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, 1997

                                       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) 222-2141

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:
                                                        Name of Each Exchange
Registrant             Title of Each Class              on Which Registered

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

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

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

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


SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Registrant                 Title of  Each Class

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

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

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

West Texas Utilities       Cumulative Preferred Stock, $100 Par Value
Company                    $100 Par Value

      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 [   ]
      Central Power and Light Company [ x ]
      Public Service Company of Oklahoma [ x ]
      Southwestern Electric Power Company [ x ]
      West Texas Utilities Company [ x ]

      Aggregate  market  value of the  Common  Stock of  Central  and South West
Corporation  at March 6,  1998 held by  non-affiliates  was  approximately  $5.7
billion.   Number  of  shares  of   Common   Stock   outstanding   at  March  6,
1998:212,271,060.  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 Notice of Annual  Meeting and Joint  Proxy  Statement  of
Central and South West Corporation and American Electric Power Company, Inc. 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..............................................27
  ITEM 3.LEGAL PROCEEDINGS.......................................28
  ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....29

PART II

  ITEM 5.MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.....................................2-1
  ITEM 6.SELECTED FINANCIAL DATA.................................2-2
         Central and South West Corporation
         Central Power and Light Company
         Public Service Company of Oklahoma
         Southwestern Electric Power Company
         West Texas Utilities Company
  ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.....................2-2
         Central and South West Corporation
         Central Power and Light Company
         Public Service Company of Oklahoma
         Southwestern Electric Power Company
         West Texas Utilities Company
  ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............2-2
         Central and South West Corporation
         Central Power and Light Company
         Public Service Company of Oklahoma
         Southwestern Electric Power Company
         West Texas Utilities Company
  ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.....................2-133

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.............................................3-13
  ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........3-15

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
ACSI.......................American Customer Satisfaction Index(TM) (Survey
                           conducted by the University of Michigan Business
                           School and the American Society of Quality Control)
AEP........................American Electric Power Company, Inc.
AEP Merger.................Proposed Merger between AEP and CSW where CSW would
                           become a wholly owned subsidiary of AEP
APBO.......................Accumulated Postretirement Benefit Obligation
AFUDC......................Allowance for funds used during construction
Alpek......................Alpek S.A. de C.V.
ANI........................American Nuclear Insurance
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 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 1997 Original Rate
  Order....................Final order issued on March 31, 1997 by the Texas
                           Commission in CPL's rate case Docket No. 14965
CPL 1995  Agreement........Settlement  agreement  filed  by CPL with the  Texas
                           Commission to settle certain CPL regulatory matters
CPL 1996 Fuel Agreement....Fuel settlement agreement entered into by CPL and
                           other parties
CSW........................Central and South West Corporation, Dallas, Texas
CSW Common.................CSW common stock, $3.50 par value per share
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.....CSW Finco, 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 Electricity Supply
DHMV.......................Dolet Hills Mining Venture
DOE........................United States Department of Energy
ECOM.......................Excess cost over market
El Paso....................El Paso Electric Company
El Paso Merger Agreement...Agreement and Plan of Merger between El Paso and CSW,
                           dated as of May 3, 1993, as amended
EMF........................Electric and magnetic fields
Energy Policy Act..........National Energy Policy Act of 1992
EnerShop...................EnerShopSM Inc., Dallas, Texas
Entergy Texas..............Entergy Texas Utilities Company
EPA........................United States Environmental Protection Agency

                                       ii
<PAGE>


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

Abbreviation or Acronym    Definition
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
FASB.......................Financial Accounting Standards Board
FCC........................Federal Communications Commission
FERC.......................Federal Energy Regulatory Commission
FMB........................First mortgage bond
FUCO.......................Foreign utility company as defined by the Holding
                           Company Act
Guadalupe..................Guadalupe-Blanco River Authority pollution control
                           revenue bond issuing authority
HL&P.......................Houston Lighting & Power Company
Holding Company Act........Public Utility Holding Company Act of 1935, a
                           amended
HVdc.......................High-voltage direct-current
IPP........................Independent power producer
IBEW.......................International Brotherhood of Electrical Workers
ISO........................Independent system operator
ITC........................Investment tax credit
Joint Proxy Statement......The Notice of Annual Meeting and Joint Proxy 
                           Statement of American Electric Power Company, Inc. 
                           and Central and South West Corporation
KW.........................Kilowatt
KWH........................Kilowatt-hour
LIFO.......................Last-in first-out (inventory accounting method)
Louisiana Commission.......Louisiana Public Service Commission
LTIP.......................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
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. 1
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
PURA.......................Public Utility Regulatory Act of Texas, as amended
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


                                      iii
<PAGE>


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

Abbreviation or Acronym    Definition
Retirement Plan............CSW's tax-qualified Cash Balance Retirement 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 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. 106...............Employers' Accounting for Postemployment Benefits
SFAS No. 115...............Accounting for Certain Investments in Debt and Equity
                           Securities
SFAS No. 123...............Accounting for Stock-Based Compensation
SFAS No. 125...............Accounting for Transfers and Servicing of Financial
                           Assets and Extinguishment of Liabilities
SFAS No. 128...............Earnings Per Share
SFAS No. 130...............Reporting Comprehensive Income
SFAS No. 131...............Disclosure about Segments of an Enterprise and 
                           Related Information
SPP........................Southwest Power Pool
STB........................Surface Transportation Board of the United States
                           Department of Transportation
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 January 15, 1998
                           with the U.S. Bankruptcy Court for the Middle
                           District of Louisiana
Tejas......................Tejas Gas Corporation
Texas Commission...........Public Utility Commission of Texas
ThriftPlus.................CSW's employee thrift plan
Titus County...............Titus County Fresh Water Supply District No. 1
                           pollution control revenue bond issuing authority
Transok....................Transok, Inc. and subsidiaries, Tulsa, Oklahoma
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)"
Union Pacific..............Union Pacific Railroad Company
U.S. Electric or U.S. 
  Electric Operating
  Companies................CPL, PSO, SWEPCO and WTU
Vale.......................Empresa De Electricidade Vale Paranapanema S/A
WTU........................West Texas Utilities Company, Abilene, Texas
WTU 1995 Stipulation and
  Agreement................Stipulation and Agreement to settle certain WTU 
                           regulatory matters

                                       iv
<PAGE>




FORWARD LOOKING INFORMATION

This report made by CSW and 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, in making any such statements, 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 U.S.  and in
countries  in which CSW  either  currently  has made or in the  future  may make
investments;  the impact of deregulation on the U.S.  electric utility business;
increased  competition and electric utility industry  restructuring in the U.S.;
the impact of the AEP Merger or other merger and acquisition  activity;  federal
and  state  regulatory  developments  and  changes  in  law  which  may  have  a
substantial  adverse  impact  on the  value of CSW  System  assets;  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;  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  aforementioned  factors  would also apply,  and, in addition,  would
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,  as well as  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 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 1997, the U.S.  Electric
Operating  Companies,  SEEBOARD U.S.A. and CSW's other subsidiaries  contributed
the following percentages to aggregate operating revenues,  operating income and
income before extraordinary item.

                                                  SEEBOARD Total
                        CPL    PSO   SWEPCO  WTU   U.S.A.  Electric Other  Total
                      ----------------------------------------------------------

Operating Revenues      26      13     17     8       35      99      1    100%
Operating Income        35      11     13     12      30     101     (1)   100%
Income before           
 Extraordinary Item     37      15     28     7       36     123    (23)   100%


      The relative  contributions of the U.S. Electric  Operating  Companies and
SEEBOARD U.S.A. to the aggregate  operating  revenues,  operating income and net
income before  extraordinary  item differ from year to year due to variations in
weather, fuel costs reflected in charges to customers, timing and amount of rate
changes and other  factors,  including  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 SEEBOARD  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 and 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 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

      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 $28.1 billion ($16.5 billion in equity;  $11.6 billion in debt and
preferred  stock).  CSW expects the combination to be accounted for as a pooling
of interests.  The transaction must satisfy many  conditions,  some of which may
not be waived by the parties. There can be no assurance that the AEP Merger will
be consummated.

                                       1
<PAGE>

      This  combination  is  expected to create one of the  nation's  preeminent
diversified  electric  utilities  serving more than 4.6 million  customers in 11
states and  approximately 4 million  customers  outside the United States.  Both
companies  have  low-cost  generation  and offer their  customers in every state
prices below the  national  average.  Over the last two years,  both CSW and AEP
have ranked among the top five electric  utilities in customer  satisfaction  in
the ACSI.

      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.  AEP  will  issue  approximately  $6.6  billion  in stock to CSW
stockholders   to  complete  the   transaction.   CSW   stockholders   will  own
approximately 40% of the combined company.  Both companies anticipate continuing
their current dividend policies until the close of the transaction.

      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 or its subsidiaries.

      The companies anticipate 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
workforces.  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.
Organizational and staffing  recommendations will be made by transition teams of
employees from both companies.

      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  funds  permitted  capital   expenditures  and  (iii)  incurring
indebtedness other than pursuant to existing 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 merger is  conditioned,  among other things,  upon the approval of CSW
stockholders and several state and federal regulatory agencies. AEP shareholders
must authorize  additional  common stock and approve a new common stock issuance
to be used in the exchange for CSW common stock.  The companies  anticipate that
regulatory  approvals  can be  obtained  in 12 to 18  months  from  the  date of
announcement.  However,  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 condition that may be imposed on such consummation.

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

                                       2
<PAGE>


U.S. ELECTRIC OPERATING COMPANIES

      The U.S. Electric Operating Companies are public utility companies engaged
in generating, purchasing,  transmitting,  distributing and selling electricity.
The U.S. Electric Operating  Companies serve approximately 1.7 million customers
in one of the largest combined service 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 1997 is presented in the following table.

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

CPL       Texas - 1945    1,778,000  44,000    627,900       1         4
PSO       Oklahoma - 1913 1,100,000  30,000    481,400       2         2
SWEPCO    Delaware - 1912   943,000  25,000    415,900       3         8
WTU       Texas - 1927      393,000  53,000    186,700       3        13

      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 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,  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 cotton seed 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.

                                       3
<PAGE>

      The CSW U.S. Electric System operates 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 ERCOT  which  operate in Texas.  Other  ERCOT
members include Texas Utilities  Electric  Company,  HL&P, Texas Municipal Power
Agency,  Texas  Municipal  Power  Pool,  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  SWEPCO  are  members  of the  SPP,  which  includes  18
investor-owned  utilities,  11  municipalities,  11 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.  During 1996, CSW  functionally  reorganized its
domestic  utility  operations  into three  organizational  units including power
generation,  energy delivery and energy services, which are centrally managed by
CSW Services. The functional unbundling of CSW's vertically integrated structure
was undertaken to provide a more competitive  organizational  structure for CSW.
Certain  employees  moved  from the U.S.  Electric  Operating  Companies  to CSW
Services in connection with this functional reorganization.


SEEBOARD

      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 regulated businesses are the distribution and supply
of electricity.  In addition SEEBOARD is engaged in other businesses,  including
gas supply, electricity generation, electrical contracting and retailing.

      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  4.6  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.


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.

      CSW Energy develops,  owns and operates independent power and cogeneration
facilities  within  the United  States.  Currently,  CSW  Energy  has  ownership
interests in six electricity  generating  projects and other projects in various
stages of development.  CSW International  engages in international  activities,
including  developing,  acquiring,  financing and owning EWGs and FUCOs,  either
alone or with partners.

      C3 Communications  was the first Holding Company Act registrant  affiliate
communications company to be granted exempt  telecommunications  company status.
C3 Communications  has two main lines of business.  C3  Communications'  Utility
Automation Division specializes in providing automated meter reading and related
services to investor owned,  municipal,  and cooperative electric utilities.  C3
Communications  offers  systems  to  aggregate  meter  data  from a  variety  of
technologies  and  vendor  products  which  span  multiple   communication  mode
infrastructures  including broadband,  wireless network,  power line carrier and
telephony-based  systems.  In January 1997,  ChoiceCom was formed to offer local
telephone service, long distance, and data communications  services to customers
in the  four-state  region where CSW operates,  with an emphasis on the business
customer  market.  During its first year,  ChoiceCom  established  operations in
Texas and plans to expand to the other three states  under a five year  business
plan.

      EnerShop provides energy services to commercial, industrial, institutional
and  governmental  customers in Texas.  These  services  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 facility analysis; project management; engineering design,
equipment procurement and construction; and performance monitoring.

      CSW Energy Services will spearhead CSW's competitive efforts in the retail
electricity  markets of states outside of CSW's historical service  territories.
CSW Energy Services will not only attempt to secure  electricity supply business
in states which soon will permit retail competition,  but will also extend CSW's
business reach and name recognition  beyond CSW's traditional  customer base. In
March 1998 CSW  Energy  Services  signed  its first  major  supply  contract  in
California.

      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  parties subject to limitations imposed by the SEC under
the Holding Company Act.  CSW Leasing has investments in leveraged leases.


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

                                       5
<PAGE>

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 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 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
has functionally  reorganized its business operations into six distinct lines of
business.  These business  lines fall into both the regulated and  non-regulated
categories.  In  addition,  given  the  expected  deregulation  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)  electricity  generation;  (ii) energy  delivery;  (iii)  energy
services;  (iv) international  energy operations;  (v) energy trading;  and (vi)
telecommunications.

      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.

      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 U.S. Electric  Operating
Companies' franchises to be adequate for the conduct of their business.

      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.

                                       6
<PAGE>

      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.

      Oklahoma Rates - PSO
      PSO 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.

      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.

      SEEBOARD Rates/Franchise
      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.  At the end of 1997,  SEEBOARD  had the sole  right to
supply  substantially  all of the consumers in its authorized area, except where
demand  exceeds 100 KW.  However,  beginning  September 1, 1998,  on a phased-in
basis,  the  regional  electricity   companies'  supply  businesses,   including
SEEBOARD's,  will no longer be protected by a franchise.  The original  April 1,
1998 start up date to full competition was delayed due to information technology
issues.

      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 is not  scheduled  to  review  the  allowed  distribution
charges for the regional electricity companies,  including SEEBOARD, until 2000,
although  the  DGES may  reopen  the  review  before  such  time  under  certain
circumstances.

      The prices charged by SEEBOARD in its franchise  supply  business are also
determined  from a  formula  set  from  time to time by the  DGES.  The  formula
generally  provides for the pass through to customers of certain costs  incurred
by SEEBOARD in supplying the electricity,  which includes  electricity  purchase
costs,  transmission  charges, and distribution costs,  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 (i.e.,
demand of 100 KW or above)  must pay  charges to the host  regional  electricity
company for the use of its distribution network.


                                       7
<PAGE>


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

      Environmental Regulation
      For a discussion of regulation by the various environmental  agencies that
applies to the CSW System, see ENVIRONMENTAL MATTERS below.


FUEL RECOVERY

      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 U.S. Electric Operating Companies'
contracts 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
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  semi-annually  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

                                       8
<PAGE>

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 U.S.
Electric  Operating  Company 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.


FUEL SUPPLY AND PURCHASED POWER

      The U.S.  Electric  Operating  Companies'  present 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 1995  through  1997 is presented  in the  following  tables.  In addition,
detailed fuel cost and consumption information for 1997 is also presented.

                                           1997   1996   1995
                                         --------------------
CSW
Source of Energy (based on MW)
   Natural Gas                               36%    36%    43%
   Coal                                      41     39     33
   Lignite                                    9      9      9
   Nuclear                                    7      8      7
   Other                                     --      1     --
                                         --------------------
     Total Generated                         93     93     92
   Purchased Power                            7      7      8
                                         --------------------
     Total                                  100%    100%  100%
                                         --------------------
Fuel cost data
  Average Btu per net KWH                10,405 10,440 10,299
  Cost per MMBtu                          $1.83  $1.81  $1.58
  Cost per KWH generated                   1.90   1.89   1.63
                                           cents  cents  cents       
  Cost, including purchased power, as a  
    percentage of revenue                 38.1%  37.4%  35.0%

                                       9
<PAGE>



                                           1997   1996   1995
                                         --------------------
CPL
Source of Energy (based on MW)
   Natural Gas                               50%    42%    51%
   Coal                                      18     22     20
   Nuclear                                   22     22     23
                                         --------------------
     Total Generated                         90     86     94
   Purchased Power                           10     14      6
                                         --------------------
     Total                                  100%   100%   100%
                                         --------------------
Fuel cost data
  Average Btu per net KWH                10,386 10,391 10,175
  Cost per MMBtu                          $1.83  $1.62  $1.37
  Cost per KWH generated                   1.90   1.68   1.39
                                          cents  cents  cents
  Cost, including purchased power, as a   
    percentage of revenue                 32.9%  30.8%  28.7%

PSO
Source of Energy (based on MW)
   Natural Gas                               39%    43%    56%
   Coal                                      48     46     37
                                         --------------------
     Total Generated                         87     89     93
   Purchased Power                           13     11      7
                                         --------------------
     Total                                  100%   100%   100%
                                         --------------------
Fuel cost data
  Average Btu per net KWH                10,264 10,225 10,151
  Cost per MMBtu                          $1.98  $2.04  $1.73
  Cost per KWH generated                   2.03   2.09   1.75
                                          cents  cents  cents
  Cost, including purchased power, as a   
    percentage of revenue                 46.4%  45.1%  43.0%

SWEPCO
Source of Energy (based on MW)
   Natural Gas                               12%    15%    18%
   Coal                                      52     45     45
   Lignite                                   26     26     27
   Other                                     --      4     --
                                         --------------------
     Total Generated                         90     90     90
   Purchased Power                           10     10     10
                                         --------------------
     Total                                  100%   100%   100%
                                         --------------------
Fuel cost data
  Average Btu per net KWH                10,554 10,606 10,531
  Cost per MMBtu                          $1.69  $1.76  $1.61
  Cost per KWH generated                   1.79   1.87   1.70
                                          cents  cents  cents
  Cost, including purchased power, as a   
    percentage of revenue                 43.4%  45.1%  40.3%

                                       10
<PAGE>



                                           1997   1996   1995
                                         --------------------
WTU
Source of Energy (based on MW)
   Natural Gas                               37%    46%    58%
   Coal                                      36     35     32
                                         --------------------
     Total Generated                         73     81     90
   Purchased Power                           27     19     10
                                         --------------------
     Total                                  100%   100%   100%
                                         --------------------
Fuel cost data
  Average Btu per net KWH                10,275 10,568 10,370
  Cost per MMBtu                          $1.98  $2.01  $1.83
  Cost per KWH generated                   2.03   2.12   1.90
                                          cents  cents  cents
  Cost, including purchased power, as a   
    percentage of revenue                 42.6%  43.5%  42.1%


                   1997       
Fuel Type          Cost         1997 Consumption 
                   per MMbtu      (millions)
------------------------------------------------
                            MMbtus  Mcfs    Tons

CSW
  Natural gas      $2.67      254    249
  Coal              1.45      280             16
  Lignite           1.19       65              5
  Nuclear           0.51       52
   Composite        1.83

CPL
  Natural gas      $2.53      124    121
  Coal              1.38       41              2
  Nuclear           0.51       52
   Composite        1.83

PSO
  Natural gas       $2.89      67     65
  Coal               1.22      81              4
   Composite         1.98
SWEPCO
  Natural gas       $2.65      32     32
  Coal               1.69     129              8
  Lignite            1.19      65              5
   Composite         1.69

WTU
  Natural gas       $2.81      31     31
  Coal               1.09      29              2
   Composite         1.98

      Natural Gas
      The U.S. Electric  Operating  Companies  purchase their natural gas from a
number of suppliers operating in and around their service territories.  In 1997,
approximately  36% of the U.S. Electric  Operating  Companies' total natural gas
purchases were made under long-term  contracts and  approximately  64% came from
short-term contracts and spot market purchases.

                                       11
<PAGE>

      CPL
      CPL's  eight  gas-fired  electric  generating  plants  are  supplied  by a
portfolio of long-term and short-term  natural gas purchase  agreements  through
multiple natural gas pipeline systems.  Approximately 48% of CPL's total natural
gas   requirements  in  1997  were  purchased   under   long-term   arrangements
representing both purchase obligations and discretionary  purchases. The balance
of CPL's natural gas  requirements  was acquired under  short-term  arrangements
from the spot market.

      PSO
      PSO's six gas-fired electric generating plants are supplied by a portfolio
of  long-term  and  short-term  natural  gas  purchase   agreements.   In  1997,
approximately  37% of PSO's natural gas  requirements  were provided  under firm
contracts  with the remaining  requirements  acquired  from the spot market.  In
order to comply  with an  Oklahoma  Commission  order  issued  in 1991,  PSO has
contracted  with  two  pipeline  suppliers  to  connect  to four of the  natural
gas-fired generating units. Duke Energy Field Services, Inc. is now connected to
Riverside  Power  Station,  and ONEOK Gas  Marketing  Company  is  connected  to
Riverside Power Station,  Northeastern Power Station, Southwestern Power Station
and Tulsa Power Station.  Transok, a former affiliate, is still connected to all
six  plants.  These  additional  connections  will  give PSO  greater  access to
competitive supplies.

      SWEPCO
      SWEPCO purchased approximately 97% of its natural gas requirements in 1997
pursuant to spot purchase  contracts.  Since  SWEPCO's five  gas-fired  electric
generating  plants are used  primarily for peaking  requirements,  a majority of
SWEPCO's  natural gas  requirements  will  continue to be  purchased on the spot
market and will be subject to market conditions.

      WTU
      WTU purchases its natural gas requirements  from numerous  suppliers.  The
long-term  purchase  contract with Lone Star Gas Company was renegotiated into a
long-term  transportation  agreement with Lone Star Pipeline  Company during the
latter part of 1997.  This new agreement  will allow WTU to buy natural gas from
alternative suppliers.  In 1997, WTU purchased  approximately 22% of its natural
gas  requirements  under  firm  contracts  with Lone Star Gas  Company,  and the
remaining 78% was purchased from a number of suppliers on the spot market.

      Coal and Lignite
      The U.S.  Electric  Operating  Companies  purchase  coal  from a number of
suppliers.   In  1997,  the  U.S.   Electric   Operating   Companies   purchased
approximately  86% of their total coal purchases under long-term  contracts with
the balance  procured  on the spot  market.  The coal for the CSW U.S.  Electric
System 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  68% of the
total 1997 Oklaunion coal requirements for WTU, 68% for CPL and 69% for PSO with
the balance procured on the spot market. As of December 31, 1997, CPL's share of
the year-end  1997 coal  inventory at Oklaunion was  approximately  22,000 tons,
representing  a 29-day  supply.  PSO's  share  was  approximately  41,000  tons,
representing  a 27-day  supply.  WTU's  share was  approximately  178,000  tons,
representing a 33-day supply.

                                       12
<PAGE>

      Burlington  Northern supplies railcars to Oklaunion for the transportation
of coal  pursuant to a tariff  filed with the  Interstate  Commerce  Commission,
whose  authority in the matter was  transferred to the STB effective  January 1,
1996. In a decision  issued May 3, 1996,  the STB declared the rate set forth in
Burlington  Northern's  tariff of  $19.36  per ton to be  unreasonably  high and
imposed a maximum rate of $13.68 per ton. On July 2, 1996,  Burlington  Northern
established the new rate for the transportation of coal to Oklaunion. Burlington
Northern  appealed the May 3, 1996 decision and a related June 25, 1996 decision
to the U.S.  Court of Appeals for the District of Columbia  Circuit.  On May 23,
1997, the STB decisions were upheld. Subsequently,  on October 24, 1997, the STB
ordered Burlington Northern to pay reparations, including interest, to WTU on or
before  November 24, 1997.  On November 24, 1997,  Burlington  Northern paid WTU
approximately  $12.4 million.  WTU's share of this amount was $7 million;  PSO's
share was $1.9  million;  CPL's  share was  approximately  $1  million,  and the
outside participants' share was $2.5 million. WTU, CPL and PSO each credited its
respective fuel expense in November 1997 for the refund amounts.

      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  1997,  this  agreement  was  suspended  and  replaced  with an agreement
pursuant to which both coal and coal  transportation,  using CPL-owned railcars,
were  provided  by  Colowyo  Coal  Company,   which,   in  turn,   entered  into
transportation   agreements  with  Southern  Pacific   Transportation   Company.
Approximately  83% of  Coleto  Creek's  deliveries  were  furnished  under  this
agreement.  The  balance  of the  plant's  coal  deliveries  resulted  from spot
purchases  of  Powder  River  Basin  coal  that was  delivered  under  spot rail
transportation agreements. Additionally,  approximately 26,000 tons of coal were
purchased  from a supplier in Columbia and  transported  via ship to the Port of
Corpus Christi where it was then  transferred by train to the plant. At December
31,  1997,  CPL had  approximately  144,000  tons of coal in inventory at Coleto
Creek, representing a 21-day supply.

      During 1998,  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 the Colowyo Coal
Company. 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
STB granted the motion.  CPL has  appealed  this  decision to the U.S.  Court of
Appeals for the Eighth Circuit.

      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 at
least 2004.  Coal delivery is by unit trains from mines located in the Gillette,
Wyoming  vicinity,  a distance  of about  1,100  rail  miles  from  Northeastern
Station.  PSO owns sufficient railcars for operation of six unit trains. Coal is
transported  to  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, 1997,  PSO had  approximately  269,000 tons of coal in
inventory at Northeastern Station representing a 22-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.  Coal under this
contract is mined near  Gillette,  Wyoming,  a distance of about 1,500 and 1,100

                                       13
<PAGE>

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
1997 and 2007. SWEPCO owns or leases under long-term leases sufficient  railcars
and spares for  operation of fifteen unit trains.  SWEPCO has  supplemented  its
railcar fleet from time to time with  short-term  leases.  At December 31, 1997,
SWEPCO had coal inventories of approximately  502,000 tons at Welsh representing
a 25-day supply and  approximately  179,000 tons at Flint Creek  representing  a
24-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, 1997,  approximately  231,000
tons of lignite were in SWEPCO's  inventory at the Pirkey plant  representing  a
19-day  supply.  Another  25,000 acres are jointly  leased in equal  portions by
SWEPCO and CLECO in the Dolet  Hills area of  Louisiana  near Dolet  Hills Power
Plant. The DHMV is the contract miner for these reserves.  At December 31, 1997,
SWEPCO had  161,000  tons of  lignite  in  inventory  at the Dolet  Hills  plant
representing  a 28-day supply.  In the opinion of the management of SWEPCO,  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 an 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 April 2001, with additional flexible contracts to provide
69% of the uranium concentrate needed for STP through 2002. 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  November 1998, with additional  flexible  contracts to provide at
least 50% of the  conversion  service  needed for STP through  2002.  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 from October 2000 to September 2007 under a ten-year no-cost  termination
provision of the enrichment contracts.  The STP participants believe that other,
lower  cost  options  will be  available  in the  future.  CPL and the other STP
participants  have  entered  into  additional   flexible  contracts  to  provide
enrichment  service  from  October  2000 to December  2004.  Also,  nuclear 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.

                                       14
<PAGE>

      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,  requires  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 be
available in 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
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 CSW U.S.  Electric  System's  ability to economically  meet the needs of its
customers and 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  CSW's  and/or  the  U.S.  Electric  Operating
Companies' financial condition and results of operations.

      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.

                                       15
<PAGE>

      CPL - Magic Valley Electric Cooperative
      CPL's largest wholesale customer,  Magic Valley Electric  Cooperative,  is
currently  served  under an  agreement  that  requires  a five  year  notice  of
termination.  During 1996, the cooperative exercised such notice of termination.
Magic Valley Electric  Cooperative's  contract will expire July 23, 2001. During
1997,  Magic Valley  Electric  Cooperative  purchased  755 million KWHs from CPL
which represents 43% of CPL's sales for resale but only 3% of CPL's total sales.

      WTU - Weatherford and Hearne
      WTU began  wholesale  service to a new customer,  the City of Weatherford,
Texas,  in  January  1997.  Service to the City of  Weatherford  for its load of
approximately  55 MW will  continue  through  the  year  2001.  WTU  will  begin
wholesale service to a new customer,  the City of Hearne,  Texas, in April 1998.
Service to the City of Hearne for its load of  approximately 12 MW will continue
through March 2003.


ENVIRONMENTAL MATTERS

      The CSW  System is  subject to  regulation  with  respect to air and water
quality,  solid  waste  standards  and other  environmental  matters  by various
governmental authorities. 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 CSW and  each of the  U.S.  Electric  Operating
Companies'  results  of  operations  and  financial  condition.   Violations  of
environmental statutes or regulations can result in fines and other costs.

      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 U.S.  Electric  Operating  Companies'
allowances  are adequate to meet their needs at least through  2008.  Public and
private markets are developing for trading of excess allowances.

      As a result of requirements  imposed by the CAAA, CSW spent  approximately
$16 million over the three year period from 1995 to 1997 for annual  testing of,
software  modifications  to, and maintenance of continuous  emission  monitoring
equipment.  Approximately  $0.6  million  of this  amount  was  spent  in  1997.
Similarly,  the expenditures for each of the U.S. Electric  Operating  Companies
are presented in the following table.

                                       16
<PAGE>

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

Total expenditures (1995-1997)       $530     $310    $469     $295
Expenditures in 1997                  194      100     166      102

       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.   Approximately  $150,000  was  expended  in  1997  towards
optimizing  nitrogen  oxide  emissions  at the coal units to  safeguard  against
exceeding those limits.

       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' 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 levels 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
companies  could be  affected  if this  treaty is  approved  by  Congress in its
present  form.  The  impact,  if  any,  on CSW or the  U.S.  Electric  Operating
Companies cannot yet be determined, but the impact could be significant.

      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.

                                       17
<PAGE>

      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.

      SEEBOARD
      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.

      PSO Sand Springs/Grandfield, Oklahoma Sites
      In 1989, PSO found some 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 complaint has three counts,  two of which
pertain  to the Sand  Springs  facility  and the  third of  which  deals  with a
substation in Grandfield, Oklahoma. The EPA alleges 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  at the
Grandfield  site  alleges  failure to date PCB  articles at the site.  The total
proposed  penalty for the three  counts,  which was accrued by PSO in 1996,  was
$479,000.  PSO settled all claims in the suit in March, 1998. The settlement did
not have a material  adverse  effect on CSW's or PSO's  results of operations or
financial condition.

      PSO Compass Industries Superfund Site
      PSO has received notice from the EPA that it is a PRP under CERCLA and may
be  required  to share in the  reimbursement  of cleanup  costs for the  Compass
Industries  Superfund  site  which  has  been  remediated.  PSO has  been  named

                                       18
<PAGE>

defendant in a lawsuit  filed in Federal  District  Court in Tulsa,  Oklahoma on
August 29,  1994,  for  reimbursement  of the  cleanup  costs.  PSO's  degree of
responsibility,  if any, is believed to be insignificant, and management expects
that PSO will have an  opportunity  to pay its share of costs and remove  itself
from the case. Accordingly, in 1995, PSO accrued $100,000 for this matter.

      On March 19, 1996, a district  judge ruled in favor of the  defendants and
determined  that the plaintiffs do not have a cause of action under CERCLA.  The
plaintiffs  may have a claim to funds  expended  after  August  29,  1991.  This
greatly reduces PSO's exposure since most of the remediation was completed prior
to this date. In October,  1996, the plaintiffs appealed this ruling, and PSO is
awaiting the outcome of this matter.

      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 on
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.

      The MDEQ has not agreed to a non-residential  future land use scenario and
has requested further testing.  Following the additional  testing and resolution
of   whether   cleanup   must   meet  a   residential   usage   scenario   or  a
commercial/industrial  scenario,  a feasibility  study will be conducted to more
definitively  evaluate  remedial  strategies for the property.  The  feasibility
study process will require public input prior to a final decision being made.

      At  the  present  time,  SWEPCO  has  not  had  any  further   substantive
discussions  with  MDEQ  regarding  the  ultimate   resolution  of  this  issue.
Therefore,  a final range of cleanup costs is not yet  determinable.  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 $2 million for the
cleanup of the site.

      SWEPCO Voda Petroleum Superfund Site
      In April  1996,  SWEPCO  received  correspondence  from the EPA  notifying
SWEPCO  that it is a PRP to a  cleanup  action  planned  for the Voda  Petroleum
Superfund  Site located in  Clarksville,  Texas.  SWEPCO is conducting a records
review  to  compile  documentation  relating  to  SWEPCO's  past use of the Voda
Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost
approximately $2 million and to take approximately twelve months to complete. An
option for over 30 PRPs to conduct the cleanup in lieu of the EPA conducting the
cleanup  is under  consideration.  Any  SWEPCO  liability  associated  with this
project is not  expected  to have a material  adverse  effect on its  results of
operations or financial condition.
                                  
      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

                                       19
<PAGE>

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.

      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  CSW's  or any of the U.S.
Electric Operating Companies' results of operations or financial condition.

      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.



                                       20
<PAGE>


OPERATING INFORMATION - U.S. ELECTRIC OPERATING COMPANIES

CSW
(excludes SEEBOARD)
                                                     1997    1996     1995
                                                  ------------------------

Kilowatt-hour sales (millions)
   Residential                                     17,995  17,883   16,872
   Commercial                                      14,546  14,256   13,755
   Industrial                                      21,087  20,266   19,321
   Other retail                                     1,705   1,592    1,518
                                                  ------------------------
   Sales to retail customers                       55,333  53,997   51,466
   Sales for resale                                 7,824   8,428    8,468
                                                  ------------------------
   Total                                           63,157  62,425   59,934
                                                  ------------------------


Average number of electric customers (thousands)
   Residential                                      1,462   1,443   1,425
   Commercial                                         214     210     206
   Industrial                                          23      24      24
   Other                                               13      13      13
                                                  -----------------------
   Total                                            1,712   1,690   1,668
                                                  -----------------------


Revenue per KWH (cents)
   Residential                                       6.96    6.95    6.75
   Commercial                                        6.13    6.12    5.89
   Industrial                                        3.85    3.85    3.63
   Sales for Resale                                  3.11    3.03    2.65


Peak Load and Capability
   Net system capability (MW) (1)                  14,290  14,377   14,168
   Maximum coincident system demand (MW)           13,105  12,613   12,314
   Percentage increase in peak demand            
     over prior period                               3.9%    2.4%     7.7%
   Generation at time of peak (MW)                 12,817  11,625   12,053
   Percent of peak demand generated                 97.8%   92.2%    97.9%
   Net purchases at time of peak (MW)                 288     988      261
   Percent of net purchases at time of peak          2.2%    7.8%     2.1%
   Date of maximum coincidentsystem demand         July 28 July 22  July 28
    
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)Does not include 310 MW of system  capability in storage and 156 MW of system
   capability  in 1997 as  described  in ITEM 2.  PROPERTIES,  358 MW of  system
   capability in storage in 1996, 392 MW of system capability in storage in 1995
   and 54 MW of SWEPCO capability in 1995 that was not available at the peak due
   to fuel procurement issues.

                                       21
<PAGE>



CPL
                                                     1997    1996     1995
                                                  ------------------------

Kilowatt-hour sales (millions)
   Residential                                      6,771   6,680    6,223
   Commercial                                       4,846   4,773    4,656
   Industrial                                       7,999   7,610    7,250
   Other retail                                       486     499      465
                                                  ------------------------
   Sales to retail customers                       20,102  19,562   18,594
   Sales for resale                                 1,737   2,029    1,680
                                                  ------------------------
   Total                                           21,839  21,591   20,274
                                                  ------------------------


Average number of electric customers
   Residential                                    538,700 536,500  526,900
   Commercial                                      79,700  78,900   77,700
   Industrial                                       5,600   5,700    5,700
   Other                                            3,900   3,900    3,600
                                                  ------------------------
   Total                                          627,900 625,000  613,900
                                                  ------------------------


Revenue per KWH (cents)
  Residential                                        7.99    7.92     7.48
  Commercial                                         8.26    8.13     7.63
  Industrial                                         4.13    4.05     3.53
  Sales for resale                                   4.06    3.56     3.10


Peak Load and Capability
  Net system capability (MW) (1)                    4,319   4,380    4,200
  Maximum coincident system demand (MW)             4,232   4,046    3,862
  Percentage increase in peak demand                 
    over prior period                                4.6%    4.8%     3.5%
  Generation at time of peak (MW)                   4,227   3,484    3,846
  Percent of peak demand generated                  99.9%   86.1%    99.6%
  Net purchases at time of peak (MW)                    5     562       16
  Percent of net purchases at time of peak           0.1%   13.9%     0.4%
  Date of maximum coincident system demand       August 20 August 13 July 26
  
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)Does not include 60 MW of system  capability  in storage in 1997 as described
   in ITEM 2. PROPERTIES, 108 MW of system capability in storage in 1996 and 142
   MW of system capability in storage in 1995.

                                       22
<PAGE>



PSO
                                                     1997    1996     1995
                                                  ------------------------

Kilowatt-hour sales (millions)
   Residential                                      5,054   5,098    4,753
   Commercial                                       4,698   4,621    4,427
   Industrial                                       4,714   4,581    4,307
   Other retail                                       192      81       80
                                                  ------------------------
   Sales to retail customers                       14,658  14,381   13,567
   Sales for resale                                   958   1,487    1,617
                                                  ------------------------
   Total                                           15,616  15,868   15,184
                                                  ------------------------


Average number of electric customers
   Residential                                    419,600 414,800  411,000
   Commercial                                      55,300  54,400   53,800
   Industrial                                       5,100   5,200    5,200
   Other                                            1,400   1,400    1,400
                                                  ------------------------
   Total                                          481,400 475,800  471,400
                                                  ------------------------


Revenue per KWH (cents)
   Residential                                       5.88    5.89     5.89
   Commercial                                        4.82    4.80     4.76
   Industrial                                        3.44    3.45     3.43
   Sales for Resale                                  3.23    2.64     2.12


Peak Load and Capability
   Net system capability (MW) (1)                   3,882   3,848    3,759
   Maximum coincident system demand (MW)            3,474   3,360    3,292
   Percentage  increase  in  peak  demand            
     over prior period                               3.4%    2.1%     3.9%
   Generation at time of peak (MW)                  3,376   3,009    3,025
   Percent of peak demand generated                 97.2%   89.6%    91.9%
   Net purchases at time of peak (MW)                  98     351      267
   Percent of net purchases at time of peak          2.8%   10.4%     8.1%
   Date of maximum coincident system demand       July 28  August 7 August 28
           
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)Does not include 250 MW of system  capability in storage in 1997 as described
   in ITEM 2. PROPERTIES, and 250 MW of system capability in storage in 1996 and
   1995.



                                       23
<PAGE>



SWEPCO
                                                     1997    1996     1995
                                                  ------------------------

Kilowatt-hour sales (millions)
   Residential                                      4,549   4,487    4,406
   Commercial                                       3,780   3,658    3,521
   Industrial                                       6,968   6,833    6,531
   Other retail                                       445     432      424
                                                  ------------------------
   Sales to retail customers                       15,742  15,410   14,882
   Sales for resale                                 6,791   6,395    5,002
                                                  ------------------------
   Total                                           22,533  21,805   19,884
                                                  ------------------------


Average number of electric customers
   Residential                                    356,600 353,200  349,000
   Commercial                                      50,800  49,600   48,600
   Industrial                                       5,800   5,900    5,800
   Other                                            2,700   2,600    2,600
                                                  ------------------------
   Total                                          415,900 411,300  406,000
                                                  ------------------------


Revenue per KWH (cents)
   Residential                                       6.37    6.46     6.32
   Commercial                                        5.08    5.19     5.03
   Industrial                                        3.78    3.85     3.77
   Sales for Resale                                  2.16    2.11     1.89


Peak Load and Capability
   Net system capability (MW) (1)                   4,636   4,554    4,783
   Maximum coincident system demand (MW)            4,157   4,018    3,932
   Percentage increase in peak demand                
     over prior period                               3.5%    2.2%    11.5%
   Generation at time of peak (MW)                  3,839   3,608    4,022
   Percent of peak demand generated                 92.4%   89.8%   102.3%
   Net purchases at time of peak (MW)                 318     410     (90)
   Percent of net purchases at time of peak          7.6%   10.2%   (2.3)%
   Date of maximum coincident system demand         July 28 July 22  July 28

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)Does not include 54 MW of system  capability  in storage in 1995 that was not
   available at the peak due to fuel procurement issues.


                                       24
<PAGE>



WTU
                                                     1997    1996     1995
                                                  ------------------------

Kilowatt-hour sales (millions)
   Residential                                      1,622   1,620    1,490
   Commercial                                       1,223   1,203    1,152
   Industrial                                       1,406   1,241    1,233
   Other retail                                       580     581      549
                                                  ------------------------
   Sales to retail customers                        4,831   4,645    4,424
   Sales for resale                                 2,504   2,411    2,268
                                                  ------------------------
   Total                                            7,335   7,056    6,692
                                                  ------------------------


Average number of electric customers
   Residential                                    146,900 146,500  145,700
   Commercial                                      27,800  27,600   27,000
   Industrial                                       6,000   6,300    7,400
   Other                                            6,000   5,700    5,600
                                                  ------------------------
   Total                                          186,700 186,100  185,700
                                                  ------------------------


Revenue per KWH (cents)
   Residential                                       7.68    7.67     7.67
   Commercial                                        5.99    6.02     5.76
   Industrial                                        4.05    4.22     4.17
   Sales for Resale                                  3.55    3.69     3.26


Peak Load and Capability
   Net system capability (MW) (1)                   1,453   1,595    1,426
   Maximum coincident system demand (MW)            1,481   1,433    1,435
   Percentage increase (decrease) in peak            
     demand over prior period                        3.3%  (0.1)%    13.7%
   Generation at time of peak (MW)                    865   1,048    1,167
   Percent of peak demand generated                 58.4%   73.1%    81.3%
   Net purchases at time of peak (MW)                 616     385      268
   Percent of net purchases at time of peak         41.6%   26.9%    18.7%
   Date of maximum coincident system demand   September 17  July 8  July 28

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)   Does not include 156 MW of system capability for 1997 as described in
   ITEM 2. PROPERTIES.

                                       25
<PAGE>


EMPLOYEES AND EXECUTIVE OFFICERS

      The  number  of  employees  in the CSW  System  at  December  31,  1997 is
presented  in  the  table  below.  Of the  employees  listed  below,  565 of the
positions at PSO and 805 of the positions at SWEPCO are covered under collective
bargaining  agreements  with the IBEW. In addition,  2,456 employees at SEEBOARD
are covered by collective agreements with several different unions. These unions
include the Amalgamated  Electrical and Engineering  Union, GMB, EMA, Unison and
the Transport and General  Workers  Union.  For  information  related to ongoing
union negotiations at PSO, reference is made to ITEM 7. MD&A.

                              CSW SYSTEM EMPLOYEES
                       CPL                             1,668
                       PSO                             1,273
                       SWEPCO                          1,529
                       WTU                               907
                       SEEBOARD                        4,161
                       CSW Services                    1,553
                       Other Non-Regulated Businesses    324
                                                      ------
                                                      11,415
                                                      ------


EXECUTIVE OFFICERS   Age at
                    March 1,            Present Position
                      1998
-------------------------------------------------------------------------------

E. R. Brooks           60      Chairman,  CEO and Director

T. V. Shockley, III    52      President, Chief Operating Officer and Director
                            
Glenn Files            50      Senior Vice President, Electric Operations
                               
Ferd. C. Meyer, Jr.    57      Executive Vice President and General Counsel
                        
Glenn D. Rosilier      50      Executive Vice President and Chief Financial
                                   Officer

Thomas M. Hagan        53      Senior Vice President, External Affairs

Venita McCellon-Allen  38      Senior Vice President, Customer Relations and
                                   Corporate Development and Assistant Corporate
                                   Secretary

Kenneth C. Raney       46      Vice President, Associate General Counsel and 
                                   Corporate Secretary

Wendy G. Hargus        40      Treasurer

Lawrence B. Connors    46      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 May 28,  1998.  Each of the
executive  officers  listed in the table  above has been  employed  by CSW or an
affiliate of CSW in an executive  or  managerial  capacity for at least the last
five years.



                                       26
<PAGE>


ITEM 2.     PROPERTIES.


U.S. ELECTRIC OPERATING COMPANIES

      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, 1997 are shown in the following  table.  These  properties  are all
located in either Arkansas, Louisiana, Oklahoma or Texas.

                     Natural          Lignite Nuclear  Other   Total
Company     Stations Gas MW  Coal MW    MW       MW    MW (a)  MW (b)
---------------------------------------------------------------------

CPL            12     3,056    685              630       6    4,377(c)
PSO             8     2,629  1,006                       25    3,660(c)
SWEPCO          9     1,784  1,848      842                    4,474
WTU            11       847    370                       11    1,228(c)
             --------------------------------------------------------
CSW            40     8,316  3,909      842     630      42   13,739
             --------------------------------------------------------

(a) 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.
(b) 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.
(c) Excludes 310 MW from units in storage,  consisting  of 60 MW at Victoria for
    CPL and 250 MW at Tulsa for PSO of which 125 MW will be  available  in March
    1998.  Excludes  117 MW at Paint  Creek and 39 MW at Rio Pecos for WTU which
    will be available in June 1998.

      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  (which  the U.S.
Electric Operating Companies believe to be satisfactory, but without examination
of  underlying  land  titles)  have been  obtained.  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.


OTHER PROPERTIES

      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.

                                       27
<PAGE>



                                              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                CSW Energy   Texas      85      n/a     100%     IPP
  Sweeny                 CSW Energy   Texas     330       90      50%      QF
                                                ------------
                                                978      637
                                                ------------

Operating Facilities - International

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


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.




                                       28
<PAGE>


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

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


                                       29
<PAGE>
PART II

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


CSW COMMON STOCK INFORMATION

                                1997                       1996
                     Market Price   Dividends     Market Price      Dividends
                    High      Low     Paid       High       Low       Paid
                  -------   ------  ----------  -------   -------  ----------
First Quarter    $25 3/4   $21 1/4  43.5(cent)  $28 1/2   $26 3/8  43.5(cent)
Second Quarter    22 1/8    18 1/4  43.5         28 7/8    26 1/2  43.5
Third Quarter     22 7/16   19 3/4  43.5         28 1/2    25 3/4  43.5
Fourth Quarter    27 5/16   20 5/8  43.5         28        25 1/2  43.5

          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
trades as reported on Bloomberg Financial Commodities News.

         In January 1998, CSW's board of directors elected to maintain the
quarterly dividend, payable on February 27, 1998, to stockholders of record on
February 9, 1998, 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 at rates per share
as was paid during 1997, 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 65,000 record holders of CSW's common stock as
of March 6, 1998. See NOTE 12. COMMON STOCK for information on CSW Common.


CPL, PSO, SWEPCO AND WTU 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 to CSW on their common stock for
1997 and 1996 are presented in the following table.

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

1997                $157,000  $59,000   $90,000  $26,000
1996                $128,000  $35,000   $44,000  $19,000

          During 1997, the common stock dividends paid to CSW by the U.S.
Electric Operating Companies were higher than 1996 because of increased earnings
available for common in 1997 at the U.S. Electric Operating Companies. This
resulted primarily from charges associated with certain investments for plant
sites, engineering studies and lignite reserves of the U.S. Electric Operating
Companies during 1996. For information related to restrictions on the ability of
the U.S. Electric Operating Companies to pay dividends to CSW, see NOTE 8.
LONG-TERM DEBT.

                                      CSW
                                      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 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                                      Page Number
                                             CSW   CPL    PSO   SWEPCO   WTU
                                            ----- -----  -----  ------  -----
SELECTED FINANCIAL DATA                      2-4   2-81  2-95   2-108   2-121
MD&A (1)                                     2-5   2-5    2-5    2-5     2-5
   RESULTS OF OPERATIONS                     2-29  2-82  2-96   2-109   2-122
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  2-35  2-85  2-98   2-111   2-124
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS     2-76  2-92  2-105  2-118   2-131
REPORT OF MANAGEMENT                         2-79  2-93  2-106  2-119   2-132


(1)  In 1997 CSW combined 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.


                                      CSW
                                      2-2
<PAGE>




                             CENTRAL AND SOUTH WEST
                                   CORPORATION



                                      CSW
                                      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 the Transok reclassifications, certain other
financial statement items for prior years have been reclassified to conform to
the 1997 presentation.

                                      1997(1)  1996(2)    1995     1994  1993(3)
                                     --------  -------   ------  ------- -------
                                     (millions, except per share and ratio data)
INCOME STATEMENT DATA
Revenues                               $5,268   $5,155   $3,143   $3,105  $3,084
Income from continuing operations         329      297      377      369     247
Income before extraordinary item and
  cumulative effect of changes in
  accounting principles                   329      429      402      394     260
Net income for common stock               153      429      402      394     308
EPS of common stock from continuing
   operations                           $1.55    $1.43    $1.97    $1.95   $1.32
EPS of common stock                     $0.72    $2.07    $2.10    $2.08   $1.63
Dividends paid per share of common
  stock                                 $1.74    $1.74    $1.72    $1.70   $1.62
Average common shares outstanding       212.1    207.5    191.7    189.3   188.4

BALANCE SHEET DATA
Assets                                $13,451  $13,332  $13,869  $11,066 $10,604
Long-term obligations (4)               4,259    4,057    3,948    2,975   2,807
Capitalization ratios
   Common stock equity                     45%     47%      43%      48%     49%
   Preferred stock                          2       4        4        5       6
   Certain Subsidiary-obligated,
   mandatorily redeemable 
   preferred securities of
   subsidiary trusts holding 
   solely Junior Subordinated 
   Debentures of such Subsidiaries          4      --       --       --      --


   Long-term debt                          49      49       53       47      45

(1)  Earnings in 1997 decreased significantly due primarily to the accrual of
     the United Kingdom Windfall Profits Tax. Also contributing to the decline
     in earnings was the effect of both the CPL 1997 Final Order and the PSO
     1997 Rate Settlement Agreement. Further reducing earnings in 1997 was the
     settlement of litigation with El Paso and the write-offs associated with
     other assets including certain regulatory assets, capitalized demand side
     management energy efficiency assets and obsolete inventory.
(2)  Revenues in 1996 increased significantly due to the acquisition of
     SEEBOARD. Earnings in 1996 were significantly impacted by the charges
     associated with certain investments for plant sites, engineering studies
     and lignite reserves at the U.S. Electric Operating Companies, the
     write-off of certain investments at CSW Energy and the gain realized on the
     sale of Transok.
(3)  Earnings in 1993 were significantly impacted by restructuring charges, the
     $46 million cumulative effect of changes in accounting principles, the
     establishment of reserves for fuel and other properties and prior year tax
     adjustments.
(4)  Long-term obligations includes long-term debt, Trust Preferred Securities
     and preferred stock subject to mandatory redemption.

                                      CSW
                                      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 an emerging 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 new directions 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 1997, CSW International doubled its
investment in a Brazilian electric distribution utility and made other
investments in Latin America. CSW continues to pursue the acquisition of the
non-nuclear generating assets of Cajun, a Louisiana member electric cooperative.
C3 Communications' joint venture limited partnership, ChoiceCom, has entered the
local telephone markets in the Texas cities of Austin, Corpus Christi and San
Antonio and plans to enter the markets of Dallas and Houston offering a variety
of telecommunications services. These events are discussed 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 provided by operating activities decreased $149 million during
1997 compared to 1996. The decrease was primarily attributable to the December
1997 payment of $88 million on the first installment of the windfall profits tax
imposed on SEEBOARD in the United Kingdom. In addition, increased factored
accounts receivable purchases at CSW Credit, federal and state income tax
payments for the gain on CSW's 1996 sale of Transok which totaled approximately
$122 million (after being offset in part by the utilization of Alternative
Minimum Tax credits that CSW had previously generated), and a $35 million

                                      CSW
                                      2-5
<PAGE>
payment related to the settlement of litigation between CSW and El Paso all
contributed to the decrease. Offsetting part of the decrease, the U.S. Electric
Operating Companies realized greater fuel recovery during 1997 compared to 1996.

         Net cash used in investing activities was $904 million in 1997 compared
to $1.3 billion in 1996. There were no acquisition expenditures during 1997
while $1.4 billion in SEEBOARD acquisition expenditures were made during 1996.
However, during 1996, CSW received $690 million in cash on the sale of Transok
and $99 million on the sale of the National Grid shares. During 1997, while
CSW's total construction expenditures decreased $14 million compared to 1996, a
combined total of approximately $294 million was invested by CSW Energy and CSW
International in 1997 on several projects compared to $124 million in 1996. In
addition, during 1997, CSW Energy made its final payment on the Ft. Lupton
cogeneration project which was more than offset by the reduction of CSW Energy's
equity investment in the Orange cogeneration project when permanent external
financing was obtained on the project.

         Net cash flows from financing activities decreased substantially during
1997 compared to 1996. During 1996, CSW incurred substantial debt to finance the
acquisition of SEEBOARD. In addition, CSW sold approximately 15.5 million shares
of common stock and received net proceeds of approximately $398 million in a
primary public offering in 1996, the proceeds of which were subsequently used to
repay a portion of the debt incurred in connection with the SEEBOARD
acquisition. CSW Energy also issued $200 million in Senior Notes during 1996.
During 1997, CSW made changes in its common stock plans and stopped issuing
original shares through these plans. Consequently, $20 million in new common
stock was issued pursuant to these plans in 1997 compared to $79 million in
1996. CPL's $200 million Series BB, 6% FMBs also matured in 1997. However,
offsetting a portion of the decrease, the business trusts of CPL, PSO and SWEPCO
received cash proceeds of approximately $323 million from the issuance of Trust
Preferred Securities during 1997. These proceeds were used primarily to redeem
preferred stock and repay short-term debt of the companies.

         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 these funds. CSW's internally
generated funds totaled $343 million, $499 million and $451 million for 1997,
1996 and 1995, respectively. Internally generated funds for the U.S. Electric
Operating Companies are detailed in the following table.


                                      CSW
                                      2-6
<PAGE>

                                          1997     1996     1995
                                         ------------------------
CPL                                           ($ - millions)
   Internally Generated Funds             $172     $268      $100
   Construction Expenditures Provided  
     by Internally Generated Funds        136%     196%       66%


PSO
   Internally Generated Funds              $62     $107       $88
   Construction Expenditures Provided  
     by Internally Generated Funds         78%     128%       89%


SWEPCO
   Internally Generated Funds             $108     $153      $100
   Construction Expenditures Provided
     by Internally Generated Funds        100%     165%       96%


WTU
   Internally Generated Funds              $69      $52       $12
   Construction Expenditures Provided
     by Internally Generated Funds        217%     121%       27%


         CAPITAL EXPENDITURES
         The CSW System's need for capital results primarily from its
construction of facilities to provide reliable electric service to its
customers, and 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
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
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
electric utility companies or 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
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 diversified
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 diversified operations, construction expenditures and
net equity investments. It does not include the $2.1 billion used to acquire
SEEBOARD during 1995 and 1996. The majority of the capital expenditures for the
U.S. Electric Operating Companies for 1995 through 1997 were spent on
distribution facilities. It is anticipated that the majority of the estimated
capital expenditures for 1998 through 2000 will be for 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


                                      CSW
                                      2-7
<PAGE>
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION).

                          CAPITAL EXPENDITURES
                                         Estimated expenditures
              1995    1996    1997        1998    1999    2000
              --------------------        --------------------
                         (millions including AFUDC)

CSW           $495    $644    $760        $569    $586    $595
CPL            155     139     130         129     157     136
PSO            102      85      82          71      75      89
SWEPCO         115      95     110          95     116     122
WTU             45      44      33          36      42      47

Estimated capital expenditures for 1998 - 2000 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. Refer to INTEGRATED RESOURCE PLAN 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 2.4% during the three years ended December 31, 1997.
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, 1997, the capitalization ratios of CSW were 45%
common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 49%
long-term debt. CSW is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access
capital markets opportunistically or when required. CSW continually monitors the
capital markets for opportunities to lower its cost of capital through
refinancing activities. The estimated embedded cost of long-term debt for CSW
and the U.S. Electric Operating Companies is shown below.

CSW                          7.2%
CPL                          6.8
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 ThriftPlus plan. Following the issuance of the
CPL 1997 Original Rate Order and the decline in the market price of CSW Common,
which CSW believes was attributable in part to the CPL 1997 Original Rate Order,
the determination was made that it was appropriate for CSW to begin funding
these plans through open market purchases, effective April 1, 1997. Prior to
that time, CSW had issued $20 million in new common stock in 1997. CPL has shelf
registration statements on file for the issuance of up to $60 million of FMBs
and up to $75 million of preferred stock, and 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.


                                      CSW
                                      2-8
<PAGE>
         The current securities ratings for each of the Registrants is presented
in the following table, including the securities rating on the Trust Preferred
Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.

                                                     Duff &        Standard
                                         Moody's     Phelps        & Poor's
                                         ----------------------------------

     CPL
     First mortgage bonds                  A3            A             A
     Senior unsecured                     Baa1           A-            A-
     Preferred stock                      baa1          BBB+           A-
     Trust preferred (CPL Capital I)      baa1          BBB+           A-
     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             A-
     CSW
     Commercial paper                      P-2          D-2           A-2

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

         LONG-TERM FINANCING
         On April 24, 1997, PSO's business trust, PSO Capital I, sold to
underwriters in a negotiated offering $75 million, 8.00% Series A, Trust
Originated Preferred Securities due April 30, 2037. The proceeds from the sale
of these securities were used by PSO to repay short-term debt, to reimburse
PSO's treasury for the cost of reacquiring approximately $14.5 million of 4.00%
Series and 4.24% Series preferred stock, to provide working capital and for
other general corporate purposes. Settlement of the transaction occurred on May
2, 1997. PSO Capital I is treated as a subsidiary of PSO whose only assets are
the approximately $77.3 million principal subordinated debentures issued by PSO.
In addition to PSO's obligation under the subordinated debentures, PSO has also
agreed to a security obligation which represents a full and unconditional
guarantee of PSO Capital I's trust obligations.

         On April 30, 1997, SWEPCO's business trust, SWEPCO Capital I, sold to
underwriters in a negotiated offering $110 million, 7.875% Series A, Trust
Preferred Securities due April 30, 2037. The proceeds from the sale of these
securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's
treasury for the cost of reacquiring approximately $15.5 million of 4.28%
Series, 4.65% Series, 5.00% Series and 6.95% Series preferred stock, to provide
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 8, 1997. SWEPCO Capital I is treated as a subsidiary
of SWEPCO whose only assets are the approximately $113.4 million principal
subordinated debentures issued by SWEPCO. In addition to SWEPCO's obligation


                                      CSW
                                      2-9
<PAGE>
under the subordinated debentures, SWEPCO has also agreed to a security
obligation which represents a full and unconditional guarantee of SWEPCO Capital
I's trust obligations.

         On May 8, 1997, CPL's business trust, CPL Capital I, sold to
underwriters in a negotiated offering $150 million, 8.00% Series A, Cumulative
Quarterly Income Preferred Securities due April 30, 2037. The proceeds from the
sale of these securities were used by CPL to repay short-term debt, to reimburse
CPL's treasury for the cost of reacquiring approximately $87.5 million of 4.00%
Series, 4.20% Series, 7.12% Series and 8.72% Series preferred stock, to provide
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 14, 1997. CPL Capital I is treated as a subsidiary
of CPL whose only assets are the approximately $154.6 million principal
subordinated debentures issued by CPL. In addition to CPL's obligation under the
subordinated debentures, CPL has also agreed to a security obligation which
represents a full and unconditional guarantee of CPL Capital I's trust
obligations.

         In March 1997, an affiliate of Orange Cogeneration Limited Partnership,
an entity that is 50% indirectly owned by CSW Energy and accounted for by the
equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds,
due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration
Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy
representing its equity investment in the Orange Cogeneration project.

         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, 1997,
CSW had a revolving credit facility totaling $1.4 billion to back up its
commercial paper program. At December 31, 1997 CSW had $721 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 $725 million during December 1997. Information concerning
short-term borrowings for each of the U.S. Electric Operating Companies is
presented in the following table.

                                  Maximum
                   Borrowing       Amount        Date of Maximum
                     Limit        Borrowed          Borrowed
                 -------------- -------------- -----------------
                                ($ - millions)

CPL                  $300          $149       December 30, 1997
PSO                   125            89        February 4, 1997
SWEPCO                150            83          April 23, 1997
WTU                    65            44          April 11, 1997

         CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric 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, 1997, CSW Credit had a $900 million revolving credit
agreement, secured by the assignment of its receivables, to back up its
commercial paper program, which had $637 million outstanding. The maximum amount
of such commercial paper outstanding during the year, which had a weighted
average interest yield of 5.6%, was $890 million during September 1997. The
average and year end amounts of accounts receivable sold during 1997 by the U.S.
Electric Operating Companies to CSW Credit are shown in the following table.


                                      CSW
                                      2-10
<PAGE>
                  1997          1997
                 Average     End of Year
               ------------ ------------
                       (millions)

CPL               $115          $65
PSO                 82           62
SWEPCO             109           77
WTU                 38           59

         CSW has recently made several finance-related filings with the SEC
under the Holding Company Act which, if approved, would increase CSW's financial
flexibility. In the first filing, CSW requested authority to repurchase up to
ten percent of its outstanding common stock as of June 30, 1997, from its stock
and employee benefit plans (pursuant to the terms and conditions of such plans)
from time to time through December 31, 2002, and to utilize its short-term
borrowing program, including funds borrowed through its commercial paper
program, to finance its repurchase in the open market of up to twenty percent of
its outstanding common stock as of June 30, 1997. No decision regarding this
application has been made by the SEC. Such authority would increase CSW's
flexibility to adjust its capital structure. The second filing requests
authority through December 31, 2002 for CSW, the U.S. Electric Operating
Companies and CSW Services to finance ongoing business, repay short-term debt
and finance the potential repurchase of outstanding securities. CSW has
requested authority to issue common stock, while the U.S. Electric Operating
Companies and CSW Services have requested authority to issue common stock,
preferred stock and debt. Such authority would give CSW the flexibility to take
advantage of favorable market conditions for routine financings. The SEC issued
an order on December 30, 1997 granting the requested authority. The third filing
requests an increase in the authorized short-term borrowing capacity for CSW and
certain of its subsidiaries. The SEC has not issued an order with respect to
this application. For a description of certain restrictions on CSW's ability to
repurchase common stock and to raise capital from external sources, see PROPOSED
AEP MERGER.


         CSW ENERGY AND CSW INTERNATIONAL
         In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes
due 2001. The proceeds from the notes were for the acquisition, development and
construction of electric generation assets in the United States and to make
affiliate loans to 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,
1997.

         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. This represents an 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, 1997, 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.


                                      CSW
                                      2-11
<PAGE>


RECENT DEVELOPMENTS AND TRENDS

         CSW STRATEGIC RESPONSES
         CSW and the U.S. Electric Operating Companies have, from time to time
considered, and expect to consider in the future, various strategies designed to
enhance CSW's competitive position and to increase its ability to anticipate and
adapt to changes in the electric utility industry. These strategies may include
business combinations with other companies, internal restructurings involving
the complete or partial separation of CSW's generation, transmission and
distribution businesses, acquisitions or dispositions of assets or lines of
business, and additions to or reductions of franchised service territories. CSW
and the U.S. Electric Operating Companies may from time to time engage in
discussions, either internally or with third parties, regarding one or more of
these potential strategies. Those discussions may be subject to confidentiality
agreements and CSW's policy is generally not to comment on such activities. No
assurances can be given that any potential transaction of the type described
above may actually occur, or, if one does occur, the ultimate effect thereof on
CSW's or any U.S. Electric Operating Company's results or 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).

         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. On January 19, 1998, CSW announced 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 transaction must
receive regulatory approval from federal and state authorities and must satisfy
a number of other conditions, some of which, such as CSW and AEP shareholder
approval, 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 cheaper than electricity. In the United
Kingdom, the franchised electricity supply business is scheduled to open to full
competition on a phased-in basis on September 1, 1998. As a result, SEEBOARD
will be able to seek customers while risking the loss of existing customers to
other competitors. As a whole, the CSW U.S. Electric System 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 impacting 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


                                      CSW
                                      2-12
<PAGE>
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
CSW and the U.S. Electric Operating Companies associated with various federal
and state restructuring proposals aimed at resolving any or all of these issues
will vary depending on many factors, including the proposals' competitive
position and treatment of stranded utility investment 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.

         At the federal level, several bills were introduced in Congress during
the 1997 legislative session which provided for restructuring and/or
deregulating the electric utility industry. However, no such bills were enacted
into law. In 1998, the United States Senate has progressed further in its
consideration of comprehensive energy restructuring legislation than the United
States House of Representatives. However, in the United States Senate,
differences must be resolved between those who favor legislation to repeal the
Holding Company Act and those who support repeal only in the context of
comprehensive legislation. Prospects for repeal of the Holding Company Act in
1998 are unclear.

         While a majority of the states, including the four states in which the
U.S. Electric Operating Companies operate, have considered deregulation that
requires some form of retail competition, several states have enacted actual
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 one or more of these legislative initiatives, nor can
they predict the scope or effect of such legislation on their results of
operations or financial condition. 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 that the Energy Policy
Act will continue to make the wholesale markets more competitive, CSW is unable
to predict whether the Energy Policy Act will adversely 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


                                      CSW
                                      2-13
<PAGE>
their open access tariffs for wholesale sales and purchases and by requiring
utilities to rely on the same transmission information that their transmission
customers rely on to make wholesale purchases and sales.

         In addition, the Texas Commission adopted a rule governing transmission
access and pricing for ERCOT in 1996. The pricing method adopted by the Texas
Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering
70% of total ERCOT transmission costs and a distance-sensitive component which
recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began
recording transmission revenues and expenses in accordance with the Texas
Commission's rule on January 1, 1997.

         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 9, 1998 and are waiting for FERC's
acceptance of the revised tariff.

         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.

         RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
         Increased competition in the utility industry has resulted in increased
pressure to stabilize or reduce rates. The retail regulatory environment is
beginning to shift from traditional rate base regulation to incentive
regulation. Incentive rate and performance-based plans encourage efficiencies
and increased productivity while permitting utilities to share in the results.
Retail wheeling, a major legislative initiative which would require utilities to
"wheel" or move power from third parties to their own retail customers, is
evolving gradually. Most states either have introduced legislation or are
investigating the issue, and several states have already passed legislation
which mandates retail choice by a certain date.

         CSW believes that retail competition would 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 finance power plants. These investments, which
were reasonably incurred, were made by the U.S. Electric Operating Companies to
meet their obligation to serve the public interest, necessity and convenience.
This obligation has existed for nearly a century and remains in force under
current law. CSW intends to strongly oppose attempts to impose retail
competition without just compensation for the risks and investments CSW
undertook to serve the public's demand for electricity. For additional


                                      CSW
                                      2-14
<PAGE>
information related to retail wheeling in the United States, see HOLDING COMPANY
ACT AND LEGISLATIVE UPDATE and INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS,
LOUISIANA, OKLAHOMA AND ARKANSAS.

         INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA, OKLAHOMA AND 
         ARKANSAS
         Several initiatives regarding restructuring the electric utility
industry have recently been undertaken in the four states in which the U.S.
Electric Operating Companies operate. Legislation was enacted in Oklahoma while
legislative activity in Texas, Louisiana and Arkansas stopped short of any such
definitive action.

         In April 1997, the Oklahoma Legislature enacted legislation dealing
with industry restructuring in Oklahoma, which provides for retail competition
by July 1, 2002. The legislation directs the Oklahoma Commission to study all
relevant issues relating to restructuring and develop a framework for a
restructured industry. The legislation divides the study of restructuring issues
by the Oklahoma Commission into four parts: (i) independent system operator
issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues.
At the end of each of these studies, the Oklahoma Commission must provide
reports along with legislative recommendations. The legislation directs the
Oklahoma Tax Commission to study the impact of electric utility restructuring on
state tax revenues and the existing tax structure, consider the establishment of
a uniform consumption tax, and report to the Oklahoma Legislature by December
31, 1998. The legislation prohibits the establishment of retail competition
until a uniform tax policy is established. The legislation also creates a Joint
Electric Utility Task Force, a 14-member panel composed of an equal number of
representatives from the Oklahoma House of Representatives and the Oklahoma
Senate. The duties of this task force include the oversight and direction of the
studies by the Oklahoma Commission and the Oklahoma Tax Commission. 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 will
continue to hold hearings throughout 1998. Also, the Arkansas Commission has
initiated a series of generic restructuring dockets. The Arkansas Commission
will provide a report to the Arkansas Legislature by October 1998. In Louisiana,
a special legislative committee created by the Louisiana Senate is studying the
impact of retail competition on the state of Louisiana. The committee is
scheduled to issue a report before the next regular session of the Louisiana
Legislature. The Louisiana Commission has also opened a proceeding to study
restructuring and retail competition. In Texas, the Texas Lieutenant Governor
appointed a Senate interim committee to study retail competition and
restructuring. The committee is holding a series of hearings and is scheduled to
issue a report by September 1998. Management cannot predict the outcome of the
studies in Arkansas, Louisiana and Texas or their ultimate impact on the results
of operations and financial condition of CSW, CPL, SWEPCO and WTU.

         INDUSTRY RESTRUCTURING IN TEXAS
         Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service.

         PURA also required that the Texas Commission adopt a rule on comparable
open transmission access by March 1, 1996. In conjunction with this rulemaking
proceeding (Project No. 14045), the chairman of the Texas Commission issued a
proposal on September 6, 1995, for the purpose of maximizing competition in the
ERCOT wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could purchase
their power requirements from any generator or set of generators in ERCOT. Those
generators which are currently regulated would be deregulated after provisions
are in place to recover stranded costs. The proposal was assigned a separate
proceeding (Project No. 15000), and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope


                                      CSW
                                      2-15
<PAGE>
of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including to certificate electric service resellers, the authority to adopt
consumer protection and universal service standards, the authority to determine
and allocate stranded costs to all customers, the authority to promote
unbundling, the authority to allow alternative forms of regulation, increased
authority to address mergers, authority to correct market power abuses,
authority over the ERCOT ISO and authority to permit alternative methods for
fuel cost recovery. In addition, the final report offers the Texas Legislature
four restructuring options. Option 1 maintains the regulatory status quo; Option
2 would permit utilities to voluntarily offer retail access; Option 3 would
provide for full wholesale competition; and Option 4 would provide for full
retail competition. The report's final recommendation is for the Texas
Legislature to direct the Texas Commission to prepare for full retail
competition using a careful and deliberate approach on a timetable to be
established by the Texas Legislature, but with no retail access before the year
2000. The Texas legislature considered but did not pass any of these proposals
in the 1997 legislative session.

         On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). 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 referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC
Order 888 that conform to the Texas Commission's rule. See FERC ORDERS 888 AND
889 for additional information regarding the transmission pricing rules
prescribed by FERC.

         By statute the Texas Commission was required to submit a report to the
1997 Texas Legislature on "methods or procedures for quantifying the magnitude
of stranded investment, procedures for allocating costs, and the acceptable
methods of recovering stranded costs." The Texas Commission initiated Project
No. 15001 to collect information to prepare the required report. In response to
the Texas Commission's order in Project 15001, CPL, SWEPCO, and WTU each filed
information on estimates of potential stranded costs. While the filings for CPL
included estimates of significant potential stranded costs, no significant
potential stranded costs were identified in the filings for SWEPCO or WTU. In
January 1998, the Texas Commission requested updated information on CPL's
stranded costs for a report that the Texas Commission is preparing for the
Senate interim committee on restructuring. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for a discussion of the potential impact of potential stranded costs
relating to CPL.

         The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
CPL, SWEPCO and WTU each filed information for the Texas Commission's report.

         TEXAS INDEPENDENT SYSTEM OPERATOR PLAN
         In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to adopt a plan for a regional ISO and
a regional competitive wholesale bulk power market.


                                      CSW
                                      2-16
<PAGE>

         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. The targeted purchase
goals were developed in response to customer input obtained through the
deliberative polling process conducted at each operating company in the summer
of 1996. A separate phase of the Integrated Resource Plan was created to address
the value of interruptible resources at CPL. That phase is expected to be
completed in March 1998. The Interim Order also required that a green pricing
tariff be filed which would allow customers who are interested in acquiring a
greater portion of their personal consumption from environmentally beneficial
generation to exercise that choice. A green pricing tariff was approved for use
in San Angelo, Texas in October 1996. A system-wide filing is expected in
mid-1998.

         HOLDING COMPANY ACT AND LEGISLATIVE UPDATE
         The Holding Company Act generally has been construed to limit the
operations of a registered holding company to a single integrated public utility
system, plus such additional businesses as are functionally related to such
system. Among other things, the Holding Company Act requires CSW and its
subsidiaries to seek prior SEC approval before effecting mergers and
acquisitions or pursuing other types of non-utility initiatives. Such pervasive
regulation may impede or delay CSW's efforts to achieve its strategic and
operating objectives. Consequently, CSW continues to support efforts to repeal
or modify this legislation.

         In 1995, the SEC issued a report to the United States Congress
advocating repeal of the Holding Company Act, either on a conditional and
transitional basis or immediate and outright repeal. The basis for the SEC's
recommendation for repeal is that the Holding Company Act is anachronistic and
duplicative of other federal and state regulatory regimes that have developed
over the past sixty years. Following the SEC's report, there were several bills
introduced in both the United States Senate and House of Representatives in 1996
which would have repealed the Holding Company Act on a conditional and
transitional basis and transferred its oversight functions to the FERC and the
states. Another bill was introduced into the United States House of
Representatives that, in addition to repealing the Holding Company Act, would
have repealed PURPA, which among other things, requires investor owned utilities
to purchase power at their avoided cost from qualifying facilities. Although
none of these bills were enacted into law, they may suggest the form of future
legislation.

         In January 1997, a bill was introduced in the United States Senate
providing for comprehensive electric utility industry restructuring and for
retail choice by December 2003, repeal of the Holding Company Act one year after
the bill is enacted, as well as repeal of the requirement that electric
utilities purchase power at their avoided cost from qualifying facilities under
PURPA. Under this bill, many of the oversight functions performed by the SEC
under the Holding Company Act would be shifted to the FERC and the states. In
addition, a bill was reintroduced in the United States House of Representatives
providing for choice of electricity suppliers at the retail level by the year
2000. Under this bill, which is substantially similar to the United States
Senate bill, the application of the Holding Company Act to a particular holding
company system would be eliminated after each state served by the electric
utility companies in that system made a determination that retail competition
existed in that state. No legislation was enacted in 1997.

         In February 1997, the SEC adopted Rule 58 allowing a holding company
registered under the Holding Company Act or any of its subsidiaries, to acquire,
without prior SEC approval, the securities of any energy-related company subject
to certain limits. Under the new rule, investment in energy-related company
securities without prior SEC approval is limited to the greater of (i) $50
million and (ii) 15% of the consolidated capitalization of the registered


                                      CSW
                                      2-17
<PAGE>
holding company as reported on its most recent Form 10-Q or Form 10-K as filed
with the SEC. Rule 58 does not exempt the acquisition by a registered holding
company of the securities of an electric utility company or a gas utility
company, which remains subject to the SEC's prior approval as does the issuance
of securities for the purpose of making such exempt investments.

         In 1998, the United States Senate has progressed further in its
consideration of comprehensive energy restructuring legislation than the United
States House of Representatives. However, in the United States Senate,
differences must be resolved between those who favor legislation to repeal the
Holding Company Act and those who support repeal only in the context of
comprehensive legislation. Prospects for repeal of the Holding Company Act in
1998 are unclear.

         REGULATORY ACCOUNTING
         Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, the U.S.
Electric Operating Companies have recognized significant regulatory assets and
liabilities. Management believes that the U.S. Electric Operating Companies
currently meet the criteria for following SFAS No. 71. However, in the event the
U.S. Electric Operating Companies or some portion of their business no longer
meets the criteria for following SFAS No. 71 due to deregulation or for other
reasons, a write-off of regulatory assets and liabilities would be required,
absent a means of recovering such assets or settling such liabilities in a
continuing regulated segment of the business. For additional information
regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS
and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

         PSO UNION NEGOTIATIONS
         As previously reported, 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 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 believes that the new law also broke
the impasse in the contract negotiations and has resumed negotiations 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 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 U.S.
Electric Operating Company's results of operations, financial condition or
competitive position. (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).


                                      CSW
                                      2-18
<PAGE>

RATES AND REGULATORY MATTERS

         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, and in May 1996, CPL placed a $70
million base rate increase into effect under bond, subject to refund based on
the receipt of the CPL 1997 Original Rate Order of the Texas Commission. On
March 31, 1997, the Texas Commission issued a rate order in CPL's rate review,
Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested
the reconsideration of numerous provisions of the order. Motions for rehearing
were also filed by other parties to the rate proceeding. In response to the
motions for rehearing, in June 1997, the Texas Commission made several
modifications to the CPL 1997 Original Rate Order and also agreed to rehear on
remand several other issues. CPL restored its rates in July 1997, with two
exceptions, to levels existing prior to the May 1996 implementation of bonded
rates. On August 21, 1997, after reconsidering the issues on remand, the Texas
Commission voted to issue a revised final order and on September 10, 1997, CPL
received a revised final order. CPL filed its second motion for rehearing on
September 30, 1997. The second motion for rehearing again requested
reconsideration of numerous issues in the rate case. On October 16, 1997, the
Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order
lowers 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 will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.

         There are numerous contributing factors to the difference between the
$71 million retail base rate increase originally requested by CPL and the $19
million retail base rate reduction included in the CPL 1997 Final Order. The CPL
1997 Final Order decreased CPL's requested return on equity of 12.25% on its
retail rate base to a 10.9% return on equity for all non-ECOM invested capital,
which results in a $30 million decrease in CPL's rate request. The CPL 1997
Final Order provides for the disallowance of approximately $18 million of
affiliate transactions. In addition, the CPL 1997 Final Order denied CPL's
request to use straight line amortization for CPL's deferred accounting costs.
Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage
amortization method to amortize its deferred accounting costs, resulting in a
reduction of $14 million from CPL's rate request. The CPL 1997 Final Order also
decreased depreciation by $17.4 million from CPL's rate request.

         Another major provision of the CPL 1997 Final Order was the Texas
Commission's categorization of $800 million of CPL's investment in STP as ECOM.
The term ECOM has been used to refer to the amount of costs that potentially
would become "stranded" if retail competition were mandated and prices were set
in the market, rather than the price being determined by current regulatory
standards of reasonable and necessary cost of providing service. The CPL 1997
Final Order reduced CPL's equity return on the ECOM portion of CPL's investment
in STP to 7.96%, compared to the 10.9% return on common equity approved for all
other invested capital, resulting in a $15.9 million decrease in CPL's rate
request. At the same time, the CPL 1997 Final Order accelerated the recovery of
the $800 million designated as ECOM to 20 years from the remaining 32-year life
of STP.


                                      CSW
                                      2-19
<PAGE>


         The following table contains details of the estimate of the financial 
impact of the CPL 1997 Final Order.

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

Decrease in revenue                      $(24.2)    $(28.7)   $(41.9)

Items included in decrease in revenue
   with an offsetting effect on expense:
      Recovery of STP (ECOM)               20.0       20.0     20.0
      Change in depreciation              (11.3)     (11.3)   (11.3)
      Decommissioning                       4.3        4.3      4.3
      Other                                 6.8        2.1      2.1
                                         ------     ------   ------
                                           19.8       15.1     15.1
                                         ------     ------   ------
Change in current year income before tax  (44.0)     (43.8)   (57.0)
Federal income taxes                       14.8       14.8     19.3
                                         ------     ------   ------
Current year impact on net income         (29.2)     (29.0)   (37.7)
                                         ------     ------   ------

1996 effect                               (18.9)      --       --
                                         ------     ------   ------
Estimated impact on net income           $(48.1)    $(29.0)  $(37.7)
                                         ------     ------   ------

         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 to be applied to rates in mid-1998 and mid-1999, and (iii)
the $18 million of disallowed affiliate transactions from CSW Services. As part
of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission
from implementing the "Glide Path" rate reduction methodology, currently
scheduled to begin in May 1998. A hearing has been set for the temporary
injunction on April 3, 1998. 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 had
recorded approximately $1.3 billion of regulatory-related assets at December 31,
1997. 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, including the CPL 1997 Final Order, CPL no longer meets the
criteria for following SFAS No. 71, a write-off of regulatory assets would be
required. 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.

         The foregoing discussion of CPL RATE REVIEW - DOCKET NO. 14965
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order.

         PSO 1997 RATE SETTLEMENT AGREEMENT
         In July 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings. In accordance with the established schedule,
PSO subsequently filed financial data, cost of service and rate design testimony
supporting both its current rates and an increase in annual depreciation expense
of $26 million. In July 1997, the Oklahoma Commission staff and other
intervenors to the proceeding filed their revenue requirements testimony. In its
filing, the Oklahoma Commission staff recommended a rate reduction of $76.8
million for PSO.

         On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission. On
October 23, 1997, the Oklahoma Commission issued a final order approving the
agreement. The following table represents the financial impact of the PSO 1997


                                      CSW
                                      2-20
<PAGE>
Rate Settlement Agreement on PSO's 1997 results of operations and also an
estimate of its ongoing annual impact on net income in successive years.

                                                        Ongoing
                                              1997      Annual
                                             Impact     Impact
                                            -------------------
                                                   (millions)
Decrease in revenue
      Refund to customers                     $(29.0)     $--
      Change in rates                           (2.5)   (35.9)
                                               -----    -----
                                               (31.5)   (35.9)
                                               -----    -----
Changes in expenses (offsetting 
  impact included in revenues)
      Depreciation                              (6.3)   (10.9)
      Rate case deferred costs                   2.2      --
      Income tax                               (10.2)    (8.8)
                                               -----    -----
                                               (14.3)   (19.7)
                                               -----    -----
                                               (17.2)   (16.2)
Write-off of deferred assets, net of tax       (10.2)     --
                                               -----    -----
                                              $(27.4)  $(16.2)
                                               -----    -----

         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
material adverse effect on its results of operations because of the rate
decrease. However, it also reduced significant risks for PSO related to this
regulatory proceeding and will enable PSO's rates to remain competitive for the
foreseeable future.

         The foregoing discussion of PSO 1997 RATE SETTLEMENT AGREEMENT
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information on the PSO 1997 Rate
Settlement Agreement.

         SWEPCO LOUISIANA RATE REVIEW
         In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. In 1993, the Louisiana Commission issued an order
initiating a review of the rates of all investor-owned utilities in the state.
Since that time, each of the other investor-owned utilities in Louisiana have
been reviewed. 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 requested bids from consultants to perform
a review of SWEPCO's rates and charges and to review SWEPCO's quality of
service. The Louisiana Commission plans to select consultants during the second
quarter of 1998 and a timeline for the review will be determined shortly
thereafter.  Management cannot predict the outcome of this review.

         SEEBOARD RECENT REGULATORY ACTIONS
         Following the phased-in opening of the United Kingdom domestic and
small business electricity market to competition in September 1998, customers
will be able to choose their electricity supplier. SEEBOARD will compete for
customers in its own area as well as throughout the rest of the United Kingdom.
The DGES has allowed some 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 over the first two years following the introduction of competition,
taking into account its view of future electricity purchase costs. For SEEBOARD,
this proposal reduces 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.


                                      CSW
                                      2-21
<PAGE>
         OTHER
         Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.


 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 $28.1 billion ($16.5 billion in equity; $11.6
billion in debt and preferred stock). CSW expects the combination to be
accounted for as a pooling of interests. The transaction must satisfy many
conditions, some of which may not be waived by the parties. There can be no
assurance that the AEP Merger will be consummated.

         This combination is expected to create one of the nation's preeminent
diversified electric utilities serving more than 4.6 million customers in 11
states and approximately 4 million customers outside the United States. Both
companies have low-cost generation and offer their customers in every state
prices below the national average. Over the last two years, both CSW and AEP
have ranked among the top five electric utilities in customer satisfaction in
the ACSI.

         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. AEP will issue approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. Both companies anticipate continuing
their current dividend policies until the close of the transaction.

         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 or its 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 workforces. 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. Organizational and staffing recommendations will be made by
transition teams of employees from both companies.

         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


                                      CSW
                                      2-22
<PAGE>
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 merger is conditioned, among other things, upon the approval of CSW
stockholders and several state and federal regulatory agencies. AEP shareholders
must authorize additional common stock and approve a new common stock issuance
to be used in the exchange for CSW common stock. The companies anticipate that
regulatory approvals can be obtained in 12 to 18 months from the date of
announcement. See NOTE 16. PROPOSED AEP MERGER.


OTHER MERGER AND ACQUISITION ACTIVITIES

         SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER
         In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation resulting from the termination of the
proposed merger. Under the terms of the settlement agreement, CSW and El Paso
agreed to dismiss all pending claims in the litigation and give a mutual release
from any potential claims related to the El Paso Merger Agreement or the pending
litigation, and CSW paid $35 million to El Paso, various of its creditor groups
under its plan of reorganization, and its attorneys. CSW recorded a charge of
$25 million in the first quarter of 1997 following the court's interim order and
recorded an additional charge of $10 million in the second quarter of 1997 to
fully recognize the $35 million settlement amount. The bankruptcy court vacated
the interim order and approved the settlement agreement. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS.

         SWEPCO CAJUN ASSET PURCHASE PROPOSAL
         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. 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, for $940.5 million in cash, subject to adjustment
pursuant to 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,
the Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO.

         The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by
SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19,
1996. Two competing plans of reorganization for the non-nuclear assets of Cajun
have been filed with the bankruptcy court, each with different purchase prices,
rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy
case are now scheduled through April 1998. Consummation of the SWEPCO Plan 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 board approvals. If the SWEPCO Plan is confirmed, 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 borrowings and internally
generated funds with approximately 70% of the external borrowings funded with
non-recourse debt. There can be no assurance that the SWEPCO Plan will be
confirmed by the bankruptcy court or, if it is confirmed, that it will be
approved by federal and state regulators. For additional information regarding
the SWEPCO Cajun asset purchase proposal see NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES.


                                      CSW
                                      2-23
<PAGE>
OTHER INITIATIVES

         As described in OVERVIEW, a vital part of CSW's future strategy
involves initiatives that are outside of the traditional United States electric
utility industry due to increasing competition and fundamental changes in this
industry. In addition, lower anticipated growth rates in CSW's core United
States electric utility business combined with the aforementioned 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
RECENT DEVELOPMENTS AND TRENDS.

         CSW ENERGY AND CSW INTERNATIONAL
         CSW Energy presently owns interests in six operating power projects
totaling 978 MW which are located in Colorado, Florida and Texas. In addition to
these projects, CSW Energy has other projects in various stages of development.
In August 1997, an affiliate of CSW Energy sold 50% of its 100% interest in the
Sweeny Cogeneration project. CSW Energy provided the $56.5 million non-recourse
financing for the sale which is expected to be repaid from project distributions
or proceeds from sale, as defined in the sales agreements. Construction of the
330 MW electricity generating facility was completed in early 1998 with a
commercial operation date of February 1, 1998. CSW Energy did not recognize a
gain or loss on this transaction.

         CSW International was organized to pursue investment opportunities in
EWGs and FUCOs. CSW International currently holds investments in the United
Kingdom, Mexico and Latin America. CSW International acquired a minority
interest in Vale, a Brazilian electric utility company, for an initial
investment of approximately $40 million in December 1996. In 1997, CSW
International made additional equity investments of approximately $150 million
in Latin America. The $190 million used to make the equity investments was
funded through loans to CSW International by CSW Energy. CSW Energy obtained the
funds from its $200 million Senior Note issuance in October 1996. CSW
International continues to seek to expand into other countries in Latin America,
Europe, and Asia that meet its investment criteria and the investment criteria
contained in the AEP merger agreement.

         C3 COMMUNICATIONS
         C3 Communications has two active business units; its Utility Automation
Division and a telecommunications partnership, ChoiceCom.

         C3 Communications' Utility Automation Division performs consulting,
implementation and integration of utility meter automation products and services
for traditional utility companies and, as competition markets open, in states
like California, for energy service providers. C3 Communications offers clients
innovative meter-based competitive data services including automated meter
reading; hourly, daily and monthly delivery of consumption data; advanced load
profiling data; aggregation reports for customers with multiple accounts and
operational services like outage and tamper detection and real-time-pricing and
time-of use data.

         ChoiceCom offers telecommunications services including local telephone
service, long distance and long-haul data transmission services. ChoiceCom began
offering local telephone service in August, 1997, in Austin, Corpus Christi and
San Antonio, Texas with an emphasis on the business customer. ChoiceCom also
installed state-of-the-art Lucent 5ESS(R) switches in those three cities. In
January 1998, ChoiceCom began offering telephone service in Dallas and Houston
with plans to install Lucent 5ESS(R) switches in both cities by the end of the
year. With the addition of Dallas and Houston, ChoiceCom's expected 5-year


                                      CSW
                                      2-24
<PAGE>
capital budget has increased to $210 million from $104 million. The partnership
has grown to about 150 employees during its first year of operation.

         In November 1997, the parties amended the ChoiceCom Limited Partnership
Agreement to provide that CSW hold 100% of the economic interest in ChoiceCom
and 60% of the voting interest. ICG Communications, Inc. holds the remaining 40%
voting interest in ChoiceCom, and has an option to acquire a 50% economic
interest in ChoiceCom. In the event that its option terminates without being
exercised, ICG Communications, Inc. will be bound by a non-compete agreement in
CSW's service territory.

         ENERSHOP
         EnerShop currently provides energy services to customers in Texas which
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.

         OTHER VENTURES
         CSW Energy Services will spearhead CSW's competitive efforts in the
retail electricity markets of states outside of CSW's historical service
territories. CSW Energy Services will seek to secure electricity supply business
in the markets which soon will have retail competition, and will enable CSW to
extend its business reach and name recognition beyond CSW's traditional customer
base. In March 1998, CSW Energy Services signed its first major supply contract
in California. The CSW Services Business Ventures group pursues energy projects
related to the business activities of the U.S. Electric Operating Companies.
Projects for these groups include staffing services for electric utility nuclear
power plants, energy management systems, electric substation automation software
and electric vehicles. 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. CSW has temporarily suspended this initiative in light of the AEP Merger
since AEP is already pursuing 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.

         STP Unit 1 and Unit 2 were removed from service during 1997 for
scheduled refueling outages which lasted 24 days and 18 days, respectively. For
the year 1997, Unit 1 and Unit 2 operated at net capacity factors of 90.1% and
91.0%, respectively.

         In September 1997, STPNOC was formed to replace HL&P as the STP Project
Manager. Each of the four STP co-owners are represented on the STPNOC board of
directors. The CPL representative has been elected as the initial chairman of
the board of directors. On October 1, 1997, all HL&P employees assigned to STP
were transferred from HL&P to STPNOC. On November 17, 1997, HL&P was removed as
STP Project Manager, and STPNOC became the operator of the plant. CPL believes
the formation of STPNOC is in the best interest of CPL.

         The establishment of STPNOC provides the following advantages: (i)
allows the management and work force to focus exclusively on the safe, reliable
and efficient operation of the STP units; (ii) removes most of the possibility
of disputes between the four owners over the operation of the facility; (iii)
removes dissension concerning the potential liability of HL&P who was acting as
the project manager; and (iv) allows the management of the facility to tailor a
total compensation package for the STP work force which best suits that work
force and its needs. In addition, the formation and operation of STPNOC is


                                      CSW
                                      2-25
<PAGE>
expected to result in a decrease in costs allocable to CPL related to its
investment in 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).

         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 levels 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
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 yet be determined, but the impact could be
significant.


                                      CSW
                                      2-26
<PAGE>
RISK MANAGEMENT

         In October 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 addition, 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, 1997, the gross value of such contracts for differences amounted to
not more than 80% of any year's expected power purchases.

         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 since its purchase of SEEBOARD in 1995. 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 1997, 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 $425 million.

                                           Expected        Expected Cash
                                         Cash Inflows        Outflows
Contract               Maturity        (Maturity Value)   (Market Value)
                         Date
------------------------------------------------------------------------

Cross currency swap   August 1, 2001     $200 million     $216.5 million
Cross currency swap   August 1, 2006     $200 million     $226.8 million


OTHER MATTERS

         YEAR 2000
         In 1996, a system-wide program to prepare CSW's computer systems and
applications for the year 2000 was initiated. CSW expects to incur internal
staff costs as well as consulting and other expenses related to infrastructure
and facilities enhancements necessary to prepare the systems for the year 2000.
Testing and conversion is expected to cost between $20 million and $21 million
over the next two years including both domestic and foreign operations. A
significant portion of these costs is likely to be covered through the
redeployment of existing resources. The major applications which pose the
greatest risk for CSW if implementation is not successful are the transmission
and distribution automation system; the time in use, demand and recorder
metering system for commercial and industrial customers; and the power billing
system. The potential problems related to these systems are electric service
interruptions to customers, interrupted revenue data gathering and poor customer
relations resulting from delayed billing, respectively. Costs related to the
year 2000 program will be expensed as incurred.


                                      CSW
                                      2-27
<PAGE>
         ADOPTION OF RIGHTS PLAN
         In September 1997, CSW's board of directors adopted a Rights Plan,
subject to SEC approval under the Holding Company Act. SEC approval was received
in December 1997, and on December 22, 1997, CSW executed the Rights Plan which
had been modified to permit the AEP Merger. The Rights Plan was initially
adopted and ultimately executed as part of the fiduciary responsibility of CSW's
board of directors and was not adopted because of any takeover offer or threat.
The intent of the Rights Plan is to assure fair and equal treatment for all of
CSW's stockholders in the event of a hostile takeover attempt and to encourage a
potential acquirer to negotiate with CSW's board of directors before attempting
a takeover to assure a fair price for all stockholders.

         On January 6, 1998, CSW made a dividend distribution of one right for
each outstanding share of its common stock. Each right initially entitles the
holder to buy one-tenth of one share of CSW Common for $50. Prior to the date
upon which the rights become exercisable under the Rights Plan, CSW's
outstanding stock certificates will represent both the shares of common stock
and the rights, and the rights will trade only together with the shares.

         Under the Rights Plan, a "triggering event" would occur ten days after
a person or group acquires or announces a tender or exchange offer to acquire
fifteen percent or more of CSW's outstanding common stock. Upon such a
"triggering event," the rights would become exercisable and trade independently
of CSW's common stock. After a person or group acquires fifteen percent or more
of CSW's outstanding common stock, each right (except those held by such
acquiring person or group, whose rights would become void), entitles the holder
to purchase, at the exercise price, CSW common shares having a current market
value of two times the exercise price. If CSW was acquired in a merger or other
business combination, each right would entitle the holder to purchase, at the
exercise price, common stock of the acquirer having a current market value of
two times the exercise price. In either case, after a triggering event occurs
but before an acquiring person becomes the owner of at least fifty percent of
CSW's outstanding common stock, CSW's board of directors may direct the exchange
of one share of CSW's common stock for each right then outstanding and not
exercised. The Rights Plan exempts the AEP Merger transaction. Therefore,
neither the execution of the AEP merger agreement nor consummation of the AEP
Merger caused, or will cause a "triggering event" or the rights to become
exercisable. See PROPOSED AEP MERGER for additional information on the proposed
merger.

         CSW's board of directors may redeem the rights for a price of one cent
per right prior to the earlier of the rights becoming exercisable or the
expiration of the Rights Plan. The rights will expire ten years from the
effective date unless they are earlier redeemed or exchanged by CSW.


NEW ACCOUNTING STANDARDS

         SFAS NO. 125
         SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. The
Registrants adopted SFAS No. 125 effective January 1, 1997. Adoption of this
standard has not had a material adverse effect on the Registrants' results of
operations or financial condition.


                                      CSW
                                      2-28
<PAGE>

         SFAS NO. 128
         On March 3, 1997, the FASB issued SFAS No. 128, effective for financial
statements for periods ending after December 15, 1997. SFAS No. 128 will
simplify the computation of earnings per share for many companies by eliminating
calculation provisions which were required by the prior earnings per share
standard, Accounting Principles Board Opinion No. 15. CSW adopted SFAS No. 128
effective December 31, 1997. Adoption of SFAS No. 128 did not have a material
effect on its calculation of earnings per share.

         SFAS NO. 130
         This statement is effective for fiscal years beginning after December
15, 1997. 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 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. Though effective at the
beginning of 1998, comprehensive income is not required to be disclosed in
interim statements in the year adopted. CSW will adopt this statement beginning
with 1998 year-end financial statements.

         SFAS NO. 131
         This statement is effective for fiscal years beginning after December
15, 1997, and requires that certain information about operating segments be
presented in complete sets of financial statements. It also requires the
presentation of information regarding products and services, geographic areas in
which the entity operates, and concentrations of major customers.

         The objective of this statement is to provide information about the
different types of business activities in which an entity engages and the
different economic environments in which it operates to help users of financial
statements better understand an entity's performance and prospects for future
cash flows and make more informed judgments about the enterprise as a whole.

         An operating segment is a component of an enterprise that earns
revenues and incurs expenses, whose results are regularly reviewed by the chief
decision maker, and for which discrete financial information is available.
Separate information is required to be presented for any segment that is 10
percent or more of reported income, profit or loss, or assets of the combined
entity. CSW will adopt this statement beginning with 1998 year-end financial
statements.



CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

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


                                      CSW
                                      2-29
<PAGE>
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 impacting 1997 
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 14. DISCONTINUED OPERATIONS for additional information
concerning the effects of the sale of Transok.

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

                   1997 REVENUE VARIANCES
       INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS

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


         U.S. Electric revenues increased $73 million, or 2%, in 1997 compared
to 1996. Retail MWH sales increased 2.5% with increases in all customer classes.
U.S. Electric revenues increased primarily due 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,


                                      CSW
                                      2-30
<PAGE>
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.
Other diversified revenues increased $18 million, or 31%, in 1997 compared to
1996 due primarily to increased revenues from CSW International, C3
Communications, CSW Credit and EnerShop.

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

         Other operating expense increased $196 million to $981 million in 1997
compared to 1996 due in part to the absence in 1997 of a $27 million pension
adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased
pension expense. The effect of the exchange rate movement between the British
pound and U.S. dollar also contributed to the increase in other operating
expense of SEEBOARD U.S.A. In addition, approximately $56 million in new
transmission access expense was recorded at CPL and WTU in 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. Also increasing other operating expense were asset write-offs of
approximately $57 million including certain regulatory assets, capitalized
demand side management assets and obsolete inventories. In addition, the
settlement of litigation with El Paso increased other operating expense $35
million. Further contributing to the increase in other operating expense was the
$12 million impact of the CPL 1997 Final Order and the $4 million impact of the
PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. Partially offsetting these increases were the
absence in 1997 of expenses recorded in 1996 related to inventory write-offs of
$10 million and CPL rate case adjustments of $15 million. Further offsetting the
increases were charges in 1996 associated with restructuring costs. Also
partially offsetting the increase in other operating expense was reduced pension
expense in 1997 resulting from changes made to the pension plan for CSW's
domestic employees. See NOTE 5. BENEFIT PLANS for additional information related
to the changes in the pension plan.

         Depreciation and amortization expense increased $33 million, or 7%, in
1997 due primarily to the implementation of depreciation and amortization in
accordance with the CPL 1997 Final Order. As a result of that order, the
increase in depreciation due to the accelerated recovery of ECOM property was
offset in part by the implementation of lower depreciation rates. Taxes other
than income increased $17 million, or 10%, in 1997 compared to 1996 due
primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas
franchise tax refund and true-up in 1996. Income tax expense decreased $73
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


                                      CSW
                                      2-31
<PAGE>
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.


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995

         CSW's earnings increased to $429 million in 1996 compared to $402
million in 1995. Although earnings increased, earnings per share decreased from
$2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of
common stock during 1996. The return on average common stock equity was 12.1% in
1996 compared to 13.1% in 1995. U.S. Electric operations contributed
approximately 57% of total earnings in 1996 and approximately 105% of total
earnings in 1995. The lower percent for U.S. Electric operations is mostly
attributed to the gain on the sale of Transok, higher earnings from SEEBOARD
U.S.A. and the recording of charges at each of the U.S. Electric Operating
Companies for certain investments. SEEBOARD U.S.A. contributed 24% of total
earnings in 1996 as compared to 2% in 1995, reflecting a full year of earnings
in 1996 compared to only a partial quarter in 1995.

         Earnings increased in 1996 compared to 1995 due primarily to the gain
from the sale of Transok, the additional earnings from SEEBOARD U.S.A., the
absence of charges in 1996 related to the termination of the proposed El Paso
Merger in June 1995 and the effect of the CPL 1995 Agreement. Also contributing
to the increase were higher non-fuel electric revenues resulting from increased
usage, customer growth and weather-related demand. Partially offsetting these
increases in earnings were the recording of charges by the U.S. Electric
Operating Companies in June 1996 associated with certain investments, write-offs
of certain equity investments and other project development costs for CSW
Energy, restructuring charges, the effect of the CPL 1996 Fuel Agreement, the
asset reserves for the pending CPL rate case and the absence in 1996 of
favorable tax adjustments made in 1995. Additional information related to the
reserves recorded in June 1996 is discussed below. For further discussion of
CPL's regulatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
Increased depreciation and amortization, increased other operating expense,
increased interest expense and the loss of Mirror CWIP earnings also reduced the
increase in earnings. Significant items impacting 1996 earnings are listed 
below (in millions).

                                       Earnings
                                        Impact
                                      ------------

Gain on the Sale of Transok               $120
Charges for Certain Investments           (104)
CPL Pending Rate Case Write-offs            (8)
CPL 1996 Fuel Agreement                     (7)


                                      CSW
                                      2-32
<PAGE>


         Revenues increased approximately $2.0 billion or 64% in 1996 when 
compared to 1995.  The revenue variances are shown in the following table.

                   1996 REVENUE VARIANCES
       INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS

U.S. Electric
   Fuel Revenues                                         $181
   CPL 1995 Agreement                                     112
   KWH Sales, Growth and Usage                             83
   KWH Sales, Weather-Related                              21
   WTU 1995 Stipulation and Agreement                      21
   Other Electric                                         (35)
   CPL 1996 Fuel Agreement                                (18)
                                                       ------
                                                          365
United Kingdom                                          1,640
Other Diversified                                           7
                                                       ------
                                                       $2,012
                                                       ------

         U.S. Electric revenues increased $365 million or 13% in 1996 compared
to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales
among all retail customer classes. Customer growth, increased usage and
weather-related demand contributed to the increased revenues along with higher
fuel revenues as discussed below. Also contributing to the increase was the
absence in 1996 of reserves for refunds recorded in 1995 in accordance with the
CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. KWH sales to
retail customers increased in 1996 as a result of customer growth, increased
customer usage and weather-related demand.

         CSW's operating revenues also include approximately $1.8 billion from a
full year of revenues from SEEBOARD U.S.A. for 1996 compared to $208 million of
revenues for a partial quarter of operations in 1995. Other diversified revenues
increased 13% to $59 million in 1996 as compared to $52 million in 1995 due
primarily to increased revenues from CSW Energy projects, increased factoring
revenues at CSW Credit and new revenues from C3 Communications and EnerShop.

         During 1996 and 1995 the U.S. Electric Operating Companies generated
93% and 95%, respectively, of their electric energy requirements. U.S. Electric
fuel expense increased 15% to approximately $1.1 billion in 1996 at the U.S.
Electric Operating Companies due primarily to an increase in the average unit
cost of fuel to $1.81 per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting
higher natural gas prices. Partially offsetting this increase was a reduction in
the delivered cost of coal at the U.S. Electric Operating Companies resulting
from lower coal transportation costs and lower spot market coal prices. U.S.
Electric purchased power increased $36 million to $77 million in 1996 due
primarily to increased economy energy purchases at a higher cost per MWH. CSW's
operating expenses include $1.3 billion for cost of sales from a full year of
United Kingdom operations in 1996 compared to $158 million recorded in United
Kingdom cost of sales for a partial quarter of operations in 1995.

         Other operating expenses in 1996 increased $228 million, or 41%, from
1995 due primarily to the addition in 1996 of a full year of operating expenses
from SEEBOARD U.S.A. as well as the absence in 1996 of reduced expenses in 1995
related to $28 million of regulatory assets established for previously expensed
restructuring charges and the reversal of rate case costs pursuant to the CPL
1995 Agreement. Also contributing to the increase was the recognition in 1995 of
a $13 million regulatory asset for previously recorded restructuring charges in
accordance with the WTU 1995 Stipulation and Agreement. Another factor
contributing to increased other operating expense was a CSW restructuring charge
recorded in 1996. A $42 million reserve for deferred merger and acquisition
costs was recorded in 1995 from the terminated El Paso merger. Maintenance
expense decreased $5 million to $150 million in 1996 from $155 million in 1995
due primarily to a $10 million decrease in maintenance expense at CPL resulting
from lower production and distribution maintenance costs. Partially offsetting


                                      CSW
                                      2-33
<PAGE>

this decrease was a $7 million increase in maintenance due to a write-down of
production inventory at the U.S. Electric Operating Companies in 1996.

         Depreciation and amortization increased 31% to $464 million in 1996
from $353 million in 1995 due primarily to the addition of depreciable fixed
assets and the goodwill amortization related to the purchase of SEEBOARD, as
well as increases in depreciable fixed assets at the U.S. Electric Operating
Companies. Also contributing to the increase were the amortization of the
regulatory assets established in 1995 associated with the CPL 1995 Agreement and
the WTU 1995 Stipulation and Agreement along with accelerated amortization of
deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and
Agreement.

         Taxes, other than income increased 10% to $178 million in 1996 from
$162 million in 1995. The increase was due primarily to lower 1995 ad valorem
taxes resulting from revisions of prior year estimates recorded in 1995. Also
contributing to the increase were higher ad valorem and state franchise taxes at
SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of the HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax. Income taxes increased $132 million to $224
million during 1996 compared to 1995. During 1995, income taxes were lower
primarily due to adjustments relating to prior year taxes, as well as the tax
effect from both the CPL 1995 Agreement and the WTU 1995 Stipulation and
Agreement. Income taxes of $46 million were recorded for SEEBOARD U.S.A. from a
full year of operations in 1996 compared to $6 million for a partial quarter of
operations in 1995.

         Other income and deductions decreased $160 million in 1996 when
compared to 1995 due primarily to charges recorded in June 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves
for the U.S. Electric Operating Companies. See the table below for additional
detail on these charges. Other income and deductions was also lower as a result
of certain write-offs recorded by CSW Energy. In addition, CPL's Mirror CWIP
liability, which has now been fully amortized, contributed $41 million to income
in 1995.

          Pre-tax effect  Income tax    Net income
             on income      benefit       effect
           --------------------------------------
                          (thousands)

CPL         $(21,509)       $5,940      $(15,569)
PSO          (51,109)       15,401       (35,708)
SWEPCO       (29,700)        7,885       (21,815)
WTU          (14,949)        4,003       (10,946)
           -------------------------------------
           $(117,267)      $33,229      $(84,038)
           -------------------------------------

         Interest on long-term debt increased $102 million or 46% during 1996
compared to 1995 due to higher levels of long-term debt outstanding related to
the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was
unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or
7% in 1996 compared to 1995 due to lower interest rates and lower levels of
short-term debt outstanding. CSW used a portion of the proceeds from the sale of
Transok to reduce short-term debt.

         The $120 million gain on the sale of Transok as well as Transok's 1996
operations are shown separately in discontinued operations. Transok's earnings
for the first five months of 1996 were $12 million compared to $25 million from
a full year of operations for 1995. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS
for information, including comparative statements of income, related to the sale
of Transok.


                                      CSW
                                      2-34
<PAGE>
CSW
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL AND SOUTH WEST CORPORATION
------------------------------------------------------------------------
                                           For the Years Ended December 31,
                                            ----------------------------
                                              1997       1996      1995
                                            -------    -------    ------
                                        ($ in millions, except share amounts)
Operating Revenues
    U.S. Electric                            $3,321     $3,248    $2,883
    United Kingdom                            1,870      1,848       208
    Other diversified                            77         59        52
                                            -------    -------    ------
                                              5,268      5,155     3,143
                                            -------    -------    ------
Operating Expenses and Taxes
    U.S. Electric fuel                        1,177      1,151     1,004
    U.S. Electric purchased power                89         77        41
    United Kingdom cost of sales              1,291      1,331       158
    Other operating                             981        785       557
    Maintenance                                 152        150       155
    Depreciation and amortization               497        464       353
    Taxes, other than income                    195        178       162
    Income taxes                                151        224        92
                                            -------    -------    ------
                                              4,533      4,360     2,522
                                            -------    -------    ------
Operating Income                                735        795       621
                                            -------    -------    ------

Other Income and Deductions
    Mirror CWIP liability amortization         --         --          41
    U.S. Electric charges for investments
      and plant development costs                (3)      (117)     --
    Other                                        29         16        56
    Non-operating income taxes                    6         40         2
                                            -------    -------    ------
                                                 32        (61)       99
                                            -------    -------    ------
Income Before Interest and Other Charges        767        734       720
                                            -------    -------    ------

Interest and Other Charges
    Interest on long-term debt                  333        325       223
    Distributions on Trust Preferred
      Securities                                 17       --        --
    Interest on short-term debt and other        86         94       101
    Preferred dividend requirements
      of subsidiaries                            12         18        19
    Gain on reacquired preferred stock          (10)      --        --
                                            -------    -------    ------
                                                438        437       343
                                            -------    -------    ------

Income from Continuing Operations               329        297       377
                                            -------    -------    ------

Discontinued Operations
    Income from discontinued operations,
      net of tax of $6 for 1996 and $13
      for 1995                                 --           12        25
    Gain on the sale of discontinued
      operations, net of tax of $72            --          120      --
                                            -------    -------    ------
                                               --          132        25
                                            -------    -------    ------

Income Before Extraordinary Item                329        429       402

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

Net Income for Common Stock                    $153       $429      $402
                                            =======    =======    ======

Average Common Shares Outstanding             212.1      207.5     191.7

Basic and Diluted EPS from Continuing 
  Operations                                  $1.55      $1.43     $1.97
Basic and Diluted EPS from Discontinued 
  Operations                                    --        0.64      0.13
                                            -------    -------    ------
Basic and Diluted EPS before 
  Extraordinary Item                           1.55       2.07      2.10
Basic and Diluted EPS from 
  Extraordinary Item                          (0.83)       --        --
                                            -------    -------    ------
Basic and Diluted EPS                         $0.72      $2.07     $2.10
                                            =======    =======    ======

Dividends Paid per Share of Common Stock      $1.74      $1.74     $1.72
                                            =======    =======    ======

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

                                      CSW
                                      2-35
<PAGE>
CSW
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CENTRAL AND SOUTH WEST CORPORATION
---------------------------------------------------------------------------
                                               For the Years Ended December 31,
                                                 --------------------------
                                                   1997      1996     1995
                                                 -------    ------   ------
                                                          (millions)

Common Stock at Beginning of Year                   $740      $675     $667
    Sale of Common Stock                               3        65        8
                                                 -------    ------   ------
Common Stock at End of Year                          743       740      675
                                                 -------    ------   ------

Paid-in Capital at Beginning of Year               1,022       610      561
    Sale of Common Stock                              17       412       49
                                                 -------    ------   ------
Paid-in Capital at End of Year                     1,039     1,022      610
                                                 -------    ------   ------

Retained Earnings at Beginning of Year             1,963     1,893    1,824
    Net income for common stock                      153       429      402
    Deduct:  Common stock dividends                  369       358      329
    Deduct:  Other                                     1         1        4
                                                 -------    ------   ------
Retained Earnings at End of Year                   1,746     1,963    1,893
                                                 -------    ------   ------

Foreign Currency Translation and Other
  at Beginning of Year                                77      --       --
    Net Change                                       (49)       77     --
                                                 -------    ------   ------
Foreign Currency Translation and Other
  at End of Year                                      28        77     --
                                                 -------    ------   ------


                                                 -------    ------   ------
Total Stockholders' Equity                        $3,556    $3,802   $3,178
                                                 =======    ======   ======























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

                                      CSW
                                      2-36
<PAGE>
CSW
CONSOLIDATED BALANCE SHEETS
CENTRAL AND SOUTH WEST CORPORATION
---------------------------------------------------------------------------
                                                          As of December 31,
                                                          -----------------
                                                            1997      1996
                                                          -------   -------
                                                              (millions)
ASSETS
Fixed Assets
    Electric
        Production                                         $5,824    $5,830
        Transmission                                        1,558     1,538
        Distribution                                        4,453     4,237
        General                                             1,381     1,318
        Construction work in progress                         184       230
        Nuclear fuel                                          196       184
                                                          -------   -------
                                                           13,596    13,337
    Other diversified                                         250        84
                                                          -------   -------
                                                           13,846    13,421
  Less - Accumulated depreciation and amortization          5,218     4,940
                                                          -------   -------
                                                            8,628     8,481
                                                          -------   -------
Current Assets
    Cash and temporary cash investments                        75       254
    Accounts receivable                                       916       837
    Materials and supplies, at average cost                   172       185
    Electric utility fuel inventory                            65       102
    Under-recovered fuel costs                                 84        46
    Prepayments and other                                      78        85
                                                          -------   -------
                                                            1,390     1,509
                                                          -------   -------
Deferred Charges and Other Assets
    Deferred plant costs                                      503       509
    Mirror CWIP asset                                         285       299
    Other non-utility investments                             448       371
    Securities available for sale                             103      --
    Income tax related regulatory assets, net                 329       236
    Goodwill                                                1,428     1,525
    Other                                                     337       402
                                                          -------   -------
                                                            3,433     3,342
                                                          -------   -------
                                                          $13,451   $13,332
                                                          =======   =======












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

                                      CSW
                                      2-37
<PAGE>
CSW
CONSOLIDATED BALANCE SHEETS
CENTRAL AND SOUTH WEST CORPORATION
----------------------------------------------------------------------
                                                  As of December 31,
                                                ----------------------
                                                  1997          1996
                                                --------      --------
CAPITALIZATION AND LIABILITIES                         (millions)
Capitalization
    Common stock:   $3.50 par value
        Authorized shares:   
                350.0 million shares
        Issued and outstanding: 
                212.2 million shares
          in 1997 and 211.5 million 
          shares in 1996                           $ 743         $ 740
    Paid-in capital                                1,039         1,022
    Retained earnings                              1,746         1,963
    Foreign currency translation and other            28            77
                                                --------      --------
                                                   3,556  45%     3,802  47%
                                                -------- ---  --------- ---
    Preferred Stock
        Not subject to mandatory redemption          176            292
        Subject to mandatory redemption               26             33
                                                --------      ---------
                                                     202   2%       325   4%
    Certain Subsidiary-obligated, 
       mandatorily redeemable preferred 
       securities of subsidiary trusts 
       holding solely Junior Subordinated 
       Debentures of such Subsidiaries               335   4%      --    --%
    Long-term debt                                 3,898  49%     4,024  49%
                                                -------- ---  --------- ---
          Total Capitalization                     7,991 100%     8,151 100%
                                                -------- ---  --------- ---

Current Liabilities
    Long-term debt and preferred stock 
      due within twelve months                        32           204
    Short-term debt                                  721           364
    Short-term debt - CSW Credit, Inc.               636           579
    Loan notes                                        56            76
    Accounts payable                                 558           630
    Accrued taxes                                    171           324
    Accrued interest                                  87            82
    Other                                            238           166
                                                --------      --------
                                                   2,499         2,425
                                                --------      --------

Deferred Credits
    Accumulated deferred income taxes              2,432         2,272
    Investment tax credits                           278           291
    Other                                            251           193
                                                --------      --------
                                                   2,961         2,756
                                                --------      --------
                                                $ 13,451      $ 13,332
                                                ========      ========









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

                                      CSW
                                      2-38
<PAGE>
CSW
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL AND SOUTH WEST CORPORATION
-----------------------------------------------------------------------------
                                                For the Years Ended December 31,
                                                 ----------------------------
                                                   1997       1996      1995
                                                 -------    -------    ------
                                                           (millions)
OPERATING ACTIVITIES
    Net income for common stock                     $153       $429     $402
    Non-cash Items and Adjustments
        Depreciation and amortization                529        521      425
        Deferred income taxes and
          investment tax credits                     110         62      (11)
        Preferred stock dividends                     12         18       19
        Gain on reacquired preferred stock           (10)      --       --
        Mirror CWIP liability amortization          --         --        (41)
        Charges for investments and assets            53        147     --
        Gain on sale of subsidiary                  --         (192)    --
    Changes in Assets and Liabilities
        Accounts receivable                         (140)       (86)     (36)
        Accounts payable                              45         23      (32)
        Accrued taxes                               (153)       (14)      25
        Fuel recovery                                (37)       (89)      76
    Other                                            164         56      (28)
                                                 -------    -------    -----
                                                     726        875      799
                                                 -------    -------    -----
INVESTING ACTIVITIES
    Construction expenditures                       (507)      (521)    (474)
    Acquisitions expenditures                       --       (1,394)    (421)
    CSW Energy/CSW International projects           (382)      (124)     109
    Sale of National Grid assets                    --           99     --
    Cash proceeds from sale of subsidiary           --          690     --
    Other                                            (15)       (36)     (26)
                                                 -------    -------    -----
                                                    (904)    (1,286)    (812)
                                                 -------    -------    -----
FINANCING ACTIVITIES
    Common stock sold                                 20        477       57
    Proceeds from issuance of long-term debt        --          437      456
    SEEBOARD acquisition financing                  --          350      731
    Reacquisition/Maturity of long-term debt        (253)      (239)    (363)
    Redemption of preferred stock                   (114)        (1)      (1)
   Trust Preferred Securites Sold                    323       --       --
    Other financing activities                        (3)        67     --
    Change in short-term debt                        414       (395)    (226)
    Payment of dividends                            (383)      (376)    (348)
                                                 -------    -------    -----
                                                       4        320      306
                                                 -------    -------    -----

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

Net Change in Cash and Cash Equivalents             (179)      (147)     293
Cash and Cash Equivalents at Beginning of Year       254        401      108
                                                 =======    =======    =====
Cash and Cash Equivalents at End of Year             $75       $254     $401
                                                 =======    =======    =====

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized          $396       $356     $301
                                                 =======    =======    =====
    Income taxes paid                               $301       $196      $77
                                                 =======    =======    =====

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

                                      CSW
                                      2-39
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         NATURE OF OPERATIONS
         CSW is a registered holding company under the Holding Company Act
subject to regulation by the SEC. CSW's U.S. Electric Operating Companies are
also regulated by the SEC under the Holding Company Act.

         The principal business of CSW's 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 CSW's United Kingdom electric operating
subsidiary, SEEBOARD, is the distribution and supply of electric power and
energy 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 and CSW Energy
Services will pursue retail energy markets outside of CSW's traditional service
territory.

         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.

         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.

         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
                                      2-40
<PAGE>

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

     1997   3.4%     3.0%      3.3%      3.2%       3.3%
     1996   3.4%     2.9%      3.6%      3.2%       3.2%
     1995   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 state.

         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 escalations 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 were estimated to be
$258 million in 1995 dollars based on a site specific study completed in 1995.
CPL is recovering these decommissioning costs through rates based on the service
life of STP at a rate of $8.2 million per year. The $8.2 million annual cost of
decommissioning is reflected on the income statement in other operating expense.
Due to the fact that the funds are deposited with a trustee under the terms of
an irrevocable trust and because of the ongoing nature of the FASB project, as
described below, CPL believes it inappropriate to reflect the trust assets on
its financial statements. At December 31, 1997, the trust balance was $45.7
million.

         The FASB is currently reviewing the utility industry's accounting
treatment of nuclear and certain other plant decommissioning costs. An exposure
draft regarding this matter was issued in February 1996. In November 1997 the
FASB abandoned all previous decisions on the scope of this project and began a
new project related to decommissioning and other environmental remediation
costs. It is not known at this time when any new pronouncement would result from
this project.

         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 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 and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for
further information about fuel recovery.

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

         CPL amortizes direct nuclear fuel costs to fuel expense on the basis of
a ratio of the estimated energy used in the core to the energy expected to be
derived from such fuel assembly over its life in the core. In addition to fuel


                                      CSW
                                      2-41
<PAGE>
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, as a wholly owned subsidiary of CSW, 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)
                                               ----------------------------------------------------
AS OF DECEMBER 31, 1997
<S>                                   <C>       <C>            <C>         <C>         <C>
 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)
   Demand side management costs          10         9,669          --          --          --
   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 (5)    --
   Other                                  8         3,669           377       2,140       2,787
                                     ----------------------------------------------------------
                                     $1,440    $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>


                                      CSW
                                      2-42
<PAGE>
<TABLE>
<CAPTION>
                                       CSW        CPL         PSO       SWEPCO      WTU
                                     -------------------------------------------------------
                                     (millions)             (thousands)
                                               ---------------------------------------------
 AS OF DECEMBER 31, 1996
<S>                                    <C>     <C>         <C>         <C>        <C>
    Regulatory Assets
      Deferred plant costs              $509    $486,978    $   --      $    --    $22,365 (3)
      Mirror CWIP asset                  299     298,708        --           --        --
      Income tax related regulatory 
        assets, net                      236     335,226        --           --        --
      Deferred restructuring and rate
        case costs                        46      30,965 (1)    --           --     14,973 (3)
      Deferred storm costs                 2          --      2,448 (4)      --        --
      Demand side management costs        15       7,070      8,278          --        --
      OPEBs                                3          --      3,325          --        --
      Under-recovered fuel costs          47      26,298      2,651 (2)    9,120     8,961
      Loss on reacquired debt            180      90,751     18,068       42,844    28,116
      Fuel settlement                     17          --         --       17,414 (5)
      Other                               13       3,453      4,997        1,326     1,576
                                      ----------------------------------------------------
                                      $1,367  $1,279,449    $39,767      $70,704   $75,991
    Regulatory Liabilities
      Refunds due customers              $43     $43,266    $   --       $   --         $2
      Income tax related regulatory
        liabilities, net                 --          --      46,007       36,106    16,918
      Other                                2       1,339         --          --        --
                                      ----------------------------------------------------
                                         $45     $44,605    $46,007      $36,106   $16,920
                                      ----------------------------------------------------

  (1) Earning no return, amortized by the end of 2000
  (2) Earning no return, amortized over 12 month period, recalculated 
      semiannually 
  (3) Earning no return, amortized through 2002 
  (4) Earning no return, amortized by the end of 1997 
  (5) Earning no return, amortized by the end of 2006
</TABLE>

         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. 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 NEW ACCOUNTING STANDARDS and
MD&A-RECENT DEVELOPMENTS AND TRENDS, REGULATORY ACCOUNTING.

         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 straight-line basis over 40 years. The unamortized balance of the
SEEBOARD goodwill at December 31, 1997 was $1.4 billion. CSW continually
evaluates whether circumstances have occurred that indicate the remaining useful
life of goodwill may warrant revision or that the remaining balance of goodwill
may not be recoverable.

         NATIONAL GRID ASSETS
         Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK) plc,
as a shareholder of SEEBOARD, received approximately 32.5 million shares of
National Grid common stock. On February 2, 1996, all of these shares were sold
for approximately $99 million.


                                      CSW
                                      2-43
<PAGE>


         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, 1997 the current exchange rate was
approximately (pound)1.00=$1.65, and the average exchange rate for the twelve
month period ended December 31, 1997 was approximately (pound)1.00=$1.58. At
December 31, 1996 the current exchange rate was approximately (pound)1.00=$1.71,
and the average exchange rate for the twelve month period ended December 31,
1996 was approximately (pound)1.00=$1.56. The average exchange rate for the
twelve month period ended December 31, 1995 was approximately (pound)1.00=$1.58.
All resulting translation adjustments are recorded directly to Foreign currency
translation and other 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.

         STATEMENTS OF CASH FLOWS
         Cash equivalents are considered to be highly liquid instruments with a
maturity of three months or less. Accordingly, temporary cash investments, which
for CSW subsidiaries includes receivables from affiliates, are considered cash
equivalents.

         RISK MANAGEMENT
         CSW has 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 since its purchase of SEEBOARD in 1995. 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 and NOTE 7. FINANCIAL INSTRUMENTS 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 within Foreign currency translation and other
on CSW's Consolidated Balance Sheets. Information related to these Securities
available for sale as of December 31, 1997 is presented in the following table.

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

Securities available for sale    $110        $5            $(12)        $103


                                      CSW
                                      2-44
<PAGE>


         ACCOUNTING CHANGE
         Effective January 1, 1997, CPL and WTU began utilizing the LIFO method
for the valuation of all fossil fuel inventories. Previously, CPL had used the
weighted average cost method and WTU had used the LIFO method for coal and the
weighted average cost method for other fuel inventories. PSO utilizes the LIFO
method. SWEPCO continues to utilize the weighted average cost method pending
approval of the Arkansas Commission to utilize the LIFO method. The change in 
accounting did not affect the results of operations due to the regulatory 
treatment of such costs.

         RECLASSIFICATION
         Certain financial statement items for prior years have been
reclassified to conform to the 1997 presentation. See NOTE 15. TRANSOK
DISCONTINUED OPERATIONS for information related to the classification of Transok
activities.


2.      LITIGATION AND REGULATORY PROCEEDINGS

         SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER
         In May 1993, CSW entered into a merger agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. In
June 1995, following its notification that CSW was terminating the El Paso
Merger Agreement, El Paso filed suit against CSW seeking a $25 million
termination fee from CSW, as well as, unspecified damages for various contract
and tort claims. Subsequently, CSW filed suit against El Paso seeking a $25
million termination fee from El Paso and recovery of certain rate case expenses
incurred by CSW on behalf of El Paso.

         The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding. On April 11, 1997, the court issued an interim order in
which it ruled that CSW owed El Paso a $25 million termination fee and reserved
judgment on certain disputed interest.

         In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation. Under the terms of the settlement
agreement, CSW and El Paso dismissed all pending claims in the litigation and
CSW paid $35 million to El Paso, various of its creditor groups under its plan
of reorganization, and its attorneys. CSW recorded a charge of $25 million in
the first quarter of 1997 following the court's interim order and recorded an
additional charge of $10 million in the second quarter of 1997 to fully
recognize the $35 million settlement amount. The bankruptcy court vacated the
interim order and approved the settlement agreement.

         LITIGATION RELATED TO THE RIGHTS PLAN AND AEP MERGER
         Two lawsuits have been filed in Delaware state court seeking to enjoin
the AEP Merger. CSW and each of its directors have been named as defendants in
both cases. The first suit alleges that the Rights Plan, approved by the CSW
Board of Directors on September 27, 1997 and which became effective after SEC
approval under the Holding Company Act on December 19, 1997, constitutes a
"poison pill" precluding acquisition offers and resulting in a heightened
fiduciary duty on the part of the CSW Board of Directors to pursue an
auction-type sales process to obtain the best value for CSW stockholders. The
second suit alleges that the AEP Merger is unfair to CSW stockholders in that it
does not recognize the underlying intrinsic value of CSW's assets and its future
profitability. The second suit also seeks an auction-type sale process. CSW
believes that both suits are without merit and intends to defend them
vigorously.

         CPL RATE REVIEW - DOCKET NO. 14965
         In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million, and in May 1996, CPL placed a $70
million base rate increase into effect under bond, subject to refund based on
the receipt of a final order of the Texas Commission. On March 31, 1997, the


                                      CSW
                                      2-45
<PAGE>
Texas Commission issued the CPL 1997 Original Rate Order in CPL's rate review,
Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested
the reconsideration of numerous provisions of the order. Motions for rehearing
were also filed by other parties to the rate proceeding. In response to the
motions for rehearing, in June 1997, the Texas Commission made several
modifications to the CPL 1997 Original Rate Order and also agreed to rehear on
remand several other issues. CPL restored its rates in July 1997, with two
exceptions, to levels existing prior to the May 1996 implementation of bonded
rates. On August 21, 1997, after reconsidering the issues on remand, the Texas
Commission voted to issue a revised final order and on September 10, 1997, CPL
received a revised final order. CPL filed its second motion for rehearing on
September 30, 1997. The second motion for rehearing again requested
reconsideration of numerous issues in the rate case. On October 16, 1997 the
Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order
lowers 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 will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.

         The CPL 1997 Original Rate Order established a separate docket, Docket
No. 17280, to consider the recoverability of $20 million of rate case expenses
incurred in the current rate case and in two prior dockets. CPL reached a
settlement with all parties to resolve Docket No. 17280 which provides for CPL
to recover $14 million out of the total $20 million of rate case expenses
originally requested. Approximately $8 million of the rate case expenses will be
recovered as an offset to the refund in the rate case, and the remaining $6
million of expenses will be surcharged to customers over three years. CPL
expensed the $6 million in foregone rate case expenses during the first quarter
of 1997.

         CPL implemented bonded rates subject to refund in May 1996. On July 17,
1997, CPL restored its rates, with two exceptions, to levels existing prior to
the implementation of the bonded rates. The two exceptions are for industrial
interruptible rates and customer service charges for which the Texas Commission
approved the increases requested by CPL. On October 31, 1997, CPL filed with the
Texas Commission a proposed methodology for issuing an interim refund to
customers in December 1997. A second refund was made in March 1998. The
different components that were all incorporated into the December 1997 refund
made to customers, a breakdown of the December 1997 refund, as well as the March
1998 refund, including interest, is shown below (millions).

December 1997
Amount collected from customers under bond           $81.7
Surcharge for rate case expenses                     (13.3)
Surcharge for fuel cost under-recovery               (23.6)
                                                    ------
Net refund to customers                              $44.8
                                                    ------

March 1998 (estimated)
Remaining refund available                           $59.0
Surcharge for fuel cost under-recovery               (34.3)
                                                    ------
Net refund to customers                              $24.7
                                                    ------

         The following table details the financial impact of the CPL 1997 Final
Order as compared to the rates existing prior to CPL placing bonded rates into
effect. Although the entire impact has been recorded in CPL's 1997 results of
operations, the financial impact on its results of operations for 1996 and for
the year 1997 is shown below.


                                      CSW
                                      2-46
<PAGE>



                                              1996
                                           Retroactive   1997 Only
                                             Impact        Impact
                                           -----------   ---------
                                                   (millions)
Decrease in revenue                             $(20.7)     $(24.2)
                                           -----------   ---------

Items included in decrease in revenue with
   offsetting effect on expense:
      Accelerated recovery of STP (ECOM)          13.3        20.0
      Change in depreciation                      (7.5)      (11.3)
      Decommissioning                              1.9         4.3
      Other                                        --          6.8
                                           -----------   ---------
                                                   7.7        19.8
                                           -----------   ---------
Change in current year income before tax         (28.4)      (44.0)
Federal income taxes                               9.5        14.8
                                           -----------   ---------
Impact on net income - all recorded in 1997     $(18.9)     $(29.2)
                                           -----------   ---------

         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 to be applied to rates in mid-1998 and mid-1999, and (iii)
the $18 million of disallowed affiliate transactions from CSW Services. As part
of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission
from implementing the "Glide Path" rate reduction methodology, currently
scheduled to begin in May 1998. A hearing has been set for the temporary
injunction on April 3, 1998. 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.

         See MD&A - RATES AND REGULATORY MATTERS, CPL RATE REVIEW - DOCKET NO. 
14965 for additional discussion of the CPL 1997 Final Order, including the 
estimated ongoing financial impact of the final order and information regarding
the difference between the rates originally requested by CPL and those ordered 
by the Texas Commission.

         CPL 1995 AGREEMENT
         On April 5, 1995, CPL reached an agreement in principle with other
parties to pending regulatory proceedings involving base rate, fuel and prudence
issues relating to an outage experienced at STP during 1993 and 1994. Under the
CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50
million. In addition, CPL refunded approximately $30 million in over-recovered
fuel costs through April 1995. Furthermore, CPL did not charge customers for
$62.25 million in replacement power costs and related interest primarily
associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result
in any ongoing change in base rate levels and provided that there would be no
new rate review requests filed prior to September 28, 1995. CPL also reduced its
fuel factors, effective in July 1995, by approximately $55 million on an annual
basis due to projections of lower fuel costs. The Texas Commission approved the
CPL 1995 Agreement on October 4, 1995. Details of the items in the CPL 1995
Agreement and the total 1995 earnings impact for CPL, including certain
accounting provisions, are set forth in the following table.


                                      CSW
                                      2-47
<PAGE>

                                                   Pre-tax  After-tax
                                                  -------------------
                                                       (millions)

Base rate refund                                   $(50.0)   $(32.5)
Fuel disallowance                                   (62.3)    (40.5)
Wholesale fuel refund                                (3.2)     (2.1)
Current flowback of excess deferred
  federal income taxes                               34.3      34.3
Capitalization of previously expensed
  restructuring and rate case costs                  27.6      17.9
Recognition of factoring income                      16.1      10.5
Amortization, interest and other                     (6.6)     (4.4)

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

         By orders issued in October 1990 and December 1990, the Texas
Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and
authorized the inclusion of the amortization of the costs and associated return
in CPL's retail rates. These Texas Commission orders were appealed to the Travis
County District Court where the appeals are still pending. Language in the
Supreme Court of Texas' opinion in the appeal of the deferred accounting
authorization case suggests that the appropriateness of including deferred
accounting costs in rates charged to customers is dependent on a finding in the
first case in which the deferred STP costs are recovered through rates that the
deferral was actually necessary to preserve the utility's financial integrity.
If in the appeals of the October 1990 and December 1990 rate orders, the courts
decide that subsequent review under the financial integrity standard is required
and was not made in those orders, such rate orders would be remanded to the
Texas Commission for the purpose of entering findings applying the financial
integrity standard. Pending the ultimate resolution of CPL's deferred accounting
issues, 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
         In January 1998, CPL filed a request with the Texas Commission to
recover approximately $41.4 million in uncollected fuel and purchased power
costs and related interest from its retail customers and to increase the fuel
factors used to recover fuel costs incurred to provide service in the future.
The fuel surcharge will be subtracted from the remaining refund totaling
approximately $59.0 million that was ordered by the Texas Commission in CPL's
recent general rate case, Docket No. 14965. This net refund is being issued as a
one-time adjustment to customers' March 1998 bills. In the same filing with the
Texas Commission, CPL also requested permission to increase its fixed fuel
factors by approximately $23.4 million effective with March 1998 bills. The
primary cause of CPL's current fuel cost under-recovery and the need to increase
its current fuel factors is the unanticipated increase in the price of natural
gas.


                                      CSW
                                      2-48
<PAGE>
         In February 1998, stipulations were reached on both the fuel factor and
surcharge. The fuel factor increase is being reduced to $15.4 million, and the
fuel surcharge including interest is being reduced to $34.3 million. The
reductions are not a disallowance and will be considered as part of CPL's fuel
reconciliation filing to be made in December 1998.

         CPL NUCLEAR INSURANCE CLAIMS
         In 1994, CPL filed a claim under its NEIL I policy relating to the
1993-1994 outage at STP Units 1 and 2. NEIL denied CPL's claim in 1995. CPL
filed an action in April 1996 against both NEIL and Johnson & Higgins of Texas,
Inc., the former insurance broker for STP, seeking recovery under the policy and
other relief. Subsequently, CPL and NEIL agreed to dismiss all litigation
between them concerning CPL's claim for NEIL coverage, and they agreed to submit
their disputes over coverage to a non-binding, neutral evaluation process.
Hearings were held by the neutral evaluator in February 1997 and April 1997. On
April 22, 1997, the neutral evaluator made the recommendation that CPL's claim
was not covered by its NEIL I policy. CPL abided by this recommendation.

         CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
         Three suits naming CPL and others as defendants relating to a
third-party owned and operated site in Corpus Christi, Texas formerly used for
commercial reclamation of used electrical transformers, lead acid batteries and
other scrap metals, were pending in federal and state court in Corpus Christi,
Texas. The plaintiffs' complaints sought damages for alleged property damage and
health impairment as a result of operations on the site and cleanup activities.
During 1997, these suits were settled with no material adverse effect on CSW's
or CPL's results of operation or financial condition.

         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
plaintiff's 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. After the Texas Commission's order, the Hidalgo County court overruled
CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo
County 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 court of appeals' affirmed the trial court's order certifying the class. CPL
appealed the court of appeals ruling to the Texas Supreme Court.

         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 these lawsuits.


                                      CSW
                                      2-49
<PAGE>


         CPL AND WTU TEXAS UTILITIES COMPLAINT (DOCKET NO. 17285)
         A Proposal for Decision was received in February 1998 in a joint
CPL/WTU complaint at the Texas Commission that since January 1, 1997, Texas
Utilities was effectively double charging for transmission service within the
Electric Reliability Council of Texas. The Proposal recommends approval of a
CPL/WTU proposed offset of $15.5 million annually of payments to Texas Utilities
under FERC-approved transmission service agreements against amounts that CPL and
WTU would otherwise owe Texas Utilities pursuant to Texas Commission rules for
transmission service in ERCOT. The Texas Commission will consider the Proposal
in April 1998.

         PSO RATE REVIEW
         In July 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings. In accordance with the established schedule,
PSO subsequently filed financial data, cost of service and rate design testimony
supporting both its current rates and an increase in annual depreciation expense
of $26 million. In July 1997, the Oklahoma Commission staff and other
intervenors to the proceeding filed their revenue requirements testimony. In its
filing, the Oklahoma Commission staff recommended a rate reduction of $76.8
million for PSO.

         On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission. On
October 23, 1997, the Oklahoma Commission issued a final order approving the
agreement. The PSO 1997 Rate Settlement Agreement calls 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
current level of retail rates. Part of the rate reduction includes 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 calls for PSO to eliminate
or amortize before its next rate filing approximately $41 million in certain
deferred assets, approximately $26 million of which had been expensed in 1996.
The remaining $15 million of deferred assets, which included approximately $9
million of costs incurred for customer energy management incentive programs,
were written off in 1997. The following table represents the financial impact of
the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations.

                                                1997
                                               Impact
                                               ------
                                             (millions)
Decrease in revenue
      Refund to customers                       $(29.0)
      Change in rates                             (2.5)
                                                ------
                                                 (31.5)
                                                ------
Changes in expenses (offsetting impact
  included in revenues)
      Depreciation                                (6.3)
      Rate case deferred costs                     2.2
      Income tax                                 (10.2)
                                                ------
                                                 (14.3)
                                                ------
                                                 (17.2)
Write-off of deferred assets, net of tax         (10.2)
                                                ------
                                                $(27.4)
                                                ------

         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.


                                      CSW
                                      2-50
<PAGE>
         See MD&A - RATES AND REGULATORY MATTERS, PSO 1997 RATE SETTLEMENT
AGREEMENT for additional discussion of the PSO 1997 Rate Settlement Agreement, 
including the estimated ongoing financial impact of the agreement.

         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. Each of the plaintiffs seeks actual and
punitive damages in excess of $10,000. As previously reported, other claims
arising from this incident have been settled and the suits dismissed. 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 April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge. The
application included a motion to either abate the requested interim surcharge
and consolidate the surcharge with a filed fuel reconciliation as discussed
below, or alternatively, implement an interim surcharge in the months of July
1997 through June 1998. The Texas Commission's Office of Policy Development, on
behalf of the Texas Commission, approved the consolidation. In addition, the
Texas Commission has waived the requirement for SWEPCO to file biannual
surcharge requests while this proceeding is pending, and has deferred the
implementation of any surcharge and interest until after final disposition.

         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
commence, 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 for one issue which will be decided by the Texas Commission. The
outstanding issue concerns transmission equalization payments and whether they
should be included in fuel or base revenues. The settlement is subject to
approval by the Texas Commission. Of the $16.8 million in under-recovered fuel
costs as of December 31, 1996, the settlement would result in a decrease of the
under-recovered fuel costs, and the resulting surcharge recovery, by
approximately $6.0 million. This disallowance will not result in an increase to
fuel expense since the $5.0 million of litigation expense and the interest
return of $2.0 million included in the requested surcharge amount were
previously expensed. However, should SWEPCO not prevail on the outstanding
issue, SWEPCO would be required to reduce earnings by approximately $1.8
million. The settlement also provides that SWEPCO's fuel and fuel-related


                                      CSW
                                      2-51
<PAGE>
expenses during the reconciliation period were reasonable and necessary and
would allow them to be reconciled as eligible fuel. Also, the settlement
provides that SWEPCO's actions in litigating and renegotiating certain fuel
contracts, together with the prices, terms and conditions of the renegotiated
contracts were prudent. The $6.0 million reduction is not associated with any
particular activity or issue within the fuel proceedings. SWEPCO cannot predict
whether approval of the settlement will be granted by the Texas Commission.

         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 benefit 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.

         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.

         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
         In March 1997, WTU filed with the Texas Commission an Application for
Authority to Implement an increase in fuel factors of $4.2 million, or 4.2%, on
an annual basis. Additionally, WTU proposed to implement a fuel surcharge of
$13.3 million, including accumulated interest, over a twelve month period to
collect its under-recovered fuel costs. WTU requested authority to implement the
revised fuel factors with its May 1997 billings and to commence the surcharge
with its June 1997 billings. On April 14, 1997, an agreement in principle was
reached among the parties to settle this docket. Under the proposed settlement,
WTU agreed not to increase the fuel factors and to implement the $13.3 million
surcharge over the period from June 1997 through February 1999. The Texas
Commission approved the settlement in May 1997.


                                      CSW
                                      2-52
<PAGE>
         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 $418 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 $292 million.

         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 requested authority to implement the revised
fuel factors and to commence the surcharge with its June 1998 billings.


      WTU 1995 STIPULATION AND AGREEMENT
         The WTU 1995 Stipulation and Agreement which was approved by the Texas
Commission in October 1996 has affected WTU's results of operations for 1996 and
1997. Details of the items with significant earnings impact for 1995, including
certain accounting treatments, are set forth in the following table.

                                                      Pre-tax  After-tax
                                                      ------------------
                                                          (millions)

Refund to retail customers                            $(21.0)    $(13.7)
Effect of retail rate reduction                         (2.4)      (1.6)
Current flowback of property related excess
    deferred federal income taxes                        6.9        6.9
Five year flowback of non-property related
    excess deferred federal income taxes                 0.1        0.1
Capitalization and amortization of previously
    expensed restructuring costs                        12.7        8.2
Other amortization                                      (0.2)      (0.1)
Other one-time items                                     1.0        0.7

         The WTU 1995 Stipulation and Agreement also eliminated several
significant risks that have been the subject of regulatory proceedings relating
to deferred accounting and rates and will enable WTU's rates to remain at
competitive levels for the foreseeable future.

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


3.      COMMITMENTS AND CONTINGENT LIABILITIES

         CONSTRUCTION AND CAPITAL EXPENDITURES

         It is estimated that CSW, including the U.S. Electric Operating
Companies, SEEBOARD and other diversified operations, will spend approximately
$569 million in capital expenditures (but excluding capital


                                      CSW
                                      2-53
<PAGE>


that may be required for acquisitions) during 1998. Substantial commitments have
been made in connection with these programs.

 CPL - $129 million  PSO - $71 million  SWEPCO - $95 million  WTU - $36 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, 1997, the
maximum amount SWEPCO believes it could potentially assume is $67 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, 1997
was $59 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 $8.72 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, which may be adjusted for inflation, plus a five
percent charge for legal expenses, but not more than $10 million per reactor for
each nuclear incident in any one year. CPL and each of the other STP owners are
subject to such assessments, which CPL and 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.

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


                                      CSW
                                      2-54
<PAGE>
         CPL purchased, 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 of STP Units 1 and
2 and the outage is the result of the same accident, such insurance will
reimburse CPL up to 80% of the recovery. The maximum amount recoverable for a
single unit outage is $118.6 million for both Unit 1 and 2. CPL is subject to an
additional assessment up to $1.8 million for the current policy year in the
event that insured losses at a nuclear facility covered under the NEIL I policy
exceeds the accumulated funds available under the policy. CPL renewed its
current NEIL I Business Interruption and/or Extra Expense policy September 15,
1997.

         For further information relating to litigation associated with CPL
nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.

         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. 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, for $940.5 million in cash, subject to adjustment
pursuant to 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 CLECO, successor to Teche Electric Cooperative, already have agreed to
purchase power from SWEPCO if SWEPCO's plan is confirmed by the bankruptcy
court.

         Entergy Texas is no longer a co-plan proponent with SWEPCO and the
Cajun Members Committee, as it had been under SWEPCO plans filed prior to the
January 15, 1998 plan. SWEPCO continues to work with Entergy Texas to resolve
its objection to the plan. The SWEPCO Plan filed March 18, 1998 replaces plans
filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30,
1996 and April 19, 1996. Two competing plans of reorganization for the
non-nuclear assets of Cajun have been filed with the bankruptcy court, each with
different purchase prices, rate paths and other provisions. Confirmation
hearings in Cajun's bankruptcy case are now scheduled through April 1998.
Consummation of the SWEPCO Plan 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 board approvals. If the SWEPCO
Plan is confirmed, 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 borrowings and internally generated funds with approximately 70% of the
external borrowings funded with non-recourse debt. There can be no assurance
that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is
confirmed, that it will be approved by federal and state regulators.

         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, 1997, leased assets
of $45.7 million, less accumulated amortization of $39.0 million, were included
in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,
1996, leased assets were $46.0 million, less accumulated amortization of $36.9
million.


                                      CSW
                                      2-55
<PAGE>
         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 on
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.

         The MDEQ has not agreed to a non-residential future land use scenario
and has requested further testing. Following the additional testing and
resolution of whether cleanup must meet a residential usage scenario or a
commercial/industrial scenario, a feasibility study will be conducted to more
definitively evaluate remedial strategies for the property. The feasibility
study process will require public input prior to a final decision being made.

         At the present time, SWEPCO has not had any further substantive
discussions with MDEQ regarding the ultimate resolution of this issue.
Therefore, a final range of cleanup costs is not yet determinable. 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 $2 million for the
cleanup of the site.

         SWEPCO VODA PETROLEUM SUPERFUND SITE
         In April 1996, SWEPCO received correspondence from the EPA notifying
SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum
Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records
review to compile documentation relating to SWEPCO's past use of the Voda
Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost
approximately $2 million and to take approximately twelve months to complete. An
option for over 30 PRPs to conduct the cleanup in lieu of EPA conducting the
cleanup is under consideration. Any SWEPCO liability associated with this
project is not expected to have a material adverse effect on its results of
operations or financial condition.

         CSW ENERGY LOANS AND COMMITMENTS
         CSW Energy has agreed to provide construction financing and other
credit support up to $235 million for the 330 MW Phillips Sweeny project. CSW
Energy obtained the funds for this project through CSW's short-term borrowing
program. Construction of this plant began in September 1996 and commenced
commercial operations in February 1998. At December 31, 1997, CSW Energy had
provided $163 million, including development, construction and financing, of the
total estimated $189 million in project costs. CSW Energy expects to obtain
permanent project financing in the second quarter of 1998 at which time the
project will return a significant portion of the investment and the short-term
borrowings will be repaid. In addition, CSW has provided letters of credit and
guarantees on behalf of other independent power projects totaling approximately
$27 million.

         CSW INTERNATIONAL ENERTEK PROJECT
         In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have 50% ownership in the project,
Enertek, which will cost approximately $75 million. CSW International has agreed
to provide construction financing for the project of which $62 million had been


                                      CSW
                                      2-56
<PAGE>
funded at December 31, 1997. The Enertek project began operations in the first
quarter of 1998.


4.      INCOME TAXES

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

INCOME TAX EXPENSE               CSW       CPL      PSO     SWEPCO      WTU
                               ----------------------------------------------
1997                          (millions)            (thousands)
                                        -------------------------------------
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 
  DISCONTINUED OPERATIONS
  (includes $72 resulting 
    from the gain on the sale)    78        --       --        --        --
                                 --------------------------------------------
                                $262     $93,150  $21,145   $31,050   $10,944
                                 --------------------------------------------
1995
INCLUDED IN OPERATING 
  EXPENSES AND TAXES
  Current (1)                   $105     $51,626  $37,687   $41,852    $4,892
  Deferred                         1     (30,025)   2,704     6,287     1,971
  Deferred ITC (2)               (14)     (5,789)  (2,789)   (4,786)   (1,321)
                                 --------------------------------------------
                                  92      15,812   37,602    43,353     5,542
INCLUDED IN OTHER 
  INCOME AND DEDUCTIONS
  Current                          2         129     (197)     (721)    1,564
  Deferred                        (4)         --       --        --        --
                                 --------------------------------------------
                                  (2)        129     (197)     (721)    1,564

INCOME TAXES FOR 
  DISCONTINUED OPERATIONS         13        --       --        --        --
                                 --------------------------------------------
                                $103     $15,941  $37,405   $42,632    $7,106
                                 --------------------------------------------

     (1)  Approximately $30 million, $49 million and $7 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 1997,
          1996 and 1995, respectively. In addition, approximately $7 million and


                                      CSW
                                      2-57
<PAGE>
          $19 million of CSW's Deferred Income Tax Expense in 1997 and 1996,
          respectively, was attributed to SEEBOARD U.S.A.
      (2) ITC deferred in prior years are included in income over the lives of
          the related properties.

INCOME TAX RATE              CSW        CPL        PSO      SWEPCO      WTU
RECONCILIATION
                         -------------------------------------------------------
1997                    ($ in millions)           ($ in thousands)
                                       -----------------------------------------
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            --         --        --        --
  Tax credit on foreign 
    operations dividend       (3)           --         --        --        --
  United Kingdom deferred
    income tax adjustment    (16)           --         --        --        --
  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 tax 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            --         --        --        --
  Tax credit on foreign 
    operations dividend      (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%

1995
Income before taxes 
     attributable to:
  Domestic operations       $506
  Foreign operations          13
                            ----
Income before taxes         $519      $222,388   $119,233  $159,675   $41,636

Tax at U.S. statutory rate  $182       $77,836    $41,732   $55,886   $14,573
Differences
  Amortization of ITC        (14)       (5,789)    (2,789)   (4,786)   (1,321)
  Mirror CWIP                (11)      (10,843)        --        --        --
  CPL 1995 Agreement         (34)      (34,289)        --        --        --
  WTU 1995 Stipulation and
    Agreement                 (7)           --         --        --    (6,859)
  Adjustments                (22)      (13,462)    (2,949)   (2,783)      953
  Other                        9         2,488      1,411    (5,685)     (240)
                            -------------------------------------------------
                            $103       $15,941    $37,405   $42,632    $7,106
                            -------------------------------------------------
Effective tax rate            20%           7%        31%       27%       17%


                                      CSW
                                      2-58
<PAGE>
<TABLE>
<CAPTION>
DEFERRED INCOME TAXES (1)          CSW        CPL      PSO      SWEPCO     WTU
                                -------------------------------------------------
                                (millions)             (thousands)
                                          ---------------------------------------
1997
<S>                             <C>       <C>       <C>       <C>       <C>
Deferred Income Tax Liabilities
  Depreciable utility plant      $1,920    $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                             371     147,513    36,836    36,237    20,651
                                 ------------------------------------------------
                                  2,778   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                           (76)     (3,744)  (35,188)  (19,061)   (9,859)
                                 ------------------------------------------------
                                   (326)   (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
                                 ------------------------------------------------
1996
Deferred Income Tax Liabilities
    Depreciable utility plant    $1,867    $791,693  $275,938  $389,575  $135,215
    Deferred plant costs            178     170,442        --        --     7,237
    Mirror CWIP asset               105     104,548        --        --        --
    Income tax related regulatory
      assets                        207     156,059    10,976    30,486     9,743
    Other                           307      72,798    35,626    38,875    26,055
                                 ------------------------------------------------
                                  2,664   1,295,540   322,540   458,936   178,250

Deferred Income Tax Assets
  Income tax related regulatory
    liability                      (126)    (39,202)  (28,771)  (42,533)  (15,664)
  Unamortized ITC                  (105)    (51,517)  (16,802)  (26,394)  (10,234)
  Alternative minimum tax
   carryforward                     (83)    (16,129)       --        --        --
    Other                           (99)    (19,331)  (28,519)  (13,295)   (9,285)
                                 ------------------------------------------------
                                   (413)   (126,179)  (74,092)  (82,222)  (35,183)

                                 ------------------------------------------------
Net Accumulated Deferred Income
  Taxes                          $2,251  $1,169,361  $248,448  $376,714  $143,067
                                 ------------------------------------------------

Net Accumulated Deferred Income
  Taxes
    Noncurrent                   $2,272  $1,162,051  $251,007  $372,552  $144,146
    Current                         (21)      7,310    (2,559)    4,162    (1,079)
                                 ------------------------------------------------
                                 $2,251  $1,169,361  $248,448  $376,714  $143,067
                                 ------------------------------------------------

        (1)  In 1996, CSW generated $33 million of excess foreign tax credits
             against which a full valuation allowance was established as of
             December 31, 1996. In 1997, the valuation reserve was reduced to
             $17 million due to lower 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, 1997 and 1996 due to a favorable earnings history.
</TABLE>


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


                                      CSW
                                      2-59
<PAGE>
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 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.

         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. As a result of the July 1, 1997
amendment, CSW realized a savings in 1997 of approximately $20 million in
pension expense and will also realize significant ongoing reductions in
operating and maintenance expense because of the change. The change to the
pension plan was applied retroactively to the beginning of 1997, so these
savings were recognized evenly throughout 1997 with a portion being capitalized.
The approximate amount of savings attributable to the U.S. Electric Operating
Companies for 1997 is as follows.

CPL-$4.7 million   PSO-$3.6 million   SWEPCO-$4.4 million   WTU-$2.6 million

         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 two separate pension plans (the U.S. plan and the
non-U.S. plan), including: (i) pension plan net periodic costs and
contributions; (ii) pension plan participation; (iii) a reconciliation of the
funded status of the pension plan to the amounts recognized on the balance
sheets; and (iv) assumptions used in accounting for the pension plan follow.


                                      CSW
                                      2-60
<PAGE>
<TABLE>
<CAPTION>

NET PERIODIC                               NON-
PENSION PLAN COSTS           CSW     U.S.  U.S.
AND CONTRIBUTIONS           PLANS   PLAN   PLAN     CPL        PSO   SWEPCO      WTU
                            ----------------------------------------------------------
                                  (millions)                  (thousands)
                                                  ------------------------------------
1997
<S>                         <C>     <C>    <C>   <C>       <C>        <C>     <C>
Net Periodic Pension Costs
  Service cost               $34     $20    $14    $4,602    $3,421    $4,260   $2,488
  Interest cost on
    projected benefit
    obligation               137      65     72    15,085    11,214    13,965    8,156
  Actual return on plan
    assets                  (245)   (163)   (82)  (38,031)  (28,272)  (35,206) (20,561)
  Net amortization and
    deferral                  68      66      2    15,648    11,633    14,486    8,460
                            ----------------------------------------------------------
                             $(6)   $(12)    $6   $(2,696)  $(2,004)  $(2,495) $(1,457)
                            ----------------------------------------------------------

Pension Plan Contributions    $6     $--     $6       $--       $--       $--      $--

1996
Net Periodic Pension Costs
  Service cost               $37     $23    $14    $5,367    $4,238    $4,891   $3,005
  Interest cost on
    projected benefit
    obligation               136      69     67    16,233    12,817    14,793    9,089
  Actual return on plan
    assets                  (184)   (110)   (74)  (26,033)  (20,554)  (23,723) (14,576)
  Net amortization and
    deferral                  27      27     --     6,509     5,139     5,932    3,645
                            ----------------------------------------------------------
                             $16      $9     $7    $2,076    $1,640    $1,893   $1,163
                            ----------------------------------------------------------

Pension Plan Contributions   $35     $28     $7    $6,622    $5,228    $6,034   $3,708

1995
Net Periodic Pension Costs
  Service cost               $20     $20    $--    $4,699    $3,614    $4,220   $2,609
  Interest cost on
    projected benefit
    obligation                64      64     --    14,860    11,428    13,345    8,251
  Actual return on plan
    assets                  (117)   (117)    --   (27,137)  (20,869)  (24,370) (15,068)
  Net amortization and
    deferral                  44      44     --    10,136     7,795     9,102    5,628
                            ----------------------------------------------------------
                             $11     $11    $--    $2,558    $1,968    $2,297   $1,420
                            ----------------------------------------------------------

Pension Plan Contributions   $29     $29    $--    $6,754    $5,195    $6,066   $3,751
</TABLE>



APPROXIMATE NUMBER                       NON-
OF PARTICIPANTS IN      CSW     U.S.     U.S.
PLANS DURING 1997      PLANS    PLAN     PLAN     CPL     PSO   SWEPCO    WTU
                      --------------------------------------------------------

Active employees      10,100    7,200    2,900   1,800   1,300   1,700   1,000
Retirees              10,200    4,200    6,000   1,400   1,300     900     600
Terminated employees   6,800    2,000    4,800     400     400     200     200



                                      CSW
                                      2-61
<PAGE>
RECONCILIATION OF FUNDED                          1997                    1996
STATUS OF PLAN TO AMOUNTS          1997    1997   NON-       1996  1996   NON-
RECOGNIZED ON THE CSW              CSW     U.S.   U.S.       CSW   U.S.   U.S.
CONSOLIDATED BALANCE SHEETS       PLANS    PLAN   PLANS      PLANS PLAN   PLAN
                                  ----------------------------------------------
                                                   (millions)
Actuarial present value of
  Accumulated benefit obligation
    for service rendered to date  $1,860   $896    $964   $1,748   $781   $967
  Additional benefit for future
    salary levels                     94     35      59      200    141     59
                                  ---------------------   --------------------
    Projected benefit obligation   1,954    931   1,023    1,948    922  1,026
Plan assets, at fair value         2,290  1,109   1,181    2,077    991  1,086
                                  ---------------------   --------------------
Plan assets in excess of the 
  projected benefit obligation       336    178     158      129     69     60
Unrecognized net loss                (86)    12     (98)      30     27      3
Unrecognized prior service cost      (93)   (88)     (5)     (12)    (7)    (5)
Unrecognized net obligation           16     11       4       16     12      4
                                  ---------------------   --------------------
     Prepaid pension cost           $173   $113     $59     $163   $101    $62
                                  ---------------------   --------------------

         The vested portion of the accumulated benefit obligations for the
combined plans was $1.8 billion at December 31, 1997 and $1.7 billion for the
combined plans at December 31, 1996. The unrecognized net obligation for the
U.S. plan is being amortized over the average remaining service life of
employees or 15 years. Prepaid pension cost is included in Deferred Charges and
Other Assets on the balance sheets. No reconciliation of the funding status of
the plan for CPL, PSO, SWEPCO or WTU is presented because the plan is
administered for the CSW System as a whole and such information is unavailable
for the U.S. Electric Operating Companies individually.

         In addition to the amounts shown in the above table, 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. CSW's net periodic cost for this non-qualified plan
for the years ended December 31, 1997, 1996 and 1995 was $3.7 million, $4.8
million and $2.4 million, respectively.


ASSUMPTIONS USED IN                Long-Term
ACCOUNTING FOR        Discount    Compensation    Return on
THE PENSION PLAN        Rate        Increase     Plan Assets
                      --------------------------------------

1997  U.S. Plan         7.50%        5.46%           9.00%
      Non-U.S. Plan     6.75%        4.75%           7.25%
1996  U.S. Plan         8.00%        5.46%           9.50%
      Non-U.S. Plan     7.75%        5.75%           8.25%
1995  U.S. Plan         8.00%        5.46%           9.50%

         POSTRETIREMENT 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 fifteen 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.

         Information about the non-pension postretirement benefit plan,
including: (i) net periodic postretirement benefit costs; (ii) a reconciliation
of the funded status of the postretirement benefit plan to the amounts
recognized on the balance sheets; and (iii) assumptions used in accounting for
the postretirement benefit plan follow.


                                      CSW
                                      2-62
<PAGE>
NET PERIODIC
POSTRETIREMENT
BENEFIT COSTS                     CSW     CPL      PSO     SWEPCO     WTU
                               -------------------------------------------
                              (millions)           (thousands)
                                        ----------------------------------
1997
  Service cost                   $ 8     $2,076   $1,694   $1,771   $1,120
  Interest cost on APBO           18      5,663    4,794    4,190    2,564
  Actual return on plan assets   (22)    (4,948)  (6,707)  (6,737)  (2,266)
  Amortization of transition
    obligation                     9      2,900    2,528    1,967    1,225
  Net amortization and deferral   11      2,047    3,344    3,769    1,009
                                 -----------------------------------------
                                 $24     $7,738   $5,653   $4,960   $3,652
                                 -----------------------------------------
1996
  Service cost                    $8     $2,077   $1,705   $1,810   $1,111
  Interest cost on APBO           19      5,887    5,018    4,321    2,602
  Actual return on plan assets    (7)    (1,695)  (2,236)  (2,168)    (766)
  Amortization of transition
    obligation                     9      2,900    2,528    1,967    1,225
  Net amortization and deferral   (2)      (560)    (250)    (100)    (261)
                                 -----------------------------------------
                                 $27     $8,609   $6,765   $5,830   $3,911
                                 -----------------------------------------
1995
  Service cost                    $8     $2,123   $1,986   $1,803   $1,113
  Interest cost on APBO           18      5,929    5,175    4,299    2,561
  Actual return on plan assets    (8)    (1,948)  (2,597)  (2,466)    (870)
  Amortization of transition
    obligation                     9      2,900    2,528    1,967    1,225
  Net amortization and deferral    2        238      631      679       96
                                 -----------------------------------------
                                 $29     $9,242   $7,723   $6,282   $4,125
                                 -----------------------------------------

RECONCILIATION OF FUNDED
STATUS OF PLAN TO  AMOUNTS
RECOGNIZED ON THE BALANCE SHEETS    CSW     CPL      PSO    SWEPCO     WTU
                                 -------------------------------------------
                                (millions)           (thousands)
                                          ----------------------------------
1997
APBO
  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
                                    ----------------------------------------
  Total                              241   72,991   61,434   54,214   32,516
Plan assets at fair value           (159) (44,168) (43,366) (39,630) (20,411)
                                    ----------------------------------------
APBO in excess of plan assets         82   28,823   18,068   14,584   12,105
Unrecognized transition obligation  (135) (43,508) (37,928) (29,502) (18,372)
Unrecognized gain                     53   15,443   19,018   14,715    6,503
                                    ----------------------------------------
      Accrued/(Prepaid) Cost         $--     $758    $(842)   $(203)    $236
                                    ----------------------------------------

1996
APBO
  Retirees                          $163  $54,158  $45,736  $36,013  $22,880
  Other fully eligible participants   18    4,281    3,789    5,302    2,398
  Other active participants           55   14,871   12,534   12,694    7,857
                                    ----------------------------------------
  Total                              236   73,310   62,059   54,009   33,135
Plan assets at fair value           (123) (34,566) (33,748) (30,028) (15,806)
                                    ----------------------------------------
APBO in excess of plan assets        113   38,744   28,311   23,981   17,329
Unrecognized transition obligation  (144) (46,408) (40,456) (31,469) (19,597)
Unrecognized gain                     32    8,723   11,569    7,527    2,662
                                    ----------------------------------------
      Accrued/(Prepaid) Cost          $1   $1,059    $(576)     $39     $394
                                    ----------------------------------------


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

1997                            7.50%       9.00%            39.6%
1996                            8.00%       9.50%            39.6%
1995                            8.00%       9.50%            39.6%

     Health care cost trend rates
     1997 Average Rate of 7.0% grading down .50% per year to
       an ultimate average rate of 5.00% in 2001. 
     1996 Average Rate of 9.0% grading down .75% per year to an ultimate
       average rate of 5.25% in 2001. 
     1995 Average Rate of 10.25% grading down .75% per year to an ultimate 
       average rate of 5.75% in 2001.

         Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the APBO and the aggregate of the service and
interest costs components on net postretirement benefits by the amounts
presented in the following table.

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

APBO                          $25.1   $7.1      $5.7      $6.9     $3.2
Service and interest costs      3.6    0.9       0.7       1.0      0.5

         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 1995 - 1997 are
listed in the following table.

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

1997         $35.6      $9.0      $7.0     $8.3    $5.1
1996          28.4       7.0       5.5      6.5     4.0
1995          27.0       6.6       5.3      6.2     3.6

         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, 1997, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.

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

Plant in service     $2,336        $80        $437        $230         $398
Accumulated            $517        $47        $176         $84         $122
depreciation
Plant capacity-MW     2,501        528         675         650          676
Participation         25.2%      50.0%       85.9%       40.2%        78.1%
Share of capacity-MW    630        264         580         262          528


                                      CSW
                                      2-64
<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, $80 million and $281 million, respectively,
          at December 31, 1997. Accumulated depreciation was $11 million, $32
          million and $79 million for CPL, PSO and WTU, respectively, at
          December 31, 1997.


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 HELD FOR SALE
         The fair values, which are based on quoted market prices, equal the
carrying amounts as stated on the balance sheet because the accounting treatment
prescribed under SFAS No. 115.

         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.


                                      CSW
                                      2-65
<PAGE>
CARRYING VALUE AND
ESTIMATED FAIR VALUE         CSW         CPL       PSO      SWEPCO     WTU
                           --------------------------------------------------
                           (millions)               (thousands)
                                     ----------------------------------------
LONG-TERM DEBT
   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
   1996 carrying amount     4,024     1,323,054   420,301   597,151   275,070
        fair value          4,065     1,346,306   420,863   605,853   275,355

TRUST PREFERRED SECURITIES
   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
   1997 carrying amount        26            --        --    25,930        --
        fair value             27            --        --    26,809        --
   1996 carrying amount        33            --        --    32,464        --
        fair value             34            --        --    33,579        --

LONG-TERM DEBT AND
PREFERRED STOCK DUE WITHIN
12 MONTHS
   1997 carrying amount        32        28,000        --     3,555        --
        fair value             32        28,000        --     3,555        --
   1996 carrying amount       204       200,000        --     3,760        --
        fair value            204       200,000        --     3,760        --


         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 $43
million at December 31, 1997. 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          $443



                                      CSW
                                      2-66
<PAGE>


8.      LONG-TERM DEBT

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

  Maturities                 Interest Rates           December 31,
From       To                From       To        1997            1996
----------------------------------------------------------------------
                                                       (millions)
Secured bonds
1998      2025               5.25%     7.75%     $2,080         $2,108

Unsecured bonds
2001      2030                3.9%(1)  8.88%      1,353          1,384

Notes and Lease Obligations
1999      2003               5.54%     9.75%        641            724

Unamortized discount                                (10)           (12)
Unamortized cost of
  reacquired debt                                  (166)          (180)
                                                 ---------------------
                                                 $3,898         $4,024
                                                 ---------------------
(1)  Variable rate

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

         CSW's year end weighted average cost of long-term debt was 7.2% for
1995-1997. For additional information about the U.S. Electric Operating
Companies' long term debt, see their STATEMENTS OF CAPITALIZATION in the
FINANCIAL STATEMENTS.

         ANNUAL REQUIREMENTS
         Certain series of outstanding FMBs have annual sinking fund
requirements, which are generally 1% of the amount of each such series issued.
These requirements may be, and generally have been, satisfied by the application
of net expenditures for bondable property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking fund requirements. At December 31, 1997, 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
1998              $1          $360        $550        $145         $--
1999               1           360         300         595          --
2000               1           360         300         595          --
2001               1            --         300         595          --
2002               1            --          --         595          --

Annual
Maturities
1998             $31       $28,360        $550      $2,355         $--
1999             195       125,360      25,300      43,932          --
2000             208       100,360      20,300      47,807      40,000
2001             517        36,000      20,300         595          --
2002             181       115,000      30,000         595      35,000


                                      CSW
                                      2-67
<PAGE>
         DIVIDENDS
         At December 31, 1997, approximately $1.4 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The mortgage indentures, as amended and supplemented,
at CPL and PSO contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
currently limit the ability of CSW to pay dividends to its shareholders. The
amounts of retained earnings available for dividends attributable to each of the
U.S. Electric Operating Companies at December 31, 1997 is as follows.

CPL-$747 million  PSO-$137 million  SWEPCO-$324 million  WTU-$119 million

         REACQUIRED LONG-TERM DEBT
         During 1996 and 1995, the U.S. Electric Operating Companies reacquired
$205 million and $355 million of long-term debt, respectively, including
reacquisition premiums, prior to maturity. The premiums and related
reacquisition costs and discounts are included in long-term debt on the balance
sheets and are being amortized over periods consistent with their expected
ratemaking treatment. The remaining amortization periods for such items range
from 2 to 33 years. 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 1997 as well as information related to the financing of
the SEEBOARD acquisition.


9.      PREFERRED STOCK

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

                                                               Current
                            Dividend Rate   December 31,   Redemption Price
                              From - To     1997    1996      From - To
                           --------------------------------------------------
                                             (millions)
Not subject to mandatory redemption
  1,352,900 shares           4.00% - 8.72%   $19    $135   $102.75 - $109.00
  1,600,000 shares              auction      160     160        $100.00
Issuance expenses/premiums                    (3)     (3)
                                            ------------
                                            $176    $292
                                            ------------
Subject to mandatory redemption
  340,000 shares                 6.95%       $27     $34        $102.32
  To be redeemed within one year              (1)     (1)
                                            ------------
                                             $26     $33
                                            ------------
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, 1996 and 1995, SWEPCO redeemed $1.2
million annually pursuant to its annual sinking fund requirement. In addition
during 1997, each of the U.S. Electric Operating Companies reacquired a
significant portion of its outstanding preferred stock. As a result of
differences between the dividend rates on the reacquired securities and
prevailing market rates, CSW realized an overall gain of approximately $10
million on the transactions. This gain is shown separately, as Gain on
reacquired preferred stock, on the Consolidated Statements of Income. The
following table shows the results of the tender offers of the U.S. Electric
Operating Companies' preferred stock.


                                      CSW
                                      2-68
<PAGE>
                                Shares           Shares
                              Reacquired       Remaining
                              --------------------------
   CPL
   Series 4.00%                 57,952           42,048
   Series 4.20%                 57,524           17,476
   Series 7.12%                260,000               --
   Series 8.72%                500,000               --

   PSO
   Series 4.00%                 53,260           44,640
   Series 4.24%                 91,931            8,069

   SWEPCO
   Series 4.28%                 52,614            7,386
   Series 4.65%                 23,092            1,908
   Series 5.00%                 37,261           37,739
   Series 6.95%                 65,990          274,010

   WTU
   Series 4.40%                 36,325           23,675

         CPL
         The dividends on CPL's $160 million auction and money market preferred
stocks are adjusted every 49 days, based on current market rates. The dividend
rates averaged 4.3%, 4.1% and 4.5% during 1997, 1996 and 1995, respectively.

         SWEPCO
         The minimum annual sinking fund requirement for SWEPCO's preferred
stock subject to mandatory redemption is $1.2 million for the years 1997 through
2001. This sinking fund retires 12,000 shares annually.

         For additional information about the U.S. Electric Operating Companies'
preferred stock, see their STATEMENTS OF CAPITALIZATION in the FINANCIAL
STATEMENTS.


10.      TRUST PREFERRED SECURITIES

          The following Trust Preferred Securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at December
31, 1997. They are classified on the balance sheets 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).

                                           Amount    Description of Underlying
Business Trust    Security         Units (millions)  Debentures of Registrant
------------------------------------------------------------------------------

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
                                  ---------- -----

         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.


                                      CSW
                                      2-69
<PAGE>
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, 1997, CSW had revolving credit facilities
totaling $1.4 billion to back up its commercial paper program. At December 31,
1997, CSW had $721 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 $725 million during
December 1997.

         CSW Credit, which does not participate in the money pool, issues
commercial paper on a stand-alone basis. At December 31, 1997, CSW Credit had a
$900 million revolving credit agreement that is secured by the assignment of its
receivables to back up its commercial paper program which had $637 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 $890
million during September 1997.


12.     COMMON STOCK

         CSW adopted SFAS No. 128 during 1997. SFAS No. 128 requires the
computation of earnings per share on both a basic as well as a diluted basis.
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
1995 - 1997. 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 ThriftPlus. Following the issuance of the CPL
1997 Original Rate Order and the decline in the market price of CSW's common
stock, which CSW believes is attributable in part to the CPL 1997 Original Rate
Order, the determination was made that it was appropriate for CSW to begin
funding these plans through open market purchases, effective April 1, 1997.
Prior to that time, CSW had issued $20 million in new common stock in 1997.
Information concerning common stock activity issued through the LTIP, the stock
option plan, PowerShare and ThriftPlus is presented in the following table.

                               1997               1996               1995
                         -------------------------------------------------------
Number of new shares
   issued (millions)            0.8                2.9                2.3
Range of stock price for
   new shares            $21 1/4 - $25 5/8  $24 3/8 - $28 7/8  $22 5/8 - $28 3/8
New common stock 
   equity (millions)            $20                $79                $57

         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


                                      CSW
                                      2-70
<PAGE>
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 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, 1997.

         A summary of the status of CSW's stock option plan at December 31,
1997, 1996 and 1995 and the changes during the years then ended is presented in
the following table.

<TABLE>
<CAPTION>
                               1997                  1996                 1995
                     -----------------------------------------------------------------------
                                 Weighted               Weighted                Weighted
                      Shares      Average    Shares     Average    Shares        Average
                    (thousands)  Exercise  (thousands)  Exercise (thousands)  Exercise Price
                                   Price                 Price
<S>                   <C>          <C>        <C>        <C>       <C>             <C>
Outstanding at
  beginning of year    1,412        $26        1,564      $26       1,616           $26
Granted                  694         21           70       27          --            --
Exercised                 --         22         (147)      24        (23)            22
Canceled                (204)        28          (75)      27        (29)            27
                      ------                   -----                ----
Outstanding at end of
   year                1,902         24        1,412       26       1,564            26

Exercisable at end of
  year                 1,162        n/a        1,004      n/a         828           n/a

Weighted average fair
   value of options    $2.24 - $2.39
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: (i) risk-free interest rate of 5.9%; (ii)
expected dividend rate of 6.5%; (iii) and expected volatility of 19%. The
expected life of the options granted did not materially impact the values
produced.


                                      CSW
                                      2-71
<PAGE>


14.     BUSINESS SEGMENTS

         CSW's business segments at December 31, 1997 included the U.S. Electric
operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric operations
(SEEBOARD U.S.A.). See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a
discussion of the accounting for the SEEBOARD acquisition. Eight additional
non-utility companies are included with CSW in Corporate items and Other (CSW
Energy, CSW International, C3 Communications, CSW Credit, CSW Leasing, CSW
Services, EnerShop and CSW Energy 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.

                                     1997       1996         1995
                                  --------    --------    --------
                                             (millions)
OPERATING REVENUES
  Electric Operations
     United States                  $3,321      $3,248      $2,883
     United Kingdom (1)              1,870       1,848         208
  Corporate items and Other             77          59          52
                                  --------    --------    --------
                                    $5,268      $5,155      $3,143
                                  --------    --------    --------
OPERATING INCOME
  Electric Operations
     United States                    $661        $768        $719
     United Kingdom (1)                255         236          21
  Corporate items and Other            (30)         15         (27)
                                  --------    --------    --------
  Operating income before taxes        886       1,019         713
  Income taxes                        (151)       (224)        (92)
                                  --------    --------    --------
                                      $735        $795        $621
                                  --------    --------    --------
DEPRECIATION AND AMORTIZATION
  Electric Operations
    United States                     $389        $362        $335
    United Kingdom (1)                  92          88           7
  Corporate items and Other             16          14          11
                                  --------    --------    --------
                                      $497        $464        $353
                                  --------    --------    --------
IDENTIFIABLE ASSETS
  Electric Operations
     United States                  $9,172      $9,142      $9,278
     United Kingdom (1)              2,931       3,061       2,821
  Corporate items and Other          1,348       1,129       1,004
                                  --------    --------    --------
                                    13,451      13,332      13,103
  Gas Operations (Discontinued)       --          --           766
                                  --------    --------    --------
                                   $13,451     $13,332     $13,869
                                  --------    --------    --------
CAPITAL EXPENDITURES AND
ACQUISITIONS
  Electric Operations
     United States                    $346        $356        $398
     United Kingdom (1), (2)           126       1,543         731
  Corporate items and Other (3)        276         109          19
                                  --------    --------    --------
                                       748       2,008       1,148
  Gas Operations (Discontinued)       --            23          66
                                  --------    --------    --------
                                      $748      $2,031      $1,214
                                  --------    --------    --------

(1)  Represents equity method of accounting for November 1995 (27.6%) and full
     consolidation accounting for December 1995 (76.45%).
(2)  Includes $1,394 million and $731 million in 1996 and 1995, respectively, 
     used to purchase SEEBOARD.
(3)  Includes CSW Energy and CSW International equity investments.


                                      CSW
                                      2-72
<PAGE>
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 and 1995 are summarized in the
following table (transactions with CSW have not been eliminated).

                                           1996           1995
                                           -------------------


Total revenue                              $362           $721

Operating income before income taxes         23             52

Earnings before income taxes                 18             38
Income taxes                                 (6)           (13)
                                           -------------------
Net income from discontinued operations     $12            $25
                                           -------------------


16.     PROPOSED AEP MERGER

        In December 1997, CSW and AEP entered into a definitive merger agreement
for a tax-free, stock-for stock transaction with AEP being the surviving
corporation. The transaction is subject to the approval of various state and
federal regulatory agencies. The shareholders of CSW will be asked to approve
the AEP Merger and the shareholders of AEP will be asked to approve the issuance
of shares of AEP common stock pursuant to the AEP Merger Agreement and to amend
AEP's certificate of incorporation to increase the number of authorized shares
of AEP common stock from 300 million shares to 600 million shares.

         The proposed AEP Merger, with a targeted completion date in the first
half of 1999, is expected to be accounted for as a pooling of interests.

                 Upon completion of the AEP Merger, CSW common stockholders will
receive 0.6 shares of AEP common stock for each share of CSW common stock. At
that time, CSW common stockholders will own approximately 40% of the outstanding
common stock of AEP. Under the AEP Merger Agreement, there will be no changes
required with respect to the outstanding debt, preferred stock or Trust
Preferred Securities of CSW or its subsidiaries. The transaction must satisfy
many conditions, some of which may not be waived by the parties.  There can be 
no assurance that the AEP Merger will be consummated.


                                      CSW
                                      2-73
<PAGE>


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,
(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 is 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. On December 1, 1997, SEEBOARD made the first such
payment.

         As enacted, the windfall profits tax is not tax deductible for United
Kingdom purposes. To date, no United States income tax benefit has been
recognized due to the uncertainty as to the impact on the use of foreign tax
credits. CSW continues to analyze the potential United States income tax benefit
from the use of foreign tax credits.


18.     PRO FORMA INFORMATION (UNAUDITED)

         CSW secured effective control of SEEBOARD in December 1995. The
unaudited pro forma information is presented in response to applicable
accounting rules relating to acquisition transactions. The pro forma information
gives effect to the acquisition of SEEBOARD accounted for under the purchase
method of accounting for the twelve months ended December 31, 1995 as if the
transaction had been consummated at the beginning of the period presented.

         The unaudited pro forma information has been prepared in accordance
with United States generally accepted accounting principles. The pro forma
information in the following table is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred if the SEEBOARD acquisition had taken place at the beginning of the
period specified, nor is it necessarily indicative of future operating results.
The following pro forma information has been prepared reflecting the February
1996 issuance of CSW Common, and has been converted at an exchange rate of
(pound)1.00=$1.58 for the twelve months ended December 31, 1995.

                                               1995
                                        -----------------
                                       (millions except EPS)

Operating Revenues                            $5,404
Operating Income                                 750
Net Income for Common Stock                      445
EPS of Common Stock                            $2.15


                                      CSW
                                      2-74
<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                                           1997(1)   1996(2)
-------------------------------------------------------------------------------
                                                    (millions, except EPS)
MARCH 31
    Operating Revenues                                  $1,278    $1,215
    Operating Income                                       127       144
    Income from Continuing Operations                       25        43
    Net Income for Common Stock                             25        51
    Basic and Diluted EPS from Continuing Operations     $0.12     $0.22
    Basic and Diluted EPS                                $0.12     $0.26


JUNE 30
    Operating Revenues                                  $1,184    $1,267
    Operating Income                                       169       214
    Income from Continuing Operations                       83        11
    Net Income for Common Stock                             83       128
    Basic and Diluted EPS from Continuing Operations     $0.39     $0.05
    Basic and Diluted EPS                                $0.39     $0.61

SEPTEMBER 30
    Operating Revenues                                  $1,477    $1,438
    Operating Income                                       303       284
    Income from Continuing Operations                      196       190
    Extraordinary Item                                    (176)     --
    Net Income for Common Stock                             20       190
    Basic and Diluted EPS from Continuing Operations     $0.93     $0.90
    Basic and Diluted EPS from Extraordinary Item       $(0.83)     --
    Basic and Diluted EPS                                $0.10     $0.90

DECEMBER 31
    Operating Revenues                                  $1,329    $1,235
    Operating Income                                       136       153
    Income from Continuing Operations                       25        53
    Net Income for Common Stock                             25        60
    Basic and Diluted EPS from Continuing Operations     $0.11     $0.26
    Basic and Diluted EPS                                $0.11     $0.28

TOTAL
    Operating Revenues                                  $5,268    $5,155
    Operating Income                                       735       795
    Income from Continuing Operations                      329       297
    Extraordinary Item                                    (176)     --
    Net Income for Common Stock                            153       429
    Basic and Diluted EPS from Continuing Operations     $1.55     $1.43
    Basic and Diluted EPS from Extraordinary Item       $(0.83)     --
    Basic and Diluted EPS                                $0.72     $2.07

(1)  The first, second and third quarters of 1997 include the effect of certain
     reclassifications to conform with the 1997 year end financial statement
     presentation.

(2)  In 1996, CSW EPS of Common Stock for the year do not sum to the total of
     the individual quarters' EPS of Common Stock due to different levels of
     average shares outstanding for the different periods.


                                      CSW
                                      2-75
<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, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years ended
December 31, 1997. 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 (1997 - which includes CSW Investments) and
CSW Investments (1996), which statements reflect total assets and total revenues
of 22 percent and 35 percent in 1997 and 23 percent and 36 percent 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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years ended December 31, 1997, in conformity with generally
accepted accounting principles.


Arthur Andersen LLP

Dallas, Texas
February 16, 1998


                                      CSW
                                      2-76
<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 1997 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 in 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 1997 and the result of their operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles in the United Kingdom.

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



KPMG Audit Plc
Chartered Accountants                                           London, England
Registered Auditor                                              19 January 1998


                                      CSW
                                      2-77
<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 in 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 result of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles in the United Kingdom.

Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations and shareholders' equity as of
and for the year ended 31 December 1996 to the extent summarised in the notes to
the consolidated financial statements.



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


                                      CSW
                                      2-78
<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, 1997.





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


                                      CSW
                                      2-79
<PAGE>
     

                                                    


                             CENTRAL POWER AND LIGHT
                                     COMPANY

                                      CPL
                                      2-80
<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.

                       ---------------------------------------------------------
                          1997       1996 (1)     1995        1994       1993(2)
                                        (thousands except ratios)
INCOME STATEMENT DATA
Revenues               $1,376,282  $1,300,688  $1,073,469  $1,217,979 $1,223,528
Income before cumulative 
 effect of changes in     128,471     147,051     206,447     205,439    145,130
 accounting principles
Net income for common     121,350     133,488     191,978     191,635    158,422
 stock
BALANCE SHEET DATA
Assets                  4,813,310   4,828,263   4,881,136   4,822,699  4,781,745
Long-term          
 obligations (3)        1,452,266   1,323,054   1,517,347   1,466,393  1,384,820
Capitalization ratios
   Common stock equity        47%         48%         45%         45%        47%
   Preferred stock              5           8           8           8          9
   CPL-obligated, mandatorily
      redeemable preferred
      securities of subsidiary 
      trusts holding solely    
      Junior Subordinated
      Debentures of CPL         5         --           --          --         --
   Long-term debt              43          44          47          47         44

Ratio of earnings to fixed   2.48        2.86        2.63        3.24       2.69
 charges (SEC Method) (4)



(1)  Earnings in 1996 reflect a $15.6 million one-time charge, net of tax,
     associated with certain investments for plant sites, engineering studies
     and lignite reserves and the expiration in 1995 of Mirror CWIP liability
     amortization income.
(2)  Earnings in 1993 were significantly affected by restructuring charges, the
     $27 million cumulative effect of changes in accounting principles and prior
     year tax adjustments. CPL changed its method of accounting for unbilled
     revenues in 1993.
(3)  Long-term obligations includes long-term debt and Trust Preferred 
     Securities, and for 1993 preferred stock subject to mandatory redemption.
(4)  Ratio of earnings to fixed charges for 1993 was calculated before
     cumulative effect of change in accounting principles.


                                      CPL
                                      2-81
<PAGE>



CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS

         Reference is made to CPL'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.


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, primarily due 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.


                                      CPL
                                      2-82
<PAGE>

         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 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 also refinancing activities in 1996.


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995

         Net income for common stock for 1996 decreased 30% to $133 million from
$192 million in 1995. The decrease was due primarily to the expiration of Mirror
CWIP liability amortization, the CPL 1996 Fuel Agreement, a charge in 1996
associated with certain investments for plant sites, engineering studies and
lignite reserves of $15.6 million, net of tax, and management's expectation of
the outcome of CPL's pending rate review . Partially offsetting the decline was
the absence of the net effect of the CPL 1995 Agreement. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS for additional information.

         Electric operating revenues were $1.3 billion in 1996, an increase of
21% when compared to 1995 revenues of $1.1 billion. The increase was due
primarily to a $96.6 million increase in fuel revenues resulting primarily from
higher average unit fuel costs and purchased power as discussed below. The
increase was also attributable to a one-time $50 million base rate refund and a
$62.3 million disallowance of under-recovered fuel costs in 1995 as a result of
the CPL 1995 Agreement. KWH sales increased 6% resulting primarily from
increased customer and favorable weather-related demand as well as residential
and commercial customer growth.

         Fuel expense increased $53.0 million, or 18%, during 1996 as compared
to 1995. The increase in fuel expense was due primarily to an 18% increase in
the average unit cost of fuel from $1.37 per MMbtu in 1995 to $1.62 per MMbtu in
1996. The fuel costs reflect an increase in the spot market price of natural gas
partially offset by a decrease in the delivered cost of coal and a one-time $9.6
million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement.
Purchased power increased $39.9 million during 1996 when compared to the prior
year primarily as a result of increased economy energy purchases at a higher
cost per MWH. Also contributing to this increase were additional cogeneration
purchases in 1996.

         Other operating expenses increased $22.5 million, or 11%, during 1996
when compared to 1995. This increase was due primarily to a $9.5 million
write-off associated with the cancellation of a transmission project, a $2.2
million write-off of demand side management assets as well as increased rate
case and decommissioning expenses, all associated with management's expectation
of the outcome of CPL's pending rate review. Also contributing to the increase
was the establishment of a regulatory asset for rate case costs previously
expensed and subsequent amortization of such regulatory asset pursuant to the
CPL 1995 Agreement. Further contributing to this increase were lower
employee-related costs in 1995. The overall restructuring charges increase of
$25.4 million during 1996 when compared to 1995 was due primarily to the
recognition of a $20.7 million regulatory asset established in accordance with
the CPL 1995 Agreement for previously recorded restructuring charges. In 1996,
the CSW System began implementation of organizational and executive changes
which were completed in 1997. CPL recorded its $4.6 million portion of the
estimated cost of the restructuring during 1996. Maintenance expenses decreased
$10.1 million or 16% during 1996 when compared to 1995 due primarily to lower
production and distribution maintenance. The decrease in production maintenance
was the result of fewer scheduled steam maintenance repair projects in 1996 as
well as lower nuclear maintenance due to fewer scheduled refueling outages in

                                      CPL
                                      2-83
<PAGE>

1996. The decrease in distribution maintenance was due primarily to lower tree
trimming expenses in 1996.

         Depreciation and amortization increased $2.3 million, or 2%, during
1996 as compared to 1995 as a result of an increase in depreciable property and
the amortization of regulatory assets associated with the CPL 1995 Agreement.
Such increases were partially offset by a decrease in depreciation rates,
effective May 1996, in accordance with management's expectation of the outcome
of CPL's pending rate review. Taxes, other than income increased $8.1 million
during 1996 as compared to 1995 due primarily to lower 1995 ad valorem taxes
resulting from revisions of prior year estimates. Income taxes increased $82.6
million in 1996 as compared to 1995 due primarily to the accelerated flowback in
1995 of $34.3 million of unprotected excess deferred income taxes in accordance
with the CPL 1995 Agreement. This increase was also attributable to prior year
tax adjustments, higher pre-tax income, excluding the effects of the one-time
charge, as discussed below, and the permanent tax effect associated with the
expiration of the Mirror CWIP liability amortization, also discussed below.

         Other income and deductions decreased $67.5 million in 1996 when
compared to 1995. Mirror CWIP liability amortization, which expired in 1995,
contributed $41.0 million to other income and deductions in 1995. Also, a
one-time charge in 1996 associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.6 million, net of
tax, contributed to this decline. Furthermore, other income and deductions
decreased in 1996 as a result of the recognition of previously deferred
factoring income in 1995 pursuant to the CPL 1995 Agreement. Interest on
long-term debt also decreased $5.8 million during 1996 when compared to 1995 as
a result of refinancing activity in 1995. Interest on short-term debt and other
decreased $1.4 million during 1996 when compared to 1995 primarily as a result
of lower levels of short-term debt outstanding at lower interest rates partially
offset by an increase in the amortization of debt issuance costs and AFUDC for
borrowed funds.


                                      CPL
                                      2-84
<PAGE>
CPL
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL POWER AND LIGHT COMPANY
-------------------------------------------------------------------------------
                                             For the Years Ended December 31,
                                          -------------------------------------
                                              1997        1996          1995
                                          -----------  -----------  -----------
                                                       (thousands)
Electric Operating Revenues
    Residential                              $541,169     $528,916     $465,478
    Commercial                                400,412      388,008      355,238
    Industrial                                330,481      308,186      256,223
    Sales for resale                           70,461       72,164       52,081
    Other                                      33,759        3,414      (55,551)
                                          -----------  -----------  -----------
                                            1,376,282    1,300,688    1,073,469
                                          -----------  -----------  -----------
Operating Expenses and Taxes
    Fuel                                      396,707      340,962      287,979
    Purchased power                            56,475       59,562       19,632
    Other operating                           283,640      231,501      209,021
    Restructuring charges                        --          4,628      (20,793)
    Maintenance                                59,791       53,077       63,201
    Depreciation and amortization             171,349      152,831      150,508
    Taxes, other than income                   82,909       74,029       65,925
    Income taxes                               74,044       98,451       15,812
                                          -----------  -----------  -----------
                                            1,124,915    1,015,041      791,285
                                          -----------  -----------  -----------

Operating Income                              251,367      285,647      282,184
                                          -----------  -----------  -----------

Other Income and Deductions
    Charges for investments and
      plant development costs                  (2,060)     (21,509)        --
    Allowance for equity funds
      used during construction                  1,724          427          442
    Mirror CWIP liability amortization           --           --         41,000
    Other                                       3,563        4,636       15,009
    Non-operating income taxes                  5,050        5,301         (129)
                                          -----------  -----------  -----------
                                                8,277      (11,145)      56,322
                                          -----------  -----------  -----------

Income Before Interest Charges                259,644      274,502      338,506
                                          -----------  -----------  -----------

Interest Charges
    Interest on long-term debt                105,081      110,375      116,205
    Distributions on Trust
      Preferred Securities                      7,533         --           --
    Interest on short-term debt and other      20,613       18,494       19,926
    Allowance for borrowed funds
      used during construction                 (2,054)      (1,418)      (4,072)
                                          -----------  -----------  -----------
                                              131,173      127,451      132,059
                                          -----------  -----------  -----------

Net Income                                    128,471      147,051      206,447
    Less:  Preferred stock dividends            9,523       13,563       14,469
    Gain on reacquired preferred stock          2,402         --           --
                                          -----------  -----------  -----------
Net Income for Common Stock                  $121,350     $133,488     $191,978
                                          ===========  ===========  ===========





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

                                      CPL
                                      2-85
<PAGE>
CPL
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
CENTRAL POWER AND LIGHT COMPANY
----------------------------------------------------------------------------
                                              For the Years Ended December 31,
                                              ------------------------------
                                                1997       1996       1995
                                              --------   --------   --------
                                                        (thousands)

Retained Earnings at Beginning of Year        $868,932   $863,444   $857,466
    Net income for common stock                121,350    133,488    191,978
    Deduct:  Common stock dividends            157,000    128,000    186,000
                                              --------   --------   --------
Retained Earnings at End of Year              $833,282   $868,932   $863,444
                                              ========   ========   ========






































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

                                      CPL
                                      2-86
<PAGE>
CPL
CONSOLIDATED BALANCE SHEETS
CENTRAL POWER AND LIGHT COMPANY
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
ASSETS
Electric Utility Plant
    Production                                          $3,106,576   $3,102,929
    Transmission                                           517,903      505,801
    Distribution                                         1,021,759      956,928
    General                                                295,974      271,347
    Construction work in progress                           77,390       95,336
    Nuclear fuel                                           196,147      184,229
                                                        ----------   ----------
                                                         5,215,749    5,116,570
  Less - accumulated depreciation                        1,845,730    1,697,552
                                                        ----------   ----------
                                                         3,370,019    3,419,018
                                                        ----------   ----------
Current Assets
    Cash                                                      --          3,299
    Special deposits                                          --            113
    Accounts receivable                                     61,311       53,038
    Materials and supplies, at average cost                 65,290       75,732
    Fuel inventory                                          14,816       15,461
    Under-recovered fuel costs                              43,229       26,298
    Prepayments                                              2,595        4,371
                                                        ----------   ----------
                                                           187,241      178,312
                                                        ----------   ----------
Deferred Charges and Other Assets
    Deferred STP costs                                     484,277      486,978
    Mirror CWIP asset                                      285,431      298,708
    Income tax related regulatory assets, net              390,149      335,226
    Other                                                   96,193      110,021
                                                        ----------   ----------
                                                         1,256,050    1,230,933
                                                        ----------   ----------
                                                        $4,813,310   $4,828,263
                                                        ==========   ==========
















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

                                      CPL
                                      2-87
<PAGE>
CPL
CONSOLIDATED BALANCE SHEETS
CENTRAL POWER AND LIGHT COMPANY
--------------------------------------------------------------------------
                                                   As of December 31,
                                              ----------------------------
                                                 1997              1996
                                              ----------        ----------
CAPITALIZATION AND LIABILITIES                        (thousands)
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                            833,282           868,932
                                              ----------        ----------
       Total Common Stock Equity               1,407,170  47%    1,442,820  48%
                                              ---------- ----   ---------- ----

    Preferred stock                              163,204   5%      250,351   8%
    CPL-obligated, mandatorily redeemable 
      preferred securities of subsidiary
      trust holding solely Junior 
      Subordinated Debentures of CPL             150,000   5%         --    --
    Long-term debt                             1,302,266  43%    1,323,054  44%
                                              ---------- ----   ---------- ----
       Total Capitalization                    3,022,640 100%    3,016,225 100%
                                              ---------- ----   ---------- ----

Current Liabilities
    Long-term debt due within twelve months       28,000           200,000
    Advances from affiliates                     142,781            52,525
    Accounts payable                              84,160            69,941
    Accrued taxes                                 13,558            64,207
    Accumulated deferred income taxes             21,382             7,310
    Accrued interest                              28,379            31,566
    Refund due customers                          63,713            43,266
    Other                                         14,551            19,048
                                              ----------        ----------
                                                 396,524           487,863
                                              ----------        ----------
Deferred Credits
    Accumulated deferred income taxes          1,237,386         1,162,051
    Investment tax credits                       142,371           147,191
    Other                                         14,389            14,933
                                              ----------        ----------
                                               1,394,146         1,324,175
                                              ----------        ----------
                                              $4,813,310        $4,828,263
                                              ==========        ==========














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

                                      CPL
                                      2-88
<PAGE>
CPL
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL POWER AND LIGHT COMPANY
-------------------------------------------------------------------------------
                                               For the Years Ended December 31,
                                              ---------------------------------
                                                 1997        1996        1995
                                              ---------   ---------   ---------
                                                         (thousands)
OPERATING ACTIVITIES
    Net Income                                 $128,471    $147,051    $206,447
    Non-cash Items Included in Net Income
        Depreciation and amortization           192,775     178,271     173,711
        Deferred income taxes and
          investment tax credits                 29,666      45,923     (35,815)
        Mirror CWIP liability amortization         --          --       (41,000)
        Establishment of regulatory assets         --          --       (20,652)
        Refund due customers                     20,447      43,266        --
        Charges for investments and assets        2,061      21,374        --
        Inventory reserve                         3,834         717        --
    Changes in Assets and Liabilities
        Accounts receivable                      (8,273)     (7,852)    (15,321)
        Fuel inventory                              645      11,011      (3,556)
        Material and supplies                    10,442      (4,620)     (4,902)
        Accrued interest                         (3,187)      1,176      (8,061)
        Accounts payable                         14,219      19,780     (35,101)
        Accrued taxes                           (50,649)      2,593       2,228
        Fuel recovery                           (16,931)    (38,884)     66,712
        Other deferred credits                    2,701      (2,856)      2,022
        Other                                    13,419      (6,672)     13,106
                                              ---------   ---------   ---------
                                                339,640     410,278     299,818
                                              ---------   ---------   ---------
INVESTING ACTIVITIES
    Construction expenditures                  (126,693)   (136,901)   (150,372)
    Other                                         1,185      (3,257)     (4,072)
                                              ---------   ---------   ---------
                                               (125,508)   (140,158)   (154,444)
                                              ---------   ---------   ---------
FINANCING ACTIVITIES
    Proceeds from issuance of long-term debt       --        63,930     337,828
    Retirement of long-term debt                   --          (231)       --
    Reacquisition of long-term debt            (200,000)    (67,720)   (295,938)
    Redemption of preferred stock               (84,745)       --          --
    Proceeds from issuance of Trust
      Preferred Securities                      144,706        --          --
    Change in advances from affiliates           90,256    (123,809)     15,014
    Payment of dividends                       (167,648)   (141,874)   (200,037)
                                              ---------   ---------   ---------
                                               (217,431)   (269,704)   (143,133)
                                              ---------   ---------   ---------

Net Change in Cash and Cash Equivalents          (3,299)        416       2,241
Cash and Cash Equivalents at
  Beginning of Year                               3,299       2,883         642
                                              ---------   ---------   ---------
Cash and Cash Equivalents at End of Year      $    --        $3,299      $2,883
                                              =========   =========   =========

SUPPLEMENTARY INFORMATION
    Interest paid less amounts
      capitalized (includes distributions
      on Trust Preferred Securities)           $116,782    $117,974    $115,845
                                              =========   =========   =========
    Income taxes paid                           $61,509     $44,082     $37,151
                                              =========   =========   =========

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

                                      CPL
                                      2-89
<PAGE>
CPL
CONSOLIDATED STATEMENTS OF CAPITALIZATION
CENTRAL POWER AND LIGHT COMPANY
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
COMMON STOCK EQUITY                                     $1,407,170   $1,442,820
                                                        ----------   ----------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 
  3,035,000 shares
                                     Current
                    Number of Shares Redemption
Series              Outstanding      Price
-----------------------------------------------
Not Subject to Mandatory Redemption
     4.00%            42,048          $105.75                4,205       10,000
     4.20%            17,476          $103.75                1,748        7,500
     7.12%              --               --                   --         26,000
     8.72%              --               --                   --         50,000
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)      (3,149)
                                                        ----------   ----------
                                                           163,204      250,351
                                                        ----------   ----------
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        --
                                                        ----------   ----------

LONG-TERM DEBT
First Mortgage Bonds
  Series J, 6 5/8%, due January 1, 1998                     28,000       28,000
  Series L, 7%, due February 1, 2001                        36,000       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 BB, 6%, due October 1, 1997                         --         200,000
  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 1/8%, due June 1, 2020 (Red River)          6,330        6,330
  Series 1996,6 1/2%, due May 1, 2030 (Matagorda)           60,000       60,000
Unamortized Discount                                        (4,484)      (5,015)
Unamortized Costs of Reacquired Debt                       (84,070)     (90,751)
Amount to be Redeemed Within One Year                      (28,000)    (200,000)
                                                        ----------   ----------
                                                         1,302,266    1,323,054
                                                        ----------   ----------
TOTAL CAPITALIZATION                                    $3,022,640   $3,016,225
                                                        ==========   ==========

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

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

                                      CPL
                                      2-90
<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.


                                      CPL
                                      2-91
<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, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules 
and is not a required part of the basic financial statements. This exhibit has 
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.



Arthur Andersen LLP

Dallas, Texas
February 16, 1998


                                      CPL
                                      2-92
<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, 1997.




J. Gonzalo Sandoval                                            R. Russell Davis
General Manager/President - CPL                                Controller - CPL


                                      CPL
                                      2-93
<PAGE>



                                                       



                             PUBLIC SERVICE COMPANY
                                   OF OKLAHOMA

                                      PSO
                                      2-94
<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.

                       ---------------------------------------------------------
                          1997       1996 (1)      1995        1994     1993 (2)
                                       (thousands, except ratios)             
INCOME STATEMENT DATA
Revenues               $ 712,690 $  735,265   $  690,823  $  740,496  $  707,536
Income before cumulative
  effect of changes in
  accounting principles   46,206     31,478       81,828      68,266      40,496
Net income for common     
  stock                   50,053     30,662       81,012      67,450      45,903
BALANCE SHEET DATA
Assets                 1,447,681  1,431,597    1,480,816   1,465,114   1,420,379
Long-term        
  obligations (3)        496,821   420,301       379,250     402,752     401,255
Capitalization ratios
   Common stock equity       49%       52%           55%         52%         51%
   Preferred stock            --         2             2           2           2
 PSO-obligated, mandatorily
   redeemable preferred
   securities of subsidiary
   trusts holding solely                               
   Junior Subordinated
   Debentures of PSO           8        --            --          --          --
   Long-term debt             43        46            43          46          47

Ratio of earnings to fixed  2.68      2.45          4.32        4.03        2.78
  charges (SEC Method) (4)


(1)  Earnings in 1996 reflect a $35.7 million one-time charge, net of tax,
     associated with certain investments for plant sites, engineering studies
     and lignite reserves.
(2)  Earnings in 1993 were significantly affected by restructuring charges, the
     $6 million cumulative effect of changes in accounting principles and the
     establishment of reserves for fuel and other properties.
(3)  Long-term obligations includes long-term debt and Trust Preferred
     Securities.
(4)  Ratio of earnings to fixed charges for 1993 was calculated before
     cumulative effect of changes in accounting principles.

                                      PSO
                                      2-95
<PAGE>


PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS

         Reference is made to PSO'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 to understanding, the following discussion and analysis.


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 taxable operating 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.

                                      PSO
                                      2-96
<PAGE>

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


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995

         Net income for common stock for 1996 was $30.7 million, a 62% decrease
from 1995 net income for common stock of $81 million. The decrease resulted
primarily from a one-time charge associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $35.7 million,
net of tax, and prior year tax adjustments recorded in 1995 offset in part by
increased non-fuel revenue.

         Electric operating revenues increased 6% to $735.3 million during 1996
from $690.8 million during 1995. The increase was due primarily to increased
fuel revenues, as discussed below and a 6% increase in retail KWH sales
resulting from increased customer usage, as well as additional weather-related
demand.

         Fuel expense for 1996 was $290.4 million, a 6% increase compared to
$273.5 million during 1995. The increase was due primarily to an increase in
average unit fuel costs from $1.73 per MMbtu in 1995 to $2.04 per MMbtu in 1996.
The increase in average unit fuel costs is attributable to an increase in the
spot market price of natural gas brought about by strong demand offset in part
by a decline in the delivered cost of coal resulting from lower transportation
charges as well as purchases of lower priced spot market coal. Offsetting these
factors in part was an under-recovery of fuel costs in 1996 compared to an
over-recovery in 1995, as well as decreased KWH generation. Purchased power
expense increased 75% to $41.2 million for 1996 from $23.6 million for 1995. The
increase was due primarily to increases in purchases of economy energy at a
higher cost per MWH.

         Other operating expenses increased 4% to $121.2 million in 1996 from
$116.2 million in 1995 due primarily to the 1996 restructuring charges,
increased employee-related expenses and increased outside services expenses.
Maintenance expenses increased 9% to $38.5 million in 1996 from $35.4 million in
1995. The increase was due primarily to a $3.2 million write-down of production
inventory in 1996. Depreciation and amortization expense increased approximately
$9.8 million during 1996 when compared to the prior year due to increases in
depreciable property and completion in 1995 of the amortization of previously
expensed inventory and supply items that were credited through amortization to
cost of service.

         Income tax expense for 1996 compared to 1995 was affected by prior year
tax adjustments recorded in 1995 offset in part by lower pre-tax income,
excluding the effects of a one-time charge associated with certain investments
as discussed below. Other income and deductions for 1996 decreased approximately
$39 million when compared to 1995 as a result of a one-time charge associated
with certain investments for plant sites, engineering studies and lignite
reserves of $35.7 million, net of tax. Other income and deductions were also
affected by the $2.7 million gain on the sale of non-utility fiber optic
telecommunication property in the first quarter of 1995.

                                      PSO
                                      2-97
<PAGE>
PSO
CONSOLIDATED STATEMENTS OF INCOME
PUBLIC SERVICE COMPANY OF OKLAHOMA
----------------------------------------------------------------------------
                                            For the Years Ended December 31,
                                           ---------------------------------
                                              1997        1996       1995
                                           ---------   ---------   ---------
                                                      (thousands)
  Electric Operating Revenues
    Residential                             $297,265    $299,550    $280,127
    Commercial                               226,525     221,985     210,875
    Industrial                               161,974     157,509     147,811
    Sales for resale                          30,896      39,285      34,273
    Other                                     (3,970)     16,936      17,737
                                           ---------   ---------   ---------
                                             712,690     735,265     690,823
                                           ---------   ---------   ---------
Operating Expenses and Taxes
    Fuel                                     278,976     290,408     273,533
    Purchased power                           51,619      41,194      23,584
    Other operating                          135,943     121,235     116,175
    Maintenance                               33,608      38,469      35,356
    Depreciation and amortization             81,227      77,470      67,657
    Taxes, other than income                  28,778      27,194      25,147
    Income taxes                              20,763      37,558      37,602
                                           ---------   ---------   ---------
                                             630,914     633,528     579,054
                                           ---------   ---------   ---------
Operating Income                              81,776     101,737     111,769
                                           ---------   ---------   ---------

Other Income and Deductions
    Allowance for equity funds used
      during construction                        995         292       1,270
    Charges for investments and plant
      development costs                         (123)    (51,109)         --
    Other                                     (1,503)     (1,107)      2,077
    Non-operating income taxes                 2,280      16,413         197
                                           ---------   ---------   ---------
                                               1,649     (35,511)      3,544
                                           ---------   ---------   ---------
Income Before Interest Charges                83,425      66,226     115,313
                                           ---------   ---------   ---------

Interest Charges
    Interest on long-term debt                30,474      30,555      29,594
    Interest on short-term debt and other      4,100       5,623       6,355
    Distributions on Trust Preferred
      Securities                               3,967          --          --
    Allowance for borrowed funds used
      during construction                     (1,322)     (1,430)     (2,464)
                                           ---------   ---------   ---------
                                              37,219      34,748      33,485
                                           ---------   ---------   ---------

Net Income                                    46,206      31,478      81,828
  Less:  Preferred stock dividends               364         816         816
  Gain on reacquired preferred stock           4,211          --          --
                                           ---------   ---------   ---------

Net Income for Common Stock                  $50,053     $30,662     $81,012
                                           =========   =========   =========







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

                                      PSO
                                      2-98
<PAGE>
PSO
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
PUBLIC SERVICE COMPANY OF OKLAHOMA
----------------------------------------------------------------------------
                                             For the Years Ended December 31,
                                              ------------------------------
                                                1997       1996       1995
                                              --------   --------   --------
                                                       (thousands)

Retained Earnings at Beginning of Year        $145,943   $150,281   $124,269
    Net income for common stock                 50,053     30,662     81,012
    Deduct:  Common stock dividends             59,000     35,000     55,000
                                              --------   --------   --------
Retained Earnings at End of Year              $136,996   $145,943   $150,281
                                              ========   ========   ========







































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

                                      PSO
                                      2-99
<PAGE>
PSO
CONSOLIDATED BALANCE SHEETS
PUBLIC SERVICE COMPANY OF OKLAHOMA
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
ASSETS
Electric Utility Plant
    Production                                            $907,735     $902,813
    Transmission                                           375,111      368,280
    Distribution                                           818,806      773,590
    General                                                197,264      186,252
    Construction work in progress                           40,992       59,241
                                                        ----------   ----------
                                                         2,339,908    2,290,176
  Less - Accumulated depreciation                        1,031,322      987,283
                                                        ----------   ----------
                                                         1,308,586    1,302,893
                                                        ----------   ----------
Current Assets
    Cash                                                     2,171        1,479
    Accounts receivable                                     34,974       11,069
    Materials and supplies, at average cost                 32,211       34,542
    Fuel inventory, at LIFO cost                            11,427       14,061
    Accumulated deferred income taxes                         --          2,558
    Prepayments and other                                    3,366        2,991
                                                        ----------   ----------
                                                            84,149       66,700
                                                        ----------   ----------

Deferred Charges and Other Assets                           54,946       62,004
                                                        ----------   ----------
                                                        $1,447,681   $1,431,597
                                                        ==========   ==========























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

                                      PSO
                                     2-100
<PAGE>
PSO
CONSOLIDATED BALANCE SHEETS
PUBLIC SERVICE COMPANY OF OKLAHOMA
-----------------------------------------------------------------------
                                                 As of December 31,
                                           ----------------------------
                                              1997              1996
                                           ----------        ----------
CAPITALIZATION AND LIABILITIES                     (thousands)
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                         136,996           145,943
                                           ----------        ----------
       Total Common Stock Equity              474,226  49%      483,173  52%
                                           ---------- ----   ---------- ----

    Preferred stock                             5,287  --        19,826   2%
    PSO-obligated, mandatorily redeemable 
      preferred securities of subsidiary 
      trust holding solely Junior 
      Subordinated Debentures of PSO           75,000   8%         --    --
    Long-term debt                            421,821  43%      420,301  46%
                                           ---------- ----   ---------- ----
       Total Capitalization                   976,334 100%      923,300 100%
                                           ---------- ----   ---------- ----

Current Liabilities
    Advances from affiliates                    4,874            42,867
    Payables to affiliates                     29,011            27,425
    Accounts payable                           55,179            47,604
    Payables to customers                      18,837            14,329
    Accrued taxes                                  --            12,306
    Accumulated deferred income taxes           2,262                --
    Accrued interest                            9,090             9,193
    Other                                       4,178             7,421
                                           ----------        ----------
                                              123,431           161,145
                                           ----------        ----------
Deferred Credits
    Accumulated deferred income taxes         258,848           251,007
    Investment tax credits                     41,160            43,438
    Income tax related regulatory 
      liabilities, net                         41,793            46,007
    Other                                       6,115             6,700
                                           ----------        ----------
                                              347,916           347,152
                                           ----------        ----------
                                           $1,447,681        $1,431,597
                                           ==========        ==========














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

                                      PSO
                                     2-101
<PAGE>
PSO
CONSOLIDATED STATEMENTS OF CASH FLOWS
PUBLIC SERVICE COMPANY OF OKLAHOMA
-------------------------------------------------------------------------------
                                               For the Years Ended December 31,
                                              ---------------------------------
                                                 1997       1996         1995
                                              ---------   ---------   ---------
                                                         (thousands)
OPERATING ACTIVITIES
    Net Income                                  $46,206     $31,478     $81,828
    Non-cash Items Included in Net Income
        Depreciation and amortization            85,459      83,424      73,218
        Deferred income taxes and
          investment tax credits                  6,169      (4,112)        (85)
        Charges for investments and assets       12,803      50,854          --
        Inventory reserve                           838       3,150          --
    Changes in Assets and Liabilities
        Accounts receivable                     (23,905)      6,888       3,574
        Other investments and property           (5,682)     (6,264)      2,196
        Accounts payable                         13,433      (5,878)    (22,970)
        Accrued taxes                           (12,306)    (14,708)      9,658
        Other deferred credits                     (585)      1,078      (3,193)
        Other                                      (776)     (3,292)       (338)
                                              ---------   ---------   ---------
                                                121,654     142,618     143,888
                                              ---------   ---------   ---------
INVESTING ACTIVITIES
    Construction expenditures                   (79,568)    (83,509)    (98,415)
    Other                                        (6,008)     (8,596)     (9,715)
                                              ---------   ---------   ---------
                                                (85,576)    (92,105)   (108,130)
                                              ---------   ---------   ---------
FINANCING ACTIVITIES
    Proceeds from issuance of long-term debt         --      51,744          --
    Retirement of long-term debt                     --     (25,000)         --
    Reacquisition of long-term debt                  --     (13,040)         --
    Reacquisition of preferred stock            (10,329)         --          --
    Proceeds from issuance of Trust
      Preferred Securities                       72,450          --          --
    Change in advances from affiliates          (37,993)    (27,643)     15,350
    Payment of dividends                        (59,514)    (35,839)    (55,817)
                                              ---------   ---------   ---------
                                                (35,386)    (49,778)    (40,467)
                                              ---------   ---------   ---------

Net Change in Cash and Cash Equivalents             692         735      (4,709)
Cash and Cash Equivalents at Beginning 
  of Year                                         1,479         744       5,453
                                              ---------   ---------   ---------
Cash and Cash Equivalents at End of Year         $2,171      $1,479        $744
                                              =========   =========   =========

SUPPLEMENTARY INFORMATION
    Interest paid less amounts capitalized
      (includes distributions on Trust
      Preferred Securities)                     $35,557     $32,488     $31,285
                                              =========   =========   =========
    Income taxes paid                           $34,244     $30,353     $27,651
                                              =========   =========   =========







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

                                      PSO
                                     2-102
<PAGE>
PSO
CONSOLIDATED STATEMENTS OF CAPITALIZATION
PUBLIC SERVICE COMPANY OF OKLAHOMA
-----------------------------------------------------------------------------
                                                           As of December 31,
                                                          -------------------
                                                            1997       1996
                                                          --------   --------
                                                              (thousands)
COMMON STOCK EQUITY                                       $474,226   $483,173
                                                          --------   --------

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      9,790
  4.24%             8,069       $103.19                        807     10,000
Premium                                                         16         36
                                                          --------   --------
                                                             5,287     19,826
                                                          --------   --------

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         --
                                                          --------   --------

LONG-TERM DEBT
First Mortgage Bonds
  Series K, 7 1/4%, due January 1, 1999                     25,000     25,000
  Series L, 7 3/8%, due March 1, 2002                       30,000     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                                        (3,657)    (3,991)
Unamortized costs of reacquired debt                       (16,882)   (18,068)
                                                          --------   --------
                                                           421,821    420,301
                                                          --------   --------
TOTAL CAPITALIZATION                                      $976,334   $923,300
                                                          ========   ========







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

                                      PSO
                                     2-103
<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.


                                      PSO
                                     2-104
<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, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows, for
each of the three years in the period ended December 31, 1997. 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, 1997 and
1996, and the results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules 
and is not a required part of the basic financial statements. This exhibit has 
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.


Arthur Andersen LLP

Dallas, Texas
February 16, 1998

                                      PSO
                                     2-105
<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, 1997.






T. D. Churchwell                                               R. Russell Davis
President - PSO                                                Controller - PSO

                                      PSO
                                     2-106
<PAGE>




                                                     

                              SOUTHWESTERN ELECTRIC
                                  POWER COMPANY

                                     SWEPCO
                                     2-107
<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.

                        --------------------------------------------------------
                            1997       1996 (1)    1995       1994      1993 (2)
                                        (thousands, except ratios)
INCOME STATEMENT DATA
Revenues                $  939,869 $  920,786 $  836,705  $  825,296  $  837,192
Income before cumulative
effect of changes in        92,902     66,566    117,114     105,712      78,471
 changes in accounting
 principles
Net income for common       
 stock                      92,254     63,503    113,870     102,351      78,514
BALANCE SHEET DATA
Assets                   2,094,746  2,099,156  2,116,719   2,079,207   1,968,285
Long-term obligations(3)   683,681    629,615    632,579     630,661     638,093
Capitalization ratios
   Common stock equity         51%        52%        51%         51%         50%
   Preferred stock               2          4          4           4           4
 SWEPCO-obligated, mandatorily
   redeemable preferred
   securities of subsidiary 
   trusts holding solely
   Junior Subordinated                      
   Debentures of SWEPCO          8          --          --          --        --
   Long-term debt               39          44          45          45        46


Ratio of earnings to fix      3.46        2.81        3.80        3.70      3.27
(SEC Method) (4)


(1)  Earnings in 1996 reflect a $21.8 million one-time charge, net of tax,
     associated with certain investments for plant sites, engineering studies
     and lignite reserves.
(2)  Earnings in 1993 were significantly affected by restructuring charges, the 
     $3 million cumulative effect of changes in accounting principles and the 
     establishment of reserves for fuel properties.
(3) Long-term obligations includes long-term debt, preferred stock subject to
    mandatory redemption and Trust Preferred Securities. (4) Ratio of earnings 
    to fixed charges for 1993 was calculated before cumulative effect of changes
    in accounting principles.

                                     SWEPCO
                                     2-108
<PAGE>


SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS

         Reference is made to SWEPCO'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.


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 approximately $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 one-time 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.


                                     SWEPCO
                                     2-109
<PAGE>


COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995

        Net income for common stock decreased 44% during 1996 to $63.5 million
from $113.9 million in 1995. The decrease resulted primarily from increased
other operating expenses and a one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of $21.8
million, net of tax. Increased depreciation and amortization also contributed to
the decrease in net income for common stock.

         Total electric operating revenues increased $84.1 million, or 10%, to
$920.8 million in 1996 due primarily to a $61 million increase in fuel revenues
and a $22 million increase in non-fuel revenues. The increase in fuel revenues
was due to higher average unit fuel cost as discussed below. The increase in
non-fuel revenues was primarily due to a 3% increase in retail KWH sales
resulting from increased customer demand.

         Fuel expense increased 22% to $388.5 million due primarily to a 10%
increase in generation and an increase in the average unit cost of fuel from
$1.61 per MMbtu in 1995 to $1.76 per MMbtu in 1996. The increase in the average
unit cost of fuel is attributable to an increase in the spot market price of
natural gas offset in part by a decline in the delivered cost of coal resulting
from lower transportation charges as well as purchases of lower priced spot
market coal. Purchased power expense increased $8.1 million, or 42%, during 1996
when compared to 1995 due primarily to an increase in economy energy purchases
at higher cost per MWH.

         Other operating expenses increased $20.3 million, or 17%, during 1996
when compared to 1995. The increase is due primarily to $4.6 million in
restructuring charges, an increase in outside services employed and a $3.0
million increase in factoring costs. The increase in factoring costs resulted
from an increase in accounts receivable factored and the correction in 1995 of
an error relating to a prior year, partially offset by a decrease in the average
interest rate associated with factored receivables. Also contributing to the
increase in other operating expense was the write-off of $3.6 million in
deferred SFAS 106 costs which SWEPCO began deferring in 1993 pursuant to an
order issued by the Arkansas Commission. The order allowed deferral of the
difference between OPEB costs recorded under SFAS 106 and OPEB costs paid to
retirees for up to five years. The order required such deferrals to be expensed
if at the end of five years amortization of such deferrals is not included in
rates. Depreciation and amortization expense increased $8.3 million, or 10%,
during 1996 when compared to 1995 due primarily to increases in depreciable
plant and the completion in 1995 of the amortization of previously expensed
inventory and supply items that were credited through amortization to cost of
service.

         Taxes, other than income, increased $5.2 million, or 12%, during 1996
when compared to 1995 due primarily to an increase in ad valorem taxes and state
franchise taxes. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of an HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax. Income tax expense decreased approximately
$3.5 million in 1996 due primarily to lower pre-tax income partially offset by
prior year tax adjustments recorded in 1995.

         Other income and deductions decreased $25.6 million during 1996 when
compared to 1995 due primarily to a one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of $21.8
million, net of tax.

                                     SWEPCO
                                     2-110
<PAGE>
SWEPCO
CONSOLIDATED STATEMENTS OF INCOME
SOUTHWESTERN ELECTRIC POWER COMPANY
----------------------------------------------------------------------------
                                            For the Years Ended December 31,
                                           ---------------------------------
                                              1997        1996        1995
                                           ---------   ---------   ---------
                                                       (thousands)
Electric Operating Revenues
    Residential                             $289,723    $290,020    $278,319
    Commercial                               192,115     189,954     177,135
    Industrial                               263,207     262,878     246,182
    Sales for resale                         146,916     134,836      94,638
    Other                                     47,908      43,098      40,431
                                           ---------   ---------   ---------
                                             939,869     920,786     836,705
                                           ---------   ---------   ---------
Operating Expenses and Taxes
    Fuel                                     382,404     388,450     318,506
    Purchased power                           25,928      27,160      19,077
    Other operating                          157,188     141,542     121,248
    Maintenance                               44,038      43,742      43,320
    Depreciation and amortization             95,228      91,566      83,272
    Taxes, other than income                  55,962      50,373      45,153
    Income taxes                              39,712      39,870      43,353
                                           ---------   ---------   ---------
                                             800,460     782,703     673,929
                                           ---------   ---------   ---------

Operating Income                             139,409     138,083     162,776
                                           ---------   ---------   ---------

Other Income and Deductions
    Charges for investments and plant
      development costs                         (743)    (29,700)         --
    Allowance for equity funds used
      during construction                        934         325       4,290
    Other                                      1,616        (623)       (543)
    Non-operating income taxes                 2,222       8,820         721
                                           ---------   ---------   ---------
                                               4,029     (21,178)      4,468
                                           ---------   ---------   ---------

Income Before Interest Charges               143,438     116,905     167,244
                                           ---------   ---------   ---------

Interest Charges
    Interest on long-term debt                40,440      44,066      44,468
    Distributions on Trust Preferred
      Securities                               5,582          --          --
    Interest on short-term debt and other      5,736       8,381      10,706
    Allowance for borrowed funds used
      during construction                     (1,222)     (2,098)     (5,044)
                                           ---------   ---------   ---------
                                              50,536      50,349      50,130
                                           ---------   ---------   ---------

Net Income                                    92,902      66,556     117,114
    Less: Preferred stock dividends            2,467       3,053       3,244
    Gain on reacquired preferred stock         1,819          --          --
                                           ---------   ---------   ---------
Net Income for Common Stock                  $92,254     $63,503    $113,870
                                           =========   =========   =========





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

                                     SWEPCO
                                     2-111
<PAGE>
SWEPCO
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
SOUTHWESTERN ELECTRIC POWER COMPANY
---------------------------------------------------------------------------
                                           For the Years Ended December 31,
                                         ----------------------------------
                                            1997         1996        1995
                                         ---------    ---------    --------
                                                     (thousands)

Retained Earnings at Beginning of Year    $321,801     $302,334    $297,462
    Net income for common stock             92,254       63,503     113,870
    Gain/(loss) on reacquisition of
      preferred stock                           (5)         (36)          2
    Deduct:  Common stock dividends         90,000       44,000     109,000
                                         ---------    ---------    --------
Retained Earnings at End of Year          $324,050     $321,801    $302,334
                                         =========    =========    ========





































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

                                     SWEPCO
                                     2-112
<PAGE>
SWEPCO
CONSOLIDATED BALANCE SHEETS
SOUTHWESTERN ELECTRIC POWER COMPANY
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
ASSETS

  Electric Utility Plant
    Production                                          $1,391,676   $1,407,134
    Transmission                                           456,401      463,425
    Distribution                                           870,378      844,503
    General                                                311,323      283,878
    Construction work in progress                           51,665       45,374
                                                        ----------   ----------
                                                         3,081,443    3,044,314
  Less - Accumulated depreciation                        1,225,865    1,192,356
                                                        ----------   ----------
                                                         1,855,578    1,851,958
                                                        ----------   ----------
Current Assets
    Cash and temporary cash investments                      2,298        1,879
    Accounts receivable                                     81,507       68,140
    Materials and supplies, at average cost                 24,523       29,265
    Fuel inventory                                          26,415       55,775
    Under-recovered fuel costs                              13,013        9,120
    Prepayments and other                                   13,678       13,499
                                                        ----------   ----------
                                                           161,434      177,678
                                                        ----------   ----------

Deferred Charges and Other Assets                           77,734       69,520
                                                        ----------   ----------
                                                        $2,094,746   $2,099,156
                                                        ==========   ==========





















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

                                     SWEPCO
                                     2-113
<PAGE>
SWEPCO
CONSOLIDATED BALANCE SHEETS
SOUTHWESTERN ELECTRIC POWER COMPANY
-------------------------------------------------------------------------
                                                  As of December 31,
                                            -----------------------------
                                               1997               1996
                                            ----------         ----------
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                          324,050            321,801
                                            ----------         ----------
        Total Common Stock Equity              704,710  51%       702,461  52%
                                            ---------- ----    ---------- ----
    Preferred stock
        Not subject to mandatory redemption      4,709             16,032
        Subject to mandatory redemption         25,930             32,464
                                            ----------         ----------
                                                30,639   2%        48,496   4%
    SWEPCO-obligated, mandatorily redeemable
      preferred securities of subsidiary
      trust holding solely Junior 
      Subordinated Debentures of SWEPCO        110,000   8%            --  --%
    Long-term debt                             547,751  39%       597,151  44%
                                            ---------- ----    ---------- ----
        Total Capitalization                 1,393,100 100%     1,348,108 100%
                                            ---------- ----    ---------- ----

Current Liabilities
    Long-term debt and preferred stock due
      within twelve months                       3,555              3,760
    Advances from affiliates                    25,175             57,495
    Accounts payable                            73,582             48,826
    Payables to affiliates                      63,583             68,708
    Customer deposits                           14,359             10,497
    Accrued taxes                               12,884             25,241
    Accumulated deferred income taxes            4,594              4,162
    Accrued interest                            13,425             14,782
    Other                                        9,551             27,449
                                            ----------         ----------
                                               220,708            260,920
                                            ----------         ----------
Deferred Credits
    Accumulated deferred income taxes          395,909            372,552
    Investment tax credits                      66,845             71,507
    Income tax related regulatory 
      liabilities, net                          10,072             36,106
    Other                                        8,112              9,963
                                            ----------         ----------
                                               480,938            490,128
                                            ----------         ----------

                                            $2,094,746         $2,099,156
                                            ==========         ==========










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

                                     SWEPCO
                                     2-114
<PAGE>
SWEPCO
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHWESTERN ELECTRIC POWER COMPANY
-----------------------------------------------------------------------------
                                             For the Years Ended December 31,
                                            ---------------------------------
                                               1997        1996        1995
                                            ---------   ---------   ---------
                                                       (thousands)
OPERATING ACTIVITIES
    Net Income                                $92,902     $66,556    $117,114
    Non-cash Items Included in Net Income
        Depreciation and amortization         100,015     101,204      93,624
        Deferred income taxes and
          investment tax credits               (6,907)     (1,881)      1,501
        Charges for investments and assets     16,493      29,590          --
        Inventory reserve                       1,150       1,632          --
    Changes in Assets and Liabilities
        Accounts receivable                   (13,367)    (13,512)       (284)
        Fuel inventory                         29,360      17,501     (11,575)
        Accounts payable                       24,374      12,253      (3,303)
        Payables to affiliates                 (5,125)     16,234      11,735
        Accrued taxes                         (12,357)        (27)     17,844
        Other current liabilities             (17,699)     (3,076)     (5,161)
        Fuel recovery                          (3,893)    (18,043)     (3,277)
        Other                                  (4,458)     (8,506)     (4,706)
                                            ---------   ---------   ---------
                                              200,488     199,925     213,512
                                            ---------   ---------   ---------
INVESTING ACTIVITIES
    Construction expenditures                (108,126)    (92,737)   (105,193)
    Other                                      (4,545)     (7,510)     (9,437)
                                            ---------   ---------   ---------
                                             (112,671)   (100,247)   (114,630)
                                            ---------   ---------   ---------
FINANCING ACTIVITIES
    Proceeds from sale of long-term debt           --      79,346          --
    Reacquisition of long-term debt                --     (83,334)         --
    Redemption of preferred stock             (16,043)     (1,236)     (1,198)
    Proceeds from issuance of Trust
      Preferred Securities                    106,231          --          --
    Retirement of long-term debt              (52,600)     (3,901)     (3,600)
    Change in advances from affiliates        (32,320)    (43,734)     19,360
    Payment of dividends                      (92,666)    (46,642)   (113,038)
                                            ---------   ---------   ---------
                                              (87,398)    (99,501)    (98,476)
                                            ---------   ---------   ---------

Net Change in Cash and Cash Equivalents           419         177         406
Cash and Cash Equivalents at Beginning
  of Year                                       1,879       1,702       1,296
                                            ---------   ---------   ---------
Cash and Cash Equivalents at End of Year       $2,298      $1,879      $1,702
                                            =========   =========   =========

SUPPLEMENTARY INFORMATION
    Interest paid less amounts
      capitalized (includes distributions
      on Trust Preferred Securities)          $49,847     $53,231     $46,243
                                            =========   =========   =========
    Income taxes paid                         $57,715     $35,549     $28,079
                                            =========   =========   =========



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

                                     SWEPCO
                                     2-115
<PAGE>
SWEPCO
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SOUTHWESTERN ELECTRIC POWER COMPANY
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
COMMON STOCK EQUITY                                       $704,710     $702,461
                                                        ----------   ----------

PREFERRED STOCK
Cumulative $100 Par Value, Authorized 1,860,000 shares
                                       Current
                      Number of Shares Redemption
Series                Outstanding      Price
------------------------------------------------------
Not Subject to Mandatory Redemption
  5.00%                 37,749         $109.00               3,775        7,500
  4.65%                  1,908         $102.75                 191        2,500
  4.28%                  7,386         $103.90                 739        6,000
Premium                                                          4           32
                                                        ----------   ----------
                                                             4,709       16,032
                                                        ----------   ----------
Subject to Mandatory Redemption
  6.95%                274,010         $102.32              27,401       34,000
Issuance Expense                                              (271)        (336)
Amount to be redeemed within one year                       (1,200)      (1,200)
                                                        ----------   ----------
                                                            25,930       32,464
                                                        ----------   ----------
                                                            30,639       48,496
                                                        ----------   ----------
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           --
                                                        ----------   ----------

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)                                       6,230        6,375
    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
Bank Loan, Variable Rate, due June 15, 2000                     --       50,000
Railcar lease obligations                                    7,759       10,242
Unamortized discount and premium                               955          903
Unamortized costs of reacquired debt                       (39,873)     (42,844)
Amount to be redeemed within one year                       (2,355)      (2,560)
                                                        ----------   ----------
                                                           547,751      597,151
                                                        ----------   ----------
TOTAL CAPITALIZATION                                    $1,393,100   $1,348,108
                                                        ==========   ==========

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

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

                                     SWEPCO
                                     2-116
<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.


                                     SWEPCO
                                     2-117
<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, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules 
and is not a required part of the basic financial statements. This exhibit has 
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.



Arthur Andersen LLP

Dallas, Texas
February 16, 1998


                                     SWEPCO
                                     2-118
<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, 1997.




Michael D. Smith                                             R. Russell Davis
President - SWEPCO                                           Controller - SWEPCO


                                     SWEPCO
                                     2-119
<PAGE>



                                                      


                          WEST TEXAS UTILITIES COMPANY













                                      WTU
                                     2-120
<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.

                       ---------------------------------------------------------
                          1997       1996 (1)     1995       1994       1993 (2)
                                       (thousands, except ratios)
INCOME STATEMENT DATA
Revenues                $397,778    $377,057    $319,835    $342,991    $345,445
Income before cumulative 
 effect of changes in      
 changes in accounting
 principles               21,461      16,571      34,530      37,366      26,517
Net income for common     22,402      16,307      34,266      36,914      29,329
 stock
BALANCE SHEET DATA
Assets                   802,148     810,379     815,614     771,977     754,443
Long-term obligations    278,640     275,070     273,245     210,047     176,882
Capitalization ratios
   Common stock equity       48%         48%         49%         56%         59%
   Preferred stock           --            1           1           1           1
   Long-term debt             52          51          50          43          40

Ratio of earnings to        2.21        2.05        2.63        3.37        2.79
 fixed charges
 (SEC Method) (3)

(1)  Earnings in 1996 reflect a $10.9 million one-time charge, net of tax,
     associated with certain investments for plant sites, engineering studies
     and lignite reserves.
(2)  Earnings in 1993 were significantly affected by restructuring charges and
     the $4 million cumulative effect of changes in accounting principles.
(3)  Ratio of earnings to fixed charges for 1993 was calculated before 
     cumulative effect of change in accounting principles.


                                      WTU
                                     2-121
<PAGE>


WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS

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


COMPARISON OF THE YEAR 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 taxable 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.


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995

         Net income for common stock decreased 52% during 1996 to $16.3 million
from $34.2 million in 1995. The decrease resulted primarily from a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of $10.9 million, net of tax.

         Electric operating revenues increased $57.2 million in 1996 when
compared to the prior year. The increase was attributable primarily to an
increase in fuel revenues as well as a one-time $21 million base rate refund

                                      WTU
                                     2-122
<PAGE>

made pursuant to the WTU 1995 Stipulation and Agreement. Also contributing to
the variance was a $14.3 million increase in non-fuel revenues resulting from a
5% increase in KWH sales due to additional weather-related demand as well as
increased customer demand. Partially offsetting this increase in non-fuel
revenues was a $6.0 million reduction reflecting the lower rates implemented in
accordance with the WTU 1995 Stipulation and Agreement.

         Fuel expense was $132.0 million in 1996, which represented an increase
of 7% when compared to 1995 fuel expense of $123.7 million. The increase was
primarily attributable to a 10% increase in average unit fuel costs from $1.83
per MMbtu in 1995 to $2.02 per MMbtu in 1996 due largely to higher spot gas
market prices. The increase was partially offset by lower coal costs resulting
from resolution of coal transportation litigation as well as purchases of lower
priced spot market coal. Purchased power expenses increased approximately $20.8
million during 1996 when compared with 1995, primarily as a result of increased
economy energy purchases at a higher cost per MWH.

         Other operating expense increased $3.3 million during 1996 when
compared to 1995. The increase was primarily due to increased expenses
associated with regulatory activity, increased employee-related expenses,
increased expenses associated with accounts receivable factoring due to higher
revenues, and the amortization of a regulatory asset for rate case expenses in
accordance with the WTU 1995 Stipulation and Agreement. Depreciation and
amortization expense increased $6.5 million during 1996 when compared to the
prior year due primarily to the accelerated amortization of Oklaunion deferred
costs and amortization of a regulatory asset for restructuring costs, both in
accordance with the WTU 1995 Stipulation and Agreement. Also contributing to the
increase were additions to depreciable property. Income taxes increased
approximately $9.8 million when compared with 1995 due primarily to a reduction
of $6.9 million of deferred income taxes in accordance with the WTU 1995
Stipulation and Agreement recorded in 1995 and prior year tax adjustments
recorded in 1996. During 1996, the CSW System began implementation of
organizational and executive changes. Although implementation will not be
complete until early 1997, WTU recorded its portion of the estimated cost of the
implementation, $1.8 million, during 1996. In 1995, WTU established a $13.2
million regulatory asset for previously expensed restructuring costs in
accordance with the WTU 1995 Stipulation and Agreement

         Other income and deductions decreased $9.8 million in 1996 due
primarily to a one-time charge associated with certain investments for plant
sites, engineering studies and lignite reserves of $10.9 million, net of tax.

                                      WTU
                                     2-123
<PAGE>
WTU
STATEMENTS OF INCOME
WEST TEXAS UTILITIES COMPANY
---------------------------------------------------------------------------
                                          For the Years Ended December 31,
                                        -----------------------------------
                                           1997         1996         1995
                                        ---------    ---------    ---------
                                                    (thousands)
Electric Operating Revenues
    Residential                          $124,578     $124,214     $114,269
    Commercial                             73,196       72,422       66,363
    Industrial                             56,928       52,375       51,443
    Sales for resale                       88,814       88,921       73,905
    Other                                  54,262       39,125       13,855
                                        ---------    ---------    ---------
                                          397,778      377,057      319,835
                                        ---------    ---------    ---------
Operating Expenses and Taxes
    Fuel                                  119,158      132,034      123,723
    Purchased power                        50,493       31,803       10,998
    Other operating                        93,796       67,060       63,727
    Restructuring charges                      --        1,809      (13,582)
    Maintenance                            14,013       14,122       13,931
    Depreciation and amortization          41,592       39,755       33,290
    Taxes, other than income               24,669       23,402       22,720
    Income taxes                            9,490       15,338        5,542
                                        ---------    ---------    ---------
                                          353,211      325,323      260,349
                                        ---------    ---------    ---------
Operating Income                           44,567       51,734       59,486
                                        ---------    ---------    ---------

Other Income and Deductions
    Charges for investments and
      plant development costs                  --      (14,949)          --
    Allowance for equity funds
      used during construction                227          423          378
    Other                                     766          210        1,101
    Non-operating income taxes                471        4,394       (1,564)
                                        ---------    ---------    ---------
                                            1,464       (9,922)         (85)
                                        ---------    ---------    ---------
Income Before Interest Charges             46,031       41,812       59,401
                                        ---------    ---------    ---------

Interest Charges
    Interest on long-term debt             20,352       21,169       21,413
    Interest on short-term debt
      and other                             4,911        4,925        4,111
    Allowance for borrowed funds
      used during construction               (693)        (853)        (653)
                                        ---------    ---------    ---------
                                           24,570       25,241       24,871
                                        ---------    ---------    ---------

Net Income                                 21,461       16,571       34,530
    Less: Preferred stock dividends           144          264          264
    Gain on Reaquired Preferred Stock       1,085           --           --
                                        ---------    ---------    ---------
Net Income for Common Stock               $22,402      $16,307      $34,266
                                        =========    =========    =========











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

                                      WTU
                                     2-124
<PAGE>
WTU
STATEMENTS OF RETAINED EARNINGS
WEST TEXAS UTILITIES COMPANY
-----------------------------------------------------------------------------
                                              For the Years Ended December 31,
                                               ------------------------------
                                                 1997       1996       1995
                                               --------   --------   --------
                                                         (thousands)

Retained Earnings at Beginning of Year         $123,077   $125,770   $132,504
    Net income for common stock                  22,402     16,307     34,266
    Deduct:  Common stock dividends              26,000     19,000     41,000
                                               --------   --------   --------
Retained Earnings at End of Year               $119,479   $123,077   $125,770
                                               ========   ========   ========









































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

                                      WTU
                                     2-125
<PAGE>
WTU
BALANCE SHEETS
WEST TEXAS UTILITIES COMPANY
-------------------------------------------------------------------------------
                                                           As of December 31,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
                                                              (thousands)
ASSETS

  Electric Utility Plant
    Production                                            $417,849     $417,467
    Transmission                                           208,905      200,688
    Distribution                                           363,911      347,328
    General                                                104,026       92,622
    Construction work in progress                           14,154       30,036
                                                        ----------   ----------
                                                         1,108,845    1,088,141
  Less - Accumulated depreciation                          441,281      414,777
                                                        ----------   ----------
                                                           667,564      673,364
                                                        ----------   ----------
Current Assets
    Cash                                                       811          664
    Receivables from affiliates                             19,802           --
    Accounts receivable                                     10,570       24,123
    Materials and supplies, at average cost                 14,246       15,966
    Fuel inventory                                          12,471       16,674
    Accumulated deferred income taxes                           --        1,079
    Under-recovered fuel costs                              11,968        8,961
    Prepayments and other                                    4,006        1,331
                                                        ----------   ----------
                                                            73,874       68,798
                                                        ----------   ----------
Deferred Charges and Other Assets
    Deferred Oklaunion costs                                18,637       22,365
    Restructuring costs                                      8,966       10,854
    Other                                                   33,107       34,998
                                                        ----------   ----------
                                                            60,710       68,217
                                                        ----------   ----------

                                                          $802,148     $810,379
                                                        ==========   ==========


















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

                                      WTU
                                     2-126
<PAGE>
WTU
BALANCE SHEETS
WEST TEXAS UTILITIES COMPANY
---------------------------------------------------------------------
                                                As of December 31,
                                            -------------------------
                                              1997             1996
                                            --------         --------
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                        119,479          123,077
                                            --------         --------
        Total Common Stock Equity            258,929  48%     262,527  48%
                                            -------- ----    -------- ----

    Preferred stock                            2,483  --%       6,291   1%
    Long-term debt                           278,640  52%     275,070  51%
                                            -------- ----    -------- ----
        Total Capitalization                 540,052 100%     543,888 100%
                                            -------- ----    -------- ----

Current Liabilities
    Advances from affiliates                      --           14,833
    Payables to affiliates                    21,569           13,578
    Accounts payable                          15,419           19,669
    Accrued taxes                             11,375           13,463
    Accumulated deferred income taxes            203               --
    Accrued interest                           4,525            5,403
    Other                                      3,859            4,124
                                            --------         --------
                                              56,950           71,070
                                            --------         --------
Deferred Credits
    Accumulated deferred income taxes        149,346          144,146
    Investment tax credits                    27,918           29,239
    Income tax related regulatory 
      liabilities, net                         9,482           16,918
    Other                                     18,400            5,118
                                            --------         --------
                                             205,146          195,421
                                            --------         --------

                                            $802,148         $810,379
                                            ========         ========


















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

                                      WTU
                                     2-127
<PAGE>
WTU
STATEMENTS OF CASH FLOWS
WEST TEXAS UTILITIES COMPANY
------------------------------------------------------------------------------
                                               For the Years Ended December 31,
                                              --------------------------------
                                                1997        1996        1995
                                              --------   ---------   ---------
                                                        (thousands)
OPERATING ACTIVITIES
    Net Income                                 $21,461     $16,571     $34,530
    Non-cash Items Included in Net Income
        Depreciation and amortization           43,138      41,342      34,382
        Deferred income taxes and investment
          tax credits                           (2,275)      4,397         650
        Charges for investments and assets       5,296      14,905          --
        Inventory Reserve                        1,498         809          --
        Regulatory asset established for
          previously incurred restructuring
          charges                                   --          --     (13,213)
    Changes in Assets and Liabilities
        Accounts receivable                     13,553       4,800      (5,758)
        Fuel inventory                           4,203      (2,848)      1,845
        Accounts payable                        (4,182)        584      (4,922)
        Payables to affiliates                   7,991       5,334       3,697
        Accrued taxes                           (2,088)        281       5,730
        Fuel recovery                           (3,007)    (11,917)      2,474
        Refunds due customers                       --      (1,811)      1,812
        Other deferred credits                  13,284      (5,482)     (1,039)
        Other                                   (3,626)      3,798      (6,848)
                                              --------   ---------   ---------
                                                95,246      70,763      53,340
                                              --------   ---------   ---------
INVESTING ACTIVITIES
    Construction expenditures                  (31,817)    (42,453)    (44,076)
    Other                                          261      (1,795)     (2,517)
                                              --------   ---------   ---------
                                               (31,556)    (44,248)    (46,593)
                                              --------   ---------   ---------
FINANCING ACTIVITIES
    Proceeds from issuance of
      long-term debt                                --      43,256     118,376
    Reacquisition of long-term debt                 --     (45,639)    (59,082)
    Redemption of preferred stock               (2,724)         --          --
    Payment of dividends                       (26,184)    (19,198)    (41,330)
    Change in advances from affiliates         (14,833)     (4,987)    (26,495)
                                              --------   ---------   ---------
                                               (43,741)    (26,568)     (8,531)
                                              --------   ---------   ---------

Net Change in Cash and Cash Equivalents         19,949         (53)     (1,784)
Cash and Cash Equivalents at Beginning
  of Year                                          664         717       2,501
                                              --------   ---------   ---------
Cash and Cash Equivalents at End of Year       $20,613        $664        $717
                                              ========   =========   =========

SUPPLEMENTARY INFORMATION
    Interest paid less amounts
      capitalized                              $19,659     $20,248     $20,496
                                              ========   =========   =========
    Income taxes paid                          $15,710      $6,295      $8,399
                                              ========   =========   =========





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

                                      WTU
                                     2-128
<PAGE>
WTU
Statements of Capitalization
West Texas Utilities Company
------------------------------------------------------------------------------
                                                          As of December 31,
                                                       -----------------------
                                                         1997           1996
                                                       --------       --------
                                                             (thousands)
COMMON STOCK EQUITY                                    $258,929       $262,527
                                                       --------       --------

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

  4.40%            23,675           $107.00               2,368          6,000
Premium                                                     115            291
                                                       --------       --------
                                                          2,483          6,291
                                                       --------       --------


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                                       (960)        (1,128)
Unamortized costs of reacquired debt                    (24,710)       (28,112)
                                                       --------       --------
                                                        278,640        275,070
                                                       --------       --------

TOTAL CAPITALIZATION                                   $540,052       $543,888
                                                       ========       ========

















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

                                      WTU
                                     2-129

<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.






                                      WTU
                                     2-130
<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, 1997
and 1996, and the related statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in 
conformity with generally accepted accounting principles.

     Our audits were made for the purpose of forming an opinion on the basic 
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules 
and is not a required part of the basic financial statements. This exhibit has 
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

Arthur Andersen LLP

Dallas, Texas
February 16, 1998





                                      WTU
                                     2-131
<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, 1997.

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





                                      WTU
                                     2-132
<PAGE>

                                                     

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

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



                                     2-133
<PAGE>
PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.

         CSW has filed with the SEC its Joint Proxy Statement relating to its
1998 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 CSW MEETING - ADDITIONAL MATTERS of the Joint 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.

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

CPL

JOHN F. BRIMBERRY                         AGE - 65                     1995
Chief Executive Officer Professional Insurance Agents, Inc., 
Victoria, Texas.

E. R. BROOKS                              AGE - 60                     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 - 50                     1996
Senior Vice President of CSW since 1996.  President and CEO of WTU 
from 1992 to 1996.

RUBEN M. GARCIA                           AGE - 66                     1981
President and Chief Executive Officer of Modern Construction Inc. 
and Modern Machine Shop, Inc., Laredo, Texas.

ALPHONSO R. JACKSON                       AGE - 51                     1998
President of CSW-Texas since 1998.  Vice President of CSW Energy, 
Inc., from 1996 to 1997.  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.

ROBERT A. McALLEN                         AGE - 63                     1983
Robert A. McAllen, Insurance Agency, Weslaco, Texas.

PETE MORALES, JR.                         AGE - 57                     1990
President of Morales Feed Lots, Inc., Devine, Texas.

                                      3-1
<PAGE>
      Name, Age, Principal                                             Year
  Occupation, Business Experience                                   First Became
     and Other Directorships                                          Director
--------------------------------------------------------------------------------

H. LEE RICHARDS                           AGE - 64                     1987
Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas.

J. GONZALO SANDOVAL                       AGE - 49                     1992
President and General Manager of CPL since February 1998.  General 
Manager of CPL since 1996.  Vice President, Operations and 
Engineering of CPL from 1993 to 1996.  Vice President, Regional 
Operations of CPL from 1992 to 1993.

GERALD E. VAUGHN                          AGE - 55                     1993
Vice President, Nuclear of CSW Services since 1994.  Vice 
President, Nuclear Affairs of CPL from 1993 to 1994.  Vice 
President for Shearon Harris Nuclear Plant from 1992 to 1993.  
Chairman for the STPNOC since its formation in September 1997.

       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 1998 Annual
Meeting of Stockholders. CPL's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on April 17, 1998. 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 - 60                     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 - 53                     1996
President of PSO since 1996.  Executive Vice President, Operations 
and Engineering of WTU from 1995 to 1996.  Executive Vice President 
of WTU from 1993 to 1995.  Vice President, Corporate Services of 
CSW Services from 1991 to 1993.

HARRY A. CLARKE                           AGE - 69                     1972
General Partner and President of HAC Investments, Afton, Oklahoma.

GLENN FILES                               AGE - 50                     1996
Senior Vice President of CSW since 1996.  President and CEO of WTU
from 1992 to 1996.

PAUL K. LACKEY, JR.                       AGE - 54                     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. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma.

                                      3-2
<PAGE>
      Name, Age, Principal                                             Year
  Occupation, Business Experience                                   First Became
     and Other Directorships                                          Director
--------------------------------------------------------------------------------

PAULA MARSHALL-CHAPMAN                    AGE - 44                     1991
Chief Executive Officer of Bama Companies, a baked goods produce 
company, Tulsa, Oklahoma.

WILLIAM R. McKAMEY                        AGE - 51                     1993
General Manager of PSO since 1996.  Vice President, Marketing 
and Business Development of PSO from 1993 to 1996.  Director of 
Marketing and Business Development of CSW from 1992 to 1993.

DR. ROBERT B. TAYLOR, JR.                 AGE - 69                     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 1998 Annual
Meeting of Stockholders. PSO's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on April 22, 1998. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.


SWEPCO

E. R. BROOKS                              AGE - 60                     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 - 60                     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.

GLENN FILES                               AGE - 50                     1996
Senior Vice President of CSW since 1996.  President and CEO of WTU 
from 1992 to 1996.

DR. FREDERICK E. JOYCE                    AGE - 63                     1990
President of Chappell-Joyce Pathology Association, P.A., Texarkana, 
Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, 
Texas.  Director of State First National Bank, Texarkana, Arkansas.  
Director of First Commercial Corporation, Little Rock, Arkansas.

JOHN M. LEWIS                             AGE - 58                     1997
Chairman and Chief Executive Officer of The Bank of Fayetteville, 
Fayetteville, Arkansas.

                                      3-3
<PAGE>
      Name, Age, Principal                                             Year
  Occupation, Business Experience                                   First Became
     and Other Directorships                                          Director
--------------------------------------------------------------------------------

KAREN C. MARTIN                           AGE - 37                     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.  Director of 
Audits at SWEPCO from 1992 to 1993.

WILLIAM C. PEATROSS                       AGE - 54                     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 - 58                     1996
Vice President and Office Manager for Sarpy Medical Clinic; 
Shreveport, Louisiana.

MICHAEL D. SMITH                          AGE - 46                     1996
President of SWEPCO since 1996.  Vice President of Mergers and 
Acquisitions at CSW from 1995 to 1996.  Vice President of CSW 
Corporate Services from 1993 to 1995.  Controller of CSW from 
1990 to 1993.


         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
1998 Annual Meeting of Stockholders. SWEPCO's 1998 Annual Meeting of
Stockholders is presently scheduled to be held on April 8, 1998. 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 - 60                     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 - 49                     1991
President and General Manager of WTU since 1998.  General Manager 
of WTU since 1996.  Vice President, Marketing and Business 
Development of WTU from 1991 to 1996.

GLENN FILES                               AGE - 50                     1996
Senior Vice President of CSW since 1996.  President and CEO of WTU 
from 1992 to 1996.

ALPHONSO R. JACKSON                       AGE - 51                     1998
President of CSW-Texas since 1998.  Vice President of CSW Energy, 
Inc., from 1996 to 1997.  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.

                                      3-4
<PAGE>
      Name, Age, Principal                                             Year
  Occupation, Business Experience                                   First Became
     and Other Directorships                                          Director
--------------------------------------------------------------------------------

TOMMY MORRIS                              AGE - 63                     1976
President of The Tommy Morris Agency, an independent insurance 
and investment agency, Abilene, Texas.

DIAN G. OWEN                              AGE - 58                     1994
Corporate Executive/Founder of Owen Healthcare, Inc., hospital 
pharmacy management company services, Abilene, Texas.

JAMES M. PARKER                           AGE - 67                     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 1998 Annual
Meeting of Stockholders. WTU's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on March 31, 1998. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.


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

U.S. ELECTRIC OPERATING COMPANIES
WENDY G. HARGUS                           AGE - 40                     1996 
Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since 
1996. Controller of CSW from 1993 to 1996. Director of Strategic
Planning during a portion of 1993 at CSW and Director of Investor 
Relations at CSW from 1990 to 1993.

R. RUSSELL DAVIS                          AGE - 41                     1994
Controller of CPL, WTU, SWEPCO and CSW Services since 1994.  
Controller of PSO since 1993.  Assistant Controller of CSW from 
1992 to 1993. 

CPL
BRENDA I. SNIDER                          AGE - 44                     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.  Internal Business Consultant of Business 
Development at CPL from 1991 to 1994. 


                                      3-5
<PAGE>
                                                                   Year First
      Name, Age, Principal                                         Elected to
  Occupation, Business Experience                               Present Position
--------------------------------------------------------------------------------

PSO
LINA P. HOLM                              AGE - 57                     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 - 50                     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 - 52                     1992
Corporate Secretary of WTU since 1992.  Previously a senior 
secretary at WTU.


                                      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 CSW MEETING - ADDITIONAL MATTERS of
the Joint Proxy Statement.

         The following table sets forth the aggregate cash and other
compensation for services rendered for the fiscal years of 1997, 1996 and 1995
for 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. For additional information regarding the restructuring, see PART
II-MD&A.

U.S. ELECTRIC OPERATING COMPANIES
<TABLE>
<CAPTION>

                                        SUMMARY COMPENSATION TABLE

                                                                     LONG TERM COMPENSATION
                                                                ---------------------------------
                                 ANNUAL COMPENSATION                   AWARDS             PAYOUTS
                            ---------------------------------   ------------------------  -------
                                                                                 CSW
                                                       Other    CSW          Securities
                                                       Annual   Restricted     Underlying           All Other
     Name and                                          Compen-  Stock         Options/     LTIP     Compen-
 Principal Position                Salary    Bonus     sation   Award(s)         SARs      Payouts  sation
   At Registrant            YEAR     ($)    ($)(1)     ($)(2)   ($)(1)(3)        (#)        ($)     ($)(4)
-------------------------------------------------------------------------------------------------------------
<S>                        <C>    <C>      <C>       <C>        <C>            <C>          <C>     <C> 
Glenn Files, Senior         1997   374,999  143,099    8,534          --        31,000        --     23,757
Vice President of CSW       1996   331,135   44,860   66,415     153,750            --        --     23,992
Electric Operations (2,5)   1995   266,223   85,048   19,144          --            --        --     23,117

Richard H. Bremer,          1997   307,462   99,993    4,648          --        26,000        --     21,357
President of CSW Energy     1996   305,910  144,404   73,711     153,750            --        --     21,742
Services business unit      1995   298,372   89,358   14,691          --            --        --     21,706
(2,5)

Robert L. Zemanek,          1997   283,250   89,279   10,272          --        24,000        --     23,757
President of CSW Energy     1996   283,250  176,863    6,500     153,750            --        --     23,992
Delivery business unit (5)  1995   276,270   91,436    9,192          --            --        --     23,117

Richard P. Verret,          1997   251,230   83,390    2,083          --        21,000        --      7,953
President of CSW            1996   236,154   84,788    6,055      89,688            --        --      7,590
Production (5)

M. Bruce Evans              1997   208,000   65,780      882          --        14,000        --      5,520
President of CPL (2,5)      1996   208,000   91,376   70,783      89,688            --        --      4,500

T. D. Churchwell,           1997   192,500   53,672    2,167          --        13,000        --      6,398
President of PSO (2,5)      1996   192,500   24,097   79,730      38,438            --        --      5,340
                            1995   180,400   40,388    9,206          --            --        --      4,500

Michael D. Smith,           1997   190,923   64,306      945          --        13,000        --      6,419
President of SWEPCO (2,5)   1996   184,269   64,050  115,322      38,438            --        --      5,340

Floyd W. Nickerson,         1997   160,769   40,293    1,806          --        11,000        --      6,661
President of WTU (2,5)      1996   147,692   36,384   69,665      38,438            --        --      5,270

                                      3-7
<PAGE>



(1)  Amounts in this column 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.

               1996 Relocation Reimbursements
--------------------------------------------------------------

Glenn Files                                           $25,662
Richard H. Bremer                                      34,117
M. Bruce Evans                                         32,537
T.D. Churchwell                                        38,955
Michael D. Smith                                       63,818
Floyd W. Nickerson                                     37,416


(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 all have four-year vesting periods with 25%
     vesting on the first, second, third and fourth anniversary dates of the
     award. Upon vesting, CSW Shares 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 table represents the
     market value of the shares at the date of grant. As of December 31, 1997,
     the aggregate restricted stock holdings of each of the Named Executive
     Officers are presented in the following table.

                          Restricted Stock Held     Market Value at
Name                      at December 31, 1997     December 31, 1997
--------------------------------------------------------------------

Glenn Files                       4,500                $121,781
Richard H. Bremer                 4,500                 121,781
Robert L. Zemanek                 4,500                 121,781
Richard P. Verret                 2,625                  71,039
M. Bruce Evans                    2,625                  71,039
T. D. Churchwell                  1,125                  30,445
Michael D. Smith                  1,125                  30,445
Floyd W. Nickerson                1,125                  30,445

(4)  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 $15,803 per
     participant for 1997, $16,402 for 1996 and $16,367 for 1995. In 1997, 1996
     and 1995, Messrs. Bremer, Files and Zemanek participated.

(5)  System Affiliations.

     In the first quarter of 1998, the positions of President and General
     Manager at both CPL and WTU were combined into one. These position's were
     assumed by J. Gonzalo Sandoval for CPL and Paul J. Brower for WTU. Messrs.
     Evans and Nickerson assumed other positions within the CSW System.

                                      3-8
<PAGE>
     Messrs. Files, Bremer, Zemanek and Verret assumed policy making functions
     for each of the U.S. Electric Operating Companies in 1996. Messrs. Evans,
     Smith and Nickerson assumed policy-making positions at the U.S. Electric
     Operating Companies in 1996.

     Messrs. Verret, Evans, Smith and Nickerson received no compensation from
     any of the U.S. Electric Operating Companies in 1995.
</TABLE>

OPTION/SAR GRANTS

         Shown below is information on grants of stock options made in 1997
pursuant to the CSW stock option plan to the Named Executive Officers. No stock
appreciation rights were granted in 1997.
<TABLE>
<CAPTION>
                             CSW OPTION/SAR GRANTS IN 1997(1)
                                                                               Potential Realizable
                                                                             Value at Assumed Annual
                                                                                Rates of CSW Stock
                                                                              Price Appreciation for
                        Individual Grants                                        Option Terms(3)
----------------------------------------------------------------------------    ------------------
                    Number of CSW    % of Total
                    Securities       Options/SARs
                    Underlying       Granted to     Exercise or
                    Options/SARs     Employees In   Base Price    Expiration
Name                Granted(#)(2)    Fiscal Year     ($/Sh)          Date        5%($)     10%($)
----                -------------    -----------   ------------  ------------   -------  ---------
<S>                   <C>              <C>           <C>          <C>          <C>      <C>
Glenn Files            31,000           4.5           20.750       5/23/2007    405,248  1,022,768
Richard H. Bremer      26,000           3.8           20.750       5/23/2007    339,885    857,805
Robert L. Zemanek      24,000           3.5           20.750       5/23/2007    313,740    791,820
Richard P. Verret      21,000           3.0           20.750       5/23/2007    274,523    692,843
M. Bruce Evans         14,000           2.0           20.750       5/23/2007    183,015    461,895
T. D. Churchwell       13,000           1.9           20.750       5/23/2007    169,943    428,903
Michael D. Smith       13,000           1.9           20.750       5/23/2007    169,943    428,903
Floyd W. Nickerson     11,000           1.6           20.750       5/23/2007    143,798    362,918

(1)      The stock option plans are administered by the Executive Compensation
         Committee of the Board, which has the authority to determine the
         individuals to whom and the terms upon which option and SAR grants
         shall be made.

(2)      All options were granted on May 23, 1997, and are first exercisable 12
         months after the grant date, with one-third of the shares becoming
         exercisable at that time and with an additional one third of the
         aggregate becoming exercisable on each of the next two anniversary
         dates.

(3)      The annual rates of appreciation of 5% and 10% are specifically
         required by SEC disclosure rules and in no way guarantee that such
         annual rates of appreciation will be achieved by CSW nor should this be
         construed in any way to constitute any representation by CSW that such
         growth will be achieved.
</TABLE>


                                      3-9
<PAGE>

OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

         Shown below is information regarding option/SAR exercises during 1997
and unexercised options/SARs at December 31, 1997 for the Named Executive
Officers.

                     AGGREGATED OPTION/SAR EXERCISES IN 1997
                      AND FISCAL YEAR-END OPTION/SAR VALUES

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

Glenn Files              --           --     23,653/31,000      5,593/195,688
Richard H. Bremer        --           --     28,332/26,000      3,915/164,125
Robert L. Zemanek        --           --     25,430/24,000      6,015/151,500
Richard P. Verret        100        1,081    13,325/21,000     14,889/132,563
M. Bruce Evans           --           --      8,928/14,000       9,810/88,375
T. D. Churchwell         --           --      9,268/13,000       5,763/82,063
Michael D. Smith         --           --      7,779/13,000       2,413/82,063
Floyd W. Nickerson       --           --      4,867/11,000         675/69,438

(1)  Calculated based upon the difference between the closing price of CSW's
     Shares on the New York Stock Exchange on December 31, 1997 ($27.0625 per
     share) and the exercise price per share of the outstanding unexercisable
     and exercisable options ($16.250, $20.750, $24.813 and $29.625, as
     applicable).

LONG-TERM INCENTIVE PLAN-AWARDS IN 1997

         The following table shows information concerning awards made to the
Named Executive Officers during 1997 under the CSW stock option plan.

                                                            Estimated
                                                       Future Payouts under
                   Number of       Performance or   Non-stock Price Based Plans
                   Shares, Units    Other Period    ----------------------------
                   or Other       Until Maturation  Threshold  Target    Maximum
       Name        Rights            or Payout         ($)       ($)       ($)
--------------------------------------------------------------------------------
Glenn Files            --            2 years           --      225,000   337,500
Richard H. Bremer      --            2 years           --      183,546   275,319
Robert L. Zemanek      --            2 years           --      169,950   254,925
Richard P. Verret      --            2 years           --      150,000   225,000
M. Bruce Evans         --            2 years           --       90,667   136,001
T. D. Churchwell       --            2 years           --       63,258    94,887
Michael D. Smith       --            2 years           --       54,740    82,110
Floyd W. Nickerson     --            2 years           --       47,369    71,054


         Payouts of these awards are contingent upon CSW's achieving a specified
level of total stockholder return, relative to the S&P Electric Index, 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 stock option plan contains a
provision accelerating awards upon a change in control of CSW. Except as
provided in the next sentence, if a change in control of CSW occurs, all options
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. Awards which have been outstanding for less than six
months prior to the date the change in control occurs are not subject to
acceleration upon the occurrence of a change of control. The CSW stock option

                                      3-10
<PAGE>
plan 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 qualified Retirement Plan
because of maximum limitations imposed on such plans by the Internal Revenue
Code.

         Through June 30, 1997, the Retirement Plan was structured as a
traditional, defined benefit final average pay plan. Effective, July 1, 1997,
the present value of accrued benefits under the Retirement Plan was converted to
a cash balance.

         Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which pay credits are allocated annually based
on a percentage of the participant's pay. As of July 1, 1997, the definition of
pay for the CSW Cash Balance Plan was expanded to include not only base pay but
also 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 termination date, if earlier). The
following table shows the Applicable Percentage used to determine credits at the
age and years of service indicated.

       Sum of Age plus
       YEARS OF SERVICE                         APPLICABLE PERCENTAGE
           < 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, 1997, the sum of age plus years of service of the 
Named Executive Officers for the cash balance formula are as follows:  Mr. 
Files, 76; Mr. Bremer, 69; Mr. Zemanek, 73; Mr. Verret, 76; Mr. Evans, 60; Mr. 
Churchwell, 72; Mr. Smith, 53; Mr. Nickerson, 58.

         All 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 1997, the interest rate was 6.48%. For 1998, the interest
rate is 6.11%. 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 CSW Cash Balance 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, $272,378; Mr. Bremer, $213,333; Mr. Zemanek,
$243,305; Mr. Verret, $173,626; Mr. Evans, $185,905; Mr. Churchwell; $109,329;
Mr. Smith, $91,560; Mr. Nickerson, $139,609. 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 1997 assuming no future increases plus
bonus at 1997 target level; (3) interest credit at 6.11% for 1998 and future
years; (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 6.11% and the 1983
Group Annuity Mortality Table, which sets forth generally accepted life
expectancies.

                                      3-11
<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, the following
Named Officers have a choice of their accrued benefit using the cash balance
formula or their accrued benefit using the prior pension formula: Mr. Verret and
Mr. Churchwell. 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

         Benefits payable under the prior pension formula are based upon the
participant's years of credited service, 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, 1997,
for the following officers who continue to earn a benefit under the prior
pension formula are: Mr. Verret, 25 and 51, Mr. Churchwell, 19 and 53.

         The registrants have entered into change in control agreements with
certain individuals named in the Summary Compensation Table. The purpose of the
agreements is to assure the objective judgment, and to retain the loyalties of
these key individuals in the event CSW is faced with a potential change in
control. Consummation of the proposed AEP Merger will constitute a change in
control under these agreements, information related to the change in control
agreements is incorporated by reference herein from THE MERGER - CSW LONG-TERM
INCENTIVE PLAN and CHANGE IN CONTROL AGREEMENTS of the Joint Proxy Statement.


                                      3-12
<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 1997 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 1997. No person serving during 1997 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 CSW MEETING ADDITIONAL MATTERS of the Joint 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, 1616 Woodall Rodgers Freeway, Dallas, Texas 
75202-1234.

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, 1997, by each director, the President and Executive Officers of each of the
U.S. Electric Operating Companies. Share amounts shown in this table include
options exercisable within 60 days after December 31, 1997, restricted stock,
CSW Shares credited to thrift plus accounts and all other CSW Shares
beneficially owned by the listed persons.

         Each of the U.S. Electric Operating Companies has one or more series of
preferred stock outstanding. As of December 31, 1997, none of the individuals
listed in the following tables owned any shares of preferred stock of any U.S.
Electric Operating Company.

                                      3-13
<PAGE>
                  BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1997

                                                             CSW Common
CPL                                                          Underlying
                               CSW      Restricted           Immediately
Name                       Common (1)  Stock (2) (3)     Exercisable Options (3)
--------------------------------------------------------------------------------

John F. Brimberry                765          --                   --
E. R. Brooks                 131,529      12,225               65,175
M. Bruce Evans                12,574       2,625                8,928
Glenn Files                   42,269       4,500               23,653
Ruben M. Garcia                   --          --                   --
Robert A. McAllen              1,500          --                   --
Pete Morales, Jr.                 --          --                   --
H. Lee Richards                1,400          --                   --
J. Gonzalo Sandoval           16,850       1,125                6,926
Gerald E. Vaughn               6,023       1,125                1,337
All of the above and other
  officers as a group        223,958      22,725              112,742


PSO
E. R. Brooks                 131,529      12,225               65,175
T. D. Churchwell              12,597       1,125                9,268
Harry A. Clarke                   --          --                   --
Glenn Files                   42,269       4,500               23,653
Paul K. Lackey, Jr.               --          --                   --
Paula Marshall-Chapman            --          --                   --
William R. McKamey            13,554       1,125                3,323
Dr. Robert B. Taylor, Jr.         --          --                   --
All of the above and other
  officers as a group        210,428      20,100              108,142


SWEPCO
E. R. Brooks                 131,529      12,225               65,175
James E. Davison                  --          --                   --
Glenn Files                   42,269       4,500               23,653
Dr. Frederick E. Joyce            --          --                   --
John M. Lewis                     --          --                   --
Karen C. Martin                3,741          --                2,005
William C. Peatross               --          --                   --
Maxine P. Sarpy                  100          --                   --
Michael D. Smith              10,176       1,125                7,779
All of the above and other
officers as a group          198,867      18,975              105,335


WTU
E. R. Brooks                 131,529      12,225               65,175
Paul J. Brower                10,911       1,125                7,145
Glenn Files                   42,269       4,500               23,653
Tommy Morris                   2,000          --                   --
Floyd W. Nickerson             6,403       1,125                4,867
Dian G. Owen                     100          --                   --
James M. Parker                5,000          --                   --
F. L. Stephens                 2,800          --                   --
All of the above and other
  officers as a group        214,142      20,100              107,563

    (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.

                                      3-14
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         CSW
         The information required by ITEM 13 is incorporated herein by reference
from THE CSW MEETING ADDITIONAL MATTERS of the Joint Proxy Statement.

         U.S. ELECTRIC OPERATING COMPANIES
         None.

                                      3-15
<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
         ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
         dated December 22, 1997, reporting SEC approval of CSW's stockholders
         rights plan, as amended.

         CSW AND PSO
         ITEM 5. OTHER EVENTS, dated October 15, 1997, reporting the PSO 1997
         Rate Settlement Agreement.

         CSW, CPL, PSO, SWEPCO AND WTU
         ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
         dated December 22, 1997, reporting the proposed merger between CSW and
         AEP.

                                      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
25, 1998. 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 25, 1998. 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
25, 1998. 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 25, 1998. 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
25, 1998. 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 25, 1998. 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
25, 1998. 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 25, 1998. 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 D. Smith            President and Director
                            (Principal Executive Officer)

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

*E. R. Brooks               Director
*James E. Davison           Director
*Glenn Files                Director
*Dr. Frederick E. Joyce     Director
*John M. Lewis              Director
*Karen C. Martin            General Manager and 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
25, 1998. 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 25, 1998. 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
                 Committee of Certain Members and Southwestern Electric Power
                 Company dated March 18, 1998.

       (3) ARTICLES OF INCORPORATION AND BY-LAWS.

          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.
          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
                 (3), and Articles of Amendment to the Articles of Incorporation
                 (incorporated herein by reference to Exhibit 3.1 to CPL's Form
                 10-Q for the quarterly period ended 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 B-3.2 of CSW's 1996 Form U5S, File No. 1-1443).
          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).

                                      4-7
<PAGE>


          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 March 31, 1997 Form
                 10-Q, 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:

           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 March 31, 1997 Form 10-Q, File No.
                 0-346).
           3     First Supplemental Indenture, dated as of May 1, 1997, between
                 CPL and the Bank of New York, as Trustee (incorporated herein
                 by reference to Exhibit 4.2 of CPL's March 31, 1997 Form 10-Q,
                 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 March 31, 1997 Form
                 10-Q, File No. 0-346).

                                      4-8
<PAGE>
           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 March 31, 1997 Form 10-Q, 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 March 31, 1997 Form 10-Q,
                 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 March 31, 1997 Form 10-Q, 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 March 31, 1997 Form 10-Q,
                 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 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 March 31, 1997 Form
                 10-Q, 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 March 31, 1997 Form 10-Q, 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 March 31, 1997 Form 10-Q,
                 File No. 0-343).
       SWEPCO
           (a)   Indenture dated February 1, 1940, as amended through November
                 1, 1976, of SWEPCO (incorporated herein by reference to Exhibit
                 5.04 in Registration No. 2-60712).

           (b)   Supplemental Indentures to the First Mortgage Indenture:

                                      4-9
<PAGE>
            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 March 31, 1997 Form 10-Q, 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 March 31, 1997
                 Form 10-Q, 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 March 31, 1997
                 Form 10-Q, 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 March 31, 1997 Form 10-Q, 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 March 31, 1997 Form
                 10-Q, File No. 1-3146).
       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.

                                      4-10
<PAGE>

           (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 (incorporated herein by reference to Exhibit 10(b) to
                 CSW's 1990 Form 10-K, File No. 1-1443).
           + 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).
           + 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).

                                      4-11
<PAGE>

              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 Joint Proxy Statement,
                 File No. 1-1443).

       (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, 1997.
           * 2   PSO's Statement re computation of Ratio of Earnings to Fixed 
                 Charges for the five years ended December 31, 1997.
           * 3   SWEPCO's Statement re computation of Ratio of Earnings to
                 Fixed Charges for the five years ended December 31, 1997.
           * 4   WTU's Statement re computation of Ratio of Earnings to Fixed 
                 Charges for the five years ended December 31, 1997.

     * (13)  ANNUAL REPORT TO SECURITY HOLDERS.
             CSW's 1997 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 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.
           CPL
           * 5   Power of Attorney.
           * 6   Power of Attorney.
           * 7   Power of Attorney.
           PSO
           * 8   Power of Attorney.
           * 9   Power of Attorney.
           * 10  Power of Attorney.
           SWEPCO
           * 11  Power of Attorney.
           * 12  Power of Attorney.
           * 13  Power of Attorney.

                                      4-12
<PAGE>


           WTU
           * 14  Power of Attorney.
           * 15  Power of Attorney.
           * 16  Power of Attorney.

       (27)  FINANCIAL DATA SCHEDULES.

          PSO
           * 1 PSO's Financial Data Schedule 



(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.

                                      4-13