------------------    -------
Ending Balance -- December 31, 1997       $743     $1,039    $1,751          $23       $3,556
                                         ==========================================    =======

Beginning Balance -- January 1, 1998      $743     $1,039    $1,751          $23       $3,556
   Sale of common stock                      1         10        --           --           11
   Common stock dividends                   --         --      (370)          --         (370)
   Other                                    --         --         2           --            2
                                                                                       -------
                                                                                        3,199

   Comprehensive Income:
      Foreign currency translation
        adjustment (net of tax of $2)        --        --        --            7            7
      Unrealized loss on securities
        (net of tax of $8)                   --        --        --          (14)         (14)
      Adjustment for gain included in net
        income (net of tax $4)               --        --        --           (7)          (7)
      Minimum pension liability (net of
        tax of $0.6)                         --        --        --           (1)          (1)
      Net Income                             --        --       440           --          440
                                                                                       -------
         Total comprehensive income                                                       425

                                         ------------------------------------------    -------
Ending Balance -- December 31, 1998        $744    $1,049    $1,823           $8       $3,624
                                         ==========================================    =======

Beginning Balance -- January 1, 1999       $744    $1,049    $1,823           $8       $3,624
   Sale of common stock                      --         1        --           --            1
   Common stock dividends                    --        --      (370)          --         (370)
   Other                                     --         1        (2)          --           (1)
                                                                                       -------
                                                                                        3,254
   Comprehensive Income:
      Foreign currency translation
        adjustment (net of tax of $15)       --        --        --          (28)         (28)
      Minimum pension liability (net of
        tax of $0.7)                         --        --        --            2            2
      Net Income                             --        --       455           --          455
                                                                                       -------
         Total comprehensive income                                                       429

                                         ------------------------------------------    -------
Ending Balance -- December 31, 1999        $744    $1,051    $1,906         ($18)      $3,683
                                         ==========================================    =======
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.


                                       36
<PAGE>
CSW
Consolidated Balance Sheets
Central and South West Corporation
--------------------------------------------------------------------------------
                                                              As of December 31,
                                                            --------------------
                                                              1999       1998
                                                            ---------  ---------
                                                                 (millions)
ASSETS
Fixed Assets
    Electric
        Production                                             $ 5,901   $ 5,887
        Transmission                                             1,663     1,594
        Distribution                                             4,896     4,681
        General                                                  1,437     1,380
        Construction work in progress                              205       166
        Nuclear fuel                                               227       207
                                                               -------   -------
                                                                14,329    13,915
    Other diversified                                              353       333
                                                               -------   -------
                                                                14,682    14,248
  Less - Accumulated depreciation and amortization               6,008     5,652
                                                               -------   -------
                                                                 8,674     8,596
                                                               -------   -------
Current Assets
    Cash and temporary cash investments                            270       157
    Special deposits for reacquisition of long-term debt            50        --
    Accounts receivable                                          1,140     1,110
    Materials and supplies, at average cost                        149       191
    Electric utility fuel inventory                                129        90
    Under-recovered fuel costs                                      52         4
    Notes receivable                                                53       109
    Prepayments and other                                           84        90
                                                               -------   -------
                                                                 1,927     1,751
                                                               -------   -------
Deferred Charges and Other Assets
    Regulatory assets                                              219     1,113
    Regulatory assets designated for securitization                953        --
    Other non-utility investments                                  454       432
    Securities available for sale                                   62        66
    Benefit costs                                                  202       185
    Goodwill                                                     1,330     1,402
    Other                                                          341       352
                                                               -------   -------
                                                                 3,561     3,550
                                                               -------   -------
                                                               $14,162   $13,897
                                                               =======   =======






  The accompanying notes to consolidated financial statements are an integral
                            part of these statements.


                                       37
<PAGE>

Consolidated Balance Sheets
Central and South West Corporation
---------------------------------------------------------------------------
                                                       As of December 31,
                                                     ----------------------
                                                      1999          1998
                                                     --------      --------
CAPITALIZATION AND LIABILITIES                             (millions)
Capitalization
    Common stock:   $3.50 par value
        Authorized shares:   350.0 million shares
        Issued and outstanding: 212.6 million shares
          in 1999 and 212.6 million shares in 1998     $ 744         $ 744
    Paid-in capital                                    1,051         1,049
    Retained earnings                                  1,906         1,823
    Accumulated other comprehensive income               (18)            8
                                                     --------      --------
                                                       3,683  47%    3,624  45%
                                                     ------------- -------------

    Preferred Stock                                       18  --%      176   2%
    Certain Subsidiary-obligated, mandatorily redeemable
       preferred securities of subsidiary trusts holding
       solely Junior Subordinated Debentures of such
       Subsidiaries                                      335   4%      335   4%
    Long-term debt                                     3,821  49%    3,938  49%
                                                     ------------- -------------
          Total Capitalization                         7,857 100%    8,073 100%
                                                     ------------- -------------

Current Liabilities
    Long-term debt due within twelve months              256           169
    Short-term debt                                    1,346           811
    Short-term debt - CSW Credit                         754           749
    Loan notes                                            24            32
    Accounts payable                                     581           624
    Accrued taxes                                        187           190
    Accrued interest                                      64            84
    Other                                                175           218
                                                     --------      --------
                                                       3,387         2,877
                                                     --------      --------
Deferred Credits
    Accumulated deferred income taxes                  2,431         2,410
    Investment tax credits                               254           267
    Other                                                233           270
                                                     --------      --------
                                                       2,918         2,947
                                                     --------      --------
                                                     $14,162       $13,897
                                                     ========      ========








  The accompanying notes to consolidated financial statements are an integral
                            part of these statements.

                                       38
<PAGE>

Consolidated Statements of Cash Flows
Central and South West Corporation
--------------------------------------------------------------------------------
                                                For the Years Ended December 31,
                                                --------------------------------
                                                  1999        1998         1997
                                                 --------    ------      -------
                                                          (millions)
OPERATING ACTIVITIES
    Net income for common stock                  $ 455       $ 440       $ 153
    Non-cash Items and Adjustments
        Depreciation and amortization              580         552         529
        Deferred income taxes and investment
         tax credit                                 24         (56)        110
        Preferred stock dividends                    7           8          12
        Gain on reacquired preferred stock           3           1         (10)
        Charges for investments and assets          --          39          53
        Extraordinary loss - Discontinuance of
          SFAS No. 71                                8          --          --
        Extraordinary loss - Loss on Reacquired
          Debt                                       6          --          --
        Gain on sale of investments                (35)        (13)         --
    Changes in Assets and Liabilities
        Accounts receivable                        (49)       (187)       (140)
        Accounts payable                           (19)         69          59
        Accrued taxes                               --          20        (153)
        Fuel recovery                              (75)        109         (37)
        Fuel inventory                             (38)        (25)         37
        Other                                      (64)        (15)        113
                                                  -----       -----       -----
                                                   803         942         726
                                                  -----       -----       -----
INVESTING ACTIVITIES
    Construction expenditures                     (639)       (492)       (507)
    Disposition of plant                            (1)         (5)          6
    CSW Energy/CSW International projects         (182)       (184)       (382)
    Cash proceeds from sale of investments          80          56          --
    Other                                          (16)        (10)        (21)
                                                  -----       -----       -----
                                                  (758)       (635)       (904)
                                                  -----       -----       -----
FINANCING ACTIVITIES
    Common stock sold                                1          11          20
    Proceeds from issuance of long-term debt       500         154          --
    Reacquisition/Maturity of long-term debt      (342)       (182)       (253)
    Redemption of preferred stock                 (160)        (28)       (114)
    Trust Preferred Securites sold                  --          --         323
    Special deposits for reacquisitions of
      long-term debt                               (50)         --          --
    Other financing activities                     (41)         (4)         (3)
    Change in short-term debt                      541         202         414
    Payment of dividends                          (378)       (378)       (383)
                                                  -----       -----       -----
                                                    71        (225)          4
                                                  -----       -----       -----

Effect of exchange rate changes on cash and cash
   equivalents                                      (3)         --          (5)
                                                  -----       -----       -----

Net Change in Cash and Cash Equivalents            113          82        (179)
Cash and Cash Equivalents at Beginning of Year     157          75         254
                                                  -----       -----       -----
Cash and Cash Equivalents at End of Year         $ 270       $ 157       $  75
                                                  =====       =====       =====

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized       $ 466       $ 446       $ 413
                                                  =====       =====       =====
    Income taxes paid                            $ 175       $ 258       $ 412
                                                  =====       =====       =====




   The accompanying notes to consolidated financial statements are an integral
                            part of these statements.


                                      39
<PAGE>


CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Nature of Operations
      CSW is a registered  holding company under the Holding Company Act subject
to  regulation  by the  SEC.  The U.S.  Electric  Operating  Companies  are also
regulated by the SEC under the Holding Company Act.

      The principal  business of the U.S.  Electric  Operating  Companies is the
generation,  transmission,  and distribution of electric power and energy. These
companies  are subject to regulation by the FERC under the Federal Power Act and
follow the Uniform System of Accounts  prescribed by the FERC.  They are subject
to further regulation with regard to rates and other matters by state regulatory
commissions as follows: CPL and WTU are subject to the Texas Commission;  PSO is
subject to the  Oklahoma  Commission;  and  SWEPCO is  subject to the  Arkansas,
Louisiana, Oklahoma and Texas Commissions.

      The  principal  business  of SEEBOARD  is the  distribution  and supply of
electricity  and  gas in  South  East  England.  SEEBOARD  is  subject  to  rate
regulation by the DGEGS.

      In addition to electric utility operations,  CSW has subsidiaries involved
in a variety of business  activities.  CSW Energy and CSW  International  pursue
cogeneration and other energy-related  ventures. CSW Credit factors the accounts
receivable of affiliated and non-affiliated companies. C3 Communications pursues
telecommunications  projects.  CSW Leasing has investments in leveraged  leases.
EnerShop offers  energy-management  services. CSW Energy Services pursued retail
energy  markets  outside of CSW's  traditional  service  territory,  until these
activities  were  discontinued in early 1999. In the fourth quarter of 1999, CSW
Energy Services began operating a staffing services company for electric utility
nuclear power plants, which was previously a PSO investment.

      The more significant  accounting policies of the CSW System are summarized
below.

      Principles of Consolidation
      The consolidated  financial statements include the accounts of CSW and its
subsidiary  companies.  The consolidated  financial  statements for CPL, PSO and
SWEPCO include their  respective  capital trusts.  All significant  intercompany
transactions have been eliminated.

      Use of Estimates
      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and  liabilities  along
with  disclosure of contingent  liabilities at the date of financial  statements
and the reported  amounts of revenues and expenses during the reporting  period.
Actual results could differ from those estimates.

      Fixed Assets and Depreciation
      U.S.   Electric   fixed  assets  are  stated  at  the  original   cost  of
construction,  which  includes the cost of  contracted  services,  direct labor,
materials,  overhead  items and  allowances  for  borrowed and equity funds used
during  construction.  SEEBOARD's fixed assets are stated at their original fair

                                       40
<PAGE>

market value which existed on the date of acquisition  plus the original cost of
property acquired or constructed since the acquisition, less disposals.

      Provisions for depreciation of plant are computed using the  straight-line
method,  generally  at  individual  rates  applied  to the  various  classes  of
depreciable  property.  The annual average  consolidated  composite rates of the
Registrants are presented in the following table.

                         CSW      CPL       PSO      SWEPCO     WTU
                      --------------------------------------------------
           1999         3.3%      3.1%      3.1%      3.3%      3.3%
           1998         3.4%      3.0%      3.1%      3.3%      3.2%
           1997         3.4%      3.0%      3.3%      3.2%      3.3%

      CPL Nuclear Decommissioning of STP
      At the end of  STP's  service  life,  decommissioning  is  expected  to be
accomplished using the  decontamination  method,  which is one of the techniques
acceptable to the NRC. Using this method, the  decontamination  activities occur
as soon as possible after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location,  and the site is generally
returned to its original condition.

      CPL's  decommissioning  costs are accrued and funded to an external  trust
over the  expected  service life of the STP units.  The  existing NRC  operating
licenses  will  allow the  operation  of STP Unit 1 until  2027 and Unit 2 until
2028. CPL pays annual  decommissioning  costs based on the estimated future cost
to decommission STP, including escalation for expected inflation to the expected
time of decommissioning.

      CPL estimates its portion of the costs of  decommissioning  STP to be $289
million in 1999 dollars based on a study  completed in 1999. CPL is accruing and
recovering these  decommissioning  costs through rates based on the service life
of STP at a rate of $8.2  million  per  year.  The funds  are  deposited  with a
trustee  under the terms of an  irrevocable  trust  and are  reflected  in CPL's
consolidated   balance  sheets  as  Nuclear   decommissioning   trust,   with  a
corresponding amount accrued in Accumulated depreciation.  On CSW's consolidated
balance sheets,  the irrevocable trust is included in Deferred Charges and Other
Assets, Other, with a corresponding amount accrued in Accumulated  depreciation.
In CSW's and CPL's consolidated  statements of income, the income related to the
irrevocable  trust is recorded in Other Income and  Deductions,  Other. In CPL's
consolidated   statements  of  income,  the  interest  expense  related  to  the
irrevocable trust is recorded in Interest  Charges,  Interest on short-term debt
and other.  In CSW's  consolidated  statements  of income the  interest  expense
related to the  irrevocable  trust is recorded in  Interest  and Other  Charges,
Interest on short-term  debt and other.  At December 31, 1999, the nuclear trust
balance was $86.1 million.

      Electric Revenues and Fuel
      The  U.S.  Electric   Operating   Companies  record  revenues  based  upon
cycle-billings.  Electric service  provided  subsequent to billing dates through
the end of each calendar month are accrued for by estimating  unbilled  revenues
in accordance with industry standards.

      CPL,  SWEPCO  and WTU  recover  retail  fuel  costs  in  Texas  as a fixed
component of rates whereby  over-recoveries of fuel are payable to customers and
under-recoveries may be billed to customers after Texas Commission approval. The
cost  of  fuel  is  charged  to  expense  as  incurred,   with   resulting  fuel
over-recoveries  and  under-recoveries  recorded as regulatory  liabilities  and
assets.  PSO recovers  fuel costs in Oklahoma  through  service  level fuel cost
adjustment  factors,  and SWEPCO  recovers  fuel costs in Arkansas and Louisiana
through automatic fuel recovery mechanisms.  The application of these mechanisms
varies by jurisdiction.  See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS,  for
further information about fuel recovery.

                                       41
<PAGE>

      CPL, PSO and WTU recover  fuel costs  applicable  to wholesale  customers,
which are regulated by the FERC,  through an automatic fuel  adjustment  clause.
SWEPCO  recovers fuel costs  applicable to wholesale  customers  through formula
rates.

      CPL amortizes  direct nuclear fuel costs to fuel expense on the basis of a
ratio of the  estimated  energy  used in the core to the energy  expected  to be
derived from such fuel  assembly  over its life in the core. In addition to fuel
amortization,  CPL also records nuclear fuel expense as a result of other items,
including  spent fuel  disposal fees assessed on the basis of net MWHs sold from
STP and DOE special assessment fees for  decontamination  and decommissioning of
the enrichment facilities on the basis of prior usage of enrichment services.

      Accounts Receivable
      CSW Credit purchases,  without recourse,  the billed and unbilled accounts
receivable of the U.S. Electric Operating  Companies and certain  non-affiliated
public utility companies.

      Regulatory Assets and Liabilities
      For their regulated  activities,  the U.S.  Electric  Operating  Companies
follow SFAS No. 71,  which  defines the  criteria  for  establishing  regulatory
assets  and  regulatory  liabilities.  See  NOTE 2.  LITIGATION  AND  REGULATORY
PROCEEDINGS - Electric Utility Restructuring Legislation for a discussion of the
continued  application of SFAS No. 71 to the Texas Electric Operating Companies.
Regulatory  assets represent  probable future revenue to the company  associated
with  certain  costs,  which  will  be  recovered  from  customers  through  the
ratemaking process.  Regulatory liabilities represent probable future refunds to
customers.  The regulatory  assets are currently being recovered in rates or are
probable of being recovered in rates.  The unamortized  balances are included in
the table below.

                                                      1999      1998
                                                   --------  --------
                                                        (millions)
As of December 31
   Regulatory Assets
     Deferred plant costs (1)                        $491        $497
     Mirror CWIP asset                                257         257
     Income tax related regulatory assets, net        318         308
     Deferred restructuring and rate case costs (2)    22          26
     OPEBs                                              2           2
     Under-recovered fuel costs (3)                    52           4
     Loss on reacquired debt                          133         153
     Fuel settlement (4)                                7          14
     Other                                             11          10
                                                   --------  --------
                                                   $1,293      $1,271
                                                   ========  ========
   Regulatory Liabilities
     Refunds due customers (5)                        $15         $22

     Income tax related regulatory
       liabilities,  net                               --          --
                                                   --------  --------
                                                      $15         $22
                                                   ========  ========

(1)   $8 million and $15 million earning no return in 1999 and 1998, amortized
      through 2001.
(2)   $8 million and $16 million  earning no return in 1999 and 1998,  amortized
      by the end of 2000;  $7 million and $10 million  earning no return in 1999
      and 1998, amortized through 2001.
(3)   $6 million earning no return in 1999,  amortized over twelve month period,
      recalculated twice each year.
(4)   $7 million and $14 million earning no return in 1999 and 1998, amortized
      by the end  of 2006.
(5)   $15 million earning no return in 1998, amortized over twelve month period,
      recalculated twice each year.


      Under provisions of the Texas  Legislation,  CPL filed an application with
the  Texas  Commission  to  securitize   generation-related  regulatory  assets.
Management  believes the  unamortized  regulatory  asset amounts at December 31,

                                       42
<PAGE>

1999 will either be recovered  through:  (1) regulated  rates; (2) stranded cost
recovery;  or (3)  FERC  jurisdictional  rates.  The  legislation  provides  for
securitization of 100% of regulatory  assets and 75% of ECOM.  Regulatory assets
in the amount of $763.7  million have been  approved for  securitization  by the
Texas  Commission,  and a draft order has been prepared in this case.  The Texas
Commission  has  indicated  that it expects to issue a final order in late March
2000.  The  settlement  also calls for $290  million  of the  amount  originally
requested  to be included in the  calculation  of stranded  costs in CPL's March
2000 transmission and distribution cost filing.  The  securitization  amount was
reduced by $186 million from the amount originally requested to reflect customer
benefits  associated with accumulated  deferred income taxes. CPL previously had
proposed to flow these  benefits  back to customers  over the 14-year bond term.
See MD&A  Securitization  of  Generation-related  Regulatory Assets and Stranded
Costs and NOTE 2.  LITIGATION  AND  REGULATORY  PROCEEDINGS  - Electric  Utility
Restructuring  Legislation for a discussion of CPL's securitization  application
and the Texas Legislation.

      Discontinuance of SFAS No. 71
      Application  of SFAS No. 71 was  discontinued  in 1999 for CPL's and WTU's
generation  business in Texas and SWEPCO's  generation  business in Arkansas and
Texas  resulting  from   legislation   passed  in  those  states.   See  MD&A  -
Securitization  of  Generation-related  Regulatory Assets and Stranded Costs and
NOTE 2. LITIGATION AND REGULATORY  PROCEDURES - Electric  Utility  Restructuring
Legislation for additional  information.  The following table summarizes the net
assets included in Electric  Utility Plant related to each company's  generation
plant for which the  application  of SFAS No. 71 was  discontinued,  compared to
total assets at December 31, 1999.

                         Generation Net Assets
                              Which For
                           SFAS No. 71 Was
        Company             Discontinued          Total Assets
      ------------------------------------------------------------
                                          (millions)
      CPL                       $1,872                $4,848
      SWEPCO                       226                 2,108
      WTU                          168                   861

      Goodwill Resulting from SEEBOARD Acquisition
      The  acquisition of SEEBOARD was accounted for as a purchase  combination.
The purchase  price has been  allocated  and is  reflected  in the  consolidated
financial statements. The goodwill,  resulting from the SEEBOARD acquisition, is
being amortized on a straight-line  basis over 40 years. The unamortized balance
of the SEEBOARD goodwill at December 31, 1999 was $1.3 billion.  CSW continually
evaluates  whether  circumstances  have  occurred  that  indicates the remaining
useful life of goodwill warrants revision.

      Long-Term Contract
      In a  joint  venture,  SEEBOARD  Powerlink  won a  30-year,  $1.6  billion
contract  to  operate,  maintain,  finance  and  renew  the  high-voltage  power
distribution network of the London Underground.  Revenues from this contract are
recognized  under the  percentage of completion  method in line with progress on
defined contract segments.

      Foreign Currency Translation
      The financial  statements of SEEBOARD U.S.A.,  which are included in CSW's
consolidated  financial statements,  have been translated from British pounds to
U.S.  dollars in accordance  with SFAS No. 52. All asset and liability  accounts
are  translated  at the exchange  rate at the end of the period,  and all income
statement  items are  translated at the weighted  average  exchange rate for the
applicable  period.  All the  resulting  translation  adjustments  are  recorded
directly  to  "Accumulated  other  comprehensive  income" on CSW's  Consolidated
Balance  Sheets.  Cash flow  statement  items are translated at a combination of

                                       43
<PAGE>

average,  historical  and current  exchange  rates.  The non-cash  impact of the
changes  in  exchange  rates on cash and cash  equivalents,  resulting  from the
translation  of  items  at the  different  exchange  rates,  is  shown  on CSW's
Consolidated  Statements  of Cash Flows in "Effect of exchange  rate  changes on
cash and cash equivalents."

      One British pound equals the following U.S. dollar amounts:

                                    1999        1998         1997
                                  ---------   ----------  -----------
      At December 31               $1.62        $1.66       $1.65

      Weighted average for
      the 12 months ended
      December 31                  $1.62        $1.66       $1.58

      See NOTE 18. SOUTH AMERICAN  INVESTMENTS for  information  regarding CSW's
investments in Brazil and Chile.

      Cash Equivalents
      Cash  equivalents  are considered to be highly liquid  instruments  with a
maturity of three months or less.  Accordingly,  temporary cash  investments and
advances to affiliates are considered cash equivalents.

      Risk Management
      CSW has, at times,  been exposed to currency and interest rate risks which
reflect the floating  exchange rate that exists between the U.S.  dollar and the
British pound. CSW has utilized certain risk management  tools,  including cross
currency swaps, foreign currency futures and foreign currency options, to manage
adverse  changes in  exchange  rates and to  facilitate  financing  transactions
resulting from CSW's acquisition of SEEBOARD.

      SEEBOARD has entered into contracts for  differences to reduce exposure to
fluctuations  in the price of electricity  purchased  from the United  Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's  electric  industry  for  the  bulk  trading  of  electricity  between
generators and suppliers.

      CSW accounts for these transactions as hedge transactions and any gains or
losses associated with the risk management tools are recognized in the financial
statements  at the time the hedge  transactions  are  settled.  CSW believes its
credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT, NOTE 7.
FINANCIAL  INSTRUMENTS;  NOTE 17. NEW  ACCOUNTING  STANDARDS  and NOTE 18. SOUTH
AMERICAN INVESTMENTS for additional information.

      Securities Available for Sale
      CSW accounts for its  investments in equity  securities in accordance with
SFAS No. 115. The investments have been designated as available for sale, and as
a result are stated at fair value.  Unrealized  holding gains and losses, net of
related taxes, are included in Accumulated other  comprehensive  income on CSW's
Consolidated  Balance Sheets.  Information related to these securities available
for sale as of December 31, 1999 is presented in the following table.

                                  Original Unrealized Holding
                                   Cost     Gains / (Losses)    Fair Value
           ---------------------------------------------------------------
                                                (millions)

           Securities available
           for sale                $110           $(48)            $62


                                       44
<PAGE>

      As of December 31, 1999,  CSW  International  has invested $110 million in
stock of a Chilean electric company.  The investment is classified as securities
available for sale and  accounted for by the cost method.  Based on the year-end
market  value  of the  shares  and  foreign  exchange  rates,  the  value of the
investment  at December 31, 1999 is $62 million.  The  reduction in the carrying
value of this investment has been reflected in Accumulated  other  comprehensive
income in CSW's Consolidated Balance Sheets.  Management views its investment in
Chile as a long-term  investment strategy and believes this investment continues
to have significant long-term value and that it is recoverable.  Management will
continue to closely  evaluate the changes in the South American  economy and its
impact on CSW  International's  investment in the Chilean electric company.  See
NOTE 18. SOUTH AMERICAN INVESTMENTS.

      Inventory
      CPL,  PSO and WTU utilize the LIFO method for the  valuation of all fossil
fuel  inventories.  SWEPCO continues to utilize the weighted average cost method
pending  approval of the  Arkansas  Commission  to utilize the LIFO  method.  At
December  31,  1999,  none of the U.S.  Electric  Operating  Companies  had LIFO
reserves.  LIFO reserves are the excess of the inventory  replacement  cost over
the carrying amount on the balance sheet.

      Comprehensive Income
      Consistent   with  the   requirements  of  SFAS  No.  130,  CSW  discloses
comprehensive  income.  Comprehensive  income is defined as the change in equity
(net  assets) of a business  enterprise  during a period from  transactions  and
other events and circumstances from non-owner  sources.  It includes all changes
in equity during a period except those resulting from  investments by owners and
distributions to owners.

      Components of Other Comprehensive Income
      The  following  table  provides the  components  that comprise the balance
sheet amount in Accumulated other comprehensive income.

                      Components                1999     1998     1997
         ----------------------------------------------------------------
                                                      (millions)

         Foreign Currency Adjustments             $6      $34      $27
         Unrealized Losses on Securities         (20)     (20)       1
         Minimum Pension Liability                (4)      (6)      (5)
                                              ---------------------------
                                                $(18)      $8      $23
                                              ---------------------------

      Segment Reporting
      CSW  has  adopted  SFAS  No. 131,  which  requires  disclosure  of  select
financial  information  by  business  segment  as viewed by the chief  operating
decision-maker. See NOTE 14. BUSINESS SEGMENTS.

      Reclassification
      Certain  financial  statement items for prior years have been reclassified
to conform to the 1999 presentation.

                                       45
<PAGE>


2.  LITIGATION AND REGULATORY PROCEEDINGS

      Litigation Related to the Rights Plan and AEP Merger
      Two lawsuits were filed in Delaware  state court seeking to enjoin the AEP
Merger.  CSW and each of its  directors  were named as defendants in both cases.
The first  suit  alleged  that the  Rights  Plan,  approved  by the CSW Board of
Directors  on  September  27,  1997,  constituted  a  "poison  pill"  precluding
acquisition  offers and resulting in a heightened  fiduciary duty on the part of
the CSW Board of Directors to pursue an auction-type sales process to obtain the
best value for CSW stockholders. The second suit alleged that the AEP Merger was
unfair to CSW stockholders in that it did not recognize the underlying intrinsic
value of CSW's assets and its future profitability. Both suits were dismissed in
1999.

      Electric Utility Restructuring Legislation
      On June 18,  1999,  legislation  was  signed  into law in Texas  that will
restructure the electric utility industry in the state. The new law, among other
things,

-   gives Texas customers of investor-owned utilities the opportunity to choose
    their electric provider beginning January 1, 2002;

-   provides for the recovery of stranded costs, which are defined as the excess
    of net book value of  generation  assets  over the defined  market  value of
    those assets;

-   requires reductions in nitrogen oxide and sulfur dioxide emissions;

-   provides a rate freeze until January 1, 2002 followed by a 6% rate reduction
    for residential and small commercial customers, an additional rate reduction
    for low-income customers and a number of customer protections; and

-   sets certain limits on capacity owned and controlled by power generation
    companies.

      Rural  electric  cooperatives  and municipal  electric  systems can choose
 whether to participate in retail  competition.  Delivery of the  electricity at
 regulated prices will continue to be the  responsibility  of the local electric
 transmission and distribution  utility company.  Each utility must unbundle its
 business activities into a retail electric provider, a power generation company
 and a transmission and distribution utility.

      CPL, SWEPCO and WTU filed their business  separation or "unbundling" plans
with the Texas  Commission on January 10, 2000.  The filing gives an overview of
how the Texas Electric  Operating  Companies  could separate into three separate
companies to meet the requirements of the Texas Legislation.  Specifically,  the
filing  describes the financial  aspects of separating the companies,  lists the
functions  each of the new business  entities  will  perform,  describes how the
companies will physically  separate their  operations,  discusses the accounting
aspects,  describes how the companies will handle  competitive  energy services,
and introduces interim and permanent codes of conduct. The main issues the Texas
Commission  will  determine  in this case are whether  CSW's  proposed  business
separation  method and the proposed code of conduct are in  compliance  with the
Texas Legislation. Other separation issues will be presented in a March 31, 2000
cost  unbundling  filing.  CPL,  SWEPCO  and WTU  expect an order from the Texas
Commission on this case in the second quarter of 2000.

      During 1999, legislation was also enacted in Arkansas that will ultimately
restructure  the  electric  utility  industry in that state.  SWEPCO will file a
business unbundling plan in Arkansas in mid-2000.


                                       46
<PAGE>

      The financial  statements of the U.S.  Electric  Operating  Companies have
historically  reflected the effects of applying the requirements of SFAS No. 71.
Pursuant to those  requirements,  the U.S.  Electric  Operating  Companies  have
recorded  regulatory  assets  and  liabilities  (probable  future  revenues  and
refunds) to reflect the economic effect of cost-based regulation. When a company
determines  that its  operations or a segment of its  operations no longer meets
the criteria for applying SFAS No. 71, it is required to apply the  requirements
of SFAS No. 101. Pursuant to those requirements and further guidance provided in
EITF 97-4, a company is required to write-off  regulatory assets and liabilities
related to deregulated  operations,  unless recovery of such amounts is provided
through rates to be collected in a continuing regulated portion of the company's
operations.  Additionally,  it is required to  determine if any plant assets are
impaired under SFAS No. 121.

      As a result  of the  scheduled  deregulation  of  generation  in Texas and
Arkansas,  CSW concluded that it should  discontinue the application of SFAS No.
71 for the Texas  generation  portion  of the  business  for CPL and WTU and the
Texas and  Arkansas  jurisdictional  portions  of the  generation  business  for
SWEPCO.  Consequently,  WTU recorded an extraordinary charge to earnings of $5.5
million and SWEPCO recorded an extraordinary  charge to earnings of $3.0 million
to reflect the effects of  discontinuing  the  application of SFAS No. 71 and to
write-off net regulatory assets that are not probable of recovery.

      The  discontinuance  of SFAS No. 71 for CPL did not result in a net charge
to earnings as such net  regulatory  assets,  pursuant to the  legislation,  are
expected to be recovered from  transmission and distribution  customers  through
rates that will continue to be regulated.

      Electric utilities who have stranded costs under the Texas Legislation are
allowed to recover  generation-related  regulatory assets that otherwise may not
be  recoverable  in the future  competitive  market.  All or a majority of those
costs can be refinanced through  securitization,  which is a financing structure
designed  to  provide  lower  financing  costs  than is  available  through  the
conventional  utility cost of capital model.  The  securitized  amounts are then
recovered through a non-bypassable  wires charge. On October 18, 1999, CPL filed
an  application  with the Texas  Commission  to securitize  approximately  $1.27
billion of its retail generation-related regulatory assets and approximately $47
million in other qualified costs. CPL expects to issue the securitization  bonds
in 2000,  depending  on market  conditions  and the  timing of an order from the
Texas  Commission.  Hearings were held in December 1999. CPL reached  settlement
agreements  which resolved all issues except the role of the Texas  Commission's
financial advisor.

      On  Feburary  10,  2000,  the  Texas  Commission  tentatively  approved  a
settlement,  which will permit CPL to securitize  approximately  $764 million of
regulatory  assets.  The Texas Commission is expected to grant final approval by
March 27, 2000. The settlement calls for CPL to reduce its proposed amount to be
securitized  from $1.27  billion to  approximately  $764  million of  regulatory
assets plus an estimated $29 million of other  qualified  costs.  The settlement
also calls for $290 million of the amount originally requested to be included in
the  calculation  of  stranded  costs  in  CPL's  March  2000  transmission  and
distribution  cost filing.  This filing will establish  stranded costs, of which
75% can be securitized and 25% can be recovered through a competitive transition
charge.  The  securitization  amount was reduced by $186 million from the amount
originally  requested to reflect customer  benefits  associated with accumulated
deferred  income taxes.  CPL previously had proposed to flow these benefits back
to customers over the 14-year bond term. A second phase of securitization  could
occur when the Texas  Commission  makes a preliminary  determination of stranded
costs,  currently  expected to occur in the first half of 2001. A non-bypassable
charge will be used to recover additional unsecuritized stranded cost amounts.

      Under the provisions of EITF 97-4, CPL's generation-related net regulatory
assets were  transferred to the  transmission  and  distribution  portion of the
business  and  will be  amortized  as they  are  recovered  through  charges  to
customers.  Management  currently  believes  all  generation-related  regulatory
assets for CPL will be recovered as provided under Texas Legislation.  If future
events were to occur that made the recovery of these assets no longer  probable,

                                       47
<PAGE>

CPL would  write-off  any  non-recoverable  portion of such assets as a non-cash
charge to earnings.

      The  discontinuance  of SFAS No. 71 for CPL's and WTU's  Texas  generation
business and SWEPCO's Texas and Arkansas generation business requires that these
businesses  no longer defer costs or recognize  liabilities  strictly  resulting
from the  actions  of a  regulator.  For  example,  operations  and  maintenance
expenditures will be expensed as incurred regardless of regulatory treatment. In
addition,  the equity component of allowance for funds used during  construction
can no longer be accrued for generation-related  capital projects.  Instead, the
businesses will be required to follow the interest  capitalization rules in SFAS
No. 34. SFAS No. 71 also allowed for the deferral of the loss on any  reacquired
debt. In December 1999, CPL incurred a loss totaling  approximately $8.5 million
that was expensed as an extraordinary item, since CPL is no longer able to apply
the provisions of SFAS No. 71 to its Texas generation-related operations.

      CPL's  amount of  regulatory  assets and  stranded  costs are subject to a
final  determination  by the Texas  Commission  in 2004.  The Texas  Legislation
provides  that all such finally  determined  stranded  costs will be  recovered.
Since  SWEPCO  and  WTU  are  not  expected  to have  net  stranded  costs,  all
generation-related  non-recoverable  net regulatory  assets were written off and
reflected on the  statement  of income as an  extraordinary  loss.  See NOTE 16.
EXTRAORDINARY ITEMS.

      Additionally,  CPL,  SWEPCO and WTU  performed  an  accounting  impairment
analysis of  generation  assets  under SFAS No. 121 and  concluded  there was no
impairment of generation  assets at that time. An impairment  analysis  involves
estimating  future net cash flows  arising from the use of an asset.  If the net
cash flows exceed the net book value of the asset,  then there is no  impairment
of the asset for  accounting  purposes.  CPL,  SWEPCO and WTU will  continue  to
review  their  assets  for   potential   impairment  if  events  or  changes  in
circumstances indicate the carrying amount of an asset may not be recoverable.

      The Texas Legislation also provides that each year during the 1999 through
2001 rate freeze period, utilities with stranded costs are required to apply any
earnings in excess of the most recently  approved cost of capital in a company's
last rate case (if issued on or after January 1, 1992) to reduce stranded costs.
As a result,  CPL recorded a net charge to earnings of $12.0 million for 1999 to
reflect the impact of this  provision.  Utilities  without  stranded  costs must
either flow such amounts back to customers or make capital  expenditures,  at no
charge to customers,  to improve  transmission or distribution  facilities or to
improve air quality.  As a result, WTU recorded a net charge to 1999 earnings of
$3.9 million and SWEPCO  recorded a net charge of $4.2 million to 1999  earnings
from the effect of the excess earnings under the Texas Legislation.  The charges
were  based  on  estimates  for the  current  year  and  are  subject  to  final
determination by the Texas Commission.

      Beginning  January  1,  2002,  fuel  costs  will not be  subject  to Texas
Commission fuel reconciliation proceedings.  Consequently,  CPL, SWEPCO, and WTU
will file a final fuel reconciliation with the Texas Commission reconciling fuel
costs  through the period  December 31, 2001.  These final fuel balances will be
included in each company's true-up proceeding in 2004.

      CSW  continues  to analyze  the impact of the  electric  utility  industry
restructuring  legislation on the U.S. Electric Operating  Companies.  The Texas
Commission has established numerous task forces, including  representatives from
CPL,  SWEPCO  and WTU,  to  address  various  issues  associated  with the Texas
Legislation and to provide guidance regarding implementation of restructuring.

      As previously discussed,  as a result of the Texas Legislation,  CPL filed
its  application  for   securitization  on  October  18,  1999  with  the  Texas
Commission.  CPL, SWEPCO and WTU filed business  separation plans with the Texas

                                       48
<PAGE>

Commission on January 10, 2000, and will file excess  earnings  reports and cost
unbundling plans in March 2000 and CPL will file its ECOM report in March 2000.

      Also  see  MD&A  -  RECENT  DEVELOPMENTS  AND  TRENDS,   Electric  Utility
Restructuring Legislation for a discussion on restructuring legislation.

      CPL Rate Review - Docket No. 14965
      In  November  1995,  CPL filed  with the  Texas  Commission  a request  to
increase  its retail base rates by $71 million.  On October 16, 1997,  the Texas
Commission  issued the CPL 1997 Final Order which lowered the annual retail base
rates of CPL by  approximately  $19  million,  or 2.5%,  from  CPL's  rate level
existing  prior to May 1996. The Texas  Commission  also included a "glide path"
rate  methodology  in the CPL 1997 Final Order  pursuant  to which CPL's  annual
rates  were  reduced by $13  million  beginning  May 1, 1998 with an  additional
reduction of $13 million on May 1, 1999.

      CPL  filed an  appeal of the CPL 1997  Final  Order to the State  District
Court of Travis County to raise  several  issues  related to the rate case.  The
primary  issues  include:  (i) the  classification  of $800  million of invested
capital in STP as ECOM which was also  assigned  a lower  return on equity  than
non-ECOM  property;  (ii) the Texas  Commission's  use of the "glide  path" rate
reduction methodology applied on May 1, 1998 and 1999; and (iii) the $18 million
of disallowed  affiliate expenses from CSW Services.  As part of the appeal, CPL
sought a temporary injunction to prohibit the Texas Commission from implementing
the "glide path" rate  reduction  methodology.  The court  denied the  temporary
injunction and the "glide path" rate  reduction was  implemented in May 1998 and
May 1999. Hearings on the appeal were held during the third quarter of 1998, and
a judgment was issued in February  1999  affirming the Texas  Commission  order,
except  for a  consolidated  tax issue in the  amount of $6  million,  which was
remanded to the Texas Commission.

      CPL filed an appeal of this most  recent  order to the Third  District  of
Texas  Court of  Appeals  and  management  is  unable to  predict  how the final
resolution  of these issues will  ultimately  affect CSW's and CPL's  results of
operations and financial  condition.  On May 4, 1999, AEP and CSW announced that
they had reached a stipulated  agreement  with the General  Counsel of the Texas
Commission  and other  intervenors  in the state of Texas related to the AEP/CSW
merger case.  The Texas  Commission  approved  the AEP Merger in early  November
1999. If the AEP Merger is ultimately consummated,  CSW will withdraw its appeal
with respect to the "glide path" rate reduction  methodology as discussed  above
as issue "(ii)" but will  continue  seeking the appeal of issues "(i) and (iii)"
as  discussed  above.  See NOTE 15.  PROPOSED AEP MERGER and MD&A - PROPOSED AEP
MERGER for a discussion on the stipulated agreement.

      See MD&A - RATES AND  REGULATORY  MATTERS,  CPL Rate  Review - Docket  No.
14965 for a discussion of the CPL 1997 Final Order.

      CPL Deferred Accounting
      By orders issued in 1989 and 1990, the Texas Commission  authorized CPL to
defer  certain  STP  Unit 1 and Unit 2 costs  incurred  between  the  commercial
operation  dates of those units and the effective  date of rates  reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting  as an  appropriate  mechanism  for the  Texas  Commission  to use in
preserving the financial  integrity of CPL, but remanded CPL's case to the Third
District  of Texas  Court of Appeals to consider  certain  substantial  evidence
points of error not  previously  decided by the Third District of Texas Court of
Appeals.  On August  16,  1995,  the Third  District  of Texas  Court of Appeals
rendered  its  opinion  in  the  remand   proceeding   and  affirmed  the  Texas
Commission's order in all respects.


                                       49
<PAGE>

      By orders issued in October 1990 and December 1990,  the Texas  Commission
quantified  the STP Unit 1 and Unit 2 deferred  accounting  costs and authorized
the inclusion of the  amortization  of the costs and associated  return in CPL's
retail rates.  These Texas Commission  orders were appealed to the Travis County
District  Court  where the appeals  are still  pending.  Language in the Supreme
Court of Texas' opinion in the appeal of the deferred  accounting  authorization
case suggests that the appropriateness of including deferred accounting costs in
rates  charged to customers is dependent on a finding in the first case in which
the  deferred  STP costs are  recovered  through  rates  that the  deferral  was
actually  necessary to preserve the  utility's  financial  integrity.  If in the
appeals of the October 1990 and December  1990 rate  orders,  the courts  decide
that subsequent  review under the financial  integrity  standard is required and
was not made in those  orders,  such rate orders  would be remanded to the Texas
Commission for the purpose of entering findings applying the financial integrity
standard.  Pending the ultimate  resolution of CPL's deferred accounting issues,
management  is  unable  to  predict  how its  deferred  accounting  orders  will
ultimately be resolved by the Texas Commission.

      If CPL's deferred accounting matters are not favorably resolved, CSW could
experience a material  adverse effect on its results of operations and financial
condition.  While  management is unable to predict the ultimate outcome of these
matters,  management  believes  either  that CPL will  receive  approval  of its
deferred  accounting  amounts or that CPL will be successful in renegotiation of
its rate  orders,  so that there  will be no  material  adverse  effect on CSW's
results of operation or financial condition.

      The  deferred  accounting  amounts  are  included  in  the  amounts  to be
securitized as part of the settlement amount approved by the Texas Commission in
its  October  18,  1999  securitization  filing.  See MD&A -  Securitization  of
Generation-related Regulatory Assets and Stranded Costs.

      CPL Fuel Reconciliation
      On December 31, 1998,  CPL filed with the Texas  Commission an application
to reconcile  fuel costs and to request  authorization  to carry the  reconciled
balance forward into the next reconciliation  period.  During the reconciliation
period of July 1, 1995  through June 30, 1998,  CPL incurred  $828.5  million in
eligible fuel and fuel-related expenses. The Texas jurisdictional  allocation of
such fuel and fuel-related expenses is $783.4 million.

      In  addition to  requesting  reconciliation  of its fuel and  fuel-related
expenses for the reconciliation  period, CPL requested  authority from the Texas
Commission to recover the reward earned during the  reconciliation  period under
the performance  standard adopted in the CPL 1997 Final Order for CPL's share of
STP. The Texas  Commission  adopted a three-year  average capacity factor of 83%
performance  standard for STP in that order.  During the reconciliation  period,
STP operated at a net capacity  factor of 93.1%,  resulting in a reward of $19.2
million.

      CPL requested  authority to recover the Texas portion of 50% of the reward
by including  1/36th of this amount in Texas retail  eligible  fuel expense each
month for the three-year  period following the Texas  Commission's  order in the
fuel  reconciliation  case. CPL further requested authority to apply the amounts
of the reward  recovered  through  Texas retail  eligible  fuel  expense  toward
additional  amortization of its STP deferred  accounting  regulatory  asset. The
remaining  50% of the reward  would be  "banked"  to be used  against  potential
future penalties or other disallowance of fuel costs.  Hearings were held before
an ALJ in June  1999.  In  July  1999,  all  parties  reached  a  settlement  in
principle.   The  settlement   resolves  all  disputed  issues  and  includes  a
disallowance  of $7.44  million  recorded  in the  third  quarter  of 1999.  The
settlement  provides for no STP performance  reward either now or in the future.
The Texas Commission  issued its final order on September 23, 1999 approving the
settlement.

                                       50
<PAGE>

      CPL Fuel Factor Filing
      In January 2000, CPL filed with the Texas  Commission an  Application  for
Authority to implement an increase in fuel factors of $55.4 million, or 16.5% on
an annual basis effective with the March 2000 billing month.  Additionally,  CPL
proposed to  implement an interim fuel  surcharge  of $36.5  million,  including
accumulated interest over a six-month period to collect its under-recovered fuel
costs  beginning in April 2000.  CPL entered into a settlement  providing for an
increase  in fuel  factors of $43.3  million or 12.9% and a  surcharge  of $24.7
million. The settlement will be implemented in March and April 2000.

      CPL Municipal Franchise Fee Litigation
      In May 1996,  the City of San Juan,  Texas  filed a class  action  suit in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged  underpayment  of municipal  franchise  fees. The plaintiffs'
third amended petition, filed in January 2000, asserts various contract and tort
claims against CPL as well as certain audit rights.  The third amended  petition
seeks  actual  damages  of up to $200  million,  punitive  damages of up to $100
million and attorneys'  fees. CPL filed a  counterclaim  for any  overpayment of
franchise fees it may have made as well as its attorneys' fees. CPL also filed a
motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction
and  pleas  in  abatement  asserting  that  the  Texas  Commission  has  primary
jurisdiction over the claims. In May 1996 and December 1996,  respectively,  the
Cities of Pharr,  Texas and San Benito,  Texas  filed  individual  suits  making
claims  virtually  identical to those claimed by the City of San Juan.  The suit
filed by the City of San Benito has been voluntarily dismissed.

      In January 1997,  CPL filed an original  petition at the Texas  Commission
requesting  the  Texas  Commission  to  declare  its  jurisdiction   over  CPL's
collection  and payment of municipal  franchise  fees. In April 1997,  the Texas
Commission   issued  a  declaratory   order  in  which  it  declined  to  assert
jurisdiction  over the claims of the City of San Juan.  CPL  appealed  the Texas
Commission's decision to the Travis County, Texas District Court, which affirmed
the Texas  Commission  ruling on February 19, 1999.  CPL appealed this ruling to
the Austin Court of Appeals;  oral argument was heard on this appeal in November
1999.

      After the Texas  Commission's  order,  the Hidalgo  County  District Court
overruled CPL's plea to the  jurisdiction  and plea in abatement.  In July 1997,
the Hidalgo  County  District  Court entered an order  certifying  the case as a
class action. CPL appealed this order to the Corpus Christi Court of Appeals. In
February 1998,  the Corpus  Christi Court of Appeals  affirmed the trial court's
order  certifying  the class.  CPL appealed the Corpus  Christi Court of Appeals
ruling to the Texas Supreme  Court,  which  declined to hear the case. In August
1998,  the Hidalgo  County  District  Court  ordered the case to  mediation  and
suspended all proceedings pending the completion of the mediation. The mediation
was completed in December 1998, but the case was not resolved.

      On January 5, 1999, a class notice was mailed to each of the cities served
by CPL.  Over 90 of the 128  cities  declined  to  participate  in the  lawsuit.
However, CPL has pledged that if any final, non-appealable court decision in the
litigation awards a judgement against CPL for a franchise underpayment, CPL will
extend  the  principles  of  that   decision,   with  regard  to  the  franchise
underpayment,  to the cities that decline to participate in the litigation.  The
plaintiffs filed a motion to extend the time for the cities to decide whether to
participate  in the lawsuit.  In December  1999,  the court ruled that the class
would consist of 30 cities,  and the  plaintiffs'  motion to extend the time for
the cities to participate in the lawsuit was withdrawn.  The City of Weslaco has
recently joined as an additional class representative.

      Although  CPL  believes  that it has  substantial  defenses to the cities'
claims and intends to defend  itself  against the cities'  claims and pursue its
counterclaims vigorously, management cannot predict the outcome of the municipal
franchise  fee  litigation  or its  impact on CSW's  results  of  operations  or
financial position.


                                       51
<PAGE>

      CPL Anglo Iron Litigation
      In April 1998,  CPL was sued by Anglo Iron in the United  States  District
Court for the  Southern  District  of Texas,  Brownsville  Division,  for claims
arising  from the  clean-up  of a site  owned  and  operated  by  Anglo  Iron in
Harlingen,  Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common
law  contribution  and  indemnity  for alleged  response and  clean-up  costs of
$328,139 and damages of $150,000 for "loss of fair market value" of the site. In
1999, the parties settled the case for $137,500, and the case was dismissed with
prejudice.

      CPL Sinton Landfill Litigation
      CPL,  along with over 30 others,  was named as a defendant in the district
court in San Patricio  County,  Texas.  The  plaintiffs  are  approximately  500
current and former  landowners  in the vicinity of a landfill  site near Sinton,
Texas. Each plaintiff alleges $10 million property damage and personal injury as
a result of alleged  contamination  from the site.  Plaintiffs made a collective
settlement demand upon CPL for $1.1 million.  In January 1999, in exchange for a
de minimus sum, CPL reached an agreement with Browning Ferris Industries,  Inc.,
the operator of the site, to indemnify CPL for any judgment or settlement amount
that CPL may owe to the  plaintiffs  in this case,  as well as CPL's  attorney's
fees  incurred  after the  agreement.  In August 1999,  the trial court  granted
summary  judgment for CPL. The plaintiffs  appealed the summary judgment ruling.
Management  believes that the ultimate resolution of this matter will not have a
material adverse impact on CSW's consolidated results of operations or financial
condition.

      CPL Valero Litigation
      In April  1998,  Valero  filed suit  against CPL in Nueces  County,  Texas
District Court, alleging claims for breach of contract and negligence.  Valero's
suit  seeks in excess of $11  million  as  damages  for  property  loss and lost
profits allegedly  incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. The parties held a settlement conference
in August 1999, but no progress was made toward settlement of the case. The case
is  currently  in  discovery.  Management  cannot  predict  the  outcome of this
litigation. However, management believes that CPL has valid defenses to Valero's
claims and intends to defend the matter  vigorously.  Management  also  believes
that the claims are covered by  insurance  and that the ultimate  resolution  of
this  matter  will not have a  material  adverse  impact  on CSW's  consolidated
results of operations or financial condition.

      CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
      17285)
      A joint complaint filed by CPL and WTU  with the Texas Commission asserted
that  since  January  1,  1997,  Texas  Utilities   Electric  Company  had  been
effectively  double charging for  transmission  service within ERCOT. A proposal
for decision received in February 1998 recommended approval of a proposal by CPL
and WTU to reduce by $15.5 million  annually their  payments to Texas  Utilities
Electric Company.  The Texas Commission approved the proposal in September 1998.
Although Texas Utilities  Electric  Company  appealed the Texas Commission final
order,  it refunded $26.6 million to CPL and WTU in November 1998.  Prior to the
Texas Commission's  September 1998 decision, the $15.5 million annual payment to
Texas Utilities  Electric Company was allocated to the U.S.  Electric  Operating
Companies.  As a result of this order,  the payment  continues to be recorded on
CPL's and WTU's books as a  reduction  to ERCOT  transmission  expense and there
will be no future expenses recorded on the books of PSO and SWEPCO.

      On  November  15,  1999,  CPL and WTU  reached  a  settlement  with  Texas
Utilities Electric Company. This settlement resulted in the execution of two new
Transmission  Service Agreements  retroactive to January 1, 1997. As a result of
this settlement, all pending litigation between Texas Utilities Electric Company
and CSW will be terminated and Texas  Utilities  Electric  Company will withdraw
its  appeal in  Docket  No.  17285.  CPL and WTU  agreed to pay Texas  Utilities
Electric Company $12 million during 2000. The $12 million  liability was accrued
on CPL's and WTU's books  during the fourth  quarter of 1999.  CPL accrued  $6.4

                                       52
<PAGE>

million and WTU accrued  $5.6  million.  In addition,  the two new  Transmission
Service  Agreements require CPL and WTU to pay for export  transmission  service
along with the ERCOT transmission charges approved by the Texas Commission.

      Transmission Coordination Agreement
      The transmission  coordination  agreement  provides the means by which the
U.S. Electric  Operating  Companies plan, operate and maintain the four separate
transmission systems as a single unit. The agreement also establishes the method
by which the U.S. Electric Operating  Companies allocate revenues received under
open  access  transmission  tariffs.  In  August  1998,  the FERC  accepted  the
transmission  coordination  agreement  for  filing,  suspended  it for a nominal
period, and made it effective  retroactive to January 1, 1997, subject to refund
and  investigation.  In the fourth quarter of 1998, the U.S. Electric  Operating
Companies and supporting  intervenor  signatories  filed an uncontested offer of
settlement.  The FERC issued an order on June 18, 1999,  accepting  the offer of
settlement. The FERC further ordered that appropriate refunds be made to reflect
the terms of the  revised  transmission  coordination  agreement.  In the second
quarter  of 1999,  the FERC also  issued an order  accepting  the U.S.  Electric
Operating Companies' compliance filing of their open access transmission tariff.
The FERC  previously had ordered the  compliance  filing to review the method by
which certain open access  transmission  tariff customers were to be charged for
transmission  service.  As a result of that order,  certain changes were made in
the  transmission  coordination  agreement  related to the allocation of certain
open access transmission  tariff revenues.  Each U.S. Electric Operating Company
will be allocated  revenue in proportion to each  company's  respective  revenue
requirement   for  the  service  it  provides  under  the  revised  open  access
transmission  tariff.  The  U.S.  Electric  Operating  Companies  requested  and
received  from the FERC a deferral  of their  refund  obligation  until the FERC
issues an order accepting the revised transmission coordination agreement.

      On  October  29,  1999,  CSW filed  with the FERC a  revised  transmission
coordination agreement. The revised transmission coordination agreement includes
changes  to the  original  transmission  coordination  agreement  to ensure  the
above-mentioned  allocation of revenues to each U.S. Electric Operating Company.
In 1999, each of the U.S. Electric  Operating  Companies  recorded the estimated
impact of the reallocation of open access  transmission  tariff revenues,  which
increased CSW's income before taxes by approximately $2.4 million.  The earnings
increase was related to additional  non-affiliated  revenues  resulting from the
open access  transmission  tariff.  On December 16, 1999,  the FERC accepted the
revised transmission coordination agreement,  which is retroactive to January 1,
1997.

      PSO Rate Review
      In July 1996, the Oklahoma Commission staff filed an application seeking a
review of PSO's earnings and in July 1997  recommended a rate reduction of $76.8
million for PSO.

      On  October  23,  1997,  the  Oklahoma  Commission  issued  a final  order
approving a stipulated  agreement  with parties to settle the rate inquiry.  The
PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates
beginning  with the December 1997 billing cycle by  approximately  $35.9 million
annually,  or a 5.3% decrease below the then current level of retail rates. Part
of the rate  reduction  included a reduction in annual  depreciation  expense of
approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement
resulted in PSO making a one-time  $29 million  refund to  customers in December
1997.

       The PSO 1997 Rate  Settlement  Agreement also called for PSO to eliminate
or  amortize  before its next rate filing  approximately  $41 million in certain
deferred assets,  approximately  $26 million of which had been expensed in 1996.
The remaining $15 million of deferred  assets,  which included  approximately $9
million of costs incurred for customer  energy  management  incentive  programs,
were written off in 1997. The financial  impact of the PSO 1997 Rate  Settlement
Agreement  on PSO's 1997  results of  operations  was a reduction in revenues of

                                       53
<PAGE>

$31.5  million and a reduction  in expenses of $4.1 million  which  included the
write-off of the previously mentioned deferred assets.

      The PSO 1997 Rate  Settlement  Agreement  resulted  in a material  adverse
effect on PSO's, but not CSW's,  results of operations for 1997 that will have a
continuing impact because of the rate decrease.  However, it reduced significant
risks for PSO related to this regulatory proceeding and should allow PSO's rates
to remain competitive for the foreseeable future.

      PSO PCB Cases
      PSO was named a defendant in petitions filed in state court in Oklahoma in
1996. The petitions allege that the plaintiffs suffered personal injury and fear
future  injury  as  a  result  of  contamination  by  PCBs  from  a  transformer
malfunction  that occurred in April 1982 at the Page Belcher Federal Building in
Tulsa,  Oklahoma.  Each of the plaintiffs  seeks actual and punitive  damages in
excess of $10,000.  Other claims arising from this incident were settled and the
suits  dismissed.  During 1999,  eleven cases were settled for a nominal  amount
covered  by PSO's  insurance,  and two  cases  were  dismissed  for  failure  to
prosecute. At December 31, 1999, nine cases remain pending.  Management believes
that PSO has  defenses  to the  remaining  cases  and  intends  to  defend  them
vigorously.  Management believes that the remaining claims, excluding claims for
punitive damages,  are covered by insurance and that the ultimate  resolution of
the  remaining  lawsuits  will not have a  material  effect on CSW's  results of
operations or financial condition.

      SWEPCO Louisiana Rate Review
      In December  1997,  the  Louisiana  Commission  announced  it would review
SWEPCO's  rates  and  service.  In  October  1999,  SWEPCO  and the staff of the
Louisiana  Commission  reached an agreement and stipulation,  which was filed on
October 14, 1999. The  significant  provisions of the agreement and  stipulation
follow:

-    SWEPCO's Louisiana retail  jurisdictional  revenues were reduced by $11
     million, effective with the December 1999 billing cycle;

-    SWEPCO is allowed to earn an 11.1% return on common equity;

-    SWEPCO is allowed to recover certain regulatory assets totaling $7.1
     million;

-    SWEPCO will be subject to a two-year base rate freeze, which includes force
     majeure provisions; and

-    SWEPCO will be allowed to increase depreciation rates for transmission,
     distribution and general plant.

      The  Louisiana  Commission  approved  the  agreement  and  stipulation  in
 November 1999, which was implemented in December 1999.

      SWEPCO Arkansas Rate Review
      In July 1998, the Arkansas Commission began a review of SWEPCO's earnings.
On July 30, 1999,  SWEPCO  entered into a settlement  agreement with the general
staff of the Arkansas Commission and the Arkansas Attorney General's Office. The
settlement  agreement reduces SWEPCO's Arkansas annual revenues by $5.4 million,
or 3%.  Additionally,  the stipulation and settlement  agreement  provides for a
10.75%  return on common  equity,  an increase  in  depreciation  rates,  and an
agreement by SWEPCO not to seek recovery of generation-related stranded costs.


                                       54
<PAGE>

      On September 23, 1999, the Arkansas  Commission  issued an order approving
the  stipulation  and settlement  agreement.  On October 25, 1999,  SWEPCO filed
compliance rate tariffs with the Arkansas Commission,  which are consistent with
the Arkansas  Commission order. The provisions of the settlement  agreement were
implemented in December 1999.

      SWEPCO Fuel Proceeding
      In May 1997,  SWEPCO filed with the Texas  Commission  an  application  to
reconcile   fuel  costs  and  implement  a  12-month   surcharge  of  fuel  cost
under-recoveries.  Because  of the  uncertainty  as to when a  surcharge  may be
implemented,  SWEPCO did not  propose a  surcharge  period or a total  surcharge
amount,  which  would  include  interest  through the entire  surcharge  period.
However,  SWEPCO indicated that it had under-recovered Texas jurisdictional fuel
costs of approximately $16.8 million,  including interest through December 1996.
Included in the $16.8 million balance are  fuel-related  litigation  expenses of
$5.0 million and an interest return of $2.0 million on the  unamortized  balance
of a fuel contract termination payment.

      On  December  8,  1997,  SWEPCO and the other  parties to the  proceedings
before  the Texas  Commission  filed a  settlement  on all  issues  except as to
whether  transmission  equalization  payments should be included in fuel or base
revenues.  The  settlement  resulted in a decrease of the  under-recovered  fuel
costs, and the resulting surcharge recovery, by $6.0 million, which was recorded
in 1997.  The  settlement  also provides  that  SWEPCO's  fuel and  fuel-related
expenses  during the  reconciliation  period were  reasonable  and necessary and
recoverable as fuel expense. Also, the settlement provides that SWEPCO's actions
in  litigating  and  renegotiating  certain fuel  contracts,  together  with the
prices, terms and conditions of the renegotiated contracts, were prudent.

      On April 8, 1998,  the ALJ issued a proposal  for decision  regarding  the
only  outstanding  issue,   recommending  that  SWEPCO  be  allowed  to  include
transmission equalization expense in eligible fuel expense. On May 19, 1998, the
Texas  Commission  reversed  the  ALJ  and  ordered  an  earnings  reduction  of
approximately  $1.8 million,  recorded in the second quarter of 1998. On June 8,
1998,  SWEPCO  filed a motion for  rehearing  on the  transmission  equalization
issue,  which was denied through operation of law. After the Texas  Commission's
order  on May 19,  1998,  SWEPCO  had  still  under-recovered  its fuel and fuel
related expenses. On July 1, 1998, the Texas Commission issued an order allowing
SWEPCO to surcharge its Texas retail  customers $6.9 million of  under-recovered
fuel and fuel-related  expenses and associated interest.  The surcharge began in
July 1998 and ended in June  1999.  SWEPCO  has filed an appeal  regarding  this
matter in the State District Court of Travis County, Texas. Management is unable
to predict the ultimate outcome of this litigation.  However,  SWEPCO has agreed
to withdraw the appeal if the AEP Merger is  consummated.  See NOTE 15. PROPOSED
AEP MERGER for additional information.

      SWEPCO Interim Fuel Refund
      On August 24, 1999, SWEPCO filed an application at the Texas Commission to
make an interim refund of fuel cost  over-recoveries of $7.5 million received by
SWEPCO from its Texas retail jurisdictional customers. The application requested
that the refund be made in October  1999.  On September  20, 1999, a stipulation
between  all  parties  was filed  with the  Texas  Commission,  which  preserved
SWEPCO's  application to refund $7.5 million to SWEPCO's Texas retail customers.
An order granting interim approval to make the refund in October 1999 was issued
by the hearing  examiner on September 24, 1999.  SWEPCO began  implementing  the
refund on customer  bills during the first  billing  cycle of October  1999.  On
October 21,  1999,  the Texas  Commission  issued a final  order which  affirmed
approval to refund the fuel cost over-recoveries.

                                       55
<PAGE>

      SWEPCO Lignite Mining Agreement Litigation
      SWEPCO and CLECO are each a 50% owner of Dolet Hills Power  Station Unit 1
and  jointly  own  lignite  reserves  in the Dolet  Hills  area of  northwestern
Louisiana.  In 1982,  SWEPCO and CLECO entered into a lignite  mining  agreement
with the DHMV,  a  partnership  for the mining and  delivery  of lignite  from a
portion of these reserves.

      On April 15,  1997,  SWEPCO  and CLECO sued DHMV and its  partners  in the
United States  District Court for the Western  District of Louisiana  seeking to
enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining
agreement,  including  provisions  relating  to the  quality  of  the  delivered
lignite,  pricing, and mine reclamation practices.  On June 15, 1997, DHMV filed
an answer denying the allegations in the suit and filed a counterclaim asserting
various  contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have
denied  the  allegations  contained  in the  counterclaims.  On January 8, 1999,
SWEPCO and CLECO  amended  the claims  against  DHMV in the lawsuit to include a
request that the lignite mining agreement be terminated.  The parties engaged in
unsuccessful settlement discussions in the third quarter of 1999 and early 2000.
The trial date is May 22, 2000.

      Although  management  cannot predict the ultimate  outcome of this matter,
management  believes that the resolution of this matter will not have a material
effect on CSW's results of operations or financial condition.

      Withdrawal of SWEPCO Cajun Asset Proposal
      Cajun filed a petition for reorganization  under  Chapter 11 of the United
States  Bankruptcy Code on December 21, 1994 under the supervision of the United
States  Bankruptcy  Court for the Middle District of Louisiana.  Both SWEPCO and
Louisiana  Generating LLC had filed  competing plans of  reorganization  for the
non-nuclear assets of Cajun with the bankruptcy court.

      On August 26, 1999, SWEPCO,  together with the Cajun Members Committee and
Washington-St.  Tammany Electric Cooperative,  reached a settlement agreement to
withdraw  the  jointly  filed  July  1999  SWEPCO  Plan  to  acquire  all of the
non-nuclear assets of Cajun. SWEPCO had deferred  approximately $13.0 million in
costs related to the Cajun acquisition on its consolidated  balance sheet. Under
the settlement agreement,  SWEPCO received $7.5 million on November 8, 1999. The
remaining  balance was written off in the third quarter of 1999,  resulting in a
$3.7 million after tax charge to earnings.

      WTU Fuel Factor and Interim Fuel Surcharge Filing
      In March 1998,  WTU filed with the Texas  Commission  an  application  for
authority to implement an increase in fuel factors of $7.4  million,  or 7.3% on
an annual  basis.  Additionally,  WTU proposed to implement a fuel  surcharge of
$6.8 million,  including accumulated interest over a six-month period to collect
its  under-recovered  fuel costs.  WTU implemented the revised fuel factors with
its June 1998 billing.

      In September 1999, WTU filed with the Texas  Commission an application for
authority to implement an increase in fuel factors of $13.5  million or 12.2% on
an annual  basis.  Additionally,  WTU  proposed  to  implement  an interim  fuel
surcharge  of $6.5  million,  including  accumulated  interest  over a six-month
period to collect its under-recovered  fuel costs. WTU proposed to implement the
revised fuel factors with its December 1999 cycle billing.  On November 4, 1999,
the Texas Commission approved WTU's application. The order allows an increase in
fuel  factors of 12.2% on an annual  basis  beginning  in the billing  cycle for
December   1999  and  to   surcharge   customers  to  recover  $6.5  million  of
under-recovered  fuel costs and associated  interest for six months beginning in
the billing cycle for January 2000.

                                       56
<PAGE>

      Regulatory Price Proposal for SEEBOARD
      On December 2, 1999,  OFGEM  published its final price  proposals from its
United  Kingdom  electricity  distribution  review.  OFGEM has proposed  revenue
reductions in SEEBOARD's  distribution  business of 21%. In addition,  OFGEM has
proposed  the  reallocation  of  a  further  12%  of  costs  out  of  SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999 and will take effect from April 1, 2000,  and remain in effect
for five years.  OFGEM's  proposals  will reduce net income for  SEEBOARD in the
year 2000 by approximately $40 million, dependent upon the level of further cost
reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A.,  its United Kingdom business segment,  was $113
million for the twelve months ended December 31, 1999.

      OFGEM also published the final price proposals for the electricity  supply
price review.  OFGEM has  recommended  that the price cap for charges  levied to
electricity  supply domestic and small business customers should be extended for
two years from April 1, 2000.  Overall,  these  proposals are expected to have a
broadly neutral effect on the results of CSW.

      The foregoing discussion  constitutes  forward-looking  information within
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.

      CSW Energy, Texas-New Mexico Power Company Phillips Litigation
      In May 1997, equipment operated by an unrelated third party allegedly came
in contact with a Texas-New  Mexico Power Company  transmission  line  rendering
Texas-New Mexico Power Company's Old Ocean switching  station  inoperable.  As a
result, Phillips' refinery, located in Sweeny, Texas, lost power.

      In October  1997,  Phillips  filed suit  against  Texas-New  Mexico  Power
Company in the District  Court of Brazoria  County,  Texas,  seeking  damages in
excess  of $36  million  associated  with the loss of power to its  refinery  in
Sweeny, Texas. Texas-New Mexico Power Company denies any liability to Phillips.

      In June 1999, Sweeny  Cogeneration  Limited  Partnership was notified that
Texas-New   Mexico  Power  Company  had  joined  Sweeny   Cogeneration   Limited
Partnership  as a third party  defendant  to the pending  litigation.  Texas-New
Mexico  Power  Company  is  claiming  that  during  the  construction  of Sweeny
Cogeneration Limited  Partnership's  cogeneration facility adjacent to Phillips'
refinery,  Sweeny  Cogeneration  Limited  Partnership  modified Texas-New Mexico
Power Company's equipment which was supplying power to the Phillips refinery. In
this connection, Texas-New Mexico Power Company alleges that Sweeny Cogeneration
Limited  Partnership  was  negligent  in the  construction  of the  cogeneraiton
facility.

      Sweeny  Cogeneration  Limited  Partnership  believes these allegations are
without  merit and intends to contest  vigorously  any claims made against it by
Phillips or Texas-New Mexico Power Company.  Management is unable to predict the
ultimate outcome of this pending  litigation.  If Texas-New Mexico Power Company
prevailed in the litigation, then CSW could experience a material adverse effect
on its results of operations but not on its financial condition.

      Other
      The  Registrants  are party to various  other  legal  claims,  actions and
complaints arising in the normal course of business.  Management does not expect
disposition  of  these  matters  to  have  a  material  adverse  effect  on  the
Registrants' results of operations or financial condition.


                                       57
<PAGE>

3. COMMITMENTS AND CONTINGENT LIABILITIES

      Construction and Capital Expenditures

      It is estimated that CSW, including the U.S. Electric Operating Companies,
SEEBOARD  and other  operations,  will  spend  approximately  $1,071  million in
capital   expenditures   (but  excluding   capital  that  may  be  required  for
acquisitions) during 2000. Substantial  commitments have been made in connection
with these programs. See MD&A - LIQUIDITY AND CAPITAL RESOURCES for expected use
of these expenditures.

CPL - $229 million  PSO - $174 million  SWEPCO - $159 million  WTU - $55 million

      Fuel and Related Commitments

      To  supply  a  portion  of their  fuel  requirements,  the  U.S.  Electric
Operating Companies have entered into various commitments for the procurement of
fuel.

      SWEPCO Henry W. Pirkey Power Plant
      In connection  with the South  Hallsville  lignite mining contract for its
Henry W. Pirkey Power Plant,  SWEPCO has agreed,  under certain  conditions,  to
assume the  obligations of the mining  contractor.  As of December 31, 1999, the
amount  SWEPCO  may have to assume  is $69  million,  which is the  contractor's
actual obligation outstanding at December 31, 1999.

      SWEPCO South Hallsville Lignite Mine
      As part of the process to receive a renewal of a Texas Railroad Commission
permit for lignite  mining at the South  Hallsville  lignite mine and  expansion
into the  Marshall  South  Lignite  Project  area,  SWEPCO has agreed to provide
guarantees of mine  reclamation in the amount of $85 million.  Since SWEPCO uses
self-bonding,  the guarantee  provides for SWEPCO to commit to use its resources
to complete the  reclamation in the event the work is not completed by the third
party  miner.  At December 31, 1999 the cost to reclaim the mine is estimated to
be approximately $36 million.

      Other Commitments and Contingencies

      CPL Nuclear Insurance
      In  connection  with the  licensing  and operation of STP, the owners have
purchased nuclear property and liability  insurance coverage as required by law,
and have executed indemnification agreements with the NRC in accordance with the
financial protection requirements of the Price-Anderson Act.

      The Price-Anderson Act, a comprehensive  statutory  arrangement  providing
limitations  on nuclear  liability and  governmental  indemnities,  is in effect
until August 1, 2002. The limit of liability  under the  Price-Anderson  Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December  1997.  The owners of STP are insured for their share of this liability
through a  combination  of private  insurance  amounting  to $200  million and a
mandatory  industry-wide program for self insurance totaling $9.145 billion. The
maximum  amount  that each  licensee  may be  assessed  under the  industry-wide
program of self insurance following a nuclear incident at an insured facility is
$83.9 million per reactor,  for any one nuclear  incident payable at $10 million
per year per  reactor.  An  additional  surcharge  of 5% of the  maximum  may be
payable if the total amount of public  claims and legal costs exceeds the limit.
CPL and each of the other STP owners are subject to such assessments,  which CPL
and the  other  owners  have  agreed  will be  allocated  on the  basis of their

                                       58
<PAGE>

respective  ownership  interests in STP. For purposes of these assessments,  STP
has two licensed reactors. CPL owns 25.2% of each reactor.

      The owners of STP currently maintain on-site decontamination liability and
property  damage  insurance  in the amount of $2.75  billion  provided  by NEIL.
Policies of insurance issued by NEIL stipulate that policy proceeds must be used
first to pay decontamination and cleanup costs before being used to cover direct
losses to property.  Under project  agreements,  CPL and the other owners of STP
will share the total cost of  decontamination  liability and property  insurance
for STP, including premiums and assessments,  on a pro rata basis,  according to
each owner's respective ownership interest in STP.

      CPL purchases,  for its own account, a NEIL I Business Interruption and/or
Extra Expense  policy.  This  insurance  will  reimburse CPL for extra  expenses
incurred  for  replacement  generation  or  purchased  power as the  result of a
covered  accident that shuts down production at one or both of the STP Units for
more than 23 consecutive weeks. In the event of an outage which is the result of
the same accident,  insurance will reimburse CPL up to 80% of the recovery.  The
maximum amount  recoverable  for a single unit outage is $133.8 million for both
Units 1 and 2. CPL is subject to an additional assessment of up to $1.54 million
for the  current  policy  year in the  event  that  insured  losses at a nuclear
facility covered under the NEIL I policy exceed the accumulated  funds available
under the policy.  CPL renewed its current NEIL I Business  Interruption  and/or
Extra Expense policy on October 1, 1999.

      SWEPCO Rental and Lease Commitments
      SWEPCO has entered  into various  financing  arrangements  primarily  with
respect  to coal  transportation  and  related  equipment  which are  treated as
operating leases for rate-making  purposes.  At December 31, 1999, leased assets
of $45.7 million, less accumulated  amortization of $45.7 million, were included
in Electric  Utility Plant on the Consolidated  Balance Sheets,  and at December
31, 1998,  leased assets were $45.7 million,  less  accumulated  amortization of
$41.4 million.

      SWEPCO Biloxi, Mississippi MGP Site
      SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a
MGP site in Biloxi,  Mississippi,  which was  formerly  owned and  operated by a
predecessor of SWEPCO.  Since then,  SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as the
subsequent sampling of the site. The sampling results indicated contamination at
the  property  as  well  as the  possibility  of  contamination  of an  adjacent
property.  A risk  assessment  was submitted to the MDEQ, and the MDEQ requested
that a future  residential  exposure  scenario be evaluated for comparison  with
commercial and industrial  exposure  scenarios.  However,  Mississippi Power and
SWEPCO do not believe that  clean-up to a  residential  scenario is  appropriate
since  this site has been  industrial/commercial  for more than 100  years,  and
Mississippi  Power plans to continue this type of usage.  Mississippi  Power and
SWEPCO also presented a report to the MDEQ  demonstrating  that the ground water
on the site was not potable,  further demonstrating that clean-up to residential
standards is not necessary. Resolution of this issue is still pending.

      A feasibility  study was  conducted to evaluate  remedial  strategies  and
costs associated with cleanup activities. SWEPCO and Mississippi Power agreed to
a buyout agreement for the amount of $1.5 million, in which SWEPCO received full
indemnification  for any liabilities  associated with  contamination  and/or any
clean-up efforts.

      SWEPCO Marshall Street Site
      SWEPCO  owns a  tract  of  land  known  as the  Marshall  Street  site  in
Shreveport,  Louisiana,  which was previously a MGP site. The City of Shreveport
may  acquire  the  Marshall  Street  site from  SWEPCO to expand its  convention
center.  In  1999,   environmental   testing  was  performed  at  the  site  and
contaminants  were  discovered  that  could  be  related  to a  MGP.  SWEPCO  is

                                       59
<PAGE>

negotiating  with the City of Shreveport to determine  under what terms the city
may  acquire  the  Marshall  Street  site and who  would  pay for any  potential
clean-up  costs  related  to the site.  In the fourth  quarter  of 1999,  SWEPCO
accrued  $4.0  million for  SWEPCO's  portion of any  potential  clean-up  costs
related to the Marshall Street site.

      SWEPCO Wilkes Power Plant Copper Limit Compliance
      The EPA has issued to SWEPCO's Wilkes power plant, an administrative order
for wastewater permit violations  related to copper limits.  Planned  compliance
activities,  including  activities  that have been  conducted to  determine  the
source of copper,  were presented by SWEPCO to the EPA during an  administrative
meeting,  held on August  13,  1998.  SWEPCO  and the EPA  negotiated  a $41,500
penalty pending final approval from the EPA.

      Clean Air Provisions of the Texas Legislation
      The Texas  Legislation  requires that  grandfathered  electric  generating
facilities  be permited to reduce  emission  levels 50% and  provides for a cost
recovery mechanism.  Final regulations are still being developed.  The estimated
total costs to comply  with the  expected  regulations  are  approximately  $4.2
million,  $4.8  million and $10 million for CPL,  SWEPCO and WTU,  respectively.
Expenditures have begun to meet the requirements of the legislation.

      Proposed Regional Control Strategy Regulations
      The TNRCC released for comment  proposed  regulations  that, if adopted as
proposed,  would  require  reductions in nitrogen  oxide  emissions for existing
permited electric generating  facilities in the East Texas Region in addition to
the Clean Air provisions of the Texas  Legislation  discussed  above.  The final
regulations  could be issued in April  2000 with an  implementation  date of May
2003. The current  estimate for  compliance  with the proposed rules could be as
much as $38  million  for CPL and $151  million  for SWEPCO in capital  projects
costs and as much as $3 million for CPL and $11 million for SWEPCO in additional
annual operating costs.

      The foregoing discussion  constitutes  forward-looking  information within
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.

      SEEBOARD London Underground Commitment
      SEEBOARD has committed  (pound)57  million,  or $92 million  (converted at
(pound)1.00 equals $1.62), for costs associated with its contract related to the
London  Underground  transportation  system.  In  1998,  SEEBOARD,  through  its
subsidiary,  SEEBOARD  Powerlink,  signed a $1.6 billion,  30-year contract as a
joint venture partner to operate,  maintain,  finance and renew the high-voltage
power distribution network of the London Underground.

      SEEBOARD - Third Party Pension Litigation
      In the U.K.,  National  Grid and National  Power PLC have been involved in
continuing  litigation  regarding their use of actuarial  surpluses disclosed in
the 1992 and 1995 valuations of the electricity industry's  occupational pension
plan, the ESPS. A High Court decision in favor of the National Grid and National
Power PLC was  appealed.  On February 10, 1999,  the U.K.  Court of Appeal ruled
that the particular  arrangements made by these  corporations to dispose of part
of the surplus  were  invalid  due to  procedural  defects.  This  decision  was
confirmed at a later hearing of the U.K.  Court of Appeal held in May 1999.  The
National Grid has appealed to the House of Lords, the highest court of appeal in
the U.K.,  and a decision  is  expected  in late 2000 or early  2001.  The final
outcome of this appeal cannot presently be determined.

                                       60
<PAGE>

      SEEBOARD  employees are members of the ESPS, and SEEBOARD has made similar
use of  actuarial  surpluses  disclosed  in the 1992 and 1995  valuations.  As a
result of subsequent  legal  clarification  of certain  issues  arising from the
hearing  held in May 1999,  the  potential  impact of the ruling on SEEBOARD has
increased.  The amount of the payments  cancelled by SEEBOARD in  recognition of
these  surpluses  amounts to  approximately  $78 million,  excluding any accrued
interest.

      The U.K. Court of Appeal did not order the National Grid or National Power
PLC to make payment into the ESPS, and the court  indicated that any requirement
to make such payments  would be extreme since the relevant  sections of the ESPS
are already in surplus. In the event that the court finally decides a payment by
SEEBOARD  into the  ESPS is  necessary,  such a  payment  is  likely  to  create
additional  pension  fund  surplus,  which the  company  should  then be able to
utilize over the next several years to reduce pension expense.

      Management  is unable  currently to predict the amount of any payment that
it may be required to make to ESPS,  but the payment  should not have a material
adverse affect on CSW's results of operations or financial condition.

      The foregoing discussion  constitutes  forward-looking  information within
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.

      Diversified Electric - Commitments and Contingencies
      In June 1998, the 330 MW Sweeny cogeneration facility, an entity 50% owned
by CSW Energy,  obtained permanent project financing.  The $149 million of debt,
with an effective  interest rate of 7.4%, is  unconditionally  guaranteed by the
project and is  non-recourse  to CSW Energy and CSW.  Concurrently,  the project
repaid its outstanding note to CSW Energy for construction financing.

      In October 1999, GE Capital  Structured Finance Group purchased 50 percent
of the equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's
after-tax  earnings from the proceeds of the transaction were  approximately $33
million and were recorded in the fourth quarter of 1999.  The agreement  between
CSW Energy and GE Capital  Structured Finance Group also provides for additional
payments  to CSW Energy  subject to  completion  of a planned  expansion  of the
Sweeny cogeneration facility.

      CSW Energy  began  construction  in August  1998 of a 500 MW power  plant,
known as Frontera,  in the Rio Grande Valley,  near the city of Mission,  Texas.
The natural  gas-fired  facility began simple cycle  operation of 330 MW in July
1999 and is  scheduled  to  commence  combined  cycle  operation  in early 2000.
Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the
state  of  Texas  related  to the AEP  Merger,  CSW  Energy  may  sell 250 MW of
Frontera.  See NOTE 15. PROPOSED AEP MERGER and MD&A,  PROPOSED AEP MERGER for a
discussion including timing of sale.

      CSW  International  and its 50% partner,  Scottish  Power plc have entered
into a joint venture to construct and operate the South Coast power  project,  a
400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed  approximately  (pound)19 million of the (pound)190
million  construction  financing.   Both  the  guarantee  and  the  construction
financing are  denominated in pounds  sterling.  The U.S.  dollar  equivalent at
December  31, 1999 would be $31 million and $308 million  respectively,  using a
conversion  rate  of  (pound)1.00  equals  $1.62.  The  permanent  financing  is
unconditionally guaranteed by the project.  Construction of the project began in
March 1999, and commercial operation is expected to begin in late 2000.


                                       61
<PAGE>

      CSW Energy's Colorado  facilities are cogeneration  plants with steam as a
by-product of its electricity generation.  In February 2000, notice was received
that  the  lessee  of  the   facilities   utilizing  the  steam  had  filed  for
reorganization  under Chapter 11 of the Bankruptcy  Code,  which could result in
the lessee rejecting the leases. Should that occur,  management is positioned to
pursue other lease  arrangements.  Management  believes the  resolution  of this
matter will not have a material adverse effect on CSW's results of operations or
financial condition.

      CSW, CSW Energy and CSW International  have provided letters of credit and
guarantees  on  behalf  of  CSW  Energy  and  CSW   International   projects  of
approximately $62 million,  $41 million, and $233 million,  respectively,  as of
December 31, 1999.

4.    INCOME TAXES

      CSW files a  consolidated  United  States  federal  income  tax return and
participates  in a tax  sharing  agreement  with its  subsidiaries.  Income  tax
includes United States federal income taxes,  applicable  state income taxes and
SEEBOARD's United Kingdom  corporation taxes. Total income taxes differ from the
amounts computed by applying the United States federal statutory income tax rate
to income before taxes for a number of reasons which are presented in the INCOME
TAX RATE  RECONCILIATION  table  below.  Information  concerning  income  taxes,
including total income tax expense, the reconciliation between the United States
federal statutory tax rate and the effective tax rate and significant components
of deferred income taxes follow.

                                     --------------------------
INCOME TAX EXPENSE                    1999     1998     1997
                                     --------------------------
                                            (millions)
   Current (1)                          $177    $253      $47
   Deferred (1)                           40     (38)     117
   Deferred ITC (2)                      (13)    (12)     (13)
                                     --------------------------
                                         204     203      151
Included in Other Income and Deductions
   Current                                18      18       --
   Deferred                                1      --       (6)
                                     --------------------------
                                          19      18       (6)

Included in Extraordinary Item            (8)     --       --

                                     --------------------------
                                        $215    $221     $145
                                     --------------------------

(1)Approximately  $3  million,  $14  million  and $30  million of CSW's  Current
   Income Tax Expense was  attributable  to SEEBOARD  U.S.A.  operations and was
   recognized as United Kingdom corporation tax expense for 1999, 1998 and 1997,
   respectively.  In  addition,  approximately  $16  million,  $9 million and $7
   million  of  CSW's  Deferred  Income  Tax  Expense  in 1999,  1998 and  1997,
   respectively, was attributed to SEEBOARD U.S.A.
(2)ITC  deferred  in prior  years are  included  in income over the lives of the
   related properties.

                                       62
<PAGE>



                                       -------------------------
 INCOME TAX RATE RECONCILIATION         1999    1998     1997
                                       -------------------------
                                              (millions)
 Income before taxes attributable to:
    Domestic operations                 $541   $558     $327
    Foreign operations                   128    112      147
                                       -------------------------
 Income before taxes                    $669   $670     $474

 Tax at U.S. statutory rate             $234   $235     $166
 Differences
    Amortization of ITC                  (13)   (12)     (13)
    Mirror CWIP                           --     10        5
    Other regulated flowthrough items      5      5        3
    Non-deductible goodwill amortization  12     12       12

    Foreign tax benefits                 (28)   (41)     (19)
    State income taxes, net of
      Federal income tax benefit          13      8        5
    Adjustments                          (19)    14       (4)
    Other                                 11    (10)     (10)
                                      -------------------------
                                        $215   $221     $145
                                      -------------------------
 Effective rate                          32%    33%      31%



                                     -----------------
DEFERRED INCOME TAXES (1)             1999     1998
                                     -----------------
                                        (millions)

Deferred Income Tax Liabilities
   Depreciable utility plant          $1,944  $1,936
   Deferred plant costs                    3     174
   Mirror CWIP asset                       1      90
   Income tax related regulatory assets  156     224
   Regulatory assets designated for
     securitization                      332      --
   Other                                 280     257
                                     -----------------
                                       2,716   2,681

Deferred Income Tax Assets
   Income tax related regulatory
     liability                           (95)   (117)
   Unamortized ITC                       (91)    (96)
   Alternative minimum tax
     carryforward                        (11)    (11)
   Other                                (106)    (75)
                                     -----------------
                                        (303)   (299)

                                     -----------------
Net Accumulated Deferred Income Taxes $2,413  $2,382
                                     -----------------

Net Accumulated Deferred Income
Taxes
   Noncurrent                         $2,430  $2,410
   Current                               (17)    (28)
                                     -----------------
                                      $2,413  $2,382
                                     -----------------



(1)Other than  excess  foreign  tax  credits,  CSW did not have other  valuation
   allowances  recorded  against other  deferred tax assets at December 31, 1999
   and 1998 due to a favorable  earnings history.  At December 31, 1999, CSW had
   $117 million of foreign tax credits, for which a 100% valuation allowance has
   been  provided.  At December  31,  1998,  CSW had $145 million of foreign tax
   credits, for which a 100% valuation allowance has been provided.

   CSW has not provided for U.S. federal income and foreign withholding taxes on
   $62 million of non-U.S.  subsidiaries'  undistributed earnings as of December
   31, 1999,  because such earnings are intended to be reinvested  indefinitely.

                                       63
<PAGE>

   If these  earnings  were  distributed,  foreign  tax  credits  should  become
   available  under current law to reduce or eliminate the resulting U.S. income
   tax liability.

5.    BENEFIT PLANS


      Cash Balance and Non-qualified Pension Plans

      CSW  maintains a tax  qualified,  non-contributory  defined  benefit  cash
balance  pension plan  covering  substantially  all CSW  employees in the United
States.  Under the cash balance formula,  each  participant has an account,  for
recordkeeping  purposes only, to which credits are allocated annually based on a
percentage of the participant's pay. The applicable  percentage is determined by
age and years of vested service the  participant  has with CSW as of December 31
of each year.  The fair value of the plan assets are measured as of September 30
of each year. Pension plan assets consist primarily of stocks and short-term and
intermediate-term fixed income investments.

      In addition,  CSW has a  non-qualified  excess benefit  pension plan. This
plan is available to all pension plan participants who are entitled to receive a
pension  benefit  from CSW  which is in  excess of the  limitations  imposed  on
benefits by the Internal Revenue Code through the qualified plan.

      As the plan sponsor, CSW will continue to reflect the cost of  the pension
plans according to the provisions of SFAS No. 87 and allocate such costs to each
of the participating  employers.  SFAS No. 132, adopted by CSW in 1998,  amended
the  disclosure  requirements  of SFAS  No.  87 and SFAS  No.  88 and have  been
incorporated in the following disclosures.

      U.K. Pension Plans

      The  majority  of  SEEBOARD's  employees  joined a  pension  plan  that is
administered for the United Kingdom's electricity  industry.  The assets of this
plan are held in a separate trustee-administered fund that is actuarially valued
every three years.  SEEBOARD and its participating  employees both contribute to
the plan.  Subsequent  to July 1, 1995,  new  employees  were no longer  able to
participate in that plan. Instead,  two new pension plans were made available to
new employees, both of which are also separate trustee-administered plans.


      CSW Retirement Savings Plan

      The CSW System  Retirement  Savings  Plan is a defined  contribution  plan
offered to all full time employees and certain part time employees who meet plan
eligibility requirements. Company contributions to this plan totaled $15 million
in 1999, $15 million in 1998 and $11 million in 1997.

<TABLE>
<CAPTION>

                                                  1999                           1998
Pension Retirement Plans                 CSW      U.S.       U.K.        CSW     U.S.    U.K.
                                        TOTAL     PLANS     PLANS       TOTAL    PLANS   PLANS
                                      -------------------------------  -------------------------
Change in Benefit Obligations                  (millions)                       (millions)
<S>                                     <C>         <C>      <C>        <C>       <C>   <C>

Benefit obligation at beginning of year $ 2,111     $ 991    $ 1,120    $ 1,978   $ 955 $ 1,023
Service cost                                 35        21         14         36      22      14
Interest cost                               123        65         58        137      69      68
Plan participants' contributions              3         -          3          3       -       3
Amendments                                    7         -          7         58       -      58
Foreign currency translation adjustment     (26)        -        (26)         9       -       9
Acquistions                                   -         -          -          7       -       7
Actuarial (gain) loss                       (11)      (47)        36         11      11       -
Benefits paid                              (129)      (63)       (66)      (128)    (66)    (62)
                                      -------------------------------  -------------------------
Benefit obligation at end of year       $ 2,113     $ 967    $ 1,146    $ 2,111   $ 991 $ 1,120
                                      -------------------------------  -------------------------
</TABLE>



                                       64
<PAGE>
<TABLE>
<CAPTION>

                                                  1999                           1998
Pension Retirement Plans                 CSW      U.S.       U.K.        CSW     U.S.    U.K.
                                        TOTAL     PLANS     PLANS       TOTAL    PLANS   PLANS
                                      -------------------------------  -------------------------
Change in Plan Assets                          (millions)                       (millions)
<S>                                     <C>       <C>        <C>        <C>     <C>     <C>

Fair value of plan assets at beginning
  of year                               $ 2,326   $ 1,014    $ 1,312    $ 2,290 $ 1,109 $ 1,181
Actual return on plan assets                274       122        152        143     (30)    173
Employer contributions                        9         2          7          7       1       6
Plan participants' contributions              3         -          3          3       -       3
Foreign currency translation adjustment     (33)        -        (33)        11       -      11
Benefits paid                              (129)      (63)       (66)      (128)    (66)    (62)
                                      -------------------------------  -------------------------
Fair value of plan assets at end
  of year                               $ 2,450   $ 1,075    $ 1,375    $ 2,326 $ 1,014 $ 1,312
                                      -------------------------------  -------------------------


Reconciliation of Funded Status
Funded status at end of year              $ 337     $ 108      $ 229      $ 214    $ 23   $ 191
Unrecognized:
    Transition obligation                     8         8          -         10      10       -
    Prior service cost                      (64)      (75)        11        (77)    (81)      4
    Actuarial (gain) loss                   (88)       88       (176)        26     159    (133)
                                      -------------------------------  -------------------------
Prepaid benefit cost                      $ 193     $ 129       $ 64      $ 173   $ 111    $ 62
                                      -------------------------------  -------------------------


Amounts Recognized in Balance Sheet
Prepaid benefit cost                      $ 209     $ 145       $ 64      $ 188   $ 126    $ 62
Additional minimum liability                (23)      (23)         -        (25)    (25)      -
Intangible asset                              -         -          -          2       2       -
Accumulated other comprehensive expense       7         7          -          8       8       -
                                      -------------------------------  -------------------------
Net amount recognized on balance sheet    $ 193     $ 129       $ 64      $ 173   $ 111    $ 62
                                      -------------------------------  -------------------------

Other comprehensive expense(income)
  attributable to change in additional
  minimum liability recognition           $ (2)     $  (2)      $ --      $   1   $   1    $ --
                                      -------------------------------  -------------------------
</TABLE>



Additional Information for Plans With       Non Qualified Plan
Unfunded Accumulated Benefit Obligations    ------------------
                                               (thousands)

                                        1999                 1998
                                      ----------          -----------
Projected benefit obligation           $ 24,676             $ 27,379
Accumulated benefit obligation           22,875               25,137
Plan assets at fair value                     -                    -





                                       65

<PAGE>
Pension Retirement Plans
                                           CSW      U.S.       U.K.
Components of Net Periodic Benefit Costs  TOTAL     PLANS     PLANS
                                      -------------------------------
1999                                              (millions)
Service cost                               $ 35      $ 21       $ 14
Interest cost                               123        65         58
Expected return on plan assets             (167)      (98)       (69)
Amortization of:
    Unrecognized transition obligation        2         2          -
    Prior service cost                       (6)       (6)         -
                                      -------------------------------
Net periodic benefit cost                 $ (13)    $ (16)       $ 3
                                      -------------------------------

Weighted-average assumptions as of year end
Discount rate                                       7.50%      6.00%
Expected return on plan assets                      9.00%      6.50%
Rate of compensation increase                       4.96%      4.00%


                                           CSW      U.S.       U.K.
                                         TOTAL     PLANS     PLANS
                                      -------------------------------
1998                                             (millions)
Service cost                               $ 36      $ 22       $ 14
Interest cost                               137        69         68
Expected return on plan assets             (174)      (97)       (77)
Amortization of:
    Unrecognized transition obligation        2         2          -
    Prior service cost                       (6)       (6)         -
                                      -------------------------------
Net periodic benefit cost                  $ (5)    $ (10)       $ 5
                                      -------------------------------

Weighted-average assumptions as of year end
Discount rate                                       6.75%      5.50%
Expected return on plan assets                      9.00%      6.25%
Rate of compensation increase                       4.96%      3.50%





                                       66

<PAGE>
Pension Retirement Plans
                                           CSW      U.S.       U.K.
Components of Net Periodic Benefit Costs  TOTAL     PLANS     PLANS
                                      -------------------------------
1997                                             (millions)
Service cost                               $ 34      $ 20       $ 14
Interest cost                               139        66         73
Expected return on plan assets             (173)      (92)       (81)
Amortization of:
    Unrecognized transition obligation        2         2          -
    Prior service cost                       (6)       (6)         -
    Net actuarial (gain) loss                 1         1          -
                                      -------------------------------
Net periodic benefit cost                  $ (3)     $ (9)       $ 6
                                      -------------------------------


Weighted-average assumptions as of year end
Discount rate                                       7.50%      6.75%
Expected return on plan assets                      9.00%      7.25%
Rate of compensation increase                       5.46%      4.75%


      As  permitted,  the  amortization  of any prior service cost is determined
using a straight-line amortization of the cost over the average remaining period
of employees expected to receive benefits under the plan.

      Post-retirement Benefits Other Than Pensions
      CSW, including each of the U.S. Electric Operating Companies, adopted SFAS
No. 106 effective  January 1, 1993.  The  transition  obligation  established at
adoption is being  amortized over twenty years,  with thirteen years  remaining.
Prior to 1993,  these  benefits  were  accounted for on a  pay-as-you-go  basis.
Pursuant to an order by the Oklahoma  Commission,  PSO  established a regulatory
asset of  approximately  $5  million  in 1993  for the  difference  between  the
pay-as-you-go  basis  and the  costs  determined  under  SFAS  No.  106.  PSO is
recovering the amortization of this regulatory asset over a ten year period.


                                       67

<PAGE>

Post- Retirement Benefits Other Than Pensions           1999      1998
                                                     --------------------
                                                          (millions)
Change in Benefit Obligation

Benefit obligation at beginning of year                   $ 275    $ 241
Service cost                                                 11        8
Interest cost                                                18       17
Plan participants' contributions                              2        1
Amendments                                                    -       (5)
Actuarial (gain) loss                                       (19)      28
Benefits paid                                               (21)     (15)
                                                     --------------------
Benefit obligation at end of year                         $ 266    $ 275
                                                     --------------------


Change in Plan Assets

Fair value of plan assets at beginning of year            $ 164    $ 158
Actual return on plan assets                                 23        3
Employer contributions                                       25       17
Plan participants' contributions                              2        1
Benefits paid                                               (21)     (15)
                                                     --------------------
Fair value of plan assets at end of year                  $ 193    $ 164
                                                     --------------------

Reconciliation of Funded Status

Funded status at end of year                              $ (73)  $ (111)
Unrecognized:
    Transition obligation                                   117      126
    Actuarial (gain) loss                                   (44)     (15)
                                                     --------------------
Prepaid (accrued) benefit cost                              $ -      $ -
                                                     --------------------





                                       68
<PAGE>
Post- Retirement Benefits Other Than Pensions           1999      1998
                                                     --------------------
                                                          (millions)
Amounts Recognized in Balance Sheet

Prepaid benefit costs                                       $ 3      $ 2
Accrued benefit (liability)                                  (3)      (2)
                                                     --------------------
Net amount recognized                                       $ -      $ -
                                                     --------------------

Components of Net Periodic Benefit Cost                 1999      1998     1997
                                                     ---------------------------
                                                             (millions)
Service cost                                            $ 11      $ 8      $ 8
Interest cost                                             18       17       18
Expected return on plan assets                           (13)     (12)     (10)
Amortization of:
    Transition obligation                                  9        9        9
    Net actuarial (gain) loss                                      (2)      (1)
                                                     ---------------------------

Net periodic benefit cost                               $ 25     $ 20     $ 24
                                                     ---------------------------


Weighted-average assumptions as of year end
Discount rate                                            7.5%    6.75%    7.50%
Expected return on plan assets                           9.0%    9.00%    9.00%
Health care cost trend rate                              6.0%    6.50%    7.00%
   (Ultimate rate of 5.0% in 2001)

Effect of 1% Change in Assumed Health                Total CSW
                                                     -----------
  Care Cost Trend Rate                               (millions)
1% Increase
  Service cost plus interest cost                         $ 4
  APBO                                                     28

1% Decrease
  Service cost plus interest cost                        $ (3)
  APBO                                                    (24)


      As  permitted,  the  amortization  of any prior service cost is determined
using a  straight-line  amortization  of the  cost  over the  average  remaining
service period of employees expected to receive benefits under the plan.


                                       69

<PAGE>


6. JOINTLY OWNED ELECTRIC UTILITY PLANT

      The U.S.  Electric  Operating  Companies  are  parties  to  various  joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint  ownership  and  operation  of  generating  stations  and  related
facilities,  whereby each  participant  bears its share of the project costs. At
December 31, 1999, the U.S. Electric Operating Companies had undivided interests
in five  such  generating  stations  and  related  facilities  as  shown  in the
following table.
<TABLE>
<CAPTION>

                                  CPL        SWEPCO      SWEPCO          SWEPCO       CSW(1)
                                  STP      Flint Creek   Pirkey        Dolet Hills   Oklaunion
                            Nuclear Plant  Coal Plant  Lignite Plant  Lignite Plant  Coal Plant
                            -------------------------------------------------------------------
                                                      ($ millions)
<S>                             <C>           <C>        <C>              <C>          <C>

      Plant in service          $2,352         $82        $435             $231        $400
      Accumulated depreciation     746          52         204               99         143
      Plant capacity-MW          2,501         528         675              650         690
      Participation              25.2%       50.0%       85.9%            40.2%       78.1%
      Share of capacity-MW         630         264         580              262         539

</TABLE>

   (1) CPL,  PSO and WTU have  joint  ownership  agreements  with each other and
   other  non-affiliated   entities.  Such  agreements  provide  for  the  joint
   ownership and operation of Oklaunion Power Station. Each participant provided
   financing  for its share of the  project,  which was  placed  in  service  in
   December 1986.  CPL's 7.8%,  PSO's 15.6% and WTU's 54.7%  ownership  interest
   represents  CSW's 78.1%  participation in the plant. The statements of income
   reflect CPL's, PSO's and WTU's respective  portions of the operating costs of
   Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion
   Power  Station for CPL,  PSO and WTU were $37  million,  $81 million and $282
   million, respectively, at December 31, 1999. Accumulated depreciation was $13
   million, $36 million and $94 million for CPL, PSO and WTU,  respectively,  at
   December 31, 1999.


7.          FINANCIAL INSTRUMENTS

      The following  methods and assumptions were used to estimate the following
fair values of each class of financial  instruments  for which it is practicable
to estimate  fair value.  The fair value does not affect any of the  liabilities
unless the issues are redeemed prior to their maturity dates.

      Cash, temporary cash investments, accounts receivable, other financial
      instruments and short-term debt
      The fair value equals the  carrying amount as stated on the balance sheets
due to the short maturity of those instruments.

      Securities available for sale
      The  fair values,  which  are based  on quoted  market prices,  equal  the
carrying  amounts as stated on the balance  sheet as prescribed by SFAS No. 115.
See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

      Long-term debt
      The fair value of long-term  debt is estimated  based on the quoted market
prices for the same or similar issues or on the current rates offered to CSW for
debt of the same remaining maturities.

      Trust Preferred Securities
      The fair  value of the  Trust  Preferred  Securities  are  based on quoted
market prices on the New York Stock Exchange.


70
<PAGE>

      Long-term debt and preferred stock due within 12 months
      The fair value of current maturities of long-term debt and preferred stock
due within 12 months are estimated based on quoted market prices for the same or
similar  issues or on the current rates offered for long-term  debt or preferred
stock with the same or similar remaining redemption provisions.

CARRYING VALUE AND
ESTIMATED FAIR VALUE        1999         1998
                          ----------   ----------
                                (millions)
Long-term debt
   carrying amount           $3,821       $3,938
   fair value                 3,828        4,025

Trust Preferred Securities
   carrying amount              335          335
   fair value                   290          345

Long-term debt and preferred
 stock duewithin 12 months
   carrying amount              256          169
   fair value                   256          169

      Commodity Contracts
      CSW utilizes  commodity  forward  contracts  which contain  pricing and/or
volume terms designed to stabilize  market risk associated with  fluctuations in
the price of natural gas used in generation and electric  energy sold under firm
commitments with certain of our customers.

      During 1999 and 1998,  CSW did not utilize any contracts  for  commodities
that would be  classified as a financial  instrument  under  generally  accepted
accounting  principles,  since physical  delivery of natural gas and electricity
may,  and  most  frequently  does,  occur  pursuant  to these  contracts.  These
contracts are, however, the major part of CSW's risk management program.

      Based on year-end contractual  commitments,  CSW's natural gas futures and
swap contracts and electricity  forward  contracts that are sensitive to changes
in commodity  prices  include fair value of assets of $157,260 and fair value of
liabilities  of $396,440.  These swap and future  contracts  hedge their related
commodity price exposure for 2000.  Cash outflows on the swap agreements  should
be offset by increased  margins on electricity sales to customers under tariffed
rates with fixed fuel costs. The electricity  forward  contracts hedge a portion
of CSW's energy  requirements  through February 2000. The average contract price
for forward  purchases is $30 per MWH and $2.32 per MMbtu. The average price for
natural gas futures contracts is $2.47 per MMbtu and $2.37 MMbtu for swaps.

      Cross-currency swaps and SEEBOARD's electricity contracts for differences
      The fair value of cross  currency  swaps  reflect  third-party  valuations
calculated using proprietary  pricing models.  Based on these valuations,  CSW's
position in these cross currency swaps  represented an unrealized  loss of $41.8
million at December 31, 1999. This unrealized loss is offset by unrealized gains
related to the underlying  transactions  being hedged. CSW expects to hold these


                                       71
<PAGE>


contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.

                                              Expected        Expected Cash
                                            Cash Inflows        Outflows
Contract                Maturity Date     (Maturity Value)   (Market Value)
-----------------------------------------------------------------------------
                                                     (millions)
Cross currency swaps   August 1, 2001           $200              $213
Cross currency swaps   August 1, 2006           $200              $229


8.    LONG-TERM DEBT

      The CSW System's  long-term debt outstanding as of the end of the last two
years is presented in the following table.

         Maturities              Interest Rates             December 31,
      From          To          From          To          1999        1998
  -----------------------------------------------------------------------------
                                                             (millions)

  Secured bonds
  2001          2025             5.25%       7.75%      $1,452       $1,824

  Unsecured bonds
  2001          2030           3.33% (1)      8.88%       1,701        1,359

  Notes and Lease
  Obligations
  2001          2021             5.91%       9.25%         672          765

  Unamortized discount                                      (4)         (10)
                                                      -------------------------
                                                        $3,821       $3,938
                                                      -------------------------
  (1) Variable rate.

      The mortgage indentures, as amended and supplemented, securing FMBs issued
by the U.S.  Electric  Operating  Companies,  constitute a direct first mortgage
lien on substantially all electric utility plants.  The U.S. Electric  Operating
Companies may offer  additional  FMBs,  medium-term  notes and other  securities
subject to market conditions and other factors.

      CSW's year end weighted  average cost of long-term debt was 7.0% for 1999,
7.3% for 1998 and 7.2% for  1997.  For  additional  information  about  the U.S.
Electric   Operating   Companies'   long-term  debt,  see  their  Statements  of
Capitalization in the Financial Statements.

      Annual Requirements
      Certain series of outstanding FMBs have annual sinking fund  requirements,
which  are  generally  1% of the  amount  of  each  such  series  issued.  These
requirements  may be, and generally have been,  satisfied by the  application of
net  expenditures  for  bondable  property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking  fund  requirements.  At December  31,  1999,  the annual  sinking  fund
requirements and annual maturities (including sinking fund requirements) for all
long-term debt for the next five years are presented in the following table.

                                       72
<PAGE>



                          Sinking fund    Annual
                          Requirements  Maturities
                          ------------------------
                                  (millions)
      2000                    $1          $256
      2001                     1           421
      2002                     1           151
      2003                     1           388
      2004                     1           271


      Dividends
      At December  31,  1999,  approximately  $1.5  billion of CSW's  subsidiary
companies'  retained  earnings were  available for payment of cash  dividends by
such subsidiaries to CSW.

      Long-term Debt

      CPL
      On February 16, 2000,  CPL sold $150  million of unsecured  floating  rate
notes.  The notes will have a two-year  final maturity of February 22, 2002, but
may be redeemed at par after one year. The interest rate will reset quarterly at
the then current  three-month  LIBOR plus 0.45%. The initial rate, which was set
February 18,  2000,  was 6.56%.  Net proceeds of $149.6  million will be used to
refund  $100  million  of FMBs  maturing  April 1, 2000 and  repay a portion  of
short-term  debt. CPL is replacing FMBs with unsecured debt, which provides more
financial flexibility as CPL unbundles its electric operations.

      On May 1, 1999,  $100 million of CPL's 7.50% Series JJ FMBs matured and on
December 1, 1999,  $25 million of CPL's 7.125% Series DD FMBs  matured.  In June
1999, CPL reacquired $25 million of its 7.50% Series II FMBs due April 1, 2023.

      In November 1999, CPL issued $200 million of unsecured floating rate notes
maturing  November 23, 2001 and callable at par November 23, 2000.  The interest
rate will reset quarterly at the then current three-month LIBOR plus 0.60%.

      In November and December  1999,  Matagorda  sold,  for the benefit of CPL,
$111.7  million of 4.90%  Series  1999A and $50  million of 4.95%  Series  1999B
unsecured  tax  exempt  PCRBs.  The bonds  mature in 2030 but will be subject to
remarketing  and an interest rate reset in two years.  The proceeds were used to
refund $111.7 million  aggregate  principal amount of outstanding 7.50% Series T
due December 15, 2014 and will be used to refund $50 million aggregate principal
amount of outstanding 7.50% Series AA due March 21, 2020.

      In September 1998, CPL reacquired $36 million principal amount outstanding
of Series L FMBs, in its entirety, at a call price of 100.53.

      PSO
      In July 1999,  the Oklahoma  Development  Finance  Authority  sold for the
benefit of PSO $33.7 million of 4.875%  unsecured tax exempt  pollution  control
revenue  refunding  bonds. The bonds mature in fifteen years but will be subject
to  remarketing  and an interest rate reset in five years.  In August 1999,  the
proceeds  were  used to  refund  $33.7  million  aggregate  principal  amount of
outstanding Oklahoma Environmental Finance Authority (PSO Project) 5.9% Series A
bonds due December 1, 2007.


                                       73
<PAGE>

      In September 1998, PSO reacquired $25 million principal amount outstanding
of Series K and $30 million  principal  amount  outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively.

      SWEPCO
      In the first  quarter  of 2000,  SWEPCO  sold $150  million  of  unsecured
floating rate notes.  The bonds will have a two-year  final maturity of March 1,
2002,  but may be redeemed at par after one year.  The interest  rate will reset
quarterly at the then current  three-month  LIBOR plus 0.23%.  The initial rate,
which was set March 1, 2000,  was 6.34%.  Net proceeds of $149.6 million will be
used to refund  $45  million  of FMBs  maturing  April 1, 2000 and to repay of a
portion of outstanding short-term indebtedness.

      On  September  1, 1999,  $40  million  of  SWEPCO's  6.125%  Series W FMBs
matured.

      The  reacquisitions  and maturities  were funded with  short-term debt and
with proceeds from the issuance of the floating rate notes.

      Reference is made to MD&A,  LIQUIDITY  AND CAPITAL  RESOURCES  for further
information  related to long-term debt,  including new issues and reacquisitions
of long-term debt during 1999.


9.    PREFERRED STOCK

      The outstanding  preferred stock of the U.S. Electric Operating  Companies
as of the end of the last two years is presented in the following table.

                                                                   Current
                                  Dividend Rate  December 31,  Redemption Price
                                    From   To    1999   1998       From - To
                                  --------------------------------------------
                                                  (millions)
Not subject to mandatory
redemption
     182,907 shares               4.00% - 5.00%   $18    $19  $103.19 - $107.00
                                     Auction       --    160
   Issuance expenses/premiums                      --     (3)
                                                 -------------
                                                  $18   $176
                                                 -------------
Total authorized shares
     6,405,000

      All of the outstanding  preferred stock is redeemable at the option of the
U.S. Electric Operating Companies upon 30 days' notice at the current redemption
price per share.  During  November and December  1999, CPL called $75 million of
its money  market  preferred  stock and $85 million of its Series A and Series B
preferred  stock at par. During 1997,  SWEPCO redeemed $1.2 million  pursuant to
its annual  sinking fund  requirement.  During 1997,  each of the U.S.  Electric
Operating  Companies   reacquired  a  significant  portion  of  its  outstanding
preferred  stock.  As a result of differences  between the dividend rates on the
reacquired  securities and prevailing market rates, CSW realized an overall gain
of approximately $10 million on the transactions. This gain is shown separately,
as Gain on Reacquired Preferred Stock, on the Consolidated Statements of Income.

                                       74
<PAGE>


      CPL
      The  dividends  on CPL's $160 million  auction and money market  preferred
stocks are adjusted every 49 days,  based on current market rates.  The dividend
rates averaged 4.3%, 4.4% and 4.3% during 1999, 1998 and 1997, respectively.  In
November and December 1999, CPL called $75 million of its money market preferred
stock and $85  million of its Series A and Series B Auction  Preferred  Stock at
par.

      SWEPCO
      On April 1, 1998,  SWEPCO called the remaining  274,010 shares of its $100
par  value  6.95%  preferred  stock.  SWEPCO  used  short-term  debt to fund the
redemption.


10.   TRUST PREFERRED SECURITIES

      The  following  Trust  Preferred  Securities  issued  by the  wholly-owned
statutory  business  trusts of CPL, PSO and SWEPCO were  outstanding at December
31,  1999.  They are  classified  on the  balance  sheets as CPL,  PSO or SWEPCO
Obligated,  Mandatorily  Redeemable  Preferred  Securities of Subsidiary  Trusts
Holding   Solely  Junior   Subordinated   Debentures  of  CPL,  PSO  or  SWEPCO,
respectively.
<TABLE>
<CAPTION>

                                                    Amount      Description of Underlying
Business Trust         Security           Units   (millions)    Debentures of Registrant
------------------------------------------------------------------------------------------
<S>                 <C>                <C>           <C>       <C>

CPL Capital I       8.00%, Series A     6,000,000    $150      CPL, $154.6 million, 8.00%, Series A
PSO Capital I       8.00%, Series A     3,000,000      75      PSO, $77.3 million, 8.00%,  Series A
SWEPCO Capital I    7.875%, Series A    4,400,000     110      SWEPCO, $113.4 million, 7.875%, Series A
                                      ---------------------
                                       13,400,000    $335
                                      ---------------------
</TABLE>

      Each of the business  trusts will be treated as a subsidiary of its parent
company. The only assets of the business trusts are the subordinated  debentures
issued  by  their  parent  company  as  specified  above.  In  addition  to  the
obligations under their  subordinated  debentures,  each of the parent companies
has  also  agreed  to  a  security   obligation  which  represents  a  full  and
unconditional guarantee of its capital trust obligation.


11.   SHORT-TERM FINANCING

      The CSW System uses short-term debt,  primarily  commercial paper, to meet
fluctuations  in working capital  requirements  and other interim capital needs.
CSW has established a money pool to coordinate short-term borrowings for certain
subsidiaries  and also  incurs  borrowings  outside  the  money  pool for  other
subsidiaries.  As of December  31, 1999,  CSW had  revolving  credit  facilities
totaling $1.4 billion to backup its commercial  paper  program.  At December 31,
1999,  CSW had $1.3 billion  outstanding in short-term  borrowings.  The maximum
amount of such short-term  borrowings  outstanding  during the year, which had a
weighted  average  interest  yield for the year of 5.5%, was $1.4 billion during
December 1999.

      CSW  Credit,  which  does  not  participate  in  the  money  pool,  issues
commercial paper on a stand-alone  basis. At December 31, 1999, CSW Credit had a
$1.2 billion revolving credit agreement that is secured by the assignment of its
receivables  to back up its  commercial  paper  program  which had $754  million
outstanding.  The maximum amount of such commercial paper outstanding during the
year, which had a weighted average interest yield for the year of 5.3%, was $1.0
billion during August 1999.


                                       75
<PAGE>


12.   COMMON STOCK

      CSW's basic  earnings  per share of common  stock are computed by dividing
net income for common stock by the average  number of common shares  outstanding
for the  respective  periods.  Diluted  earnings per share reflect the potential
dilution that could occur if all options outstanding under CSW's stock incentive
plan were  converted  to common  stock and then  shared in the income for common
stock.  CSW's basic earnings per share equalled  diluted  earnings per share for
each of the years 1997-1999.  CSW's dividends per common share reflect per share
amounts paid for each of the periods.

      CSW can issue common stock,  either through the purchase and reissuance of
shares from the open market or by issuing original  shares,  through the LTIP, a
stock option plan,  PowerShare  and  Retirement  Savings Plan. CSW began funding
these plans through open market purchases,  effective April 1, 1997. Information
concerning common stock activity issued through the LTIP, the stock option plan,
PowerShare and the Retirement Savings Plan is presented in the following table.
<TABLE>
<CAPTION>

                                        1999                1998                 1997
                                  ----------------------------------------------------------
<S>                               <C>                  <C>                 <C>

  Number of new shares issued
    (thousands)                          41                   372                 765
  Range of stock price for new
    shares                        $23 1/8 - $26 7/16   $25 5/8 - $30 1/16  $21 1/4 - $25 5/8
  New common stock equity (millions)      $1                  $10                 $20

</TABLE>


13.   STOCK-BASED COMPENSATION PLANS

      CSW has a key employee  incentive  plan.  This plan is accounted for under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized.  Had compensation cost for this plan been determined consistent
with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric
Operating  Companies'  net  income for common  stock and  earnings  per share as
required  by SFAS No.  123 would not have  changed  significantly  from  amounts
reported.

      Because  the SFAS No. 123  method of  accounting  has not been  applied to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be representative of that to be expected in future years.

      CSW may grant  options  for up to 4.0 million  shares of CSW common  stock
under the stock option plan.  Under the stock option plan,  the option  exercise
price equals the stock's market price on the date of grant. The grant vests over
three years,  one-third on each of the three  anniversary dates of the grant and
expires 10 years  after the  original  grant  date.  CSW has granted 2.8 million
shares through  December 31, 1999. A summary of the status of CSW's stock option
plan at December 31, 1999,  1998, and 1997 and the changes during the years then
ended is presented in the following table.

                                       76
<PAGE>

<TABLE>
<CAPTION>
                               1999                       1998                         1997
                     -----------------------------------------------------------------------------------
                                   Weighted                   Weighted                     Weighted
                       Shares       Average        Shares      Average          Shares      Average
                     (thousands) Exercise Price  (thousands) Exercise Price   (thousands) Exercise Price
<S>                   <C>          <C>             <C>          <C>             <C>       <C>

Outstanding at
  beginning of year     1,446          $24           1,902         $24            1,412         $26
Granted                    --           --              --          --              694          21
Exercised                 (37)          23            (337)         24               --          --
Canceled                  (30)          26            (119)         24             (204)         28
                     ----------                   ----------                   ---------
Outstanding at end
  of year               1,379           24           1,446          24            1,902           24

Exercisable at end
  of year               1,178     not applicable     1,010     not applicable     1,162      not applicable

</TABLE>


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<PAGE>



14.   BUSINESS SEGMENTS

      CSW's business  segments at December 31, 1999,  included U.S. Electric and
U.K. Electric.  Eight additional  non-utility companies are included with CSW in
Other and Reconciling Items (CSW Energy, CSW  International,  C3 Communications,
EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and CSW Services).  CSW's
business segment information is presented in the following tables.

<TABLE>
<CAPTION>

                                   U.S.      U.K.      Other   Reconciling     CSW
                                 Electric   Electric  Segments    Items     Consolidated
                                 --------------------------------------------------------
                                                       (millions)
<S>                               <C>        <C>       <C>        <C>        <C>

1999
Operating revenues                 $3,524    $1,705     $342      $(34)      $5,537
Depreciation and amortization         400       128       24        --          552
Interest income                        10         6       92       (54)          54
Interest expense                      196       105      159       (54)         406
Operating income tax expense          191         6        7        --          204
Net income from equity method
  subsidiaries                         --        --       --        --           --
Income before extraordinary item      370       113      508      (522)         469
Extraordinary loss -
  discontinuance of SFAS No. 71        (8)       --       --        --           (8)
Extraordinary loss - loss on
  reacquired debt                      (6)       --       --        --           (6)
Total assets                        9,391     3,024    7,217    (5,470)      14,162
Investments in equity method
  subsidiaries                         17        --       --        --           17
Capital expenditures                  474       153      138        --          765

1998
Operating revenues                 $3,488    $1,769     $258      $(33)      $5,482
Depreciation and amortization         399        95       27        --          521
Interest income                         6         6       73       (55)          30
Interest expense                      197       116      160       (57)         416
Operating income tax expense          235         1      (33)       --          203
Net income from equity method
  subsidiaries                        (1)        --       --        --           (1)
Income before extraordinary item      374       117      441      (492)         440
Total assets                        9,151     3,032    6,656    (4,942)      13,897
Investments in equity method
  subsidiaries                        15         --       --        --           15
Capital expenditures                  313       106      100        --          519

1997
Operating revenues                 $3,321    $1,870     $112      $(35)      $5,268
Depreciation and amortization         389        92       16        --          497
Interest income                         8        12       34       (34)          20
Interest expense                      212       120      105       (23)         414
Operating income tax expense          144        31      (24)       --          151
Net income from equity method
  subsidiaries                         (1)       --       --        --           (1)
Income before extraordinary item      289       117      149      (226)         329
Extraordinary loss U.K.
  windfall profits tax                 --      (176)      --        --         (176)
Total assets                        9,337     2,931    6,267    (4,919)      13,616
Investments in equity method
  subsidiaries                         15        --       --        --           15
Capital expenditures                  346       126      279        --          751
</TABLE>

Products and Services
The U.S. Electric Operating  Companies'  products and services primarily consist
of the  generation,  transmission  and  distribution  of  electricity.  The U.K.
Electric  segment's primary lines of business are the supply and distribution of
electricity. CSW is currently developing computer systems to provide information
by product and services rather than by legal entity.


                                       78
<PAGE>


Geographic Areas

                                                   Revenues
                             ---------------------------------------------------
                                            United                      CSW
                             United States  Kingdom  Other Foreign  Consolidated
                             ---------------------------------------------------
                                                  (millions)
1999                               $3,828       $1,705          $4      $5,537
1998                                3,705        1,769           8       5,482
1997                                3,390        1,870           8       5,268


                                                Long-Lived Assets
                             ---------------------------------------------------
                                            United                      CSW
                             United States  Kingdom  Other Foreign  Consolidated
                             ---------------------------------------------------
                                                  (millions)
1999                               $7,850       $2,499        $257     $10,606
1998                                7,831        2,530         201      10,562
1997                                7,801        2,551         254      10,606


15.   PROPOSED AEP MERGER

      On December 22, 1997, CSW and AEP announced that their boards of directors
had  approved a  definitive  merger  agreement  for a tax-free,  stock-for-stock
transaction. The combined company would serve more than 4.7 million customers in
11 states and  approximately 4 million  customers  outside the United States. On
May 27, 1998, AEP shareholders approved the issuance of the additional shares of
stock  required  to complete  the  merger.  On May 28,  1998,  CSW  stockholders
approved the merger.  On December 16, 1999, the merger  agreement was amended to
extend the term of the agreement to June 30, 2000.  After June 30, 2000,  either
party may terminate the merger agreement if the merger has not been consummated.

      AEP is subject  to the  information  requirements  of the  Securities  and
Exchange Act of 1934, as amended, and in accordance therewith, files reports and
other information with the SEC. For additional  information  related to AEP, see
AEP's Current  Reports on Form 8-K, its  Quarterly  Reports on Form 10-Q and its
Annual Report on Form 10-K and the documents referenced therein.

      Under the AEP merger agreement, each common share of CSW will be converted
into 0.6 share of AEP common stock. CSW stockholders  will own approximately 40%
of the combined  company.  CSW plans to continue to pay  dividends on its common
stock  until the closing of the AEP Merger at  approximately  the same times and
rates per share as in 1999, subject to continuing  evaluation of CSW's earnings,
financial condition and other factors by the CSW board of directors.

      Under the AEP merger  agreement,  there will be no changes  required  with
respect to the public debt issues, the outstanding  preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.

      AEP and CSW anticipate net savings related to the merger of  approximately
$2  billion  over a  10-year  period  from the  elimination  of  duplication  in
corporate and administrative  programs,  greater  efficiencies in operations and
business processes, increased purchasing efficiencies and the combination of the
two work forces.  As a result of the approved  settlement and agreement with the
state commissions in CSW and AEP's respective service  territories,  AEP and CSW
have agreed to guarantee that  approximately 55% of those savings will be passed
through to their  customers.  AEP and CSW  continue  to seek  opportunities  for
additional  saving and expect to realize  significant  additional  savings based
upon the work of the  merger  transitions  teams  over the last two  years.  The
preceding discussion constitutes  forward-looking information within the meaning

                                       79
<PAGE>

of Section 21E of the Exchange Act.  Actual results may differ  materially  from
such projected information. See FORWARD-LOOKING INFORMATION.

      The  electric  systems of AEP and CSW will  operate on an  integrated  and
coordinated  basis as required by the Holding  Company  Act. AEP and CSW project
fuel savings of  approximately  $98 million over a 10-year period resulting from
the coordinated operation of the combined company,  which will be passed through
to customers.

      The AEP merger agreement  contains  covenants and agreements that restrict
the manner in which the parties may operate their  respective  businesses  until
the time of closing of the merger.  In  particular,  without  the prior  written
consent of AEP, CSW may not engage in a number of  activities  that could affect
its sources  and uses of funds.  Pending  closing of the  merger,  CSW's and its
subsidiaries'  strategic investment activity,  capital expenditures and non-fuel
operating  and  maintenance  expenditures  are limited to  specific  agreed upon
projects and in agreed upon amounts.  In addition,  prior to consummation of the
merger, CSW and its subsidiaries are restricted from:

-  Issuing shares of common stock other than pursuant to employee benefit plans;

-  Issuing  shares  of  preferred  stock or  similar  securities  other  than to
   refinance  existing  obligations or to fund  permitted  investment or capital
   expenditures; and

-  Incurring indebtedness other than pursuant to existing credit facilities,  in
   the ordinary  course of business,  or to fund  permitted  projects or capital
   expenditures. These limitations do not preclude CSW and its subsidiaries from
   making investments and expenditures in amounts previously budgeted.

      Cook Nuclear Plant
      On June 25, 1999, AEP announced a  comprehensive  plan to restart the idle
Cook  nuclear  power  plant.  Unit 2 is  scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement  follows a comprehensive  systems  readiness review of all
operating  systems at Cook nuclear  power plant and a  cost/benefit  analysis of
whether  to  restart  the  plant  or shut it down  completely.  Plant  officials
originally shut down both units of the facility, located in Bridgman,  Michigan,
in September 1997 because of questions raised during a design  inspection by the
NRC.  AEP  estimated  that  its  costs  to  restart  the idle  plant  should  be
approximately  $574  million,  of which  $373  million  has been  spent  through
December 31, 1999.

      On February 24,  2000,  AEP  announced a  three-week  delay in the planned
April 1, 2000 restart.  The delay is due to issues encountered during testing of
equipment necessary for core reload and power operations of its Cook Unit 2. The
testing process  continues and may still encounter  additional  items that could
extend the delay.

      Merger Regulatory Approvals
      The merger is  conditioned,  among  other  things,  upon the  approval  of
several state and federal  regulatory  agencies.  Some of the merger  conditions
cannot be waived by the parties.

      State Regulatory Commissions
      Arkansas
      On June 12,  1998,  AEP and CSW jointly  filed a request with the Arkansas
Commission for approval of the proposed merger.  The Arkansas  Commission issued
an order  approving  the merger on August 13,  1998,  subject to approval of the
associated regulatory plan. On December 17, 1998, the Arkansas Commission issued
a final order granting conditional approval of a stipulated agreement related to

                                       80
<PAGE>

a proposed merger regulatory plan. The stipulated  agreement calls for SWEPCO to
reduce  rates  through  a net  merger  savings  rider  for its  Arkansas  retail
customers by $6 million over the five-year  period  following  completion of the
merger.  The Arkansas  Commission  order notes the  possibility  of decisions in
other jurisdictions  adversely affecting provisions of the stipulated agreement.
Consequently,  the  Arkansas  Commission  conditioned  its  final  order  on its
consideration   of   approval   of  the  merger  in  other   state  and  federal
jurisdictions.

      Louisiana
      On May 15, 1998,  AEP and CSW jointly  filed a request with the  Louisiana
Commission for approval of the proposed merger and for a finding that the merger
is in the public interest.

      On  September  27, 1999,  the  Louisiana  Commission  issued a final order
granting  conditional  approval  of the pending  merger  between AEP and CSW. In
granting  approval,   the  Louisiana   Commission  also  approved  a  stipulated
settlement with the Louisiana Commission staff. Under the stipulated settlement,
AEP and CSW have  agreed  to share  with  SWEPCO's  Louisiana  customers  merger
savings  created as a result of the merger  over the eight years  following  its
completion.  A savings mechanism will be implemented to calculate merger savings
annually.  AEP and CSW estimate that the customer rate credits in Louisiana will
total more than $18 million  during that  eight-year  period.  During the second
year  following  completion  of the  merger,  customers  will begin  receiving a
monthly rate credit for 50% of calculated  merger  savings.  This credit will be
updated  annually  and  continue  for the  remainder  of the  eight-year  period
following the merger's completion.

      Oklahoma
      On August 14, 1998,  AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.

      An amended  application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma  Commission approved the proposed merger
between  AEP and CSW.  The  approval  follows a partial  settlement  between the
Oklahoma  Commission  Utility Division Staff, the Oklahoma  Commission  Consumer
Services Division, the Office of the Attorney General for Oklahoma, PSO, AEP and
CSW.  The  Oklahoma  Commission  order was  appealed by the  Municipal  Electric
Systems of Oklahoma, Inc. and the Oklahoma Association of Electric Cooperatives.
On October 13, 1999,  the Oklahoma  Supreme  Court  dismissed  the appeal of the
Oklahoma Association of Electric Cooperatives.  The Municipal Electric System of
Oklahoma,  Inc.  withdrew  its appeal and the Oklahoma  Association  of Electric
Cooperatives  filed a motion to dismiss  its appeal of the  Oklahoma  Commission
order approving the merger.

      Under the partial settlement agreement, AEP and CSW would:

-  Share merger savings with Oklahoma customers as well as AEP shareholders,
   effective with the merger closing;

-  Not increase Oklahoma base rates prior to January 1, 2003;

-  File by December 31, 2001 with the FERC an application to join a regional
   transmission organization; and

-  Establish additional quality of service standards for PSO's retail customers.
   Oklahoma's  share of the $50.2 million in guaranteed  net merger savings over
   the first five years after the merger is  consummated  would be split between
   Oklahoma   customers  and  AEP   shareholders,   with   customers   receiving
   approximately 55% of the savings.


                                       81
<PAGE>

      The Oklahoma  Commission has withdrawn its opposition to the merger at the
FERC.

      Texas
      On April 30,  1998,  AEP and CSW  jointly  filed a request  with the Texas
Commission for a finding that the merger is in the public interest.

      On May 4, 1999, AEP and CSW announced a proposed  settlement  with several
intervenor  groups for the proposed  merger  between AEP and CSW. The settlement
would result in combined rate  reductions  totaling $221 million over a six-year
period for Texas customers of the three CSW Texas Electric  Operating  Companies
if the merger is completed as planned and issues are  resolved  associated  with
the three CSW Texas Electric  Operating  Companies rate and fuel  reconciliation
proceedings.

      The  settlement  was  reached  with  the  General  Counsel  of  the  Texas
Commission,  the State of Texas, the Texas Industrial Energy Consumers,  the Low
Income  Intervenors,  the  Office of  Public  Utility  Counsel  of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria,  Abilene,
Big Lake,  Vernon and Paducah.  The  settlement  expands  upon a previous  Texas
settlement  announced on November 12,  1998,  with the Office of Public  Utility
Counsel of Texas and the  cities'  steering  committee.  That  prior  settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following  completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing and
proposed generating capacity within Texas.

      The first  rate-reduction  rider  provides for $84.4 million in net-merger
savings.  The amounts are to be credited  to Texas  customers'  bills  through a
net-merger-savings  rate-reduction  rider over six years following completion of
the merger.

      Additional  rate-reduction  riders will be  implemented  to resolve issues
associated with the three CSW Texas Electric  Operating  Companies rate and fuel
reconciliation  proceedings and court appeals in Texas. The settlement  provides
for an additional  reduction of $136.6 million,  which will be implemented  over
the six years following completion of the merger.

      Hearings  on the merger in Texas  began  August 9, 1999 and  concluded  on
August 10, 1999. As the hearings  began,  settlements  were reached with all but
one of the parties in the case. The settling parties are all wholesale  electric
customers  of  the  three  CSW  Texas  electric  operating  companies,  and  the
settlements  call for the  withdrawal  of their  opposition to the merger in all
regulatory approval proceedings.  On October 1, 1999, an ALJ for the Texas State
Office of  Administrative  Hearings issued a proposal for decision  recommending
that the Texas Commission approve the pending merger between AEP and CSW. In the
proposal for decision, the ALJ determined that, consistent with the terms of the
proposed settlement,  the merger is in the public interest. On November 2, 1999,
the Texas Commission approved the proposed merger with AEP.

      FERC
      On April 30, 1998,  AEP and CSW jointly  filed a request with the FERC for
approval of their proposed  merger.  On May 25, 1999, AEP and CSW announced they
had reached a settlement  with the FERC trial staff  resolving  competition  and
rate issues that related to the proposed  merger.  On July 13, 1999, AEP and CSW
reached an  additional  settlement  with the FERC trial staff  resolving  energy
exchange  pricing  issues.  The  settlements  were  submitted  to the  FERC  for
approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999,
the ALJ who presided over the FERC merger hearing issued a recommendation to the
FERC that the merger be approved  and found that the  proposed  merger is in the
public interest.


                                       82
<PAGE>

      On March 15, 2000, the FERC conditionally approved the merger.  Conditions
placed on the merger include:

-        Transfer  operational  control  of AEP's  east  and  west  transmission
         systems to a  fully-functioning,  FERC-approved  regional  transmission
         organization  by December  15, 2001,  which is the same  implementation
         date  included in the FERC's  general  order for regional  transmission
         organizations that applies to all transmission-owning utilities.

-        Two interim  transmission-related  mitigation  measures  consisting  of
         market monitoring and independent  calculation and posting of available
         transmission   capacity  to  monitor  the   operation   of  AEP's  east
         transmission system.

-        Divestiture  of 550 MW of  generating  capacity  comprised of 300 MW of
         capacity in SPP and 250 MW of capacity in ERCOT.  The FERC will require
         AEP and CSW to divest their entire ownership interest in the generating
         facilities  that  are to be  divested.  Alternatively,  AEP and CSW may
         choose to divest the same or greater  amount of capacity from different
         generating  plants in their entirety.  However,  such generating plants
         must be of similar  cost,  operation  and location  characteristics  of
         generating plants AEP and CSW originally proposed.

-        AEP and CSW must complete  divestiture  of the ERCOT  capacity by March
         15, 2001 and divestiture of the SPP capacity by July 1, 2002.

      The  FERC  found  that  certain  energy  sales in SPP and  ERCOT  would be
reasonable and effective  interim  mitigation  measures until  completion of the
required SPP and ERCOT divestitures.  The FERC will require the proposed interim
energy sales to be in effect when the merger is consummated.

      AEP and CSW must notify the FERC by March 30, 2000 whether they accept the
condition  that  they  transfer   operational   control  of  their  transmission
facilities  to  a   fully-functioning,   FERC-approved   regional   transmission
organization  by  December  15,  2001 and the  condition  requiring  the interim
mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must
make a compliance  filing at least 60 days prior to  consummation  of the merger
describing their plan to implement the interim mitigation measures.  AEP and CSW
intend to make this compliance  filing on a date that would permit completion of
the merger in the second  quarter of 2000.  AEP and CSW believe they can address
the conditions.

      NRC
      On June 19, 1998, CPL filed a license  transfer  application  with the NRC
requesting  the NRC's  consent  to the  indirect  transfer  of  control of CPL's
interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue
to own its  25.2%  interest  in STP,  and  CPL's  name  would  remain on the NRC
operating  license.  On November 5, 1998, the NRC approved the license  transfer
application  with a condition  that the merger must be completed by December 31,
1999. The NRC has extended the condition relating to completion of the merger to
June 30, 2000.

      Other Federal
      On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger.  The SEC merger filing requests approval of
the merger and related  transactions and outlines the expected  combined company
benefits of the merger to AEP and CSW  customers and  shareholders.  Since then,
AEP and CSW have filed four amendments to the application.  Several parties have
filed  petitions  opposing  the  proposed  merger at the SEC which have not been
withdrawn.

                                       83
<PAGE>

      On July 29, 1999,  applications  were made with the FCC to  authorize  the
transfer  of control of  licenses  of several  CSW  entities to AEP. In February
2000, the FCC approved the transfer  which will be effective upon  completion of
the proposed merger.

      On July 26,  1999,  AEP and CSW  submitted  filings to the  Department  of
Justice  under the  Hart-Scott-Rodino  Antitrust  Improvements  Act of 1976.  On
February 2, 2000,  AEP and CSW announced  that their  proposed  merger  received
antitrust clearance from the Department of Justice.

      United Kingdom
      CSW  has a 100%  interest  in  SEEBOARD,  and AEP  has a 50%  interest  in
Yorkshire.  The proposed merger of CSW into AEP would result in common ownership
of these United  Kingdom  entities.  On January 25, 2000,  the United  Kingdom's
Department  of Trade and Industry  approved  the common  ownership of the United
Kingdom entities that would result from the proposed merger,  subject to certain
conditions  concerning the separate  operation of their respective  distribution
and supply businesses.

      Other
      On April 20,  1999,  AEP reached a  settlement  with the  Indiana  Utility
Regulatory  Commission staff addressing  matters  pertinent to Indiana regarding
the proposed  merger.  The Indiana Utility  Regulatory  Commission  approved the
settlement  on  April  26,  1999.  The  settlement  agreement  resulted  from an
investigation  of the  proposed  merger  between  AEP and CSW  initiated  by the
Indiana Utility Regulatory Commission.

      On April 21, 1999,  AEP and CSW announced  that they had reached  separate
settlements  with six wholesale  customers  that address  issues  related to the
proposed merger.

      On April 28, 1999,  AEP and CSW announced  that they ratified a settlement
agreement with local unions of the IBEW  representing  employees of AEP and CSW.
The  settlement  agreement  covered issues related to the pending merger between
AEP and CSW. As part of the  settlement,  the IBEW local  unions have  withdrawn
their opposition to the merger.

      On May 26, 1999,  AEP and CSW announced that they had reached a settlement
agreement  with the  Kentucky  Attorney  General and several  AEP  customers  in
Kentucky  addressing  matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky  Public  Service  Commission  has approved the
settlement.

      On August  6,  1999,  AEP  announced  that it had  ratified  a  settlement
agreement  with local  unions of the UWUA  representing  employees  of AEP.  The
settlement agreement covered issues raised in the pending merger between AEP and
CSW.  As part of the  settlement,  the UWUA  local  unions  will not  oppose the
merger.

      On October  21,  1999,  the Public  Utility  Commission  of Ohio  issued a
decision  stating  that it will notify the FERC that it is no longer  opposed to
AEP's proposed merger with CSW and that it will no longer seek conditions to the
merger.

      AEP and CSW also have reached settlements with the Missouri Public Service
Commission,  the  Michigan  Public  Service  Commission  and  various  wholesale
customers and intervenors in the FERC merger proceeding.

      Completion of the Merger
      AEP and CSW have  targeted  consummation  of the AEP  Merger in the second
quarter  of 2000.  The  merger is  conditioned,  among  other  things,  upon the
approval  of  several  state  and  federal  regulatory  agencies.  All  of  such


                                       84
<PAGE>

approvals, except from the SEC, have been obtained. The transaction must satisfy
many  conditions,  including  the  condition  that it must be accounted for as a
pooling of interests.  The parties may not waive some of these  conditions.  AEP
and CSW continue the process of seeking regulatory  approvals,  but there can be
no assurance as to when, on what terms or whether the required approvals will be
received.  After  June 30,  2000,  either  CSW or AEP may  terminate  the merger
agreement  if all of the  conditions  to its  obligation  to close have not been
satisfied. There can be no assurance that the AEP Merger will be consummated.

      Merger Costs
      As of December 31, 1999,  CSW had deferred $43 million in costs related to
the AEP  Merger on its  consolidated  balance  sheet,  which  will be charged to
expense if AEP and CSW do not complete their proposed  merger.  If the merger is
consummated,  such costs would be recovered in rates  pursuant to merger sharing
provisions contained in the state settlement agreements.


16.   EXTRAORDINARY ITEMS

      Texas Electric Operating Companies Discontinuance of SFAS No. 71
      The discontuance  of SFAS No. 71  in 1999 for SWEPCO's  Arkansas and Texas
generation   business  and  WTU's  Texas  generation  business  created  certain
write-offs for those companies, which are categorized as extraordinary losses on
their income statements.  The extraordinary loss at SWEPCO was $3.0 million. The
extraordinary  loss at WTU was $5.5 million.  The extraordinary  loss in 1999 at
CPL was $5.5 million as a result of the write-off of losses on the reacquisition
of  long-term  debt  associated  with  generation-related  assets.  See  NOTE 2.
LITIGATION  AND  REGULATORY   PROCEEDINGS  -  Electric   Utility   Restructuring
Legislation for additional discussion of discontinuing SFAS No. 71.

      United Kingdom Windfall Profits Tax
      In the general  election  held in the United  Kingdom on May 1, 1997,  the
United  Kingdom's Labour Party won control of the government with a considerable
majority.  Prior to the general election, the Labour Party had announced that if
elected,  it would impose a windfall  profits tax on certain  industries  in the
United Kingdom,  including the privatized utilities, to fund a variety of social
improvement  programs.  On July 2, 1997, the one-time  windfall  profits tax was
introduced in the Labour  Party's  budget and the  legislation  enacting the tax
subsequently  was passed during the third quarter of 1997.  Accordingly,  during
the third quarter of 1997,  SEEBOARD U.S.A.  accrued,  as an extraordinary item,
(pound)109.5 million (or $176 million when converted at (pound)1.00 = $1.61) for
a one-time windfall profits tax enacted by the United Kingdom government.

      The  windfall  profits  tax was  payable  in two equal  installments,  due
December 1, 1997 and  December 1, 1998.  The tax was charged at a rate of 23% on
the  difference  between nine times the average  profits  after tax for the four
years  following  flotation  in  1990,  and  SEEBOARD's  market   capitalization
calculated  as the  number  of  shares  issued at  flotation  multiplied  by the
flotation price per share.


17.   NEW ACCOUNTING STANDARDS

      SFAS No. 133 as amended by SFAS No. 137
      SFAS No.  133 as amended by SFAS No.  137 is  effective  for fiscal  years
beginning  after June 15, 2000 or January 1, 2001,  for calendar year  entities.
SFAS No.  133  replaces  existing  pronouncements  and  practices  with a single

                                       85
<PAGE>

integrated  accounting  framework for  derivatives  and hedging  activities  and
eliminates previous inconsistencies in generally accepted accounting principles.
SFAS No. 133 expands the accounting definition of derivatives, which had focused
on  freestanding  contracts  (futures,  forwards,  options and swaps) to include
embedded  derivatives  and many commodity  contracts.  All  derivatives  will be
reported on the balance  sheet either as an asset or liability  measured at fair
value.  Changes in a  derivative's  fair value will be  recognized  currently in
earnings unless specific hedge accounting  criteria are met. CSW has established
a project team to implement SFAS No. 133. CSW has not yet quantified the effects
of adopting SFAS No. 133 on its financial  statements,  although  application of
SFAS No. 133 could  increase  volatility  in  earnings  and other  comprehensive
income. See MD&A - NEW ACCOUNTING STANDARDS.


18.   SOUTH AMERICAN INVESTMENTS

      Through  November  1999,  CSW  International  had  purchased  a 36% equity
interest in Vale for $80 million.  CSW International  also extended $100 million
of debt  convertible  to  equity  in Vale in 1998.  In  December  of  1999,  CSW
International  converted  $69 million of the $100 million  into equity,  thereby
raising the equity interest to 44%. CSW International anticipates converting the
remaining debt into equity over the next two years.

      In  January  1999,  amid  market  instability,  the  Brazilian  government
abandoned  its policy of  pegging  the  Brazilian  Real in a range  against  the
dollar.  This action resulted in a 49% devaluation of the Brazilian  currency by
the end of December 1999.  Vale is unfavorably  affected by the  devaluation due
primarily to the revaluation of foreign denominated debt.

      CSW International has a put option, which, if exercised,  requires Vale to
purchase CSW  International  shares at a minimum price equal to the U.S.  dollar
equivalent  of the  purchase  price  for  Vale.  As a result  of the put  option
arrangement,  management  has  concluded  that  CSW  International's  investment
carrying  amount will not be reduced  below the put option value unless there is
deemed to be a permanent impairment. Pursuant to the put option arrangement, CSW
International will not recognize its proportionate  share of any future earnings
until its proportionate  share of any losses of Vale is recognized.  At December
31, 1999, CSW International had deferred losses, after tax, of approximately $21
million related to its Vale investment.  CSW International  views its investment
in Vale as a long-term investment,  which has significant long-term value and is
recoverable.  Management  will  continue to closely  evaluate the changes in the
Brazilian economy and its impact on CSW International's investment in Vale.

      As of December 31, 1999,  CSW  International  had invested $110 million in
stock of a Chilean electric company.  The investment is classified as securities
available for sale and  accounted  for by the cost method.  Based on the current
market value of the shares and the year end foreign  exchange rate, the value of
the  investment  at December  31, 1999 was $62  million.  The  reduction  in the
carrying  value of this  investment  has been  reflected in Other  Comprehensive
Income in CSW's  Consolidated  Statements of  Stockholders'  Equity.  Management
views its  investment in Chile as a long-term  investment  strategy and believes
this  investment  continues to have  significant  long-term value and that it is
recoverable.  Management  will  continue to closely  evaluate the changes in the
South American economy and its impact on CSW  International's  investment in the
Chilean electric company.


                                       86
<PAGE>



19.   QUARTERLY INFORMATION (UNAUDITED)

      The following unaudited quarterly  information includes, in the opinion of
management all  adjustments  necessary for a fair  presentation of such amounts.
Information for quarterly  periods is affected by seasonal  variations in sales,
rate changes, timing of fuel expense recovery and other factors.

      QUARTER ENDED                               1999        1998
      -----------------------------------------------------------------
                                               (millions, except EPS)
      March 31
      Operating Revenues                           $1,225      $1,257
      Operating Income                                147         163
      Net Income for Common Stock                      45          60
      Basic and Diluted EPS                         $0.21       $0.28

      June 30
      Operating Revenues                           $1,319      $1,344
      Operating Income                                206         214
      Net Income for Common Stock                     103         107
      Basic and Diluted EPS                         $0.49       $0.50

      September 30
      Operating Revenues                           $1,618      $1,581
      Operating Income                                335         344
      Income before Extraordinary Item                230         233
      Extraordinary Loss                               (8)         --
      Net Income for Common Stock                     222         233
      Basic and Diluted EPS before
        Extraordinary Item                          $1.08       $1.10
      Basic and Diluted EPS from
        Extraordinary Loss                         ($0.04)        $--
      Basic and Diluted EPS                         $1.04       $1.10

      December 31
      Operating Revenues                           $1,375      $1,300
      Operating Income                                178         145
      Income before Extraordinary Item                 91          40
      Extraordinary Loss                               (6)         --
      Net Income for Common Stock                      85          40
      Basic and Diluted EPS before
        Extraordinary Item                          $0.43       $0.19
      Basic and Diluted EPS from
        Extraordinary Loss                         ($0.03)        $--
      Basic and Diluted EPS                         $0.40       $0.19

      Total
      Operating Revenues                           $5,537      $5,482
      Operating Income                                866         866
      Income before Extraordinary Item                469         440
      Extraordinary Loss                              (14)         --
      Net Income for Common Stock                     455         440
      Basic and Diluted EPS before
        Extraordinary Item                          $2.21       $2.07
      Basic and Diluted EPS from
        Extraordinary Loss                         ($0.07)        $--
      Basic and Diluted EPS                         $2.14       $2.07



                                       87
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Central and South West
Corporation:

      We have audited the  accompanying  consolidated  balance sheets of Central
and South West Corporation (a Delaware  corporation) and subsidiary companies as
of  December  31,  1999 and 1998,  and the related  consolidated  statements  of
income,  stockholders' equity and cash flows, for each of the three years in the
period  ended   December  31,  1999.   These   financial   statements   are  the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial  statements based on our audits.  We did not audit
the financial  statements of CSW UK Holdings  (1999) and CSW UK Finance  Company
(1998 and 1997) which  statements  reflect total assets and total revenues of 20
percent and 31 percent in 1999, 22 percent and 32 percent in 1998 and 22 percent
and 35 percent in 1997, respectively,  of the related consolidated totals. Those
statements  were audited by other  auditors whose reports have been furnished to
us, and our  opinion,  insofar as it relates to the amounts  included  for those
entities, is based solely on the reports of the other auditors.

      We conducted our audits in accordance  with auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe  that our  audits and the  reports of other
auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the  financial  position of Central and South West  Corporation  and  subsidiary
companies as of December 31, 1999 and 1998, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1999, in conformity with  accounting  principles  generally  accepted in the
United States.






Arthur Andersen LLP

Dallas, Texas
February 25, 2000



                                       88
<PAGE>


AUDITOR'S REPORT TO THE MEMBERS OF CSW UK HOLDINGS

      We have  audited the  consolidated  balance  sheets of CSW UK Holdings and
subsidiaries  as of 31 December 1999 and the related  consolidated  statement of
earnings  and  statements  of  cash  flows  for  the  year  then  ended.   These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

      We conducted  our audit in accordance  with  generally  accepted  auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes assessing, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management  as  well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present  fairly,  in all material  respects,  the  financial  position of CSW UK
Holdings and subsidiaries at 31 December 1999 and the result of their operations
and cash flows for the year then ended in  conformity  with  generally  accepted
accounting principles in the United Kingdom.

      Generally  accepted  accounting  principles in the United  Kingdom vary in
certain significant  respects from generally accepted  accounting  principles in
the United States.  Application of generally accepted  accounting  principles in
the United States would have affected  results of operations  and  shareholders'
equity as of and for the year ended 31 December 1999 to the extent summarised in
Note 23 to the consolidated financial statements.






KPMG Audit Plc
Chartered Accountants                                                London
Registered Auditor                                          17 January 2000




                                       89
<PAGE>


AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY

      We have audited the consolidated  balance sheets of CSW UK Finance Company
and  subsidiaries  as of 31 December 1998 and 1997 and the related  consolidated
statement  of earnings  and  statements  of cash flows for the years then ended.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

      We conducted  our audit in accordance  with  generally  accepted  auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management  as  well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present  fairly,  in all material  respects,  the  financial  position of CSW UK
Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of
their  operations  and cash flows for the years then  ended in  conformity  with
generally accepted accounting principles in the United Kingdom.

      Generally  accepted  accounting  principles in the United  Kingdom vary in
certain significant  respects from generally accepted  accounting  principles in
the United States.  Application of generally accepted  accounting  principles in
the United States would have affected  results of operations  and  shareholders'
equity as of and for the years  ended 31  December  1998 and 1997 to the  extent
summarised in Note 23 to the consolidated financial statements.






KPMG Audit Plc
Chartered Accountants                                       London, England
Registered Auditor                                          18 January 1999




                                       90
<PAGE>


REPORT OF MANAGEMENT

      Management is responsible for the  preparation,  integrity and objectivity
of the consolidated  financial  statements of Central and South West Corporation
and subsidiary  companies as well as other information  contained in this annual
report. The consolidated  financial  statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis and,
in some cases,  reflect  amounts  based on the best  estimates  and judgments of
management  giving  due  consideration  to  materiality.  Financial  information
contained  elsewhere  in this  annual  report  is  consistent  with  that in the
consolidated financial statements.

      The  consolidated   financial   statements  have  been  audited  by  CSW's
independent  public  accountants  who  were  given  unrestricted  access  to all
financial  records  and  related  data,  including  minutes of all  meetings  of
stockholders,  the board of directors and  committees of the board.  CSW and its
subsidiaries  believe  that  representations  made  to  the  independent  public
accountants  during  their  audit were  valid and  appropriate.  The  reports of
independent public accountants are presented elsewhere in this report.

      CSW,  together  with its  subsidiary  companies,  maintains  a  system  of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's  authorization,  that the consolidated financial
statements  are  prepared  in  accordance  with  generally  accepted  accounting
principles  and  that  the  assets  of CSW and  its  subsidiaries  are  properly
safeguarded against  unauthorized  acquisition,  use or disposition.  The system
includes a documented  organizational  structure and division of responsibility,
established  policies  and  procedures  including a policy on ethical  standards
which  provides that the  companies  will maintain the highest legal and ethical
standards, and the careful selection, training and development of our employees.

      Internal auditors  continuously  monitor the effectiveness of the internal
control  system  following  standards  established  by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely  of  directors  who  are  not  officers  or  employees  of  CSW  or its
subsidiaries, provides oversight to the financial reporting process.

      Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide  absolute  assurance that errors will not
occur. However,  management strives to maintain a balance,  recognizing that the
cost of such a system should not exceed the benefits derived.

      CSW and its  subsidiaries  believe  that,  in all material  respects,  its
system of internal  controls over financial  reporting and over  safeguarding of
assets  against  unauthorized   acquisition,   use  or  disposition   functioned
effectively as of December 31, 1999.






E. R. Brooks                  Glenn D. Rosilier             Lawrence B. Connors
Chairman and                  Executive Vice President and  Controller
Chief Executive Officer       Chief Financial Officer

                                       91
<PAGE>


GLOSSARY OF TERMS
The  following  abbreviations  or  acronyms  used in this  Financial  Report are
defined below:

Abbreviation or Acronym              Definition
AEP.....................American Electric Power Company, Inc.
AEP Merger .............Proposed Merger between AEP and CSW where CSW would
                        become a wholly owned subsidiary of AEP
AFUDC ..................Allowance for funds used during construction
AIP.....................Annual Incentive Plan
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
                        Tamaulipas, Mexico
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO....................Accumulated Postretirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Bankruptcy Code.........Title 11 Of The United States Bankruptcy Code, as
                        amended
BP Amoco................BP Amoco plc
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
                        Communications, Inc.)
CAAA ...................Clean Air Act/Clean Air Act Amendments
Cajun ..................Cajun Electric Power Cooperative, Inc.
Cash Balance Plan ......CSW's tax-qualified Cash Balance Retirement Plan
CEO ....................Chief Executive Officer
CERCLA .................Comprehensive Environmental Response, Compensation and
                        Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
                        between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's
                        rate case Docket No. 14965, including both the order
                        received on September 10, 1997 and the revised order
                        received on  October 16, 1997
CSW ....................Central and South West Corporation, Dallas, Texas
CSW Credit .............CSW Credit, Inc., Dallas, Texas
CSW Energy .............CSW Energy, Inc., Dallas, Texas
CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas
CSW International ......CSW International, Inc., Dallas, Texas
CSW Investments ........CSW Investments, an unlimited company organized in the
                        United Kingdom through which CSW International owns
                        SEEBOARD
CSW Leasing ............CSW Leasing, Inc., Dallas, Texas
CSW Services ...........Central and South West Services, Inc., Dallas, Texas and
                        Tulsa, Oklahoma
CSW System .............CSW and its subsidiaries
CSW UK Finance Company..An unlimited company organized in the United Kingdom
                        through which CSW International owns CSW Investments
CSW UK Holdings.........An unlimited  company  organized in the United Kingdom
                        through which CSW International owns CSW UK Finance
                        Company
CSW U.S. Electric
 System.................CSW and the U.S. Electric Operating Companies
DeSoto..................Parish of DeSoto, State of Louisiana pollution control
                        revenue bond issuing authority
DGEGS ..................Director General of Electricity and Gas Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EDC.....................Energy Delivery Company
EITF....................Emerging Issues Task Force
EITF 97-4...............Deregulation of the Pricing of Electricity - Issues
                        Related to the Application of SFAS Nos. 71 and 101
El Paso ................El Paso Electric Company
EMF ....................Electric and magnetic fields
EnerACT.................EnerACT(TM), Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
ERISA ..................Employee Retirement Income Security Act of 1974, as
                        amended
ESPS....................Electric Supply Pension Scheme
Exchange Act ...........Securities Exchange Act of 1934, as amended

                                       92
<PAGE>


GLOSSARY OF TERMS (continued)
The  following  abbreviations  or  acronyms  used in this  Financial  Report are
defined below:

Abbreviation or Acronym       Definition
FCC.....................Federal Communications Commission
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
FUCO ...................Foreign utility company as defined by the Holding
                        Company Act
Guadalupe...............Guadalupe-Blanco River Authority pollution control
                        revenue bond issuing authority
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
HVdc ...................High-voltage direct-current
IPP ....................Independent power producer
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement
                        of American Electric Power Company, Inc. and Central and
                        South West Corporation
July 1999 SWEPCO Plan ..The  amended plan of  reorganization  for Cajun filed by
                        the Members Committee and SWEPCO on July 28, 1999 with
                        the U.S. Bankruptcy Court for the Middle District of
                        Louisiana
KWH ....................Kilowatt-hour
LIBOR...................London Inter-Bank Overnight Rate
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan
Matagorda ..............Matagorda County Navigation District Number One (Texas)
                        pollution control revenue bond issuing authority
MD&A ...................Management's Discussion and Analysis of Financial
                        Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
Named Executive
  Officers..............The CEO and the four most highly compensated Executive
                        Officers, as defined by regulation
National Grid ..........National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
OASIS ..................Open access same time information system
OEFA....................Oklahoma Environmental Finance Authority pollution
                        control revenue bond issuing authority
OFGEM...................Office of Gas and Electricity Markets
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. 1
OPEB ...................Other postretirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PCRB....................Pollution control revenue bond
PGC.....................Power Generation Company
Phillips................Phillips Petroleum Company
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
                        Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
 Agreement..............Joint stipulation agreement reached by PSO and other
                        parties to settle PSO's rate inquiry
PURPA...................Public Utility Regulatory Policies Act of 1978
QF......................Qualifying Facility as defined in PURPA
RCRA....................Federal Resource Conservation and Recovery Act of 1976
Red River...............Red River Authority of Texas pollution control revenue
                        bond issuing authority
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
RESCTA .................Retail Electric Supplier Certified Territory Act
REP.....................Retail Electric Provider
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
                        Services, as Rights Agent
RTO.....................Region Transmission Organization
Sabine..................Sabine River Authority of Texas pollution control
                        revenue bond issuing authority

                                       93
<PAGE>


GLOSSARY OF TERMS (continued)
The  following  abbreviations  or  acronyms  used in this  Financial  Report are
defined below:

Abbreviation or Acronym       Definition
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..........CSW's  investment in SEEBOARD consolidated and converted
                        to U.S. Generally Accepted Accounting Principles
SERP....................Special Executive Retirement Plan
SFAS....................Statement of Financial Accounting Standards
SFAS No. 34.............Capitalization of Interest Cost
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
                        Regulation
SFAS No. 87.............Employers' Accounting for Pensions
SFAS No. 88.............Employers' Accounting for Settlements and Curtailments
                        of Defined Pension Plans and for Termination Benefits
SFAS No. 101............Regulated Enterprises - Accounting for the
                        Discontinuation of Application of SFAS No. 71
SFAS No. 106 ...........Employers' Accounting for Postretirement Benefits Other
                        than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
                        Securities
SFAS No. 121............Accounting for the Impairment of Long-Lived Assets and
                        for Long-Lived Assets to Be Disposed Of
SFAS No. 123 ...........Accounting for Stock-Based Compensation
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
                        Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
                        Postretirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
                        Activities
SFAS No. 137............Deferral of the Effective Date of Statement No. 133
SPP ....................Southwest Power Pool
Siloam Springs..........City of Siloam Springs, Arkansas pollution control
                        revenue bond issuing authority
STP ....................South Texas Project nuclear electric generating station
STPNOC .................STP Nuclear Operating Company, a non-profit Texas
                        corporation, jointly owned by CPL, HL&P, City of Austin,
                        and City of San Antonio
SWEPCO .................Southwestern Electric Power Company, Shreveport,
                        Louisiana
Texas Commission .......Public Utility Commission of Texas
Texas Electric Operating
 Companies..............CPL, SWEPCO and WTU
Texas Legislation.......Texas Senate Bill 7 relating to deregulation of electric
                        utility industry
Titus County............Titus County Fresh Water Supply District No. 1 pollution
                        control revenue bond issuing authority
TNRCC...................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
Trust Preferred
 Securities.............Collective term for securities issued by business trusts
                        of CPL, PSO and SWEPCO classified on the balance  sheet
                        as "Certain  Subsidiary (or  CPL/PSO/SWEPCO)-obligated,
                        mandatorily  redeemable preferred securities of
                        subsidiary trusts holding solely Junior Subordinated
                        Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)"
U.K. Electric...........SEEBOARD U.S.A.
Union Pacific ..........Union Pacific Railroad Company
U.S. Electric Operating Companies or
     U.S. Electric .....CPL, PSO, SWEPCO and WTU
UWUA....................Utility Workers Union of America
Vale ...................Empresa De Electricidade Vale Paranapanema SA, a
                        Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
                        and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire plc, a regional electricity company in the
                        United Kingdom
                                       94