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                       Central and South West Corporation

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                              1998 FINANCIAL REPORT

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                                  March 5, 1999





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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


Report of Independent Public Accountants......................................86


Report of Management..........................................................89


Glossary of Terms.............................................................90




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FORWARD-LOOKING INFORMATION
This report made by CSW and certain of its subsidiaries contains forward-looking
statements  within the meaning of Section 21E of the Exchange Act.  Although CSW
and each of its  subsidiaries  believe  that  their  expectations  are  based on
reasonable  assumptions,  any such  statements may be influenced by factors that
could cause actual  outcomes and results to be materially  different  from those
projected.   Important  factors  that  could  cause  actual  results  to  differ
materially from those in the  forward-looking  statements  include,  but are not
limited to:
 -  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, 
 -  the impact of deregulation on the United States electric utility business,
 -  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, the inability to consummate the AEP Merger, or other
    merger and acquisition activity including the SWEPCO Plan,
 -  federal and state regulatory developments and changes in law which may have 
    a substantial adverse impact on the value of CSW System assets,
 -  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, power marketing and brokering, 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 and Selected  Financial  Data. 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 is
developing a global energy business.

      CSW has undertaken key initiatives in the  implementation  of this overall
strategy and is determining new directions for the corporation's  future. One of
these  key  initiatives  is the  proposed  merger  between  AEP and CSW that was
announced in December 1997. CSW would become a subsidiary of AEP in the proposed
merger.  The  proposed  merger  would  join  two  companies  which  are low cost
providers  of  electricity  and would  achieve  greater  economies of scale than
either  company  could  achieve  on its  own.  In  addition,  CSW  International
continues to make  investments  in South  America.  CSW  continues to pursue the
acquisition of the non-nuclear  generating  assets of Cajun, a Louisiana  member
electric cooperative.  In 1998, C3 Communications sold its interest in ChoiceCom
and  retained  the long  haul,  high-capacity  fiber  optic  network  from  that
partnership.  These initiatives are discussed in more detail below and elsewhere
in this report.

      CSW believes that compared to other electric utilities,  the CSW System is
well  positioned  to  capitalize  on  the  opportunities  and  challenges  of an
increasingly deregulated and competitive market for the generation, transmission
and  distribution  of  electricity.   (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). The CSW
System  benefits from economies of scale by virtue of its size and is a reliable
and relatively  low-cost  provider of electric  power.  Specifically,  CSW seeks
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.


LIQUIDITY AND CAPITAL RESOURCES

      Overview of Operating, Investing and Financing Activities
      Net cash inflows from operating  activities increased $216 million to $942
million  during 1998  compared to 1997.  The increase in net cash inflows is due
primarily to the absence in 1998 of $190 million of federal and state income tax
payments  made in the  first  half of 1997 for the gain on  CSW's  1996  sale of
Transok.  However,  these  payments  were offset in part by the  utilization  of
Alternative  Minimum  Tax  credits  that  CSW  had  previously  generated.  Also
contributing  to the increase were better fuel  recovery  positions and a higher
accounts payable balance. The increase in net cash inflows was offset in part by
an increase in the accounts  receivable  balance.  The second installment of the

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United Kingdom  windfall  profits tax was paid in December 1998 in the amount of
(pound)55 million, or $91 million; however, this cash outflow did not reduce the
increase in cash flows from operations when compared to the prior year because a
comparable amount was paid in December 1997.

      Net cash outflows from investing  activities  decreased $269 million to an
outflow of $635 million  during 1998  compared to an outflow of $904 million for
1997. CSW Energy obtained  permanent external financing during the first half of
1997 for the Orange  cogeneration  project and  subsequently  reduced its equity
investment in the project. In addition, CSW Energy made its final payment on the
Ft.  Lupton  cogeneration  project  in the first half of 1997.  CSW Energy  also
experienced  a decrease in  construction  expenditures  for the Phillips  Sweeny
project that began operating in the first quarter of 1998.  Further reducing the
cash outflows from  investing  activities  was a cash inflow  resulting from CSW
International's  Enertek  partner,  Alpek,  assuming its 50%  obligation of that
power plant project.  Reduced spending at the U.S. Electric Operating  Companies
for  facilities  also  contributed to the lower net cash outflows from investing
activities.

      Net cash flows from  financing  activities  decreased  $229  million to an
outflow of $225 million  during 1998 compared to an inflow of $4 million for the
same period last year. In the second quarter of 1997, CSW received proceeds from
the issuance of Trust Preferred Securities.  The proceeds were used primarily to
reacquire  preferred stock and pay down short-term debt in the second quarter of
1997.  In April  1997,  CSW made  changes to its common  stock plans and stopped
issuing original shares. The decrease in net cash from financing  activities was
due in part to funding these common stock plans  through open market  purchases.
The  decrease  in cash flows  from  financing  activities  was offset in part by
higher  amounts of  reacquisitions  and  maturities  of  long-term  debt in 1997
compared to 1998.  Also  partially  offsetting  the  decrease in cash flows from
financing  activities  was a cash  inflow in 1998 from  financing  CSW  Energy's
Sweeny project.

      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 in accordance with accounting guidelines.

      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 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 $564  million,  $343  million and $499 million for 1998,  1997 and 1996,
respectively.

      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  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

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transmission  and distribution  facilities and will be funded primarily  through
internally  generated  funds.  These  improvements  will be required to meet the
anticipated  needs  of new  customers  and the  growth  in the  requirements  of
existing customers.

      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 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 1996 CSW amount  does not include  SEEBOARD  acquisition  expenditures.  The
majority of the capital  expenditures for the U.S. Electric Operating  Companies
for 1996 through 1998 were spent on transmission and distribution facilities. It
is anticipated that the majority of the estimated capital  expenditures for 1999
through 2001 will be for transmission and distribution facilities as well. 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).

                              CAPITAL EXPENDITURES
                                                    Estimated Expenditures
                1996      1997      1998           1999       2000      2001
              ------------------------------    --------------------------------
                                 (millions including AFUDC)

CSW             $644      $760      $584          $855       $814       $664

         Estimated capital expenditures for 1999 - 2001 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  system's internal resource plan presently  anticipates
that any additional capacity needs will come from a variety of sources including
power purchases.  See Integrated Resource Plan below for additional  information
regarding the U.S. Electric System's capacity needs.

      Inflation
      Annual inflation rates, as measured by the U.S. Consumer Price Index, have
averaged  approximately 2.3% during the three years ended December 31, 1998. CSW
believes that inflation, at this level, does not materially affect CSW's results
of  operations  or  financial  position.   However,  under  existing  regulatory

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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, 1998, the capitalization  ratios of CSW were 46% common
stock  equity,  2%  preferred  stock,  4%  Trust  Preferred  Securities  and 48%
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 is
7.3%.

      CSW can issue common stock,  either through the purchase and reissuance of
shares from the open market or original  issue 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,
up to $75 million of preferred  stock,  and up to $350 million of Senior  Notes.
PSO has a shelf  registration  statement  on file for the  issuance of up to $35
million of Senior Notes.  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.

                                                     Duff         Standard &
                                         Moody's   & Phelps         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
      CSW Services  used  short-term  debt to repay a $60 million  variable rate
bank loan due  December 1, 2001 in two $30 million  installments  on January 28,
1998 and April 27, 1998. 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 $28 million redemption cost.

      On September 1, 1998, CPL reacquired in its entirety $36 million principal
amount outstanding of its 7% Series L FMBs, due February 1, 2001 at a call price
of 100.53.  On September 1, 1998,  PSO  reacquired in their entirety $25 million
principal  amount  outstanding  of its 7 1/4% Series K FMBs, due January 1, 1999
and $30 million  principal  amount  outstanding of its 7 3/8% Series L FMBs, due
March 1, 2002, at call prices of 100 and 100.77, respectively.  CPL and PSO used
short-term borrowings and internally generated cash to fund the reacquisitions.

      The final installment of (pound)55 million, or $91 million, related to the
windfall  profits tax,  enacted by the United  Kingdom  government,  was paid by
SEEBOARD on December 1, 1998.

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      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, 1998,  CSW had  revolving  credit
facilities  totaling $1.0 billion to back up its commercial  paper  program.  At
December 31, 1998, CSW had $811 million  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 5.8%,  was $1.1 billion
during June 1998.

      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, 1998, CSW Credit had a $1.0 billion  revolving
credit agreement,  secured by the assignment of its receivables,  to back up its
commercial paper program, which had $749 million outstanding. The maximum amount
of such  commercial  paper  outstanding  during  the year,  which had a weighted
average interest yield of 5.6%, was $1.0 billion during September 1998.

      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
agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES,  for a discussion
of CSW's  investments  and  commitments  in CSW Energy  projects at December 31,
1998.

      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.  This  represents a
twofold increase in authority  previously granted under the Holding Company Act.
However,  the amount of any such expenditures is subject to the terms of the AEP
merger  agreement.  As of December 31, 1998, CSW had invested an amount equal to
49% 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  qualifying   facilities  and  independent   power
facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.


RECENT DEVELOPMENTS AND TRENDS

      AEP Merger
      In December  1997,  AEP and CSW  announced  that their boards of directors
approved a definitive merger agreement. If the merger is completed, the combined
company will be a  diversified  electric  utility  serving more than 4.6 million
customers in 11 states and  approximately 4 million customers outside the United
States.  In 1998,  CSW  undertook a corporate  realignment  to more  effectively
position  itself for  competition and to better align itself with AEP related to
the proposed  merger of the two  companies.  The merger must receive  regulatory
approval from federal and state  authorities  and must satisfy a number of other
conditions,  some of which  may not be waived  by the  parties.  There can be no
assurance that the AEP Merger will be  consummated,  and if it is, the timing of
such consummation or the effect of any regulatory conditions that may be imposed
on such consummation. See PROPOSED AEP MERGER.

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      Competition and Industry Challenges
      Competitive  forces at work in the electric utility industry are impacting
the CSW System and 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 will be able
to seek  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: (i) who will bear the costs of prudent
utility   investments   or   past   commitments   incurred   under   traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes  referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will  be  established;   (iv)  what  the  impact  of  deregulation  will  be  on
conservation, environmental protection and other regulator-imposed programs; and
(v) 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 requirements. Although the U.S. Electric Operating Companies
believe they are in a position to compete  effectively  in a  deregulated,  more
competitive marketplace, if stranded costs are not recovered from customers then
the U.S.  Electric  Operating  Companies may be required by existing  accounting
standards to recognize potentially  significant losses from unrecovered stranded
costs,  especially  with respect to STP (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.

      A majority  of the  states,  including  the four  states in which the U.S.
Electric Operating  Companies operate,  have considered  industry  restructuring
including retail competition.  Several states have enacted legislation mandating
retail competition, including Oklahoma in which PSO operates. CSW cannot predict
when and if it will be subject to legislative or regulatory initiatives enacting
industry restructuring and retail competition, nor can they predict the scope or
effect of such initiatives on their results of operations or financial condition
in Texas,  Louisiana,  Oklahoma and Arkansas. For additional information related
to such state  initiatives,  see Industry  Restructuring  Initiatives  in Texas,
Louisiana, Oklahoma and Arkansas.

      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

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EWGs.  EWGs  are a  relatively  new  category  of  non-utility  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,  qualifying  facilities,  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 888 and 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
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 a rule governing  transmission
access and pricing for ERCOT in 1996.  The pricing  method  adopted by the Texas
Commission is a hybrid  combination of an ERCOT-wide postage stamp rate covering
70% of total ERCOT transmission costs and a  distance-sensitive  component which
recovers the  remaining  30% of ERCOT's  transmission  costs.  CPL and WTU began
recording  transmission  revenues  and  expenses  in  accordance  with the Texas
Commission's  rule on January 1, 1997. In May 1998, the Texas Commission  issued
an order in Docket No. 17285,  Complaint of CPL and WTU against Texas  Utilities
Electric Company,  granting CPL and WTU the relief they sought,  which is to net
the annual payment paid to Texas Utilities  Electric  Company under a prior FERC
settlement  for  transmission  service in ERCOT  against the amounts CPL and WTU
would   otherwise  owe  Texas  Utilities   Electric   Company  under  the  Texas
Commission's  transmission  rule. Texas Utilities  Electric Company has appealed
the order.

      FERC Order No. 888  requires  holding  companies  to offer  single  system
transmission  rates.  The  transmission  rates of the U. S.  Electric  Operating
Companies  are  under  the  exclusive   jurisdiction   of  the  FERC  while  the
transmission rates of most of the transmitting  utilities in ERCOT are under the
exclusive jurisdiction of the Texas Commission. Because the two commissions have
different  approaches  to  defining  and  implementing  comparable  open  access
transmission  service,  Order  No.  888  granted  the U. S.  Electric  Operating
Companies an exemption permitting them an opportunity to propose a solution that
provides  comparability  to all wholesale  users. On November 1, 1996, the U. S.
Electric Operating Companies filed a system-wide tariff to comply with Order No.
888 and, on December 31,  1996,  the FERC  accepted  for filing the  system-wide
tariff which became  effective on January 1, 1997,  subject to refund and to the
issuance of further orders.

      On December 10, 1997 the FERC issued an order regarding the U. S. Electric
Operating  Companies' proposed system-wide tariff filed on November 1, 1996. The
FERC's  order  accepted the proposed  tariff  subject to several  modifications,
including  revisions to provide for  system-wide  transmission  service  under a

                                       8
<PAGE>

single system rate. The U.S.  Electric  Operating  Companies  filed the required
compliance tariff on February 17, 1998. On November 13, 1998, the FERC issued an
order that accepted the U.S.  Electric  Operating  Companies'  compliance tariff
providing  for  system-wide  transmission  service  under a single  system rate,
subject to further modifications.

      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.  Order No.  889 also  created  standards  of  conduct  requiring
utilities to conduct 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.  The
FERC has accepted,  subject to minor modifications,  the U.S. Electric Operating
Companies' standards of conduct.

      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.  CSW believes that
initiatives  adopting industry  restructuring and retail  competition will be in
the best interest of CSW and the U.S. Electric Operating  Companies only if such
initiatives  fairly treat  customers,  utilities  and their  shareholders.  More
specifically  CSW  believes  industry  restructuring  will  not be in  the  best
interests of CSW's and the U.S. Electric Operating  Companies' security holders,
unless CSW and the U.S.  Electric  Operating  Companies receive fair recovery of
the full  amounts  previously  invested to serve  customers,  including  amounts
invested  to  finance  generation  facilities.  These  investments,  which  were
reasonably incurred,  were made by the U.S. Electric Operating Companies to meet
their obligation to serve the public interest,  necessity and convenience.  This
obligation  has existed for nearly a century and remains in force under  current
law.  CSW  intends to strongly  oppose  attempts  to impose  retail  competition
without just  compensation  for the risks and investments CSW undertook to serve
the public's  demand for  electricity.  For  additional  information  related to
retail wheeling in the United States, see Industry Restructuring  Initiatives in
Texas, Louisiana,  Oklahoma and Arkansas and Holding Company Act and Legislative
Update.

      Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and
      Arkansas
      Several initiatives to restructure the electric utility industry and enact
retail  competition  have been  undertaken in the four states in which the U. S.
Electric  Operating  Companies  operate.  Legislation was enacted in Oklahoma in
1997 and 1998,  while  legislative  activity in Texas,  Louisiana  and  Arkansas
stopped short of any such definitive action.

      In April 1997, the Oklahoma Legislature passed  restructuring  legislation
providing for retail access by July 1, 2002. The legislation called for a number
of  studies to be  completed  on a variety of  restructuring  issues,  including
independent  system  operator  issues,   technical  issues,   financial  issues,
transition issues, 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.  These  studies  are to be  conducted  under  the  direction  of the Joint
Electric  Utility Task Force. The Task Force has organized the study effort into
several working groups,  which have been directed to evaluate  assigned  issues.
The Task Force will  develop  its  report to the  Legislature  based on the work
performed  by these  working  groups.  The Task  Force's  final  report  will be
provided to the Legislature by October 1, 1999.  Management is unable to predict
the  outcome  of these  studies  or their  ultimate  impact  on the  results  of
operations and financial condition of CSW.

                                       9
<PAGE>

      In March 1997,  the Arkansas  Legislature  passed a  resolution  directing
interim  legislative  committees  to study  competition  in the  electric  power
industry in Arkansas.  The study began in October 1997, and the committees  held
hearings  throughout 1998. Also, the Arkansas  Commission  initiated a series of
generic restructuring dockets in 1998, and held hearings on restructuring in May
1998. In October 1998, the Arkansas Commission released a report to the Arkansas
Legislature, recommending the establishment of retail competition in Arkansas by
January  2002.  Bills  have  been  filed in the  1999  session  of the  Arkansas
legislature  concerning the  restructuring  of the electric  utility industry in
Arkansas.

      In 1998, a special  legislative  committee created by the Louisiana Senate
studied the impact of retail competition on the state of Louisiana. Further, the
Louisiana  Commission  opened a  proceeding  to study  restructuring  and retail
competition. Comments were submitted and hearings were held throughout 1998 on a
number of specific  restructuring  topics.  In  addition,  utilities  filed rate
unbundling  information  with the  Louisiana  Commission  staff.  The  Louisiana
Commission  staff  recently  released  its report on industry  restructuring  in
Louisiana,  including its recommendations to the Louisiana  Commission regarding
retail competition in Louisiana.  In its report, the Louisiana  Commission staff
found that  electric  industry  restructuring  in Louisiana is not in the public
interest  at this time,  although  the staff did  approve an  electric  industry
restructuring  plan in case  the  commissioners  decide  to  move  forward  with
electric industry restructuring and retail competition.

      In 1997, the Texas  legislature  considered  but did not pass  legislation
enacting industry  restructuring,  including retail  competition.  Following the
1997 Texas legislative session, the Texas Lieutenant Governor appointed a Senate
interim committee to study retail competition and  restructuring.  The committee
held a series of  hearings  in late 1997 and  throughout  1998,  and  issued its
report to the legislature in late 1998.

      The 1999  session of the Texas  legislature  has  already  produced  three
comprehensive   electric  industry  restructuring  bills  as  electric  industry
restructuring has become one of the primary topics the legislature will address.

      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 the results of  operations,  financial
condition, or competitive position of CSW.

      Texas Independent System Operator
      An ISO is  managing  the  ERCOT  power  grid  in a  competitive  wholesale
electric market in Texas.

      Integrated Resource Plan
      In January 1997,  CPL,  WTU, and SWEPCO filed with the Texas  Commission a
joint  integrated  resource plan outlining the companies'  future electric needs
over a 10-year forecast horizon and the manner in which the companies propose to
meet those needs. In July 1997, the Texas Commission  issued an Interim Order on
the Preliminary Plan which adopted a settlement  agreement that had been reached
with all the parties in the case.  The Interim Order  approved the load forecast
and individual resource needs for each of the companies,  as well as the request
for proposal  documents to be used to procure future resource needs. The Interim
Order also approved the targeted  purchase goal amounts for renewable and energy
efficiency  programs,  which will  result in  renewable  and  energy  efficiency
programs  being  included in the  companies'  resource  mix.  In June 1997,  CSW
Services, on behalf of CPL, SWEPCO and WTU, issued a request for proposal for up
to 75 MW of renewable resources. In November 1998, the Texas Commission approved
the winning contract from that solicitation, a 75 MW wind farm to be constructed
near  McCamey,  Texas.  Additionally,  CPL,  SWEPCO  and WTU  have  each  issued
solicitations  for  additional  resources to be available in 2001. The contracts
awarded  as a result  of these  solicitations  will be  presented  to the  Texas
Commission for  certification  during 1999. In May 1997, a separate phase of the

                                       10
<PAGE>

Integrated  Resource  Plan was  created  to address  the value of  interruptible
resources at CPL. As a result of that  proceeding,  in January  1999,  the Texas
Commission approved a new interruptible  tariff for CPL. The tariff will go into
effect in 2000 prior to the expiration of CPL's current tariffs.

      Holding Company Act and Federal Legislative Update
      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.

      In the last  Congress,  and again in February  1999,  Holding  Company Act
repeal  legislation  was  reported  out of the U.S.  Senate  Banking  Committee.
Management cannot predict the outcome of this, or similar, legislation.

      Also  in  the  last  Congress,   several  bills  which  provided  for  the
restructuring   and/or  deregulating  of  the  electric  utility  industry  were
considered but did not pass.  Several  similar bills have been  introduced as of
February 1999. 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.
Management  believes that the U.S. Electric Operating  Companies  currently meet
the criteria for following SFAS No. 71. However,  in the event the U.S. Electric
Operating  Companies  or some  portion  of their  business  no longer  meets the
criteria for following SFAS No. 71 due to deregulation  or for other reasons,  a
write-off of regulatory assets and liabilities would be required, absent a means
of recovering such assets or settling such liabilities in a continuing regulated
segment  of  the  business.  For  additional  information  regarding  regulatory
accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES.

      PSO Union Negotiations
      PSO and its Local  Union 1002 of the IBEW have been  engaged  in  contract
renewal negotiations. The underlying agreement expired in September 1996 and, to
date, the parties have been unable to reach an agreement.  In December 1996, PSO
implemented  portions of its then final proposal after declaring an impasse. The
principal  issue  of  disagreement  involves  PSO's  need for  flexibility  in a
deregulated  environment.  In April 1997, Oklahoma's governor signed into law an
electric industry restructuring bill. The new law mandates the implementation of
retail  competition to begin on July 1, 2002. PSO believed that the new law also
broke the impasse in the contract negotiations and has resumed negotiations with
the union.

      In October  1998,  PSO  received an adverse  ruling from a NLRB ALJ on the
union's unfair labor practice  charge against PSO. The ALJ upheld PSO's right to
cease collecting union dues through payroll  deductions.  The ALJ ruled that PSO
did  negotiate  in good  faith,  but also PSO's  position on some issues was too
harsh, and therefore the December 1996 implementation  should be rolled back and
employees  made  whole.  Additionally,  the ALJ  ruled  that PSO had  improperly
solicited  employees to withdraw from the union.  In December 1998, PSO appealed
the ALJ's  ruling to the NLRB.  The  union is an  intervenor  in the AEP  merger
proceedings. PSO continues to negotiate with the union. At this time, management
cannot  predict the outcome of this matter.  However,  management  believes that
even  in the  event  of a  strike,  its  operations  would  continue  without  a
significant  disruption  and that a strike  would  not have a  material  adverse
effect on its results of  operations  or  financial  condition.  (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

                                       11
<PAGE>

projected  information  due  to  changes  in  the  underlying  assumptions.  See
FORWARD-LOOKING INFORMATION).

      Impact of Competition and Industry Restructuring Initiatives
      CSW believes that compared to other electric utilities,  the CSW System is
well  positioned  to  capitalize  on  the  opportunities  and  challenges  of an
increasingly deregulated and competitive market for the generation, transmission
and  distribution of electricity.  CSW is unable to predict the ultimate outcome
or impact of competitive  forces on the electric  utility industry in the United
States,  and in the United  Kingdom  or on the CSW  System.  As the  electricity
markets  become more  competitive,  however,  the principal  factor  determining
success is likely to be price, and to a lesser extent, reliability, availability
of capacity,  and customer service. CSW cannot predict the form or effect of any
federal  or state  electric  utility  restructuring  initiatives  at this  time.
Federal  and/or state electric  utility  restructuring  may cause  impairment of
significant  recorded  assets,  material  reductions of profit  margins,  and/or
increased costs of capital.  No assurance can be made that such events would not
have a  material  adverse  effect  on CSW's  results  of  operations,  financial
condition or  competitive  position.  (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).

      CPL - Wholesale Customers
      Certain  CPL  wholesale  customers  have given  notice of their  intent to
terminate  their  contract when they expire in 2001 through  2004.  During 1998,
these customers represented 3% of CPL's total electric operating revenues.

      SEEBOARD - Third Party Pension Litigation
      In the U.K.,  National Grid Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity  industry's  occupational pension scheme, the Electricity Supply
Pension  Scheme.  A high court  decision in favor of the National Grid Group and
National  Power was  appealed and on February 10, 1999 the court of appeal ruled
that the particular  arrangements  made by these  corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting  from  early  retirement,  were  invalid  due to  procedural  defects.
SEEBOARD  employees are members of the Electricity  Supply Pension  Scheme,  and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD,  the amount of
the payments  cancelled was approximately  $33 million.  The court of appeal did
not order the  National  Grid Group and  National  Power to make  payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take.  It is likely  that the case will then be  referred  to the U.K.
House of Lords.  The final  outcome of the hearing,  or any referral to the U.K.
House of  Lords,  cannot be  determined  and  therefore  it is not  possible  to
quantify  the  impact,  if any,  on the  results  of  operations  and  financial
condition of CSW.


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. The CPL 1997 Final Order 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

                                       12
<PAGE>

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 and will be
reduced an additional $13 million on May 1, 1999.

      CPL  appealed  the CPL 1997  Final  Order to the State  District  Court of
Travis  County to challenge the  resolution of several  issues in 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 to be applied on 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.  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 will be remanded to the Texas  Commission.  While CPL intends to
appeal this most recent order to the Court of Appeals,  management  is unable to
predict how the final  resolution of these issues will  ultimately  affect CSW's
results of operations and financial condition.

      CPL  currently   accounts  for  the  economic  effects  of  regulation  in
accordance  with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at December 31,
1998. The  application of SFAS No. 71 is conditioned  upon CPL's rates being set
based on the cost of providing service.  In the event management  concludes that
as a result of changes in regulation,  legislation, the competitive environment,
or other  factors,  CPL, or some  portion of its  business,  no longer meets the
criteria  for  following  SFAS No.  71, a  write-off  of  regulatory  assets and
liabilities  would be  required,  absent a means of  recovering  such  assets or
settling such liabilities in a continuing regulated segment of the business. CPL
would also be required  to  evaluate  whether  there was any  impairment  of any
deregulated  plant assets. In addition,  CSW could experience,  depending on the
timing and amount of any write-off,  a material  adverse effect on their results
of operations and financial condition.

      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. SWEPCO's last rate activity was an $8.2 million rate
decrease,  initiated by SWEPCO and  approved for its small and large  industrial
customers in January  1988.  Prior to that  SWEPCO's  last rate  increase was in
1985.

      The Louisiana  Commission  has selected  consultants  and legal counsel to
perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of
service.  The  Louisiana  Commission's  legal counsel will issue a report in May
1999, and hearings will begin in September 1999.  Management  cannot predict the
outcome of this review.

      SWEPCO Arkansas Rate Review
      In June 1998,  the Arkansas  Commission  indicated that it would conduct a
review of SWEPCO's  earnings.  The review began in July 1998.  Management cannot
predict the outcome of this review.

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

                                       13
<PAGE>

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 DGES 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 DGES 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 reduce
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.

PROPOSED AEP MERGER

      Background Information
      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   creating  a  company  with  a  total  market   capitalization   of
approximately  $28 billion at that time. At December 31, 1998,  the total market
capitalization  of the combined company would have been $28 billion ($15 billion
in equity;  $13 billion in debt) and the combined company would have served more
than 4.6 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.

      Under the merger  agreement,  each common  share of CSW will be  converted
into 0.6 shares of AEP common stock.  Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price.  At December 22, 1997, AEP would have issued  approximately  $6.6
billion in stock to CSW  stockholders to complete the  transaction.  At December
31,  1998,  AEP would have  issued  approximately  $6.0  billion in stock to CSW
stockholders   to  complete  the   transaction.   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 1998,  subject to continuing
evaluation  of  CSW's  financial  condition  and  earnings  by the CSW  board of
directors.

      Under the 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.

      The   companies   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.  At the same  time,  the  companies  will
continue  their  commitment to high quality,  reliable  service.  Job reductions
related to the  merger are  expected  to be  approximately  1,050 out of a total
domestic  workforce of  approximately  25,000.  The combined  company will use a
combination  of growth,  reduced  hiring and  attrition to minimize the need for
employee  separations.  Transition  teams of employees  from both companies will
make organizational and staffing recommendations.

                                       14
<PAGE>

      The  electric  systems of AEP and CSW will  operate on an  integrated  and
coordinated  basis as required  by the Holding  Company  Act.  Any fuel  savings
resulting from the coordinated  operation of the combined company will be passed
on to customers.

      The 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 restricted to specific agreed upon
projects or agreed upon  amounts.  In  addition,  prior to  consummation  of the
merger,  CSW and its  subsidiaries  are  restricted  from: (i) issuing shares of
common stock other than pursuant to employee benefit plans;  (ii) issuing shares
of  preferred  stock or  similar  securities  other than to  refinance  existing
obligations or to fund permitted investment or capital  expenditures;  and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary   course  of  business  or  to  fund  permitted   projects  or  capital
expenditures.  These  restrictions  are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts  previously
budgeted. (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).

      Merger Regulatory Approvals
      The merger is  conditioned,  among  other  things,  upon the  approval  of
several state and federal regulatory agencies.

      General
      Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and  shareholders.  These benefits would include $2 billion in
non-fuel  savings  over 10 years and $98  million  in net fuel  savings  over 10
years.

      FERC
      On April 30, 1998,  AEP and CSW jointly  filed a request with the FERC for
approval of their proposed  merger.  On July 15, the FERC approved a draft order
accepting the proposed transmission service agreements between the Ameren System
and PSO.  The draft  order  confirms  that  PSO's 250 MW firm  contract  path is
available for AEP and CSW to meet the Holding Company Act's requirement that the
two systems  operate on an integrated and  coordinated  basis. In November 1998,
the FERC issued an order setting  issues for hearing.  Hearings are scheduled to
begin on June 1, 1999. The FERC order  indicated that the review of the proposed
merger  would  address  the issues of  competition,  market  power and  customer
protection  and  instructed AEP and CSW to refile an updated market power study.
The  updated  market  power  study was filed in  January  1999.  CSW has filed a
proposed  settlement  with the FERC to sell 250 MWs of capacity in the  Frontera
power  plant  project,  two years  after the AEP  merger  closes to  respond  to
market-power issues. A final order is expected in the fourth quarter of 1999.

      Arkansas
      On June 12,  1998,  AEP and CSW jointly  filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger,  subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas  Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger  regulatory  plan. The stipulated  agreement calls for SWEPCO to
reduce  rates  through  a net  savings  merger  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

                                       15
<PAGE>

other jurisdictions  adversely affecting provisions of the stipulated agreement.
Consequently,  the  Arkansas  Commission  final  orders are  conditioned  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 their  proposed  merger and for a finding  that the
merger is in the public interest. AEP and CSW have proposed a regulatory plan in
Louisiana that provides for:

       -  Approximately $2.6 million in fuel cost savings to Louisiana customers
          of CSW's SWEPCO subsidiary during the 10 years following completion of
          the merger; and

       -  A  commitment  not to raise base rates above  current  levels prior to
          January 1, 2002, for SWEPCO customers in Louisiana and a plan to share
          with those customers  approximately  one-half of the savings allocated
          to Louisiana related to the merger during the first 10 years following
          the  merger.  Under  this  plan,  approximately  $26  million of these
          non-fuel merger-related savings will be used to reduce future costs to
          SWEPCO's Louisiana customers.

      Hearings in Louisiana  are expected to begin in the first quarter of 1999,
and a final order is expected in the second quarter of 1999.

      Oklahoma
      On August 14, 1998,  AEP and CSW jointly filed a request with the Oklahoma
Commission  for approval of their proposed  merger.  AEP and CSW have proposed a
regulatory plan in Oklahoma that provides for

       -  Approximately $11.8 million in fuel cost savings to Oklahoma customers
          of CSW's PSO subsidiary  during the 10 years  following  completion of
          the merger; and

       -  A  commitment  not to raise base rates above  current  levels prior to
          January 1, 2002, for PSO retail  customers and to share  approximately
          one-half of the savings from  synergies  created by the merger  during
          the  first  10  years   following   the   merger.   Under  this  plan,
          approximately $78.6 million of these non-fuel  merger-related  savings
          will be used to reduce future costs to PSO's retail customers.

      On October 1,  1998,  an  Oklahoma  Commission  ALJ issued an oral  ruling
recommending  to the  Oklahoma  Commission  that the merger  filing be dismissed
without prejudice for lack of information  regarding the potential impact of the
merger on the retail electric market in Oklahoma.  The ruling was in response to
comments  received from intervenors to the merger. A dismissal without prejudice
would  allow  AEP and CSW to  submit  an  amended  application  with  the  added
information.

      Subsequent  meetings with the parties to the merger proceeding resulted in
an agreement on criteria for the  additional  studies.  On October 21, 1998, the
ALJ approved these criteria,  as well as plans by AEP and CSW to file an amended
application along with the additional studies.

      An amended  application was filed with the Oklahoma Commission on February
25,  1999.  Submission  of  the  amended  application  reset  Oklahoma's  90-day
statutory time period for Oklahoma  Commission  action on the merger.  All other
material in the written  record in the merger case will be  preserved  since the
docket  is not  being  dismissed.  AEP  and CSW  anticipate  that  the  Oklahoma
Commission  will  establish a  procedural  schedule  that will result in a final
order in Oklahoma in the second quarter of 1999.

                                       16
<PAGE>

      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.  AEP and CSW
have proposed a regulatory plan in Texas that provides for:

       -  Approximately  $29  million in fuel cost  savings  to Texas  customers
          during the 10-year period following completion of the merger; and

       -  A  commitment  to not raise  base  rates  prior to January 1, 2002 for
          Texas customers and a plan to share with those customers approximately
          one-half  of the  savings  allocated  to Texas  related  to the merger
          during  the  first  10  years   following   the   merger.   In  Texas,
          approximately  $183 million of the savings from synergies will be used
          to reduce future costs to customers.

      On July 2, 1998, the Texas Commission  issued a preliminary  order setting
forth the issues the Texas  Commission will consider in the merger  application.
In its preliminary  order,  the Texas  Commission also determined  that: (i) the
merger application was not a rate proceeding;  (ii) restructuring  issues should
not be addressed;  and (iii)  matters in the  jurisdiction  of other  regulatory
bodies should not be addressed.

      AEP and CSW have reached a settlement  in principle  with the Texas Office
of Public Utility Counsel and several cities in Texas.  The proposed  settlement
provides for combined rate reductions totaling approximately $180 million over a
six-year  period for CSW's  electric  operating  company  customers  through two
separate rate riders.  Both rate reduction riders become effective upon approval
of the settlement and completion of the merger.

      The first rate reduction rider provides for $84.4 million in estimated net
merger savings to be credited to Texas customer bills.  The reduction would come
from a net merger  savings  rate  reduction  rider over the six years  following
completion of the merger with the aggregate rate reductions for customers of the
CSW Texas companies as follows:

    - $52.7 million for CPL;
    - $16.1 million for SWEPCO; and
    - $15.6 million for WTU.

      The second rate  reduction  rider will be  implemented  to resolve  issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation  proceedings in
Texas. The $95.6 million rate reductions over the six years following completion
of the merger include:

    - $61.3 million for CPL;
    - $19.9 million for SWEPCO; and
    - $14.4 million for WTU.

      CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction
of $13.0 million  implemented in May 1998, as well as the second glide-path rate
reduction of $13.0 million  scheduled to take effect May 1999, if the settlement
is approved and the merger between AEP and CSW merger is completed.

      In addition,  as a part of the settlement  proposal,  CPL,  SWEPCO and WTU
agree not to seek an increase in base rates prior to January 1, 2003.  The Texas
Office of Public  Utility  Counsel  and  members  of the Texas  cities  will not
initiate rate reviews prior to January 1, 2001.

                                       17
<PAGE>

      The  settlement  proposal also provides for a sharing of off-system  sales
margins on the  wholesale  electricity  market after the  effective  date of the
merger. The proposed  settlement also includes affiliate  transaction  standards
and provides for the maintenance of service quality for Texas customers.

      Hearings in Texas are expected to begin in the second quarter of 1999, and
a final order is expected by the end of the third quarter of 1999.

      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 on the condition that the merger is completed by December 31, 1999.

      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 is  similar to
requests currently before other jurisdictions and outlines the expected combined
company  benefits of the merger to AEP and CSW  customers and  shareholders.  On
November 9, 1998, AEP and CSW filed an amendment to the application.

      AEP and CSW plan to make other  required  federal  merger filings with the
Federal  Communications  Commission  and the  Department  of Justice in the near
future.

      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 the  United  Kingdom  entities.  Although  the  merger of CSW into AEP is not
subject  to  approval  of United  Kingdom  regulatory  authorities,  the  common
ownership of the United Kingdom entities could be referred by the United Kingdom
Secretary  of State for Trade and Industry  for an  investigation  by the United
Kingdom Monopolies and Mergers Commission.  CSW is unable to predict the outcome
of any such regulatory proceeding.

      AEP
      AEP has received a request from the staff of the Kentucky  Public  Service
Commission to file an application  seeking  Kentucky  Public Service  Commission
approval for the indirect  change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service  Commission has the  jurisdictional
authority to approve the merger, AEP will prepare a merger application filing to
be made with the Kentucky  Public  Service  Commission,  which is expected to be
filed by April 15, 1999. Under the governing statute the Kentucky Public Service
Commission must act on the application within 60 days.  Therefore this matter is
not expected to impact the timing of the merger.

       Completion of the Merger
      The  proposed  AEP  merger has a  targeted  completion  date in the fourth
quarter  of 1999.  The  merger is  conditioned,  among  other  things,  upon the
approval of several state and federal regulatory agencies.  The transaction must
satisfy many  conditions,  including the condition  that it must be a pooling of
interests. The parties may not waive some of these conditions.  AEP and CSW have
initiated  the  process of  seeking  regulatory  approvals,  but there can be no
assurances as to when, on what terms or whether the required  approvals  will be
received  or whether  there  will be any  regulatory  proceedings  in the United
Kingdom.  The merger  agreement will  terminate on December 31, 1999 unless,  in
certain  circumstances,  extended  by either  party as  provided  in the  merger
agreement. There can be no assurance that the AEP merger will be consummated.

                                       18
<PAGE>

      Merger Costs
      As of December 31, 1998,  CSW had deferred $26 million in costs related to
the merger on its consolidated  balance sheet,  which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.

      See NOTE 16. PROPOSED AEP MERGER.


OTHER MERGER AND ACQUISITION ACTIVITIES

      SWEPCO Cajun Asset Purchase Proposal
      Cajun filed a petition for  reorganization  under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision  of the United States  Bankruptcy  Court for the Middle  District of
Louisiana.

      On March 18, 1998,  SWEPCO,  together  with the Cajun  Members  Committee,
which  currently   represents  7  of  the  12  Louisiana   member   distribution
cooperatives  that are served by Cajun,  filed the SWEPCO Plan in the bankruptcy
court.  The SWEPCO Plan replaces  plans filed  previously  by SWEPCO.  Under the
SWEPCO  Plan,  a  SWEPCO  affiliate  or  subsidiary  would  acquire  all  of the
non-nuclear  assets  of Cajun,  comprised  of the  two-unit  Big Cajun I natural
gas-fired  plant,  the  three-unit  Big Cajun II coal-fired  plant,  and related
non-nuclear  assets.  The purchase price under the SWEPCO Plan is $940.5 million
in cash,  subject  to  adjustment  pursuant  to the terms of the asset  purchase
agreement proposed as part of the SWEPCO Plan.

      Two competing plans of reorganization  for the non-nuclear assets of Cajun
were filed with the bankruptcy  court. On September 25, 1998,  Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana  Generating LLC, a partnership of subsidiaries of Southern  Energy,
Inc.,   Northern  States  Power  Company  and  Zeigler  Coal  Holding   Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.

      On February 11,  1999,  the  bankruptcy  court issued a ruling that denied
confirmation of both the Louisiana  Generating LLC  reorganization  plan and the
SWEPCO Plan.  Although both plans were rejected,  the bankruptcy  court said its
ruling should provide  guidance for the bidders to modify their existing  plans.
SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy  court's
direction and to continue to pursue the acquisition of the non-nuclear assets of
Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999
to determine the next step in the process.

      Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon
confirmation by the bankruptcy  court,  and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to their respective
board of  directors  approvals.  If a SWEPCO  reorganization  plan for  Cajun is
ultimately  confirmed by the bankruptcy  court,  the $940.5 million  required to
consummate  the  acquisition  of Cajun's  non-nuclear  assets is  expected to be
financed  through  a  combination  of  external   non-recourse   borrowings  and
internally  generated funds. There can be no assurance that the bankruptcy court
will confirm a SWEPCO  reorganization  plan for Cajun,  or, if it is  confirmed,
that  federal and state  regulators  will  approve it. As of December  31, 1998,
SWEPCO had deferred  $11.9 million in costs related to the Cajun  acquisition on
its   consolidated   balance  sheet,   which  would  be  expensed  if  a  SWEPCO
reorganization  plan  for  Cajun  was not  ultimately  successful.  See  NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES.

                                       19
<PAGE>

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
spend 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 six  operating  power  projects
totaling  978 MW which are located in  Colorado,  Florida and Texas.  CSW Energy
began  construction  in August 1998 of a 500 MW merchant  power plant,  known as
Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural
gas-fired facility should begin simple cycle operation in the summer of 1999 and
combined cycle operation by the end of 1999.

      In addition to these  projects,  CSW Energy has other  projects in various
stages of development.

      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.  In the first quarter of 1998, CSW  International  and its joint
venture partner,  Alpek,  commenced commercial operations of a 109 MW, gas fired
cogeneration  project  at  Alpek's  Petrocel  industrial  complex  in  Altamira,
Tamaulipas, Mexico.

      In late 1998, CSW International and Scottish Power commenced  construction
of a 400 MW  combined  cycle gas turbine  power  station in  southeast  England.
Commercial  operation is expected to begin in the year 2000.  CSW  International
has a 50% interest in the project.

      Also during 1998, CSW International invested an additional $100 million in
convertible  securities of Vale.  At December 31, 1998,  CSW  International  had
approximately $290 million invested in South America.

      Through December 31, 1998, CSW  International  has invested $80 million in
Vale to obtain a 36% equity interest. CSW International also issued $100 million
of debt to Vale,  convertible  to equity by the end of 1999.  CSW  International
accounts  for its  $80  million  investment  in Vale  on the  equity  method  of
accounting, and the $100 million as a loan.


      In mid-January  1999, amid market  instability,  the Brazilian  government
abandoned  its policy of pegging  the  currency  in a broad  range  against  the

                                       20
<PAGE>

dollar. This resulted in a 40% devaluation of the Brazilian currency,  the real,
by the end of January.  Vale will be  unfavorably  impacted  by the  devaluation
primarily due to the revaluation of foreign denominated debt.

      CSW  International  has a put option which requires that Vale purchase CSW
International's shares, upon CSW International  exercising the put, at a minimum
of the purchase price paid for the shares ($80 million).  As a result of the put
option  arrangement,  management has reached a preliminary  conclusion  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.  CSW
International  views its investment in Vale as a long-term  investment  strategy
and believes that the investment in Vale continues to have 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, 1998,  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 year-end
market  value  of the  shares  and  foreign  exchange  rates,  the  value of the
investment  at December 31, 1998 is $66 million.  The  reduction in the carrying
value of this  investment  has been reflected in Other  Comprehensive  Income in
CSW's  Consolidated  Statements of  Stockholder's  Equity.  Management views its
investment in Chile as a long-term investment strategy. 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  International  has other projects in
various stages of development.


      ENERGY SERVICES

      C3 Communications
      C3 Communications,  an exempt telecommunications  company, is comprised of
two divisions. C3 Communications' Utility Automation Division provides automatic
meter  reading,  interval  meter  data and  related  products  and  services  to
commercial and industrial customers, electric, gas and water utilities and other
energy service providers.  C3 Communications'  Networks Division was formed from
the dissolution of ChoiceCom.  C3 Communications'  Networks Division offers high
capacity inter-city fiber optic network services to telecommunications  carriers
and  wholesale  customers  in Texas and  Louisiana  with  plans to  expand  into
Arkansas and Oklahoma.

      C3 Communications'  Utility Automation  Division entered the direct access
market  in 1998 and  received  approval  from  all  three  utility  distribution
companies  in  California  to  manage  meter  data for the  state's  deregulated
electric utility industry.  The Utility  Automation  Division  continues to seek
other domestic opportunities.

      In 1998,  ChoiceCom expanded its switch-based local dial tone markets from
three cities to five by installing  state-of-the  art Lucent 5ESS(R) switches in
Dallas and Houston,  Texas.  ChoiceCom  also expanded its long haul network with
the installation and operation of a high capacity fiber optic system linking the
Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998.

      By mutual agreement, the ChoiceCom partnership was terminated December 31,
1998. ICG  Communications,  Inc. purchased  ChoiceCom's local dial tone business
while C3  Communications  retained  the long  haul,  high-capacity  fiber  optic
network.  With the fiber  assets,  C3  Communications  established  the Networks
Division and plans to focus on CSW's original  strategies to build new routes in
the states of Texas, Oklahoma, Louisiana and Arkansas.

                                       21
<PAGE>

      EnerShop
      EnerShop's  two  product  lines are  performance  contracting  and EnerACT
advisory services.

      Through  performance  contracting,  EnerShop  provides  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.

      EnerACT is an  innovative  system  that  communicates  with all brands and
models of energy management systems and utility meters.  EnerACT aggregates load
profiles of  multiple  facilities  into a single  purchasing  entity,  optimizes
real-time control of buildings  simultaneously with real-time energy prices, and
predicts energy consumption for operations  through building  simulation models.
Customers in California,  Illinois,  Louisiana,  New York,  Texas, and Wisconsin
currently subscribe to EnerACT advisory services.

      Other Ventures
      The CSW Services Business Ventures group pursues energy-related  projects.
Projects for these groups include staffing services for electric utility nuclear
power plants,  energy management  systems,  and electric  substation  automation
software.  In August 1998,  the SEC approved 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.  CSW Energy Services began selling retail electric supply
to  commercial  customers in California  and  Pennsylvania.  In March 1998,  CSW
Energy Services signed its first major supply contract in California. In January
1999, CSW Energy Services announced that it was ceasing its business as a retail
electric supplier and that it would assign or terminate its existing electricity
supply contracts to other suppliers.

      In June 1997, the FERC approved the request of CSW Power Marketing to sell
power and energy at market-based rates in the wholesale market. AEP is currently
pursuing  this  initiative,  as a result,  CSW has  temporarily  suspended  this
initiative.

SOUTH TEXAS PROJECT

      CPL owns 25.2% of STP, a two-unit  nuclear  power  plant  which is located
near Bay City,  Texas.  HL&P owns 30.8%, San Antonio owns 28.0%, and 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 2 was removed from service during 1998 for a scheduled  refueling
outage. For the year 1998, Unit 1 and Unit 2 operated at net capacity factors of
99.1% and 91.1%, 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.

                                       22
<PAGE>

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
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 cannot yet be determined,  but
the impact could be significant.

      At the Kyoto  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 is  approved by the United  States
Congress in its present  form.  The impact,  if any, on CSW 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. At December
31, 1998, 34% of the U.S. Electric  Operating  Companies'  installed  generating
capacity was coal and lignite.  For the year ended December 31, 1998, 47% of the
U.S. Electric Operating Companies' MWH generation 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

                                       23
<PAGE>

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

      In response  to the  development  of a more  competitive  electric  energy
market,  CSW has received  regulatory  approval,  which authorizes the four U.S.
Electric Operating Companies to conduct a pilot program which offers 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.
These swaps cover natural gas deliveries beginning in January and continuing for
the remainder of 1999.  Natural gas volumes  purchased to serve these  contracts
for which CSW has secured swap agreements represents  approximately 1% of annual
natural gas purchases.

      The table below provides information about the Company's natural gas swaps
and  electricity  forward  contracts  that are sensitive to changes in commodity
prices.  The swaps  hedge  commodity  price  exposure  for the year  1999.  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  September 1999. The average contract price for forward purchases is $58
per MWH and the average contract price for forward sales is $80 per MWH.

      Contractual commitments at December 31, 1998 are as follows:

                           Net Notional                            Fair Value of
    Products                  Amount        Fair Value of Assets    Liabilities
    ----------------------------------------------------------------------------
                                                          (millions)
    Swaps                  6,510,000 MMbtu          $--                  $1
    Forwards:  purchases    440,000 MWH               3                  --
               sales        292,800 MWH               1                  --
    

      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,  1998,  the  gross  value of such
contracts for differences was  approximately 92% of the expected power purchases
for 1999.

      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

                                       24
<PAGE>

from CSW's acquisition of SEEBOARD. At the end of 1998, CSW had positions in two
cross currency swap contracts. The following table presents information relating
to these contracts.  The market value  represents the foreign  exchange/interest
rate terms inherent in the cross currency swaps at current market  pricing.  CSW
expects to hold these contracts to maturity.  At current  exchange  rates,  this
liability is included in long-term debt on the balance sheet at a carrying value
of approximately $429 million.

                                               Expected          Expected Cash
                                             Cash Inflows          Outflows
Contract                 Maturity Date     (Maturity Value)     (Market Value)
--------------------------------------------------------------------------------
Cross currency swaps    August 1, 2001       $200 million       $220.4 million
Cross currency swaps    August 1, 2006       $200 million       $236.2 million

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


OTHER MATTERS

      Year 2000
      On a  system-wide  basis,  CSW  initiated  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 are included in this project as well.

      Year 2000  readiness is a top  priority  for CSW.  The formal  project was
initiated  in late 1996 at which time an executive  sponsor and project  manager
were named and a centralized  project management office was formed. More than 30
Readiness  Teams have been  initiated and are in various  phases of the project.
Currently,  those teams represent the equivalent of about 90 full-time  employee
positions working on year 2000 readiness.  The teams are using a formal approach
that  includes  inventory,  assessment,  remediation,  testing  of  systems  and
development of contingency  plans.  Formal  progress  checkpoints  are conducted
biweekly  by  the  project  management  team.  An  executive  oversight  council
comprising the functional  vice presidents  convenes  monthly to review progress
and address issues.  The project  executive  sponsor updates top management on a
weekly basis and at every Board of Directors Audit Committee meeting.

      CSW has completed a review of its year 2000 project.  External consultants
assisted  in the  review.  The  purpose of the review was to assess the  project
plans and processes to ensure that the significant  risks to CSW associated with
the year 2000 are prudently managed. Several changes have been incorporated into
the year 2000 project as a result of the review findings.

      State of Readiness
      Key  milestones  for the  CSW  system-wide  year  2000  program  excluding
SEEBOARD and Vale are listed below:

  - A detailed  inventory and assessment of critical  systems was completed in
    the  third  quarter  of  1998.   This  includes   switchboards,   elevators,
    environmental  controls,  vehicles,  metering systems, and embedded logic or
    real  time  control  systems  in  support  of  generation  and  delivery  of
    electricity.  The findings indicate that less than 15% of installed controls
    have  microprocessors,  very few have date  logic and over 90% of those with

                                       25
<PAGE>

    date logic already  process new  millennium  dates  correctly.  The need for
    additional  functionality in the early 1990's resulted in the  modernization
    of several  electric  operation  systems  that has  reduced  the  conversion
    requirements.  Corrective and  certification  measures are well underway for
    these  systems  and  completion  is  targeted  for all systems by the second
    quarter of 1999.

  - Inventory and  assessment  of business  applications  and  vendor-supplied
    software  was  completed  in the  first  quarter  of  1997.  Only 25% of the
    business  application  programs were  determined to require  remediation  by
    December 1999.
    -  Plans  for   modification  and   certification   testing  of  business
       application software were completed in the third quarter of 1997.
    -  Remediation  plans  and  schedules  for  business   applications  were
       established   in  the  fourth   quarter  of  1997,   and  conversion  and
       certification  activities were  initiated.  As of the end of 1998, 75% of
       business  critical   applications  were  converted  and  certified.   The
       remaining  25% of  applications  are targeted for  completion by mid-year
       1999.

      SEEBOARD  completed an inventory of date dependent assets  including,  but
not limited to,  embedded chip  technology,  software,  hardware,  applications,
telecommunications,  access and security  systems in the third  quarter of 1998.
SEEBOARD is on schedule to complete an assessment of all critical systems by the
first quarter of 1999 and  remediation of those systems in the second quarter of
1999.  Final  verification  of those systems is scheduled for  completion by the
third  quarter of 1999.  To date,  70% of the work to be  performed  in electric
operations has been completed.

      Vale completed an inventory of date dependent  assets and critical systems
in the fourth  quarter of 1998.  Vale is on schedule  for  remediation  of these
assets  and  systems  by  the  third  quarter  of  1999.  Most  business  system
remediation has been completed.


      Cost to Address Year 2000 Issues
      Work  related to the year 2000 project is being  performed  using a mix of
internal and external  resources.  The funds for year 2000 project  expenditures
are included in CSW's  budget.  The majority of costs related to the project are
expensed as incurred.  The  historical  cost  incurred to date for the year 2000
project is approximately $10 million,  $9 million of which was incurred in 1998.
Remaining  testing and  conversion is expected to cost an additional $23 million
to $28 million over the next 15 months.  Approximately 33% of the projected cost
is to be covered through the redeployment of existing  resources.  Approximately
42% of the  projected  cost is for  contract  labor.  The  remaining  25% of the
projected cost is for computer hardware and software purchases.

      Development and upgrade costs totaling  approximately $12 million relating
to certain  SEEBOARD  systems  have been removed from the  projected  cost.  The
primary  purpose for  implementing  those  particular  systems is related to the
competitive  electricity markets in the U.K., not an acceleration of expenditure
for year 2000 purposes.

      At present no planned CSW computer  information  system projects have been
affected  by the  year  2000  project,  but  that may  change  as the year  2000
approaches.  Accordingly,  no estimate has been made for the financial impact of
any  future  projects  foregone  due to  resources  allocated  to the year  2000
project.

      Risk of Year 2000 Issues
      The greatest  financial risk to CSW would be a total inability to generate
and deliver  electricity.  Many primary systems and backup systems would have to
fail in order for that total  inability  to occur.  The  probability  of a total
inability to generate and deliver electricity by CSW is very low.

                                       26
<PAGE>

      To date at CSW System  power  plants,  no year 2000 issues have been found
that would have caused  power  plants to fail.  Risk of power  plant  failure is
limited  because 50% of power plant  controls do not operate with date sensitive
logic.  Additionally,  the year 2000 issues,  which have been  identified in the
plants, are generally minor issues typically affecting reporting systems.

      The vast majority of the transmission and distribution  system consists of
wires, poles, transformers,  switches and fuses where year 2000 is not an issue.
Fewer than 15% of control  systems that operate  transmission  and  distribution
equipment are microprocessor based, and of those, 95% have been found to process
year 2000 dates  correctly.  The  standard  residential  meter is not  affected;
however,   about  10%  of   industrial   and  large   commercial   meters   have
microprocessors. So far most of those microprocessors process dates correctly.

      The areas  requiring the greatest  amount of work are the  computers  that
operate  business  systems such as customer  billing and  accounting.  CSW is on
schedule  to have year 2000  issues in these  systems  resolved by the summer of
1999.

      Currently, no cost estimate exists related to CSW's year 2000 risk.

      Contingency Plans
      Contingency  plans  have  been in  place  for  years to  address  problems
resulting  from  weather.  These  plans are being  updated to include  year 2000
issues.   Contingency   planning  is  engineered  into  the   transmission   and
distribution  systems as it is designed with the  capability  to by-pass  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 40-45 days of extra coal is kept on hand.

      The North American Electric  Reliability  Council is coordinating with all
national  power  regions to assess the risks and to  develop  contingency  plans
within the national electric delivery system. During the fourth quarter of 1998,
CSW developed first drafts of the contingency plans to address year 2000 issues.
These  contingency  plans are  currently  being  further  developed  and will be
completed  in  the  second  quarter  of  1999.   CSW  will   participate  in  an
industry-wide  drill focused on sustaining  reliable operations with a simulated
partial loss of voice and data  communications  on April 9, 1999.  Additionally,
CSW  will  participate  in  an  industry-wide  drill  to  test  its  operational
preparedness  in the third  quarter  of 1999.  Final  verification  of  external
interfaces  will be performed in the last half of 1999.  Contingency  plans will
continue to be revised as needed as a result of the drills.

      CSW has contacted over 6,000  suppliers to determine  their readiness with
70%  responding.  Of those  responding,  55% say they are  prepared for the year
2000.  CSW is  developing  plans  for the  possible  failure  of  some  critical
suppliers.

      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.


                                       27
<PAGE>

NEW ACCOUNTING STANDARDS

      SFAS No. 130
      SFAS No.  130 is  effective  for  fiscal  year  1998 and was the  basis of
preparation  for the  Consolidated  Statements of  Stockholders'  Equity in this
report. The statement adds the requirement to present  comprehensive  income and
all of its components  (revenues,  expenses,  gains and losses) in a full set of
financial  statements,  and this new statement  must be displayed  with the same
prominence given other financial statements.  Comprehensive income is defined as
the  change in equity  (net  assets) of a  business  enterprise  during a period
except those resulting from investments by owners and distributions to owners.

      SFAS No. 131
      CSW adopted  SFAS No. 131 for fiscal  year 1998.  The  statement  requires
disclosure of selected  information  about its  reportable  operating  segments.
Operating  segments  are  components  of an  enterprise  that engage in business
activities  that may earn  revenues  and  incur  expenses,  for  which  discrete
financial  information  is  available  and is  evaluated  regularly by the chief
operating  decision-maker  within a company for making  operating  decisions and
assessing  performance.   Segments  may  be  based  on  products  and  services,
geography, legal structure or management structure.

      SFAS No. 132
      SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5.
BENEFIT PLANS.  This statement  standardizes  the  disclosure  requirements  for
pensions and OPEBs,  requires additional  information for changes in the benefit
obligations  and fair value of plan  assets and  eliminates  certain  disclosure
requirements.

      SOP No. 98-5
      SOP 98-5 is effective for fiscal years  beginning after December 15, 1998.
The statement  requires entities to expense the costs of start-up  activities as
incurred. SOP No. 98-5 broadly defines start-up activities to include: (i) costs
that are  incurred  before  operations  have begun;  (ii) costs  incurred  after
operations  have began but before full  productive  capacity  has been  reached;
(iii)  learning  costs and  non-recurring  operating  losses  incurred  before a
project is fully operational;  and (iv) one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory  or with a new class of customer,  and  initiating a new process in an
existing operation.

      CSW  adopted  SOP No.  98-5 in 1998 and,  as a result,  CSW Energy and CSW
International  expensed $4.5 million and $1.5 million,  after tax, respectively,
of start-up costs, which had previously been capitalized.

      SFAS No. 133
      SFAS No. 133 is effective for fiscal years  beginning  after June 15, 1999
(January 1, 2000 for calendar year entities).  This statement  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.  The statement 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 is met. CSW has not yet quantified the impacts of adopting SFAS No. 133
on its financial  statements  and has not determined the timing or the method of
adopting SFAS No. 133.

                                       28
<PAGE>

      EITF Issue 98-10
      In December  1998, the EITF reached  consensus on Issue 98-10,  Accounting
for Contracts  Involved in Energy Trading and Risk Management  Activities.  EITF
Issue 98-10 is effective  for fiscal years  beginning  after  December 15, 1998.
EITF Issue 98-10 requires energy trading  contracts to be recorded at fair value
on the balance sheet,  with the changes in fair value  included in earnings.  In
reaching its consensus,  the EITF distinguished between energy contracts entered
to generate a profit and energy  contracts  entered to provide for the  physical
delivery of a commodity.  Generally, CSW's energy contracts are entered into for
the physical  delivery of energy.  These contracts,  therefore,  do not meet the
definition  of "trading  activities"  addressed by EITF Issue 98-10.  Therefore,
adoption of EITF Issue 98-10 will not have a material impact on CSW's results of
operations or financial condition.



                                       29
<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.   CSW's  1998  results  reflect  an  outstanding
weather-related  year,  and that type of  weather  may not occur in 1999.  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, 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 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  17.
EXTRAORDINARY  ITEM 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

                                       30
<PAGE>

increase in fuel revenues,  as discussed in fuel expense 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.

      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.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

      CSW's  earnings  decreased  to $153  million in 1997 from $429  million in
1996.  CSW's return on average  common stock equity was 4.2% in 1997 compared to
12.1% in 1996.  The primary  reason for the lower earnings and return on average
common  stock  equity was the accrual of the one-time  United  Kingdom  windfall
profits tax. The impact of CSW's final  settlement  of  litigation  with El Paso

                                       31
<PAGE>
 
contributed  to the  decline  in  earnings  as well.  Also  contributing  to the
decrease  in  earnings  was 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 17. EXTRAORDINARY ITEM for additional
information on the windfall profits tax. Further reducing earnings for 1997 were
certain asset write-offs predominately at the U.S. Electric Operating Companies.
Partially  offsetting the lower earnings was the gain on the  reacquisition of a
portion  of the  U.S.  Electric  Operating  Companies'  preferred  stock  and an
adjustment to deferred tax balances of $15 million resulting from a 2% reduction
in the United Kingdom  corporation tax rate.  Further  offsetting the decline in
earnings  was an increase  in  non-fuel  electric  revenues.  Significant  items
occurring in 1997 that affected earnings are listed below (in millions).

                                                      Earnings
                                                       Impact
            United Kingdom Windfall Profits Tax       $(176)
            CPL 1997 Final Order                        (48)
            Asset Write-offs and Reserves               (48)
            PSO 1997 Rate Settlement Agreement          (27)
            Settlement of Litigation with El Paso       (23)
            Gain on the Reacquisition of                 
               Preferred Stock                           10
            United Kingdom Tax Adjustment                15
                               
      In addition, several items that occurred in 1996 were not present in 1997.
Prior to the sale of Transok in 1996,  CSW realized $12 million of earnings from
Transok's  operations.  As a result of the sale,  CSW also recorded an after-tax
gain of approximately $120 million in 1996. However, the U.S. Electric Operating
Companies and CSW Energy recorded charges totaling $102 million,  after-tax, for
certain investments in the second quarter of 1996 which decreased earnings.  See
NOTE 15. TRANSOK DISCONTINUED  OPERATIONS for additional  information concerning
the effects of the sale of Transok.

      Operating  revenues  increased  $113 million in 1997 compared to 1996. The
revenue variances are shown in the following table.

                            1997 REVENUE VARIANCES
                     Increase (decrease) from prior year, millions

                   U.S. Electric
                        CPL and WTU Transmission Revenues        $56
                        KWH Sales, Growth and Usage               41
                        Fuel Revenue                              23
                        CPL 1996 Fuel Agreement                   18
                        Sales for Resale                          12
                        CPL 1997 Final Order                     (45)
                        KWH Sales, Weather-Related               (37)
                        PSO 1997 Rate Settlement  Agreement      (32)
                        Other Electric                            37
                                                                ------
                                                                  73
                                                                ------
                   United Kingdom                                 22
                   Other Diversified                              18
                                                                ------
                                                                $113
                                                                ------

      U.S. Electric revenues  increased $73 million,  or 2%, in 1997 compared to
1996.  Retail MWH sales increased 2.5%, with increases in all customer  classes.
U.S.  Electric  revenues  increased due primarily to higher MWH sales  resulting
from increased  customer usage and new  transmission  access revenues at CPL and
WTU,  in  accordance  with FERC  Order No. 888 and the Texas  Commission's  rule

                                       32
<PAGE>

regarding  transmission access and pricing. The new transmission revenues had no
material  effect on earnings  because  they were almost  completely  offset by a
corresponding amount of transmission expense.  Revenues increased due in part to
the  absence  in 1997 of the  revenue  decrease  in 1996  from the CPL 1996 Fuel
Agreement.  An increase in fuel  revenues,  as discussed in fuel expense  below,
also  contributed  to the higher  revenues.  Partially  offsetting  the  revenue
increase was a decrease in  weather-related  demand due to milder weather in the
first nine months of 1997.  Further  offsetting  the  increase in U.S.  Electric
revenues was the revenue decrease from both the CPL 1997 Final Order and 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.  United Kingdom revenues increased $22 million,
or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate
movement  between the British pound and the U.S.  dollar,  partially offset by a
reduction  in the fossil  fuel levy  collected  on behalf of the United  Kingdom
government.  Other diversified  revenues increased $18 million,  or 31%, in 1997
compared to 1996 due primarily to increased revenues from CSW International,  C3
Communications, CSW Credit and EnerShop.

      During 1997 and 1996 the U.S. Electric Operating  Companies  generated 93%
of their electric energy requirements.  U.S. Electric fuel expense increased $26
million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in
natural  gas  fuel  costs  to  $2.67  per  MMbtu  from  $2.50  per  MMbtu.  Also
contributing to the increase was the absence in 1997 of a one-time  reduction to
fuel expense of  approximately  $9 million recorded in the first quarter of 1996
related to the CPL 1996 Fuel Agreement.  Partially offsetting these increases in
fuel expense was the effect of  lower-cost  coal.  United  Kingdom cost of sales
decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due
primarily  to a  reduction  in the fossil fuel levy  collected  on behalf of the
United  Kingdom  government,  which was  partially  offset by the  effect of the
exchange rate movement between the British pound and the U.S. dollar.

      Other  operating  expense  increased  $196 million to $981 million in 1997
compared  to 1996 due in part to the  absence in 1997 of a $27  million  pension
adjustment  recorded in the second quarter of 1996 at SEEBOARD  which  decreased
pension  expense.  The effect of the exchange rate movement  between the British
pound and U.S.  dollar  also  contributed  to the  increase  in other  operating
expense  of  SEEBOARD  U.S.A.  In  addition,  approximately  $56  million in new
transmission  access expense was recorded at CPL and WTU in 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding  transmission  access and
pricing.  Also  increasing  other  operating  expense were asset  write-offs  of
approximately  $57 million  including  certain  regulatory  assets,  capitalized
demand  side  management  assets and  obsolete  inventories.  In  addition,  the
settlement of litigation  with El Paso  increased  other  operating  expense $35
million. Further contributing to the increase in other operating expense was 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.  Partially  offsetting these increases were the
absence in 1997 of expenses recorded in 1996 related to inventory  write-offs of
$10 million and CPL rate case adjustments of $15 million. Further offsetting the
increases  were  charges  in 1996  associated  with  restructuring  costs.  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 $33 million,  or 7%, in
1997 due primarily to the  implementation  of depreciation  and  amortization in
accordance  with the CPL  1997  Final  Order.  As a result  of that  order,  the
increase in depreciation  due to the  accelerated  recovery of ECOM property was
offset in part by the  implementation of lower  depreciation  rates. Taxes other
than  income  increased  $17  million,  or 10%,  in 1997  compared  to 1996  due
primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas
franchise  tax refund and  true-up in 1996.  Income tax  expense  decreased  $73

                                       33
<PAGE>

million to $151 million in 1997 due primarily to lower pre-tax  income and a $15
million adjustment to deferred income tax balances resulting from a 2% reduction
in the United Kingdom corporation tax rate.

      Other  income and  deductions  increased  to a gain of $32 million in 1997
from a loss of $61  million  in 1996 due  primarily  to the  absence  in 1997 of
charges  for  certain  investments  recorded  in the  second  quarter of 1996 of
approximately $84 million,  after tax, at the U.S. Electric Operating  Companies
and $18 million at CSW Energy.  Long-term interest expense increased $8 million,
or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter
1996  debt  issuance  by CSW  Energy.  Short-term  and  other  interest  expense
decreased $8 million to $86 million in 1997 when  compared to 1996 due primarily
to lower levels of short-term  borrowings.  Distributions on newly-issued  Trust
Preferred  Securities  increased  interest  and other  charges by $17 million in
1997, which was partially offset by lower dividend  requirements  resulting from
the  related  preferred  stock  reacquisitions  at the U.S.  Electric  Operating
Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on
the new securities.

                                       34
<PAGE>


CSW
Consolidated Statements of Income
Central and South West Corporation
-------------------------------------------------------------------------------
                                                 For the Years Ended December
                                                              31,
                                                 ------------------------------
                                                    1998      1997      1996
                                                 ------------------------------
                                                 ($ in millions, except share
                                                           amounts)
Operating Revenues
   U.S. Electric                                   $ 3,488    $ 3,321  $ 3,248
   United Kingdom                                    1,769      1,870    1,848
   Other diversified                                   225         77       59
                                                 ------------------------------
                                                     5,482      5,268    5,155
                                                 ------------------------------
Operating Expenses and Taxes
   U.S. Electric fuel                                1,190      1,177    1,151
   U.S. Electric purchased power                       111         89       77
   United Kingdom cost of sales                      1,204      1,291    1,331
   Other operating                                   1,029        981      785
   Maintenance                                         169        152      150
   Depreciation and amortization                       521        497      464
   Taxes, other than income                            189        195      178
   Income taxes                                        203        151      224
                                                  -----------------------------
                                                     4,616      4,533    4,360
                                                  -----------------------------
Operating Income                                       866        735      795
                                                  -----------------------------

Other Income and Deductions
   U.S. Electric charges for investments and                      
      plant development costs                           --         (3)    (117) 
   Other                                                60         29       16
   Non-operating income taxes                          (18)         6       40
                                                  -----------------------------
                                                        42         32      (61)
                                                  -----------------------------
Income Before Interest and Other Charges               908        767      734
                                                  -----------------------------

Interest and Other Charges
   Interest on long-term debt                          311        333      325
   Distributions of Trust Preferred Securities          27         17       --
   Interest on short-term debt and other               121         86       94
   Preferred dividend requirements of subsidiaries       8         12       18
   Gain on reacquired preferred stock                    1        (10)      --
                                                  -----------------------------
                                                       468        438      437
                                                  -----------------------------
Income from Continuing Operations                      440        329      297
                                                  -----------------------------

Discontinued Operations
   Income from discontinued operations, net of
      tax of $6                                          --        --       12
   Gain on the sale of discontinued operations,          --        --      120
      net of tax of $72                          ------------------------------
                                                         --        --      132
                                                 ------------------------------
Income Before Extraordinary Item                        440       329      429

Extraordinary Item - United Kingdom windfall                    
      profits tax                                        --      (176)      --
                                                 ------------------------------

Net Income for Common Stock                            $440     $ 153    $ 429
                                                 ==============================

Average Common Shares Outstanding                     212.4     212.1    207.5

Basic and Diluted EPS from Continuing Operations      $2.07      1.55    $1.43
Basic and Diluted EPS from Discontinued Operations       --        --     0.64
                                                 ------------------------------
Basic and Diluted EPS before Extraordinary Item        2.07      1.55     2.07
Basic and Diluted EPS from Extraordinary Item            --     (0.83)      --
                                                 ------------------------------
Basic and Diluted EPS                                 $2.07     $0.72    $2.07
                                                 ==============================

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, 1996     $675         $610      $1,893          ($4)         $3,174
   Sale of common stock                    65          412          --           --             477
   Common stock dividends                  --           --        (358)          --            (358)
   Other                                   --           --           3           --               3
                                                                                             -------
                                                                                              3,296
                                                                                            
   Comprehensive Income:
      Foreign currency translation adjustment
        (net of tax of $35)                --           --           --           75             75
      Unrealized gain on securities
        (net of tax of $1)                 --           --           --            2              2
      Net Income                           --           --          429           --            429
                                                                                             -------
         Total comprehensive income                                                             506    

                                        ------      ------        ------      ------         -------
Ending Balance -- December 31, 1996       $740      $1,022        $1,967         $73         $3,802
                                        =============================================        =======

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 of $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
                                        =============================================        ========
</TABLE>





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


                                       36
<PAGE>


Consolidated Balance Sheets
Central and South West Corporation
-------------------------------------------------------------------------
                                                As of December 31,
                                          -------------------------------
                                              1998              1997
                                          --------------     ------------
                                                    (millions)
ASSETS
Fixed Assets
   Electric
      Production                              $5,887             $ 5,824
      Transmission                             1,594               1,558
      Distribution                             4,681               4,453
      General                                  1,380               1,381
      Construction work in progress              166                 184
      Nuclear fuel                               207                 196
                                          --------------     ------------
                                              13,915              13,596
   Other diversified                             333                 250
                                          --------------     ------------
                                              14,248              13,846
Less - Accumulated depreciation and                                
amortization                                   5,652               5,264
                                          --------------     ------------
                                               8,596               8,582
                                          --------------     ------------

Current Assets
   Cash and temporary cash investments           157                  75
   Accounts receivable                         1,110                 916
   Materials and supplies, at average cost       191                 172
   Electric utility fuel inventory                90                  65
   Under-recovered fuel costs                      4                  84
   Notes receivable                              109                  --
   Prepayments and other                          90                  78
                                          --------------     ------------
                                               1,751               1,390
                                          --------------     ------------
Deferred Charges and Other Assets
   Deferred plant costs                          497                 503
   Mirror CWIP asset                             257                 285
   Other non-utility investments                 432                 448
   Securities available for sale                  66                 103
   Income tax related regulatory assets, net     308                 329
   Goodwill                                    1,402               1,428
   Other                                         435                 383
                                          --------------     ------------
                                               3,397               3,479
                                          --------------     ------------
                                            $ 13,744            $ 13,451
                                          ==============     ============


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

                                       37

<PAGE>

CSW
Consolidated Balance Sheets
Central and South West Corporation
--------------------------------------------------------------------------------
                                                 As of December 31,
                                             ---------------------------
                                              1998                1997
                                             --------            -------
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 1998 and 212.2 million 
       shares in 1997                        $   744             $  743
Paid-in capital                                1,049              1,039
Retained earnings                              1,823              1,751
Accumulated other comprehensive income             8                 23
                                             --------            -------
                                               3,624     46%      3,556    45%
                                             --------   ------   -------  -----
Preferred Stock
   Not subject to mandatory redemption           176                176
   Subject to mandatory redemption                --                 26
                                             --------            -------
                                                 176      2%        202     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                                 3,785     48%      3,898    49%
                                             -------    ------   ------   -----
     Total Capitalization                      7,920    100%      7,991    100%
                                             --------   ------   -------  -----

Current Liabilities
   Long-term debt and preferred stock due                            
      within twelve months                       169                 32
   Short-term debt                               811                721
   Short-term debt - CSW Credit, Inc.            749                636
   Loan notes                                     32                 56
   Accounts payable                              624                573
   Accrued taxes                                 190                171
   Accrued interest                               84                 87
   Other                                         218                238
                                             --------            -------
                                               2,877              2,514
                                             --------            -------
Deferred Credits
   Accumulated deferred income taxes           2,410              2,431
   Investment tax credits                        267                278
   Other                                         270                237
                                             -------             -------
                                               2,947              2,946
                                             -------             -------
                                             $13,744            $13,451
                                             ========           ========

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


                                       38

<PAGE>

CSW
Consolidated Statements of Cash Flows
Central and South West Corporation

<TABLE>
<CAPTION>

                                                          For the Years Ended December 31,
                                                           ------------------------------
                                                             1998       1997       1996
                                                           --------   --------   --------
                                                                     (millions)
<S>                                                        <C>        <C>        <C>    

OPERATING ACTIVITIES
    Net income for common stock                             $ 440      $ 153      $ 429
    Non-cash Items and Adjustments
        Depreciation and amortization                         552        529        521
        Deferred income taxes and investment tax credits      (56)       110         62
        Preferred stock dividends                               8         12         18
        Gain on reacquired preferred stock                      1        (10)        --
        Charges for investments and assets                     39         53        147
        Gain on sale of investments                           (13)        --       (192)
    Changes in Assets and Liabilities
        Accounts receivable                                  (187)      (140)       (86)
        Accounts payable                                       69         45         23
        Accrued taxes                                          20       (153)       (14)
        Fuel recovery                                         109        (37)       (89)
        Other                                                 (40)       164         56
                                                           --------   --------   --------
                                                              942        726        875
                                                           --------   --------   --------
INVESTING ACTIVITIES
    Construction expenditures                                (492)      (507)      (521)
    Acquisitions expenditures                                  --         --     (1,394)
    Disposition of plant                                       (5)        --         --
    CSW Energy/CSW International projects                    (184)      (382)      (124)
    Sale of National Grid assets                               --         --         99
    Cash proceeds from sale of investments                     56         --        690
    Other                                                     (10)       (15)       (36)
                                                           --------   --------   --------
                                                             (635)      (904)    (1,286)
                                                           --------   --------   --------
FINANCING ACTIVITIES
    Common stock sold                                          11         20        477
    Proceeds from issuance of long-term debt                  154         --        437
    SEEBOARD acquisition financing                             --         --        350
    Reacquisition/Maturity of long-term debt                 (182)      (253)      (239)
    Redemption of preferred stock                             (28)      (114)        (1)
    Trust Preferred Securites sold                             --        323         --
    Other financing activities                                 (4)        (3)        67
    Change in short-term debt                                 202        414       (395)
    Payment of dividends                                     (378)      (383)      (376)
                                                           --------   --------   --------
                                                             (225)         4        320
                                                           --------   --------   --------

Effect of exchange rate changes on cash and cash
   equivalents                                                 --         (5)       (56)
                                                           --------   --------   --------

Net Change in Cash and Cash Equivalents                        82       (179)      (147)
Cash and Cash Equivalents at Beginning of Year                 75        254        401
                                                           ========   ========   ========
Cash and Cash Equivalents at End of Year                    $ 157       $ 75      $ 254
                                                           ========   ========   ========

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized                  $ 446      $ 396      $ 356
                                                           ========   ========   ========
    Income taxes paid                                       $ 357      $ 301      $ 196
                                                           ========   ========   ========

</TABLE>

   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
Commission, Louisiana Commission, Oklahoma Commission and Texas Commission.

      The  principal  business  of SEEBOARD  is the  distribution  and supply of
electricity in Southeast England.  SEEBOARD is subject to rate regulation by the
DGES.

      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.

      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  inter-company
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

                                       40
<PAGE>

during  construction.  SEEBOARD's fixed assets are stated at their original fair
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
                      ==================================================
           1998       3.4%      3.0%      3.1%      3.3%      3.2%
           1997       3.4%      3.0%      3.3%      3.2%      3.3%
           1996       3.4%      2.9%      3.6%      3.2%      3.2%

      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 pre-plant 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. The accrual for decommissioning costs is an annual level cost based on the
estimated  future cost to decommission  STP,  including  escalation for expected
inflation  to the  expected  time  of  decommissioning,  and is net of  expected
earnings on the trust fund.

      CPL's portion of the costs of decommissioning STP was estimated to be $258
million in 1995 dollars based on a site specific study completed in 1995. 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, 1998, the nuclear trust
balance was $66.0 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 base 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  assets  and
liabilities. PSO recovers fuel costs in Oklahoma through service level fuel cost
adjustment  factors,  and SWEPCO  recovers  fuel costs in Arkansas and Louisiana

                                       41
<PAGE>

through automatic fuel recovery mechanisms.  The application of these mechanisms
varies by jurisdiction.  See ITEM 1. BUSINESS, FUEL RECOVERY - U.S. Electric and
NOTE 2. LITIGATION AND REGULATORY  PROCEEDINGS,  for further  information  about
fuel recovery.

      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,  certain  non-affiliated
public utility companies and, prior to its sale by CSW in June 1996, Transok.

      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.  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
asset balances are included in the table below.

                                              1998      1997
                                             --------  -------
                                                (millions)
               As of December 31,
                  Regulatory Assets
                    Deferred plant costs (3)    $497     $503
                    Mirror CWIP asset            257      285
                    Income tax related           
                     regulatory assets, net      308      329
                    Deferred restructuring       
                     and rate case costs (1)      26       36
                    OPEBs                          2        3
                    Under-recovered fuel          
                     costs (2)                     4       84
                    Loss on reacquired debt      153      166
                    Fuel settlement (4)           14       16
                    Other                         10       19
                                             ========  =======
                                              $1,271   $1,441
                                             ========  =======
                  Regulatory Liabilities
                    Refunds due customers(5)    $ 21     $ 64
                    Income tax related
                       regulatory                 
                       liabilities,  net          --       --
                    Other                                   1
                                             ========  =======
                                                $ 21     $ 65
                                             ========  =======

    (1) $16  million  and $24  million  earning  no  return  in 1998  and  1997,
        amortized by the end of 2000;  $10 million and $12 million  earning no
        return in 1998 and 1997  through  2002. 
    (2) $15 million  earning no return in 1997,  amortized over twelve month 
        period, recalculated twice each year.
    (3) $15 million and $19 million earning no return in 1998 and 1997, 
        amortized through 2002.
    (4) $14 million and $16 million earning no return in 1998 and 1997,
        amortized by the end of 2006.
    (5) $15 million in 1998 earning no return, amortized over twelve month
        period, recalculated twice each year.

                                       42
<PAGE>

      In accordance  with orders of the Texas  Commission,  CPL and WTU deferred
carrying costs, as well as operating costs,  depreciation and tax costs incurred
for STP  and  Oklaunion,  respectively.  These  deferrals  were  for the  period
beginning on the date when the plants began commercial  operation until the date
the plants were included in rate base. CPL is amortizing  and  recovering  these
deferred  costs through rates over the life of the plant.  WTU began  amortizing
and recovering  such costs over a seven year period  beginning  January 1, 1996,
prior to this date it was  amortized  over the life of the plant.  In accordance
with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which
is being amortized over the life of STP. For further  information  regarding the
deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND
REGULATORY   PROCEEDINGS.   For  additional   information  regarding  regulatory
accounting,  reference is made to NOTE 18. NEW  ACCOUNTING  STANDARDS  and MD&A,
RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting.

      Goodwill Resulting from SEEBOARD Acquisition
      The  acquisition of SEEBOARD was accounted for as a purchase  combination.
An allocation of the purchase  price has been  performed and is reflected in the
consolidated  financial  statements.  The  goodwill  is  being  amortized  on  a
straightline  basis  over 40 years.  The  unamortized  balance  of the  SEEBOARD
goodwill  at December  31,  1998 was $1.4  billion.  CSW  continually  evaluates
whether  circumstances  have occurred that indicate the remaining useful life of
goodwill may warrant revision.

      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 balance  sheet  accounts are
translated  at the  exchange  rate  at the  end of the  period  and  all  income
statement  items are translated at the average  exchange rate for the applicable
period.  At  December  31,  1998 the  current  exchange  rate was  approximately
(pound)1.00=$1.66,  and the average  exchange  rate for the twelve  month period
ended  December 31, 1998 was  approximately  (pound)1.00=$1.66.  At December 31,
1997 the current  exchange  rate was  approximately  (pound)l.00=$1.65,  and the
average  exchange  rate for the twelve month period ended  December 31, 1997 was
approximately (pound)l.00=$1.58.  At December 31, 1996 the current exchange rate
was  approximately  (pound)l.00=$1.71,  and the  average  exchange  rate for the
twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56.
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 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.

See NOTE 20.  SUBSEQUENT  EVENT for information  regarding CSW's  investments in
Brazil.

      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.

                                       43
<PAGE>

      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 18. NEW ACCOUNTING STANDARDS and NOTE 20. SUBSEQUENT
EVENT 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, 1998 is presented in the following table.

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

   Securities available for sale    $110           $(44)            $66
           

      As of December 31, 1998,  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, 1998 is $66 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.  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.

      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,  1998,  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. See NOTE 18. NEW ACCOUNTING STANDARDS.

                                       44
<PAGE>



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

                      Components                1998     1997     1996
         ----------------------------------------------------------------
                                                      (millions)

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

      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 18. NEW ACCOUNTING STANDARDS.

      Reclassification
      Certain  financial  statement items for prior years have been reclassified
to  conform  to  the  1998  presentation.  See  NOTE  15.  TRANSOK  DISCONTINUED
OPERATIONS for information related to the classification of Transok activities.


2.    LITIGATION AND REGULATORY PROCEEDINGS

      Litigation Related to the Rights Plan and AEP Merger
      Two lawsuits have been filed in Delaware state court seeking to enjoin the
AEP Merger.  CSW and each of its directors have been named as defendants in both
cases. The first suit alleges that the Rights Plan, approved by the CSW Board of
Directors on September  27, 1997 and which became  effective  after SEC approval
under the Holding Company Act on December 19, 1997,  constitutes 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 alleges that the
AEP  Merger is  unfair to CSW  stockholders  in that it does not  recognize  the
underlying  intrinsic  value of CSW's assets and its future  profitability.  The
second suit also seeks an  auction-type  sale  process.  CSW believes  that both
suits are without merit and intends to defend them vigorously.

      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. The CPL 1997 Final Order 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 and will be
reduced an additional $13 million on May 1, 1999.

      CPL  appealed  the CPL 1997  Final  Order to the State  District  Court of
Travis  County to challenge the  resolution of several  issues in 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

                                       45
<PAGE>

reduction  methodology  applied on May 1, 1998 and to be applied on 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.  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 will be remanded to the Texas  Commission.  While CPL intends to
appeal this most recent order to the Court of Appeals,  management  is unable to
predict how the final  resolution of these issues will  ultimately  affect CSW's
results of operations and financial condition.

      CPL  currently   accounts  for  the  economic  effects  of  regulation  in
accordance  with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at December 31,
1998. The  application of SFAS No. 71 is conditioned  upon CPL's rates being set
based on the cost of providing service.  In the event management  concludes that
as a result of changes in regulation,  legislation, the competitive environment,
or other factors, CPL, that all or some portion of its business, no longer meets
the criteria for  following  SFAS No. 71, a write-off of  regulatory  assets and
liabilities  would be  required,  absent a means of  recovering  such  assets or
settling such liabilities in a continuing regulated segment of the business. CPL
would also be required  to  evaluate  whether  there was any  impairment  of any
deregulated  plant assets. In addition,  CSW could experience,  depending on the
timing and amount of any write-off,  a material  adverse effect on their results
of operations and financial condition.

      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 Court
of  Appeals  to  consider  certain  substantial  evidence  points  of error  not
previously  decided by the Court of Appeals.  On August 16,  1995,  the Court of
Appeals  rendered  its opinion in the remand  proceeding  and affirmed the Texas
Commission's order in all respects.

      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 their  respective  results of operations

                                       46
<PAGE>

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.

      CPL Fuel Proceeding
      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.  CPL did  not  seek a
surcharge of the reconciled balance in the filing.

      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 the Texas Commission to
authorize  CPL to recover the reward that was earned  during the  reconciliation
period  under the  performance  standard  adopted in Docket No.  14965 for CPL's
share of STP. In Docket No.  14965,  the Texas  Commission  adopted a three-year
average  capacity  factor  of 83%  performance  standard  for  STP.  During  the
reconciliation  period,  STP operated at a net capacity factor of 93.1%,  saving
customers  $28.4  million in fuel and  purchased  power  costs,  as  compared to
operation at an 83%  capacity  factor.  CPL  proposed an equal  sharing with its
customers of the benefit,  or reward,  resulting  from STP operation  during the
reconciliation period above the 83% capacity factor target, net of any reduction
of eligible  fuel  expense as a result of this case.  CPL  requested  that it be
authorized  to recover the Texas retail  amount,  or $13.4  million,  of its 50%
share of the  performance  standard  reward,  by including  1/36, or $373,003 in
retail eligible fuel expense each month for the three-year  period following the
Texas  Commission's  order in this  case.  These  amounts  will be  included  in
calculating the monthly  over-recovery or under-recovery  balances.  CPL further
requested  that it be  authorized  to apply the amounts of the reward  recovered
through Texas retail eligible fuel expense as additional amortization of its STP
deferred accounting regulatory asset.

      CPL also made an  alternative  proposal if  consistent  and uniform  equal
sharing  of  potential  penalties  and  rewards  is not  intended  by the  Texas
Commission.  CPL proposed  that it be authorized to recover the Texas portion of
50% of the reward by including  1/36, or $373,003 in Texas retail  eligible fuel
expense each month for three years following the Texas  Commission order in this
case and that the  remaining  50% of the reward be "banked"  to be used  against
potential future penalties or other disallowance of fuel costs.

      CPL Municipal Franchise Fee Litigation
      In May 1996, the City of San Juan, Texas filed a purported class action 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'
petition asserts various contract and tort claims against CPL as well as certain
audit rights. The suit seeks unspecified  damages 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. 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

                                       47
<PAGE>

Court,  which affirmed the Texas  Commission  ruling on February 19, 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 CPL cities;
the cities have until April 5, 1999, to decide  whether or not to participate in
the lawsuit as a class member.

      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.

      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
January 1999,  the parties  settled the case,  and the case was  dismissed  with
prejudice by the court in February  1999. The settlement did not have a material
adverse  impact  on  CSW's  consolidated  results  of  operations  or  financial
condition.

      CPL Sinton Landfill Litigation
      CPL,  along with over 30 others,  is named as a defendant  in the district
court in San Patricio County,  Texas. The plaintiffs,  approximately 500 current
and former  landowners  in the vicinity of a landfill  site near Sinton,  Texas,
each of whom 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
non-material  sum, CPL reached an agreement  with  Browning  Ferris  Industries,
Inc.,  the  operator  of the site,  for  Browning  Ferris  Industries,  Inc.  to
indemnify  CPL for any  judgment  or  settlement  amount that CPL may owe to the
plaintiffs in this case.

      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. 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 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 CPL and WTU

                                       48
<PAGE>

proposed  reduction  of $15.5  million  annually of payments to Texas  Utilities
Electric Company under  FERC-approved  transmission  service  agreements against
amounts that CPL and WTU would  otherwise owe Texas Utilities  Electric  Company
pursuant to Texas Commission rules for transmission  service in ERCOT. The Texas
Commission  approved the proposal in September 1998. Even though Texas Utilities
Electric Company has appealed the Texas  Commission  final order,  they 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  is  recorded  on CPL's and WTU's  books as a
reduction to ERCOT transmission expense.

      Transmission Coordination Agreement
      The Transmission  Coordination  Agreement  provides the means by which the
U.S.  Electric  Operating  Companies  will  operate,  plan and maintain the four
separate transmission systems as a single system. The agreement also establishes
a  process  for the U.S.  Electric  Operating  Companies  to  allocate  revenues
received  under open access  transmission  tariffs.  On August 7, 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.

      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  percent  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  were lower  revenues  of $31.5
million and lower  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  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 has been  named a  defendant  in  petitions  filed  in state  court in
Oklahoma in February and August 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  have been  settled  and the suits  dismissed.  The first case to go to
trial is  anticipated  to begin in May 1999.  Management  believes  that PSO has

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<PAGE>

defenses to the remaining complaints and intends to defend the suits vigorously.
Management  believes  that  the  remaining  claims  are  covered  by  insurance.
Management also believes that the ultimate  resolution of the remaining lawsuits
will not have a  material  adverse  effect on CSW's  results  of  operations  or
financial condition.

      PSO Sand Springs/Grandfield, Oklahoma Sites
      In 1989,  PSO found PCB  contamination  in a Sand  Springs,  Oklahoma  PCB
storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed
a complaint  against PSO alleging  that PSO failed to comply with  provisions of
the Toxic Substances  Control Act. The EPA alleged improper  disposal of PCBs at
the Sand  Springs  site  due to the  length  of time  between  discovery  of the
contamination  and the actual  cleanup at the site.  The complaint  also alleged
failure to date PCB articles at a Grandfield,  Oklahoma site. The total proposed
penalty,  which was accrued by PSO in 1996, was $479,000. PSO settled all claims
in the suit by March 1998. The settlement did not have a material adverse effect
on CSW's results of operations or financial condition.

      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 establish in its filing a proposed surcharge period
or a total surcharge  amount,  which would reflect  interest  through the entire
surcharge period. However, SWEPCO indicated that it had an under-recovered Texas
jurisdictional  fuel cost  balance 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  above
consolidated  proceedings  before the Texas Commission filed a settlement on all
issues except whether transmission  equalization  payments should be included in
fuel or base revenues.  Of the $16.8 million in under-recovered fuel costs as of
December 31, 1996, the settlement  resulted in a decrease of the under-recovered
fuel  costs,  and  the  resulting  surcharge  recovery,  by  $6.0  million.  The
settlement also provides that SWEPCO's fuel and fuel-related expenses during the
reconciliation  period were  reasonable and necessary and would allow them to be
reconciled as eligible 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. The
$6.0 million reduction was not associated with any particular  activity or issue
within the fuel proceedings.

      On April 8, 1998, the ALJ assigned to this  proceeding,  issued a proposal
for  decision  regarding  the  one  outstanding  issue,   whether   transmission
equalization  payments should be included in eligible fuel expense. The proposal
for  decision  recommended  that  SWEPCO  be  allowed  to  include  transmission
equalization  expense in  eligible  fuel  expense.  On May 19,  1998,  the Texas
Commission reversed the ALJ and did not allow SWEPCO to recover its transmission
equalization  payments as a  component  of eligible  fuel  expense.  This ruling
resulted in an earnings  reduction  of  approximately  $1.8  million,  which was
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 will end 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  will  drop  the  appeal  if the AEP  merger
settlement is approved and the merger is consummated.

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<PAGE>

      SWEPCO Burlington Northern Transportation Contract
      In January 1995, a state  district  court in Bowie  County,  Texas entered
judgment in favor of SWEPCO against  Burlington  Northern in a lawsuit regarding
rates  charged under two rail  transportation  contracts for delivery of coal to
SWEPCO's  Welsh  and Flint  Creek  power  stations.  The  court  awarded  SWEPCO
approximately  $72 million that would have  benefited  customers,  if collected,
representing  damages for the period from April 27, 1989 through  September  26,
1994, as well as post-judgment  interest and attorneys' fees and granted certain
declaratory relief requested by SWEPCO.  Burlington  Northern appealed the state
district court's judgment to the Texarkana, Texas Court of Appeals and, in April
1996,  that court reversed the judgment of the state district  court. In October
1996,  SWEPCO filed an  application  with the Supreme  Court of Texas to grant a
writ of error to review and reverse the judgment of the  Texarkana,  Texas Court
of  Appeals.  In  June  1997,  the  Supreme  Court  of  Texas  granted  SWEPCO's
application  for writ of error.  Oral argument was held before the Supreme Court
of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed
the  judgment of the court of appeals.  On April 7, 1998,  SWEPCO filed a motion
for  rehearing of the Supreme  Court of Texas'  decision.  On June 5, 1998,  the
motion for  rehearing  was denied and the court  reaffirmed  the judgment of the
court of appeals.  SWEPCO does not plan additional  litigation for this lawsuit.
No  financial  impact  resulted  from  these  proceedings  other  than the legal
expenses, which were expensed as incurred.

      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  filed  suit  against  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 in the counterclaims on the grounds
the  counterclaims  have no merit. On January 8, 1999,  SWEPCO and CLECO amended
the claims  against DHVM in the lawsuit to include a request  that, if the court
agrees that DHMV has  breached  the lignite  mining  agreement  that the lignite
mining  agreement  be  terminated.  This  federal  court  suit is set for  trial
beginning in November 1999.

      SWEPCO intends to vigorously  prosecute the claims against DHMV and defend
against the counterclaims  which DHMV has asserted.  Although  management cannot
predict  the  ultimate  outcome of this  matter,  management  believes  that the
resolution  of this  matter  will not have a  material  adverse  effect on CSW's
results of operations or financial condition.

      WTU Fuel Proceedings

      Fuel Reconciliation
      On December 31, 1997,  WTU 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.  WTU did  not  seek a
surcharge of the reconciled balance in the December 31, 1997 filing.

      During the  reconciliation  period of July 1, 1994  through June 30, 1997,
WTU  incurred  approximately  $422  million in  eligible  fuel and  fuel-related
expenses  to  generate  and  purchase  electricity.   The  Texas  jurisdictional
allocation of such fuel and fuel-related expenses is approximately $295 million.

                                       51
<PAGE>

      On June 11, 1998,  WTU amended its  application to reconcile fuel costs to
remove a credit  from the  calculation  of  eligible  fuel in the  amount  of $3
million  related to  transmission  equalization  payments.  This amendment was a
result of the Texas  Commission's  ruling concerning  transmission  equalization
payments in the SWEPCO fuel reconciliation described above.

      On October 14, 1998, the general  counsel of the Texas  Commission and WTU
agreed  to  a  non-unanimous  stipulation  regarding  WTU's  eligible  fuel  and
fuel-related  expenses.  One party does not accept  the  stipulation's  proposed
treatment of transmission  equalization payment,  discussed above. Parties filed
briefs in November  1998,  and a proposal for decision from the ALJ was received
January 29, 1999. In the proposal for decision,  the ALJ recommends  recovery of
all  eligible  fuel  and  fuel-related  expenses  requested  by WTU  except  for
$100,000,  or 0.03% of the amount  requested.  A Texas  Commission  decision  is
expected  by the end of the  first  quarter  of 1999.  Management  is  unable to
predict the outcome of the fuel proceeding.

      Fuel Factor 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.

      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.


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 $855 million in capital
expenditures  (but  excluding  capital  that may be required  for  acquisitions)
during 1999.  Substantial  commitments  have been made in connection  with these
programs.

CPL - $224 million  PSO - $91 million  SWEPCO - $108 million  WTU - $51 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, 1998, the
maximum  amount  SWEPCO  believes it could  potentially  assume is $93  million.
However,  the maximum amount may vary as the mining  contractor's need for funds
fluctuates.  The contractor's actual obligation outstanding at December 31, 1998
was $71 million.

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<PAGE>

      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.  The  current  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 $8.92 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
$75.5 million per reactor,  for anyone nuclear  incident  payable at $10 million
per year per reactor. An additional surcharge of five percent 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 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 owners' 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  percent  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, 1998.

      SWEPCO Cajun Asset Purchase Proposal
      Cajun filed a petition for  reorganization  under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision  of the United States  Bankruptcy  Court for the Middle  District of
Louisiana.

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<PAGE>

      On March 18, 1998,  SWEPCO,  together  with the Cajun  Members  Committee,
which  currently   represents  7  of  the  12  Louisiana   member   distribution
cooperatives  that are served by Cajun,  filed the SWEPCO Plan in the bankruptcy
court.  The SWEPCO Plan replaces  plans filed  previously  by SWEPCO.  Under the
SWEPCO  Plan,  a  SWEPCO  affiliate  or  subsidiary  would  acquire  all  of the
non-nuclear  assets  of Cajun,  comprised  of the  two-unit  Big Cajun I natural
gas-fired  plant,  the  three-unit  Big Cajun II coal-fired  plant,  and related
non-nuclear  assets.  The purchase price under the SWEPCO Plan is $940.5 million
in cash,  subject  to  adjustment  pursuant  to the terms of the asset  purchase
agreement  proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the
terms of a  settlement  between  the RUS,  Cajun  Members  Committee,  Claiborne
Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for
SWEPCO and the Cajun member  cooperatives  to enter into long-term  power supply
agreements  which will  provide  the Cajun  member  cooperatives  with rate plan
options  and  market  access   provisions   designed  to  ensure  the  long-term
competitiveness  of the cooperatives.  Eight  cooperatives and Central Louisiana
Electric  Company,  Inc.,  successor to Teche  Electric  Cooperative,  agreed to
purchase power from SWEPCO, if the bankruptcy court confirms SWEPCO's plan.

      Two competing plans of reorganization  for the non-nuclear assets of Cajun
were filed with the bankruptcy  court. On September 25, 1998,  Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana  Generating LLC, a partnership of subsidiaries of Southern  Energy,
Inc.,   Northern  States  Power  Company  and  Zeigler  Coal  Holding   Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.

      On August 11, 1998, the U.S.  Fifth Circuit Court of Appeals  overturned a
U.S.   District  Court  for  the  Middle  District  of  Louisiana   ruling  that
disqualified  the SWEPCO  Plan from  being  considered  in the Cajun  bankruptcy
reorganization  process.  The U.S.  Fifth Circuit Court of Appeals said the U.S.
District  Court for the Middle  District of  Louisiana  erred in  reversing  the
bankruptcy  court,  which had  originally  had  determined  that $1  million  in
assistance  payments  from  SWEPCO  to  the  Cajun  Members  Committee  did  not
constitute  vote-buying  and were legal.  On October 30,  1998,  the U.S.  Fifth
Circuit Court of Appeals  rejected  requests for rehearing by the Cajun Trustee,
the RUS and others of its  decision  to overturn a U.S.  District  Court for the
Middle  District  of  Louisiana  ruling that  disqualified  the SWEPCO Plan from
competing in the Cajun bankruptcy  reorganization  process. On February 3, 1999,
the Cajun Trustee asked the United States Supreme Court to review the U.S. Fifth
Circuit  Court of  Appeals  decision  that  reinstated  the  SWEPCO  Plan in the
bankruptcy court.

      On October 13, 1998, the trustee for Cajun sought an injunction preventing
the Louisiana Commission from acting on a rate case involving Cajun,  contending
that the Louisiana Commission's  involvement in the rate case was a violation of
the bankruptcy  court's  jurisdiction over Cajun's assets and thus by extension,
its  rates.  The  bankruptcy  court  enjoined  individual  commissioners  of the
Louisiana  Commission  from  acting on issues  related  to  possible  changes in
wholesale  electric rates of Cajun. The bankruptcy court dismissed the Louisiana
Commission  as a defendant  in the case,  but  permitted  the action to continue
against  the  commissioners  of  the  Louisiana  Commission  and  the  executive
secretary of the Louisiana Commission.

      On February 11,  1999,  the  bankruptcy  court issued a ruling that denied
confirmation of both the Louisiana  Generating LLC  reorganization  plan and the
SWEPCO Plan.  Although both plans were rejected,  the bankruptcy  court said its
ruling should  provide  guidance for the bidders to modify their  existing plans
and a status  conference  has been  scheduled  for March 1999.  No timetable for
modifications was set.

      Louisiana  Generating LLC reorganization  plan was denied confirmation due
to issues related to power supply  agreements  with Cajun.  SWEPCO and the Cajun
Members Committee are  co-plaintiffs in litigation  regarding a central issue in

                                       54
<PAGE>

the bankruptcy case, whether a competing plan supported by the Cajun trustee can
force  the  cooperatives  to buy power  for 25 years  under  the  non-consensual
arrangements  contained  in that  plan.  The  bankruptcy  court  ruled  that the
cooperatives'  existing  supply  agreements  with Cajun cannot be assumed in the
manner proposed in the Louisiana Generating LLC reorganization plan.

      The SWEPCO Plan was denied  confirmation  due to several  technical issues
upon which the  bankruptcy  court  ruled  that the SWEPCO  Plan did not meet the
requirements  of the bankruptcy  code.  SWEPCO expects to modify the SWEPCO Plan
consistent with the bankruptcy  court's  direction and to continue to pursue the
acquisition of the non-nuclear  assets Cajun. The bankruptcy court has scheduled
a status  conference  for  March  15,  1999 to  determine  the next  step in the
process.

      Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon
confirmation by the bankruptcy  court,  and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to their respective
boards of  directors  approvals.  If a SWEPCO  reorganization  plan for Cajun is
ultimately  confirmed by the bankruptcy  court,  the $940.5 million  required to
consummate  the  acquisition  of Cajun's  non-nuclear  assets is  expected to be
financed  through  a  combination  of  external   non-recourse   borrowings  and
internally  generated funds. There can be no assurance that the bankruptcy court
will confirm a SWEPCO reorganization plan for Cajun or, if it is confirmed, that
federal and state  regulators  will approve it. As of December 31, 1998,  SWEPCO
had deferred  $11.9  million in costs  related to the Cajun  acquisition  on its
consolidated  balance sheet, which would be expensed if a SWEPCO  reorganization
plan for Cajun was not ultimately successful.

      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, 1998, leased assets
of $45.7 million, less accumulated  amortization of $41.4 million, were included
in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,
1997, leased assets were $45.7 million,  less accumulated  amortization of $39.0
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  cleanup 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 cleanup to residential
standards is not necessary. Resolution of this issue is still pending.

      Currently,  a  feasibility  study is being  conducted  to more  definitely
evaluate  remedial  strategies for the property.  The feasibility  study process
will  require  public  input  prior to a final  decision  and will  result  in a
remediation strategy along with associated costs.

      SWEPCO has incurred  approximately $200,000 to date for its portion of the
cleanup of this site, and based on its preliminary  estimates,  anticipates that
an  additional  $2 million may be incurred.  Accordingly,  SWEPCO has accrued an
additional $2 million for the cleanup of the site.

                                       55
<PAGE>

      The State of Mississippi has passed Brownfield legislation, which provides
for  levels  of  cleanup  standards.   Although  regulations  implementing  this
legislation  are not expected to be finalized until the summer of 1999, the MDEQ
has  indicated  that  it  will  work  with  SWEPCO  in the  interim  within  the
legislation's intent to allow the project to move forward.

      SWEPCO / CPL Voda Petroleum Superfund Site
      SWEPCO and CPL received  correspondence  from the EPA notifying SWEPCO and
CPL that  they are  PRPs to a  cleanup  action  planned  for the Voda  Petroleum
Superfund Site located in Clarksville, Texas. SWEPCO and CPL conducted a records
review to compile  documentation  relating to SWEPCO's and CPL's past use of the
Voda Petroleum  site. The matter was settled through a payment of $1,400 each by
SWEPCO and CPL.

      SWEPCO Wilkes Power Plant Copper Limit Compliance
      The EPA has  issued  Wilkes  power  plant,  which is owned by  SWEPCO,  an
administrative  order for wastewater permit violations related to copper limits.
The  administrative  order is for a show  cause  meeting  only.  Past and future
compliance  activities,   including  activities  that  have  been  conducted  to
determine  the source of copper were  presented by SWEPCO  during this  meeting,
which was held on August 13, 1998, which resulted in continued negotiations. The
EPA has not issued an administrative  penalty order nor a referral to the United
States  Department  of Justice for  judicial  action  with  monetary  fines.  On
December 29, 1998, the TNRCC fined SWEPCO $8,250 for the same issue on the state
permit, which was paid in February 1999.

      SEEBOARD London Underground Commitment
      SEEBOARD has  committed  (pound)83  million,  or $137  million,  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 Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity  industry's  occupational pension scheme, the Electricity Supply
Pension  Scheme.  A high court  decision in favor of the National Grid Group and
National  Power was  appealed and on February 10, 1999 the court of appeal ruled
that the particular  arrangements  made by these  corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting  from  early  retirement,  were  invalid  due to  procedural  defects.
SEEBOARD  employees are members of the  Electricity  Supply  Pension  Scheme and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD,  the amount of
the payments  cancelled was approximately  $33 million.  The court of appeal did
not order the  National  Grid Group and  National  Power to make  payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take.  It is likely  that the case will then be  referred  to the U.K.
House of Lords.  The final  outcome of the hearing,  or any referral to the U.K.
House of  Lords,  cannot be  determined  and  therefore  it is not  possible  to
quantify  the  impact,  if any,  on the  results  of  operations  and  financial
condition of CSW.

      Diversified Electric Loans and Commitments
      In June 1998, the 330 MW Phillips 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.

                                       56
<PAGE>

CSW Energy obtained the funds for this project from CSW's short-term  borrowings
program, which were also repaid.

      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. At
December 31, 1998,  CSW Energy had spent  approximately  $81 million,  including
development  construction  and financing of the projected  $210 million  project
costs. The natural gas-fired facility should begin simple cycle operation in the
summer of 1999 and combined  cycle  operation  by the end of 1999.  The Frontera
project is being built as a merchant power plant. Frontera is expected to supply
power  to  the  rapidly  growing  Rio  Grande  Valley  and to  supply  customers
throughout Texas.

      CSW  International  and its 50% joint  venture  partner,  Scottish  Power,
commenced construction of the South Coast Power project, a 400 MW combined cycle
gas turbine power station in Shoreham,  United Kingdom.  Commercial operation is
expected  to  begin  in  the  year  2000.  The  partners  will  provide  interim
construction  financing with third party financing expected in the first quarter
of 1999. At December 31, 1998, CSW  International  had spent  approximately  $12
million, including development, construction and financing of their 50% share of
the total $320 million of estimated project costs.

      CSW, CSW Energy and CSW International  have provided letters of credit and
guarantees  on  behalf of  independent  power  projects  of  approximately  $254
million, $13 million, and $201 million, respectively, as of December 31, 1998.

                                       57
<PAGE>


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                    1998     1997    1996
                                             --------------------------
                                                    (millions)
         Included in Operating Expenses and
           Taxes
            Current (1)                         $253      $47     $118
            Deferred (1)                         (38)     117      120
            Deferred ITC (2)                     (12)     (13)     (14)
                                             --------------------------
                                                 203      151      224
         Included in Other Income and
           Deductions
            Current                               18       --       (1)
         Deferred                                 --       (6)     (39)
                                             --------------------------
                                                  18       (6)     (40)
         Income Taxes for Discountinued
           Operations (includes $72 resulting 
           from the gain on the sale)             --       --       78
                                             --------------------------
                                                $221     $145     $262
                                             --------------------------

         (1)Approximately  $14  million,  $30  million  and $49 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  1998,  1997  and  1996,  respectively.   In  addition,
            approximately  $9  million,  $7  million  and $19  million  of CSW's
            Deferred  Income Tax Expense in 1998,  1997 and 1996,  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.


       INCOME TAX RATE RECONCILIATION        1998     1997     1996
                                           ---------------------------
                                                   (millions)
       Income before taxes attributable to:
          Domestic operations                 $558     $327     $562
          Foreign operations                   112      147      146
                                           ---------------------------
       Income before taxes                    $670     $474     $708

       Tax at U.S. statutory rate             $235     $166     $248
       Differences
          Amortization of ITC                  (13)     (13)     (14)
          Mirror CWIP                           10        5        5
          Non-deductible goodwill               
           amortization                         12       12       13
          Foreign tax benefits                 (41)     (19)     (18)
          Adjustments                           15       (4)      10
          Other                                  3       (2)      18
                                           ---------------------------
                                              $221     $145     $262
                                           ---------------------------
       Effective rate                           33%      31%      37%


                                       58
<PAGE>



                                                1998     1997
                                              ------------------
          DEFERRED INCOME TAXES (1)              (millions)
          1998
          Deferred Income Tax Liabilities
             Depreciable utility plant         $1,936   $1,912
             Deferred plant costs                 174      176
             Mirror CWIP asset                     90      100
             Income tax related regulatory        
               assets                             224      211
             Other                                257      375
                                              ------------------
                                                2,681    2,774
          Deferred Income Tax Assets
             Income tax related regulatory       
               liability                         (117)    (123)
             Unamortized ITC                      (96)    (100)
             Alternative minimum tax              
               carryforward                       (11)     (27)
             Other                                (75)     (72)
                                              ------------------
                                                 (299)    (322)

                                              ------------------
          Net Accumulated Deferred Income      
            Taxes                              $2,382   $2,452
                                              ------------------

          Net Accumulated Deferred Income
            Taxes
             Noncurrent                        $2,410   $2,432
             Current                              (28)      20
                                              ------------------
                                               $2,382   $2,452
                                              ------------------

          (1)In 1997,  the  valuation  reserve was reduced to $17 million due to
             lower levels of excess foreign tax credits.  In 1998, the valuation
             reserve  was  increased  to $145  million  due to higher  levels of
             excess foreign tax credits.  Other than excess foreign tax credits,
             CSW did not have other valuation  allowances recorded against other
             deferred  tax  assets  at  December  31,  1998  and  1997  due to a
             favorable earnings history.

             CSW  has  not  provided  for  U.S.   federal   income  and  foreign
             withholding   taxes  on  $75  million  of  non-U.S.   subsidiaries'
             undistributed  earnings  as of  December  31,  1998,  because  such
             earnings  are  intended  to be  reinvested  indefinitely.  If these
             earnings  were  distributed,  foreighn  tax credits  should  become
             available  under  current law to reduce or eliminate  the resulting
             U.S. income tax liability.


5.    BENEFIT PLANS

      Pension Plans
      Prior to June 30, 1997, CSW  maintained a tax qualified,  non-contributory
defined  benefit  pension plan covering  substantially  all CSW employees in the
United States.  Benefits were based on employees' years of credited service, age
at  retirement,  and  final  average  annual  earnings  with an  offset  for the
participant's  primary  Social  Security  benefit.  The CSW  board of  directors
approved an amendment  effective July 1, 1997, which converted the present value
of accrued  benefits under the existing pension plan into a cash balance pension
plan.  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 plan assets are  measured as of September 30 of
each year.

      The purpose of the plan change is to continue to provide retirement income
benefits which are competitive  both within the utility industry as well as with
other companies within the United States.

                                       59
<PAGE>

      In addition,  CSW has a  non-qualified  excess benefit 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 costs of the pension
plan  according to the provisions of SFAS No. 87 and allocate such costs to each
of the participating employers.

      SFAS No. 132 was  published  in  February  1998.  SFAS No. 132 amended the
disclosure  requirements  of SFAS No.  87 and  SFAS  No.88.  The new  disclosure
requirements under Statement 132 are effective for CSW in 1998 and are currently
being implemented.

      Pension plan assets consist  primarily of common stocks and short-term and
intermediate-term fixed income investments.

      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.

      Information  about the  separate  pension  plans  (the U.S.  plans and the
non-U.S. plan), including: (i) change in benefit obligation; (ii) change in plan
assets; (iii) reconciliation of funded status; (iv) amount recognized on balance
sheets;  (v)  additional  information  for pension plans with  unfunded  benefit
obligaitons;  (vi)  additional  information  for  pension  plans  with  unfunded
accumulated benefit obligations; (vii) components of net periodic benefit costs;
and (viii) assumptions used in accounting for the pension plan follow.

                                       60
<PAGE>



                                                  1998
                               -------------------------------------------
Pension/Cash Balance                            U.S. Plan
Retirement Plan
                                          ----------------------
                                                         Non-        Non-
                                  CSW      Qualified   Qualified   U.S. Plan
                                 -------   ---------   ---------   ---------
                                                 (millions)
Change in benefit obligation
Benefit obligation at            
beginning of year                 $1,978       $931        $24     $1,023
Service cost                          36         21          1         14
Interest Cost                        137         68          1         68
Plan participants' contributions       3         --         --          3
Amendments                            58         --         --         58
Foreign currency translation           
  adjustment                           9         --         --          9
Acquisition                            7         --         --          7
Actuarial gain                        11          8          3         --
Benefits paid                       (128)       (65)        (1)       (62)
                               -------------------------------------------
Benefit obligation at end of     
  year                            $2,111       $963        $28     $1,120
                               -------------------------------------------

Change in plan assets
Fair value of plan assets at
  beginning of year               $2,290     $1,109        $--     $1,181
Actual return on plan assets         143        (30)        --        173
Employer contributions                 7         --          1          6
Plan participants' contributions       3         --         --          3
Foreign currency translation          
  adjustment                          11         --         --         11
Benefits paid                       (128)       (65)        (1)       (62)
                               -------------------------------------------
Fair value of plan assets at     
  end of year                     $2,326     $1,014         --     $1,312
                               -------------------------------------------

Reconciliation of Funded Status     $214        $50       $(27)      $191
Unrecognized net actuarial           
  loss/(gain)                         26        149         11       (134)
Unrecognized prior service cost      (77)       (82)         1          4
Unrecognized transition              
  obligation                          10          9          1         --
                               -------------------------------------------
Prepaid (accrued) benefit cost
  before balance sheet adjustments  $173       $126       $(14)       $61
                               -------------------------------------------

Amounts Recognized in Balance Sheet

Prepaid benefit costs               $188       $126       $ --        $62
Accrued benefit (liability)-smaller
  of (accrued) benefit             
  cost and minimum (liability)       (25)        --        (25)        --
 
Intangible asset                       2         --          2         --
Accumulated other comprehensive        
  income                               8         --          8         --
                               -------------------------------------------
Prepaid (accrued) benefit
  cost before  balance sheet                        
  adjustments                       $173       $126       $(15)       $62
                               -------------------------------------------

Other comprehensive expense
attributable to change in                 
additional minimum pension liability
recognition                          $ 1         --         $1         --

Weighted-average assumptions
as of December 31
Discount rate                                  6.75%      6.75%     5.50%
Expected return on plan assets                 9.00%      9.00%     6.25%
Rate of compensation increase                  4.96%      4.96%     3.50%


                                       61
<PAGE>



                                                  1997
                               -------------------------------------------
Pension/Cash Balance                            U.S. Plan
Retirement Plan
                                          ----------------------
                                                          Non-            Non-
                                  CSW     Qualified    Qualified       U.S. Plan
                                 ------   ----------   ---------       ---------
                                               (millions)
Change in benefit obligation
Benefit obligation at           
  beginning of year              $1,969      $922         $21           $1,026  
Service cost                         35        20          --               15
Interest cost                       141        65           2               74
Plan participants' contributions      3        --          --                3
Amendments and other                (85)      (85)         --               --
Foreign currency translation        
  adjustment                        (41)       --          --              (41)
Acquisition                          62        56           1                5
Actuarial gain                        1        --           1               --
Benefits paid                      (107)      (47)         (1)             (59)
                                 ----------------------------------------------
Benefit obligation at end of    
year                              $1,978      $931         $24           $1,023
                                 ----------------------------------------------

Change in plan assets
Fair value of plan assets at
  beginning of year               $2,071      $985         $--           $1,086
Actual return on plan assets         351       164          --              187
Employer contributions                14         7           1                6
Plan participants' contributions       3        --          --                3
Foreign currency translation         
  adjustment                         (42)       --          --              (42)
Benefits paid                       (107)      (47)         (1)             (59)
                                 ----------------------------------------------
Fair value of plan assets at    
  end of year                     $2,290    $1,109       $  --           $1,181
                                 ----------------------------------------------

Reconciliation of Funded Status     $313      $178        $(23)            $158
Unrecognized net actuarial          
  loss/(gain)                        (77)       12           9              (98)
Unrecognized prior service cost      (92)      (88)          1               (5)
Unrecognized transition              
  obligation                          16        11           1                4 
                                 ----------------------------------------------
Prepaid (accrued) benefit cost
  before balance sheet adjustments  $160      $113        $(12)             $59
                                 ----------------------------------------------

Amounts Recognized in Balance Sheet
Prepaid benefit costs               $172      $113         $--              $59
Accrued benefit(liability)-smaller
  of (accrued) benefit cost and 
  minimum (liability)                (22)       --         (22)              --
Intangible asset                       3        --           3               --
Accumulated other
  comprehensive income                 7        --           7               --
        
                                 ----------------------------------------------
Prepaid (accrued) benefit
  cost before balance sheet                     
  adjustments                       $160      $113        $(12)             $59
                                 ----------------------------------------------

Other comprehensive expense
  attributable to change in               
  additional minimum pension               
  liability recognition              $ 1        --         $ 1              --

Weighted-average assumptions
  as of December 31
Discount rate                                 7.50%       7.50%           6.75%
Expected return on plan assets                9.00%       9.00%           7.25%
Rate of compensation increase                 5.46%       5.46%           4.75%


                                       62
<PAGE>



Pension/Cash Balance Retirement Plan
Components of net periodic benefit
costs
                                                 U.S. Plan
                                           ---------------------
                                             Non-        Non-        U.S.
1998                               CSW     Qualified   Qualified     Plan
                                   ---     ---------   ---------     ----
                                               (millions)

Service cost                       $36        $21          $1        $14
Interest cost                      137         67           2         68
Expected return on plan assets:   (175)       (97)         --        (77)
Amortizations of prior service         
  costs                             (5)        (6)         --         --
Amortization of unrecognized
transition obligation                2          2          --         --
Recognized net actuarial loss       --         --          --         --
                                ------------------------------------------
Net periodic benefit cost          $(5)      $(13)         $3         $5


                                                U.S. Plan
                                           ---------------------
                                             Non-        Non-       U.S.
1997                               CSW     Qualified   Qualified    Plan
                                   ---     ---------   ---------    ----
                                                (millions)

Service cost                       $34        $20         $--        $14
Interest cost                      139         64           2         73
Expected return on plan assets:   (173)       (92)         --        (81)
Amortizations of prior service         
  costs                             (6)        (6)         --         --
Amortization of unrecognized
  transition obligation              2          2          --         --
Recognized net actuarial loss        1         --           1         --
                                ------------------------------------------
Net periodic benefit cost          $(3)      $(12)         $3         $6


                                                U.S. Plan
                                           ---------------------
                                             Non-       Non-      U.S.
1996                               CSW     Qualified  Qualified   Plan
                                   ---     ---------  ---------   ----
                                               (millions)

Service cost                       $37        $22        $1        $14
Interest cost                      137         69         1         67
Expected return on plan assets:   (158)       (84)       --        (74)
Amortizations of prior service        
  costs                             --         --        --         --
Amortization of unrecognized
transition obligation                2          2        --         --
        
Recognized net actuarial loss        1         --         1         --
                                ------------------------------------------
Net periodic benefit cost          $19         $9        $3         $7

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.


                                       63
<PAGE>



Additional Information for Plans           Non-Qualified Plan
with Unfunded Benefit Obligations              (thousands)
                                        1998                1997
                                   ----------------    ----------------
Benefit obligation                         $27,379             $23,621
Plan assets at fair value                       --                  --


Additional Information for Plans           Non-Qualified Plan
with Unfunded Accumulated Benefit              (thousands)
Obligations
                                        1998                1997
                                   ----------------    ----------------
Projected benefit obligation               $27,379             $23,621
Accumulated benefit obligation              25,137              22,193
Plan assets at fair value                       --                  --


      Post-retirement Benefits Other Than Pensions (U.S. Companies Only)
      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 fourteen 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.

      SFAS No. 132 was published in February 1998. Statement No. 132 amended the
disclosure requirements of SFAS No. 106. The revised rules did not affect either
the measurement or recognition of benefit costs. The new disclosure requirements
under Standard 132 are effective for fiscal years  beginning  after December 15,
1997.

      Information about the non-pension post-retirement benefit plan, including:
(i)  change  in  benefit   obligation;   (ii)  change  in  plan  assets;   (iii)
reconciliation of funded status;  (iv) amount recognized on balance sheets;  (v)
additional   information  for   post-retirement   plans  with  unfunded  benefit
obligations;   (vi)  components  of  net  periodic   benefit  costs;  and  (vii)
assumptions used in accounting for the post-retirement plan follow.

                                       64
<PAGE>



Post-retirement Benefits Other Than Pensions
U.S. Companies Only

                                                  1998           1997
                                             ------------------------------
                                                      (millions)
      Benefit Obligations and Plan Assets
      Benefit obligation:
      Retirees                                   $170            $158
      Other fully eligible participants            30              24
      Other active participants                    75              59
                                             ------------------------------
                                                 $275            $241

      Plan Assets at Fair Value                  $164            $159

      Change in Accumulated Post-
        Retirement Benefit Obligation
      Benefit obligation at beginning of year    $241            $236
      Service Cost                                  8               8
      Interest Cost                                17              18
      Amendments                                   (5)             --
      Benefit payments                            (15)            (10)
      Plan participants' contributions              1              --
      Actuarial gain                               28             (11)
                                             ------------------------------
      Benefit Obligation at end of year          $275            $241

      Change in fair value of plan assets
      Fair value of plan assets at              
      beginning of year                          $158            $151
      Actual return of plan assets                  3               3
      Employer contributions                       17              18
      Plan participants' contributions              1               1
      Benefits Paid                               (15)            (15)
                                             ------------------------------
      Fair value of plan assets at end of        
        year                                     $164            $158

      Reconciliation of Funded Status
      Funded status end of year                 $(111)           $(82)
      Unrecognized:
         Transition Obligation                    126             135
         Prior Service Cost                        --              --
         (Gain)                                   (15)            (53)
                                             ------------------------------
      Prepaid (accrued) benefit cost
         before balance sheet adjustments        $ --            $ --

      Amounts Recognized in Balance Sheet
      Prepaid Benefit Cost                         $2              $1
      Accrued Benefit cost                         (2)             (1)
                                             ------------------------------
      Prepaid (accrued) benefit cost             $ --            $ --

      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.


                                       65
<PAGE>

Post-retirement Benefits Other Than Pensions
U.S. Companies Only

   Components of Net Periodic Benefit Costs    1998       1997        1996
                                           -----------------------------------
                                                       (millions)

   Service Cost                                 $8         $8          $8
   Interest cost                                17         18          19
   Expected Return on Plan Assets:             (12)       (10)         (9)
   Amortization of Unrecognized:
      Transition Obligation                      9          9           9
      Prior Service Cost                        --         --          --
      (Gain)                                    (2)        (1)         --
                                           -----------------------------------
   Total Net Period Benefit cost               $20        $24         $27


                 Effect of 1% Change in Assumed
                 Health Care Cost Trend Rate             1998
                                                    ---------------
                                                      (millions)
                 1% Increase
                   Service Cost Plus
                   Interest Cost                          $4
                   APBO                                   30

                 1% Decrease
                   Service Cost Plus
                   Interest Cost                         $(3)
                   APBO                                  (26)



                                                              Tax Rate
    ASSUMPTIONS USED IN THE        Discount    Return on     for Taxable
    ACCOUNTING FOR SFAS NO. 106      Rate      Plan Assets     Trusts
    ---------------------------------------------------------------------

    1998                             6.75%        9.00%        39.6%
    1997                             7.50%        9.00%        39.6%
    1996                             8.00%        9.50%        39.6%

      Health care cost trend rates
      1998  Average Rate of 6.5% grading down 0.50% per year to an ultimate
            average rate of 5.00% in 2001. 
      1997  Average Rate of 7.0% grading down 0.50% per year to an ultimate
            average rate of 5.00% in 2001.
      1996  Average Rate of 9.0% grading down 0.75% per year to an ultimate
            average rate of 5.25% in 2001.



    Additional Information for Plans     Post-retirement Benefits Other 
    with Unfunded Benefit Obligations             Than Pensions
                                                    (millions)
                                            1998                 1997
                                       ----------------    -----------------
    Benefit obligation                      $275                 $241
    Plan assets at fair value                164                  159


                                       66
<PAGE>



      Health and Welfare Plans
      CSW  provides  medical,  dental,  group  life  insurance,  dependent  life
insurance,   and  accidental  death  and   dismemberment   insurance  plans  for
substantially  all active CSW System  employees in the United States.  The total
contributions,  recorded on a pay-as-you-go basis, for the years 1996 - 1998 are
listed in the following table.

                                       CSW
                                    ---------
                                   (millions)
                                  1998   $35.6
                                  1997    35.6
                                  1996    28.4

      Employer  provided  health  care  benefits  are not  common in the  United
Kingdom due to the country's national health care system. Accordingly,  SEEBOARD
does not provide health care benefits to the majority of its employees.


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, 1998, the U.S. Electric Operating Companies had undivided interests
in five  such  generating  stations  and  related  facilities  as  shown  in the
following table.


                                        SWEPCO    SWEPCO    SWEPCO    
                              CPL       Flint               Dolet     CSW(1)
                              STP       Creek     Pirkey    Hills     Oklaunion
                              Nuclear   Coal      Lignite   Lignite   Coal
                              Plant     Plant     Plant     Plant     Plant
                            ---------------------------------------------------
                                               ($ millions)
      Plant in service          $2,336       $81      $439      $230      $400
      Accumulated                 
       depreciation               $657       $49      $190       $91      $132
      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


      (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, 1998.  Accumulated  depreciation  was $12 million,  $34
         million and $86 million for CPL, PSO and WTU, respectively, at December
         31,1998.


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.

                                       67
<PAGE>

      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.

      Preferred stock subject to mandatory redemption
      The fair value of  preferred  stock  subject to  mandatory  redemption  is
estimated based on quoted market prices for the same or similar issues or on the
current  rates  offered  to CSW for  preferred  stock  with the same or  similar
remaining redemption provisions.

      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        1998      1997
                                         --------------------
                                             (millions)
               Long-term debt
                  carrying amount           $3,785    $3,898
                  fair value                 4,025     4,052

               Trust Preferred
               Securities
                  carrying amount              335       335
                  fair value                   345       344

               Preferred stock subject
               to mandatory redemption
                  carrying amount               --        26
                  fair value                    --        27

               Long-term debt and
               preferred stock due within 
               12 months
                  carrying amount              169        32
                  fair value                   169        32

      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.

                                       68
<PAGE>

      In 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.

      The table below provides information about the Company's natural gas swaps
and  electricity  forward  contracts  that are sensitive to changes in commodity
prices.  The swaps  hedge  commodity  price  exposure  for the year  1999.  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  September 1999. The average contract price for forward purchases is $58
per MWH and the average contract price for forward sales is $80 per MWH.

      Contractual commitments at December 31, 1998 are as follows:

                        Net Notional                           Fair Value of
    Products               Amount      Fair Value of Assets     Liabilities
    ----------------------------------------------------------------------------
                                                      (millions)
    Swaps             6,510,000 MMbtu          $--                  $1
    Forwards:           
       purchases        440,000 MWH              3                  --
       sales            292,800 MWH              1                  --
   

      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 $57
million at December 31, 1998. This unrealized loss is offset by unrealized gains
related to the underlying  transactions  being hedged. CSW expects to hold these
contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.

      DERIVATIVE CONTRACTS NOTIONAL AMOUNTS   Notional       Fair
      AND ESTIMATED FAIR VALUES                Amount       Value
                                             -------------------------
                                                    (millions)

      Cross currency swaps
         Maturities:  2001 and 2006             $400         $457


                                       69
<PAGE>



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          1998        1997
  -----------------------------------------------------------------------------
                                                             (millions)
  Secured bonds
  1999          2025            5.25%       7.75%           $1,824      $2,080

  Unsecured bonds
  2001          2030            3.33% (1)   8.88%            1,359       1,353
                            
  Notes and Lease Obligations
  1999          2021            5.89%       9.75%              765         641

  Unamortized discount                                        (10)        (10)
  Unamortized cost of
    Reacquired debt                                          (153)       (166)
                                                      -------------------------
                                                            $3,785      $3,898
                                                      -------------------------
  (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 plant. 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 7.3% for 1998
and 7.2% for both 1997 and 1996.

      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,  1998,  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.

                                    Sinking Fund    Annual
                                    Requirements  Maturities
                                    -------------------------
                                          (millions)

                 1999                   $1          $169
                 2000                    1           208
                 2001                    1           421
                 2002                    1           151
                 2003                    1           206



                                       70
<PAGE>

      Dividends
      At December  31,  1998,  approximately  $1.3  billion of CSW's  subsidiary
companies'  retained  earnings were  available for payment of cash  dividends by
such subsidiaries to CSW.

      Reacquired Long-term Debt
      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.  In September
1998, CPL reacquired $36 million principal amount  outstanding of Series L FMBs,
in its entirety,  at a call price of 100.53.  No long-term  debt was  reacquired
prior to maturity during 1997.

      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 1998.


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.

                                                                
                                   Dividend                     Current
                                     Rate     December 31,  Redemption Price
                                 From    To   1998   1997      From - To
                                 ---------------------------------------------
                                              (millions)
Not subject to mandatory
redemption
     182,931 shares              4.00% -5.00%  $19     $19   $102.75-109.00
     1,600,000 shares              Auction     160     160        $100.00
   Issuance expenses/premiums                   (3)     (3)
                                              -------------
                                              $176    $176
                                              -------------
Subject to mandatory redemption
     (none outstanding at           
       December 31, 1998)           6.95%      $--     $27          $--
   To be redeemed within one year               --      (1)

                                              -------------
                                               $--     $26
                                              -------------
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 1998 and 1997, SWEPCO redeemed $1.2 million pursuant to
its annual sinking fund  requirement.  During 1997,  each of the U.S.  Electrics
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.

      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 4.4%, 4.3% and 4.1% during 1998, 1997 and 1996, respectively.

                                       71
<PAGE>

      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.

      For additional  information about the U.S. Electric  Operating  Companies'
preferred  stock,  see  their  Statements  of  Capitalization  in the  Financial
Statements.


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,  1998.  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's 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, 1998,  CSW had  revolving  credit  facilities
totaling $1.0 billion to backup its commercial  paper  program.  At December 31,
1998,  CSW had $811 million  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 5.8%, was $1.1 billion during
June 1998.

      CSW  Credit,  which  does  not  participate  in  the  money  pool,  issues
commercial paper on a stand-alone  basis. At December 31, 1998, CSW Credit had a
$1.0 billion revolving credit agreement that is secured by the assignment of its
receivables  to back up its  commercial  paper  program  which had $749  million
outstanding.  The maximum amount of such commercial paper outstanding during the
year, which had a weighted average interest yield for the year of 5.6%, was $1.0
billion during September 1998.


                                       72
<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 and diluted  earnings  per share were the same for the years
1996 - 1998. 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 original issue 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.

                                     1998           1997           1996
                             ------------------------------------------------
Number of new shares issued         
 (millions)                          0.4             0.8            2.9
Range of stock price for new 
 shares                     $25 5/8-$30 1/16  $21 1/4-$25 5/8  $24 3/8-$28 7/8  
New common stock equity              
 (millions)                          $10             $20            $79

      During  February  1996,  CSW sold  15,525,000  shares  of CSW  Common in a
primary stock offering and received net proceeds of approximately  $398 million.
These proceeds were used to repay a portion of indebtedness  incurred during the
acquisition of SEEBOARD.


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

                                       73
<PAGE>



expires 10 years  after the  original  grant  date.  CSW has granted 2.8 million
shares through  December 31, 1998. A summary of the status of CSW's stock option
plan at December 31, 1998,  1997 and 1996 and the changes  during the years then
ended is presented in the following table.

<TABLE>
<CAPTION>

                                1998                         1997                        1996
                     ------------------------------------------------------------------------------------------
                                    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     1,902           $24              1,412           $26             1,564       $26
Granted                   --            --                694            21                70        27
Exercised               (337)           24                 --            22              (147)       24
Canceled                (119)           24               (204)           28               (75)       27
                     ----------                       ----------                     ---------
Outstanding at end    
  of year              1,446            24              1,902            24             1,412        26


Exercisable at end     
  of year              1,010           n/a              1,162           n/a             1,004       n/a

</TABLE>


                                       74
<PAGE>


14.   BUSINESS SEGMENTS

      Effective  December 31, 1998,  CSW adopted  SFAS No. 131.  CSW's  business
segments at December 31, 1998 included U.S.  Electric (CPL, PSO, SWEPCO and WTU)
and U.K. Electric (SEEBOARD U.S.A.).  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).  Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15.
TRANSOK  DISCONTINUED  OPERATIONS  for  additional  information.  CSW's business
segment information is presented in the following tables.


                                                     
                                 U.S.       U.K.      Other and    CSW
                                 Electric   Electric  Reconciling  Consolidated
                                 ----------------------------------------------

1998
Operating revenues                 $3,488     $1,769       $225      $5,482
Depreciation and amortization         399         95         27         521
Interest income                         6          6         18          30
Interest expense                      197        116        103         416
Operating income tax expense          235          1        (33)        203
Net income from equity method          
  subsidiaries                         (1)        --         --          (1)
Income from continuing                
  operations                          374        117        (51)        440
Total assets                        8,998      3,032      1,714      13,744
Investments in equity method          
  subsidiaries                         15         --         --          15
Capital expenditures                  313        106        107         526

1997
Operating revenues                 $3,321     $1,870        $77      $5,268
Depreciation and amortization         389         92         16         497
Interest income                         8         12         --          20
Interest expense                      212        120         82         414
Operating income tax expense          144         31        (24)        151
Windfall profits tax                   --       (176)        --        (176)
Net income from equity method          
  subsidiaries                         (1)        --         --          (1)
Income from continuing                
  operations                          289        117        (77)        329
Total assets                        9,172      2,931      1,348      13,451
Investments in equity method           
  subsidiaries                         15         --         --          15
Capital expenditures                  346        126        276         748

1996
Operating revenues                 $3,248     $1,848        $59      $5,155
Depreciation and amortization         362         88         14         464
Interest income                         3         18         --          21
Interest expense                      224        116         65         405
Operating income tax expense          191         46        (13)        224
Windfall profits tax                   --         --        132         132
Net income from equity method         
  subsidiaries                         --         --         --          --
Income from continuing                
  operations                          262        103        (68)        297
Total assets                        9,142      3,061      1,129      13,332
Investments in equity method          
  subsidiaries                         10         --         --          10
Capital expenditures                  356      1,543        109       2,008

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.


                                       75
<PAGE>


Geographic Areas

                                                  Revenues
                              -------------------------------------------------
                                United      United      Other         CSW
                                States      Kingdom     Foreign   Consoldiated
                              -------------------------------------------------
                                                 (millions)
1998                             $3,705     $1,769         $8       $5,482
1997                              3,390      1,870          8        5,268
1996                              3,616      1,848          1        5,465

                                            Long-Lived Assets
                                ------------------------------------------------
                                United      United      Other         CSW
                                States      Kingdom     Foreign   Consoldiated
                              -------------------------------------------------
                                                 (millions)
1998                             $7,831      $2,530       $201     $10,562
1997                              7,801       2,551        254      10,606
1996                              7,682       2,623         72      10,377


15.   TRANSOK DISCONTINUED OPERATIONS

      On June 6, 1996,  CSW sold Transok to Tejas.  Accordingly,  the results of
operations for Transok have been reported as  discontinued  operations and prior
periods have been restated for consistency.

      As a wholly owned  subsidiary  of CSW,  Transok  operated as an intrastate
natural gas  gathering,  transmission,  marketing  and  processing  company that
provided  natural  gas  services  to  the  U.S.  Electric  Operating  Companies,
predominantly PSO, and to other gas customers throughout the United States.

      CSW sold Transok to Tejas for  approximately  $890 million,  consisting of
$690 million in cash and $200 million in existing  long-term  debt that remained
with Transok  after the sale.  A portion of the cash  proceeds was used to repay
borrowings  incurred  related  to the  SEEBOARD  acquisition  and the  remaining
proceeds were used to repay commercial paper  borrowings.  CSW recorded an after
tax gain on the sale of Transok of approximately $120 million in 1996.

      Transok's operating results for 1996 are summarized in the following table
(transactions with CSW have not been eliminated).

                                                      1996
                                                    ---------
                                                   (millions)

              Total revenue                             $362

              Operating income before income  taxes       23
             

              Earnings before income taxes                18
              Income taxes                                (6)
                                                    ---------
              Net income from discontinued operations    $12
                                                    ---------


                                       76
<PAGE>

16.   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   creating  a  company  with  a  total  market   capitalization   of
approximately  $28 billion at that time. At December 31, 1998,  the total market
capitalization  of the combined company would have been $28 billion ($15 billion
in equity;  $13 billion in debt) and the combined company would have served more
than 4.6 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.

      Under the merger  agreement,  each common  share of CSW will be  converted
into 0.6 shares of AEP common stock.  Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price.  At December 22, 1997, AEP would have issued  approximately  $6.6
billion in stock to CSW  stockholders to complete the  transaction.  At December
31,  1998,  AEP would have  issued  approximately  $6.0  billion in stock to CSW
stockholders   to  complete  the   transaction.   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 1998,  subject to continuing
evaluation  of  CSW's  financial  condition  and  earnings  by the CSW  board of
directors.

      Under the 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.

      The   companies   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.  At the same  time,  the  companies  will
continue  their  commitment to high quality,  reliable  service.  Job reductions
related to the  merger are  expected  to be  approximately  1,050 out of a total
domestic  workforce of  approximately  25,000.  The combined  company will use a
combination  of growth,  reduced  hiring and  attrition to minimize the need for
employee  separations.  Transition  teams of employees  from both companies will
make organizational and staffing recommendations.

      The  electric  systems of AEP and CSW will  operate on an  integrated  and
coordinated  basis as required  by the Holding  Company  Act.  Any fuel  savings
resulting from the coordinated  operation of the combined company will be passed
on to customers.

      The 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 restricted to specific agreed upon
projects or agreed upon  amounts.  In  addition,  prior to  consummation  of the
merger,  CSW and its  subsidiaries  are  restricted  from: (i) issuing shares of
common stock other than pursuant to employee benefit plans;  (ii) issuing shares
of  preferred  stock or  similar  securities  other than to  refinance  existing
obligations or to fund permitted investment or capital  expenditures;  and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary   course  of  business  or  to  fund  permitted   projects  or  capital
expenditures.  These  restrictions  are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts  previously
budgeted. (The foregoing statements constitute forward-looking statements within

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<PAGE>

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).

      Merger Regulatory Approvals
      The merger is  conditioned,  among  other  things,  upon the  approval  of
several state and federal regulatory agencies.

      General
      Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and  shareholders.  These benefits would include $2 billion in
non-fuel  savings  over 10 years and $98  million  in net fuel  savings  over 10
years.

      FERC
      On April 30, 1998,  AEP and CSW jointly  filed a request with the FERC for
approval of their proposed  merger.  On July 15, the FERC approved a draft order
accepting the proposed transmission service agreements between the Ameren System
and PSO.  The draft  order  confirms  that  PSO's 250 MW firm  contract  path is
available for AEP and CSW to meet the Holding Company Act's requirement that the
two systems  operate on an integrated and  coordinated  basis. In November 1998,
the FERC issued an order setting  issues for hearing.  Hearings are scheduled to
begin on June 1, 1999. The FERC order  indicated that the review of the proposed
merger  would  address  the issues of  competition,  market  power and  customer
protection  and  instructed AEP and CSW to refile an updated market power study.
The  updated  market  power  study was filed in  January  1999.  CSW has filed a
proposed  settlement  with the FERC to sell 250 MWs of capacity in the  Frontera
power  plant  project,  two years  after the AEP  merger  closes to  respond  to
market-power issues. A final order is expected in the fourth quarter of 1999.

      Arkansas
      On June 12,  1998,  AEP and CSW jointly  filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order  approving the merger subject to approval of the associated  regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas  Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger  regulatory  plan. The stipulated  agreement calls for SWEPCO to
reduce  rates  through  a net  savings  merger  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  final  orders are  conditioned  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 their  proposed  merger and for a finding  that the
merger is in the public interest. AEP and CSW have proposed a regulatory plan in
Louisiana that provides for:

        - Approximately $2.6 million in fuel cost savings to Louisiana customers
          of CSW's SWEPCO subsidiary during the 10 years following completion of
          the merger; and

       -  A  commitment  not to raise base rates above  current  levels prior to
          January 1, 2002, for SWEPCO customers in Louisiana and a plan to share
          with those customers  approximately  one-half of the savings allocated
          to Louisiana related to the merger during the first 10 years following
          the  merger.  Under  this  plan,  approximately  $26  million of these
          non-fuel merger-related savings will be used to reduce future costs to
          SWEPCO's Louisiana customers.

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<PAGE>

      Hearings in Louisiana  are expected to begin in the first quarter of 1999,
and a final order is expected in the second quarter of 1999.

      Oklahoma
      On August 14, 1998,  AEP and CSW jointly filed a request with the Oklahoma
Commission  for approval of their proposed  merger.  AEP and CSW have proposed a
regulatory plan in Oklahoma that provides for

       -  Approximately $11.8 million in fuel cost savings to Oklahoma customers
          of CSW's PSO subsidiary  during the 10 years  following  completion of
          the merger; and

       -  A  commitment  not to raise base rates above  current  levels prior to
          January 1, 2002, for PSO retail  customers and to share  approximately
          one-half of the savings from  synergies  created by the merger  during
          the  first  10  years   following   the   merger.   Under  this  plan,
          approximately $78.6 million of these non-fuel  merger-related  savings
          will be used to reduce future costs to PSO's retail customers.

      On October 1,  1998,  an  Oklahoma  Commission  ALJ issued an oral  ruling
recommending  to the  Oklahoma  Commission  that the merger  filing be dismissed
without prejudice for lack of information  regarding the potential impact of the
merger on the retail electric market in Oklahoma.  The ruling was in response to
comments  received from intervenors to the merger. A dismissal without prejudice
would  allow  AEP and CSW to  submit  an  amended  application  with  the  added
information.

      Subsequent  meetings with the parties to the merger proceeding resulted in
an agreement on criteria for the  additional  studies.  On October 21, 1998, the
ALJ approved these criteria,  as well as plans by AEP and CSW to file an amended
application along with the additional studies.

      An amended  application was filed with the Oklahoma Commission on February
25,  1999.  Submission  of  the  amended  application  reset  Oklahoma's  90-day
statutory time period for Oklahoma  Commission  action on the merger.  All other
material in the written  record in the merger case will be  preserved  since the
docket  is not  being  dismissed.  AEP  and CSW  anticipate  that  the  Oklahoma
Commission  will  establish a  procedural  schedule  that will result in a final
order in Oklahoma in the second quarter of 1999.

      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.  AEP and CSW
have proposed a regulatory plan in Texas that provides for:

        - Approximately  $29  million in fuel cost  savings  to Texas  customers
          during the 10-year period following completion of the merger; and

        - A  commitment  to not raise  base  rates  prior to January 1, 2002 for
          Texas customers and a plan to share with those customers approximately
          one-half  of the  savings  allocated  to Texas  related  to the merger
          during  the  first  10  years   following   the   merger.   In  Texas,
          approximately  $183 million of the savings from synergies will be used
          to reduce future costs to customers.

      On July 2, 1998, the Texas Commission  issued a preliminary  order setting
forth the issues the Texas  Commission will consider in the merger  application.

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<PAGE>

In its preliminary  order,  the Texas  Commission also determined  that: (i) the
merger application was not a rate proceeding;  (ii) restructuring  issues should
not be addressed;  and (iii)  matters in the  jurisdiction  of other  regulatory
bodies should not be addressed.

      AEP and CSW have reached a settlement  in principle  with the Texas Office
of Public Utility Counsel and several cities in Texas.  The proposed  settlement
provides for combined rate reductions totaling approximately $180 million over a
six-year  period for CSW's  electric  operating  company  customers  through two
separate rate riders.  Both rate reduction riders become effective upon approval
of the settlement and completion of the merger.

      The first rate reduction rider provides for $84.4 million in estimated net
merger savings to be credited to Texas customer bills.  The reduction would come
from a net merger  savings  rate  reduction  rider over the six years  following
completion of the merger with the aggregate rate reductions for customers of the
CSW Texas companies as follows:

    - $52.7 million for CPL;
    - $16.1 million for SWEPCO; and
    - $15.6 million for WTU.

      The second rate  reduction  rider will be  implemented  to resolve  issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation  proceedings in
Texas. The $95.6 million rate reductions over the six years following completion
of the merger include:

    - $61.3 million for CPL;
    - $19.9 million for SWEPCO; and
    - $14.4 million for WTU.

      CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction
of $13.0 million  implemented in May 1998, as well as the second glide-path rate
reduction of $13.0 million  scheduled to take effect May 1999, if the settlement
is approved and the merger between AEP and CSW merger is completed.

      In addition,  as a part of the settlement  proposal,  CPL,  SWEPCO and WTU
agree not to seek an increase in base rates prior to January 1, 2003.  The Texas
Office of Public  Utility  Counsel  and  members  of the Texas  cities  will not
initiate rate reviews prior to January 1, 2001.

      The  settlement  proposal also provides for a sharing of off-system  sales
margins on the  wholesale  electricity  market after the  effective  date of the
merger. The proposed  settlement also includes affiliate  transaction  standards
and provides for the maintenance of service quality for Texas customers.

      Hearings in Texas are expected to begin in the second quarter of 1999, and
a final order is expected by the end of the third quarter of 1999.

      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 on the condition that the merger is completed by December 31, 1999.

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<PAGE>



      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 is  similar to
requests currently before other jurisdictions and outlines the expected combined
company  benefits of the merger to AEP and CSW  customers and  shareholders.  On
November 9, 1998, AEP and CSW filed an amendment to the application.

      AEP and CSW plan to make other  required  federal  merger filings with the
Federal  Communications  Commission  and the  Department  of Justice in the near
future.

      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 the  United  Kingdom  entities.  Although  the  merger of CSW into AEP is not
subject  to  approval  of United  Kingdom  regulatory  authorities,  the  common
ownership of the United Kingdom entities could be referred by the United Kingdom
Secretary  of State for Trade and Industry  for an  investigation  by the United
Kingdom Monopolies and Mergers Commission.  CSW is unable to predict the outcome
of any such regulatory proceeding.

      AEP
      AEP has received a request from the staff of the Kentucky  Public  Service
Commission to file an application  seeking  Kentucky  Public Service  Commission
approval for the indirect  change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service  Commission has the  jurisdictional
authority to approve the merger, AEP will prepare a merger application filing to
be made with the Kentucky  Public  Service  Commission,  which is expected to be
filed by April 15, 1999. Under the governing statute the Kentucky Public Service
Commission must act on the application within 60 days.  Therefore this matter is
not expected to impact the timing of the merger.

       Completion of the Merger
      The  proposed  AEP  merger has a  targeted  completion  date in the fourth
quarter  of 1999.  The  merger is  conditioned,  among  other  things,  upon the
approval of several state and federal regulatory agencies.  The transaction must
satisfy many  conditions,  including the condition  that it must be a pooling of
interests. The parties may not waive some of these conditions.  AEP and CSW have
initiated  the  process of  seeking  regulatory  approvals,  but there can be no
assurances as to when, on what terms or whether the required  approvals  will be
received  or whether  there  will be any  regulatory  proceedings  in the United
Kingdom.  The merger  agreement will  terminate on December 31, 1999 unless,  in
certain  circumstances,  extended  by either  party as  provided  in the  merger
agreement. There can be no assurance that the AEP merger will be consummated.

      Merger Costs
      As of December 31, 1998,  CSW had deferred $26 million in costs related to
the merger on its consolidated  balance sheet,  which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.


17.   EXTRAORDINARY ITEM

      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

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<PAGE>

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.


18.   NEW ACCOUNTING STANDARDS

      SFAS No. 130
      SFAS No.  130 is  effective  for  fiscal  year  1998 and was the  basis of
preparation  for the  Consolidated  Statements of  Stockholders'  Equity in this
report. The statement adds the requirement to present  comprehensive  income and
all of its components  (revenues,  expenses,  gains and losses) in a full set of
financial  statements,  and this new statement  must be displayed  with the same
prominence given other financial statements.  Comprehensive income is defined as
the  change in equity  (net  assets) of a  business  enterprise  during a period
except those resulting from investments by owners and distributions to owners.

      SFAS No. 131
      CSW adopted  SFAS No. 131 for fiscal  year 1998.  The  statement  requires
disclosure of selected  information  about its  reportable  operating  segments.
Operating  segments  are  components  of an  enterprise  that engage in business
activities  that may earn  revenues  and  incur  expenses,  for  which  discrete
financial  information  is  available  and is  evaluated  regularly by the chief
operating  decision-maker  within a company for making  operating  decisions and
assessing  performance.   Segments  may  be  based  on  products  and  services,
geography, legal structure or management structure.

      SFAS No. 132
      SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5.
BENEFIT PLANS.  This statement  standardizes  the  disclosure  requirements  for
pensions and OPEBs,  requires additional  information for changes in the benefit
obligations  and fair value of plan  assets and  eliminates  certain  disclosure
requirements.  Adoption of this statement did not have a material  effect on the
CSW's results of operations or financial condition.

      SOP No. 98-5
      SOP No. 98-5 is effective for fiscal years  beginning  after  December 15,
1998.  The  statement  requires  entities  to  expense  the  costs  of  start-up
activities  as incurred.  SOP No. 98-5 broadly  defines  start-up  activities to
include:  (i) costs that are incurred before  operations have begun;  (ii) costs
incurred after  operations  have begun but before full  productive  capacity has
been reached;  (iii) learning costs and non-recurring  operating losses incurred
before a project is fully operational;  and (iv) one-time  activities related to
opening  a new  facility,  introducing  a new  product  or  service,  conducting
business in a new  territory or with a new class of customer,  and  initiating a
new process in an existing operation.

      CSW  adopted  SOP No.  98-5 in  1998.  CSW  Energy  and CSW  International
expensed $4.5 million and $1.5  million,  after tax,  respectively,  of start-up
costs which had previously been capitalized.

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<PAGE>

      SFAS No. 133
      SFAS No. 133 is effective for fiscal years  beginning  after June 15, 1999
(January 1, 2000 for calendar year entities).  This statement  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.  The statement 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 is met. CSW has not yet quantified the impacts of adopting SFAS No. 133
on its  financial  statements  and has not  determined  the  timing or method of
adopting SFAS No. 133.

      EITF Issue 98-10
      In December  1998, the EITF reached  consensus on Issue 98-10,  Accounting
for Contracts  Involved in Energy Trading and Risk Management  Activities.  EITF
Issue 98-10 is effective  for fiscal years  beginning  after  December 15, 1998.
EITF Issue 98-10 requires energy trading  contracts to be recorded at fair value
on the balance sheet,  with the changes in fair value  included in earnings.  In
reaching its consensus,  the EITF distinguished between energy contracts entered
to generate a profit and energy  contracts  entered to provide for the  physical
delivery of a commodity.  Generally, CSW's energy contracts are entered into for
the physical  delivery of energy.  These contracts,  therefore,  do not meet the
definition  of "trading  activities"  addressed by EITF Issue 98-10.  Therefore,
adoption of EITF Issue 98-10 will not have a material impact on CSW's results of
operations or financial condition.


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<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                              1998         1997
        -----------------------------------------------------------------
        March 31
        Operating Revenues                         $1,257      $1,278
        Operating Income                              163         127
        Income from Continuing Operations              60          25
        Net Income for Common Stock                    60          25
        Basic and Diluted EPS from Continuing       $0.28       $0.12
        Operations
        Basic and Diluted EPS                       $0.28       $0.12
        June 30
        Operating Revenues                         $1,344      $1,184
        Operating Income                              214         169
        Income from Continuing Operations             107          83
        Net Income for Common Stock                   107          83
        Basic and Diluted EPS from Continuing       $0.50       $0.39
        Operations
        Basic and Diluted EPS                       $0.50       $0.39
        September 30
        Operating Revenues                         $1,581      $1,477
        Operating Income                              344         303
        Income from Continuing Operations             233         196
        Extraordinary Item                             --        (176)
        Net Income for Common Stock                   233          20
        Basic and Diluted EPS from Continuing       $1.10       $0.93
        Operations
        Basic and Diluted EPS from                   $--       $(0.83)
        Extraordinary Item
        Basic and Diluted EPS                       $1.10       $0.10
        December 31
        Operating Revenues                         $1,300      $1,329
        Operating Income                              145         136
        Income from Continuing Operations              40          25
        Net Income for Common Stock                    40          25
        Basic and Diluted EPS from Continuing       $0.19       $0.11
        Operations
        Basic and Diluted EPS                       $0.19       $0.11
        Total
        Operating Revenues                          $5,482      $5,268
        Operating Income                               866         735
        Income from Continuing Operations              440         329
        Extraordinary Item                              --        (176)
        Net Income for Common Stock                    440         153
        Basic and Diluted EPS from Continuing        $2.07       $1.55
        Operations
        Basic and Diluted EPS from                     $--      $(0.83)
        Extraordinary Item
        Basic and Diluted EPS                        $2.07       $0.72




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<PAGE>


20.   SUBSEQUENT EVENT

      Through December 31, 1998, CSW  International  has invested $80 million in
Vale,  a  Brazilian  electric  distribution  company,  to  obtain  a 36%  equity
interest.   CSW  International  also  issued  $100  million  of  debt  to  Vale,
convertible to equity by the end of 1999. CSW International accounts for its $80
million  investment  in Vale on the equity  method of  accounting,  and the $100
million as a loan.


      In mid-January  1999, amid market  instability,  the Brazilian  government
abandoned  its policy of pegging  the  currency  in a broad  range  against  the
dollar.  This resulted in a 40%  devaluation of the Brazilian Real by the end of
January.  Vale will be unfavorably  impacted by the devaluation due primarily to
the revaluation of foreign denominated debt.

      CSW  International  has a put option which requires that Vale purchase CSW
International's shares, upon CSW International  exercising the put, at a minimum
of the purchase price paid for the shares ($80 million).  As a result of the put
option  arrangement,  management has reached a preliminary  conclusion  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.  CSW
International  views its investment in Vale as a long-term  investment  strategy
and believes that the investment in Vale continues to have 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.


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<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,  1998 and 1997,  and the related  consolidated  statements  of
income,  stockholders' equity and cash flows, for each of the three years in the
period  ended   December  31,  1998.   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  Finance  Company  (1998  and 1997 - which
includes CSW Investments) and CSW Investments  (1996),  which statements reflect
total assets and total revenues of 22 percent and 32 percent in 1998, 22 percent
and 35 percent in 1997 and 36 percent of total  revenues in 1996,  respectively,
of the  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  generally  accepted  auditing
standards.  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,  1998 and  1997,  and the  related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended  December  31,  1998,  in  conformity  with  generally
accepted accounting principles.






/s/ Arthur Andersen LLP
Arthur Andersen LLP

Dallas, Texas
February 12, 1999



                                       86
<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.






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





                                       87
<PAGE>


AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS

      We have audited the  consolidated  balance sheets of CSW  Investments  and
subsidiaries  as of 31 December 1996 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 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
Investments  and  subsidiaries  at 31  December  1996 and the  results  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 1996 to the extent summarised in
the notes to the consolidated financial statements.






/s/ KPMG Audit Plc
KPMG Audit Plc
Chartered Accountants                                       London, England
Registered Auditor                                          22 January 1997

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<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, 1998.





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


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<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
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO ...................Accumulated Post-retirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
                        Communications, Inc.)
Cajun ..................Cajun Electric Power Cooperative, Inc.
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.
Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas
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
CPL 1996 Fuel Agreement.Fuel settlement agreement entered into by CPL and other
                        parties
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 Power Marketing ....CSW Power Marketing, 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
CWIP ...................Construction work in progress
DGES ...................Director General of Electricity Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EITF....................Emerging Issues Task Force
EITF Issue 98-10........Accounting for Contracts Involved in Energy Trading and
                        Risk Management Activities
El Paso ................El Paso Electric Company
EnerACT.................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
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
FUCO ...................Foreign utility company as defined by the Holding 
                        Company Act
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit

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<PAGE>

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

Abbreviation or Acronym.......Definition
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Long-Tern Incentive Plan
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
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
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. I
OPEB ...................Other post-retirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
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
Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW 
                        Services, as Rights Agent
RUS ....................Rural Utilities Service of the federal government
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
SFAS ...................Statement of Financial Accounting Standards
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. 106 ...........Employers' Accounting for Post-retirement Benefits Other
                        than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity 
                        Securities
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
                        Post-retirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
                        Activities
SOP 98-5 ...............Statement of Position 98-5, Reporting on the Costs of 
                        Start-up Activities
SPP ....................Southwest Power Pool
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
SWEPCO Plan ............The amended plan of reorganization for Cajun filed by 
                        the Members Committee and SWEPCO on March 18, 1998 with
                        the U.S. Bankruptcy Court for the Middle District of
                        Louisiana
Tejas ..................Tejas Gas Corporation
Texas Commission .......Public Utility Commission of Texas
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)"

                                       91
<PAGE>

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

Abbreviation or Acronym.......Definition
U.K. Electric...........SEEBOARD U.S.A.
U.S. Electric Operating 
 Companies or U.S.
 Electrics..............CPL, PSO, SWEPCO and WTU
Vale ...................Empresa De Electricidade Vale Paranapanema S/A, 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

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