CSW

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Central and South West Corporation

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1997 FINANCIAL REPORT

TABLE OF CONTENTS

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

Consolidated Statements of Income 30

Consolidated Statements of Stockholders' Equity 31

Consolidated Balance Sheets 32

Consolidated Statements of Cash Flows 34

Notes to Consolidated Financial Statements 35

Report of Independent Public Accountants 66

Report of Management 69

Glossary of Terms 70

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.

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

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

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
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.

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 are
shown in the table below. 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 results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD LOOKING
INFORMATION).

Estimated
1995 1996 1997 1998 1999 2000
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(millions including AFUDC)

Capital Expenditures $495 $644 $760 $569 $586 $595

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. CSW's estimated embedded cost of long-term debt for 1997
was 7.2%.

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.

The current securities ratings for CSW and each of the U. S. Electric
Operating Companies is presented in the following table, including the
securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO
Capital I and SWEPCO Capital I.
Moody's Duff & Phelps Standard & Poor's
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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
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.

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.

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.

RECENT DEVELOPMENTS AND TRENDS

CSW Strategic Responses
CSW has, from time to time considered, and expects 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 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 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
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 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 CSW believes it is in a
position to compete effectively in a deregulated, more competitive marketplace,
if stranded costs are not recovered from customers, then CSW 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 cannot predict when and if it will be subject to one or more of
these legislative initiatives, nor can it predict the scope or effect of such
legislation on its 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 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 security holders unless CSW receives 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 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 United States 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 CSW's results of operations and financial.

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 CSW's
results of operations and financial condition.

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
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.

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
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 CSW's 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, theprincipal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service. CSW cannot predict the form or effect of any federal or state
electric utility restructuring initiatives at this time. Federal and/or state
electric utility restructuring may cause impairment of significant recorded
assets, material reductions of profit margins, and/or increased costs of
capital. No assurance can be made that such events would not have a material
adverse effect on CSW's results of operations, financial condition or
competitive position (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).

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.

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 (44.0) (43.8) (57.0)
income before tax
Federal income taxes 14.8 14.8 19.3
--------- --------- ---------
Current year impact on net (29.2) (29.0) (37.7)
income
--------- --------- ---------

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 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, CSW could experience, depending on the timing and amount
of any write-off, a material adverse effect on its 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.

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.

1997 Ongoing 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.

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
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.

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
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. CSW believes
the formation of STPNOC is in its best interest.

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
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 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.

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

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. CSW adopted
SFAS No. 125 effective January 1, 1997. Adoption of this standard has not had a
material adverse effect on CSW's results of operations or financial condition.

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.

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
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,
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
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)

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
this decrease was a $7 million increase in maintenance expense due to a
write-down of production and distribution inventories 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 on Income tax Net Income
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
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
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
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
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
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.

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.

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. CSW's annual average consolidated composite rates were
3.4% for the years 1995-1997.

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, management believes it inappropriate to reflect the trust
assets on CSW's 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 NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS, for further information about fuel recovery.

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

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

Accounts Receivable
CSW Credit, 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.

1997 1996
-------- ---------
As of December 31, (millions)
Regulatory Assets
Deferred plant costs (1) $503 $509
Mirror CWIP asset 285 299
Income tax related regulatory
assets, net 329 236
Deferred restructuring and rate
case costs (2) 36 46
Deferred storm costs (3) -- 2
OPEBs 3 3
Demand side management costs 10 15
Under-recovered fuel costs (4) 84 47
Loss on reacquired debt 166 180
Fuel settlement (5) 16 17
Other 8 13
-------- ---------
$1,440 $1,367
Regulatory Liabilities
Refunds due customers $64 $43
Other 1 2
-------- ---------
$65 $45
-------- ---------

(1) $19 in 1997 and $22 in 1996 earning no return, amortized through 2002
(2) $24 in 1997 and $31 in 1996 earning no return, amortized by the end
of 2000; $12 in 1997 and $15 in 1996 earning no return, amortized
through 2002
(3) Item earning no return, amortized by the end of 1997 (4) $15 in 1997
and $3 in 1996 earning no return, amortized over 12 month period,
recalculated semiannually
(5) Item earning no return, amortized by the end of 2006

In accordance with orders of the Texas Commission, CPL and WTU deferred carrying
costs, as well as operating costs, depreciation and tax costs incurred for STP
and Oklaunion, respectively. These deferrals were for the period beginning on
the date when the plants began commercial operation until the date the plants
were included in rate base. CPL is amortizing and recovering these deferred
costs through rates over the life of the plant. WTU began amortizing and
recovering such costs over a seven year period beginning January 1, 1996. 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.

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

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

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
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
Anticipated 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 CSW's 1997 results of
operations, the financial impact on its results of operations for 1996 and for
the year 1997 is shown below.

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 (28.4) (44.0)
tax
Federal income taxes 9.5 14.8
---------- ----------
Impact on net income - all
recorded in 1997 $(18.9) $(29.2)
---------- ----------

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, including certain accounting
provisions, are set forth in the following table.

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 could
experience a material adverse effect on its 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
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 base rate 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.

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 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, management cannot predict the outcome of these
lawsuits.

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 CSW's 1997 results of operations.

1997
Impact
----------
(millions)
Decrease in revenues
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 (10.2)
tax
----------
$(27.4)
----------

The PSO 1997 Rate Settlement Agreement resulted in an adverse effect on
CSW's results of operations for 1997 that will have a continuing impact because
of the rate decrease. However, it reduced significant risks for PSO related to
this regulatory proceeding and should allow PSO's rates to remain competitive
for the foreseeable future.

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 results of
operations or financial condition.

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

SWEPCO Fuel Proceeding
In 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

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

WTU Fuel Proceedings
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.

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-ta 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
CSW is 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 CSW's 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 that may be required for
acquisitions) during 1998. Substantial commitments have been made in connection
with these programs.

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.

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.

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 liability associated with this project is
not expected to have a material adverse effect on CSW's 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
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 1997 1996 1995
------------------------------
(millions)
Included in Operating Expenses
and Taxes
Current (1) $47 $118 $105
Deferred (1) 117 120 1
Deferred ITC (2) (13) (14) (14)
--------- --------- --------
151 224 92
Included in Other Income and
Deductions
Current -- (1) 2
Deferred (6) (39) (4)
--------- --------- --------
(6) (40) (2)
Income Taxes for Discontinued
Operations
(includes $72 resulting from -- 78 13
the gain on the sale
of Transok for 1996)
--------- --------- --------
--------- --------- --------
$145 $262 $103
--------- --------- --------

(1)Approximately $30 million, $49 million and $7 million of CSW's Current
Income Tax Expense was attributable to SEEBOARD U.S.A. and was recognized
as United Kingdom corporation tax expense for 1997, 1996 and 1995,
respectively. In addition, approximately $7 million and $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 RECONCILIATION 1997 1996 1995
--------------------------
($ in millions)
Income before taxes attributable to:
Domestic operations $327 $562 $506
Foreign operations 147 146 13
------- -------- -------
Income before taxes $474 $708 $519

Tax at U.S. statutory rate $166 $248 $182
Differences
Amortization of ITC (13) (14) (14)
Mirror CWIP 5 5 (11)
Non-deductible goodwill
amortization 12 13 --
Tax credit on foreign
operations dividend (3) (18) --
United Kingdom deferred
income tax adjustment (16) -- --
CPL 1995 Agreement -- -- (34)
WTU 1995 Stipulation and
Agreement -- -- (7)
Adjustments (4) 10 (22)
Other (2) 18 9
------- ------- -------
$145 $262 $103
------- ------- -------
Effective tax rate 31% 37% 20%

DEFERRED INCOME TAXES (1) 1997 1996
--------------------
(millions)
Deferred Income Tax Liabilities
Depreciable utility plant $1,920 $1,867
Deferred plant costs 176 178
Mirror CWIP asset 100 105
Income tax related regulatory
assets 211 207
Other 371 307
--------- ---------
2,778 2,664
Deferred Income Tax Assets
Income tax related regulatory (123) (126)
liability
Unamortized ITC (100) (105)
Alternative minimum tax carryforward (27) (83)
Other (76) (99)
--------- ---------
(326) (413)

--------- ---------
Net Accumulated Deferred Income $2,452 $2,251
Taxes
--------- ---------

Net Accumulated Deferred Income
Taxes
Noncurrent $2,432 $2,272
Current 20 (21)
--------- ---------
$2,452 $2,251
--------- ---------

(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.

5. BENEFIT PLANS

Pension Plans
Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory
defined benefit pension plan covering substantially all CSW employees in the
United States. Benefits were based on employees' years of credited service, age
at retirement, and final average annual earnings with an offset for the
participant's primary Social Security benefit. The CSW board of directors
approved an amendment, effective July 1, 1997, which converted the present value
of accrued benefits under the existing pension plan into a cash balance pension
plan. Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which credits are allocated annually based on a
percentage of the participant's pay. The applicable percentage is determined by
age and years of vested service the participant has with CSW as of December 31
of each year.

The 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.

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.

NET PERIODIC PENSION 1997 1996 1995
PLAN COSTS AND 1997 1997 NON- 1996 1996 NON- U.S.
CONTRIBUTIONS CSW U.S. U.S. CSW U.S. U.S. PLAN
PLANS PLAN PLAN PLANS PLAN PLAN ONLY
-------------------------------------------------------
(millions)
Net Periodic Pension
Costs
Service cost $34 $20 $14 $37 $23 $14 $20
Interest cost on
projected benefit
obligation 137 65 72 136 69 67 64
Actual return on
plan assets (245) (163) (82) (184) (110) (74) (117)
Net amortization
and deferral 68 66 2 27 27 -- 44
--------------------- ------------------------- ------
$(6) $(12) $6 $16 $9 $7 $11
--------------------- ------------------------- ------

Pension Plan Contributions $6 $-- $6 $35 $28 $7 $29

APPROXIMATE NUMBER NON-
OF PARTICIPANTS IN CSW U.S. U.S.
PLANS DURING 1997 PLANS PLAN PLAN
-------------------------

Active employees 10,100 7,200 2,900
Retirees 10,200 4,200 6,000
Terminated employees 6,800 2,000 4,800

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 PLAN 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.

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 THE Compensation
PENSION PLAN Plan Return on
Discount Rate Increase 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.

NET PERIODIC POSTRETIREMENT
BENEFIT COSTS 1997 1996 1995
------------------------------
(millions)

Service cost $ 8 $8 $8
Interest cost on APBO 18 19 18
Actual return on plan
assets (22) (7) (8)
Amortization of
transition obligation 9 9 9
Net amortization and
deferral 11 (2) 2
-------- -------- ---------
$24 $27 $29
-------- -------- ---------

RECONCILIATION OF FUNDED
STATUS OF PLAN TO AMOUNTS
RECOGNIZED ON THE BALANCE SHEETS 1997 1996
-------------------
(millions)
APBO
Retirees $158 $163
Other fully eligible participants 24 18
Other active participants 59 55
-------- --------
Total 241 236
Plan assets at fair value (159) (123)
-------- --------
APBO in excess of plan assets 82 113
Unrecognized transition obligation (135) (144)
Unrecognized gain 53 32
-------- --------
Accrued Cost $-- $1
-------- --------

ASSUMPTIONS USED IN THE Return on Tax Rate
ACCOUNTING FOR SFAS NO. 106 Discount Plan for
Rate 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 by approximately $25.2 million and
the aggregate of the service and interest costs components on net postretirement
benefits by approximately $3.6 million.

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 ended December
31, 1997, 1996, and 1995 were $35.6 million, $28.4 million and $27.0 million,
respectively. 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

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.

CARRYING VALUE AND ESTIMATED FAIR VALUE 1997 1996
-------------------
(millions)
Long-term debt
Carrying amount $3,898 $4,024
Fair value 4,052 4,065

Trust Preferred Securities
Carrying amount 335 --
Fair value 344 --

Preferred stock subject to mandatory redemption
Carrying amount 26 33
Fair value 27 34

Long-term debt and preferred stock
due within 12 months
Carrying amount 32 204
Fair value 32 204

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

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.

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.

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

1998 $1 $31
1999 1 195
2000 1 208
2001 1 517
2002 1 181

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.

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.

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

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. 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.

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 sheet as Certain
Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary
trusts holding solely Junior Subordinated Debentures of such Subsidiaries.

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 CapitalI 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.

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 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.

1997 1996 1995
-----------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(thousands) Exercise (thousands) Exercise (thousands) Exercise Price
Price Price

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

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.

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.

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.

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

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.

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 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

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

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.

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

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

GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Financial Report 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.
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
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
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
EPS........................Earnings per share of common stock
ERCOT......................Electric Reliability Council of Texas

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

Abbreviation or Acronym Definition
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, as
amended
HVdc.......................High-voltage direct-current
IBEW.......................International Brotherhood of Electrical Workers
ISO........................Independent system operator
ITC........................Investment tax credit
KW.........................Kilowatt
LIFO.......................Last-in first-out (inventory accounting method)
Louisiana Commission.......Louisiana Public Service Commission
LTIP.......................Long-Term Incentive Plan
MD&A.......................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ.......................Mississippi Department of Environmental Quality
MGP........................Manufactured gas plant or coal gasification plant
Mirror CWIP................Mirror construction work in progress
Mississippi Power..........Mississippi Power Company
MMbtu......................Million Btu
MW.........................Megawatt
MWH........................Megawatt-hour
National Grid..............National Grid Group plc
NEIL.......................Nuclear Electric Insurance Limited
NRC........................Nuclear Regulatory Commission
OASIS......................Open access same time information system
Oklahoma Commission........Corporation Commission of the State of Oklahoma
Oklaunion..................Oklaunion Power Station Unit No. 1
OPEB.......................Other postretirement benefits (other than pension)
PCB........................Polychlorinated biphenyl
PowerShare.................CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP........................Potentially responsible party
PSO........................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement................Joint stipulation agreement reached by PSO and other
parties to settle PSO's rate inquiry
PURA.......................Public Utility Regulatory Act of Texas (including
amendments to the law)
PURPA......................Public Utility Regulatory Policies Act of 1978
RCRA.......................Federal Resource Conservation and Recovery Act of
1976
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
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
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

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

Abbreviation or Acronym Definition
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
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 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
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-obligated,
mandatorily redeemable preferred securities of
subsidiary trusts holding solely Junior Subordinated
Debentures of such Subsidiaries"
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