UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

         (Mark One)
               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998

                                       OR
              [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the Transition Period from ________ to _______

Commission        Registrant, State of Incorporation,         I.R.S. Employer
File Number       Address and Telephone Number                Identification No.
-----------       -----------------------------------         ------------------
1-1443            Central and South West Corporation             51-0007707
                  (A Delaware Corporation)
                  1616 Woodall Rodgers Freeway
                  Dallas, Texas 75202-1234
                  (214) 777-1000

0-346             Central Power and Light Company                74-0550600
                  (A Texas Corporation)
                  539 North Carancahua Street
                  Corpus Christi, Texas 78401-2802
                  (512) 881-5300

0-343             Public Service Company of Oklahoma             73-0410895
                  (An Oklahoma Corporation)
                  212 East 6th Street
                  Tulsa, Oklahoma 74119-1212
                  (918) 599-2000

1-3146            Southwestern Electric Power Company            72-0323455
                  (A Delaware Corporation)
                  428 Travis Street
                  Shreveport, Louisiana 71156-0001
                  (318) 673-3000

0-340             West Texas Utilities Company                   75-0646790
                  (A Texas Corporation)
                  301 Cypress Street
                  Abilene, Texas 79601-5820
                  (915) 674-7000


<PAGE>


SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>

                                                                                    Name of Each Exchange
Registrant                            Title of Each Class                           on Which Registered
----------                            -------------------                           ---------------------
<S>                                   <C>                                           <C>    

Central and South West Corporation    Common Stock, $3.50 Par Value                 New York Stock Exchange, Inc.
                                                                                    Chicago Stock Exchange, Inc.

CPL Capital I                         8.00% Cumulative Quarterly Income Preferred   New York Stock Exchange, Inc.
                                      Securities, Series A, Liquidation Preference
                                      $25 per Preferred Security

PSO Capital I                         8.00% Trust Originated Preferred Securities   New York Stock Exchange, Inc.
                                      Series A, Liquidation Preference $25 per
                                      Preferred Security

SWEPCO  Capital I                     7.875% Trust Preferred Securities, Series A,  New York Stock Exchange, Inc.
                                      Liquidation amount $25 per Preferred
                                      Security
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<CAPTION>

Registrant                                      Title of Each Class
----------                                      -------------------
<S>                                             <C>    

Central Power and Light Company                 Cumulative Preferred Stock, $100 Par Value

Public Service Company of Oklahoma              Cumulative Preferred Stock, $100 Par Value

Southwestern Electric Power Company             Cumulative Preferred Stock, $100 Par Value

West Texas Utilities Company                    Cumulative Preferred Stock, $100 Par Value
</TABLE>

      Indicate by check mark whether the  Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months and (2) have been  subject to such filing
requirements for the past 90 days. Yes __X__ No ____

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:

Central and South West Corporation[__X__], Central Power and Light Company
[__X__], Public Service Company of Oklahoma [__X__], Southwestern Electric
Power Company [__X__] and West Texas Utilities Company [__X__]

      Aggregate  market  value of the  Common  Stock of  Central  and South West
Corporation at February 22, 1999 held by non-affiliates  was approximately  $5.4
billion.  Number of shares of Common  Stock  outstanding  at February  22, 1999:
212,612,368. Central and South West Corporation is the sole holder of the common
stock of Central Power and Light Company,  Public  Service  Company of Oklahoma,
Southwestern Electric Power Company and West Texas Utilities Company.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions  of the 1999  Notice of Annual  Meeting  and Proxy  Statement  of
Central and South West  Corporation  are hereby  incorporated  by reference into
Part III hereof.

      This  Combined  Form 10-K is  separately  filed by Central  and South West
Corporation,  Central  Power  and  Light  Company,  Public  Service  Company  of
Oklahoma,  Southwestern Electric Power Company and West Texas Utilities Company.
Information  contained herein relating to any individual  Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.



<PAGE>


                                      
                               TABLE OF CONTENTS

GLOSSARY OF TERMS................................................ii

FORWARD-LOOKING INFORMATION......................................v

PART I

 ITEM 1. BUSINESS ...............................................1
 ITEM 2. PROPERTIES .............................................26
 ITEM 3. LEGAL PROCEEDINGS ......................................27
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....28

 PART II

 ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
      STOCKHOLDER MATTERS .......................................2-1
 ITEM 6. SELECTED FINANCIAL DATA ................................2-2
      Registrants
 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS .......................2-2
      Registrants
 ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK................................................2-2
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............2-2
      Registrants
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE .......................2-151

PART III

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS ..3-1
 ITEM 11. EXECUTIVE COMPENSATION ...............................3-7
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT ...............................................3-12
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......3-14

 PART IV

 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
      ON FORM 8-K ..............................................4-1


                                       i
<PAGE>


GLOSSARY OF TERMS
The  following  abbreviations  or  acronyms  used in this Form 10-K 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.
Altamira................CSW International cogeneration project in Altamira,
                        Tamaulipas, Mexico
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO ...................Accumulated Postretirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
                        Communications, Inc.)
CAAA ...................Clean Air Act/Clean Air Act Amendments
Cajun ..................Cajun Electric Power Cooperative, Inc.
CEO ....................Chief Executive Officer
CERCLA .................Comprehensive Environmental Response, Compensation and
                        Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
                        between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
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
CSW U.S. Electric
   System...............CSW and the U.S. Electric Operating Companies
CWIP ...................Construction work in progress
DeSoto .................Parish of DeSoto, State of Louisiana pollution control
                        revenue bond issuing authority
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
El Paso ................El Paso Electric Company
EMF ....................Electric and magnetic fields
EnerACT.................Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
Entergy Texas, Inc. ....Entergy Texas Utilities Company, Inc.
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
ERISA ..................Employee Retirement Income Security Act of 1974, as
                        amended
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
Guadalupe ..............Guadalupe-Blanco River Authority pollution control
                        revenue bond issuing authority
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
HVdc ...................High-voltage direct-current

                                       ii
<PAGE>

GLOSSARY OF TERMS (continued)
The  following  abbreviations  or  acronyms  used in this Form 10-K are  defined
below:

Abbreviation or Acronym       Definition
IPP ....................Independent power producer
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement
                        of American Electric Power Company, Inc. and Central and
                        South West Corporation
KW .....................Kilowatt
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan
Matagorda ..............Matagorda County Navigation District Number One
                        (Texas) pollution control revenue bond issuing authority
Mcfs ...................Thousand cubic feet of gas
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
OEFA ...................Oklahoma Environmental Finance Authority pollution
                        control revenue bond issuing authority
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. I
OPEB ...................Other postretirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PCRB ...................Pollution Control Revenue Bond
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
                        Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
   Agreement............Joint stipulation agreement reached by PSO and other
                        parties to settle PSO's rate inquiry
PURPA ..................Public Utility Regulatory Policies Act of 1978
QF .....................Qualifying Facility as defined in PURPA
RCRA ...................Federal Resource Conservation and Recovery Act of 1976
Red River ..............Red River Authority of Texas pollution control revenue
                        bond issuing authority
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
RESCTA .................Rural Electric Supplier Certified Territory Act
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
Sabine .................Sabine River Authority of Texas pollution control
                        revenue bond issuing authority
Siloam Springs .........City of Siloam Springs, Arkansas pollution control
                        revenue bond issuing authority
SAR ....................Stock Appreciation Right
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United
                        Kingdom
SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted 
                        to U.S. Generally Accepted Accounting Principles
SERP ...................Special Executive Retirement Plan
SFAS ...................Statement of Financial Accounting Standards
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
                        Regulation
SFAS No. 87 ............Employers' Accounting for Pensions
SFAS No. 88.............Employers' Accounting for Settlements and Curtailments
                        of Defined Pension Plans and for Termination Benefits
SFAS No. 106 ...........Employers' Accounting for Postretirement 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

                                      iii
<PAGE>

GLOSSARY OF TERMS (continued)
The  following  abbreviations  or  acronyms  used in this Form 10-K are  defined
below:

Abbreviation or Acronym       Definition
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
                        Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
                        Postretirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
                        Activities
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
Titus County ...........Titus County Fresh Water Supply District No. 1 pollution
                        control revenue bond issuing authority
TNRCC ..................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
Trust Preferred
   Securities...........Collective term for securities issued by business trusts
                        of CPL, PSO and SWEPCO classified on the balance  sheet
                        as "Certain  Subsidiary (or  CPL/PSO/SWEPCO)-obligated,
                        mandatorily  redeemable preferred securities of 
                        subsidiary trusts holding solely Junior Subordinated 
                        Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)"
U.K. Electric...........SEEBOARD U.S.A.
Union Pacific ..........Union Pacific Railroad Company
U.S. Electric Operating Companies or
     U.S. Electric .....CPL, PSO, SWEPCO and WTU
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

                                       iv
<PAGE>


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.


                                       v

<PAGE>


PART I

ITEM 1. BUSINESS.

      CSW,  incorporated  under the laws of Delaware in 1925, is a  Dallas-based
public utility  holding  company  registered  under the Holding Company Act. CSW
owns  all of the  outstanding  shares  of  common  stock  of the  U.S.  Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3
Communications,  EnerShop  and a  currently  inactive  CSW Energy  Services  and
indirectly owns all of the outstanding  share capital of SEEBOARD.  In addition,
CSW owns 80% of the outstanding shares of common stock of CSW Leasing.  In 1998,
CSW's  operating  segments,  including its four  registrants  that form the U.S.
Electric segment,  contributed the following  percentages to aggregate operating
revenues, operating income and net income.


                                                              Other and
                                           U.S.       U.K.   Reconciling
                  CPL  PSO  SWEPCO  WTU   Electric  Electric    Items    Total
                  -------------------------------------------------------------
   Operating       
     Revenues      25   14    17      8     64         32         4      100%
   Operating       
     Income        32   15    16     10     73         26         1      100%
   Net Income      35   17    22      9     83         27       (10)     100%


      The  relative  contributions  of the  U.S.  Electric,  U.K.  Electric  and
Diversified  Electric  segments  and  other  non-utility   subsidiaries  to  the
aggregate operating  revenues,  operating income and net income differ from year
to year due to  variations  in weather,  fuel  costs,  timing and amount of rate
changes  and other  factors,  including  but not  limited to changes in business
conditions  and the results of non-utility  businesses.  Sales of electricity by
the U.S.  Electric  Operating  Companies  tend to increase  during warmer summer
months and, to a lesser extent,  cooler winter months,  because of higher demand
for  power.  The sale of  electricity  by the  U.K.  Electric  segment  tends to
increase  during colder winter months because of a higher demand for power.  For
additional detail related to CSW's reportable  business  segments,  see ITEM 8 -
NOTE 14. BUSINESS SEGMENTS. For financial results showing CSW's seasonality, see
ITEM 8 - NOTE 19. QUARTERLY INFORMATION.

      The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance,  acquisition  and sale of  securities,
the acquisition and sale of utility assets or any interest in any other business
and accounting practices,  including certain affiliate  transactions,  and other
matters.  See  RATES  AND  REGULATION  below,  and ITEM 7.  MD&A for  additional
information regarding the Holding Company Act.


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),  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.


                                       1
<PAGE>

      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 and 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 plans to continue to pay  dividends  on its common stock until
the  closing  of the AEP  Merger at  approximately  the same times and rates per
share as in 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.

      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 Approval
      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 accounted for as 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 proposed AEP merger has a targeted  completion  date in the fourth
quarter of 1999. However,  there can be no assurance that the AEP merger will be
consummated.

      See ITEM 7. MD&A and ITEM 8 - NOTE 16. PROPOSED AEP MERGER.


U.S. ELECTRIC

      The  U.S.  Electric  Operating  Companies  generate,  purchase,  transmit,
distribute and sell  electricity.  The U.S. Electric  Operating  Companies serve
approximately  1.7  million  customers  in one of the largest  combined  service

                                       2
<PAGE>

territories in the United States covering  approximately 152,000 square miles in
portions of Texas, Oklahoma,  Louisiana and Arkansas. The customer base includes
a mix of residential,  commercial and diversified industrial customers.  CPL and
WTU  operate in portions of south and  central  west  Texas,  respectively.  PSO
operates in portions of eastern and southwestern  Oklahoma,  and SWEPCO operates
in portions of northeastern Texas,  northwestern Louisiana and western Arkansas.
Information concerning each of the U.S. Electric Operating Companies for 1998 is
presented in the following table.

<TABLE>
<CAPTION>

                                            Estimated
                               Estimated     Service     Average               Rural Electric
            State and Year of  Population   Territory   Number of   Municipal   Cooperatives
 Registrant Incorporation       Served     (sq. miles)  Customers   Customers      Served
 ---------------------------------------------------------------------------------------------
 <S>        <C>               <C>          <C>          <C>         <C>        <C>

 CPL        Texas - 1945      1,808,000       44,000     642,000        1             4
 PSO        Oklahoma - 1913   1,112,000       30,000     486,000        2             2
 SWEPCO     Delaware - 1912     952,000       25,000     419,000        3             8
 WTU        Texas - 1927        394,000       53,000     188,000        4            13

</TABLE>

      The largest cities in CPL's service  territory are Corpus Christi,  Laredo
and  McAllen.   The  economic   base  of  CPL's   service   territory   includes
manufacturing,   mining,  agricultural,   transportation  and  public  utilities
sectors. Major activities in these sectors include oil and gas extraction,  food
processing,  apparel, metal refining,  chemical and petroleum refining, plastics
and machinery  equipment.  Contracts  with  substantially  all large  industrial
customers  provide for both demand and energy charges.  Demand charges  continue
under such contracts even during periods of reduced  industrial  activity,  thus
mitigating the effect of reduced activity on operating income.

      The largest cities in PSO's service  territory are Tulsa,  Lawton,  Broken
Arrow and Bartlesville.  The economic base of PSO's service  territory  includes
petroleum products,  manufacturing and agriculture.  The principal industries in
the  territory  include  natural gas and oil  production,  oil  refining,  steel
processing,  aircraft  maintenance,  paper  manufacturing  and timber  products,
glass, chemicals, cement, plastics, aerospace manufacturing,  telecommunications
and rubber goods.

      The largest cities in SWEPCO's  service  territory are  Shreveport/Bossier
City,  Longview and Texarkana.  The economic base of SWEPCO's service  territory
includes  mining,   manufacturing,   chemical  products,   petroleum   products,
agriculture  and tourism.  The principal  industries  in the  territory  include
natural gas and oil production,  petroleum  refining,  manufacturing of pulp and
paper,  chemicals,  food processing and metal  refining.  The territory also has
several military installations, colleges and universities.

      The largest cities in WTU's service  territory are Abilene and San Angelo.
The economic base of WTU's service territory includes  agricultural  businesses,
such as the production of cattle,  sheep, goats,  cotton,  wool, mohair and feed
crops.  Significant  gains have been made in  economic  diversification  through
value added processing of these products. The natural resources of the territory
include  oil,  natural  gas,  sulfur,   gypsum  and  ceramic  clays.   Important
manufacturing and processing plants served by WTU produce  cottonseed  products,
oil products, electronic equipment,  precision and consumer metal products, meat
products,  gypsum  products and carbon fiber  products.  The territory  also has
several military installations and state correctional institutions.

      The U.S.  Electric  Operating  Companies operate on an interstate basis to
facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW
North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL
are  interconnected  through the 600 MW East HVdc  transmission  interconnection
located at Pittsburg, Texas.

      CPL and WTU are  members of the ERCOT  power grid that  operates in Texas.
Other ERCOT members  include  Texas  Utilities  Electric  Company,  HL&P,  Texas
Municipal Power Agency, Lower Colorado River Authority, the municipal systems of
San  Antonio,  Austin  and  Brownsville,  the South  Texas and  Medina  Electric
Cooperatives, and several other interconnected systems and cooperatives. PSO and

                                       3
<PAGE>

SWEPCO  are  members  of the SPP power  grid  that  includes  12  investor-owned
utilities,  7  municipalities,  7 cooperatives,  3 state and 1 federal agency as
well as IPPs and power  marketers  operating in the states of Arkansas,  Kansas,
Louisiana,  Oklahoma and parts of Mississippi,  Missouri,  New Mexico and Texas.
ERCOT members  interchange power and energy with one another on a firm,  economy
and emergency basis, as do the members of the SPP.

      CSW Services performs,  at cost,  various  accounting,  engineering,  tax,
legal, financial,  electronic data processing,  centralized economic dispatching
of electric power and other services for the CSW System,  primarily for the U.S.
Electric  Operating  Companies.   The  U.S.  Electric  Operating  Companies  are
functionally  organized  into  power  generation,  energy  delivery  and  energy
services business units, which are centrally managed by CSW Services. Currently,
CSW is developing  management  information systems to report segment information
along these business lines.


U.K. ELECTRIC

      SEEBOARD  is one of the 12  regional  electricity  companies  formed  as a
result of the restructuring  and subsequent  privatization of the United Kingdom
electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April
1996.  SEEBOARD's  principal  businesses  are the  distribution  and  supply  of
electricity. In addition, SEEBOARD is engaged in other businesses, including gas
supply, electricity generation, and electrical contracting.

      SEEBOARD's  service  area  covers  approximately  3,000  square  miles  in
Southeast England. The service area extends from the outlying areas of London to
the English  Channel,  and  includes  large towns such as  Kingston-upon-Thames,
Croydon, Crawley, Maidstone,  Ashford and Brighton, as well as substantial rural
areas.  The area has a  population  of  approximately  4.7  million  people with
significant portions of the area, such as south London, having a high population
density.  Over the past 25 years,  the services sector of the area's economy has
grown in  importance,  while the  industrial  sector has declined.  Considerable
commercial  development  has  occurred in a number of towns in the area over the
last ten years,  in  particular  in the areas  around  Gatwick  Airport  and the
English Channel ports.

      In 1998, the  electricity  market in the U.K. began a phased in opening of
competition, allowing domestic and small business customers in selected areas to
choose their electric  suppliers.  During 1999,  competition will be extended to
the  entire  country.  SEEBOARD  became  one of the first  regional  electricity
companies  to compete in the open  marketplace,  with part of its  service  area
being opened to competition in October 1998.  SEEBOARD is actively  competing to
retain its existing customers and win new customers in other regions.

      In 1998,  SEEBOARD  streamlined  its  business  by  selling  its 41 retail
appliance superstores to the Dixons Stores Group for about $30 million. SEEBOARD
recognized  that its retail  business would not be able to compete  successfully
over the long term with the larger national chains.

      In a joint  venture,  SEEBOARD  Powerlink  won a 30 year contract for $1.6
billion  to  operate,   maintain,  finance  and  renew  the  high-voltage  power
distribution  network of the London Underground,  the largest  metropolitan rail
system in the world.  SEEBOARD  Powerlink will be responsible  for  distributing
high voltage  electricity supply to all 270 London  Underground  stations and to
some 250 miles of the rail system's track.  SEEBOARD's partners in the Powerlink
consortium are the  international  electrical  engineering  group,  ABB, and the
international cable and construction group, BICC.


OTHER CSW BUSINESS OPERATIONS

      CSW continually seeks opportunities to expand its non-utility  business in
areas related to energy and energy services.  This expansion  frequently  occurs
through  strategic  domestic and international  acquisitions,  through marketing

                                       4
<PAGE>

initiatives  inside and outside of the service  territories of the U.S. Electric
Operating  Companies and through new business  investments.  Acquisitions of any
new assets, or development of any new business opportunities,  must meet defined
criteria,  including the potential to lower CSW System costs, increase long-term
efficiency and  competitiveness,  and provide an acceptable return on investment
to CSW.  See  PROPOSED  AEP MERGER for  information  related  to  covenants  and
restrictions on certain business activities.

      Diversified Electric
      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.

      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.

      Also during 1998, CSW  International  provided $100 million of debt, to be
converted to equity at the end of 1999, to Vale based in Sao Paulo,  Brazil.  At
December 31, 1998, CSW International had approximately  $290 million invested in
South America.

      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.

      In addition to these projects, CSW Energy and CSW International have 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.


                                       5
<PAGE>

      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.

      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.

      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.

      Other Diversified
      CSW Credit was originally formed to purchase,  without recourse,  accounts
receivable from the U.S. Electric Operating  Companies to reduce working capital
requirements.  In  addition,  because CSW  Credit's  capital  structure  is more
leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost
of capital is lower.  Subsequent  to its  formation,  CSW Credit's  business has
expanded to include the purchase,  without recourse, of accounts receivable from
certain non-affiliated utilities subject to limitations imposed by the SEC under
the Holding Company Act.

      CSW Leasing has investments in leveraged leases.

                                       6
<PAGE>

COMPETITION AND INDUSTRY CHALLENGES

      Competitive  forces at work in the electric utility industry are affecting
the CSW  System  and  electric  utilities  generally.  Current  legislative  and
regulatory  initiatives are likely to result in even greater competition in both
the wholesale and retail  markets 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 will 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 cheaper than  electricity.
As a whole, the U.S. Electric Operating  Companies believe that their prices for
electricity  and the quality and  reliability of their service  currently  place
them in a position to compete effectively in the marketplace.  In light of these
anticipated  changes, CSW continues to seek opportunities to expand its business
operations  that are not regulated by state utility  commissions  (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).

      To address the anticipated changes in the electric utility industry and to
properly align its business  operations with its non-regulated  activities,  CSW
manages  its  business  operations  in six  distinct  lines of  business.  These
business  lines fall into both the regulated and  non-regulated  categories.  In
addition,  given the expected  restructuring  of the utility  industry,  certain
aspects  of  the  business  lines  will   eventually   cease  to  be  regulated.
Consequently,  CSW's  operating  structure is designed to  accommodate  both the
current business  environment as well as the future. The six business lines are:
(i)  power  generation;  (ii)  energy  delivery;  (iii)  energy  services;  (iv)
international    energy    operations;    (v)   energy    trading;    and   (vi)
telecommunications.  Currently, CSW is developing management information systems
to report segment information along these business lines.

      For additional  information regarding competition and industry challenges,
including legislative  initiatives at both the state and federal level, see ITEM
7. MD&A.

RATES AND REGULATION

      The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance of securities,  certain acquisition and
divestiture  activities,  certain affiliate  transactions and other matters. The
Holding  Company Act generally  limits the  operations  of a registered  holding
company  to that  of a  single  integrated  public  utility  system,  plus  such
additional  businesses  as are  functionally  related to such  system.  The U.S.
Electric Operating  Companies have been classified as public utilities under the
Federal Power Act. Accordingly, the FERC has jurisdiction,  in certain respects,
over their electric  utility  facilities and operations,  wholesale  rates,  and
certain other matters.  The U.S. Electric Operating Companies are subject to the
jurisdiction  of  various  state  commissions  as to  retail  rates,  accounting
matters,  standards  of service  and, in some cases,  issuances  of  securities,
certification of facilities and extensions or divisions of service  territories.
For a  discussion  of  regulation  by the various  environmental  agencies  that
applies to the CSW System, see ENVIRONMENTAL MATTERS below.


U.S. ELECTRIC

      Franchises
      The U.S. Electric Operating  Companies hold franchises to provide electric
service in various  municipalities  within their service areas. These franchises
have  varying  provisions  and  expiration  dates  including,   in  some  cases,
termination  and buy-out  provisions.  CSW considers the  franchises of the U.S.
Electric Operating Companies to be adequate for the conduct of their business.

                                       7

<PAGE>

      Texas Rates - CPL, SWEPCO and WTU
      The Texas  Commission has original  jurisdiction  over retail rates in the
unincorporated   areas  of  Texas.   The   governing   bodies  of   incorporated
municipalities  have original  jurisdiction over rates within their incorporated
limits.  Municipalities  may elect,  and some have  elected,  to surrender  this
original  jurisdiction  to  the  Texas  Commission.  The  Texas  Commission  has
appellate jurisdiction over rates set by incorporated municipalities.

      In Texas,  electric service areas are approved by the Texas Commission.  A
given tract in a  utility's  overall  service  area may be  certificated  to one
utility,  to one of several  competing  electric  cooperatives or investor owned
utilities,  to one of the competing  municipal  electric  systems,  or it may be
certificated to two or more of these entities.  The Texas Commission has changed
these certificated areas only slightly since 1976.

      Three parties have filed  applications at the Texas Commission  requesting
authority to provide retail  electric  service in CPL's  currently  certificated
areas.  Two of the  parties  requested  that the Texas  Commission  order CPL to
permit them to use CPL's distribution  facilities,  which management believes to
be unlawful  resulting in mandatory  retail  wheeling.  The third party seeks to
operate as a distribution  utility that will serve a major economic  development
project located in the service areas of CPL and an electric cooperative in South
Texas. The Texas Commission has docketed the cases for hearings. CPL is actively
opposing these applications.

      In a separate docket, the Texas Commission has determined that three large
naval bases,  which are  currently  served as  industrial  customers by CPL, may
qualify  as  wholesale  customers.  A second  phase of the  proceeding  has been
docketed  to  analyze  all  issues  pertinent  to the bases  being  able to take
electric  service  from  other  wholesale  providers.  Among  the  issues  to be
addressed is the extent to which the Navy would have to compensate CPL for costs
that may be stranded if the naval  facilities  were to obtain  electric  service
from another wholesale provider.  The Texas Commission's ultimate decision could
have ramifications for other industrial  customers in the State of Texas who own
facilities upon which extensive distribution systems are located and who believe
access to wholesale electric power providers would reduce their electric costs.

      Oklahoma Rates - PSO
      PSO currently is subject to the  jurisdiction  of the Oklahoma  Commission
with respect to retail prices.  Pursuant to authority granted under RESCTA,  the
Oklahoma  Commission  established  service  territorial  boundary  maps  in  all
unincorporated  areas  for  all  regulated  retail  electric  suppliers  serving
Oklahoma.  In accordance with RESCTA, a retail electric  supplier may not extend
retail electric service into the certified territory of another supplier, except
to serve its own facilities or to serve a new customer with an initial full load
of 1,000 KW or more.  RESCTA  provides  that when any  territory  certified to a
retail  electric  supplier  or  suppliers  is  annexed  and  becomes  part of an
incorporated  city or town, the  certification  becomes null and void.  However,
once established in the annexed territory,  a supplier may generally continue to
serve within the annexed area. See ITEM 7. MD&A, RECENT DEVELOPMENTS AND TRENDS.

      Arkansas and Louisiana Rates - SWEPCO
      SWEPCO is subject  to the  jurisdiction  of the  Arkansas  Commission  and
Louisiana  Commission  with  respect  to  retail  rates,  as well  as the  Texas
Commission as described above.

      Nuclear Regulation - CPL
      Ownership  of an interest in a nuclear  generating  unit  exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the  Atomic  Energy  Act of 1954  and the  Energy  Reorganization  Act of  1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose  licensing  and  safety-related  requirements.  Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the  environmental  aspects of nuclear  reactors.  The NRC has the  authority to
impose fines  and/or shut down a unit until  compliance  is achieved,  depending

                                       8
<PAGE>

upon its assessment of the severity of the situation. For additional information
regarding STP, see ITEM 7. MD&A.

U.K. ELECTRIC

      SEEBOARD Rates and Franchise Area
      The  distribution  and  supply  businesses  of  SEEBOARD  are  principally
regulated  by the  Electricity  Act of 1989 and by the  conditions  contained in
SEEBOARD's public  electricity  supply license.  The public  electricity  supply
license generally continues until at least 2025, although it may be revoked upon
25 years prior notice after 2000.  In addition,  the public  electricity  supply
license  may be revoked by the United  Kingdom's  Secretary  of State in certain
specified  circumstances.  Before  October 1998,  SEEBOARD had the sole right to
supply  substantially  all of the consumers in its authorized area, except where
demand  exceeds 100 KW.  However,  commencing  in October  1998,  on a phased-in
basis,  SEEBOARD no longer has monopoly  supply rights in its franchise area. At
December 31, 1998,  10.5% of  SEEBOARD's  domestic  customers  had the option to
elect an alternative supplier but no more than 0.5% had done so.

      Most of the income of the distribution  business is regulated by a formula
set by the DGES based upon, among other factors, the United Kingdom Retail Price
Index.  The  formula  generally  sets a cap on the  average  price  per  unit of
electricity distributed, with allowed annual increases based upon changes in the
United Kingdom Retail Price Index plus a percentage factor set from time to time
by the DGES. The DGES has commenced the review of allowed  distribution  charges
for the regional electricity companies,  including SEEBOARD, to take effect from
April 1, 2000.

      The prices charged by SEEBOARD in its franchise  supply  business are also
determined  from a  formula  set  from  time to time by the  DGES,  although  as
competition  increases,  the  significance  of  the  regulatory  allowance  will
decline.  The  formula  provides  for a price  cap  derived  from  the  forecast
electricity  purchase  costs,  transmission  charges,   distribution  costs  and
overheads,  together  with an  allowed  margin as  determined  by the DGES.  All
holders of a second-tier license,  including SEEBOARD, who supply electricity to
non-franchise  customers  must  pay  charges  to the host  regional  electricity
company for the use of its distribution network.


FUEL RECOVERY - U.S. ELECTRIC

      The  recovery of fuel costs from  retail  customers  by the U.S.  Electric
Operating Companies is subject to regulation by the state utility commissions in
the states in which they  operate.  All of the  contracts  of the U.S.  Electric
Operating  Companies  with  their  wholesale  customers  contain  FERC  approved
fuel-adjustment provisions for recovery of fuel costs.

      Texas Fuel Recovery - CPL, SWEPCO and WTU
      Electric  utilities  in Texas,  including  CPL,  SWEPCO  and WTU,  are not
allowed to make  automatic  adjustments  to  recover  changes in fuel costs from
retail  customers.  A utility  is allowed  to  recover  its known or  reasonably
predictable  fuel  costs  through a fixed  fuel  factor.  The  Texas  Commission
established  procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months  according  to a specified  schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding.  Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition  the Texas  Commission  for a surcharge  or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially  under- or  over-collect.  Material
under- or  over-collections  including interest are defined as variances of four
percent or more of the most recent Texas  Commission  adopted  annual  estimated
fuel cost for the  utility.  A utility  does not have to revise its fuel  factor

                                       9
<PAGE>

when  requesting a surcharge or refund.  An interim  emergency fuel factor order
must be issued by the Texas  Commission  within 30 days after such  petition  is
filed by the  utility.  Final  reconciliation  of fuel  costs is made  through a
reconciliation  proceeding,  which may  contain a maximum  of three  years and a
minimum  of one year of  reconcilable  data,  and must be filed  with the  Texas
Commission  no  later  than  six  months  after  the  end  of the  period  to be
reconciled.  In addition,  a utility must include a reconciliation of fuel costs
in any  general  rate  proceeding  regardless  of the time  since  its last fuel
reconciliation proceeding. Any fuel costs that are determined to be unreasonable
in a reconciliation proceeding are not recoverable from retail customers.

      Oklahoma Fuel Recovery - PSO
      In general,  MWH sales to PSO's retail  customers  are made at rates which
include a service level fuel cost  adjustment  factor  reflecting the difference
between  projected fuel and purchased  power costs and the fuel rate embedded in
PSO's base rates.  The factors are determined twice each year and are based upon
projected  fuel,  natural gas  transportation,  and purchased  power costs.  Any
difference  between  projected and actual costs is included in the fuel recovery
calculation  for future  periods.  Oklahoma law requires that an  examination of
PSO's retail fuel cost adjustment  factor be performed  annually by the Oklahoma
Commission which approves the utility's embedded fuel rate per KWH.

      Arkansas and Louisiana Fuel Recovery - SWEPCO
      SWEPCO's  retail rates currently in effect in Louisiana are adjusted based
on SWEPCO's  cost of fuel in  accordance  with a fuel cost  adjustment  which is
applied to each billing month based on the second previous  month's average cost
of fuel.  Provision  for any over- or  under-recovery  of fuel  costs is allowed
under an automatic fuel clause.  Under SWEPCO's fuel adjustment  rider currently
in effect in Arkansas, the fuel cost adjustment is applied to each billing month
on a basis which  permits  SWEPCO to recover the level of fuel cost  experienced
two  months  earlier.  SWEPCO's  fuel  recovery  mechanisms  are  subject to the
jurisdiction of the Arkansas Commission and the Louisiana Commission.

      Recoverability of Fuel Costs
      Under current  regulation,  the U.S. Electric Operating  Companies recover
all their material fuel costs from their customers.  The inability of any of the
U.S. Electric Operating Companies to recover its fuel costs under the procedures
described above could have a material  adverse effect on such company's  results
of operations and financial condition.

      See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY  PROCEEDINGS
for further information with respect to regulatory, rate and fuel proceedings.


                                       10

<PAGE>


FUEL SUPPLY AND PURCHASED POWER - U.S. ELECTRIC

      The U.S. Electric Operating Companies' net dependable summer rating, power
generation  capabilities  and the  type of fuel  used  are set  forth in ITEM 2.
PROPERTIES.  Information  concerning  energy sources and cost data for the years
1996 through 1998 is presented in the following  tables.  In addition,  detailed
fuel cost and consumption information for 1998 is also presented.

CSW
Source of Energy (based on MW)                  1998          1997          1996
                                             -----------------------------------
Natural Gas                                       38%          36%           36%
Coal                                              39           41            39
Lignite                                            8            9             9
Nuclear                                            7            7             8
Other                                             --           --             1
                                             -----------------------------------
Total Generated                                   92           93            93
Purchased Power                                    8            7             7
                                             -----------------------------------
Total                                            100%         100%          100%
                                             -----------------------------------
Fuel Cost data
Average Btu per net KWH                       10,514       10,405        10,440
Cost per Mmbtu                                 $1.67        $1.83         $1.81
Cost per KWH generated                     1.75(cent)   1.90(cent)    1.89(cent)
Cost, including purchased power, as a           
  percentage of revenue                         37.3%        38.1%         37.4%

CPL
Source of Energy (based on MW)
Natural Gas                                      51%           50%           42%
Coal                                              20           18            22
Nuclear                                           21           22            22
                                             -----------------------------------
Total Generated                                   92           90            86
Purchased Power                                    8           10            14
                                             -----------------------------------
Total                                            100%         100%          100%
                                             -----------------------------------
Fuel cost data
Average Btu per net KWH                       10,563       10,386        10,391
Cost per Mmbtu                                 $1.59        $1.83         $1.62
Cost per KWH generated                     1.68(cent)   1.90(cent)    1.68(cent)
Cost, including purchased power, as a          
  percentage of revenue                         30.3%        32.9%         30.8%

PSO
Source of Energy (based on MW)
Natural Gas                                       43%          39%           43%
Coal                                              43           48            46
                                             -----------------------------------
Total Generated                                   86           87            89
Purchased Power                                   14           13            11
                                             -----------------------------------
Total                                            100%         100%          100%
                                             -----------------------------------
Fuel cost data
Average Btu per net KWH                       10,272       10,264        10,225
Cost per Mmbtu                                 $1.77        $1.98         $2.04
Cost per KWH generated                     1.82(cent)   2.03(cent)    2.09(cent)
Cost, including purchased power, as a          
  percentage of revenue                         47.1%        46.4%         45.1%

                                       11

<PAGE>

SWEPCO
Source of Energy (based on MW)                 1998          1997           1996
                                             -----------------------------------
Natural Gas                                       15%          12%           15%
Coal                                              51           52            45
Lignite                                           23           26            26
Other                                             --           --             4
                                             -----------------------------------
Total Generated                                   89           90            90
Purchased Power                                   11           10            10
                                             -----------------------------------
Total                                            100%         100%          100%
                                             -----------------------------------
Fuel cost data
Average Btu per net KWH                       10,544       10,554        10,606
Cost per Mmbtu                                 $1.63        $1.69         $1.76
Cost per KWH generated                     1.72(cent)   1.79(cent)    1.87(cent)
Cost, including purchased power, as a           
  percentage of revenue                         42.7%        43.4%         45.1%

WTU
Source of Energy (based on MW)
Natural Gas                                       42%          37%           46%
Coal                                              33           36            35
                                             -----------------------------------
Total Generated                                   75           73            81
Purchased Power                                   25           27            19
                                             -----------------------------------
Total                                            100%         100%          100%
                                             -----------------------------------
Fuel cost data
Average Btu per net KWH                       10,828       10,275        10,568
Cost per Mmbtu                                 $1.83        $1.98         $2.01
Cost per KWH generated                     1.98(cent)   2.03(cent)    2.12(cent)
Cost, including purchased power, as a          
  percentage of revenue                         40.2%         42.6%        43.5%


                                       12

<PAGE>



                             1998 Cost             1998 Consumption
Fuel Type                    per MMbtu                (millions)
--------------------------------------------------------------------------------

                                           Mmbtus         Mcfs         Tons
CSW
Natural gas                     $2.21       295            288
Coal                             1.40       285                         17
Lignite                          1.35        59                          4
Nuclear                           .46        55
Composite                        1.67

CPL
Natural gas                     $2.12       137           133
Coal                             1.37        51                         3
Nuclear                           .46        55
Composite                        1.59

PSO
Natural gas                     $2.36        79            77
Coal                             1.17        78                         4
Composite                        1.77

SWEPCO
Natural gas                     $2.18        41            40
Coal                             1.58       127                         8
Lignite                          1.35        59                         4
Composite                        1.63

WTU
Natural gas                     $2.23        38            38
Coal                             1.26        29                         2
Composite                        1.83

      Natural Gas
      CSW Services purchased approximately 295 billion cubic feet of natural gas
during 1998 for the U.S. Electric Operating  Companies,  which ranks them as the
third largest  consumer of natural gas in the United  States.  A majority of the
gas fired electric  generation  plants are connected to at least two natural gas
pipelines,  which provides  greater access to competitive  supplies and improves
reliability. Natural gas requirements for each plant are supplied by a portfolio
of long-term and short-term  gas purchase and  transportation  agreements  which
were acquired on a competitive basis and are market price based.

      Coal and Lignite
      The U.S.  Electric  Operating  Companies  purchase  coal  from a number of
suppliers.   In  1998,  the  U.S.   Electric   Operating   Companies   purchased
approximately  73% of their total coal purchases under long-term  contracts with
the balance procured on the spot market. The coal for the plants comes primarily
from Wyoming and Colorado  mines which are located  between 1,000 and 1,700 rail
miles from the generating plants.

      Oklaunion - CPL, PSO and WTU
      The  jointly-owned  Oklaunion  plant  purchases  coal under a coal  supply
contract with Caballo Coal Company which accounts for  approximately 64% each of
the total 1998 Oklaunion coal requirements for CPL, PSO and WTU with the balance
procured  on the spot  market.  As of  December  31,  1998,  CPL's  share of the
year-end  1998 coal  inventory  at  Oklaunion  was  approximately  30,000  tons,

                                       13
<PAGE>

representing  a 39-day  supply.  PSO's  share  was  approximately  50,000  tons,
representing  a 32-day  supply.  WTU's  share was  approximately  180,000  tons,
representing a 34-day supply.

      Coleto Creek - CPL
      CPL has a long-term  coal  supply  agreement  with  Colowyo  Coal  Company
covering  approximately  25% of the coal requirements of its Coleto Creek plant.
During 1998, this agreement was extended to cover approximately 40% of the plant
deliveries.  The balance of the plant's  coal  deliveries  came from spot market
purchases of Powder River Basin and Colorado coal that was  delivered  under one
spot market rail transportation agreement.  Additionally,  approximately 102,000
tons of coal were purchased from suppliers in Venezeula and transported via ship
to the Port of Corpus  Christi  where it was then  transferred  by train  and/or
truck to the plant. At December 31, 1998, CPL had approximately  334,000 tons of
coal in inventory at Coleto Creek, representing a 44-day supply.

      During 1999,  CPL intends to purchase  Powder River Basin coal on the spot
market for  approximately  50% of the Coleto Creek plant  requirements  and will
transport  such coal  pursuant  to a rail  transportation  agreement  with Union
Pacific.  The remainder of CPL's coal will be purchased  from multiple  Colorado
suppliers.  This coal will also be transported by Union Pacific.  As a result of
the recent merger between Union Pacific and the Southern Pacific  Transportation
Company,  Union  Pacific is  currently  the only rail carrier with access to the
Coleto Creek Plant.  In 1994,  CPL  instituted  a proceeding  at the  Interstate
Commerce  Commission  requesting a reasonable rate for the 16 miles  transported
from Victoria,  Texas to Coleto Creek. Southern Pacific  Transportation  Company
moved to dismiss the complaint and, in a decision  issued December 31, 1996, the
Surface Transportation Board of the U.S. Department of Transportation, successor
to the Interstate Commerce Commission, granted the motion. CPL has appealed this
decision to the U.S. Court of Appeals for the Eighth Circuit where the matter is
pending.

      Northeastern Station - PSO
      PSO has a contract with Kerr-McGee Coal Corporation,  which  substantially
covers the coal supply for PSO's  Northeastern  Station coal units through 2007.
In 1998, Kennecott Energy Corporation  purchased Kerr-McGee Coal Corporation and
assumed  the PSO coal  contract.  Coal  delivery  is by unit  trains  from mines
located in the Gillette,  Wyoming vicinity, a distance of about 1,100 rail miles
from the Northeastern Station. PSO owns sufficient railcars for operation of six
unit trains.  Coal is  transported  to the  Northeastern  Station  pursuant to a
long-term  contract  with  Burlington  Northern.  The plant is also  equipped to
accept   deliveries   from  Union  Pacific.   At  December  31,  1998,  PSO  had
approximately  522,000  tons  of  coal  in  inventory  at  Northeastern  Station
representing a 42-day supply.

      Welsh and Flint Creek - SWEPCO
      The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint
Creek plant is provided under a contract with Cyprus Amax Minerals Company. Coal
under this contract is mined near Gillette,  Wyoming,  a distance of about 1,500
and 1,100 miles,  respectively,  from the Welsh and Flint Creek plants.  Coal is
delivered  to the plants under rail  transportation  contracts  with  Burlington
Northern and the Kansas City Southern  Railroad Company having  expiration dates
ranging between 2001 and 2006.  SWEPCO owns or leases,  under long-term  leases,
sufficient  railcars and spares for the operation of 15 unit trains.  SWEPCO has
supplemented  its railcar  fleet from time to time with  short-term  leases.  At
December 31, 1998, SWEPCO had coal inventories of approximately  875,000 tons at
Welsh,  representing  a 44-day  supply and  approximately  503,000 tons at Flint
Creek,  representing  a  67-day  supply,  See  ITEM  8-NOTE  2.  LITIGATION  AND
REGULATORY  PROCEEDINGS and NOTE 3.  COMMITMENTS AND CONTINGENT  LIABILITIES for
additional information.

      Pirkey and Dolet Hills - SWEPCO
      SWEPCO has acquired  lignite leases  covering an aggregate of about 27,000
acres  near the Henry W.  Pirkey  power  plant.  Sabine  Mining  Company  is the
contract miner of these reserves.  At December 31, 1998,  approximately  277,000
tons of lignite were in SWEPCO's  inventory at the Pirkey plant  representing  a
23-day  supply.  Another  25,000 acres are jointly  leased in equal  portions by
SWEPCO and CLECO in the Dolet Hills area of Louisiana near the Dolet Hills Power

                                       14
<PAGE>

Plant. The DHMV is the contract miner for these reserves.  At December 31, 1998,
SWEPCO had  133,000  tons of  lignite in  inventory  at the Dolet  Hills  plant,
representing a 23-day supply.  SWEPCO  believes the acreage under lease in these
areas contains sufficient reserves to cover the anticipated lignite requirements
for the estimated useful lives of the lignite-fired plants.

      Nuclear Fuel - CPL
      The  supply of fuel for STP  involves  a  complex  process.  This  process
includes the  acquisition  of uranium  concentrate,  the  conversion  of uranium
concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into
the isotope U235,  the  fabrication  of the enriched  uranium into fuel rods and
incorporation  of fuel rods into fuel  assemblies.  The fuel  assemblies are the
final  product  loaded  into the reactor  core.  The time  associated  with this
process requires that fuel decisions be made years in advance of the actual need
to refuel  the  reactor.  Fuel  requirements  for STP are being  handled  by the
STPNOC.

      Outages are necessary approximately every 18 months for refueling. Because
STP's fuel costs are significantly  lower than any of the other CPL units, CPL's
average  fuel costs are  expected  to be higher  whenever a STP unit is down for
refueling or maintenance.

      CPL and the  other STP  participants  have  entered  into  contracts  with
suppliers for 100% of the uranium  concentrate  sufficient  for the operation of
both STP units  through  October 2001,  with  additional  flexible  contracts to
provide 53% of the uranium concentrate needed for STP through 2003. In addition,
CPL and the other STP  participants  have entered into  contracts with suppliers
for 100% of the nuclear fuel conversion  service sufficient for the operation of
both STP units  through  October 2001,  with  additional  flexible  contracts to
provide at least 40% of the  conversion  service  needed for STP  through  2005.
Enrichment  contracts  were  secured  for a  30-year  period  from  the  initial
operation  of each unit.  The STP  participants  have  canceled  the  enrichment
requirements  for the period after  October 2000 by  negotiating  a new contract
with the initial  supplier.  The  participants  believe  that other,  lower cost
options will be available in the future. CPL and the other STP participants have
entered into flexible contracts to provide for 100% of enrichment  services from
October 2000 to December 2004, with additional  flexible contracts to provide at
least 40% of enrichment  services through 2006. Also, fuel fabrication  services
have been contracted for operation  through 2005 for Unit 1 and 2006 for Unit 2.
Although CPL and the other STP owners cannot predict the availability of uranium
and related  services,  CPL and the other STP owners do not currently  expect to
have  difficulty  obtaining  uranium  and  related  services  required  for  the
remaining years of STP operation.

      The Energy Policy Act has  provisions for the recovery of a portion of the
costs associated with the  decommissioning  and  decontamination  of the gaseous
diffusion plants used in the enrichment process. These costs are being recovered
on the basis of enrichment services purchased by utilities from the DOE prior to
October of 1992.  The total  annual  assessment  for all  domestic  utilities is
limited to $150 million per federal  fiscal year and  assessable  until  October
2007. The STP assessment will be approximately $2.0 million each year with CPL's
share being 25.2% of the annual STP assessment.

      The Nuclear  Waste  Policy Act of 1982,  as amended,  required  the DOE to
develop a permanent high level waste disposal  facility for the storage of spent
nuclear fuel by 1998. The DOE last  estimated  that the permanent  facility will
not be  available  until 2010.  The DOE will take  possession  of all spent fuel
generated at STP as a result of a contract CPL and other STP  participants  have
entered  into  with  the  DOE.  STP has  on-site  storage  facilities  with  the
capability to store all the spent  nuclear fuel  generated by the STP units over
their lives.  Therefore,  the DOE delay in providing the disposal  facility will
not impact the operation of the STP units. Under provisions of the Nuclear Waste
Policy Act of 1992, a one-mill per KWH assessment on  electricity  generated and
sold from nuclear reactors funds the DOE waste disposal program.

      Risks of substantial  liability  could arise from the operation of STP and
from the use, handling,  disposal and possible radioactive  emissions associated
with nuclear fuel. While CPL carries  insurance,  the  availability,  amount and
coverage  thereof is limited  and may become  more  limited in the  future.  The

                                       15
<PAGE>

available  insurance may not cover all types or amounts of loss or expense which
may be experienced  in connection  with the ownership of STP. See ITEM 8-NOTE 3.
COMMITMENTS  AND  CONTINGENT  LIABILITIES  for  information  relating to nuclear
insurance.

      Governmental Regulation
      The  price  and  availability  of each of the  foregoing  fuel  types  are
significantly affected by governmental  regulation.  Any inability in the future
to obtain adequate fuel supplies or adoption of additional  regulatory  measures
restricting the use of such fuels for the generation of electricity might affect
the U.S. Electric Operating Companies' ability to economically meet the needs of
their  customers.  Such  regulatory  measures  could  require the U.S.  Electric
Operating  Companies  to  supplement  or  replace,  prior to normal  retirement,
existing  generating  capability  with units  using other  fuels.  This would be
impossible  to  accomplish  quickly,   would  require   substantial   additional
expenditures for construction and could have a significant adverse effect on the
financial  condition  and  results of  operations  of CSW and/or any of the U.S.
Electric Operating Companies.

      The  Registrants  are  unable  to  predict  the  future  cost of fuel (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 ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information concerning fuel costs.

      Power Purchases and Sales
      The  U.S.  Electric  Operating  Companies  serve  various  municipalities,
electric cooperatives and public power authorities.  The U.S. Electric Operating
Companies exchange power with various neighboring electric systems and engage in
electric  interchanges with each other. In addition,  they contract with certain
suppliers  including  power  marketers and  independent  power producers for the
purchase  or sale of  capacity,  firm  energy,  responsive  reserves  and  other
wholesale services.

      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.


ENVIRONMENTAL MATTERS

      The CSW  System is  subject to  regulation  with  respect to air and water
quality,   solid  waste  standards  and  other  environmental   matters.   These
authorities have continuing  jurisdiction in most cases to require modifications
in facilities  and  operations.  Any such changes in  environmental  statutes or
regulations could require substantial additional  expenditures to modify the CSW
System's  facilities and operations and could have a material  adverse effect on
the results of operations and financial  condition of CSW and/or any of the U.S.
Electric   Operating   Companies.   Violations  of  environmental   statutes  or
regulations can result in fines and other costs.

      EMFs
      Research is ongoing whether  exposure to EMFs may result in adverse health
effects.  Although earlier studies suggested a correlation between EMFs and some
types of effects,  the research to date has not  established a  cause-and-effect
relationship  between  EMFs and adverse  health  effects  from  electric  lines.
Recently,  more comprehensive  studies have failed to show any correlation.  CSW
cannot  predict the impact on CSW or the  electric  utility  industry if further
investigations  or proceedings  were to establish  that the present  electricity
delivery  system  is  contributing  to  increased  risk or  incidence  of health
problems.

                                       16
<PAGE>

      Other Environmental Matters
      From  time to time  the  Registrants  are  made  aware  of  various  other
environmental  issues or are named as  parties to various  other  legal  claims,
actions,  complaints  or other  proceedings  related to  environmental  matters.
Management  does  not  expect  disposition  of any  such  pending  environmental
proceedings  to have a material  adverse  effect on the results of operations or
financial condition of CSW and/or any of the U.S. Electric Operating Companies.

      See ITEM 7. MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information
relating to environmental matters.

U.S. ELECTRIC ENVIRONMENTAL MATTERS

      Air Quality
      Air  quality  standards  and  emission  limitations  are  subject  to  the
jurisdiction  of state  regulatory  authorities  in each  state in which the CSW
System  operates,  with oversight by the EPA. In accordance with  regulations of
these state authorities,  permits are required for all generating units on which
construction  is  commenced  or  which  are  substantially  modified  after  the
effective date of the applicable regulations.

      In 1990,  the U.S.  Congress  amended  the  Clean  Air  Act.  CAAA  places
restrictions   on  the  emission  of  sulfur   dioxide  from  gas-,   coal-  and
lignite-fired  generating plants.  Beginning in the year 2000, the U.S. Electric
Operating  Companies will be required to hold allowances in order to emit sulfur
dioxide.  The EPA issues allowances to owners of existing generating units based
on  historical  operating  conditions.  Based  on the CSW U.S.  Electric  System
facilities plan, CSW believes that the allowances of the U.S. Electric Operating
Companies  are  adequate to meet their needs  through  2008.  Public and private
markets are developing for trading of excess allowances.

      The CAAA also  directed the EPA to issue  regulations  governing  nitrogen
oxide emissions and requiring government studies to determine what controls,  if
any,  should be imposed on utilities to control  toxic air  emissions.  The acid
rain rules have not been released.  Accordingly,  the impact on CSW and the U.S.
Electric Operating Companies cannot be determined at this time.

      Under the Acid Rain Title IV rules of the CAAA for nitrogen  oxide control
for coal units, the U.S.  Electric  Operating  Companies have elected  alternate
standards for their units under an optional provision regarding emission limits.
This  will  eliminate  any  capital  expenses  through  2007,  if the  alternate
standards are met.

      There is a legislative initiative in Texas to have older units, which were
grandfathered under the CAAA, operate under permits and reduce emissions.  Based
upon reduction levels being discussed,  the U.S. Electric  Operating  Companies'
compliance cost could be approximately $131 million. The time frame has not been
established for these  controls.  The issue will be considered in the 1999 Texas
legislative session.

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

      At the Kyoto  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

                                       17
<PAGE>

Companies could be affected if this treaty,  in its present form, is approved by
the United  States  Congress.  The impact,  if any, on CSW or the U.S.  Electric
Operating  Companies  cannot be determined  because most of the  greenhouse  gas
emission  reduction  would  come  from coal  generation  that  would  have to be
switched  to  natural  gas or  retired.  Currently,  47% of  the  U.S.  Electric
Operating Companies' MWH generation and 34% of its installed generating capacity
was coal and lignite.

      Water Quality
      Water  quality  is  subject  to the  jurisdiction  of  each  of the  state
regulatory authorities in which the U.S. Electric Operating Companies operate as
well as the  EPA.  These  authorities  have  jurisdiction  over  all  wastewater
discharges into state waters,  establish water quality standards and issue waste
control  permits  covering  discharges  which might  affect the quality of state
waters.  The EPA has  jurisdiction  over point  source  discharges  through  the
National  Pollutant  Discharge  Elimination System provisions of the Clean Water
Act.

      RCRA and CERCLA
      The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules
provide for  comprehensive  control of all solid wastes from generation to final
disposal.  The appropriate  state regulatory  authorities in the states in which
the U.S. Electric Operating  Companies operate have received  authorization from
the EPA to administer the RCRA solid waste control program for their  respective
states.

      The operations of the U.S.  Electric  Operating  Companies,  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. Theoretically,  any one PRP can be held responsible for the entire cost of
a cleanup. Typically, however, cleanup costs are allocated among PRPs.

      CSW's   subsidiaries   incur   significant   costs   for   the   handling,
transportation,  storage  and  disposal of  hazardous  and  non-hazardous  waste
materials.  Unit costs for waste classified as hazardous exceed by a substantial
margin unit costs for waste classified as non-hazardous.

      The U.S.  Electric  Operating  Companies,  like other electric  utilities,
produce combustion and other generation by-products,  such as ash, sludge, slag,
low-level  radioactive waste and spent nuclear fuel. The U.S. Electric Operating
Companies own distribution poles treated with creosote or other substances.  The
EPA currently  exempts coal combustion  by-products from regulation as hazardous
wastes.  Distribution  poles treated with creosote or other  substances  are not
expected to exhibit characteristics that would cause them to be hazardous waste.
In connection with their operations,  the U.S. Electric Operating Companies also
have used  asbestos,  PCBs and  materials  classified  as  hazardous  waste.  If
additional  by-products or other materials generated or used by companies in the
CSW U.S.  Electric System were  reclassified as hazardous  wastes,  or other new
laws or regulations concerning hazardous wastes were put into effect, CSW System
disposal and remedial  costs could increase  materially.  The EPA is expected to
issue new regulations stating whether certain other materials will be classified
as hazardous.

      EPA Toxic Release Inventory Initiative
      Beginning July 1, 1999, the EPA is requiring  electric utilities to report
the amount of certain  chemicals  released by coal-fired  power plants under its
Toxic Release  Inventory  Initiative.  The regulations  currently require nearly
30,000  facilities  nationwide  to report  their  annual  emissions  of  certain
chemicals.  The Toxic Release  Inventory  Initiative allows the public to access
information on the types and  quantities of listed  chemicals that are released.
The Toxic  Release  Inventory  regulations  require  reports  on the  amounts of
materials disposed of, transferred offsite, recovered and recycled.

                                       18
<PAGE>

U.K. ELECTRIC ENVIRONMENTAL MATTERS

      SEEBOARD's  operations  are subject to  regulation  with  respect to water
quality standards and other environmental  matters by various authorities within
the United Kingdom. Under certain  circumstances,  these authorities may require
modifications to SEEBOARD's  facilities and operations or impose fines and other
costs for violations of applicable  statutes and regulations.  From time to time
SEEBOARD is made aware of various environmental issues or is named as a party to
various  legal  claims,  actions,  complaints  or other  proceedings  related to
environmental  matters.  Management  does  not  expect  disposition  of any such
pending  environmental  proceedings  to have a material  adverse effect on CSW's
consolidated results of operations or financial condition.


                                       19

<PAGE>

OPERATING INFORMATION - CSW SYSTEM


CSW
(excludes SEEBOARD)
                                                      1998    1997      1996
Kilowatt-hour sales (millions)                     --------------------------
Residential                                         19,757  17,995    17,883
Commercial                                          15,554  14,546    14,256
Industrial                                          21,481  21,087    20,266
Other retail                                         1,906   1,705     1,592
                                                   --------------------------
Sales to retail customers                           58,698  55,333    53,997
Sales for resale                                     8,296   7,824     8,428
                                                   --------------------------
Total                                               66,994  63,157    62,425
                                                   --------------------------

Average number of electric customers (thousands)
Residential                                          1,480   1,462     1,443
Commercial                                             218     214       210
Industrial                                              22      23        24
Other retail                                            15      13        13
                                                   --------------------------
Total                                                1,735   1,712     1,690
                                                   --------------------------

Revenue per KWH
Residential                                       6.60(cent)6.96(cent)6.95(cent)
Commercial                                            5.71    6.13     6.12
Industrial                                            3.62    3.85     3.85
Sales for Resale                                      3.16    3.11     3.03


Peak Load and Capability
   Net system capability (MW) (1)                   14,839  14,290    14,377
   Maximum coincident system demand (MW)            13,718  13,105    12,613
   Percentage increase in peak demand over prior      
      period                                          4.7%    3.9%      2.4%
   Generation at time of peak (MW)                  13,012  12,817    11,625
   Percent of peak demand generated                  94.9%   97.8%     92.2%
   Net purchases at time of peak (MW)                  706     288       988
   Percent of net purchases at time of peak           5.2%    2.2%      7.8%
   Date of maximum coincident system demand        July 27 July 28   July 22

The preceding table sets forth: (i) the net system capability, including the net
amounts  of  contracted  purchases  and  contracted  sales,  at the time of peak
demand;  (ii) the  maximum  coincident  system  demand on a one-hour  integrated
basis, exclusive of sales to other electric utilities;  and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.

(1)Excludes 85 MW of system  capability  in storage in 1998 as described in ITEM
   2.  PROPERTIES,  310 MW of system  capability in storage and 156 MW of system
   capability under repair in 1997 and 358 MW of system capability in storage in
   1996.


                                       20

<PAGE>


CPL

                                                      1998      1997      1996
                                                 -----------------------------
Kilowatt-hour sales (millions)
Residential                                          7,167      6,771      6,680
Commercial                                           5,122      4,846      4,773
Industrial                                           8,350      7,999      7,610
Other retail                                           553        486        499
                                                   -----------------------------
Sales to retail customers                           21,192     20,102     19,562
Sale for resale                                      1,867      1,737      2,029
                                                   -----------------------------
Total                                               23,059     21,839     21,591
                                                   -----------------------------


Average number of electric customers
Residential                                        550,000    538,700    529,100
Commercial                                          82,000     79,700     78,000
Industrial                                           5,500      5,600      5,700
Other                                                4,500      3,900      3,900
                                                   -----------------------------
Total                                              642,000    627,900    616,700
                                                   -----------------------------


Revenue per KWH
Residential                                       7.35(cent)7.99(cent)7.92(cent)
Commercial                                            7.37       8.26       8.13
Industrial                                            3.71       4.13       4.05
Sales for resale                                      3.57       4.06       3.56


Peak Load and Capability
   Net system capability (MW) (1)                    4,542      4,319      4,380
   Maximum coincident system demand (MW)             4,537      4,232      4,046
   Percentage increase in peak demand over prior        
      period                                          7.2%       4.6%       4.8%
   Generation at time of peak (MW)                   3,688      4,227      3,484
   Percent of peak demand generated                  81.3%      99.9%      86.1%
   Net purchases at time of peak (MW)                  849          5        562
   Percent of net purchases at time of peak          18.7%       0.1%      13.9%
   Date of maximum coincident system demand        August 13 August 20 August 13

The preceding table sets forth; (i) the net system capability, including the net
amounts  of  contracted  purchases  and  contracted  sales,  at the time of peak
demand;  (ii) the  maximum  coincident  system  demand on a one-hour  integrated
basis, exclusive of sales to other electric utilities;  and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.

(1)  Excludes 60 MW of system capability in storage in 1997 and 108 MW of
     system capability in storage in 1996.


                                       21

<PAGE>


PSO

                                                      1998       1997       1996
                                              ----------------------------------
Kilowatt-hour sales (millions)
   Residential                                       5,772      5,054      5,098
   Commercial                                        5,091      4,698      4,621
   Industrial                                        4,873      4,714      4,581
   Other retail                                        265        192         81
                                              ----------------------------------
   Sales to retail customers                        16,001     14,658     14,381
   Sales for resale                                    861        958      1,487
                                              ----------------------------------
   Total                                            16,862     15,616     15,868
                                              ----------------------------------


Average number of electric customers
   Residential                                     423,300    419,600    414,800
   Commercial                                       56,100     55,300     54,400
   Industrial                                        5,000      5,100      5,200
   Other                                             1,600      1,400      1,400
                                              ----------------------------------
   Total                                           486,000    481,400    475,800
                                              ----------------------------------


Revenue per KWH
   Residential                                   5.70(cent) 5.88(cent)5.89(cent)
   Commercial                                         4.64       4.82       4.80
   Industrial                                         3.34       3.44       3.45
   Sales for Resale                                   3.18       3.23       2.64


Peak Load and Capability
   Net system capability (MW) (1)                    4,042      3,882      3,848
   Maximum coincident system demand (MW)             3,683      3,474      3,360
   Percentage increase in peak demand over            
      prior period                                    6.0%       3.4%       2.1%
   Generation at time of peak (MW)                   3,048      3,376      3,009
   Percent of peak demand generated                  82.8%      97.2%      89.6%
   Net purchases at time of peak (MW)                  635         98        351
   Percent of net purchases at time of peak          17.2%       2.8%      10.4%
   Date of maximum coincident system demand    September 4    July 28   August 7

The preceding table sets forth: (i) the net system capability, including the net
amounts  of  contracted  purchases  and  contracted  sales,  at the time of peak
demand;  (ii) the  maximum  coincident  system  demand on a one-hour  integrated
basis, exclusive of sales to other electric utilities:  and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.

(1)  Excludes 85 MW of system capability in storage in 1998 as described in ITEM
     2. PROPERTIES, and 250 MW of system capability in storage in 1997 and 1996.


                                       22

<PAGE>


SWEPCO

                                                      1998       1997       1996
                                            ------------------------------------
Kilowatt-hour sales (millions)
   Residential                                       5,052      4,549      4,487
   Commercial                                        4,039      3,780      3,658
   Industrial                                        6,929      6,968      6,833
   Other retail                                        467        445        432
                                            ------------------------------------
   Sales to retail customers                        16,487     15,742     15,410
   Sales for resale                                  6,449      6,791      6,395
                                            ------------------------------------
   Total                                            22,936     22,533     21,805
                                            ------------------------------------


Average number of electric customers
   Residential                                     358,600    356,600    353,200
   Commercial                                       51,800     50,800     49,600
   Industrial                                        5,800      5,800      5,900
   Other                                             2,800      2,700      2,600
                                            ------------------------------------
   Total                                           419,000    415,900    411,300
                                            ------------------------------------


Revenue per KWH
   Residential                                  6.23(cent) 6.37(cent) 6.46(cent)
   Commercial                                         4.90       5.08       5.19
   Industrial                                         3.66       3.78       3.85
   Sales for Resale                                   2.17       2.16       2.11


Peak Load and Capability
   Net system capability (MW)                        4,559      4,636      4,554
   Maximum coincident system demand (MW)             4,372      4,157      4,018
   Percentage increase in peak demand over            
      prior period                                    5.2%       3.5%       2.2%
   Generation at time of peak (MW)                   4,414      3,839      3,608
   Percent of peak demand generated                 101.0%      92.4%      89.8%
   Net purchases (sales) at time of peak (MW)         (42)        318        410
   Percent of net purchases at time of peak         (1.0)%       7.6%      10.2%
   Date of maximum coincident system demand        July 29    July 28    July 22

The preceding table sets forth: (i) the net system capability, including the net
amounts  of  contracted  purchases  and  contracted  sales,  at the time of peak
demand;  (ii) the  maximum  coincident  system  demand on a one-hour  integrated
basis, exclusive of sales to other electric utilities;  and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.


                                       23

<PAGE>



WTU

                                                      1998       1997       1996
                                                 -------------------------------
Kilowatt-hour sales (millions)
   Residential                                       1,766      1,622      1,620
   Commercial                                        1,302      1,223      1,203
   Industrial                                        1,329      1,406      1,241
   Other retail                                        621        580        581
                                                 -------------------------------
   Sales to retail customers                         5,018      4,831      4,645
   Sales for resale                                  2,622      2,504      2,411
                                                 -------------------------------
   Total                                             7,640      7,335      7,056
                                                 -------------------------------


Average number of electric customers
   Residential                                     147,600    146,900    146,500
   Commercial                                       28,400     27,800     27,600
   Industrial                                        5,800      6,000      6,300
   Other                                             6,200      6,000      5,700
                                                 -------------------------------
   Total                                           188,000    186,700    186,100
                                                 -------------------------------


Revenue per KWH
   Residential                                   7.60(cent) 7.68(cent)7.67(cent)
   Commercial                                         5.85       5.99       6.02
   Industrial                                         3.89       4.05       4.22
   Sales for Resale                                   3.72       3.55       3.69


Peak Load and Capability
   Net system capability (MW) (1)                    1,696      1,453      1,595
   Maximum coincident system demand (MW)             1,591      1,481      1,433
   Percentage increase (decrease) in peak demand      
      over prior period                               7.4%       3.3%     (0.1)%
   Generation at time of peak (MW)                   1,357        865      1,048
   Percent of peak demand generated                  85.3%      58.4%      73.1%
   Net purchases at time of peak (MW)                  234        616        385
   Percent of net purchases at time of peak          14.7%      41.6%      26.9%
   Date of maximum coincident system demand      August 3 September 17    July 8
                                                                        

The preceding table sets forth: (i) the net system capability, including the net
amounts  of  contracted  purchases  and  contracted  sales,  at the time of peak
demand;  (ii) the  maximum  coincident  system  demand on a one-hour  integrated
basis, exclusive of sales to other electric utilities;  and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.

(1)  Excludes 156 MW of system capability for under repair 1997.


                                       24

<PAGE>


EMPLOYEES AND EXECUTIVE OFFICERS

      The  number  of  employees  in the CSW  System  at  December  31,  1998 is
presented  in  the  table  below.  Of the  employees  listed  below,  562 of the
positions at PSO and 788 of the positions at SWEPCO are covered under collective
bargaining  agreements  with the IBEW. In addition,  2,174 employees at SEEBOARD
are  covered  by  collective  agreements  with  several  different  unions.  For
information  related to ongoing union  negotiations at PSO, reference is made to
ITEM 7. MD&A.

                        CSW SYSTEM EMPLOYEES

               CPL                                 1,555
               PSO                                 1,227
               SWEPCO                              1,461
               WTU                                   913
                                              -----------
                    U.S. Electric                  5,156
               UK Electric                         3,985
               Diversified Electric                  137
               Other (including CSW Services)      1,678
                                              -----------
                                                  10,956


                             Age at
EXECUTIVE                    March 1,                
OFFICERS                       1999                  Present Position
--------------------------------------------------------------------------------
E. R. Brooks                    61    Chairman, CEO and Director
T. V. Shockley, III             53    President, Chief Operating Officer and
                                      Director
Glenn Files                     51    Senior Vice President, Electric Operations
Ferd. C. Meyer, Jr.             59    Executive Vice President and General
                                      Counsel
Glenn D. Rosilier               51    Executive Vice President and Chief
                                      Financial Officer
Thomas M. Hagan                 54    Senior Vice President, External Affairs
Venita McCellon-Allen           39    Senior Vice President, Customer Relations
                                      and Corporate Development and Assistant
                                      Corporate Secretary
Kenneth C. Raney                47    Vice President, Associate General Counsel
                                      and Corporate Secretary
Wendy G. Hargus                 41    Treasurer
Lawrence B. Connors             47    Controller

The  information  in the  foregoing  table is  included  in Part I  pursuant  to
Regulation S-K, Item 401 (b),  Instruction 3. Each of the executive  officers of
CSW is  elected  to hold  office  until  the  first  meeting  of CSW's  Board of
Directors  after the next  annual  meeting of  stockholders.  CSW's next  annual
meeting  of  stockholders  is  scheduled  to be held April 22,  1999.  CSW or an
affiliate of CSW has employed each of the executive officers listed in the table
above in an executive or managerial capacity for at least the last five years.


                                       25

<PAGE>


ITEM 2. PROPERTIES.

U.S. ELECTRIC

      The total  capabilities  (MW, net  dependable  summer  rating) of the U.S.
Electric  Operating  Companies,  which owned the following  electric  generating
units  or  portions  thereof  in the case of  jointly  owned  facilities,  as of
December 31, 1998 are shown in the following  table.  These  properties  are all
located in either Arkansas, Louisiana, Oklahoma or Texas.

                           Natural  Coal    Lignite  Nuclear   Other  Total MW
Company        Stations(a)  Gas MW   MW        MW       MW     MW(b)     (c)
--------------------------------------------------------------------------------
CPL                   12    3,142     686              630        6    4,464
PSO                    8    2,794   1,008                        25    3,827 (d)
SWEPCO                 9    1,784   1,848      842                     4,474
WTU                   11    1,018     377                        11    1,406
               -----------------------------------------------------------------
CSW                   40    8,738   3,919      842     630       42   14,171
               -----------------------------------------------------------------

(a)  CSW actually  owns 38  stations.  CPL, PSO and WTU each include the jointly
     owned Oklaunion power station in their respective ownership count.
(b) Some plants have the capability of burning oil in combination with gas.
     Use of oil  in  facilities  primarily  designed  to  burn  gas  results  in
     increased maintenance expense and a slight reduction in capability. PSO and
     WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to
     burn oil. CPL has 6 MW of hydroelectric generation.
(c)  Data reflects only the U.S. Electric Operating Companies' portion of
     plants which are jointly owned with non-affiliates.  For additional 
     information concerning jointly owned facilities see ITEM 8 - NOTE 6. 
     JOINTLY OWNED ELECTRIC UTILITY PLANT.
(d)  Excludes  85 MW from  units in storage  at Tulsa for PSO,  which  should be
     available in the summer of 1999.

All of the generating  facilities  described  above are located on land owned by
the  U.S.  Electric  Operating  Companies  or,  in the  case  of  jointly  owned
facilities,  jointly  with  other  participants.  The  U.S.  Electric  Operating
Companies' electric transmission and distribution  facilities are mostly located
over or under  highways,  streets and other public  places or property  owned by
others,  for which  permits,  grants,  easements or licenses  have been obtained
(which the U.S. Electric  Operating  Companies  believe to be satisfactory,  but
without  examination  of  underlying  land  titles).  The  principal  plants and
properties of the U.S. Electric Operating  Companies are subject to the liens of
the first mortgage indentures under which the U.S.
Electric Operating Companies' FMBs are issued.



                                       26

<PAGE>


DIVERSIFIED ELECTRIC

      In  addition  to  the  generating  facilities  described  above,  CSW  has
ownership interests in other electrical generating facilities,  both foreign and
domestic. Information concerning these facilities is listed below.

                                            Capacity  Capacity   Ownership
                      Company     Location   Total    Committed  Interest Status
                      ----------------------------------------------------------
Operating Facilities - United States

Brush II              CSW Energy  Colorado      68          68      47%       QF
Ft. Lupton            CSW Energy  Colorado     272         272      50%       QF
Mulberry              CSW Energy  Florida      120         110      50%       QF
Orange Cogen          CSW Energy  Florida      103          97      50%       QF
Newgulf (1)           CSW Energy   Texas        85          80     100%      EWG
Sweeny (2)            CSW Energy   Texas       330         292      50%       QF
                                           ---------------------
                                               978         919
                                           ---------------------
Operating Facilities - International



                     CSW           United
Medway               International Kingdom      675         675      37.5%  n/a
                     CSW
Altamira             International Mexico       109         109      50%    FUCO
                                             ---------------------
                                                784         784
                                             ---------------------

(1) The committed capacity at Newgulf is for the summer of 1999 only.
(2) 205 MW of the committed capacity is for the summer of 1999 only.


CAPITAL EXPENDITURES

      The CSW System, including the U.S. Electric Operating Companies, maintains
a continuing  construction program, the nature and extent of which is based upon
current and  estimated  demands  upon the system.  In  addition,  the CSW System
requires capital to invest in new enterprises, either through equity investments
or loans to  projects,  when deemed  appropriate.  See ITEM 7. MD&A for detailed
information related to historical and projected capital expenditures.


ITEM 3. LEGAL PROCEEDINGS.

      The  Registrants  are  parties  to  various  legal  claims,   actions  and
complaints  arising in the normal  course of  business  which are not  described
herein.  Management  does not  expect  disposition  of these  matters  to have a
material  adverse  effect on any of the  Registrants'  results of  operations or
financial  condition.  See ITEM 1.  BUSINESS,  ITEM 7.  MD&A and ITEM  8-NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal,
environmental and regulatory proceedings.

                                       27

<PAGE>


ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

CSW         None.
CPL         None.
PSO         None.
SWEPCO      None.
WTU         None.



                                       28
<PAGE>

                                            
PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

CSW COMMON STOCK INFORMATION

<TABLE>
<CAPTION>

                             1998                                1997
                    Market Price     Dividends         Market Price       Dividends
                   High       Low      Paid          High        Low        Paid
                 ------------------------------   -----------------------------------
<S>              <C>       <C>       <C>          <C>           <C>       <C>

First Quarter    $27 13/16 $26 1/4     43.5(cent) $25 3/4       $21 1/4    43.5(cent)
Second Quarter    27  5/8   25 5/8     43.5        22 1/8        18 1/4    43.5
Third Quarter     28 3/4    25 1/4     43.5        22 7/16       19 3/4    43.5
Fourth Quarter    30 1/16   27 3/8     43.5        27 5/16       20 5/8    43.5


</TABLE>

      CSW's common stock is traded under the ticker symbol CSR and listed on the
New York Stock  Exchange,  Inc. and Chicago Stock  Exchange,  Inc. Market prices
were  obtained from the  composite  listing of all closing  prices on CSW common
stock trades as reported on Bloomberg Financial Commodities News.

      In  January  1999,  CSW's  board of  directors  elected  to  maintain  the
quarterly  dividend,  payable on March 1,  1999,  to  stockholders  of record on
February 5, 1999,  unchanged at $0.435 per share,  or an indicated rate of $1.74
per year.

      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
was paid  during  1998,  subject to  continuing  evaluation  of CSW's  financial
condition  and earnings by the CSW board of  directors.  Traditionally,  the CSW
board of directors has declared dividends to be payable on the last business day
of February, May, August and November.

      There were approximately 60,000 record holders of CSW's common stock as of
February  22, 1999.  See NOTE 12.  COMMON  STOCK for  information  on CSW common
stock.


U.S. ELECTRIC COMMON STOCK INFORMATION


      All of the  outstanding  shares  of  common  stock  of the  U.S.  Electric
Operating Companies are owned by CSW. Consequently, there is no market for their
common stock. Cash dividends  declared and paid by the U.S.  Electric  Operating
Companies  to CSW on  their  respective  common  stock  for  1998  and  1997 are
presented in the following table.

                           CPL          PSO        SWEPCO         WTU
                      -----------------------------------------------------
                                   (thousands)

      1998              $249,000      $69,000    $120,000       $40,000
      1997              $157,000      $59,000     $90,000       $26,000


                                      2-1
<PAGE>


Reference is made to the page numbers noted in the table below for the locations
of the following items:


ITEM 6.     SELECTED FINANCIAL DATA.

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS.

ITEM 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
            See ITEM 7.  MD&A - RISK MANAGEMENT and ITEM 8. - NOTE 1.  SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES, NOTE 7.  FINANCIAL INSTRUMENTS
            and NOTE 20. SUBSEQUENT EVENT.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                                        Page Number
                                            CSW     CPL    PSO    SWEPCO    WTU
                                           -------------------------------------
Selected Financial Data                      2-4    2-98   2-112    2-126  2-139
MD&A (1)                                     2-5     2-5     2-5      2-5    2-5
    Results of Operations                   2-35    2-99   2-113    2-127  2-140
Quantitative and Qualitative Disclosures     
  About Market Risk                          2-2     2-2     2-2      2-2    2-2
Financial Statements and Supplementary Data 2-40   2-102   2-116    2-129  2-142
Report of Independent Public Accountants    2-93   2-109   2-123    2-136  2-149
Report of Management                        2-96   2-110   2-124    2-137  2-150

(1)   CSW combines the MD&A sections of the  Registrants  except for the Results
      of Operations which are located at the page numbers indicated in the table
      above.



                                      2-2

<PAGE>




                             CENTRAL AND SOUTH WEST
                                   CORPORATION




                                      2-3
<PAGE>

SELECTED FINANCIAL DATA

      The  following  selected  financial  data for each of the five years ended
December  31 is  provided  to  highlight  significant  trends  in the  financial
condition  and results of  operations  for CSW. CSW recorded the United  Kingdom
windfall profits tax in the third quarter of 1997 as an extraordinary  item. CSW
sold Transok in 1996.  Accounting rules require the  classification  of both the
sale  and the  actual  operating  results  prior  to such  sale as  discontinued
operations.  In addition to these  reclassifications,  certain  other  financial
statement  items for prior years have been  reclassified  to conform to the 1998
presentation.

                                1998 (1)  1997 (1)   1996 (1)      1995    1994
                              --------------------------------------------------
                                 (millions, except per share and ratio data)
INCOME STATEMENT DATA
Revenues                          $5,482    $5,268     $5,155    $3,143  $3,105
Income from continuing               
 operations                          440       329        297       377     369
Income before extraordinary item     440       329        429       402     394
Net income for common stock          440       153        429       402     394
Basic and diluted EPS of
 common stock from                  
 continuing operations             $2.07     $1.55      $1.43     $1.97   $1.95
Basic and diluted EPS of           
 common stock                      $2.07     $0.72      $2.07     $2.10   $2.08
Dividends paid per share of        
 common stock                      $1.74     $1.74      $1.74     $1.72   $1.70
Average common shares outstanding  212.4     212.1      207.5     191.7   189.3
 

BALANCE SHEET DATA
Assets                           $13,744   $13,451    $13,332   $13,869 $11,066
Long-term obligations (2)          4,120     4,259      4,057     3,948   2,975
Capitalization ratios
     Common stock equity            46%        45%       47%       43%      48%
     Preferred stock                 2          2         4         4        5
     Trust Preferred Securities      4          4        --        --       --
     Long-term debt                 48         49        49        53       47


(1)See CENTRAL AND SOUTH WEST  CORPORATION - RESULTS OF  OPERATIONS  for factors
   affecting earnings.
(2)Long-term  obligations  includes  long-term debt, Trust Preferred  Securities
   and preferred stock subject to mandatory redemption.

                                      2-4
<PAGE>


REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S 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 and the U.S.  Electric  Operating  Companies  precede their
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

                                      2-5
<PAGE>

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.  The amounts of internally  generated funds for the U.S.  Electric
Operating Companies are detailed in the following table.


                                      2-6
<PAGE>

                                                   1998        1997       1996
                                                --------------------------------
                                                          ($ millions)
CPL
Internally Generated Funds                         $183        $172       $268
Construction Expenditures Provided by                 
 Internally Generated Funds                         148%        136%       196%

PSO
Internally Generated Funds                         $124         $62       $107
Construction Expenditures Provided by                 
 Internally Generated Funds                         180%         78%       128%

SWEPCO
Internally Generated Funds                         $105        $108       $153
Construction Expenditures Provided by                 
 Internally Generated Funds                         127%        100%       165%

WTU
Internally Generated Funds                          $20        $69         $52
Construction Expenditures Provided by                 
 Internally Generated Funds                          53%       217%        121%

      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
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

                                      2-7
<PAGE>

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
CPL              139       130       127           224        167        152
PSO               85        82        71            91        174        117
SWEPCO            95       110        86           108        121        118
WTU               44        33        38            51         48         49

         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
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
and the U.S. Electric Operating Companies is shown below.

                    CSW                   7.3%
                    CPL                   6.7
                    PSO                   6.9
                    SWEPCO                6.8
                    WTU                   6.7

      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.

                                      2-8
<PAGE>

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.

      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.

                                                                  Standard &
                                        Moody's    Duff & 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.

                                      2-9
<PAGE>

      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.

      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.  Information  concerning short-term borrowings for each of the
U.S. Electric Operating Companies is presented in the following table.

                                
                   Borrowing      Borrowing
                    Limit at    Limit at date    Maximum 
                      Year       Of Maximum      Amount     Date of Maximum  
                      End        Borrowed        Borrowed       Borrowed
                  -----------------------------------------------------------
                                   (millions)

CPL                   $600          $300           $227      March 10, 1998
PSO                    300           125             58      January 30, 1998
SWEPCO                 250           250             70      June 2, 1998
WTU                    165           165             16      June 2, 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. The
average and year end amounts of accounts receivable sold during 1998 by the U.S.
Electric Operating Companies to CSW Credit are shown in the following table.

                                     1998       1998
                                   Average   End of Year
                                  -----------------------
                                        (millions)

              CPL                     $124       $145
              PSO                       80         77
              SWEPCO                    98         90
              WTU                       48         43


      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.

                                      2-10
<PAGE>

      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.

      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

                                      2-11
<PAGE>

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 and the U.S.
Electric Operating  Companies cannot predict when and if they 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
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

                                      2-12
<PAGE>

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
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

                                      2-13
<PAGE>

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 and PSO.

      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.

                                      2-14
<PAGE>

      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, CPL, SWEPCO and WTU.

      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
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 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

                                      2-15
<PAGE>

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, PSO cannot
predict the outcome of this matter. However, PSO 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 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 and the U.S. Electric Operating Companies
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
or any  of  the  U.S.  Electric  Operating  Companies'  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.

                                      2-16
<PAGE>

      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 and/or SEEBOARD.



                                      2-17
<PAGE>

RATES AND REGULATORY MATTERS

U.S. ELECTRIC

      CPL Rate Review - Docket No 14965
      In  November  1995,  CPL filed  with the  Texas  Commission  a request  to
increase  its retail  base rates by $71  million.  On October 16, 1997 the Texas
Commission issued the CPL 1997 Final Order. 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
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
and CPL'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,  CPL and 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

                                      2-18
<PAGE>

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.


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),  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.

                                      2-19
<PAGE>

      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
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

                                      2-20
<PAGE>

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.

      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.

                                      2-21
<PAGE>

      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.
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.

                                      2-22

<PAGE>

      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.

      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

                                      2-23
<PAGE>

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.

      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.

                                      2-24
<PAGE>

      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.


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

                                      2-25
<PAGE>

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
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

                                      2-26
<PAGE>

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.

      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.

                                      2-27
<PAGE>

      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.


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

                                      2-28
<PAGE>

within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.

      At the Kyoto  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 or the U.S.  Electric
Operating  Companies  cannot be determined  because most of the  greenhouse  gas
emission  reduction  would  come  from coal  generation  that  would  have to be
switched to natural  gas or  retired.  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
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.

                                      2-29
<PAGE>



      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
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

                                      2-30
<PAGE>

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 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.

                                      2-31
<PAGE>

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.

      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  micro-processor  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,

                                      2-32
<PAGE>

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.


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 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 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.

                                      2-33
<PAGE>

      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.

      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.



                                      2-34
<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

                                      2-35
<PAGE>

hotter than normal summer weather and increased  customer  usage and growth.  An
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

                                      2-36
<PAGE>

profits tax. The impact of CSW's final  settlement  of  litigation  with El Paso
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 Deferred 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.


                                      2-37

<PAGE>


      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
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

                                      2-38
<PAGE>

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
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.

                                      2-39

<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.

                                       2-40
<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.


                                       2-41
<PAGE>

CSW
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.

                                       2-42

<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.


                                       2-43

<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.

                                       2-44

<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
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.

                                      2-45
<PAGE>

      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
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.

                                      2-46
<PAGE>

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

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

      Accounts Receivable
      CSW Credit purchases,  without recourse,  the billed and unbilled accounts
receivable of the U.S.  Electric  Operating  Companies,  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.

<TABLE>
<CAPTION>

                               CSW       CPL         PSO       SWEPCO      WTU
                             --------  ----------------------------------------------
                             (millions)                (thousands)
<S>                          <C>       <C>         <C>       <C>          <C>    
As of December 31, 1998
   Regulatory Assets
     Deferred plant costs    $  497    $482,447        $--        $--     $14,910(3)
     Mirror CWIP asset          257     256,702         --         --        --
     Income tax related         
      regulatory assets, net    308     360,482         --         --        --
     Deferred restructuring      
      and rate case costs        26      16,236 (1)     --         --       9,765(3)
      OPEBs                       2          --      2,333         --        --
     Under-recovered fuel costs   4          --         --         --       3,980
     Loss on reacquired debt    153      78,944     15,943     36,803      21,307
     Fuel settlement             14          --         --     13,746 (4)    --
     Other                       10       9,159         --         --       1,196
                             ========  ==============================================
                             $1,271  $1,203,970    $18,276   $ 50,549     $51,158
                             ========  ==============================================

   Regulatory Liabilities
     Refunds due customers   $   21      $ (498)   $15,240   $  7,239     $  (329)
      Income tax related
       regulatory             
       liabilities,  net         --          --     35,818      4,931      12,088
                             ========  ==============================================
                             $   21      $ (498)   $51,058   $ 12,170     $11,759
                             ========  ==============================================

</TABLE>

                                      2-47

<PAGE>

<TABLE>
<CAPTION>


                               CSW       CPL          PSO       SWEPCO       WTU
                             --------  -----------------------------------------------
                             (millions)                 (thousands)
<S>                          <C>       <C>          <C>        <C>         <C>    <C>

As of December 31, 1997
   Regulatory Assets
     Deferred plant costs       $503   $484,277        $ --       $ --     $18,637 (3)
     Mirror CWIP asset           285    285,431          --         --          --
     Income tax related          
      regulatory assets, net     329    390,149          --         --          --
     Deferred restructuring       
      and rate case costs         36     24,049 (1)      --         --      12,369 (3)
     OPEBs                         3         --       2,829         --          --
     Under-recovered fuel costs   84     43,229      15,365 (2) 13,013      11,968
     Loss on reacquired debt     166     84,070      16,882     39,873      24,710
     Fuel settlement              16         --          --     15,710 (4)      --
     Other                        19     13,338         377      2,140       2,787
                             ========  ===============================================
                              $1,441   $1,324,543   $35,453    $70,736     $70,471
                             ========  ===============================================
   Regulatory Liabilities
     Refunds due customers      $ 64   $ 63,713        $ --       $ --        $366
     Income tax related
      regulatory                        
      liabilities, net            --         --      41,793     10,072       9,482
     Other                         1      1,205          --         --          --
                             ========  ===============================================
                                $ 65   $ 64,918     $41,793    $10,072      $9,848
                              ========  ===============================================
</TABLE>
   (1)Earning no return, amortized by the end of 2000.
   (2)Earning no return, amortized over twelve month period,  recalculated twice
      each year.
   (3)Earning no return, amortized through 2002.
   (4)Earning no return, amortized by the end of 2006.

      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

                                      2-48
<PAGE>

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.

      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
                                   Cost     Gains / (Losses)    Fair 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

                                      2-49
<PAGE>

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.

      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

                                      2-50
<PAGE>

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
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
and CPL'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,  CPL and 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.

                                      2-51
<PAGE>

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

                                      2-52
<PAGE>

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
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,  CPL 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 or CPL'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,

                                      2-53
<PAGE>

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 or CPL'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
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,

                                      2-54
<PAGE>

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
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 or PSO'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 or PSO'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

                                      2-55
<PAGE>

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.

      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

                                      2-56
<PAGE>

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  SWEPCO  cannot
predict  the  ultimate  outcome of this  matter,  management  believes  that the
resolution  of this matter will not have a material  adverse  effect on SWEPCO'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.

      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.


                                      2-57
<PAGE>

3.    COMMITMENTS AND CONTINGENT LIABILITIES

      Construction and Capital Expenditures

      It is estimated that CSW, including the U.S. Electric Operating Companies,
SEEBOARD and other operations,  will spend approximately $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.

      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

                                      2-58
<PAGE>

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.

      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.

                                      2-59
<PAGE>

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
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  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
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

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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.

      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

                                      2-61
<PAGE>

$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 and/or SEEBOARD.

      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.
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.

                                      2-62
<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.
<TABLE>
<CAPTION>


                                                 -------------------------------------------------------
INCOME TAX EXPENSE                                 CSW        CPL        PSO        SWEPCO       WTU
                                                         -----------------------------------------------
1998                                             (millions)                (thousands)
<S>                                              <C>       <C>         <C>          <C>         <C>    

Included in Operating Expenses and Taxes
   Current (1)                                    $253     $128,942    $52,587      $64,463     $28,542
   Deferred (1)                                    (38)      (8,253)    (1,693)     (11,850)     (6,578)
   Deferred ITC (2)                                (12)      (3,858)    (1,795)      (4,631)     (1,321)
                                                 -------------------------------------------------------
                                                   203      116,831     49,099       47,982      20,643
Included in Other Income and Deductions
   Current                                          18       (2,204)       (93)      (1,868)       (454)
                                                 -------------------------------------------------------
                                                    18       (2,204)       (93)      (1,868)       (454)
                                                 -------------------------------------------------------
                                                  $221     $114,627    $49,006      $46,114     $20,189
                                                 -------------------------------------------------------
1997
Included in Operating Expenses and Taxes
Current (1)                                        $47      $43,600    $14,543      $46,358     $11,765
Deferred (1)                                       117       35,263      8,498       (1,984)       (954)
Deferred ITC (2)                                   (13)      (4,819)    (2,278)      (4,662)     (1,321)
                                                 --------------------------------------------------------
                                                   151       74,044     20,763       39,712       9,490
Included in Other Income and Deductions
   Current                                          --       (4,271)    (2,230)      (1,962)       (471)
   Deferred                                         (6)        (779)       (50)        (260)         --
                                                 --------------------------------------------------------
                                                    (6)      (5,050)    (2,280)      (2,222)       (471)
                                                 --------------------------------------------------------
                                                  $145      $68,994    $18,483      $37,490      $9,019
                                                 --------------------------------------------------------
1996
Included in Operating Expenses and Taxes
   Current (1)                                    $118      $46,588    $26,152      $33,904      $6,953
   Deferred (1)                                    120       57,416     14,190       10,696       9,706
   Deferred ITC (2)                                (14)      (5,553)    (2,784)      (4,730)     (1,321)
                                                 --------------------------------------------------------
                                                   224       98,451     37,558       39,870      15,338
Included in Other Income and Deductions
   Current                                          (1)         639       (895)        (973)       (406)
   Deferred                                        (39)      (5,940)   (15,518)      (7,847)     (3,988)
                                                 --------------------------------------------------------
                                                   (40)      (5,301)   (16,413)      (8,820)     (4,394)
Income Taxes for Discountinued Operations
(includes $72 resulting from the          
 gain on the sale)                                  78           --         --           --          --
                                                 --------------------------------------------------------
                                                  $262      $93,150    $21,145      $31,050     $10,944
                                                 --------------------------------------------------------

</TABLE>

(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.

                                      2-63
<PAGE>

<TABLE>
<CAPTION>
                                                 --------------------------------------------------------
INCOME TAX RATE RECONCILIATION                     CSW         CPL       PSO        SWEPCO        WTU
                                                         ------------------------------------------------
1998                                             (millions)          (thousands)
<S>                                              <C>     <C>           <C>         <C>          <C>    

Income before taxes attributable to:
   Domestic operations                            $558
   Foreign operations                              112
                                                 --------
Income before taxes                               $670      $276,277   $125,849    $144,217     $58,004

Tax at U.S. statutory rate                        $235       $96,697    $44,047     $50,476     $20,301
Differences
   Amortization of ITC                             (13)       (3,858)    (1,795)     (4,631)     (1,321)
   Mirror CWIP                                      10        10,055         --          --          --
   Non-deductible goodwill amortization             12            --         --          --          --
   Foreign tax benefits                            (41)           --         --          --          --
   Adjustments                                      15         5,493      3,977      (2,526)       (779)
   Other                                             3         6,240      2,777       2,795       1,988
                                                 ---------------------------------------------------------
                                                  $221      $114,627    $49,006     $46,114     $20,189
                                                 ---------------------------------------------------------
Effective rate                                      33%           41%        39%         32%         35%
1997
Income before taxes attributable to:
   Domestic operations                            $327
   Foreign operations                              147
                                                 --------
Income before taxes                               $474      $197,465    $64,689     $130,392    $30,480

Tax at U.S. statutory rate                        $166       $69,113    $22,641      $45,637    $10,668
Differences
   Amortization of ITC                             (13)       (4,819)    (2,278)      (4,662)    (1,321)
   Mirror CWIP                                       5         4,647         --           --         --
   Non-deductible goodwill amortization             12            --         --           --         --
   Foreign tax benefits                            (19)           --         --           --         --
   Adjustments                                      (4)       (1,361)    (1,324)        (633)      (177)
   Other                                            (2)        1,414       (556)      (2,852)      (151)
                                                ----------------------------------------------------------
                                                  $145       $68,994    $18,483      $37,490     $9,019
                                                ----------------------------------------------------------
Effective rate                                      31%           35%        29%          29%        30%
1996
Income before taxes attributable to:
   Domestic operations                            $562
   Foreign operations                              146
                                                --------
Income before taxes                               $708      $240,201    $52,622      $97,605    $27,515

Tax at U.S. statutory rate                        $248       $84,070    $18,418      $34,162     $9,630
Differences
   Amortization of ITC                             (14)       (5,553)    (2,784)      (4,730)    (1,321)
   Mirror CWIP                                       5         4,584         --           --         --
   Non-deductible goodwill amortization             13            --         --           --         --
   Foreign tax benefits                            (18)           --         --           --         --
   Adjustments                                      10         5,127        201        1,544      1,467
   Other                                            18         4,922      5,310           74      1,168
                                               -----------------------------------------------------------
                                                  $262       $93,150    $21,145      $31,050    $10,944
                                               -----------------------------------------------------------
Effective tax rate                                  37%           39%        40%          32%        40%
</TABLE>

                                      2-64
<PAGE>


<TABLE>
<CAPTION>

                                               -----------------------------------------------------------
                                               CSW            CPL         PSO       SWEPCO       WTU

                                                         -------------------------------------------------
DEFERRED INCOME TAXES (1)                      (millions)               (thousands)
<S>                                            <C>          <C>        <C>          <C>        <C>   

1998
Deferred Income Tax Liabilities
   Depreciable utility plant                    $1,936      $812,335   $299,659     $409,779   $141,627
   Deferred plant costs                            174       168,856         --           --      5,219
   Mirror CWIP asset                                90        89,846         --           --         --
   Income tax related regulatory assets            224       165,263     10,086       37,738     11,072
   Other                                           257        72,123     21,881       35,851     18,076
                                               -----------------------------------------------------------
                                                 2,681     1,308,423    331,626      483,368    175,994

Deferred Income Tax Assets
   Income tax related regulatory liability        (117)      (39,095)   (23,940)     (38,251)   (15,303)
   Unamortized ITC                                 (96)      (48,480)   (15,226)     (22,964)    (9,309)
   Alternative minimum tax carryforward            (11)           --         --           --         --
   Other                                           (75)           --    (27,068)     (28,357)   (11,017)
                                               -----------------------------------------------------------
                                                  (299)      (87,575)   (66,234)     (89,572)   (35,629)
                                               -----------------------------------------------------------
Net Accumulated Deferred Income Taxes           $2,382    $1,220,848   $265,392     $393,796   $140,365
                                               -----------------------------------------------------------

Net Accumulated Deferred Income Taxes
   Noncurrent                                   $2,410    $1,221,561   $277,181     $398,664   $140,731
   Current                                         (28)         (713)   (11,789)      (4,868)      (366)
                                               -----------------------------------------------------------
                                                $2,382    $1,220,848   $265,392     $393,796   $140,365
                                               -----------------------------------------------------------

DEFERRED INCOME TAXES (1)
1997
Deferred Income Tax Liabilities
   Depreciable utility plant                    $1,912      $802,279   $291,547     $410,313   $144,690
   Deferred plant costs                            176       169,497         --           --      6,523
   Mirror CWIP asset                               100        99,901         --           --         --
   Income tax related regulatory assets            211       149,834     10,539       38,603     12,284
   Other                                           375       147,513     36,836       36,237     20,651
                                               -----------------------------------------------------------
                                                 2,774     1,369,024    338,922      485,153    184,148
Deferred Income Tax Assets
   Income tax related regulatory liability        (123)      (40,552)   (26,704)     (40,916)   (14,969)
   Unamortized ITC                                (100)      (49,830)   (15,920)     (24,673)    (9,771)
   Alternative minimum tax carryforward            (27)      (16,129)        --           --         --
   Other                                           (72)       (3,744)   (35,188)     (19,061)    (9,859)
                                               -----------------------------------------------------------
                                                  (322)     (110,255)   (77,812)     (84,650)   (34,599)
                                               -----------------------------------------------------------
Net Accumulated Deferred Income Taxes           $2,452    $1,258,769   $261,110     $400,503   $149,549
                                               -----------------------------------------------------------

Net Accumulated Deferred Income Taxes
   Noncurrent                                   $2,432    $1,237,387   $258,848     $395,909   $149,346
   Current                                          20        21,382      2,262        4,594        203
                                               -----------------------------------------------------------
                                                $2,452    $1,258,769   $261,110     $400,503   $149,549
                                               -----------------------------------------------------------
</TABLE>

(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,  foreign  tax credits  should  become
   available  under current law to reduce or eliminate the resulting U.S. income
   tax liability.

                                      2-65
<PAGE>

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 the 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.

      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 SFAS No. 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.

                                      2-66

<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%


                                      2-67

<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%


                                      2-68
<PAGE>



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

                                    CPL       PSO       SWEPCO             WTU
                                    ---       ---       ------             ---
                                               (thousands)

Service cost                      $4,537    $3,485      $4,109           $2,352
Interest cost                     14,693    11,283      13,302            7,614
Expected return on plan assets   (21,107)  (16,211)    (19,111)         (10,940)
Amortizations of prior service    
 costs                            (1,301)     (999)     (1,178)            (674)
Amortization of unrecognized
 transition  obligation              328       252         297              170
Recognized net actuarial loss         --        --          --               --
                                 -----------------------------------------------
Net periodic benefit cost        $(2,850)  $(2,190)    $(2,581)         $(1,478)


                                                 U.S. Plan
                                            ---------------------
                                              
                                                          Non-            Non-
1997                              CSW     Qualified    Qualified       U.S. 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

                                   CPL        PSO       SWEPCO            WTU
                                   ---        ---       ------            ---
                                                  (thousands)

Service cost                      $4,602    $3,421      $4,260           $2,488
Interest cost                     15,085    11,214      13,965            8,156
Expected return on plan assets   (21,410)  (15,892)    (19,839)         (11,597)
Amortizations of prior service   
 costs                            (1,301)     (999)     (1,178)            (674)
Amortization of unrecognized
 transition obligation               328       252         297              170
Recognized net actuarial loss         --        --          --               --
                                ------------------------------------------------
Net periodic benefit cost        $(2,696)  $(2,004)    $(2,495)         $(1,457)

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.

                                      2-69
<PAGE>



Pension/Cash Balance Retirement Plan
Components of net periodic benefit costs

                                                 U.S. Plan
                                            ---------------------
                                              
                                                          Non-            Non-
1996                              CSW     Qualified    Qualified       U.S. 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


                                   CPL        PSO       SWEPCO            WTU
                                   ---        ---       ------            ---
                                                  (thousands)

Service cost                      $5,367    $4,238      $4,891           $3,005
Interest cost                     16,233    12,817      14,793            9,089
Expected return on plan assets   (19,747)  (15,590)    (17,995)         (11,056)
Amortizations of prior service      
 costs                              (135)     (108)       (123)             (76)
Amortization of unrecognized
 transition  obligation              358       283         327              201
       
Recognized net actuarial loss         --        --          --               --
                                 -----------------------------------------------
Net periodic benefit cost         $2,076    $1,640      $1,893           $1,163

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.



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.

                                      2-70
<PAGE>

      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.

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

1998                             CSW         CPL      PSO     SWEPCO    WTU
                               ---------  ------------------------------------
                               (millions)             (thousands)
Benefit Obligations and Plan
  Assets
Benefit obligation:
  Retirees                        $170    $54,805   $46,700  $38,795  $22,958
Other fully eligible                
  participants                      30      6,514     6,799    7,973    4,214
Other active participants           75     20,020    14,189   15,579    8,985
                               ---------  ------------------------------------
                                  $275    $81,339   $67,688  $62,347  $36,157

Plan Assets at Fair Value         $164    $46,538   $42,728  $39,876  $21,475

Change in Accumulated Post-
  Retirement Benefit Obligation

Benefit obligation at           
 beginning of year                $241    $72,991   $61,434  $54,214  $32,516
Service Cost                         8      2,201     1,616    1,781    1,132
Interest Cost                       17      5,290     4,450    3,941    2,358
Amendments                          (5)    (1,569)   (1,322)  (1,204)    (717)
Benefit payments                   (15)    (4,730)   (3,984)  (3,272)  (2,134)
Plan participants' contributions     1        228       195      186      119
Actuarial gain                      28      6,928     5,299    6,701    2,883
                               ---------  ------------------------------------
Benefit Obligation at end of     
 year                             $275    $81,339   $67,688  $62,347  $36,157

Change in fair value of plan assets
Fair value of plan assets at    
 beginning of year                $158    $44,168   $43,366  $39,630  $20,411
Actual return of plan assets         3        201     2,190      487      202
Employer contributions              17      6,671       961    2,845    2,877
Plan participants' contributions     1        228       195      186      119
Benefits Paid                      (15)    (4,730)   (3,984)  (3,272)  (2,134)
                               ---------  ------------------------------------
Fair value of plan assets at      
 end of year                      $164    $46,538   $42,728  $39,876  $21,475

Reconciliation of Funded Status
Funded status end of year        $(111)  $(34,801) $(24,960)$(22,471)$(14,682)
Unrecognized:
   Transition Obligation           126     40,608    35,400   27,535   17,147
   Prior Service Cost               --         --        --       --       --
   (Gain)                          (15)    (5,807)  (10,440)  (5,064)  (2,465)
                               ---------  ------------------------------------
Prepaid (accrued) benefit cost
   before balance sheet          
   adjustments                    $ --       $ --      $ --     $ --     $ --

Amounts Recognized in Balance Sheet
Prepaid Benefit Cost                $2        $19       $83     $121      $74
Accrued Benefit cost                (2)       (19)      (83)    (121)     (74)
                               ---------  ------------------------------------
Prepaid (accrued) benefit cost     $ --      $ --      $ --     $ --     $ --


                                      2-71
<PAGE>

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



1997                             CSW         CPL      PSO     SWEPCO    WTU
                               ---------  ------------------------------------
                               (millions)             (thousands)
Benefit Obligations and Plan Assets
Benefit obligation:
Retirees                          $158    $51,426   $43,732  $34,906  $21,607
Other fully eligible participants   24      5,449     5,707    6,559    3,184
Other active participants           59     16,116    11,995   12,749    7,725
                               ---------  ------------------------------------
                                  $241    $72,991   $61,434  $54,214  $32,516

Plan Assets at Fair Value         $159    $44,168   $43,366  $39,630  $20,411

Change in Accumulated Post-
  Retirement Benefit Obligation
Benefit obligation at            
 beginning of year                $236    $73,310   $62,059  $54,009  $33,135
Service Cost                         8      2,076     1,694    1,771    1,120
Interest Cost                       18      5,663     4,794    4,190    2,564
Amendments                          --         --        --       --       --
Benefit payments                   (10)    (3,148)   (2,836)  (2,234)  (1,387)
Plan participants' contributions    --         55        41       37       29
Actuarial gain                     (11)    (4,965)   (4,318)  (3,559)  (2,945)
                               ---------  ------------------------------------
Benefit Obligation at end of     
 year                             $241    $72,991   $61,434   54,214  $32,516

Change in fair value of plan assets
Fair value of plan assets at      
 beginning of year                $151    $32,424   $32,067  $28,570  $14,828
Actual return of plan assets         3      4,866     7,292    6,814    2,217
Employer contributions              18      9,972     6,803    6,442    4,723
Plan participants' contributions     1         55        41       37       29
Benefits Paid                      (15)    (3,149)   (2,837)  (2,233)  (1,386)
                               ---------  ------------------------------------
Fair value of plan assets at      
  end of year                     $158    $44,168   $43,366  $39,630  $20,411

Reconciliation of Funded Status
Funded status end of year         $(82)   $(28,823) $(18,068)$(14,584)$(12,105)
Unrecognized:
   Transition Obligation           135     43,508    37,928   29,502   18,372
   Prior Service Cost               --         --        --       --       --
   (Gain)                          (53)   (15,443)  (19,018) (14,715)  (6,503)
                               ---------  ------------------------------------
Prepaid (accrued) benefit cost
   before balance sheet         
   adjustments                    $ --      $(758)     $842     $203    $(236)

Amounts Recognized in Balance Sheet
Prepaid Benefit Cost                $1       $ --    $1,023     $330     $ --
Accrued Benefit cost                (1)      (758)     (181)    (127)    (236)
                               ---------  ------------------------------------
Prepaid (accrued) benefit cost     $--      $(758)     $842     $203    $(236)


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.

                                      2-72
<PAGE>

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

Components of Net Periodic Benefit Costs

1998                             CSW         CPL      PSO    SWEPCO    WTU
                               ---------  ------------------------------------
                               (millions)             (thousands)

Service Cost                        $8     $2,201    $1,616   $1,781   $1,132
Interest cost                       17      5,290     4,450    3,941    2,358
Expected Return on Plan            
  Assets                           (12)    (3,237)   (3,401)  (3,387)  (1,497)
Amortization of Unrecognized:
   Transition Obligation             9      2,900     2,528    1,967    1,225
   Prior Service Cost               --         --        --       --       --
   (Gain)                           (2)      (555)     (824)    (629)    (216)
                               ---------  ------------------------------------
Total Net Period Benefit cost      $20     $6,599    $4,369   $3,673   $3,002

1997

Service Cost                        $8     $2,076    $1,694   $1,771   $1,120
Interest cost                       18      5,663     4,794    4,190    2,564
Expected Return on Plan            
  Assets                           (10)    (2,739)   (2,998)  (2,787)  (1,257)
Amortization of Unrecognized:
   Transition Obligation             9      2,900     2,528    1,967    1,225
   Prior Service Cost               --         --        --       --       --
   (Gain)                           (1)      (162)     (365)    (181)      --
                               ---------  ------------------------------------
Total Net Period Benefit cost      $24     $7,738    $5,653   $4,960   $3,652

1996

Service Cost                        $8     $2,077    $1,705   $1,810   $1,111
Interest cost                       19      5,887     5,018    4,321    2,602
Expected Return on Plan             
  Assets                            (9)    (2,255)   (2,486)  (2,268)  (1,027)
Amortization of Unrecognized
   Transition Obligation             9       2,900    2,528   1,967    1,225
   Prior Service Cost               --          --       --      --       --
   Gain/(Loss)                      --          --       --      --       --
                               ---------   -----------------------------------
Total Net Period Benefit cost      $27     $8,609    $6,765   $5,830   $3,911


                                Total
                                 CSW         CPL      PSO    SWEPCO    WTU
                               ---------   -----------------------------------
1998                           (millions)             (thousands)
Effect of 1% Change in
 Assumed Health
 Care Cost Trend Rate
1% Increase
  Service Cost Plus
  Interest Cost                       $4     $1,093     $832    $889     $827
  APBO                                30      8,539    6,810   6,679    3,903

1% Decrease
  Service Cost Plus
  Interest Cost                     $(3)     $(914)   $(698)  $(740)   $(438)
  APBO                              (26)    (7,390)  (5,923) (5,675)  (3,370)



                                      2-73
<PAGE>


      ASSUMPTIONS USED IN THE                              Tax Rate
      ACCOUNTING FOR SFAS NO. 106                            for
                                   Discount    Return on    Taxable
                                     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     Post-retirement Benefits Other
    Plans with Unfunded Benefit            Than Pensions
    Obligations                              (millions)
                                      1998               1997
                                  --------------    ---------------
    Benefit obligation                $275               $241
    Plan assets at fair value          164                159


      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     CPL     PSO   SWEPCO    WTU
                                ----------------------------------------
                                              (millions)
     1998                        $35.6    $7.8   $6.2    $7.0     $4.1
     1997                         35.6     9.0    7.0     8.3      5.1
     1996                         28.4     7.0    5.5     6.5      4.0


      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    
                               CPL     Flint      SWEPCO     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

                                      2-74
<PAGE>

      (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.

      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.

                                      2-75
<PAGE>



CARRYING VALUE AND
ESTIMATED FAIR VALUE         CSW       CPL       PSO     SWEPCO     WTU
                          -------------------------------------------------
                          (millions)             (thousands)
Long-term debt
   1998 carrying amount      $3,785 $1,146,762  $368,121 $506,939  $282,211
        fair value            4,025  1,223,502   389,220  546,450   301,894
   1997 carrying amount       3,898  1,302,266   421,821  547,751   278,640
        fair value            4,052  1,361,539   435,908  576,387   290,489

Trust Preferred Securities
   1998 carrying amount         335    150,000    75,000  110,000        --
        fair value              345    154,875    77,640  112,772        --
   1997 carrying amount         335    150,000    75,000  110,000        --
        fair value              344    153,375    78,000  112,750        --

Preferred stock subject
to mandatory redemption
   1998 carrying amount           --        --        --       --        --
        fair value                --        --        --       --        --
   1997 carrying amount           26        --        --   25,930        --
        fair value                27        --        --   26,809        --

Long-term debt and preferred
stock due within 12 months
   1998 carrying amount          169   125,000        --   43,932        --
        fair value               169   125,000        --   43,932        --
   1997 carrying amount           32    28,000        --    3,555        --
        fair value                32    28,000        --    3,555        --

      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.

      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.

                                      2-76
<PAGE>

      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


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

                                      2-77
<PAGE>

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

      Annual Requirements
      Certain series of outstanding FMBs have annual sinking fund  requirements,
which  are  generally  1% of the  amount  of  each  such  series  issued.  These
requirements  may be, and generally have been,  satisfied by the  application of
net  expenditures  for  bondable  property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking  fund  requirements.  At December  31,  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.


                            CSW      CPL      PSO     SWEPCO    WTU
      -----------------------------------------------------------------
                          (millions)           (thousands)
                                   ------------------------------------
      Sinking fund
      Requirements

      1999                      $1      $--      $--     $595      $--
      2000                       1       --       --      595       --
      2001                       1       --       --      595       --
      2002                       1       --       --      595       --
      2003                       1       --       --      595       --

      Annual Maturities

      1999                    $169 $125,000      $--  $43,932      $--
      2000                     208  100,000   20,000   47,807   40,000
      2001                     421       --   20,000      595       --
      2002                     151  115,000       --      595   35,000
      2003                     206   50,000  100,000   55,595       --

      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.  The  amounts of  retained  earnings  available  for
dividends  attributable  to each of the U.S.  Electric  Operating  Companies  at
December 31, 1998.

CPL-$739 million    PSO-$145 million    SWEPCO-$301 million    WTU-$117 million
                                     
      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.

                                      2-78
<PAGE>

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 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.

      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.


                                      2-79
<PAGE>


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.


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

                                      2-80
<PAGE>

plans  through  open  market  purchases,  effective  April 1, 1997.  Information
concerning common stock activity issued through the LTIP, the stock option plan,
PowerShare and the Retirement Savings Plan is presented in the following table.
<TABLE>
<CAPTION>

                                       1998               1997                 1996
                                  ---------------------------------------------------------
<S>                               <C>                <C>                 <C>    

  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
</TABLE>

      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
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>

                                      2-81
<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.


                                      2-82
<PAGE>


Geographic Areas

                                                   Revenues
                               -------------------------------------------------
                                         
                                 United      United        Other        CSW    
                                 States      Kingdom      Foreign   Consolidated
                               -------------------------------------------------
                                                  (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   Consolidated
                               -------------------------------------------------
                                                  (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
                                              ---------





                                      2-83

<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
the  meaning of Section  21E of the  Exchange  Act.  Actual  results  may differ

                                      2-84
<PAGE>

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.

                                      2-85
<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.
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.

                                      2-86
<PAGE>

      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.

      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

                                      2-87
<PAGE>

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
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,

                                      2-88
<PAGE>

(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
Registrants' 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.

      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

                                      2-89
<PAGE>

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.


                                      2-90
<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         
        Operations                                   $0.28       $0.12
      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         
        Operations                                   $0.50       $0.39
      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          
        Operations                                   $1.10        $0.93
      Basic and Diluted EPS from                      
        Extraordinary Item                             $--       $(0.83)
      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          
        Operations                                   $0.19       $0.11
      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          
        Operations                                   $2.07        $1.55
      Basic and Diluted EPS from                       
        Extraordinary Item                             $--       $(0.83)
      Basic and Diluted EPS                          $2.07        $0.72



                                      2-91

<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.


                                      2-92
<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



                                      2-93
<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 Audit Plc
KPMG Audit Plc
Chartered Accountants                                       London, England
Registered Auditor                                          18 January 1999





                                      2-94
<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

                                      2-95
<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     Controller
Chief Executive Officer     and Chief Financial Officer

                                      2-96
<PAGE>
                                     









                             CENTRAL POWER AND LIGHT
                                     COMPANY






                                      2-97
<PAGE>


SELECTED FINANCIAL DATA

      The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CPL. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.

<TABLE>
<CAPTION>
                              ----------------------------------------------------
                                   1998 (1)    1997 (1)    1996 (1)    1995        1994
                                           (thousands except ratios)
<S>                           <C>         <C>         <C>         <C>         <C>
INCOME STATEMENT DATA
Revenues                      $1,406,117  $1,376,282  $1,300,688  $1,073,469  $1,217,979
Net Income                       161,650     128,471     147,051     206,447     205,439
Net Income for Common Stock      154,479     121,350     133,488     191,978     191,635

BALANCE SHEET DATA
Assets                         4,657,245   4,813,310   4,828,263   4,881,136   4,822,699
Long-term obligations (2)      1,296,762   1,452,266   1,323,054   1,517,347   1,466,393
Capitalization ratios
     Common stock equity              47%         47%         48%         45%         45%
     Preferred stock                   6           5           8           8           8
     Trust Preferred Securities        5           5          --          --          --
     Long-term debt                   42          43          44          47          47
Ratio of earnings to fixed
  charges                           3.21        2.48        2.86        2.63        3.24
(SEC Method)
</TABLE>

(1)  See CENTRAL POWER AND LIGHT - RESULTS OF OPERATIONS for major factors
     affecting earnings.
(2)  Long-term obligations include long-term debt and Trust Preferred
     Securities.



                                      2-98
<PAGE>


CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS

      Reference is made to CPL's Consolidated Financial Statements, related
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.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

      Net income for common stock increased $33.4 million to $154.7 million
during 1998 from $121.4 million in 1997. This increase was due primarily to
increased non-fuel revenues related to weather-related demand and the absence in
1998 of the provision for the CPL 1997 Final Order. The increase in net income
for common stock was partially offset by a reduction in base rates associated
with the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for more information related to the CPL 1997 Final Order.

      Total electric operating revenues increased $29.8 million, or 2%, in 1998
as compared to 1997. This increase was mainly attributed to increased non-fuel
revenue of $91.6 million, which was a result of a 3% increase in weather related
MWH sales and the absence in 1998 of the $76.4 million provision for rate refund
in 1997. In addition, electric operating revenues increased due in part to a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.17285).
The increase was partially offset by decreased fuel revenues of $30.8 million 
and by lower base rates resulting from the CPL 1997 Final Order.

      Fuel and purchased power expenses decreased approximately $27.1 million in
1998 as compared to 1997. Fuel expense decreased $10.7 million as a result of
lower average unit cost of fuel declining from $1.83 per MMbtu in 1997 to $1.59
per MMbtu in 1998 due to lower spot market natural gas prices. Purchased power
expenses decreased approximately 29% from $56.4 million in 1997 to $40.1 million
in 1998 due to decreases in economy energy purchases.

      Other operating expenses were $260.8 million during 1998, a decrease of
$22.8 million when compared to 1997. The decrease is primarily due to a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285). Also contributing to the decrease is the absence in 1998 of
approximately $15 million write-off of previously capitalized energy efficiency
incentives, and rate case related expenses. Maintenance expenses increased $4.0
million due primarily to flood damage, power plant repairs and storm related
tree maintenance. Depreciation and amortization expenses increased $13.5
million, or 8%, in 1998 as compared to last year due primarily to the
accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997
Final Order as well as increases in depreciable and amortizable plant. Partially
offsetting the increase in depreciation and amortization expenses was lower
depreciation rates on non-ECOM property related to the CPL 1997 Final Order.

      Taxes, other than income decreased $12.0 million for 1998 due to a
decrease in Texas ad valorem taxes. Operating income taxes increased $42.8
million for the year compared to 1997 as a result of higher pre-tax income.

      Other income and deductions decreased approximately $7.5 million due to
reduced interest income associated with lower levels of short-term investments
in 1998 as well as reduced non-operating taxes.

                                      2-99
<PAGE>

      Interest charges decreased $9.1 million during 1998 when compared to 1997
primarily as a result of the maturity of CPL's $200 million Series BB, 6% FMBs
in October 1997 and $28 million Series J, 6-5/8%, FMBs that matured January 1,
1998; and the reacquisition of $36 million Series L 7% FMBs in September 1998.
See NOTE 8. LONG-TERM DEBT for additional information on the reacquisition of
long-term debt. The decrease was offset in part by increased distributions on
Trust Preferred Securities, which were outstanding for a portion of 1997.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

      Net income for common stock decreased to $121.4 million, or 9%, compared
to $133.5 million in 1996. The major reason for the decrease was the impact of
the CPL 1997 Final Order. This decrease was partially offset by an increase in
other income and deductions of $19.4 million, due primarily to the absence in
1997 of a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $15.6 million, net of tax, recorded
in the second quarter of 1996. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for more information related to the CPL 1997 Final Order.

      Total electric operating revenues increased $75.6 million, or 5.8%, in
1997 compared to 1996 due primarily to a 3% increase in retail MWH sales
resulting from increased customers and demand as well as higher fuel related
revenue due to higher fuel costs, as discussed below. Another factor that
contributed to the increase was a $41.5 million increase in transmission
revenues as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing, offset by a decrease related to provisions for
refunds in 1997 and 1996 associated with the CPL rate case. The impact on net
income of the increase in transmission access revenues was offset by a
corresponding increase in transmission expense.

      Fuel expense increased $55.7 million, or 16%, during 1997 as compared to
1996. The increase in fuel expense was due primarily to a 13% increase in the
average unit cost of fuel from $1.62 per MMbtu in 1996 to $ 1.83 per MMbtu in
1997. The increase in fuel costs reflects an increase in the spot market price
of natural gas partially offset by a decrease in the delivery cost of coal. Also
contributing to this increase was the absence in 1997 of a one-time $8.8 million
reduction in fuel expense recorded in the first quarter of 1996 in accordance
with the CPL 1996 Fuel Agreement. Purchased power expense decreased 5% from
$59.9 million in 1996 to $56.4 million in 1997 due primarily to decreased
economy energy purchases.

      Other operating expense increased $52.1 million to $283.6 million in 1997
when compared to 1996. The increase is due primarily to an increase in
transmission operations expenses as a result of the January 1997 implementation
of open access tariffs in accordance with FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing, the write-off of
previously deferred rate case expenses in accordance with the settlement in
principle of the rate case expense phase of CPL's Rate Review - Docket No. 14965
and the write-off of obsolete inventory of $3.8 million. The increase in other
operating expense was offset in part by reductions in pension expense, other
employee related expenses and the absence in 1997 of the write-off of a canceled
transmission project of $9.5 million. See NOTE 5. BENEFIT PLANS for additional
information related to changes in the pension plan. Maintenance expense
increased $6.7 million, or 12%, in 1997 as compared to 1996 due primarily to
higher steam and nuclear production and distribution overhead line expenses in
1997.

      Depreciation and amortization expenses increased $18.5 million compared to
1996 due primarily to the impact of the CPL 1997 Final Order. Taxes, other than
income increased approximately $8.8 million during 1997 as compared to 1996 due
primarily to an increase in ad valorem and franchise taxes.

      Other income and deductions increased $19.4 million from a loss of $11.1
million in 1996 to $8.2 million in 1997 due primarily to the absence in 1997 of
the one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $15.6 million, net of tax, recorded
in 1996. Also contributing to this increase was additional interest income in
1997 due primarily to a higher level of short-term investments.  Interest and
other charges increased $3.7 million in 1997 due primarily to the new
distributions on Trust Preferred Securities of $7.7 million. For additional

                                     2-100
<PAGE>

information on these new securities see NOTE 10. TRUST PREFERRED SECURITIES.
Partially offsetting this increase was a decrease of $5.3 million in long-term
debt expense due primarily to the maturity of CPL's $200 million, Series BB, 6%
FMBs in October 1997 and refinancing activities in 1996.

                                     2-101
<PAGE>

CPL
Consolidated Statements of Income
Central Power and Light Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    For the Years Ended December 31,
                                                                        ---------------------------------------------------------
                                                                             1998                 1997                1996
                                                                        ----------------     ---------------     ----------------
                                                                                              (thousands)
<S>                                                                     <C>                  <C>                 <C>
Electric Operating Revenues
    Residential                                                               $ 527,081           $ 541,169            $ 528,916
    Commercial                                                                  377,492             400,412              388,008
    Industrial                                                                  309,543             330,481              308,186
    Sales for resale                                                             66,680              70,461               72,164
    Other                                                                       125,321              33,759                3,414
                                                                        ----------------     ---------------     ----------------
                                                                              1,406,117           1,376,282            1,300,688
                                                                        ----------------     ---------------     ----------------
Operating Expenses and Taxes
    Fuel                                                                        385,944             396,707              340,962
    Purchased power                                                              40,062              56,475               59,562
    Other operating                                                             260,843             283,640              236,129
    Maintenance                                                                  63,779              59,791               53,077
    Depreciation and amortization                                               184,805             171,349              152,831
    Taxes, other than income                                                     70,927              82,909               74,029
    Income taxes                                                                116,831              74,044               98,451
                                                                        ----------------     ---------------     ----------------
                                                                              1,123,191           1,124,915            1,015,041
                                                                        ----------------     ---------------     ----------------

Operating Income                                                                282,926             251,367              285,647
                                                                        ----------------     ---------------     ----------------

Other Income and Deductions
    Charges for investments and plant development costs                              --              (2,060)             (21,509)
    Allowance for equity funds used during construction                              51               1,724                  427
    Other                                                                        (1,495)              3,563                4,636
    Non-operating income taxes                                                    2,204               5,050                5,301
                                                                        ----------------     ---------------     ----------------
                                                                                    760               8,277              (11,145)
                                                                        ----------------     ---------------     ----------------

Income Before Interest Charges                                                  283,686             259,644              274,502
                                                                        ----------------     ---------------     ----------------

Interest Charges
    Interest on long-term debt                                                   93,301             105,081              110,375
    Distributions on Trust Preferred Securities                                  12,000               7,533                   --
    Interest on short-term debt and other                                        19,506              20,613               18,494
    Allowance for borrowed funds used during construction                        (2,771)             (2,054)              (1,418)
                                                                        ----------------     ---------------     ----------------
                                                                                122,036             131,173              127,451
                                                                        ----------------     ---------------     ----------------

Net Income                                                                      161,650             128,471              147,051
    Less:  Preferred stock dividends                                              6,901               9,523               13,563
    Gain on reacquired preferred stock                                               --               2,402                   --
                                                                        ----------------     ---------------     ----------------
Net Income for Common Stock                                                   $ 154,749           $ 121,350            $ 133,488
                                                                        ================     ===============     ================


</TABLE>

 The accompanying notes to consolidated financial statements as they relate to
                  CPL are an integral part of these statements.


                                     2-102
<PAGE>
CPL
Consolidated Statements of Retained Earnings
Central Power and Light Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    For the Years Ended December 31,
                                                                           ----------------------------------------------------
                                                                                1998              1997               1996
                                                                           ---------------    --------------    ---------------
                                                                                               (thousands)
<S>                                                                        <C>                <C>               <C>
Retained Earnings at Beginning of Year                                           $833,282          $868,932           $863,444
    Net income for common stock                                                   154,749           121,350            133,488
    Deduct:  Common stock dividends                                               249,000           157,000            128,000
                                                                           ---------------    --------------    ---------------
Retained Earnings at End of Year                                                 $739,031          $833,282           $868,932
                                                                           ===============    ==============    ===============

</TABLE>



  The accompanying notes to consolidated financial statements as they relate to
                  CPL are an integral part of these statements.

                                     2-103
<PAGE>
CPL
Consolidated Balance Sheets
Central Power and Light Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                         As of December 31,
                                                                                   ----------------------------------
                                                                                       1998                  1997
                                                                                   ------------          ------------
                                                                                              (thousands)
<S>                                                                                <C>                   <C>
ASSETS
Electric Utility Plant
    Production                                                                      $3,146,269            $3,106,576
    Transmission                                                                       527,146               517,903
    Distribution                                                                     1,090,175             1,021,759
    General                                                                            298,352               295,974
    Construction work in progress                                                       67,300                77,390
    Nuclear fuel                                                                       206,949               196,147
                                                                                   ------------          ------------
                                                                                     5,336,191             5,215,749
  Less - accumulated depreciation                                                    2,072,686             1,891,406
                                                                                   ------------          ------------
                                                                                     3,263,505             3,324,343
                                                                                   ------------          ------------
Current Assets
    Cash                                                                                 5,195                    --
    Accounts receivable                                                                 51,056                61,311
    Materials and supplies, at average cost                                             59,814                65,290
    Fuel inventory                                                                      20,340                14,816
    Under-recovered fuel costs                                                              --                43,229
    Accumulated deferred income taxes                                                      713                    --
    Prepayments                                                                          2,952                 2,595
                                                                                   ------------          ------------
                                                                                       140,070               187,241
                                                                                   ------------          ------------
Deferred Charges and Other Assets
    Deferred STP costs                                                                 482,447               484,277
    Mirror CWIP asset                                                                  256,702               285,431
    Income tax related regulatory assets, net                                          360,482               390,149
    Nuclear decommissioning trust                                                       65,972                45,676
    Other                                                                               88,067                96,193
                                                                                   ------------          ------------
                                                                                     1,253,670             1,301,726
                                                                                   ------------          ------------
                                                                                    $4,657,245            $4,813,310
                                                                                   ============          ============
</TABLE>

  The accompanying notes to consolidated financial statements as they relate to
                  CPL are an integral part of these statements.

                                     2-104
<PAGE>
CPL
Consolidated Balance Sheets
Central Power and Light Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                          As of December 31,
                                                                                   ----------------------------------
                                                                                      1998                   1997
                                                                                   ------------          ------------
                                                                                               (thousands)
<S>                                                                                <C>            <C>    <C>            <C>
CAPITALIZATION AND LIABILITIES
Capitalization
    Common stock:  $25 par value
        Authorized shares:  12,000,000
        Issued and outstanding shares:  6,755,535                                   $  168,888             $ 168,888
    Paid-in capital                                                                    405,000               405,000
    Retained earnings                                                                  739,031               833,282
                                                                                   ------------          -----------
       Total Common Stock Equity                                                     1,312,919    47%      1,407,170    47%
                                                                                   ------------          ------------

    Preferred stock                                                                    163,204     6%        163,204     5%
    CPL-obligated, mandatorily redeemable preferred securities of
        subsidiary trust holding solely Junior Subordinated
        Debentures of CPL                                                              150,000     5%        150,000     5%
    Long-term debt                                                                   1,146,762    42%      1,302,266    43%
                                                                                   ------------          ------------
       Total Capitalization                                                          2,772,885   100%      3,022,640   100%
                                                                                   ------------          ------------

Current Liabilities
    Long-term debt due within twelve months                                            125,000                28,000
    Advances from affiliates                                                           160,298               142,781
    Accounts payable                                                                    86,998                72,170
    Payable to Affiliates                                                               38,331                11,990
    Accrued taxes                                                                       46,855                13,558
    Accumulated deferred income taxes                                                       --                21,382
    Accrued interest                                                                    27,036                28,379
    Over-recovered fuel costs                                                            9,135                    --
    Refund due customers                                                                    --                63,713
    Other                                                                               18,819                14,551
                                                                                   ------------          ------------
                                                                                       512,472               396,524
                                                                                   ------------          ------------

Deferred Credits
    Accumulated deferred income taxes                                                1,221,561             1,237,386
    Investment tax credits                                                             138,513               142,371
    Other                                                                               11,814                14,389
                                                                                   ------------          ------------
                                                                                     1,371,888             1,394,146
                                                                                   ------------          ------------
                                                                                    $4,657,245            $4,813,310
                                                                                   ============          ============
</TABLE>

  The accompanying notes to consolidated financial statements as they relate to
                 CPL are an integral part of these statements.

                                     2-105
<PAGE>
CPL
Consolidated Statements of Cash Flows
Central Power and Light Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    For the Years Ended December 31,
                                                                           ----------------------------------------------------
                                                                                1998              1997               1996
                                                                           ---------------    --------------    ---------------
                                                                                               (thousands)
<S>                                                                        <C>                <C>               <C>
OPERATING ACTIVITIES
    Net Income                                                                   $161,650          $128,471           $147,051
    Non-cash Items Included in Net Income
        Depreciation and amortization                                             206,515           192,775            178,271
        Deferred income taxes and investment tax credits                          (12,111)           29,666             45,923
        Refund due customers                                                      (63,713)           20,447             43,266
        Charges for investments and assets                                         18,669             2,061             21,374
        Inventory reserve                                                              --             3,834                717
    Changes in Assets and Liabilities
        Accounts receivable                                                        10,255            (8,273)            (7,852)
        Fuel inventory                                                             (5,524)              645             11,011
        Material and supplies                                                       5,476            10,442             (4,620)
        Accrued interest                                                           (1,343)           (3,187)             1,176
        Accounts payable                                                           40,232            14,219             19,780
        Accrued taxes                                                              33,297           (50,649)             2,593
        Fuel recovery                                                              52,364           (16,931)           (38,884)
        Other deferred credits                                                     (2,575)            2,701             (2,856)
        Other                                                                      (4,311)           13,419             (6,672)
                                                                           ---------------    --------------    ---------------
                                                                                  438,881           339,640            410,278
                                                                           ---------------    --------------    ---------------
INVESTING ACTIVITIES
    Construction expenditures                                                    (123,803)         (126,693)          (136,901)
    Other                                                                          (7,181)            1,185             (3,257)
                                                                           ---------------    --------------    ---------------
                                                                                 (130,984)         (125,508)          (140,158)
                                                                           ---------------    --------------    ---------------
FINANCING ACTIVITIES
    Proceeds from issuance of long-term debt                                           --                --             63,930
    Retirement of long-term debt                                                  (28,000)               --               (231)
    Reacquisition of long-term debt                                               (36,000)         (200,000)           (67,720)
    Redemption of preferred stock                                                      --           (84,745)                --
    Proceeds from issuance of Trust Preferred Securities                               --           144,706                 --
    Change in advances from affiliates                                             17,517            90,256           (123,809)
    Payment of dividends                                                         (256,219)         (167,648)          (141,874)
                                                                           ---------------    --------------    ---------------
                                                                                 (302,702)         (217,431)          (269,704)
                                                                           ---------------    --------------    ---------------

Net Change in Cash and Cash Equivalents                                             5,195            (3,299)               416
Cash and Cash Equivalents at Beginning of Year                                         --             3,299              2,883
                                                                           ===============    ==============    ===============
Cash and Cash Equivalents at End of Year                                          $ 5,195              $ --            $ 3,299
                                                                           ===============    ==============    ===============

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized (includes
      distributions on Trust Preferred Securities)                               $ 99,239          $116,782           $117,974
                                                                           ===============    ==============    ===============
    Income taxes paid                                                            $ 94,245          $ 61,509           $ 44,082
                                                                           ===============    ==============    ===============

</TABLE>

  The accompanying notes to consolidated financial statements as they relate to
                  CPL are an integral part of these statements.

                                     2-106
<PAGE>
CPL
Consolidated Statements of Capitalization                                       
Central Power and Light Company
--------------------------------------------------------------------------------
                                                           As of December 31,
                                                --------------------------------
                                                     1998               1997
                                                -------------      -------------
                                                          (thousands)
COMMON STOCK EQUITY                              $ 1,312,919        $ 1,407,170
                                                -------------      -------------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 3,035,000 shares
               Number of Shares      Current
Series          Outstanding          Redemption Price
------------------------------------------------------
Not Subject to Mandatory Redemption
        4.00%         42,048         $105.75           4,205              4,205
        4.20%         17,476         $103.75           1,748              1,748
Auction Money Market 750,000         $100.00          75,000             75,000
Auction Series A     425,000         $100.00          42,500             42,500
Auction Series B     425,000         $100.00          42,500             42,500
Issuance Expense                                      (2,749)            (2,749)
                                                -------------      -------------
                                                     163,204            163,204
                                                -------------      -------------
TRUST PREFERRED  SECURITIES
    CPL-obligated, mandatorily redeemable
      preferred securities of subsidiary
      trust holding solely Junior 
      Subordinated Debentures of CPL, 8.00%,
      due April 30, 2037                             150,000            150,000
                                                -------------      -------------
LONG-TERM DEBT
First Mortgage Bonds
    Series J, 6 5/8%, due January 1, 1998                 --             28,000
    Series L, 7%, due February 1, 2001                    --             36,000
    Series T, 7 1/2%,
      due December 15, 2014 (Matagorda)  *           111,700            111,700
    Series AA, 7 1/2%,
      due March 1, 2020 (Matagorda)  *                50,000             50,000
    Series CC, 7 1/4%, due October 1, 2004           100,000            100,000
    Series DD, 7 1/8%, due December 1, 1999           25,000             25,000
    Series EE, 7 1/2%, due December 1, 2002          115,000            115,000
    Series FF, 6 7/8%, due February 1, 2003           50,000             50,000
    Series GG, 7 1/8%, due February 1, 2008           75,000             75,000
    Series HH, 6%, due April 1, 2000                 100,000            100,000
    Series II, 7 1/2%, due April 1, 2023             100,000            100,000
    Series JJ, 7 1/2%, due May 1, 1999               100,000            100,000
    Series KK, 6 5/8%, due July 1, 2005              200,000            200,000
Installment Sales Agreements - PCRBs  *
    Series 1993, 6%, due July 1, 2028 (Matagorda)    120,265            120,265
    Series 1995, 6.10%, 
      due July 1, 2028 (Matagorda)                   100,635            100,635
    Series 1995, variable rate, 
      due November 1, 2015 (Guadalupe)                40,890             40,890
    Series 1996, 6%, due June 1, 2020 (Red River)      6,330              6,330
    Series 1996, 6 1/8%, due May 1, 2030 (Matagorda)  60,000             60,000
Unamortized Discount                                  (4,114)            (4,484)
Unamortized Costs of Reacquired Debt                 (78,944)           (84,070)
Amount to be Redeemed Within One Year               (125,000)           (28,000)
                                                -------------      -------------
                                                   1,146,762          1,302,266
                                                -------------      -------------
TOTAL CAPITALIZATION                             $ 2,772,885        $ 3,022,640
                                                =============      =============

*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.

  The accompanying notes to consolidated financial statements as they relate to
                  CPL are an integral part of these statements.

                                     2-107
<PAGE>

CENTRAL POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      See CSW's NOTE 1.

2.    LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.

3.    COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.

4.    INCOME TAXES See CSW's NOTE 4.

5.    BENEFIT PLANS See CSW's NOTE 5.

6.    JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.

7.    FINANCIAL INSTRUMENTS See CSW's NOTE 7.

8.    LONG-TERM DEBT See CSW's NOTE 8.

9.    PREFERRED STOCK See CSW's NOTE 9.

10.   TRUST PREFERRED SECURITIES See CSW's NOTE 10.

11.   SHORT-TERM FINANCING See CSW's NOTE 11.

12.   STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.

13.   NEW ACCOUNTING STANDARDS See CSW's NOTE 18.


                                     2-108
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Central Power and Light Company:

      We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Central Power and Light Company (a
Texas corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1998 and 1997, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Central Power and Light Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

      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 provide 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 Central
Power and Light Company and subsidiary company as of December 31, 1998 and 1997,
and the results of their operations 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



                                     2-109
<PAGE>


REPORT OF MANAGEMENT

      Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Central Power and Light Company and
subsidiary company 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 CPL's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. CPL and its
subsidiary company believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.

      CPL, together with its subsidiary company, 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 the companies 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 CPL
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 CPL or its subsidiary
company, 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.

      CPL and its subsidiary believe that, in all material respects, their
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/ J. Gonzalo Sandoval                        /s/ R. Russell Davis          
    J. Gonzalo Sandoval                            R. Russell Davis
    General Manager/President - CPL                Controller - CPL

                                     2-110
<PAGE>













                             PUBLIC SERVICE COMPANY
                                   OF OKLAHOMA



                                     2-111
<PAGE>


SELECTED FINANCIAL DATA

      The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for PSO. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.

<TABLE>
<CAPTION>
                               ----------------------------------------------------------
                               1998 (1)     1997 (1)     1996 (1)     1995        1994
                                             (thousands, except ratios)
<S>                            <C>         <C>         <C>         <C>         <C>
INCOME STATEMENT DATA
Revenues                        $780,159    $712,690    $735,265    $690,823    $740,496
Net Income                        76,843      46,206      31,478      81,828      68,266
Net Income for Common Stock       76,630      50,053      30,662      81,012      67,450

BALANCE SHEET DATA
Assets                         1,466,785   1,447,681   1,431,597   1,480,816   1,465,114
Long-term obligations (2)        443,121     496,821     420,301     379,250     402,752
Capitalization ratios
     Common stock equity              52%         49%         52%         55%         52%
     Preferred stock                  --          --           2           2           2
     Trust Preferred Securities        8           8          --          --          --
     Long-term debt                   40          43          46          43          46
Ratio of earnings to fixed
  charges                           4.21        2.68        2.45        4.32        4.03
(SEC Method)
</TABLE>

(1) See PUBLIC SERVICE COMPANY OF OKLAHOMA - RESULTS OF OPERATIONS for major
    factors affecting earnings.
(2) Long-term obligations includes long-term debt and Trust Preferred
    Securities.


                                     2-112
<PAGE>


PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS

      Reference is made to PSO's Consolidated Financial Statements, related
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.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

      Net income for common stock increased 53% during 1998 to $76.6 million
from $50.1 million in 1997. The increase resulted primarily from higher
revenues, decreased transmission expenses and the absence in 1998 of the impact
of recording the effects associated with the outcome of the PSO 1997 Rate
Settlement Agreement. The increase was offset in part by the absence in 1998 of
the $4.2 million gain on the reacquisition of preferred stock recorded in 1997.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information
related to the PSO 1997 Rate Settlement Agreement.

      Electric operating revenues were $780.2 million during 1998, a 9% increase
from $712.7 million for the same period in 1997. This increase was due primarily
to higher non-fuel revenues of $39.2 million and fuel-related revenues of $28.3
million. The increase in non-fuel revenues was due primarily to a 9% increase in
retail MWH sales resulting from warmer weather as well as the absence in 1998 of
a $29.0 million provision for rate refund. The increase in revenues was offset
in part by lower base rates resulting from the PSO 1997 Rate Settlement
Agreement and a decrease in transmission related revenues resulting from changes
to a transmission coordination agreement pending before the FERC. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. The
increase in fuel revenues was due primarily to higher fuel expense, as discussed
below.

      Fuel expense increased $31.0 million, or 11%, during 1998 when compared to
1997 due primarily to a $43.3 million increase in the recovery of deferred fuel
costs and a 7% increase in generation due primarily to higher weather-related
demand. The increase in fuel expense was offset in part by lower average unit
fuel costs. The average unit cost of fuel declined from $1.98 per MMbtu in 1997
to $1.77 per MMbtu in 1998 due primarily to lower spot market natural gas and
coal prices. Purchased power expenses increased 11% to $57.2 million in 1998
from $51.6 million in 1997. This increase was due primarily to higher off-system
and emergency energy purchases associated with higher weather-related demand in
1998 and a plant outage in the first quarter of 1998, partially offset by lower
cogeneration purchases.

      Other operating expenses were $109.4 million in 1998, a decrease of $26.5
million from $135.9 million in 1997. The decrease was due primarily to the
absence in 1998 of a write-off of previously capitalized energy efficiency
incentives and the write-off of rate case related expenses, both associated with
the aforementioned rate settlement agreement. Also contributing to the decline
in other operating expenses were lower transmission expenses resulting from a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No.
17285). The decrease in other operating expenses was offset in part by
additional environmental expenses. Maintenance expenses increased 10% to $37.0
million in 1998 from $33.6 million in 1997. The increase was due primarily to
higher production and distribution maintenance activities.

      Depreciation and amortization expense decreased $8.6 million, or 11%,
during 1998 when compared to the prior year. This decrease was due primarily to
lower depreciation rates and the absence in 1998 of a write-off of regulatory
assets, both resulting from the PSO 1997 Rate Settlement Agreement. This
decrease was offset in part by higher depreciable plant. Taxes, other than
income were $29.8 million in 1998, a 4% increase from $28.8 million in 1997 as a
result of higher ad valorem tax expenses. Operating income taxes were $49.1
million in 1998 compared to $20.8 million in 1997 due primarily to higher
pre-tax income in 1998.

                                     2-113
<PAGE>

      Other income and deductions decreased $1.7 million in 1998 when compared
to 1997 primarily as a result of lower miscellaneous non-operating income.
Interest charges increased $0.9 million in 1998 when compared to the same period
in 1997 due primarily to a full year of distributions in 1998 on Trust Preferred
Securities offset in part by a decrease in long-term interest expenses in 1998
as a result of a reduction of long-term debt outstanding during 1998. See NOTE
8. LONG-TERM DEBT.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

      Net income for common stock increased to $50.1 million for the year ended
1997 from $30.7 million in 1996. The increase resulted primarily from the
absence in 1997 of a one-time charge for certain investments for plant sites,
engineering studies and lignite reserves of approximately $35.7 million, net of
tax, recorded in 1996 partially offset by the impact of recording the effects
associated with the outcome of the PSO 1997 Rate Settlement Agreement. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to
the PSO 1997 Rate Settlement Agreement.

      Electric operating revenues were $712.7 million during 1997, a 3% decrease
from $735.3 million for the same period in 1996. The decrease was due primarily
to a $29 million provision for rate refund established in September and paid in
December related to the PSO 1997 Rate Settlement Agreement. Partially offsetting
this decrease was an increase in transmission access and wheeling revenues.

      Fuel expense decreased $11.4 million during 1997 compared to 1996 due
primarily to a 4% reduction in generation. Also contributing to this decrease
was a decline in the average unit cost of fuel from $2.04 per MMbtu in 1996 to
$1.98 per MMbtu in 1997. The decline in the average unit cost of fuel was due
primarily to utilizing lower cost coal in place of higher cost spot market
natural gas. Partially offsetting the decrease in fuel expense was a decline in
the amount of under-recovered fuel costs in 1997 when compared to 1996.
Purchased power expenses increased 25% to $51.6 million in 1997 from $41.2
million in 1996 as a result of increased purchases of economy energy along with
increased cogeneration purchases in 1997.

      Other operating expenses increased $14.7 million, or 12%, to $135.9
million in 1997 when compared to 1996. The increase was due primarily to the
write-off of previously capitalized demand side management energy efficiency
incentives of $9.6 million, the write-off of $2.2 million of rate case related
expenses, both associated with the aforementioned rate settlement agreement, as
well as the write-off of $0.8 million of obsolete inventory. Operating expenses
were also affected by a decrease in pension related expenses. See NOTE 5.
BENEFIT PLANS for additional information related to changes in the pension plan.
Maintenance expenses decreased 13% to $33.6 million in 1997 from $38.5 million
in 1996. The decrease was due primarily to a $3.2 million write-down of
production inventory in 1996 and lower tree management expenses in 1997.

      Depreciation and amortization expense increased $3.8 million, or 5%,
during 1997 when compared to the prior year. This increase was due primarily to
the write-off of $5.8 million of regulatory assets resulting from the PSO 1997
Rate Settlement Agreement, as well as an increase in depreciable assets, offset
in part by a decrease in depreciation expense of $5.2 million also attributable
to the agreement. Taxes, other than income were $28.8 million in 1997, a 6%
increase from $27.2 million in 1996 as a result of higher ad valorem tax expense
in 1997. Operating income taxes were $20.8 million in 1997 compared to $37.6
million in 1996 due primarily to lower pre-tax income in 1997.

      Other income and deductions increased $37.2 million in 1997 when compared
to 1996 primarily as a result of the absence in 1997 of a one-time charge
associated with certain investments for plant sites, engineering studies and
lignite reserves of $35.7 million, net of tax, recorded in 1996.

      Interest and other charges increased $2.5 million, or 7%, in 1997 when
compared to the same period in 1996 due primarily to the new distributions on

                                     2-114
<PAGE>

Trust Preferred Securities, partially offset by a decrease in short-term
interest expense as a result of a reduction of short-term debt outstanding
during 1997. For information on the new securities see NOTE 10. TRUST PREFERRED
SECURITIES.

                                     2-115
<PAGE>
PSO
Consolidated Statements of Income
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      For the Years Ended December 31,
                                                                                 -------------------------------------------
                                                                                    1998           1997            1996
                                                                                 ------------   ------------    ------------
                                                                                                (thousands)
<S>                                                                              <C>            <C>             <C>
  Electric Operating Revenues
    Residential                                                                    $ 329,058      $ 297,265       $ 299,550
    Commercial                                                                       236,258        226,525         221,985
    Industrial                                                                       162,773        161,974         157,509
    Sales for resale                                                                  27,413         30,896          39,285
    Other                                                                             24,657         (3,970)         16,936
                                                                                 ------------   ------------    ------------
                                                                                     780,159        712,690         735,265
                                                                                 ------------   ------------    ------------
Operating Expenses and Taxes
    Fuel                                                                             309,969        278,976         290,408
    Purchased power                                                                   57,222         51,619          41,194
    Other operating                                                                  109,393        135,943         121,235
    Maintenance                                                                       36,981         33,608          38,469
    Depreciation and amortization                                                     72,671         81,227          77,470
    Taxes, other than income                                                          29,816         28,778          27,194
    Income taxes                                                                      49,099         20,763          37,558
                                                                                 ------------   ------------    ------------
                                                                                     665,151        630,914         633,528
                                                                                 ------------   ------------    ------------
Operating Income                                                                     115,008         81,776         101,737
                                                                                 ------------   ------------    ------------

Other Income and Deductions
    Allowance for equity funds used during construction                                  860            995             292
    Charges for investments and plant development costs                                   --           (123)        (51,109)
    Other                                                                             (1,044)        (1,503)         (1,107)
    Non-operating income taxes                                                            93          2,280          16,413
                                                                                 ------------   ------------    ------------
                                                                                         (91)         1,649         (35,511)
                                                                                 ------------   ------------    ------------
Income Before Interest Charges                                                       114,917         83,425          66,226
                                                                                 ------------   ------------    ------------

Interest Charges
    Interest on long-term debt                                                        29,136         30,474          30,555
    Distributions on Trust Preferred Securities                                        6,000          3,967              --
    Interest on short-term debt and other                                              4,107          4,100           5,623
    Allowance for borrowed funds used during construction                             (1,169)        (1,322)         (1,430)
                                                                                 ------------   ------------    ------------
                                                                                      38,074         37,219          34,748
                                                                                 ------------   ------------    ------------

Net Income                                                                            76,843         46,206          31,478
  Less:  Preferred stock dividends                                                       213            364             816
  Gain on reacquired preferred stock                                                      --          4,211              --
                                                                                 ------------   ------------    ------------

Net Income for Common Stock                                                         $ 76,630       $ 50,053        $ 30,662
                                                                                 ============   ============    ============

</TABLE>




  The accompanying notes to consolidated financial statements as they relate to
                  PSO are an integral part of these statements.

                                     2-116
<PAGE>
PSO
Consolidated Statements of Retained Earnings
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                For the Years Ended December 31,
                                                                           --------------------------------------------
                                                                               1998           1997            1996
                                                                           -------------   ------------    ------------
                                                                                           (thousands)

<S>                                                                        <C>             <C>             <C>     
Retained Earnings at Beginning of Year                                         $136,996       $145,943        $150,281
    Net income for common stock                                                  76,630         50,053          30,662
    Deduct:  Common stock dividends                                              69,000         59,000          35,000
                                                                           -------------   ------------    ------------
Retained Earnings at End of Year                                               $144,626       $136,996        $145,943
                                                                           =============   ============    ============
</TABLE>

  The accompanying notes to consolidated financial statements as they relate to
                 PSO are an integral part of these statements.

                                     2-117
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      As of December 31,
                                                                              ------------------------------------
                                                                                   1998                 1997
                                                                              ----------------     ---------------
                                                                                           (thousands)
ASSETS
<S>                                                                           <C>                  <C>
Electric Utility Plant
    Production                                                                      $ 913,083           $ 907,735
    Transmission                                                                      378,719             375,111
    Distribution                                                                      855,277             818,806
    General                                                                           211,124             197,264
    Construction work in progress                                                      33,519              40,992
                                                                              ----------------     ---------------
                                                                                    2,391,722           2,339,908
  Less - Accumulated depreciation                                                   1,082,081           1,031,322
                                                                              ----------------     ---------------
                                                                                    1,309,641           1,308,586
                                                                              ----------------     ---------------
Current Assets
    Cash                                                                                4,670               2,171
    Accounts receivable                                                                32,916              34,974
    Materials and supplies, at average cost                                            33,006              32,211
    Fuel inventory, at LIFO cost                                                       16,441              11,427
    Accumulated deferred income taxes                                                  11,789                  --
    Prepayments and other                                                               2,881               3,366
                                                                              ----------------     ---------------
                                                                                      101,703              84,149
                                                                              ----------------     ---------------

Deferred Charges and Other Assets                                                      55,441              54,946
                                                                              ----------------     ---------------
                                                                                  $ 1,466,785         $ 1,447,681
                                                                              ================     ===============
</TABLE>
  The accompanying notes to consolidated financial statements as they relate to
                  PSO are an integral part of these statements.

                                     2-118
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       As of December 31,
                                                                            -----------------------------------------
                                                                                 1998                     1997
                                                                            ---------------          ----------------
CAPITALIZATION AND LIABILITIES                                                             (thousands)
<S>                                                                         <C>              <C>     <C>              <C>
Capitalization
    Common stock:   $15 par value
        Authorized shares:   11,000,000 shares
        Issued 10,482,000 shares and outstanding 9,013,000 shares                 $157,230                  $157,230
    Paid-in capital                                                                180,000                   180,000
    Retained earnings                                                              144,626                   136,996
                                                                            ---------------          ----------------
       Total Common Stock Equity                                                   481,856      52%          474,226      49%
                                                                            ---------------  ------- ---------------- --------

    Preferred stock                                                                  5,287     -- %            5,287     -- %
    PSO-obligated, mandatorily redeemable preferred securities of
         subsidiary trust holding solely Junior Subordinated
         Debentures of PSO                                                          75,000       8%           75,000       8%
    Long-term debt                                                                 368,121      40%          421,821      43%
                                                                            ---------------  ------- ---------------- --------
       Total Capitalization                                                        930,264     100%          976,334     100%
                                                                            ---------------  ------- ---------------- --------

Current Liabilities
    Advances from affiliates                                                        15,892                     4,874
    Payables to affiliates                                                          33,489                    29,011
    Accounts payable                                                                52,888                    55,179
    Payables to customers                                                           32,608                    18,837
    Accrued taxes                                                                   23,095                        --
    Accumulated deferred income taxes                                                   --                     2,262
    Accrued interest                                                                 7,606                     9,090
    Other                                                                            6,599                     4,178
                                                                            ---------------          ----------------
                                                                                   172,177                   123,431
                                                                            ---------------          ----------------
Deferred Credits
    Accumulated deferred income taxes                                              277,181                   258,848
    Investment tax credits                                                          39,365                    41,160
    Income tax related regulatory liabilities, net                                  35,818                    41,793
    Other                                                                           11,980                     6,115
                                                                            ---------------          ----------------
                                                                                   364,344                   347,916
                                                                            ---------------          ----------------
                                                                               $ 1,466,785               $ 1,447,681
                                                                            ===============          ================
</TABLE>
  The accompanying notes to consolidated financial statements as they relate to
                  PSO are an integral part of these statements.

                                     2-119
<PAGE>
PSO
Consolidated Statements of Cash Flows
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                 For the Years Ended December 31,
                                                                           ---------------------------------------------
                                                                               1998            1997            1996
                                                                           -------------    ------------    ------------
                                                                                           (thousands)
<S>                                                                        <C>              <C>             <C>
OPERATING ACTIVITIES
    Net Income                                                                 $ 76,843        $ 46,206        $ 31,478
    Non-cash Items Included in Net Income
        Depreciation and amortization                                            75,693          85,459          83,424
        Deferred income taxes and investment tax credits                         (3,488)          6,169          (4,112)
        Charges for investments and assets                                        4,159          12,803          50,854
        Inventory reserve                                                            --             838           3,150
    Changes in Assets and Liabilities
        Accounts receivable                                                      17,297         (23,905)          6,888
        Other investments and property                                           (5,380)         (5,682)         (6,264)
        Accounts payable                                                          1,113          13,433          (5,878)
        Accrued taxes                                                            23,095         (12,306)        (14,708)
        Other deferred credits                                                    5,865            (585)          1,078
        Other                                                                    (2,104)           (776)         (3,292)
                                                                           -------------    ------------    ------------
                                                                                193,093         121,654         142,618
                                                                           -------------    ------------    ------------
INVESTING ACTIVITIES
    Construction expenditures                                                   (68,897)        (79,568)        (83,509)
    Other                                                                        (8,271)         (6,008)         (8,596)
                                                                           -------------    ------------    ------------
                                                                                (77,168)        (85,576)        (92,105)
                                                                           -------------    ------------    ------------
FINANCING ACTIVITIES
    Proceeds from issuance of long-term debt                                         --              --          51,744
    Retirement of long-term debt                                                     --              --         (25,000)
    Reacquisition of long-term debt                                             (55,231)             --         (13,040)
    Reacquisition of preferred stock                                                 --         (10,329)             --
    Proceeds from issuance of Trust Preferred Securities                             --          72,450              --
    Change in advances from affiliates                                           11,018         (37,993)        (27,643)
    Payment of dividends                                                        (69,213)        (59,514)        (35,839)
                                                                           -------------    ------------    ------------
                                                                               (113,426)        (35,386)        (49,778)
                                                                           -------------    ------------    ------------

Net Change in Cash and Cash Equivalents                                           2,499             692             735
Cash and Cash Equivalents at Beginning of Year                                    2,171           1,479             744
                                                                           -------------    ------------    ------------
Cash and Cash Equivalents at End of Year                                        $ 4,670         $ 2,171         $ 1,479
                                                                           =============    ============    ============

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized (includes
        distributions on Trust Preferred Securities)                           $ 37,772        $ 35,557        $ 32,488
                                                                           =============    ============    ============
    Income taxes paid                                                          $ 33,712        $ 34,244        $ 30,353
                                                                           =============    ============    ============
</TABLE>
  The accompanying notes to consolidated financial statements as they relate to
                 PSO are an integral part of these statements.

                                     2-120
<PAGE>
PSO
Consolidated Statements of Capitalization
Public Service Company of Oklahoma
--------------------------------------------------------------------------------
                                                          As of December 31,
                                                  ------------------------------
                                                      1998             1997
                                                  -------------    -------------
                                                           (thousands)
COMMON STOCK EQUITY                                   $481,856         $474,226
                                                  -------------    -------------

PREFERRED STOCK
(Cumulative $100 Par Value, Authorized 700,000
    shares, redeemable at the option of PSO
    upon 30 days notice)
                        Number      Current
                      of Shares    Redemption
Series               Outstanding    Price
---------------------------------------------

        4.00%         44,640        $105.75              4,464            4,464
        4.24%          8,069        $103.19                807              807
Premium                                                    16               16
                                                  ------------     -------------
                                                        5,287            5,287
                                                  ------------     -------------

TRUST PREFERRED SECURITIES
    PSO-obligated, mandatorily redeemable
      preferred securities of subsidiary
      trust holding solely Junior
      Subordinated Debentures of PSO, 8.00%,
      due April 30, 2037                                75,000           75,000
                                                  -------------    -------------

LONG-TERM DEBT
First Mortgage Bonds
    Series K, 7 1/4%, due January 1, 1999                   --           25,000
    Series L, 7 3/8%, due March 1, 2002                     --           30,000
    Series S, 7 1/4%, due July 1, 2003                  65,000           65,000
    Series T, 7 3/8%, due December 1, 2004              50,000           50,000
    Series U, 6 1/4%, due April 1, 2003                 35,000           35,000
    Series V, 7 3/8%, due April 1, 2023                100,000          100,000
    Series W, 6 1/2%, due June 1, 2005                  50,000           50,000
Medium-term Notes, 5.89%-6.43%, 
    due December 15, 2000-March 1, 2001                 40,000           40,000
Installment sales agreement - PCRBs  *
    Series A, 5.9%, due December 1, 2007 (OEFA)         34,700           34,700
    Series 1996, 6.0%, 
      due June 1, 2020 (Red River)                      12,660           12,660
Unamortized discount                                    (3,296)          (3,657)
Unamortized costs of reacquired debt                   (15,943)         (16,882)
                                                  -------------    -------------
                                                       368,121          421,821
                                                  -------------    -------------
TOTAL CAPITALIZATION                                   $930,264         $976,334
                                                  =============    =============

*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.


 The accompanying notes to consolidated financial statements as they relate to
                 PSO are an integral part of these statements.

                                     2-121
<PAGE>



PUBLIC SERVICE COMPANY OF OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      See CSW's NOTE 1.

2.    LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.

3.    COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.

4.    INCOME TAXES See CSW's NOTE 4.

5.    BENEFIT PLANS See CSW's NOTE 5.

6.    JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.

7.    FINANCIAL INSTRUMENTS See CSW's NOTE 7.

8.    LONG-TERM DEBT See CSW's NOTE 8.

9.    PREFERRED STOCK See CSW's NOTE 9.

10.   TRUST PREFERRED SECURITIES See CSW's NOTE 10.

11.   SHORT-TERM FINANCING See CSW's NOTE 11.

12.   STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.

13.   NEW ACCOUNTING STANDARDS See CSW's NOTE 18.


                                     2-122
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Public Service Company of
Oklahoma:

      We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Public Service Company of Oklahoma
(an Oklahoma corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary companies, as of December 31, 1998 and 1997, and the
related consolidated statements of income, retained earnings and cash flows, for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Public Service Company of Oklahoma's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

      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 provide 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 Public
Service Company of Oklahoma and subsidiary companies as of December 31, 1998 and
1997, and the results of their operations 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

                                     2-123
<PAGE>


REPORT OF MANAGEMENT

      Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Public Service Company of Oklahoma
and its 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 PSO's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. PSO and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.

      PSO, 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 the companies 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 PSO
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 PSO 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.

      PSO and its subsidiaries believe that, in all material respects, their
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/ T.D. Churchwell                                    /s/ R. Russell Davis
    T. D. Churchwell                                       R. Russell Davis
    President - PSO                                        Controller - PSO



                                     2-124
<PAGE>







                              SOUTHWESTERN ELECTRIC
                                  POWER COMPANY





                                     2-125
<PAGE>


SELECTED FINANCIAL DATA

      The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for SWEPCO. Certain financial statement
items for prior years have been reclassified to conform to the most recent
period presented.

                                ------------------------------------------------
                                1998 (1)   1997 (1)  1996 (1)    1995      1994
                                           (thousands, except ratios)
INCOME STATEMENT DATA
Revenues                       $952,952   $939,869  $920,786  $836,705 $825,296
Net Income                       98,103     92,902    66,566   117,114  105,712
Net Income for Common Stock      96,542     92,254    63,503   113,870  102,351

BALANCE SHEET DATA
Assets                        2,049,520  2,094,746 2,099,156 2,116,716 2,079,207
Long-term obligations (2)       616,939    683,681   629,615   632,579  630,661
Capitalization ratios
     Common stock equity           52%       51%        52%       51%       51%
     Preferred stock                1         2          4         4         4
     Trust Preferred Securities     8         8         --        --        --
     Long-term debt                39        39         44        45        45
Ratios of earnings to fixed
 charges                           3.53       3.46      2.81      3.80     3.70
(SEC Method)

(1)  See SOUTHWESTERN ELECTRIC POWER COMPANY - RESULTS OF OPERATIONS for major
     factors affecting earnings.
(2)  Long-term obligations includes long-term debt, preferred stock subject to
     mandatory redemption and Trust Preferred Securities.


                                     2-126
<PAGE>


SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS

      Reference is made to SWEPCO's Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Selected Financial Data.
Referenced information should be read in conjunction with, and is essential in
understanding, the following discussion and analysis.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 AND 1997

      Net income for common stock increased 5% during 1998 to $96.5 million from
$92.3 million in 1997. The increase resulted primarily from increased non-fuel
revenue and the absence in 1998 of certain operating expense charges in 1997.

      Electric operating revenues increased $13.1 million, to $953.0 million in
1998 from $939.9 million in 1997. The increase was due primarily to higher
non-fuel revenues of $26.8 million resulting from a 5% increase in
weather-related MWH sales. The increase in electric operating revenues was
offset in part by a transmission service agreement adjustment related to the
final order in Texas Commission Docket No. 17285, a provision for rate refund of
$5.3 million primarily in connection with the annual determination of cost of
service formula rates for SWEPCO's wholesale customers and a $3.2 million
reduction in fuel revenues in accordance with a Texas Commission order in
SWEPCO's fuel reconciliation regarding transmission equalization expense
recovery. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU
Complaint Versus Texas Utilities Electric Company (Docket No. 17285). Electric
operating revenues were also affected by a decrease in fuel revenues of $1.3
million.

      Fuel expense decreased $11.0 million for 1998 when compared to 1997 due
primarily to a decrease in average unit fuel costs for natural gas from $1.69
per MMbtu in 1997 to $1.63 per MMbtu in 1998 as a result of lower priced spot
market natural gas. The decrease in fuel expenses was offset in part as a result
of a transmission service agreement adjustment related to the final order in
Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company
(Docket No. 17285). Fuel expense was also affected by an increase in natural gas
generation associated with weather-related demand. Purchased power expense
increased $9.6 million for 1998 compared to 1997 due primarily to an increase in
economy energy purchases.

      Other operating expenses decreased $16.7 million, or 11%, to $140.5
million during 1998 when compared to 1997. The decrease is due primarily to a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No.
17285). The decrease was also affected by the absence in 1998 of costs in 1997
associated with a canceled transmission project of $10.2 million, the write-off
of previously capitalized energy efficiency incentives of $4.2 million and the
write-off of obsolete inventory of $1.2 million. The decrease was offset in part
by increased expenses in 1998 related to a transmission coordination agreement
currently pending before the FERC. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - Transmission Coordination Agreement. Maintenance expenses
increased $7.2 million, or 16%, as a result of increased power station
maintenance, wind storm damage and additional tree-trimming maintenance
expenses. Depreciation and amortization expense increased $3.3 million, or 3%,
during 1998 when compared to 1997 due primarily to increases in depreciable and
amortizable plant. Operating income taxes increased $8.3 million, or 21%, as a
result of increased pre-tax income.

      Other income and deductions decreased $1.6 million for 1998 compared to
1997 due primarily to the absence in 1998 of a $ 1.1 million, net of tax, gain
on the sale of lignite properties recorded in 1997.

                                     2-127
<PAGE>

      Interest charges increased $4.6 million due primarily to distributions on
Trust Preferred Securities, which were outstanding for a portion of 1997.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996

      Net income for common stock increased 45% during 1997 to $92.3 million
from $63.5 million in 1996. The increase resulted primarily from the absence in
1997 of a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $21.8 million, net of tax.

      Electric operating revenues increased $19.1 million, or 2%, to $939.9
million in 1997 from $920.8 million in 1996. The increase was due primarily to
an increase in non-fuel revenue of $31.5 million, including $15.9 million in
non-fuel wholesale sales, as a result of increased retail customer usage and
customer growth, offset in part by a $12.4 million decrease in fuel revenue.

      Fuel and purchased power expense decreased for 1997 when compared to 1996.
Fuel expense decreased $6.1 million, or 2%, due primarily to a decrease in
average unit fuel costs from $1.76 per MMbtu in 1996 to $1.69 per MMbtu in 1997,
which resulted from lower coal transportation charges as well as purchases of
lower priced spot market coal. A decrease in natural gas generation because of
its relatively higher cost per MMbtu also contributed to the lower fuel expense
for 1997. Purchased power expenses decreased $1.2 million, or 5%, during 1997
when compared to 1996 due primarily to a decrease in economy energy purchases.

      Other operating expenses increased $15.6 million, or 11%, to $157.2
million during 1997 when compared to 1996. The increase is due primarily to
costs associated with a canceled transmission project of $10.2 million, the
write-off of previously capitalized energy efficiency incentives of $4.2 million
and the write-off of obsolete inventory of $1.2 million. Operating expenses were
also positively affected by a decrease in pension expenses. See NOTE 5. BENEFIT
PLANS for additional information related to changes in the pension plan.
Depreciation and amortization expense increased $3.7 million, or 4%, during 1997
when compared to 1996 due primarily to increases in depreciable plant. Taxes,
other than income, increased $5.6 million, or 11%, during 1997 when compared to
1996 due primarily to an increase in ad valorem taxes due to higher assessed
values and the expiration of a 10-year exemption on one of SWEPCO's power
plants.

      Other income and deductions increased $25.2 million for 1997 compared to
1996 due primarily to a onetime charge associated with certain investments for
plant sites, engineering studies and lignite reserves of $21.8 million, net of
tax, recorded in 1996, and a $1.1 million, net of tax, gain on the sale of
lignite properties recorded in 1997.

      Interest expense on long-term debt decreased $3.6 million due to
retirement of long-term debt in 1997. Interest expense on short-term debt
decreased $2.6 million resulting from decreased short-term debt outstanding.
Offsetting these decreases were the distributions on newly-issued Trust
Preferred Securities of $5.6 million. See NOTE 10. TRUST PREFERRED SECURITIES
for additional information on the new securities.


                                     2-128
<PAGE>
SWEPCO
Consolidated Statements of Income
Southwestern Electric Power Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    For the Years Ended December 31,
                                                                              ---------------------------------------------
                                                                                 1998            1997             1996
                                                                              ------------    ------------     ------------
                                                                                              (thousands)
<S>                                                                           <C>             <C>              <C>
Electric Operating Revenues
    Residential                                                                 $ 314,600       $ 289,723        $ 290,020
    Commercial                                                                    197,737         192,115          189,954
    Industrial                                                                    253,458         263,207          262,878
    Sales for resale                                                              139,869         146,916          134,836
    Other                                                                          47,288          47,908           43,098
                                                                              ------------    ------------     ------------
                                                                                  952,952         939,869          920,786
                                                                              ------------    ------------     ------------
Operating Expenses and Taxes
    Fuel                                                                          371,414         382,404          388,450
    Purchased power                                                                35,483          25,928           27,160
    Other operating                                                               140,460         157,188          141,542
    Maintenance                                                                    51,219          44,038           43,742
    Depreciation and amortization                                                  98,479          95,228           91,566
    Taxes, other than income                                                       57,128          55,962           50,373
    Income taxes                                                                   47,982          39,712           39,870
                                                                              ------------    ------------     ------------
                                                                                  802,165         800,460          782,703
                                                                              ------------    ------------     ------------

Operating Income                                                                  150,787         139,409          138,083
                                                                              ------------    ------------     ------------

Other Income and Deductions
    Charges for investments and plant development costs                                --            (743)         (29,700)
    Allowance for equity funds used during construction                             1,336             934              325
    Other                                                                            (753)          1,616             (623)
    Non-operating income taxes                                                      1,868           2,222            8,820
                                                                              ------------    ------------     ------------
                                                                                    2,451           4,029          (21,178)
                                                                              ------------    ------------     ------------

Income Before Interest Charges                                                    153,238         143,438          116,905
                                                                              ------------    ------------     ------------

Interest Charges
    Interest on long-term debt                                                     39,233          40,440           44,066
    Distributions on Trust Preferred Securities                                     8,662           5,582               --
    Interest on short-term debt and other                                           8,591           5,736            8,381
    Allowance for borrowed funds used during construction                          (1,351)         (1,222)          (2,098)
                                                                              ------------    ------------     ------------
                                                                                   55,135          50,536           50,349
                                                                              ------------    ------------     ------------

Net Income                                                                         98,103          92,902           66,556
    Less: Preferred stock dividends                                                   705           2,467            3,053
    Gain/(Loss) on reacquired preferred stock                                        (856)          1,819               --
                                                                              ------------    ------------     ------------
Net Income for Common Stock                                                      $ 96,542        $ 92,254         $ 63,503
                                                                              ============    ============     ============

</TABLE>


  The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-129
<PAGE>
SWEPCO
Consolidated Statements of Retained Earnings
Southwestern Electric Power Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                           -----------------------------------------------
                                                                               1998             1997             1996
                                                                           -------------    -------------    -------------
                                                                                            (thousands)

<S>                                                                        <C>              <C>              <C>      
Retained Earnings at Beginning of Year                                        $ 324,050        $ 321,801        $ 302,334
    Net income for common stock                                                  96,542           92,254           63,503
    Loss on reacquisition of preferred stock                                         --               (5)             (36)
    Deduct:  Common stock dividends                                             120,000           90,000           44,000
                                                                           -------------    -------------    -------------
Retained Earnings at End of Year                                              $ 300,592        $ 324,050        $ 321,801
                                                                           =============    =============    =============


</TABLE>


  The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-130
<PAGE>
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      As of December 31,
                                                                              ------------------------------------
                                                                                   1998                 1997
                                                                              ----------------     ---------------
                                                                                            (thousands)
<S>                                                                           <C>                  <C>
ASSETS

  Electric Utility Plant
    Production                                                                    $ 1,397,924         $ 1,391,676
    Transmission                                                                      474,035             456,401
    Distribution                                                                      916,293             870,378
    General                                                                           321,136             311,323
    Construction work in progress                                                      48,523              51,665
                                                                              ----------------     ---------------
                                                                                    3,157,911           3,081,443
  Less - Accumulated depreciation                                                   1,317,057           1,225,865
                                                                              ----------------     ---------------
                                                                                    1,840,854           1,855,578
                                                                              ----------------     ---------------
Current Assets
    Cash and temporary cash investments                                                 4,444               2,298
    Accounts receivable                                                                40,430              81,507
    Materials and supplies, at average cost                                            25,135              24,523
    Fuel inventory                                                                     40,238              26,415
    Under-recovered fuel costs                                                             --              13,013
    Accumulated deferred income taxes                                                   4,869                  --
    Prepayments and other                                                              16,651              13,678
                                                                              ----------------     ---------------
                                                                                      131,767             161,434
                                                                              ----------------     ---------------

Deferred Charges and Other Assets                                                      76,899              77,734
                                                                              ----------------     ---------------
                                                                                  $ 2,049,520         $ 2,094,746
                                                                              ================     ===============
</TABLE>


  The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-131
<PAGE>
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       As of December 31,
                                                                             ----------------------------------------
                                                                                  1998                     1997
                                                                             ---------------          ---------------
<S>                                                                          <C>              <C>     <C>              <C>
CAPITALIZATION AND LIABILITIES                                                              (thousands)
Capitalization
    Common stock:   $18 par value
        Authorized:   7,600,000 shares
        Issued and outstanding: 7,536,640 shares                                  $ 135,660                $ 135,660
    Paid-in capital                                                                 245,000                  245,000
    Retained earnings                                                               300,592                  324,050
                                                                             ---------------          ---------------
        Total Common Stock Equity                                                   681,252      52%         704,710      51%
                                                                             ---------------          ---------------
    Preferred stock
        Not subject to mandatory redemption                                           4,707                    4,709
        Subject to mandatory redemption                                                  --                   25,930
                                                                             ---------------          ---------------
                                                                                      4,707       1%          30,639       2%
    SWEPCO-obligated, mandatorily redeemable preferred securities
         of subsidiary trust holding solely Junior Subordinated
         Debentures of SWEPCO                                                       110,000       8%         110,000       8%
    Long-term debt                                                                  506,939      39%         547,751      39%
                                                                             ---------------  ------- ---------------  -------
        Total Capitalization                                                      1,302,898     100%       1,393,100     100%
                                                                             ---------------  ------- ---------------  -------

Current Liabilities
    Long-term debt and preferred stock due within twelve months                      43,932                    3,555
    Advances from affiliates                                                         40,705                   25,175
    Accounts payable                                                                 73,507                   73,582
    Payables to affiliates                                                           37,795                   63,583
    Customer deposits                                                                13,316                   14,359
    Accrued taxes                                                                    23,189                   12,884
    Accumulated deferred income taxes                                                    --                    4,594
    Accrued interest                                                                 14,275                   13,425
    Over-recovered fuel costs                                                         5,378                       --
    Other                                                                            12,538                    9,551
                                                                             ---------------          ---------------
                                                                                    264,635                  220,708
                                                                             ---------------          ---------------
Deferred Credits
    Accumulated deferred income taxes                                               398,664                  395,909
    Investment tax credits                                                           62,213                   66,845
    Income tax related regulatory liabilities, net                                    4,931                   10,072
    Other                                                                            16,179                    8,112
                                                                             ---------------          ---------------
                                                                                    481,987                  480,938
                                                                             ---------------          ---------------

                                                                                $ 2,049,520              $ 2,094,746
                                                                             ===============          ===============
</TABLE>

  The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-132
<PAGE>
SWEPCO
Consolidated Statements of Cash Flows
Southwestern Electric Power Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                           -----------------------------------------------
                                                                               1998             1997             1996
                                                                           -------------    -------------    -------------
                                                                                            (thousands)
<S>                                                                        <C>              <C>              <C>
OPERATING ACTIVITIES
    Net Income                                                                 $ 98,103         $ 92,902         $ 66,556
    Non-cash Items Included in Net Income
        Depreciation and amortization                                           104,047          100,015          101,204
        Deferred income taxes and investment tax credits                        (16,481)          (6,907)          (1,881)
        Charges for investments and assets                                        2,140           16,493           29,590
        Inventory reserve                                                            --            1,150            1,632
    Changes in Assets and Liabilities
        Accounts receivable                                                      41,077          (13,367)         (13,512)
        Fuel inventory                                                          (13,823)          29,360           17,501
        Accounts payable                                                            260           24,374           12,253
        Payables to affiliates                                                  (25,788)          (5,125)          16,234
        Accrued taxes                                                            10,305          (12,357)             (27)
        Other current liabilities                                                 2,987          (17,699)          (3,076)
        Fuel recovery                                                            18,391           (3,893)         (18,043)
        Other                                                                     5,245           (4,458)          (8,506)
                                                                           -------------    -------------    -------------
                                                                                226,463          200,488          199,925
                                                                           -------------    -------------    -------------
INVESTING ACTIVITIES
    Construction expenditures                                                   (83,120)        (108,126)         (92,737)
    Other                                                                        (5,202)          (4,545)          (7,510)
                                                                           -------------    -------------    -------------
                                                                                (88,322)        (112,671)        (100,247)
                                                                           -------------    -------------    -------------
FINANCING ACTIVITIES
    Proceeds from sale of long-term debt                                             --               --           79,346
    Reacquisition of long-term debt                                                  --               --          (83,334)
    Redemption of preferred stock                                               (27,988)         (16,043)          (1,236)
    Proceeds from issuance of Trust Preferred Securities                             --          106,231               --
    Retirement of long-term debt                                                 (2,354)         (52,600)          (3,901)
    Change in advances from affiliates                                           15,530          (32,320)         (43,734)
    Payment of dividends                                                       (121,183)         (92,666)         (46,642)
                                                                           -------------    -------------    -------------
                                                                               (135,995)         (87,398)         (99,501)
                                                                           -------------    -------------    -------------

Net Change in Cash and Cash Equivalents                                           2,146              419              177
Cash and Cash Equivalents at Beginning of Year                                    2,298            1,879            1,702
                                                                           ------------     -------------    -------------
Cash and Cash Equivalents at End of Year                                        $ 4,444          $ 2,298          $ 1,879
                                                                           =============    =============    =============

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized (includes
      distributions on Trust Preferred Securities)                             $ 50,341         $ 49,847         $ 53,231
                                                                           =============    =============    =============
    Income taxes paid                                                          $ 57,977         $ 57,715         $ 35,549
                                                                           =============    =============    =============

</TABLE>
  The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-133
<PAGE>
SWEPCO
Consolidated Statements of Capitalization
Southwestern Electric Power Company
--------------------------------------------------------------------------------
                                                        As of December 31,
                                             -----------------------------------
                                                    1998               1997
                                             ---------------    ----------------
                                                           (thousands)
COMMON STOCK EQUITY                               $ 681,252           $ 704,710
                                             ---------------    ----------------

PREFERRED STOCK
Cumulative $100 Par Value, Authorized 1,860,000 shares

               Number of Shares    Current
Series         Outstanding         Redemption Price
--------------------------------------------------------------------------------
Not Subject to Mandatory Redemption
        5.00%     37,729           $109.00            3,773               3,775
        4.65%      1,908           $102.75              191                 191
        4.28%      7,386           $103.90              739                 739
Premium                                                   4                   4
                                             ---------------    ----------------
                                                      4,707               4,709
                                             ---------------    ----------------
Subject to Mandatory Redemption
        6.95%         --          --                     --              27,401
Issuance Expense                                         --                (271)
Amount to be redeemed within one year                    --              (1,200)
                                             ---------------    ----------------
                                                         --              25,930
                                             ---------------    ----------------
                                                      4,707              30,639
                                             ---------------    ----------------

TRUST PREFERRED SECURITIES
    SWEPCO-obligated, mandatorily redeemable
      preferred securities of subsidiary
      trust holding solely Junior
      Subordinated Debentures of 
      SWEPCO, 7.875%, due April 30, 2037            110,000             110,000
                                             ---------------    ----------------

LONG-TERM DEBT
First Mortgage Bonds
    Series V, 7 3/4%, due June 1, 2004               40,000              40,000
    Series W, 6 1/8%, due September 1, 1999          40,000              40,000
    Series X, 7%, due September 1, 2007              90,000              90,000
    Series Y, 6 5/8%, due February 1, 2003           55,000              55,000
    Series Z, 7 1/4%, due July 1, 2023               45,000              45,000
    Series AA, 5 1/4%, due April 1, 2000             45,000              45,000
    Series BB, 6 7/8%, due October 1, 2025           80,000              80,000
    1976 Series A, 6.20%, 
      due November 1, 2006 (Siloam Springs) *         6,085               6,230
    1976 Series B, 6.20%, 
      due November 1, 2006 (Siloam Springs) *         1,000               1,000
Installment Sales Agreements - PCRBs  *
    1978 Series A, 6%, 
      due January 1, 2008 (Titus County)             14,420              14,420
    1991 Series A, 8.2%, 
      due August 1, 2011 (Titus County)              17,125              17,125
    1991 Series B, 6.9%, 
      due November 1, 2004 (Titus County)            12,290              12,290
    Series 1992, 7.6%, due January 1, 2019 (DeSoto)  53,500              53,500
    Series 1996, 6.1%, due April 1, 2018 (Sabine)    81,700              81,700
Railcar lease obligations                             5,549               7,759
Unamortized discount and premium                      1,005                 955
Unamortized costs of reacquired debt                (36,803)            (39,873)
Amount to be redeemed within one year               (43,932)             (2,355)
                                             ---------------    ----------------
                                                    506,939             547,751
                                             ---------------    ----------------
TOTAL CAPITALIZATION                            $ 1,302,898         $ 1,393,100
                                             ===============    ================

*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.

 The accompanying notes to consolidated financial statements as they relate to
                SWEPCO are an integral part of these statements.

                                     2-134
<PAGE>

SOUTHWESTERN ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      See CSW's NOTE 1.

2.    LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.

3.    COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.

4.    INCOME TAXES See CSW's NOTE 4.

5.    BENEFIT PLANS See CSW's NOTE 5.

6.    JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.

7.    FINANCIAL INSTRUMENTS See CSW's NOTE 7.

8.    LONG-TERM DEBT See CSW's NOTE 8.

9.    PREFERRED STOCK See CSW's NOTE 9.

10.   TRUST PREFERRED SECURITIES See CSW's NOTE 10.

11.   SHORT-TERM FINANCING See CSW's NOTE 11.

12.   STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.

13.   NEW ACCOUNTING STANDARDS See CSW's NOTE 18.




                                     2-135
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Southwestern Electric Power
Company:

      We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Southwestern Electric Power Company
(a Delaware corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1998 and 1997, and the
rated consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Southwestern Electric Power Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

      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 provide 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 Southwestern
Electric Power Company and subsidiary company as of December 31, 1998 and 1997,
and the results of their operations 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


                                     2-136
<PAGE>


REPORT OF MANAGEMENT

      Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Southwestern Electric Power Company
and its subsidiary company 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
financial statements.

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

      SWEPCO, together with its subsidiary, 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 the companies 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
SWEPCO 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 SWEPCO or its
subsidiary, 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.

      SWEPCO and its subsidiary believe that, in all material respects, their
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/ Michael H. Madison                                /s/ R. Russell Davis
    Michael H. Madison                                    R. Russell Davis
    President - SWEPCO                                    Controller - SWEPCO


                                     2-137
<PAGE>








                          WEST TEXAS UTILITIES COMPANY


                                     2-138
<PAGE>


SELECTED FINANCIAL DATA

      The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for WTU. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.

                              --------------------------------------------------
                              1998 (1)  1997 (1)  1996 (1)     1995      1994
                                         (thousands, except ratios)
INCOME STATEMENT DATA
Revenues                      $424,953  $397,778  $377,057  $319,835  $342,991
Net Income                      37,814    21,461    16,571    34,530    37,366
Net Income for Common Stock     37,710    22,402    16,307    34,266    36,914

BALANCE SHEET DATA
Assets                        798,504   802,148   810,379   815,614   771,977
Long-term obligations         282,211   278,640   275,070   273,245   210,047
Capitalization ratios
     Common stock equity           48%       48%       48%       49%       56%
     Preferred stock               --        --         1         1         1
     Long-term debt                52        52        51        50        43
Ratio of earnings to fixed
  charges                        3.33      2.21      2.05      2.63      3.37
(SEC Method)

(1)  See WEST TEXAS UTILITIES COMPANY - RESULTS OF OPERATIONS for major factors
     affecting earnings.


                                     2-139
<PAGE>


WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS

      Reference is made to WTU's Financial Statements, related Notes to
Financial Statements and Selected Financial Data. Referenced information should
be read in conjunction with, and is essential to understanding, the following
discussion and analysis.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

      Net income for common stock for 1998 was $37.7 million compared to $22.4
million for 1997, an increase of $15.3 million or 68%. The increase in net
income was due primarily to higher non-fuel revenue. This increase was partially
offset by higher maintenance expenses and income taxes. The increase in net
income was also offset in part by the absence in 1998 of the recognition of the
gain on reacquired preferred stock in 1997.

      Electric operating revenues were $425.0 million for 1998, an increase of
$27.2 million, or 7%, when compared to the year ended 1997. This increase was
due primarily to an increase in fuel and non-fuel related revenues of $4.5
million and $22.7 million, respectively. The increase in non-fuel related
revenues was due primarily to a 4% increase in retail MWH sales resulting from
favorable weather-related demand. Included in non-fuel related revenues were
additional transmission related revenues resulting from changes to open access
tariff transmission and a transmission coordination agreement currently pending
before the FERC. Conversely, non-fuel related revenues were decreased by a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
Transmission Coordination Agreement and CPL and WTU Complaint Versus Texas
Utilities Electric Company (Docket No. 17285). The increase in fuel-related
revenues was attributable to higher fuel costs as discussed below.

      Fuel expense increased to $122.8 million for 1998 from $119.2 million
compared to 1997 due primarily to a 6% increase in generation. The increase in
generation was due largely to a 4% increase in MWH sales. Partially offsetting
the increase was lower average unit cost of fuel. The average unit cost of fuel
declined from $1.98 per MMbtu in 1997 to $1.83 per MMbtu in 1998. This decline
in the average unit costs of fuel was due primarily to lower spot market natural
gas and coal prices. Purchased power expense declined $2.4 million, or 5%, for
1998 compared to 1997 as a result of decreased economy energy purchases.

      Other operating expenses declined $3.9 million in 1998 when compared to
1997 resulting from a reduction in transmission expenses resulting from a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285)
for additional information on the transmission service agreement. Additionally,
other operating expenses also decreased due to lower employee-related expenses.
The decrease was offset in part by higher production related expenses resulting
from the increased utilization of generating stations to meet increased
weather-related customer demand. Maintenance expenses rose $2.7 million from
1997 as a result of increased unplanned power plant maintenance activity.

      Operating income taxes were $20.6 million for 1998 compared to $9.4
million in 1997 for an increase of $11.2 million as a result of higher pre-tax
income.

      Other income and deductions increased $1.2 million due to an increase in
interest income on temporary cash investments, merchandise sales and
under-recovered fuel cost.

                                     2-140
<PAGE>

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

      Net income for common stock increased 37% during 1997 to $22.4 million
from $16.3 million in 1996. The increase resulted primarily from the absence of
a one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies, and lignite reserves of approximately $10.9 million,
net of tax, and the gain on reacquisition of preferred stock of $1.1 million
recognized in 1997.

      Electric operating revenues increased $20.7 million, or 6%, in 1997 when
compared to 1996. The increase was due primarily to a $16.0 million increase in
transmission revenues as a result of the January 1997 implementation of open
access tariffs in accordance with FERC Order No. 888 and the Texas Commission
rules regarding transmission access and pricing. Also contributing to the
increase was a 4% increase in total MWH sales. The impact on net income of the
transmission revenues was offset by a corresponding increase of $17.2 million in
transmission expense related to these transmission activities. Also contributing
to the increase was $2.8 million in additional fuel revenues due to higher
purchased power expense as discussed below.

      Fuel expense decreased $12.9 million, or 10%, for 1997 compared to 1996
due to lower-priced spot market coal and a 16% decrease in natural gas
generation. This decrease was also reflected by a decline in the average unit
cost of fuel to $1.98 per MMbtu in 1997 from $2.02 per MMbtu in 1996. Purchased
power expenses increased $18.7 million for 1997 as compared to 1996, primarily
as a result of additional economy purchases at a higher cost per MWH.

      Other operating expense increased $26.7 million, or 40%, for 1997 compared
to 1996 due primarily to a $17.2 million increase in transmission expenses as a
result of the Texas Commission rules regarding transmission access and pricing.
Also contributing to the increase was a $5.2 million write-off of previously
capitalized demand side management energy efficiency incentives and the
write-off of obsolete inventory for $1.5 million. Partially offsetting the
increase in other operating expense was a decrease in pension expense for 1997
compared to 1996. See NOTE 5. BENEFIT PLANS for additional information related
to changes in the pension plan. Depreciation and amortization increased $1.8
million, or 4.6%, as a result of an increase in depreciable plant. Taxes, other
than income increased $1.3 million due to changes in ad valorem, local
franchise, and gross receipt taxes. Income taxes decreased $5.8 million in 1997
compared to 1996 due primarily to lower pre-tax income in 1997 and timing
differences.

      Other income and deductions increased $11.4 million for 1997 compared to
1996 as a result of the absence in 1997 of a one-time charge incurred in 1996
associated with certain investments for plant sites, engineering studies, and
lignite reserves of $10.9 million, net of tax.


                                     2-141
<PAGE>
WTU
Statements of Income
West Texas Utilities Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                     For the Years Ended December 31,
                                                                              ------------------------------------------------
                                                                                  1998             1997              1996
                                                                              --------------   -------------     -------------
                                                                                                (thousands)
<S>                                                                           <C>              <C>               <C>
Electric Operating Revenues
    Residential                                                                   $ 134,204       $ 124,578         $ 124,214
    Commercial                                                                       76,155          73,196            72,422
    Industrial                                                                       51,715          56,928            52,375
    Sales for resale                                                                 97,560          88,814            88,921
    Other                                                                            65,319          54,262            39,125
                                                                              --------------   -------------     -------------
                                                                                    424,953         397,778           377,057
                                                                              --------------   -------------     -------------
Operating Expenses and Taxes
    Fuel                                                                            122,836         119,158           132,034
    Purchased power                                                                  48,131          50,493            31,803
    Other operating                                                                  89,924          93,796            68,869
    Maintenance                                                                      16,666          14,013            14,122
    Depreciation and amortization                                                    42,750          41,592            39,755
    Taxes, other than income                                                         24,638          24,669            23,402
    Income taxes                                                                     20,643           9,490            15,338
                                                                              --------------   -------------     -------------
                                                                                    365,588         353,211           325,323
                                                                              --------------   -------------     -------------
Operating Income                                                                     59,365          44,567            51,734
                                                                              --------------   -------------     -------------

Other Income and Deductions
    Charges for investments and plant development costs                                  --              --           (14,949)
    Allowance for equity funds used during construction                                 678             227               423
    Other                                                                             1,580             766               210
    Non-operating income taxes                                                          454             471             4,394
                                                                              --------------   -------------     -------------
                                                                                      2,712           1,464            (9,922)
                                                                              --------------   -------------     -------------
Income Before Interest Charges                                                       62,077          46,031            41,812
                                                                              --------------   -------------     -------------

Interest Charges
    Interest on long-term debt                                                       20,352          20,352            21,169
    Interest on short-term debt and other                                             4,580           4,911             4,925
    Allowance for borrowed funds used during construction                              (669)           (693)             (853)
                                                                              --------------   -------------     -------------
                                                                                     24,263          24,570            25,241
                                                                              --------------   -------------     -------------
 
Net Income                                                                           37,814          21,461            16,571
    Less: Preferred stock dividends                                                     104             144               264
    Gain on Reaquired Preferred Stock                                                    --           1,085                --
                                                                              --------------   -------------     -------------
Net Income for Common Stock                                                        $ 37,710        $ 22,402          $ 16,307
                                                                              ==============   =============     =============
</TABLE>


        The accompanying notes to financial statements as they relate to
                  WTU are an integral part of these statements.

                                     2-142
<PAGE>
WTU
Statements of Retained Earnings
West Texas Utilities Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                           -----------------------------------------------
                                                                               1998             1997             1996
                                                                           -------------    -------------    -------------
                                                                                            (thousands)

<S>                                                                        <C>              <C>              <C>      
Retained Earnings at Beginning of Year                                        $ 119,479        $ 123,077        $ 125,770
    Net income for common stock                                                  37,710           22,402           16,307
    Deduct:   Common stock dividends                                             40,000           26,000           19,000
                                                                           -------------    -------------    -------------
Retained Earnings at End of Year                                              $ 117,189        $ 119,479        $ 123,077
                                                                           =============    =============    =============

</TABLE>

        The accompanying notes to financial statements as they relate to
                  WTU are an integral part of these statements.

                                     2-143
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      As of December 31,
                                                                              ------------------------------------
                                                                                   1998                 1997
                                                                              ----------------     ---------------
                                                                                           (thousands)
<S>                                                                           <C>                 <C>
ASSETS
 
  Electric Utility Plant
    Production                                                                      $ 429,896           $ 417,849
    Transmission                                                                      213,630             208,905
    Distribution                                                                      382,373             363,911
    General                                                                           108,878             104,026
    Construction work in progress                                                      11,805              14,154
                                                                              ----------------     ---------------
                                                                                    1,146,582           1,108,845
  Less - Accumulated depreciation                                                     473,503             441,281
                                                                              ----------------     ---------------
                                                                                      673,079             667,564
                                                                              ----------------     ---------------
Current Assets
    Cash                                                                                2,093                 811
    Advances to affiliates                                                                 --              19,802
    Accounts receivable                                                                31,689              10,570
    Materials and supplies, at average cost                                            14,191              14,246
    Fuel inventory                                                                     13,186              12,471
    Accumulated deferred income taxes                                                     366                  --
    Under-recovered fuel costs                                                          3,980              11,968
    Prepayments and other                                                               5,988               4,006
                                                                              ----------------     ---------------
                                                                                       71,493              73,874
                                                                              ----------------     ---------------
Deferred Charges and Other Assets
    Deferred Oklaunion costs                                                           14,910              18,637
    Restructuring costs                                                                 7,079               8,966
    Other                                                                              31,943              33,107
                                                                              ----------------     ---------------
                                                                                       53,932              60,710
                                                                              ----------------     ---------------

                                                                                    $ 798,504           $ 802,148
                                                                              ================     ===============
</TABLE>

      The accompanying notes to financial statements as they relate to WTU
                    are an integral part of these statements.

                                     2-144
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       As of December 31,
                                                                             ----------------------------------------
                                                                                  1998                     1997
                                                                             ---------------          ---------------
<S>                                                                          <C>              <C>     <C>              <C>
CAPITALIZATION AND LIABILITIES                                                              (thousands)
Capitalization
    Common stock:   $25 par value
        Authorized:  7,800,000 shares
        Issued and outstanding: 5,488,560 shares                                  $ 137,214                $ 137,214
    Paid-in capital                                                                   2,236                    2,236
    Retained earnings                                                               117,189                  119,479
                                                                             ---------------          ---------------
        Total Common Stock Equity                                                   256,639      48%         258,929      48%
                                                                             ---------------  ------- ---------------  -------

    Preferred stock                                                                   2,482      --%           2,483      --%
    Long-term debt                                                                  282,211      52%         278,640      52%
                                                                             ---------------  ------- ---------------  -------

        Total Capitalization                                                        541,332     100%         540,052     100
                                                                             ---------------  ------- ---------------  -------

                                                   
Current Liabilities
    Advances from affiliates                                                          4,573                       --
    Payables to affiliates                                                           19,917                   21,569
    Accounts payable                                                                 31,473                   29,522
    Accrued taxes                                                                    10,031                   11,375
    Accumulated deferred income taxes                                                    --                      203
    Accrued interest                                                                  4,125                    4,525
    Other                                                                             3,797                    3,859
                                                                             ---------------          ---------------
                                                                                     73,916                   71,053
                                                                             ---------------          ---------------
Deferred Credits
    Accumulated deferred income taxes                                               140,731                  149,346
    Investment tax credits                                                           26,597                   27,918
    Income tax related regulatory liabilities, net                                   12,088                    9,482
    Other                                                                             3,840                    4,297
                                                                             ---------------          ---------------
                                                                                    183,256                  191,043
                                                                             ---------------          ---------------

                                                                                  $ 798,504                $ 802,148
                                                                             ===============          ===============

</TABLE>


      The accompanying notes to financial statements as they relate to WTU
                    are an integral part of these statements.

                                     2-145
<PAGE>
WTU
Statements of Cash Flows
West Texas Utilities Company
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                For the Years Ended December 31,
                                                                           --------------------------------------------
                                                                               1998           1997            1996
                                                                           -------------   ------------    ------------
                                                                                           (thousands)
<S>                                                                        <C>             <C>             <C>
OPERATING ACTIVITIES
    Net Income                                                                 $ 37,814       $ 21,461        $ 16,571
    Non-cash Items Included in Net Income
        Depreciation and amortization                                            43,826         43,138          41,342
        Deferred income taxes and investment tax credits                         (7,899)        (2,275)          4,397
        Charges for investments and assets                                        1,527          5,296          14,905
        Inventory reserve                                                            --          1,498             809
    Changes in Assets and Liabilities
        Accounts receivable                                                     (21,119)        13,553           4,800
        Fuel inventory                                                             (715)         4,203          (2,848)
        Accounts payable                                                          1,952         (4,182)            584
        Payables to affiliates                                                   (1,652)         7,991           5,334
        Accrued taxes                                                            (1,344)        (2,088)            281
        Fuel recovery                                                             7,988         (3,007)        (11,917)
        Other deferred credits                                                     (457)        13,284          (5,482)
        Other                                                                      (261)        (3,626)          1,987
                                                                           -------------   ------------    ------------
                                                                                 59,660         95,246          70,763
                                                                           -------------   ------------    ------------
INVESTING ACTIVITIES
    Construction expenditures                                                   (36,867)       (31,817)        (42,453)
    Other                                                                        (5,782)           261          (1,795)
                                                                           -------------   ------------    ------------
                                                                                (42,649)       (31,556)        (44,248)
                                                                           -------------   ------------    ------------
FINANCING ACTIVITIES
    Proceeds from issuance of long-term debt                                         --             --          43,256
    Reacquisition of long-term debt                                                  --             --         (45,639)
    Redemption of preferred stock                                                    --         (2,724)             --
    Payment of dividends                                                        (40,104)       (26,184)        (19,198)
    Change in advances from affiliates                                            4,573        (14,833)         (4,987)
                                                                           -------------   ------------    ------------
                                                                                (35,531)       (43,741)        (26,568)
                                                                           -------------   ------------    ------------

Net Change in Cash and Cash Equivalents                                         (18,520)        19,949             (53)
Cash and Cash Equivalents at Beginning of Year                                   20,613            664             717
                                                                           -------------   ------------    ------------
Cash and Cash Equivalents at End of Year                                        $ 2,093       $ 20,613           $ 664
                                                                           =============   ============    ============

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized                                     $ 17,250       $ 19,659        $ 20,248
                                                                           =============   ============    ============
    Income taxes paid                                                          $ 29,533       $ 15,710         $ 6,295
                                                                           =============   ============    ============

</TABLE>


      The accompanying notes to financial statements as they relate to WTU
                    are an integral part of these statements.

                                     2-146
<PAGE>
WTU
Statements of Capitalization
West Texas Utilities Company
--------------------------------------------------------------------------------
                                                           As of December 31,
                                                  ------------------------------
                                                       1998            1997
                                                  -------------   --------------
                                                           (thousands)
COMMON STOCK EQUITY                                  $ 256,639        $ 258,929
                                                  -------------   --------------

PREFERRED STOCK
Cumulative $100 Par Value, Authorized 810,000 shares
                 Number        Current
                 of Shares     Redemption
Series           Outstanding   Price
-----------------------------------------

4.40%            23,675        $107.00                   2,367            2,368
Premium                                                    115              115
                                                  -------------   --------------
                                                         2,482            2,483
                                                  -------------   --------------


LONG-TERM DEBT
First Mortgage Bonds
    Series P, 7 3/4%, due June 1, 2007                  25,000           25,000
    Series Q, 6 7/8%, due October 1, 2002               35,000           35,000
    Series R, 7%, due October 1, 2004                   40,000           40,000
    Series S, 6 1/8%, due February 1, 2004              40,000           40,000
    Series T, 7 1/2%, due April 1, 2000                 40,000           40,000
    Series U, 6 3/8%, due October 1, 2005               80,000           80,000
Installment Sales Agreements - PCRBs  *
    Series 1996, 6%, due June 1,  2020 (Red River)      44,310           44,310
Unamortized discount                                      (792)            (960)
Unamortized costs of reacquired debt                   (21,307)         (24,710)
                                                  -------------   --------------
                                                       282,211          278,640
                                                  -------------   --------------

TOTAL CAPITALIZATION                                 $ 541,332        $ 540,052
                                                  =============   ==============

*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.


      The accompanying notes to financial statements as they relate to WTU
                   are an integral part of these statements.

                                     2-147
<PAGE>


WEST TEXAS UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     See CSW's NOTE 1.

2.   LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.

3.   COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.

4.   INCOME TAXES See CSW's NOTE 4.

5.   BENEFIT PLANS See CSW's NOTE 5.

6.   JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.

7.   FINANCIAL INSTRUMENTS See CSW's NOTE 7.

8.   LONG-TERM DEBT See CSW's NOTE 8.

9.   PREFERRED STOCK See CSW's NOTE 9.

10.  SHORT-TERM FINANCING See CSW's NOTE 11.

11.  STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.

12.  NEW ACCOUNTING STANDARDS See CSW's NOTE 18.



                                     2-148
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of West Texas Utilities Company:

      We have audited the accompanying balance sheets and statements of
capitalization of West Texas Utilities Company (a Texas corporation and a
wholly-owned subsidiary of Central and South West Corporation) as of December
31, 1998 and 1997, and the related statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of West Texas Utilities
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

      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 provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Texas Utilities Company
as of December 31, 1998 and 1997, and the results of its operations and its 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

                                     2-149
<PAGE>


REPORT OF MANAGEMENT

      Management is responsible for the preparation, integrity and objectivity
of the financial statements of West Texas Utilities Company as well as other
information contained in this Annual Report. The 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 financial statements.

      The financial statements have been audited by WTU's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. WTU believes that representations made to
the independent public accountants during their audit were valid and
appropriate. The report of independent public accountants is presented elsewhere
in this report.

      WTU maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of the companies
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 WTU 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 WTU, 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.

      WTU believes 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/ Paul J. Brower                                      /s/ R. Russell Davis
    Paul J. Brower                                          R. Russell Davis
    General Manager/President - WTU                         Controller - WTU

                                     2-150
<PAGE>


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

CSW                     None.
CPL                     None.
PSO                     None.
SWEPCO                  None.
WTU                     None.



                                     2-151
<PAGE>
                                            
PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.

      CSW has filed with the SEC its Proxy Statement relating to its 1999 Annual
Meeting of  Stockholders.  The information  required by ITEM 10, other than with
respect to certain information  regarding the executive officers of CSW which is
included in ITEM 1-BUSINESS, is hereby incorporated by reference herein from the
1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.

      (a) Directors of each of the U.S. Electric Operating  Companies,  together
with certain  information  with respect to each of them, are listed below.  Ages
are as of March 1, 1999.

                    Name, Age, Principal                              Year
               Occupation, Business Experience                    First Became
                   and Other Directorships                          Director
--------------------------------------------------------------------------------

CPL
JOHN F. BRIMBERRY             AGE - 66                                1995
CEO of Professional Insurance Agents, Inc., Victoria, Texas.

E. R. BROOKS                  AGE - 61                                1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its  subsidiaries.  President  of CSW from  1991 to 1997.
Director of Hubbell, Inc., Orange,  Connecticut.  Trustee of
Baylor Health Care Center,  Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.

GLENN FILES                   AGE - 51                                1996
Senior Vice  President of CSW since 1996.  President and CEO
of WTU from 1992 to 1996.

RUBEN M. GARCIA               AGE - 67                                1981
President  and CEO of  Modem  Construction  Inc.  and  Modem
Machine Shop, Inc., Laredo, Texas.

ALPHONSO R. JACKSON           AGE - 53                                1998
President of CSW-Texas  since February 1998.  Vice President
of CSW Energy, Inc., from 1996 to 1998. President and CEO of
The Housing  Authority  of the City of Dallas,  Texas,  from
1989 to 1996.  Director of Chase Bank of Texas N.A., Dallas,
Texas.  Director  of Chase  Bank of  Texas,  N.A.,  Houston,
Texas.

ROBERT A. McALLEN             AGE - 64                                1983
Robert A. McAllen, Insurance Agency, Weslaco, Texas.

                                       3-1
<PAGE>


                    Name, Age, Principal                              Year
               Occupation, Business Experience                    First Became
                   and Other Directorships                          Director
--------------------------------------------------------------------------------

PETE MORALES, JR.              AGE - 58                                1990
President of Morales Feed Lots, Inc., Devine, Texas.

H. LEE RICHARDS                AGE - 65                                1987
Chairman of the Board of Hygeia  Dairy  Company,  Harlingen,
Texas.

J.  GONZALO  SANDOVAL          AGE - 50                                1992
General   Manager/President  of  CPL  since  February  1998.
General  Manager of CPL from 1996 to 1998.  Vice  President,
Operations and Engineering of CPL from 1993 to 1996.

GERALD E. VAUGHN               AGE - 56                                1993
Chairman  for the STPNOC  since its  formation  in September
1997.  Vice  President,  Nuclear of CSW Services since 1994.
Vice President, Nuclear Affairs of CPL from 1993 to 1994.

      Each of the  directors  and  executive  officers of CPL is elected to hold
office until the first meeting of CPL's Board of Directors after the 1999 Annual
Meeting of Stockholders.  CPL's 1999 Annual Meeting of Stockholders is presently
scheduled  to be held on April 8, 1999.  All outside  directors  have engaged in
their principal  occupations  listed above for a period of more than five years,
unless otherwise indicated.


PSO
E. R. BROOKS                   AGE - 61                                1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its  subsidiaries.  President  of CSW from  1991 to 1997.
Director of Hubbell, Inc., Orange,  Connecticut.  Trustee of
Baylor Health Care Center,  Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.

T. D. CHURCHWELL               AGE - 54                                1996
President of PSO since 1996. Executive Vice President of WTU
from 1993 to 1996.

HARRY A. CLARKE                AGE - 70                                1972
General  Partner and  President of HAC  Investments,  Afton,
Oklahoma.

GLENN FILES                    AGE - 51                                1996
Senior Vice  President of CSW since 1996.  President and CEO
of WTU from 1992 to 1996.

                                       3-2
<PAGE>

                    Name, Age, Principal                              Year
               Occupation, Business Experience                    First Became
                   and Other Directorships                          Director
--------------------------------------------------------------------------------

PAUL K. LACKEY, JR.            AGE - 55                                1992
Chief of Staff for the  Governor  of the  State of  Oklahoma
since  1997.   Secretary  of  Health  and  Human   Services,
Executive Director of the Office of Juvenile Affairs,  State
of   Oklahoma,   from  1995  to  1997.   Consultant,   Flint
Industries, Inc., a construction, electronics manufacturing,
and environmental services company, Tulsa, Oklahoma,  during
a portion of 1995.  President,  Flint Industries,  Inc. from
1986 to 1995. Director of Bank South, Tulsa, Oklahoma.

PAULA MARSHALL-CHAPMAN        AGE - 45                                1991
President and CEO of Bama Companies,  a baked goods products
company, Tulsa, Oklahoma.

WILLIAM R. McKAMEY            AGE - 52                                1993
General Manager of PSO since 1996. Vice President, Marketing
and Business Development of PSO from 1993 to 1996.

DR. ROBERT B. TAYLOR, JR.     AGE - 70                                1975
Dentist, Okmulgee, Oklahoma.

Each of the directors  and  executive  officers of PSO is elected to hold office
until  the first  meeting  of PSO's  Board of  Directors  after the 1999  Annual
Meeting of Stockholders.  PSO's 1999 Annual Meeting of Stockholders is presently
scheduled to be held on April 20, 1999.  All outside  directors  have engaged in
their principal  occupations  listed above for a period of more than five years,
unless otherwise indicated.


SWEPCO
KAREN C. ADAMS                 AGE - 38                               1996
General Manager of SWEPCO since 1996. Director of Regulatory
Services at CSW from 1995 to 1996.  Administrative  Director
of the El Paso Transition Team at CSW from 1993 to 1995.

E. R. BROOKS                   AGE - 61                               1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its  subsidiaries.  President  of CSW from  1991 to 1997.
Director of Hubbell, Inc., Orange,  Connecticut.  Trustee of
Baylor Health Care Center,  Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.

JAMES E. DAVISON               AGE - 61                               1993
President  and  CEO  of  Davison  Terminal  Services,   Inc.
President and CEO of Davison Motor Company,  Inc.  President
and CEO of Davison Insurance Company,  Inc. All of the above
entities are located in Ruston, Louisiana.  Director of Bank
One, Louisiana, Baton Rouge, Louisiana.

                                       3-3
<PAGE>

                    Name, Age, Principal                              Year
               Occupation, Business Experience                    First Became
                   and Other Directorships                          Director
--------------------------------------------------------------------------------

GLENN FILES                    AGE - 51                               1996
Senior Vice  President of CSW since 1996.  President and CEO
of WTU from 1992 to 1996.

DR. FREDERICK E. JOYCE         AGE - 64                               1990
President of  Chappell-Joyce  Pathology  Association,  P.A.,
Texarkana,    Texas.   President   of   Doctors   Diagnostic
Laboratory,  Inc., Texarkana,  Texas. Director of New Boston
Bank Shares,  Inc., New Boston,  Texas.  Director of Century
Bank, New Boston, Texas.

JOHN M. LEWIS                 AGE - 59                                1997
Chairman and CEO of The Bank of Fayetteville,  Fayetteville,
Arkansas.

WILLIAM C. PEATROSS           AGE - 55                                1990
President  and  CEO  of  United  Title  of  Louisiana,  Inc.
Director of Deposit Guaranty Bank. Both entities are located
in Shreveport, Louisiana.

MAXINE P. SARPY               AGE - 59                                1996
Vice President and Office Manager for Sarpy Medical  Clinic,
Shreveport, Louisiana.

MICHAEL H. MADISON            AGE - 50                                1998
President of SWEPCO since April 1998.  Programme Director of
SEEBOARD from 1996 to 1998. Vice  President,  Operations and
Engineering of SWEPCO from 1993 to 1996.

Each of the directors and executive officers of SWEPCO is elected to hold office
until the first  meeting of SWEPCO's  Board of  Directors  after the 1999 Annual
Meeting  of  Stockholders.  SWEPCO's  1999  Annual  Meeting of  Stockholders  is
presently  scheduled to be held on April 14, 1999.  All outside  directors  have
engaged in their principal occupations listed above for a period
of more than five years, unless otherwise indicated.

WTU
E. R. BROOKS                   AGE - 61                                1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its  subsidiaries.  President  of CSW from  1991 to 1997.
Director of Hubbell, Inc., Orange,  Connecticut.  Trustee of
Baylor Health Care Center,  Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.

PAUL J. BROWER                 AGE - 50                                1991
General   Manager/President  of  WTU  since  February  1998.
General  Manager of WTU from 1996 to 1998.  Vice  President,
Marketing and Business Development of WTU from 1991 to 1996.

                                       3-4
<PAGE>

                    Name, Age, Principal                              Year
               Occupation, Business Experience                    First Became
                   and Other Directorships                          Director
--------------------------------------------------------------------------------

GLENN FILES                    AGE - 51                                1996
Senior Vice  President of CSW since 1996.  President and CEO
of WTU from 1992 to 1996.

ALPHONSO R. JACKSON            AGE - 53                                1998
President of CSW-Texas  since February 1998.  Vice President
of CSW Energy, Inc., from 1996 to 1998. President and CEO of
The Housing  Authority  of the City of Dallas,  Texas,  from
1989 to 1996.  Director of Chase Bank of Texas N.A., Dallas,
Texas.  Director  of Chase  Bank of  Texas,  N.A.,  Houston,
Texas.

TOMMY MORRIS                  AGE - 64                                1976
President  of  The  Tommy  Morris  Agency,   an  independent
insurance and investment agency, Abilene, Texas.

DIAN G. OWEN                  AGE - 58                                1994
Chairperson,  Mansfeldt Investment Corporation,  since 1997.
Chairperson,  Dian Graves Owen Foundation, a general purpose
private foundation, since 1996. Consultant, Owen Healthcare,
Inc., a hospital pharmacy  management  services company from
1997  to  present.   Corporate   Executive/Founder  of  Owen
Healthcare, Inc., from 1976 to 1997.

JAMES M. PARKER               AGE - 68                                1987
President and CEO of J. M. Parker and  Associates,  Inc., an
investment  company,   Abilene,  Texas.  Director  of  First
Financial  Bankshares,  Inc.  and  First  National  Bank  of
Abilene, Abilene, Texas.

F. L.  STEPHENS               AGE - 60                                1980
Chairman and CEO of Town & Country Food  Stores,  Inc.,  San
Angelo, Texas.

Each of the directors  and  executive  officers of WTU is elected to hold office
until  the first  meeting  of WTU's  Board of  Directors  after the 1999  Annual
Meeting of Stockholders.  WTU's 1999 Annual Meeting of Stockholders is presently
scheduled to be held on March 30, 1999.  All outside  directors  have engaged in
their principal  occupations  listed above for a period of more than five years,
unless otherwise indicated.


                                       3-5
<PAGE>

(b)  The  following  is a  list  of  officers  who  are  not  directors  of  the
registrants, together with certain information with respect to each of them:

                                                                      Year
                    Name, Age, Principal                        First Elected to
             Occupation and Business Experience                 Present Position
--------------------------------------------------------------------------------

U.S. Electric Operating Companies
WENDY G. HARGUS                AGE - 41                               1996
Treasurer of CSW,  CPL,  PSO,  SWEPCO,  WTU and CSW Services
since 1996. Controller of CSW from 1993 to 1996.

R. RUSSELL DAVIS              AGE - 42                                1994
Controller of CPL, PSO, WTU,  SWEPCO and CSW Services  since
1994.

CPL
BRENDA L. SNIDER              AGE - 45                                1996
Corporate  Secretary of CPL since 1996.  Manager of Planning
and Analysis at CPL since 1996. Senior Financial  Consultant
at CPL from 1994 to 1996.

PSO
LINA P. HOLM                   AGE - 58                               1997
Corporate Secretary and Executive Secretary to the President
of PSO since 1997.  Executive Secretary to the President and
Assistant Corporate Secretary of PSO from 1992 to 1997.

SWEPCO
MARILYN S. KIRKLAND            AGE - 51                               1995
Corporate   Secretary  of  SWEPCO   since  1995.   Executive
Administrator  since 1997. Senior Executive Secretary to the
President, from 1992 to 1997.

WTU
MARTHA MURRAY                  AGE - 53                               1992
Corporate Secretary of WTU since 1992.


                                       3-6
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

Cash and Other Forms of Compensation

CSW
      Information required by ITEM 11 with respect to CSW is hereby incorporated
by reference  herein from the 1999 CSW Notice Of Annual Meeting Of  Stockholders
and Proxy Statement.

      The following  table sets forth the aggregate cash and other  compensation
for  services  rendered  for the  fiscal  years of 1998,  1997 and 1996  paid or
awarded to the President of each of the U.S.  Electric  Operating  Companies and
the Named Executive Officers as defined below.

      Because of the  functional  restructuring  undertaken  by CSW during 1996,
certain of the  Executive  Officers of the U.S.  Electric  Operating  Companies,
Messrs.  Files, Bremer,  Zemanek and Verret, are not actually employed by any of
the  U.S.  Electric  Operating  Companies.  Instead,  they are  employed  by CSW
Services and manage CSW business units and perform policy-making  functions that
are  integral  to  the  U.S.  Electric  Operating  Companies.  Therefore,  these
individuals  are included in the Summary  Compensation  Table as Named Executive
Officers due to the  functional  perspective  regarding  the  management  of the
companies.

U.S. Electric Operating Companies


<TABLE>
<CAPTION>
                          SUMMARY COMPENSATION TABLE

                                                                 Long-Term Compensation
                                                 ---------------------------------------------------------
                         Annual Compensation             Awards                     Payouts
                        -----------------------   --------------------   ---------------------------------                        
                                                  Other                                            All
                                                  Annual   Restricted    Securities                Other
    Name and                                      Compen-    Stock       Underlying     LTIP       Compen-
Principal Position            Salary     Bonus    sation    Award(s)     Options/      Payouts     sation
  at Registrant        Year     ($)     ($)(1)    ($)(2)     ($)(1)(3)    SARs(#)      ($)(4)      ($)(5)
--------------------   ----   -------   -------   -------  -----------   ----------   ---------  ---------
<S>                    <C>    <C>       <C>       <C>      <C>           <C>          <C>        <C>
    
Glenn Files            1998   392,307   125,000    10,753       --           --          75,992    23,263
 Senior Vice President 1997   374,999   143,099     8,534       --         31,000         --       23,757
 of CSW Electric       1996   331,135    44,860    66,415     153,750        --           --       23,992
 Operations (2,4,5)

Richard H. Bremer      1998   328,154    48,642     2,499       --           --          87,818    23,263
 President of CSW      1997   307,462    99,993     4,648       --         26,000         --       21,357
 Energy Services       1996   305,910   144,404    73,711     153,750        --           --       21,742
 business unit (2,4,5)

Robert L. Zemanek      1998   294,144     9,560    49,818       --           --          81,702     23,263
 President of CSW      1997   283,250    89,279    10,272       --         24,000         --        23,757
 Energy Delivery       1996   283,250   176,863     6,500     153,750        --           --        23,992
 business unit (2,4,5)
                    
Richard P. Verret      1998   270,038    50,953     1,833       --           --          47,576      7,900
 President of CSW      1997   251,230    83,390     2,083       --         21,000         --         7,953
 Production            1996   236,154    84,788     6,055      89,688        --           --         7,590
 (4,5)  

J. Gonzalo Sandoval    1998   138,115     8,110       --        --           --           18,944     6,580
 General Manager/      
 President of CPL(4)

T.D. Churchwell        1998   199,904     6,738     2,359       --           --           37,942     7,900
 President of PSO      1997   192,500    53,672     2,167       --         13,000         --         6,398
 (2,4,5)               1996   192,500    24,097    79,730      38,438        --           --         5,340
 
Michael H. Madison     1998   178,593    53,150    28,914       --           --           18,944     7,900
 President of SWEPCO      
 (2,4,5)

Paul Brower,           1998   138,115     2,874    15,136       --           --           18,944     6,344
 General Manager/      
 President of WTU(2,4)

</TABLE>
(Notes are on the following page)

                                       3-7
<PAGE>

(1)  Amounts  in  these  columns  are paid or  awarded  in a  calendar  year for
     performance in a preceding year.

(2)  The following are the perquisites and other personal  benefits  required to
     be  identified in respect of each Named  Executive  Officer.  In 1998,  Mr.
     Zemanek was  reimbursed  $12,000  for a company  automobile  allowance  and
     $19,314 for moving expenses. In 1998, Mr. Madison was reimbursed $8,100 for
     a company automobile allowance and $6,444 for moving expenses. In 1998, Mr.
     Brower was reimbursed $8,542 for membership dues.

                    1996 Relocation Reimbursements
            ------------------------------------------------
            Glenn Files                             $25,662
            Richard H. Bremer                        34,117
            T.D. Churchwell                          38,955

(3)  Grants   of    restricted   stock   are   administered   by  the  Executive
     Compensation  Committee  of the  CSW  Board  of  Directors,  which  has the
     authority to  determine  the  individuals  to whom and the terms upon which
     restricted stock grants,  including the number of underlying shares,  shall
     be made.  The awards  reflected in this column were made in 1996 and have a
     four-year  vesting  period  with 25  percent  of the stock  vesting on each
     anniversary  date.  Upon vesting,  shares of CSW Common Stock are re-issued
     without restrictions. The individuals receive dividends and may vote shares
     of restricted  stock,  even before they are vested.  The amount reported in
     the Summary Compensation Table represents the market value of the shares at
     the date of grant. As of December 31, 1998, the aggregate  restricted stock
     holdings  of each of the Named  Executive  Officers  are  presented  in the
     following table.

                                        Restricted    
                                       Stock Held      Market Value at
                                     At December 31,     December 31,
       Name                                1998             1998
       ---------------------------------------------------------------
       Glenn Files                        5,808           $159,357
       Richard H. Bremer                  6,245            171,347
       Robert L. Zemanek                  6,019            165,146
       Richard P. Verret                  3,508             96,251
       J. Gonzalo Sandoval                1,450             39,784
       T. D. Churchwell                   2,152             59,046
       Michael H. Madison                 1,450             39,784
       Paul J. Brower                     1,450             39,784


(4)The awards  reflected in this column are the value of restricted  shares paid
   out under the LTIP in 1998. The awards have a two-year vesting period with 50
   percent of the stock vesting on each anniversary  date. Upon vesting,  shares
   of CSW  Common  Stock are  re-issued  without  restrictions.  The  individual
   receives  dividends and may vote shares of restricted stock, even before they
   are vested. The amount reported in the Summary  Compensation Table represents
   the market value of the shares at the date of grant.

(5)Amounts  shown in this column  consist of: (i) the annual  employer  matching
   payments to CSW's Retirement Savings Plan; (ii) premiums paid per participant
   for personal liability insurance;  and (iii) average amounts of premiums paid
   per participant in those years under CSW's memorial gift program.  Under this
   program, for certain executive officers, directors and retired directors from
   the CSW  System,  CSW will make a donation in a  participant's  name to up to
   three charitable  organizations  in an aggregate of $500,000,  payable by CSW
   upon such  person's  death.  CSW  maintains  corporate-owned  life  insurance
   policies to fund the program.  The annual  premiums  paid by CSW are based on
   pooled risks and averaged $15,363 per participant for 1998, $15,803 for 1997,
   and $16,402  for 1996.  In 1998,  1997 and 1996,  Messrs.  Bremer,  Files and
   Zemanek participated.


                                      3-8
<PAGE>


Option/SAR Grants

No stock options or appreciation rights were granted in 1998.

Option/SAR Exercises and Year-End Value Table

      Shown below is information  regarding option/SAR exercises during 1998 and
unexercised options/SARs at December 31, 1998 for the Named Executive Officers.

                          Aggregated Option/SAR Exercises in 1998
                           and Fiscal Year-End Option/SAR Values

<TABLE>
<CAPTION>

                                                   Number of CSW Securities      Value of Unexercised
                                        Value       Underlying Unexercised     In-the-Money Options/SARs  
                    Shares Acquired    Realized    Options/SARs at Year-End     Options/SARs at Year-End
Name                 on Exercise(#)      ($)       Exercisable/Unexercisable   Exercisable/Unexercisable(1)
------------------------------------------------------------------------------------------------------------
<S>                 <C>                <C>         <C>                         <C>    

Glenn Files               --              --             33,986/20,677               83,564/138,211
Richard H. Bremer         --              --             36,998/17,334               72,493/115,921
Robert L. Zemanek         --              --             33,430/16,000               69,051/107,000
Richard P. Verret       17,190          73,557            3,135/14,000               (6,858)/93,625
J. Gonzalo Sandoval      4,010          10,524              2,916/--                   (6,379)/--
T. D. Churchwell         4,333          28,977             9,268/8,667                 9,238/57,961
Michael H. Madison       7,676          35,040             3,135/7,334               (6,858)/49,046
Paul J. Brower            --              --                 7,145/--                    3,666/--
</TABLE>

(1)Calculated  based upon the  difference  between  the  closing  price of CSW's
   Shares on the New York Stock  Exchange on December  31,  1998  ($27.4375  per
   share) and the exercise price per share of the outstanding  unexercisable and
   exercisable options ($20.750, $24.813 and $29.625, as applicable).

Long-term Incentive Plan Awards in 1998

      The following table shows information  concerning awards made to the Named
Executive Officers during 1998 under the CSW LTIP.

                                                 Estimated Future Payouts under
                                                   Non-Stock Price Based Plans
                                                --------------------------------
                                    Performance
                                         or
                                    Other Period 
                       Number of       Until        
                     Shares, Units   Maturation
                          or         Or Payout   Threshold    Target    Maximum
Name                 Other Rights       (1)         ($)        ($)        ($)
--------------------------------------------------------------------------------
Glenn Files              8,314        2 years        --      225,000    337,500
Richard H. Bremer        7,006        2 years        --      189,600    284,400
Robert L. Zemanek        6,280        2 years        --      169,950    254,925
Richard P. Verret        5,720        2 years        --      154,800    232,200
J. Gonzalo Sandoval       --          2 years        --         -         --
T. D. Churchwell         2,845        2 years        --        77,000   115,500
Michael H. Madison       2,439        2 years        --        66,000    99,000
Paul J. Brower            --          2 years        --         --        --

 (1) Vesting period for awards paid at end of three year cycle.

      Payouts of these awards are  contingent  upon CSW's  achieving a specified
level  of  total  stockholder  return,  relative  to a  peer  group  of  utility
companies,  for a three-year  period,  or cycle, and exceeding a certain defined
minimum  threshold.  If the Named Executive  Officer's  employment is terminated
during  the  performance  period  for any reason  other  than  death,  total and
permanent  disability or  retirement,  then the award is canceled.  The CSW LTIP
contains a provision  accelerating  awards upon a change in control of CSW. If a

                                      3-9
<PAGE>

change in control of CSW occurs,  all options and SARs become fully  exercisable
and all  restrictions,  terms and conditions  applicable to all restricted stock
are deemed lapsed and satisfied  and all  performance-based  units are deemed to
have been fully  earned,  as of the date of the change in control.  The CSW LTIP
also  contains  provisions  designed  to  prevent  circumvention  of  the  above
acceleration  provisions  through coerced  termination of an employee prior to a
change in control.


Retirement Plan

      CSW maintains the Retirement Plan for eligible employees. In addition, CSW
maintains the SERP, a non-qualified  ERISA excess plan, that primarily  provides
benefits  that cannot be payable  under the  Retirement  Plan because of maximum
limitations  imposed on such plans by the Internal  Revenue Code. Under the cash
balance  formula,  each  participant has an account for  recordkeeping  purposes
only,  to  which  dollar  amount  credits  are  allocated  annually  based  on a
percentage of the  participant's  pay. Pay for the Retirement Plan includes base
pay, bonuses, overtime, and commissions. The applicable percentage is determined
by the age and years of vesting  service  the  participant  has with CSW and its
affiliates  as  of  December  31 of  each  year  (or  as  of  the  participant's
termination  date,  if  earlier).  The  following  table  shows  the  applicable
percentage  used to  determine  dollar  amount  credits  at the age and years of
service indicated.

                   Sum of Age plus
                  Years of Service      Applicable Percentage
               ------------------------------------------------
                     less than 30               3.0%
                        30-39                   3.5%
                        40-49                   4.5%
                        50-59                   5.5%
                        60-69                   7.0%
                     70 or more                 8.5%

     As of December 31, 1998,  the sum of age plus years of service of the Named
Executive  Officers for the cash balance formula are as follows:  Mr. Files, 78;
Mr.  Bremer,  71;  Mr.  Zemanek,  75; Mr.  Verret,  78;  Mr.  Sandoval,  74, Mr.
Churchwell, 74; Mr. Madison, 77; Mr. Brower, 71.

      All dollar amount  balances in the accounts of  participants  earn a fixed
rate of  interest  which is also  credited  annually.  The  interest  rate for a
particular  year is the average rate of return of the 30-year  Treasury Rate for
November of the prior year. For 1998, the interest rate was 6.11%. For 1999, the
interest  rate  is  5.25%.  Interest  continues  to be  credited  as long as the
participant's balance remains in the plan.

      At retirement or other  termination of employment,  an amount equal to the
vested  balance  (including  qualified  and SERP  benefit)  then credited to the
account is payable to the  participant  in the form of an  immediate or deferred
lump-sum or annuity. Benefits (both from the Retirement Plan and the SERP) under
the cash  balance  formula  are not  subject to  reduction  for Social  Security
benefits or other offset amounts.  The estimated  annual benefit payable to each
of the Named  Officers as a single life  annuity at age 65 under the  Retirement
Plan and the SERP is: Mr. Files,  $233,016;  Mr. Bremer,  $180,955; Mr. Zemanek,
$200,710; Mr. Verret, $148,896; Mr. Sandoval, $81,802; Mr. Churchwell;  $93,338;
Mr. Madison,  $114,653; Mr. Brower,  $67,063. These projections are based on the
following assumptions: (1) participant remains employed until age 65; (2) salary
used is base pay paid for calendar year 1998 assuming no future  increases  plus
bonus at 1998 target  level;  (3)  interest  credit at 5.25% for 1999 and future
years;  and (4) the  conversion  of the  lump-sum  cash balance to a single life
annuity at normal  retirement  age is based on an interest rate of 5.25% and the
1983 Group Annuity  Mortality  Table,  which sets forth generally  accepted life
expectancies.

                                      3-10
<PAGE>

      In addition,  certain  employees  who were 50 or over and had completed at
least 10 years of service as of July 1, 1997,  also  continue  to earn a benefit
using the prior pension formula. At commencement of benefits, Mr. Verret and Mr.
Churchwell have a choice of their accrued benefit using the cash balance formula
or their accrued benefit using the prior pension  formula.  Once the participant
selects either the earned  benefit under the cash balance  formula or the earned
benefit under the prior pension  formula,  the other earned benefit is no longer
available.

      The table below shows the estimated  combined  benefits  payable from both
the prior  pension  formula  and the SERP  based on  retirement  age of 65,  the
average  compensation  shown,  the years of credited  service  shown,  continued
existence of the prior pension formula without substantial change and payment in
the form of a single life annuity.

                            Annual Benefits After
                     Specified Years of Credited Service
          Average
       Compensation      15           20           25      30 or more
       ----------------------------------------------------------------

          $100,000     $25,050     $33,333      $41,667      $50,000
           150,000      37,575      50,000       62,500       75,000
           200,000      50,100      66,667       83,333      100,000
           250,000      62,625      83,333      104,167      125,000
           300,000      75,150     100,000      125,000      150,000
           350,000      87,675     116,667      145,833      175,000
           450,000     112,725     150,000      187,500      225,000
           550,000     137,775     183,333      229,167      275,000
           650,000     162,825     216,667      270,833      325,000
           750,000     187,875     250,000      312,500      375,000
           850,000     212,500     283,333      357,000      425,000
           950,000     237,975     316,667      395,833      475,000

      Benefits  payable  under  the prior  pension  formula  are based  upon the
participant's  years of credited  service (up to a maximum of 30 years),  age at
retirement,  and  covered  compensation  earned by the  participant.  The annual
normal  retirement  benefit payable under the prior pension formula and the SERP
are based on 1.67 percent of "Average Compensation" times the number of years of
credited service  (reduced by no more than 50 percent of a participant's  age 62
or  later  Social  Security   benefit).   "Average   Compensation"   is  covered
compensation  for the prior  pension  formula  and  equals  the  average  annual
compensation,  reported as salary in the Summary  Compensation Table, during the
36 consecutive months highest pay during the 120 months prior to retirement.

      Respective  years of credited  service and ages,  as of December 31, 1998,
for the  following  officers  who  continue  to earn a  benefit  under the prior
pension formula are: Mr. Verret, 26 and 52, Mr. Churchwell, 20 and 54.


                                      3-11
<PAGE>

Meetings and Compensation

      Those  directors  who are not also  officers of CPL,  PSO,  SWEPCO and WTU
receive annual directors' fees and a fee of $300 plus expenses for each board or
committee  meeting  attended,  as  described  below.  They are also  eligible to
participate in a deferred  compensation plan. Under this plan such directors may
elect to defer payment of annual  directors'  and meeting fees until they retire
from the board or as they  otherwise  direct.  The number of board  meetings and
annual directors' fees are presented in the following table.

                                       CPL         PSO       SWEPCO        WTU
                                   ---------------------------------------------

Number of regular board meetings        4           4           4           4
Annual directors' fees               $6,000      $6,000      $6,600       $6,000

Compensation Committee Interlocks and Insider Participation

      No person  serving  during 1998 as a member of the Executive  Compensation
Committee  of the Board of  Directors of CSW served as an officer or employee of
any  Registrant  during or prior to 1998.  No person  serving  during 1998 as an
executive officer of the U.S. Electric Operating  Companies serves or has served
on  the  compensation  committee  or as a  director  of  another  company  whose
executive officers serve or has served as a member of the Executive Compensation
Committee  of  CSW or as a  director  of one  of  the  U.S.  Electric  Operating
Companies.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      CSW
      The information  required by ITEM 12 is  incorporated by reference  herein
from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.

      U.S. Electric Operating Companies
      All of the outstanding shares of common stock of each of the U.S. Electric
Operating Companies, presented in the following table, is owned beneficially and
of record by CSW.

              Company              Shares        Par Value
              -------------------------------------------------
              CPL                6,755,535           $25
              PSO                9,013,000            15
              SWEPCO             7,536,640            18
              WTU                5,488,560            25


      Security Ownership of Management

      The following tables show securities beneficially owned as of December 31,
1998, by each director, the President,  Executive Officers and all directors and
Executive Officers as a group for each of the U.S. Electric Operating Companies.
Share  amounts shown in this table include  options  exercisable  within 60 days
after December 31, 1998,  restricted  stock, CSW Common Stock credited to Thrift
Plus  accounts and all other CSW Common Stock  beneficially  owned by the listed
persons.

                                      3-12
<PAGE>

      Each of the U.S.  Electric  Operating  Companies has one or more series of
preferred  stock  outstanding.  As of December 31, 1998, none of the individuals
listed in the following tables owned any shares of preferred stock of any of the
U.S. Electric Operating Companies.

         Beneficial Ownership as of December 31, 1998
                                                           CSW Common
                                                           Underlying
                                CSW        Restricted      Immediately
                               Common        Stock         Exercisable
Name                            (1)         (2) (3)        Options (3)
------------------------------------------------------------------------
CPL
John F. Brimberry                 1,097         --               --
E. R. Brooks                    139,579      16,307           65,175
Glenn Files                      53,388       5,808           33,986
Ruben M. Garcia                      --         --               --
Robert A. McAllen                   250         --               --
Pete Morales, Jr.                    --         --               --
H. Lee Richards                   1,400         --               --
J. Gonzalo Sandoval               5,200       1,450            2,916
Gerald E. Vaughn                 10,535       1,450            5,003
Wendy Hargus                     12,966       1,450            8,983
Alphonso Jackson                  3,783         443            3,333
R. Russell Davis                  1,406         --             1,406
Brenda L. Snider                    620         --               --
                             -------------------------------------------
TOTAL                           230,224      26,908           120,802

PSO
E. R. Brooks                    139,579      16,307            65,175
T. D. Churchwell                 13,462       2,152             9,268
Harry A. Clarke                      --         --               --
Glenn Files                      53,388       5,808            33,986
Paul K. Lackey, Jr.                  --        --                --
Paula Marshall-Chapman               --        --                --
William R. McKamey               17,589       1,450             3,323
Dr. Robert B. Taylor, Jr.            --        --                --
Wendy Hargus                     12,966       1,450             8,983
R. Russell Davis                  1,406        --               1,406
Lina P. Holm                        682        --                 --
                             -------------------------------------------
TOTAL                           239,072      27,167           122,141

SWEPCO
Karen C. Adams                    2,587        --                 880
E. R. Brooks                    139,579      16,307            65,175
James E. Davison                 14,000        --                 --
Glenn Files                      53,388       5,808            33,986
Dr. Frederick E. Joyce               --        --                 --
John M. Lewis                        --        --                 --
William C. Peatross                  --        --                 --
Maxine P. Sarpy                     100        --                 --
Michael H. Madison                9,723       1,450             3,135
Wendy Hargus                     12,966       1,450             8,983
R. Russell Davis                  1,406        --               1,406
Marilyn  S. Kirkland                 --        --                 --
                             ------------------------------------------
TOTAL                           233,749      25,015           113,565

WTU
E. R. Brooks                    139,579      16,307            65,175
Paul J. Brower                   10,890       1,450             7,145
Glenn Files                      53,388       5,808            33,986
Tommy Morris                      2,000        --                 --
Dian G. Owen                         --        --                 --
James M. Parker                      --        --                 --
F. L. Stephens                    8,098        --                 --
Alphonso Jackson                  3,783         443             3,333
Wendy Hargus                     12,966       1,450             8,983
R. Russell Davis                  1,406        --               1,406
Martha Murray                     3,209        --                 --
                             -------------------------------------------
TOTAL                           235,319      25,458           120,028

(1)Beneficial ownership  percentages are all less than one percent and therefore
   are omitted.
(2)These  individuals  currently have voting power,  but not  investment  power,
   with respect to these shares.
(3)These shares are included in the CSW Common column.

                                      3-13
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       CSW
       The information  required by ITEM 13 is incorporated  herein by reference
from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.

      U.S. Electric Operating Companies
      None.

                                      3-14
<PAGE>
                                         
PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The  following  documents are filed  as a part of this  report  on this Form
    10-K.

      (1) Financial Statements.

      Reports of Independent Public Accountants on the financial  statements for
      CSW and subsidiary  companies,  CPL, PSO,  SWEPCO and WTU are listed under
      ITEM 8 herein.

      The  financial  statements  filed  as a part  of this  report  for CSW and
      subsidiary  companies,  CPL,  PSO,  SWEPCO and WTU are listed under ITEM 8
      herein.

(2)   Exhibits.
      Exhibits  for CSW,  CPL,  PSO,  SWEPCO  and WTU are listed in (c) Index to
      Exhibits below.

(b) Reports on Form 8-K.

CSW and PSO
Date of earliest event reported: October 1, 1998
Date of report: October 9, 1998
Item 5. Other Events and Item 7. Financial  Statements  and Exhibits,  reporting
the recommendation of an Oklahoma Commission administrative law judge to dismiss
the AEP and CSW merger application due to insufficient information.

CSW, CPL, PSO, SWEPCO and WTU
Date of earliest event reported: November 19, 1998
Date of report: December 7, 1998
Item 5. Other Events and Item 7. Financial  Statements  and Exhibits,  reporting
the FERC's  procedural  schedule  for the AEP and CSW merger  application  and a
proposed merger settlement with two intervenors in the Texas merger proceedings.

CSW, CPL, PSO, SWEPCO and WTU
Date of earliest event reported: December 17, 1998
Date of report: January 5, 1999
Item 5. Other Events and Item 7. Financial  Statements  and Exhibits,  reporting
developments in the CSW and AEP merger proceedings in Arkansas,  as well as, the
current status of other regulatory proceedings.

                                      4-1
<PAGE>


CSW
SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
10, 1999. The signature of the undersigned  registrant shall be deemed to relate
only to  matters  having  reference  to  such  registrant  and any  subsidiaries
thereof.

                                    CENTRAL AND SOUTH WEST CORPORATION

                                    By:  Lawrence B. Connors
                                         Controller

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities  indicated on March 10, 1999. The signature
of each of the  undersigned  shall be deemed to relate  only to  matters  having
reference to the above named registrant and any subsidiaries thereof.

Signature                              Title

E. R. Brooks                           Chairman, CEO and Director
                                       (Principal Executive Officer)

Glenn D. Rosilier                      Executive Vice President and Chief 
                                       Financial Officer
                                       (Principal Financial Officer)

Lawrence B. Connors                    Controller
                                       (Principal Accounting Officer)

*Molly Shi Boren                       Director
*Dr. Donald M. Carlton                 Director
*T. J. Ellis                           Director
*Joe H. Foy                            Director
*William R. Howell                     Director
*Dr. Robert W. Lawless                 Director
*James L. Powell                       Director
*Dr. Richard L. Sandor                 Director
*T. V. Shockley, III                   President, Chief Operating Officer and
                                       Director

*Lawrence B.  Connors,  by signing his name hereto,  does sign this  document on
behalf of the persons  indicated  above  pursuant  to a power of  attorney  duly
executed by each such person.

                                       *By:  Lawrence B. Connors
                                             Attorney-in-Fact

                                      4-2
<PAGE>


CPL
SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
10, 1999. The signature of the undersigned  registrant shall be deemed to relate
only to matters having reference to such registrant.

                                          CENTRAL POWER AND LIGHT COMPANY

                                          By:  R. Russell Davis
                                               Controller

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities  indicated on March 10, 1999. The signature
of each of the  undersigned  shall be deemed to relate  only to  matters  having
reference to the above named registrant.

Signature                                  Title
J. Gonzalo Sandoval                        General Manager/President and 
                                           Director
                                           (Principal Executive Officer)

R. Russell Davis                           Controller
                                           (Principal Accounting and Financial 
                                           Officer)

*John F. Brimberry                         Director
*E. R. Brooks                              Director
*Glenn Files                               Director
*Ruben M. Garcia                           Director
*Alphonso R. Jackson                       Director
*Robert A. McAllen                         Director
*Pete Morales, Jr.                         Director
*H. Lee Richards                           Director
*Gerald E. Vaughn                          Director

*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons  indicated above pursuant to a power of attorney duly executed by
each such person.

                                          *By:  R. Russell Davis
                                                Attorney-in-Fact





                                      4-3
<PAGE>


PSO
SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
10, 1999. The signature of the undersigned  registrant shall be deemed to relate
only to matters having reference to such registrant.

                                            PUBLIC SERVICE COMPANY OF OKLAHOMA

                                       By:  R. Russell Davis
                                            Controller

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities  indicated on March 10, 1999. The signature
of each of the  undersigned  shall be deemed to relate  only to  matters  having
reference to the above named registrant.

Signature                              Title

T. D. Churchwell                       President and Director
                                       (Principal Executive Officer)

R. Russell Davis                       Controller
                                       (Principal Accounting and Financial
                                       Officer)

*E. R. Brooks                          Director
*Harry A. Clarke                       Director
*Glenn Files                           Director
*Paul K. Lackey, Jr.                   Director
*Paula Marshall-Chapman                Director
*William R. McKamey                    General Manager and Director
*Dr. Robert B. Taylor, Jr.             Director

*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons  indicated above pursuant to a power of attorney duly executed by
each such person.

                                       *By: R. Russell Davis
                                            Attorney-in-Fact




                                      4-4
<PAGE>


SWEPCO
SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
10, 1999. The signature of the undersigned  registrant shall be deemed to relate
only to matters having reference to such registrant.

                                    SOUTHWESTERN ELECTRIC POWER COMPANY

                                    By:  R. Russell Davis
                                         Controller

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities  indicated on March 10, 1999. The signature
of each of the  undersigned  shall be deemed to relate  only to  matters  having
reference to the above named registrant.

Signature                                  Title
Michael H. Madison                         President and Director
                                           (Principal Executive Officer)

R. Russell Davis                           Controller
                                           (Principal Accounting and Financial
                                           Officer)

*Karen C. Adams                            General Manager and Director
*E. R. Brooks                              Director
*James E. Davison                          Director
*Glenn Files                               Director
*Dr. Frederick E. Joyce                    Director
*John M. Lewis                             Director
*William C. Peatross                       Director
*Maxine P. Sarpy                           Director

*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons  indicated above pursuant to a power of attorney duly executed by
each such person.

                                          *By:  R. Russell Davis
                                                Attorney-in-Fact





                                      4-5
<PAGE>


WTU
SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
10, 1999. The signature of the undersigned  registrant shall be deemed to relate
only to matters having reference to such registrant.

                                         WEST TEXAS UTILITIES COMPANY

                                          By:  R. Russell Davis
                                               Controller

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities  indicated on March 10, 1999. The signature
of each of the  undersigned  shall be deemed to relate  only to  matters  having
reference to the above named registrant.

Signature                                  Title
Paul J. Brower                             General Manager/President and 
                                           Director
                                           (Principal Executive Officer)

R. Russell Davis                           Controller
                                           (Principal Accounting and Financial
                                           Officer)

*E. R. Brooks                              Director
*Glenn Files                               Director
*Alphonso R. Jackson                       Director
*Tommy Morris                              Director
*Dian G. Owen                              Director
*James M. Parker                           Director
*F. L. Stephens                            Director

*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons  indicated above pursuant to a power of attorney duly executed by
each such person.

                                          *By:  R. Russell Davis
                                                Attorney-in-Fact





                                      4-6
<PAGE>


(c) Index to Exhibits.

      The following  exhibits indicated by an asterisk (*) preceding the exhibit
number are filed  herewith.  The balance of the exhibits  have  heretofore  been
filed  with the  SEC,  respectively,  as the  exhibits  and in the file  numbers
indicated and are incorporated  herein by reference.  The exhibits marked with a
plus (+) are management contracts or compensatory plans or arrangements required
to be filed  herewith and required to be  identified  as such by ITEM 14 of Form
10-K. Reference is made to a duplicate list of exhibits being filed as a part of
this Form 10-K,  which list,  prepared in accordance with Item 102 of Regulation
S-T of the SEC,  immediately  precedes the  exhibits  being filed with this Form
10-K.

(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.

      CSW and SWEPCO
 1    Plan of  Reorganization  for Cajun Electric Power  Cooperative,  Inc.
      submitted  jointly by the Members  Committee,  SWEPCO and Gulf States
      Utilities  Company  (incorporated  herein  by  reference  to CSW  and
      SWEPCO's Form 8-K dated April 19, 1996).
 2    Amended Plan of Reorganization  for Cajun Electric Power Cooperative,
      Inc. submitted jointly by the Members  Committee,  SWEPCO and Entergy
      Texas,  Inc.  (incorporated  herein by  reference to CSW and SWEPCO's
      Form 8-K dated September 30, 1996).
 3    Amended and Restated Joint Plan of Reorganization  for Cajun Electric
      Power  Cooperative,  Inc.  submitted jointly by the Members Committee
      and SWEPCO dated March 18, 1998. (incorporated herein by reference to
      CSW and SWEPCO's Form 10-K dated December 31, 1997).

(3) Articles of Incorporation and Bylaws.

      CSW
 1    Certificate   of  Amendment  to  Second   Restated   Certificate   of
      Incorporation  of  CSW(incorporated  herein by  reference to Item 10,
      Exhibit B-1.2 to the 1993 CSW annual report on Form U5S).
*2    Bylaws of CSW, as amended January 20, 1999.

      CPL
 3    Restated  Articles of Incorporation  Without  Amendment,  Articles of
      Correction to Restated Articles of Incorporation  Without  Amendment,
      Articles  of  Amendment  to  Restated   Articles  of   Incorporation,
      Statements  of  Registered  Office  and/or  Agent,  and  Articles  of
      Amendment to the Articles of  Incorporation  (incorporated  herein by
      reference to Exhibit 3.1 to CPL's Form 10-Q dated March 31, 1997).
 4    Bylaws of CPL, as amended (incorporated herein by reference to Exhibit
      3.1 to CPL's Form 10-Q dated September 30, 1996, File No. 0-346).

      PSO
 5    Restated  Certificate of Incorporation of PSO (incorporated herein by
      reference to Exhibit B-3.1 of CSW's 1996 Form U5S, File No. 1-1443).
 6    Bylaws of PSO, as amended (incorporated herein by reference to Exhibit
      3.1 of PSO's Form 10-Q, dated March 31, 1998, File No. 0-343).

                                      4-7
<PAGE>

      SWEPCO
 7    Restated  Certificate  of  Incorporation,  as amended  through May 6,
      1997,  including  Certificate of Amendment of Restated Certificate of
      Incorporation  (both incorporated  herein by reference to Exhibit 3.4
      to SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146).
 8    Bylaws of  SWEPCO,  as amended  (incorporated  herein by  reference  to
      Exhibit 3.3 to SWEPCO's Form 10-Q dated  September  30, 1996,  File No.
      1-3146).

      WTU
 9    Restated  Articles  of  Incorporation,  as  amended,  and  Articles  of
      Amendment to the Articles of Incorporation (both incorporated herein by
      reference to Exhibit 3.5 to WTU's Form 10-K dated March 31, 1997,  File
      No. 0-340).
10    Bylaws of WTU, as amended  (incorporated herein by reference to Exhibit
      3.4 to WTU's Form 10-Q dated September 30, 1996, File No. 0-340).

(4) Instruments defining the rights of security holder, including indentures.

      CSW
1     Rights  Agreement dated as of December 22, 1997 between CSW and Central
      and South West Services,  Inc., as Rights Agent (incorporated herein by
      reference to Exhibit 1 to CSW Form 8-A/A dated March 19, 1998, File No.
      1-1443).

      CPL
(a)   Indenture of mortgage or deed of trust date November 1, 1943,  executed
      by CPL to the First  National Bank of Chicago and Robert L. Grinnell as
      trustee,  as amended  through October 1, 1977  (incorporated  herein by
      reference to Exhibit 5.01 in File No. 2-60712).

(b)    Supplemental Indentures to the First Mortgage Indenture:

       Dated                       File Reference            Exhibit
       September 1, 1978           2-62271                   2.02
       December 15, 1984           Form U-1, No. 70-7003     17
       July 1, 1985                2-98944                   4 (b)
       May 1, 1986                 Form U-1, No. 70-7236     4
       November 1, 1987            Form U-1, No. 70-7249     4
       June 1, 1988                Form U-1, No. 70-7520     2
       December 1, 1989            Form U-1, No. 70-7721     3
       March 1, 1990               Form U-1, No. 70-7725     10
       October 1, 1992             Form U-1, No. 70-8053     10 (a)
       December 1, 1992            Form U-1, No. 70-8053     10 (b)
       February 1, 1993            Form U-1, No. 70-8053     10 (c)
       April 1, 1993               Form U-1, No. 70-8053     10 (d)
       May 1, 1994                 Form U-1, No. 70-8053     10 (e)
       July 1, 1995                Form U-1, No. 70-8053     10 (f)

(c)    CPL-obligated,   mandatorily   redeemable   preferred   securities   of
       subsidiary trust holding solely Junior Subordinated Debentures of CPL.

                                      4-8
<PAGE>

 2    Indenture,  dated as of May 1,  1997,  between  CPL and the Bank of New
      York,  as Trustee  (incorporated  herein by reference to Exhibit 4.1 of
      CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
 3    First Supplemental Indenture,  dated as of May 1, 1997, between CPL and
      the Bank of NewYork,  as Trustee  (incorporated  herein by reference to
      Exhibit 4.2 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
 4    Amended and Restated Trust  Agreement of CPL Capital I, dated as of May
      1, 1997,  among CPL, as  Depositor;  the Bank of New York,  as Property
      Trustee; the Bank of New York (Delaware),  as Delaware Trustee; and the
      Administrative Trustee (incorporated herein by reference to Exhibit 4.3
      of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
 5    Guarantee Agreement, dated as of May 1, 1997, delivered by CPL for the
      benefit of the holders of CPL Capital I's Preferred Securities 
      (incorporated herein by reference to Exhibit 4.4 of CPL's Form 10-Q dated
      March 31, 1997,  File No. 0-346).
 6    Agreement  as to  Expenses  and  Liabilities,  dated as of May 1, 1997,
      between  CPL and CPL Capital I  (incorporated  herein by  reference  to
      Exhibit 4.5 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).

      PSO
(a)   Indenture dated July 1, 1945, as amended,  of PSO (incorporated  herein
      by reference to Exhibit 5.03 in Registration No. 2-60712).

(b)   Supplemental Indentures to the First Mortgage Indenture:

      Dated                   File Reference                         Exhibit
      June 1, 1979            2-64432                                2.02
      December 1, 1979        2-65871                                2.02
      March 1, 1983           Form U-1, No. 70-6822                  2
      May 1, 1986             Form U-1, No. 70-7234                  3
      July 1, 1992            Form S-3, No. 33-48650                 4 (b)
      December 1, 1992        Form S-3, No. 33-49143                 4 (c)
      April 1, 1993           Form S-3, No. 33-49575                 4 (b)
      June 1, 1993            Form 10-K, No. 0-343                   4 (b)
      February 1, 1996        Form 8-K, March 4, 1996, No. 0-343     4.01
      February 1, 1996        Form 8-K, March 4, 1996, No. 0-343     4.02
      February 1, 1996        Form 8-K, March 4, 1996, No. 0-343     4.03
                                 

(c)   PSO-obligated,   mandatorily   redeemable   preferred   securities   of
      subsidiary trust holding solely Junior Subordinated Debentures of PSO.

 7     Indenture,  dated as of May 1,  1997,  between  PSO and the Bank of New
       York,  as Trustee  (incorporated  herein by reference to Exhibit 4.6 of
       PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
 8     First Supplemental Indenture,  dated as of May 1, 1997, between PSO and
       the Bank of New York, as Trustee  (incorporated  herein by reference to
       Exhibit 4.7 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
 9     Amended and Restated Trust  Agreement of PSO Capital I, dated as of May
       1, 1997,  among PSO, as  Depositor;  the Bank of New York,  as Property

                                     4-9
<PAGE>

      Trustee; the Bank of New York (Delaware),  as Delaware Trustee; and the
      Administrative Trustee (incorporated herein by reference to Exhibit 4.8
      of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
10    Guarantee Agreement,  dated as of May 1, 1997, delivered by PSO for the
      benefit  of  the  holders  of  PSO  Capital  I's  Preferred  Securities
      (incorporated  herein by  reference  to Exhibit  4.9 of PSO's Form 10-Q
      dated March 31, 1997, File No. 0-343).

11    Agreement  as to  Expenses  and  Liabilities,  dated as of May 1, 1997,
      between  PSO and PSO Capital I  (incorporated  herein by  reference  to
      Exhibit 4.10 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).

      SWEPCO
(a)   Indenture dated February 1, 1940, as amended  through  November 1, 1976
      (incorporated  herein by reference to Exhibit 5.04 in Registration  No.
      2-60712).

(b)   Supplemental Indentures to the First Mortgage Indenture:

      Dated                     File Reference               Exhibit
      August 1, 1978            2-61943                      2.02
      January 1, 1980           2-66033                      2.02
      April 1, 1981             2-71126                      2.02
      May 1, 1982               2-77165                      2.02
      August 1, 1985            Form U-1, No. 70-7121        4
      May 1, 1986               Form U-1, No. 70-7233        3
      November 1, 1989          Form U-1, No. 70-7676        3
      June 1, 1992              Form U-1, No. 70-7934        10
      September 1, 1992         Form U-1, No. 72-8041        10 (b)
      July 1, 1993              Form U-1, No. 70-8041        10 (c)
      October 1, 1993           Form U-1, No. 70-8239        10 (a)

(c)   SWEPCO-obligated,   mandatorily   redeemable  preferred  securities  of
      subsidiary  trust  holding  solely  Junior  Subordinated  Debentures of
      SWEPCO.

12    Indenture,  dated as of May 1, 1997, between SWEPCO and the Bank of New
      York, as Trustee  (incorporated  herein by reference to Exhibit 4.11 of
      SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146).
13    First Supplemental  Indenture,  dated as of May 1, 1997, between SWEPCO
      and the Bank of New York, as Trustee  (incorporated herein by reference
      to Exhibit 4.12 of SWEPCO's  Form 10-Q dated March 31,  1997,  File No.
      1-3146).
14    Amended and Restated  Trust  Agreement of SWEPCO Capital I, dated as of
      May 1, 1997,  among  SWEPCO,  as  Depositor;  the Bank of New York,  as
      Property Trustee; the Bank of New York (Delaware), as Delaware Trustee;
      and the  Administrative  Trustee  (incorporated  herein by reference to
      Exhibit  4.13 of  SWEPCO's  Form 10-Q dated  March 31,  1997,  File No.
      1-3146).
15    Guarantee  Agreement,  dated as of May 1, 1997, delivered by SWEPCO for
      the benefit of the holders of SWEPCO  Capital I's Preferred  Securities
      (incorporated herein by reference to Exhibit 4.14 of SWEPCO's Form 10-Q
      dated March 31, 1997, File No.
      1-3146).
16    Agreement  as to  Expenses  and  Liabilities,  dated as of May 1,  1997
      between SWEPCO and SWEPCO Capital I  (incorporated  herein by reference
      to Exhibit 4.15 of SWEPCO's  Form 10-Q dated March 31,  1997,  File No.
      1-3146).

                                      4-10
<PAGE>


      WTU
(a)   Indenture  dated August 1, 1943,  as amended  through July 1, 1973,  of
      WTU,  incorporated  herein by  reference  to  Exhibit  5.05 in File No.
      2-60712.
(b)   Supplemental Indentures to the First Mortgage Indenture:

            Dated                  File Reference               Exhibit
            May 1, 1979            2-63931                      2.02
            November 15, 1981      2-74408                      4.02
            November 1, 1983       Form U-1, No. 70-6820        12
            April 15, 1985         Form U-1, No. 70-6925        13
            August 1, 1985         2-98843                      4 (b)
            May 1, 1986            Form U-1, No. 70-7237        4
            December 1, 1989       Form U-1, No. 70-7719        3
            June 1, 1992           Form U-1, No. 70-7936        10
            October 1, 1992        Form U-1, No. 72-8057        10
            February 1, 1994       Form U-1, No. 70-8265        10
            March 1, 1995          Form U-1, No. 70-8057        10 (b)
            October 1, 1995        Form U-1, No. 70-8057        10 (c)

(10) Material contracts.

CSW
      +1 Change in Control Agreement between CSW and E. R. Brooks.
      +2 Change in Control Agreement between CSW and Thomas V. Shockley, III.
      +3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr.
      +4 Change in Control Agreement between CSW and Glenn D. Rosilier.
      +5 Change in Control Agreement between CSW and Venita. McCellon-Allen.
      +6 Change in Control Agreement between CSW and Thomas M. Hagan.
      +7 Change in Control Agreement between CSW and Glenn Files.
      +8 Change in Control Agreement between CSW and Robert L. Zemanek.
      +9 Change in Control Agreement between CSW and Richard H. Bremer.
     +10 Change in Control Agreement between CSW and Richard P. Verret.
     +11 Change in Control Agreement between CSW and T. J. Ellis.
     +12 Change in Control Agreement between CSW and Terry D. Dennis.
     +13 Change in Control Agreement between CSW and Bruce Evans.
     +14 Change in Control Agreement between CSW and Pete Churchwell.
     +15 Change in Control Agreement between CSW and Michael D. Smith.
     +16 Change in Control Agreement between CSW and Floyd Nickerson.
     +17 Restricted Stock Plan for Central and South West Corporation 
         (incorporated herein by reference to Exhibit 10 (a) to CSW's 1990 Form
         10-K, File No. 1-1443).
    *+18 Central  and South West System  Special  Executive  Retirement  Plan as
         amended and restated effective July 1, 1997.
     +19 Executive Incentive Compensation Plan for Central and South West System
         (incorporated   herein  by   reference   to   Exhibit  10  (c)  to  the
         Corporation's 1990 Form 10-K, File No. 1-1443).
      20 Central and South West  Corporation  Stock  Option  Plan  (incorporated
         herein by  reference to Exhibit 10 (d) to the  Corporation's  1990 Form
         10-K, File No. 1-1443).
      21 Central  and South  West  Corporation  Deferred  Compensation  Plan for
         Directors  (incorporated  herein by  reference to Exhibit 10 (e) to the
         Corporation's 1990 Form 10-K, File No. 1-1443).

                                      4-11
<PAGE>

     +22 Central  and South  West  Corporation  1992  Long-Term  Incentive  Plan
         (incorporated  herein by  reference  to  Appendix A to the  Central and
         South West  Corporation  Notice of 1992 Annual Meeting of  Shareholders
         and Proxy Statement).
      23 Agreement  and Plan of Merger,  dated as of December 21,  1997,  by and
         among American  Electric Power Company,  Inc.; a New York  Corporation,
         Augusta  Acquisition   Corporation,   a  Delaware   Corporation  and  a
         wholly-owned subsidiary of AEP; and Central and South West Corporation,
         a Delaware  Corporation  (incorporated  herein by reference to the 1998
         Joint Proxy Statement, File No. 1-1443).
    *+24 Central and South West Corporation  Executive  Deferred Savings Plan as
         amended and restated effective as of January 1, 1997.

   (12) Statements re computation of ratios.

   CPL, PSO, SWEPCO and WTU
    *   1 CPL's  Statement re  computation of Ratio of Earnings to Fixed Charges
          for the five years ended December 31, 1998.
    *   2 PSO's  Statement re  computation of Ratio of Earnings to Fixed Charges
          for the five years ended December 31, 1998.
    *   3 SWEPCO's  Statement  re  computation  of Ratio of  Earnings  to Fixed
          Charges for the five year ended December 31, 1998.
    *   4 WTU's  Statement re  computation of Ratio of Earnings to Fixed Charges
          for the five years ended December 31, 1998.

 * (13) Annual report to security holders.
         CSW's 1998 Financial Report.

 * (21) Subsidiaries of the registrant (CSW).

   (23) Consent of experts and counsel.

    CSW, CPL, PSO
      * 1 CSW's Consent of Independent Public Accountants.
      * 2 CSW UK Finance Company's Consent of Independent Public Accountants.
      * 3 CPL's Consent of Independent Public Accountants.
      * 4 PSO's Consent of Independent Public Accountants.

   (24) Power of attorney.

    CSW
      * 1 Power of Attorney.
      * 2 Power of Attorney.
      * 3 Power of Attorney.
      * 4 Power of Attorney.
      * 5 Board Resolution Authorizing Power of Attorney.


                                      4-12
<PAGE>

    CPL
        * 6 Power of Attorney.
        * 7 Power of Attorney.
        * 8 Power of Attorney.
        * 9 Board Resolution Authorizing Power of Attorney.

    PSO
       * 10 Power of Attorney.
       * 11 Power of Attorney.
       * 12 Power of Attorney
       * 13 Board Resolution Authorizing Power of Attorney.

    SWEPCO
       * 14 Power of Attorney.
       * 15 Power of Attorney.
       * 16 Power of Attorney.
       * 17 Board Resolution Authorizing Power of Attorney

    WTU
       * 18 Power of Attorney.
       * 19 Power of Attorney.
       * 20 Power of Attorney.
       * 21 Board Resolution Authorizing Power of Attorney.

  (27) Financial Data Schedules.

    CSW, CPL, PSO, SWEPCO and WTU
       * 1  CSW's Financial Data Schedules.
       * 2  CPL's Financial Data Schedules.
       * 3  PSO's Financial Data Schedules.
       * 4  SWEPCO's Financial Data Schedules.
       * 5  WTU's Financial Data Schedules.

(d) Index to Financial Statement Schedules.

    Other Schedules.

All other  exhibits  and  schedules  are  omitted  because of the absence of the
conditions under which they are required or because the required  information is
included in the financial statements or related notes to financial statements.


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