CSW LOGO

================================================================================

Central and South West Corporation

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

1998 FINANCIAL REPORT

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

March 5, 1999

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

FORWARD-LOOKING INFORMATION
This report made by CSW and certain of its subsidiaries contains forward-looking
statements within the meaning of Section 21E of the Exchange Act. Although CSW
and each of its subsidiaries believe that their expectations are based on
reasonable assumptions, any such statements may be influenced by factors that
could cause actual outcomes and results to be materially different from those
projected. Important factors that could cause actual results to differ
materially from those in the forward-looking statements include, but are not
limited to:
- the impact of general economic changes in the United States and in countries
in which CSW either currently has made or in the future may make
investments,
- the impact of deregulation on the United States electric utility business,
- increased competition and electric utility industry restructuring in the
United States,
- the impact of the proposed AEP Merger including any regulatory conditions
imposed on the merger, the inability to consummate the AEP Merger, or other
merger and acquisition activity including the SWEPCO Plan,
- federal and state regulatory developments and changes in law which may have
a substantial adverse impact on the value of CSW System assets,
- timing and adequacy of rate relief,
- adverse changes in electric load and customer growth,
- climatic changes or unexpected changes in weather patterns,
- changing fuel prices, generating plant and distribution facility
performance,
- decommissioning costs associated with nuclear generating facilities,
- costs associated with any year 2000 computer related failure(s) either
within the CSW System or supplier failures that adversely affect the CSW
System,
- uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries,
- the effects of retail competition in the natural gas and electricity
distribution and supply businesses in the United Kingdom, and
- the timing and success of efforts to develop domestic and international
power projects.

In the non-utility area, the previously mentioned factors apply and also
include, but are not limited to:
- the ability to compete effectively in new areas, including
telecommunications, power marketing and brokering, and other energy related
services, and
- evolving federal and state regulatory legislation and policies that may
adversely affect those industries generally or the CSW System's business in
areas in which it operates.

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

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

OVERVIEW

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

Internally Generated Funds
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, should meet most of the
capital requirements of the CSW System. However, CSW's strategic initiatives,
including expanding CSW's core electric utility and non-utility businesses
through acquisitions or otherwise, may require additional capital from external
sources. For a description of certain restrictions on CSW's ability to raise
capital from external sources, see PROPOSED AEP MERGER. Productive investment of
net funds from operations in excess of capital expenditures and dividend
payments is necessary to enhance the long-term value of CSW for its investors.
CSW is continually evaluating the best use of internally generated funds, which
totaled $564 million, $343 million and $499 million for 1998, 1997 and 1996,
respectively.

Capital Expenditures
The CSW System's need for capital results primarily from its construction
of facilities to provide reliable electric service to its customers. The
historical capital requirements of the CSW System have been primarily for the
construction of electric utility plant. However, current projected capital
expenditures are expected to be primarily for existing transmission and
distribution systems and for various non-utility investments. The U.S. Electric
Operating Companies maintain a continuing construction program, the nature and
extent of which is based upon current and estimated future demands upon the
system. Planned construction expenditures for the U.S. Electric Operating
Companies for the next three years are primarily to improve and expand

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

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

The historical and estimated capital expenditures for the CSW System,
including the U.S. Electric Operating Companies, SEEBOARD and other operations
are shown in the CAPITAL EXPENDITURES table. The amounts include construction
expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and
CSW's other operations, construction expenditures and net equity investments.
The 1996 CSW amount does not include SEEBOARD acquisition expenditures. The
majority of the capital expenditures for the U.S. Electric Operating Companies
for 1996 through 1998 were spent on transmission and distribution facilities. It
is anticipated that the majority of the estimated capital expenditures for 1999
through 2001 will be for transmission and distribution facilities as well. For a
description of certain restrictions on CSW's ability to make capital
expenditures, including through the issuance of common stock, see PROPOSED AEP
MERGER (The table and statements below contain forward-looking information
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).

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

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

Estimated capital expenditures for 1999 - 2001 do not include
expenditures for acquisition-type investments.

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

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

practice, only the historical cost of plant is recoverable from customers. As a
result, cash flows designed to provide recovery of historical plant costs may
not be adequate to replace plant in future years.

Financial Structure, Shelf Registrations and Credit Ratings
As of December 31, 1998, the capitalization ratios of CSW were 46% common
stock equity, 2% preferred stock, 4% Trust Preferred Securities and 48%
long-term debt. CSW is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access
capital markets opportunistically or when required. CSW continually monitors the
capital markets for opportunities to lower its cost of capital through
refinancing activities. The estimated embedded cost of long-term debt for CSW is
7.3%.

CSW can issue common stock, either through the purchase and reissuance of
shares from the open market or original issue shares, to fund its LTIP, stock
option plan, PowerShare plan and Retirement Savings Plan. CSW began funding
these plans through open market purchases on April 1, 1997. CPL has shelf
registration statements on file for the issuance of up to $60 million of FMBs,
up to $75 million of preferred stock, and up to $350 million of Senior Notes.
PSO has a shelf registration statement on file for the issuance of up to $35
million of Senior Notes. For a description of certain restrictions on CSW's
ability to raise capital from external sources, see PROPOSED AEP MERGER.

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

Duff Standard &
Moody's & Phelps Poor's
---------------------------------------
CPL
First mortgage bonds A3 A A
Senior unsecured Baa1 A- A-
Preferred stock Baa1 BBB+ BBB+
Trust preferred (CPL
Capital I) Baa1 BBB+ BBB+
Junior subordinated
deferrable
Interest debentures Baa2 -- --
PSO
First mortgage bonds A1 AA- AA-
Senior unsecured A2 A+ A
Preferred stock a3 A+ A-
Trust preferred (PSO
Capital I) a2 A+ A-
Junior subordinated
deferrable
Interest debentures A3 -- --
SWEPCO
First mortgage bonds Aa3 AA AA-
Senior unsecured A1 AA- A
Preferred stock a1 AA- A-
Trust preferred (SWEPCO
Capital I) aa3 AA- A-
Junior subordinated
deferrable
Interest debentures A2 -- --
WTU
First mortgage bonds A2 A+ A
Senior unsecured A3 -- A-
Preferred stock a3 A BBB+
CSW
Commercial paper P-2 D-2 A-2

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

Long-Term Financing
CSW Services used short-term debt to repay a $60 million variable rate
bank loan due December 1, 2001 in two $30 million installments on January 28,
1998 and April 27, 1998. On April 1, 1998, SWEPCO called the remaining 274,010
shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt
to fund the $28 million redemption cost.

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

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

Short-Term Financing and Accounts Receivable Factoring
The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a system money pool to coordinate short-term borrowings for
certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In
addition, CSW also incurs borrowings for other subsidiaries that are not
included in the money pool. As of December 31, 1998, CSW had revolving credit
facilities totaling $1.0 billion to back up its commercial paper program. At
December 31, 1998, CSW had $811 million outstanding in short-term borrowings.
The maximum amount of short-term borrowings outstanding during the year, which
had a weighted average interest yield for the year of 5.8%, was $1.1 billion
during June 1998.

CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric utility
companies. The sale of accounts receivable provides the U.S. Electric Operating
Companies with cash immediately, thereby reducing working capital needs and
revenue requirements. In addition, CSW Credit's capital structure contains
greater leverage than that of the U.S. Electric Operating Companies, so CSW's
cost of capital is lowered. CSW Credit issues commercial paper to meet its
financing needs. At December 31, 1998, CSW Credit had a $1.0 billion revolving
credit agreement, secured by the assignment of its receivables, to back up its
commercial paper program, which had $749 million outstanding. The maximum amount
of such commercial paper outstanding during the year, which had a weighted
average interest yield of 5.6%, was $1.0 billion during September 1998.

CSW Energy and CSW International
CSW Energy has authority from the SEC to expend up to $250 million for
general development activities related to qualifying facilities and independent
power facilities. CSW Energy may seek specific authority to spend additional
amounts on certain projects subject to limitations contained in the AEP merger
agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion
of CSW's investments and commitments in CSW Energy projects at December 31,
1998.

In January 1997, CSW received authority from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated retained earnings on
EWG or FUCO investments, subject to certain restrictions. This represents a
twofold increase in authority previously granted under the Holding Company Act.
However, the amount of any such expenditures is subject to the terms of the AEP
merger agreement. As of December 31, 1998, CSW had invested an amount equal to
49% of consolidated retained earnings, as defined by Rule 53 of the Holding
Company Act, on EWG and FUCO investments. For a description of certain
restrictions on the ability of CSW and its subsidiaries to make capital
expenditures in respect of qualifying facilities and independent power
facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.

RECENT DEVELOPMENTS AND TRENDS

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

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

Electric industry restructuring and the development of competition in the
generation and sale of electric power requires resolution of several important
issues, including, but not limited to: (i) who will bear the costs of prudent
utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
CSW and the U.S. Electric Operating Companies associated with various federal
and state restructuring proposals aimed at resolving any or all of these issues
will vary depending on many factors, including the proposals' competitive
position and treatment of stranded utility investment, primarily at CPL,
resulting from such requirements. Although the U.S. Electric Operating Companies
believe they are in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers then
the U.S. Electric Operating Companies may be required by existing accounting
standards to recognize potentially significant losses from unrecovered stranded
costs, especially with respect to STP (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See
Regulatory Accounting for additional information.

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

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

EWGs. EWGs are a relatively new category of non-utility wholesale power
producers that are free from most federal and state regulation, including
restrictions under the Holding Company Act. These provisions enable broader
participation in wholesale power markets by reducing regulatory hurdles to such
participation. The Energy Policy Act also allows the FERC, on a case-by-case
basis and with certain restrictions, to order wholesale transmission access and
to order electric utilities to enlarge their transmission systems. A FERC order
requiring a transmitting utility to provide wholesale transmission service must
include provisions generally that permit the utility to recover from the FERC
applicant all of the costs incurred in connection with the transmission services
and any enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale electric power,
have been increasingly competitive since enactment of the Energy Policy Act. The
U.S. Electric Operating Companies must compete in the wholesale energy markets
with other public utilities, cogenerators, qualifying facilities, EWGs and
others for sales of electric power. While CSW believes the Energy Policy Act
will continue to make the wholesale markets more competitive, CSW is unable to
predict how the Energy Policy Act will ultimately impact the U.S. Electric
Operating Companies.

FERC Orders 888 and 889
The FERC issued Order No. 888 in 1996, which is the final comparable open
access transmission service rule. The provisions of FERC Order No. 888 provide
for comparable transmission service between utilities and their transmission
customers by requiring utilities to take transmission service under their open
access tariffs for wholesale sales and purchases and by requiring utilities to
rely on the same transmission information that their transmission customers rely
on to make wholesale purchases and sales.

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

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

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

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

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

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

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

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

In 1998, the Oklahoma Legislature passed Senate Bill 888, which
accelerated the schedule for completion of the remaining studies to October
1999. These studies are to be conducted under the direction of the Joint
Electric Utility Task Force. The Task Force has organized the study effort into
several working groups, which have been directed to evaluate assigned issues.
The Task Force will develop its report to the Legislature based on the work
performed by these working groups. The Task Force's final report will be
provided to the Legislature by October 1, 1999. Management is unable to predict
the outcome of these studies or their ultimate impact on the results of
operations and financial condition of CSW.

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

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

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

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

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

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

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

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

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

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

Also in the last Congress, several bills which provided for the
restructuring and/or deregulating of the electric utility industry were
considered but did not pass. Several similar bills have been introduced as of
February 1999. Management cannot predict the ultimate outcome of any legislative
initiatives.

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

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

In October 1998, PSO received an adverse ruling from a NLRB ALJ on the
union's unfair labor practice charge against PSO. The ALJ upheld PSO's right to
cease collecting union dues through payroll deductions. The ALJ ruled that PSO
did negotiate in good faith, but also PSO's position on some issues was too
harsh, and therefore the December 1996 implementation should be rolled back and
employees made whole. Additionally, the ALJ ruled that PSO had improperly
solicited employees to withdraw from the union. In December 1998, PSO appealed
the ALJ's ruling to the NLRB. The union is an intervenor in the AEP merger
proceedings. PSO continues to negotiate with the union. At this time, management
cannot predict the outcome of this matter. However, management believes that
even in the event of a strike, its operations would continue without a
significant disruption and that a strike would not have a material adverse
effect on its results of operations or financial condition. (The foregoing
statement constitutes a forward-looking statement within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such

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

Impact of Competition and Industry Restructuring Initiatives
CSW believes that compared to other electric utilities, the CSW System is
well positioned to capitalize on the opportunities and challenges of an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity. CSW is unable to predict the ultimate outcome
or impact of competitive forces on the electric utility industry in the United
States, and in the United Kingdom or on the CSW System. As the electricity
markets become more competitive, however, the principal factor determining
success is likely to be price, and to a lesser extent, reliability, availability
of capacity, and customer service. CSW cannot predict the form or effect of any
federal or state electric utility restructuring initiatives at this time.
Federal and/or state electric utility restructuring may cause impairment of
significant recorded assets, material reductions of profit margins, and/or
increased costs of capital. No assurance can be made that such events would not
have a material adverse effect on CSW's results of operations, financial
condition or competitive position. (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).

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

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

RATES AND REGULATORY MATTERS

U.S. ELECTRIC

CPL Rate Review - Docket No 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997 the Texas
Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the
annual retail base rates of CPL by approximately $19 million, or 2.5%, from
CPL's rate level existing prior to May 1996. The Texas Commission also included

a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which
CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be
reduced an additional $13 million on May 1, 1999.

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

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

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

SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. SWEPCO's last rate activity was an $8.2 million rate
decrease, initiated by SWEPCO and approved for its small and large industrial
customers in January 1988. Prior to that SWEPCO's last rate increase was in
1985.

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

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

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

U.K. ELECTRIC

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

PROPOSED AEP MERGER

Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1998, the total market
capitalization of the combined company would have been $28 billion ($15 billion
in equity; $13 billion in debt) and the combined company would have served more
than 4.6 million customers in 11 states and approximately 4 million customers
outside the United States. On May 27, 1998, AEP shareholders approved the
issuance of the additional shares of stock required to complete the merger. On
May 28, 1998, CSW stockholders approved the merger.

Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. At December 22, 1997, AEP would have issued approximately $6.6
billion in stock to CSW stockholders to complete the transaction. At December
31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. CSW plans to continue to pay
dividends on its common stock until the closing of the AEP Merger at
approximately the same times and rates per share as 1998, subject to continuing
evaluation of CSW's financial condition and earnings by the CSW board of
directors.

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

The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces. At the same time, the companies will
continue their commitment to high quality, reliable service. Job reductions
related to the merger are expected to be approximately 1,050 out of a total
domestic workforce of approximately 25,000. The combined company will use a
combination of growth, reduced hiring and attrition to minimize the need for
employee separations. Transition teams of employees from both companies will
make organizational and staffing recommendations.

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

The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from: (i) issuing shares of
common stock other than pursuant to employee benefit plans; (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures; and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted. (The foregoing statements constitute forward-looking statements within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).

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

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

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

Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger, subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net savings merger rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in

other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final orders are conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger. The SEC merger filing is similar to
requests currently before other jurisdictions and outlines the expected combined
company benefits of the merger to AEP and CSW customers and shareholders. On
November 9, 1998, AEP and CSW filed an amendment to the application.

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

United Kingdom
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of the United Kingdom entities. Although the merger of CSW into AEP is not
subject to approval of United Kingdom regulatory authorities, the common
ownership of the United Kingdom entities could be referred by the United Kingdom
Secretary of State for Trade and Industry for an investigation by the United
Kingdom Monopolies and Mergers Commission. CSW is unable to predict the outcome
of any such regulatory proceeding.

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

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

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

See NOTE 16. PROPOSED AEP MERGER.

OTHER MERGER AND ACQUISITION ACTIVITIES

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

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

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

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

OTHER INITIATIVES

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

DIVERSIFIED ELECTRIC

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

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

CSW International
CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently holds investments in the United Kingdom, Mexico and
South America. In the first quarter of 1998, CSW International and its joint
venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired
cogeneration project at Alpek's Petrocel industrial complex in Altamira,
Tamaulipas, Mexico.

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

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

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

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

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

CSW International has a put option which requires that Vale purchase CSW
International's shares, upon CSW International exercising the put, at a minimum
of the purchase price paid for the shares ($80 million). As a result of the put
option arrangement, management has reached a preliminary conclusion that CSW
International's investment carrying amount will not be reduced below the put
option value unless there is deemed to be a permanent impairment. CSW
International views its investment in Vale as a long-term investment strategy
and believes that the investment in Vale continues to have significant long-term
value and is recoverable. Management will continue to closely evaluate the
changes in the Brazilian economy, and its impact on CSW International's
investment in Vale.

As of December 31, 1998, CSW International had invested $110 million in
stock of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the year-end
market value of the shares and foreign exchange rates, the value of the
investment at December 31, 1998 is $66 million. The reduction in the carrying
value of this investment has been reflected in Other Comprehensive Income in
CSW's Consolidated Statements of Stockholder's Equity. Management views its
investment in Chile as a long-term investment strategy. Management will continue
to closely evaluate the changes in the South American economy and its impact on
CSW International's investment in the Chilean electric company.

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

ENERGY SERVICES

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

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

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

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

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

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

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

Other Ventures
The CSW Services Business Ventures group pursues energy-related projects.
Projects for these groups include staffing services for electric utility nuclear
power plants, energy management systems, and electric substation automation
software. In August 1998, the SEC approved the marketing and distribution of
electric bikes, and associated accessories under the TotalEV name.

In late 1997, CSW Energy Services was launched to explore the electric
utility industry's emerging retail supply markets as they were deregulated on a
state-by-state basis. CSW Energy Services began selling retail electric supply
to commercial customers in California and Pennsylvania. In March 1998, CSW
Energy Services signed its first major supply contract in California. In January
1999, CSW Energy Services announced that it was ceasing its business as a retail
electric supplier and that it would assign or terminate its existing electricity
supply contracts to other suppliers.

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

SOUTH TEXAS PROJECT

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

STP unit 2 was removed from service during 1998 for a scheduled refueling
outage. For the year 1998, Unit 1 and Unit 2 operated at net capacity factors of
99.1% and 91.1%, respectively.

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

ENVIRONMENTAL MATTERS

The operations of the CSW System, like those of other utility systems,
generally involve the use and disposal of substances subject to environmental
laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions regardless of fault or the legality of past disposal activities. PRPs
include owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws. Legally, any
one PRP can be held responsible for the entire cost of a cleanup. Usually,
however, cleanup costs are allocated among PRPs.

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

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

At the Kyoto Conference on Global Warming held in December 1997, U.S.
representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
Companies could be affected if this treaty is approved by the United States
Congress in its present form. The impact, if any, on CSW cannot be determined
because most of the greenhouse gas emission reduction would come from coal
generation that would have to be switched to natural gas or retired. At December
31, 1998, 34% of the U.S. Electric Operating Companies' installed generating
capacity was coal and lignite. For the year ended December 31, 1998, 47% of the
U.S. Electric Operating Companies' MWH generation was coal and lignite.

RISK MANAGEMENT

In 1997, CSW's board of directors adopted a risk management resolution
authorizing CSW to engage in currency, interest rate and energy spot and forward
transactions and related derivative transactions on behalf of CSW with foreign
and domestic parties as deemed appropriate by executive officers of CSW. The
risk management program is necessary to meet the growing demands of CSW's

customers for competitive prices and price stability, to enable CSW to compete
in a deregulated power industry, to manage the risks associated with domestic
and foreign investments and to take advantage of strategic investment
opportunities.

The U.S. Electric Operating Companies experience commodity price exposures
related to the purchase of fuel supplies for the generation of electricity and
for the purchase of power and energy from other generation sources. Contracts
that provide for the future delivery of these commodities can be considered
forward contracts which contain pricing and/or volume terms designed to
stabilize the cost of the commodity. Consequently, the U.S. Electric Operating
Companies manage their price exposure for the benefit of customers by balancing
their commodity purchases through a combination of long-term and short-term
(spot market) agreements.

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

The table below provides information about the Company's natural gas swaps
and electricity forward contracts that are sensitive to changes in commodity
prices. The swaps hedge commodity price exposure for the year 1999. Cash
outflows on the swap agreements should be offset by increased margins on
electricity sales to customers under tariffed rates with fixed fuel costs. The
electricity forward contracts hedge a portion of CSW's energy requirements
through September 1999. The average contract price for forward purchases is $58
per MWH and the average contract price for forward sales is $80 per MWH.

Contractual commitments at December 31, 1998 are as follows:

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

SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers. At December 31, 1998, the gross value of such
contracts for differences was approximately 92% of the expected power purchases
for 1999.

CSW has, at times, been exposed to currency and interest rate risks which
reflect the floating exchange rate that exists between the U.S. dollar and the
British pound. CSW has utilized certain risk management tools to manage adverse
changes in exchange rates and to facilitate financing transactions resulting

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

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

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

OTHER MATTERS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NEW ACCOUNTING STANDARDS

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

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

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

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

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

SFAS No. 133
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
(January 1, 2000 for calendar year entities). This statement replaces existing
pronouncements and practices with a single integrated accounting framework for
derivatives and hedging activities and eliminates previous inconsistencies in
generally accepted accounting principles. The statement expands the accounting
definition of derivatives, which had focused on freestanding contracts (futures,
forwards, options and swaps) to include embedded derivatives and many commodity
contracts. All derivatives will be reported on the balance sheet either as an
asset or liability measured at fair value. Changes in a derivative's fair value
will be recognized currently in earnings unless specific hedge accounting
criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133
on its financial statements and has not determined the timing or the method of
adopting SFAS No. 133.

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

CENTRAL AND SOUTH WEST CORPORATION
RESULTS OF OPERATIONS

Reference is made to CSW's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Financial Data. Referenced
information should be read in conjunction with, and is essential to
understanding, the following discussion and analysis. CSW's results fluctuate,
in part, with the weather. CSW's 1998 results reflect an outstanding
weather-related year, and that type of weather may not occur in 1999. Also,
other than certain one-time items, as discussed throughout the results of
operations, CSW's income statement line items as a percentage of total revenues
remain fairly consistent, due primarily to the regulatory environment in which
CSW operates. The preceding discussion contains forward-looking information
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997

CSW's earnings increased to $440 million in 1998 from $153 million in
1997. CSW's return on average common stock equity was 12.4% in 1998 compared to
4.2% in 1997. The primary reason for the higher earnings and return on average
common stock equity was the absence in 1998 of the accrual of $176 million for
the one-time United Kingdom windfall profits tax. Hotter than normal summer
weather and increased customer growth and usage at the U.S. Electric Operating
Companies were also factors in the increase in earnings over 1997. Additionally,
the sale of a telecommunications partnership interest in 1998 and a decrease in
the United Kingdom corporate tax rate contributed to the earnings increase. The
absence of the impact of CSW's final settlement of litigation with El Paso in
1997 contributed to the increase in earnings in 1998 as well. Also contributing
to the increase in earnings was the absence in 1998 of the effect of both the
PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997
Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17.
EXTRAORDINARY ITEM for additional information on the windfall profits tax.
Partially offsetting the higher earnings was a charge for accelerated capital
recovery of STP and asset write-offs at several of CSW's business segments.

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

1998 REVENUE VARIANCES
Increase (decrease) from prior year, millions
U.S. Electric
KWH Sales, Weather-Related $72
KWH Sales, Growth and Usage 53
Fuel Revenue 31
Sales for Resale 6
Other Electric 5
------------
167
United Kingdom (101)
Other Diversified 148
------------
$214
------------

U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to
1997. Retail MWH sales increased 6% with increases in all customer classes. U.S.
Electric revenues increased due primarily to higher MWH sales resulting from
hotter than normal summer weather and increased customer usage and growth. An

increase in fuel revenues, as discussed in fuel expense below, also contributed
to the higher revenues. United Kingdom revenues decreased $101 million, or 5%,
in 1998 compared to 1997 due to the loss of revenues associated with the sale of
its retail stores in the second quarter of 1998 and the effect of price control
on the supply business. Other diversified revenues increased $148 million in
1998 compared to 1997 due primarily to increased revenues from CSW Energy, CSW
Credit and EnerShop.

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

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

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

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

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

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

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

Earnings
Impact
United Kingdom Windfall Profits Tax $(176)
CPL 1997 Final Order (48)
Asset Write-offs and Reserves (48)
PSO 1997 Rate Settlement Agreement (27)
Settlement of Litigation with El Paso (23)
Gain on the Reacquisition of
Preferred Stock 10
United Kingdom Tax Adjustment 15

In addition, several items that occurred in 1996 were not present in 1997.
Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from
Transok's operations. As a result of the sale, CSW also recorded an after-tax
gain of approximately $120 million in 1996. However, the U.S. Electric Operating
Companies and CSW Energy recorded charges totaling $102 million, after-tax, for
certain investments in the second quarter of 1996 which decreased earnings. See
NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information concerning
the effects of the sale of Transok.

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

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

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

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

regarding transmission access and pricing. The new transmission revenues had no
material effect on earnings because they were almost completely offset by a
corresponding amount of transmission expense. Revenues increased due in part to
the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel
Agreement. An increase in fuel revenues, as discussed in fuel expense below,
also contributed to the higher revenues. Partially offsetting the revenue
increase was a decrease in weather-related demand due to milder weather in the
first nine months of 1997. Further offsetting the increase in U.S. Electric
revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million,
or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate
movement between the British pound and the U.S. dollar, partially offset by a
reduction in the fossil fuel levy collected on behalf of the United Kingdom
government. Other diversified revenues increased $18 million, or 31%, in 1997
compared to 1996 due primarily to increased revenues from CSW International, C3
Communications, CSW Credit and EnerShop.

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

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

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

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.

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

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

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

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

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

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

Average Common Shares Outstanding 212.4 212.1 207.5

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

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

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

CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
(millions)

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

Beginning Balance -- January 1, 1996 $675 $610 $1,893 ($4) $3,174
Sale of common stock 65 412 -- -- 477
Common stock dividends -- -- (358) -- (358)
Other -- -- 3 -- 3
-------
3,296

Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $35) -- -- -- 75 75
Unrealized gain on securities
(net of tax of $1) -- -- -- 2 2
Net Income -- -- 429 -- 429
-------
Total comprehensive income 506

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

Beginning Balance -- January 1, 1997 $740 $1,022 $1,967 $73 $3,802
Sale of common stock 3 17 -- -- 20
Common stock dividends -- -- (369) -- (369)
-------
3,453

Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $23) -- -- -- (48) (48)
Unrealized loss on securities
(net of tax of $0.3) -- -- -- (1) (1)
Minimum pension liability
(net of tax of $0.3) -- -- -- (1) (1)
Net Income -- -- 153 -- 153
-------
Total comprehensive income 103

------ ------ ------ ------ -------
Ending Balance -- December 31, 1997 $743 $1,039 $1,751 $23 $3,556
============================================= =======

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

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

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

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

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

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

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

CSW
Consolidated Balance Sheets
Central and South West Corporation
- --------------------------------------------------------------------------------
As of December 31,
---------------------------
1998 1997
-------- -------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million
shares
Issued and outstanding: 212.6 million
shares in 1998 and 212.2 million
shares in 1997 $ 744 $ 743
Paid-in capital 1,049 1,039
Retained earnings 1,823 1,751
Accumulated other comprehensive income 8 23
-------- -------
3,624 46% 3,556 45%
-------- ------ ------- -----
Preferred Stock
Not subject to mandatory redemption 176 176
Subject to mandatory redemption -- 26
-------- -------
176 2% 202 2%
Certain Subsidiary-obligated, mandatorily
redeemable preferred securities of
subsidiary trusts holding solely Junior
Subordinated Debentures of such Subsidiaries 335 4% 335 4%
Long-term debt 3,785 48% 3,898 49%
------- ------ ------ -----
Total Capitalization 7,920 100% 7,991 100%
-------- ------ ------- -----

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

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

CSW
Consolidated Statements of Cash Flows
Central and South West Corporation

For the Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(millions)

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

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

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

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

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

CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

during construction. SEEBOARD's fixed assets are stated at their original fair
market value which existed on the date of acquisition plus the original cost of
property acquired or constructed since the acquisition, less disposals.

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

CSW CPL PSO SWEPCO WTU
==================================================
1998 3.4% 3.0% 3.1% 3.3% 3.2%
1997 3.4% 3.0% 3.3% 3.2% 3.3%
1996 3.4% 2.9% 3.6% 3.2% 3.2%

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

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

CPL's portion of the costs of decommissioning STP was estimated to be $258
million in 1995 dollars based on a site specific study completed in 1995. CPL is
accruing and recovering these decommissioning costs through rates based on the
service life of STP at a rate of $8.2 million per year. The funds are deposited
with a trustee under the terms of an irrevocable trust and are reflected in
CPL's consolidated balance sheets as Nuclear Decommissioning Trust with a
corresponding amount accrued in Accumulated Depreciation. On CSW's consolidated
balance sheets, the irrevocable trust is included in Deferred Charges and Other
Assets, Other, with a corresponding amount accrued in Accumulated Depreciation.
In CSW's and CPL's consolidated statements of income, the income related to the
irrevocable trust is recorded in Other Income and Deductions, Other. In CPL's
consolidated statements of income, the interest expense related to the
irrevocable trust is recorded in Interest Charges, Interest on Short-term Debt
and Other. In CSW's consolidated statements of income the interest expense
related to the irrevocable trust is recorded in Interest and Other Charges,
Interest on Short-term Debt and Other. At December 31, 1998, the nuclear trust
balance was $66.0 million.

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

CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed
component of base rates whereby over-recoveries of fuel are payable to customers
and under-recoveries may be billed to customers after Texas Commission approval.
The cost of fuel is charged to expense as incurred, with resulting fuel
over-recoveries and under-recoveries recorded as regulatory assets and
liabilities. PSO recovers fuel costs in Oklahoma through service level fuel cost
adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana

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

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

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

Accounts Receivable
CSW Credit purchases, without recourse, the billed and unbilled accounts
receivable of the U.S. Electric Operating Companies, certain non-affiliated
public utility companies and, prior to its sale by CSW in June 1996, Transok.

Regulatory Assets and Liabilities
For their regulated activities, the U.S. Electric Operating Companies
follow SFAS No. 71, which defines the criteria for establishing regulatory
assets and regulatory liabilities. Regulatory assets represent probable future
revenue to the company associated with certain costs which will be recovered
from customers through the ratemaking process. Regulatory liabilities represent
probable future refunds to customers. The regulatory assets are currently being
recovered in rates or are probable of being recovered in rates. The unamortized
asset balances are included in the table below.

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

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

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

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

Foreign Currency Translation
The financial statements of SEEBOARD U.S.A., which are included in CSW's
consolidated financial statements, have been translated from British pounds to
U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are
translated at the exchange rate at the end of the period and all income
statement items are translated at the average exchange rate for the applicable
period. At December 31, 1998 the current exchange rate was approximately
(pound)1.00=$1.66, and the average exchange rate for the twelve month period
ended December 31, 1998 was approximately (pound)1.00=$1.66. At December 31,
1997 the current exchange rate was approximately (pound)l.00=$1.65, and the
average exchange rate for the twelve month period ended December 31, 1997 was
approximately (pound)l.00=$1.58. At December 31, 1996 the current exchange rate
was approximately (pound)l.00=$1.71, and the average exchange rate for the
twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56.
All the resulting translation adjustments are recorded directly to Accumulated
Other Comprehensive Income on CSW's Consolidated Balance Sheets. Cash flow
statement items are translated at a combination of average, historical and
current exchange rates. The non-cash impact of the changes in exchange rates on
cash and cash equivalents, resulting from the translation of items at the
different exchange rates, is shown on CSW's Consolidated Statements of Cash
Flows in Effect of Exchange Rate Changes on Cash and Cash Equivalents.

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

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

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

CSW accounts for these transactions as hedge transactions and any gains or
losses associated with the risk management tools are recognized in the financial
statements at the time the hedge transactions are settled. CSW believes its
credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT; NOTE 7.
FINANCIAL INSTRUMENTS; NOTE 18. NEW ACCOUNTING STANDARDS and NOTE 20. SUBSEQUENT
EVENT for additional information.

Securities Available for Sale
CSW accounts for its investments in equity securities in accordance with
SFAS No. 115. The investments have been designated as available for sale, and as
a result are stated at fair value. Unrealized holding gains and losses, net of
related taxes, are included in Accumulated Other Comprehensive Income on CSW's
Consolidated Balance Sheets. Information related to these securities available
for sale as of December 31, 1998 is presented in the following table.

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

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

As of December 31, 1998, CSW International has invested $110 million in
stock of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the year-end
market value of the shares and foreign exchange rates, the value of the
investment at December 31, 1998 is $66 million. The reduction in the carrying
value of this investment has been reflected in Accumulated Other Comprehensive
Income in CSW's Consolidated Balance Sheets. Management views its investment in
Chile as a long-term investment strategy. Management will continue to closely
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.

Inventory
CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil
fuel inventories. SWEPCO continues to utilize the weighted average cost method
pending approval of the Arkansas Commission to utilize the LIFO method. At
December 31, 1998, none of the U.S. Electric Operating Companies had LIFO
reserves. LIFO reserves are the excess of the inventory replacement cost over
the carrying amount on the balance sheet.

Comprehensive Income
Consistent with the requirements of SFAS No. 130, CSW discloses
comprehensive income. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. See NOTE 18. NEW ACCOUNTING STANDARDS.

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

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

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

Segment Reporting
CSW has adopted SFAS No. 131, which requires disclosure of select
financial information by business segment as viewed by the chief operating
decision-maker. See NOTE 18. NEW ACCOUNTING STANDARDS.

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

2. LITIGATION AND REGULATORY PROCEEDINGS

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

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

reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999;
and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As
part of the appeal, CPL sought a temporary injunction to prohibit the Texas
Commission from implementing the "Glide Path" rate reduction methodology. The
court denied the temporary injunction and the "Glide Path" rate reduction was
implemented in May 1998. Hearings on the appeal were held during the third
quarter of 1998, and a judgment was issued in February 1999 affirming the Texas
Commission order, except for a consolidated tax issue in the amount of $6
million, which will be remanded to the Texas Commission. While CPL intends to
appeal this most recent order to the Court of Appeals, management is unable to
predict how the final resolution of these issues will ultimately affect CSW's
results of operations and financial condition.

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

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

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

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

If CPL's deferred accounting matters are not favorably resolved, CSW could
experience a material adverse effect on their respective results of operations

and financial condition. While management is unable to predict the ultimate
outcome of these matters, management believes either that CPL will receive
approval of its deferred accounting amounts or that CPL will be successful in
renegotiation of its rate orders, so that there will be no material adverse
effect on CSW's results of operation or financial condition.

CPL Fuel Proceeding
On December 31, 1998, CPL filed with the Texas Commission an application
to reconcile fuel costs and to request authorization to carry the reconciled
balance forward into the next reconciliation period. CPL did not seek a
surcharge of the reconciled balance in the filing.

During the reconciliation period of July 1, 1995 through June 30, 1998,
CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The
Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4
million.

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

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

CPL Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a purported class action in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged underpayment of municipal franchise fees. The plaintiffs'
petition asserts various contract and tort claims against CPL as well as certain
audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed
a counterclaim for any overpayment of franchise fees it may have made as well as
its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County,
Texas, and a plea to the jurisdiction and pleas in abatement asserting that the
Texas Commission has primary jurisdiction over the claims. In May 1996 and
December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims virtually identical to those claimed by the
City of San Juan. In January, 1997, CPL filed an original petition at the Texas
Commission requesting the Texas Commission to declare its jurisdiction over
CPL's collection and payment of municipal franchise fees.

In April 1997, the Texas Commission issued a declaratory order in which it
declined to assert jurisdiction over the claims of the City of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District

Court, which affirmed the Texas Commission ruling on February 19, 1999. After
the Texas Commission's order, the Hidalgo County District Court overruled CPL's
plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County
District Court entered an order certifying the case as a class action. CPL
appealed this order to the Corpus Christi Court of Appeals. In February 1998,
the Corpus Christi Court of Appeals affirmed the trial court's order certifying
the class. CPL appealed the Corpus Christi Court of Appeals ruling to the Texas
Supreme Court, which declined to hear the case. In August 1998, the Hidalgo
County District Court ordered the case to mediation and suspended all
proceedings pending the completion of the mediation. The mediation was completed
in December, 1998, but the case was not resolved.

On January 5, 1999, a class notice was mailed to each of the CPL cities;
the cities have until April 5, 1999, to decide whether or not to participate in
the lawsuit as a class member.

Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, management cannot predict the outcome of the municipal
franchise fee litigation.

CPL Anglo Iron Litigation
In April 1998, CPL was sued by Anglo Iron in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean up of a site owned and operated by Anglo Iron in
Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common
law contribution and indemnity for alleged response and clean up costs of
$328,139 and damages of $150,000 for "loss of fair market value" of the site. In
January 1999, the parties settled the case, and the case was dismissed with
prejudice by the court in February 1999. The settlement did not have a material
adverse impact on CSW's consolidated results of operations or financial
condition.

CPL Sinton Landfill Litigation
CPL, along with over 30 others, is named as a defendant in the district
court in San Patricio County, Texas. The plaintiffs, approximately 500 current
and former landowners in the vicinity of a landfill site near Sinton, Texas,
each of whom alleges $10 million property damage and personal injury as a result
of alleged contamination from the site. Plaintiffs made a collective settlement
demand upon CPL for $1.1 million. In January, 1999, in exchange for a
non-material sum, CPL reached an agreement with Browning Ferris Industries,
Inc., the operator of the site, for Browning Ferris Industries, Inc. to
indemnify CPL for any judgment or settlement amount that CPL may owe to the
plaintiffs in this case.

CPL Valero Litigation
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However, management believes that CPL has valid defenses to
Valero's claims and intends to defend the matter vigorously. Management also
believes that the ultimate resolution of this matter will not have a material
adverse impact on CSW's consolidated results of operations or financial
condition.

CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No.
17285)
A joint complaint filed by CPL and WTU with the Texas Commission asserted
that since January 1, 1997, Texas Utilities Electric Company had been
effectively double charging for transmission service within ERCOT. A proposal
for decision received in February 1998 recommended approval of a CPL and WTU

proposed reduction of $15.5 million annually of payments to Texas Utilities
Electric Company under FERC-approved transmission service agreements against
amounts that CPL and WTU would otherwise owe Texas Utilities Electric Company
pursuant to Texas Commission rules for transmission service in ERCOT. The Texas
Commission approved the proposal in September 1998. Even though Texas Utilities
Electric Company has appealed the Texas Commission final order, they refunded
$26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's
September 1998 decision, the $15.5 million annual payment to Texas Utilities
Electric Company was allocated to the U.S. Electric Operating Companies. As a
result of this order the payment is recorded on CPL's and WTU's books as a
reduction to ERCOT transmission expense.

Transmission Coordination Agreement
The Transmission Coordination Agreement provides the means by which the
U.S. Electric Operating Companies will operate, plan and maintain the four
separate transmission systems as a single system. The agreement also establishes
a process for the U.S. Electric Operating Companies to allocate revenues
received under open access transmission tariffs. On August 7, 1998, the FERC
accepted the Transmission Coordination Agreement for filing, suspended it for a
nominal period, and made it effective retroactive to January 1, 1997, subject to
refund and investigation.

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

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

The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate
or amortize before its next rate filing approximately $41 million in certain
deferred assets, approximately $26 million of which had been expensed in 1996.
The remaining $15 million of deferred assets, which included approximately $9
million of costs incurred for customer energy management incentive programs,
were written off in 1997. The financial impact of the PSO 1997 Rate Settlement
Agreement on PSO's 1997 results of operations were lower revenues of $31.5
million and lower expenses of $4.1 million which included the write-off of the
previously mentioned deferred assets.

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

PSO PCB Cases
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August 1996. The petitions allege that the plaintiffs
suffered personal injury and fear future injury as a result of contamination by
PCBs from a transformer malfunction that occurred in April 1982 at the Page
Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual
and punitive damages in excess of $10,000. Other claims arising from this
incident have been settled and the suits dismissed. The first case to go to
trial is anticipated to begin in May 1999. Management believes that PSO has

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

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

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

On December 8, 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission filed a settlement on all
issues except whether transmission equalization payments should be included in
fuel or base revenues. Of the $16.8 million in under-recovered fuel costs as of
December 31, 1996, the settlement resulted in a decrease of the under-recovered
fuel costs, and the resulting surcharge recovery, by $6.0 million. The
settlement also provides that SWEPCO's fuel and fuel-related expenses during the
reconciliation period were reasonable and necessary and would allow them to be
reconciled as eligible fuel expense. Also, the settlement provides that SWEPCO's
actions in litigating and renegotiating certain fuel contracts, together with
the prices, terms and conditions of the renegotiated contracts were prudent. The
$6.0 million reduction was not associated with any particular activity or issue
within the fuel proceedings.

On April 8, 1998, the ALJ assigned to this proceeding, issued a proposal
for decision regarding the one outstanding issue, whether transmission
equalization payments should be included in eligible fuel expense. The proposal
for decision recommended that SWEPCO be allowed to include transmission
equalization expense in eligible fuel expense. On May 19, 1998, the Texas
Commission reversed the ALJ and did not allow SWEPCO to recover its transmission
equalization payments as a component of eligible fuel expense. This ruling
resulted in an earnings reduction of approximately $1.8 million, which was
recorded in the second quarter of 1998. On June 8, 1998, SWEPCO filed a motion
for rehearing on the transmission equalization issue, which was denied through
operation of law. After the Texas Commission's order on May 19, 1998, SWEPCO had
still under-recovered its fuel and fuel related expenses. On July 1, 1998, the
Texas Commission issued an order allowing SWEPCO to surcharge its Texas retail
customers $6.9 million of under-recovered fuel and fuel related expenses and
associated interest. The surcharge began in July 1998 and will end in June 1999.
SWEPCO has filed an appeal regarding this matter in the State District Court of
Travis County, Texas. Management is unable to predict the ultimate outcome of
this litigation. However, SWEPCO will drop the appeal if the AEP merger
settlement is approved and the merger is consummated.

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

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

On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO
under the lignite mining agreement, including provisions relating to the quality
of the delivered lignite, pricing, and mine reclamation practices. On June 15,
1997, DHMV filed an answer denying the allegations in the suit and filed a
counterclaim asserting various contract-related claims against SWEPCO and CLECO.
SWEPCO and CLECO have denied the allegations in the counterclaims on the grounds
the counterclaims have no merit. On January 8, 1999, SWEPCO and CLECO amended
the claims against DHVM in the lawsuit to include a request that, if the court
agrees that DHMV has breached the lignite mining agreement that the lignite
mining agreement be terminated. This federal court suit is set for trial
beginning in November 1999.

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

WTU Fuel Proceedings

Fuel Reconciliation
On December 31, 1997, WTU filed with the Texas Commission an application
to reconcile fuel costs and to request authorization to carry the reconciled
balance forward into the next reconciliation period. WTU did not seek a
surcharge of the reconciled balance in the December 31, 1997 filing.

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

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

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

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

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

3. COMMITMENTS AND CONTINGENT LIABILITIES

Construction and Capital Expenditures

It is estimated that CSW, including the U.S. Electric Operating Companies,
SEEBOARD and other operations, will spend approximately $855 million in capital
expenditures (but excluding capital that may be required for acquisitions)
during 1999. Substantial commitments have been made in connection with these
programs.

CPL - $224 million PSO - $91 million SWEPCO - $108 million WTU - $51 million

Fuel and Related Commitments

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

SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of December 31, 1998, the
maximum amount SWEPCO believes it could potentially assume is $93 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at December 31, 1998
was $71 million.

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

Other Commitments and Contingencies

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

The Price-Anderson Act, a comprehensive statutory arrangement providing
limitations on nuclear liability and governmental indemnities, is in effect
until August 1, 2002. The limit of liability under the Price-Anderson Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December 1997. The owners of STP are insured for their share of this liability
through a combination of private insurance amounting to $200 million and a
mandatory industry-wide program for self insurance totaling $8.92 billion. The
maximum amount that each licensee may be assessed under the industry-wide
program of self insurance following a nuclear incident at an insured facility is
$75.5 million per reactor, for anyone nuclear incident payable at $10 million
per year per reactor. An additional surcharge of five percent of the maximum may
be payable if the total amount of public claims and legal costs exceeds the
limit. CPL and each of the other STP owners are subject to such assessments,
which CPL and the other owners have agreed will be allocated on the basis of
their respective ownership interests in STP. For purposes of these assessments,
STP has two licensed reactors. CPL owns 25.2% of each reactor.

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

CPL purchases, for its own account, a NEIL I Business Interruption and/or
Extra Expense policy. This insurance will reimburse CPL for extra expenses
incurred for replacement generation or purchased power as the result of a
covered accident that shuts down production at one or both of the STP Units for
more than 23 consecutive weeks. In the event of an outage which is the result of
the same accident, insurance will reimburse CPL up to 80 percent of the
recovery. The maximum amount recoverable for a single unit outage is $133.8
million for both Units 1 and 2. CPL is subject to an additional assessment of up
to $1.54 million for the current policy year in the event that insured losses at
a nuclear facility covered under the NEIL I policy exceed the accumulated funds
available under the policy. CPL renewed its current NEIL I Business Interruption
and/or Extra Expense policy on October 1, 1998.

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

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

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

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

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

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

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

SWEPCO Rental and Lease Commitments
SWEPCO has entered into various financing arrangements primarily with
respect to coal transportation and related equipment which are treated as
operating leases for rate-making purposes. At December 31, 1998, leased assets
of $45.7 million, less accumulated amortization of $41.4 million, were included
in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,
1997, leased assets were $45.7 million, less accumulated amortization of $39.0
million.

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

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

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

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

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

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

SEEBOARD London Underground Commitment
SEEBOARD has committed (pound)83 million, or $137 million, for costs
associated with its contract related to the London Underground transportation
system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a
$1.6 billion, 30 year contract as a joint venture partner to operate, maintain,
finance and renew the high-voltage power distribution network of the London
Underground.

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

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

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

CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. At
December 31, 1998, CSW Energy had spent approximately $81 million, including
development construction and financing of the projected $210 million project
costs. The natural gas-fired facility should begin simple cycle operation in the
summer of 1999 and combined cycle operation by the end of 1999. The Frontera
project is being built as a merchant power plant. Frontera is expected to supply
power to the rapidly growing Rio Grande Valley and to supply customers
throughout Texas.

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

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

4. INCOME TAXES

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

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

(1)Approximately $14 million, $30 million and $49 million of CSW's
Current Income Tax Expense was attributable to SEEBOARD U.S.A.
operations and was recognized as United Kingdom corporation tax
expense for 1998, 1997 and 1996, respectively. In addition,
approximately $9 million, $7 million and $19 million of CSW's
Deferred Income Tax Expense in 1998, 1997 and 1996, respectively,
was attributed to SEEBOARD U.S.A.
(2)ITC deferred in prior years are included in income over the lives of
the related properties.

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

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

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

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

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

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

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

5. BENEFIT PLANS

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

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

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

As the plan sponsor, CSW will continue to reflect the costs of the pension
plan according to the provisions of SFAS No. 87 and allocate such costs to each
of the participating employers.

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

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

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

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

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

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

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

Amounts Recognized in Balance Sheet

Prepaid benefit costs $188 $126 $ -- $62
Accrued benefit (liability)-smaller
of (accrued) benefit
cost and minimum (liability) (25) -- (25) --

Intangible asset 2 -- 2 --
Accumulated other comprehensive
income 8 -- 8 --
-------------------------------------------
Prepaid (accrued) benefit
cost before balance sheet
adjustments $173 $126 $(15) $62
-------------------------------------------

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

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

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

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

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

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

----------------------------------------------
Prepaid (accrued) benefit
cost before balance sheet
adjustments $160 $113 $(12) $59
----------------------------------------------

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

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

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

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

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

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

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

Service cost $37 $22 $1 $14
Interest cost 137 69 1 67
Expected return on plan assets: (158) (84) -- (74)
Amortizations of prior service
costs -- -- -- --
Amortization of unrecognized
transition obligation 2 2 -- --

Recognized net actuarial loss 1 -- 1 --
------------------------------------------
Net periodic benefit cost $19 $9 $3 $7

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

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

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

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

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

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

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

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

Plan Assets at Fair Value $164 $159

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6. JOINTLY OWNED ELECTRIC UTILITY PLANT

The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1998, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.

SWEPCO SWEPCO SWEPCO
CPL Flint Dolet CSW(1)
STP Creek Pirkey Hills Oklaunion
Nuclear Coal Lignite Lignite Coal
Plant Plant Plant Plant Plant
---------------------------------------------------
($ millions)
Plant in service $2,336 $81 $439 $230 $400
Accumulated
depreciation $657 $49 $190 $91 $132
Plant capacity-MW 2,501 528 675 650 690
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 264 580 262 539

(1)CPL, PSO and WTU have joint ownership agreements with each other and
other non-affiliated entities. Such agreements provide for the joint
ownership and operation of Oklaunion Power Station. Each participant
provided financing for its share of the project, which was placed in
service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7%
ownership interest represents CSW's 78.1% participation in the plant.
The statements of income reflect CPL's, PSO's and WTU's respective
portions of the operating costs of Oklaunion Power Station. The total
investments, including AFUDC, in Oklaunion Power Station for CPL, PSO
and WTU were $37 million, $81 million and $282 million, respectively,
at December 31, 1998. Accumulated depreciation was $12 million, $34
million and $86 million for CPL, PSO and WTU, respectively, at December
31,1998.

7. FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

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

Trust Preferred
Securities
carrying amount 335 335
fair value 345 344

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

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

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

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

Contractual commitments at December 31, 1998 are as follows:

Cross-currency swaps and SEEBOARD's electricity contracts for differences
The fair value of cross currency swaps reflect third-party valuations
calculated using proprietary pricing models. Based on these valuations, CSW's
position in these cross currency swaps represented an unrealized loss of $57
million at December 31, 1998. This unrealized loss is offset by unrealized gains
related to the underlying transactions being hedged. CSW expects to hold these
contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.

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

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

8. LONG-TERM DEBT

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

Maturities Interest Rates December 31,
From To From To 1998 1997
-----------------------------------------------------------------------------
(millions)
Secured bonds
1999 2025 5.25% 7.75% $1,824 $2,080

Unsecured bonds
2001 2030 3.33% (1) 8.88% 1,359 1,353

Notes and Lease Obligations
1999 2021 5.89% 9.75% 765 641

Unamortized discount (10) (10)
Unamortized cost of
Reacquired debt (153) (166)
-------------------------
$3,785 $3,898
-------------------------
(1) Variable rate

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

CSW's year end weighted average cost of long-term debt was 7.3% for 1998
and 7.2% for both 1997 and 1996.

Annual Requirements
Certain series of outstanding FMBs have annual sinking fund requirements,
which are generally 1% of the amount of each such series issued. These
requirements may be, and generally have been, satisfied by the application of
net expenditures for bondable property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking fund requirements. At December 31, 1998, the annual sinking fund
requirements and annual maturities (including sinking fund requirements) for all
long-term debt for the next five years are presented in the following table.

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

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

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

Reacquired Long-term Debt
In September 1998, PSO reacquired $25 million principal amount outstanding
of Series K and $30 million principal amount outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively. In September
1998, CPL reacquired $36 million principal amount outstanding of Series L FMBs,
in its entirety, at a call price of 100.53. No long-term debt was reacquired
prior to maturity during 1997.

Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further
information related to long-term debt, including new issues and reacquisitions
of long-term debt during 1998.

9. PREFERRED STOCK

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

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

-------------
$-- $26
-------------
Total authorized shares
6,405,000

All of the outstanding preferred stock is redeemable at the option of the
U.S. Electric Operating Companies upon 30 days notice at the current redemption
price per share. During 1998 and 1997, SWEPCO redeemed $1.2 million pursuant to
its annual sinking fund requirement. During 1997, each of the U.S. Electrics
reacquired a significant portion of its outstanding preferred stock. As a result
of differences between the dividend rates on the reacquired securities and
prevailing market rates, CSW realized an overall gain of approximately $10
million on the transactions. This gain is shown separately, as Gain on
Reacquired Preferred Stock, on the Consolidated Statements of Income.

CPL
The dividends on CPL's $160 million auction and money market preferred
stocks are adjusted every 49 days, based on current market rates. The dividend
rates averaged 4.4%, 4.3% and 4.1% during 1998, 1997 and 1996, respectively.

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

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

10. TRUST PREFERRED SECURITIES

The following Trust Preferred Securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at December
31, 1998. They are classified on the balance sheets as CPL, PSO or SWEPCO
Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO,
respectively.

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

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

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

11. SHORT-TERM FINANCING

The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a money pool to coordinate short-term borrowings for certain
subsidiaries and also incurs borrowings outside the money pool for other
subsidiaries. As of December 31, 1998, CSW had revolving credit facilities
totaling $1.0 billion to backup its commercial paper program. At December 31,
1998, CSW had $811 million outstanding in short-term borrowings. The maximum
amount of such short-term borrowings outstanding during the year, which had a
weighted average interest yield for the year of 5.8%, was $1.1 billion during
June 1998.

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

12. COMMON STOCK

CSW's basic earnings per share of common stock are computed by dividing
net income for common stock by the average number of common shares outstanding
for the respective periods. Diluted earnings per share reflect the potential
dilution that could occur if all options outstanding under CSW's stock incentive
plan were converted to common stock and then shared in the income for common
stock. CSW's basic and diluted earnings per share were the same for the years
1996 - 1998. CSW's dividends per common share reflect per share amounts paid for
each of the periods.

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

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

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

13. STOCK-BASED COMPENSATION PLANS

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

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

CSW may grant options for up to 4.0 million shares of CSW common stock
under the stock option plan. Under the stock option plan, the option exercise
price equals the stock's market price on the date of grant. The grant vests over
three years, one-third on each of the three anniversary dates of the grant and

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

1998 1997 1996
------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price

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

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

14. BUSINESS SEGMENTS

Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business
segments at December 31, 1998 included U.S. Electric (CPL, PSO, SWEPCO and WTU)
and U.K. Electric (SEEBOARD U.S.A.). Eight additional non-utility companies are
included with CSW in Other and Reconciling Items (CSW Energy, CSW International,
C3 Communications, EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and
CSW Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15.
TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business
segment information is presented in the following tables.

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

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

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

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

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

Geographic Areas

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

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

15. TRANSOK DISCONTINUED OPERATIONS

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

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

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

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

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

Total revenue $362

Operating income before income taxes 23

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

16. PROPOSED AEP MERGER

On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1998, the total market
capitalization of the combined company would have been $28 billion ($15 billion
in equity; $13 billion in debt) and the combined company would have served more
than 4.6 million customers in 11 states and approximately 4 million customers
outside the United States. On May 27, 1998, AEP shareholders approved the
issuance of the additional shares of stock required to complete the merger.
On May 28, 1998, CSW stockholders approved the merger.

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

the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).

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

Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net savings merger rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final orders are conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.

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

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

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

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

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

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

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

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

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

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

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

18. NEW ACCOUNTING STANDARDS

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

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

19. QUARTERLY INFORMATION (UNAUDITED)

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

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

20. SUBSEQUENT EVENT

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

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Central
and South West Corporation (a Delaware corporation) and subsidiary companies as
of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of CSW UK Finance Company (1998 and 1997 - which
includes CSW Investments) and CSW Investments (1996), which statements reflect
total assets and total revenues of 22 percent and 32 percent in 1998, 22 percent
and 35 percent in 1997 and 36 percent of total revenues in 1996, respectively,
of the consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to the amounts included for those entities, is based solely on the reports of
the other auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Central and South West Corporation and subsidiary
companies as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen LLP
Arthur Andersen LLP

Dallas, Texas
February 12, 1999

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

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

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

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

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

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

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 results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles in the United Kingdom.

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

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

REPORT OF MANAGEMENT

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

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

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

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

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

CSW and its subsidiaries believe that, in all material respects, its
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1998.

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

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

Abbreviation or Acronym......Definition
AEP ....................American Electric Power Company, Inc.
AEP Merger .............Proposed Merger between AEP and CSW where CSW would
become a wholly owned subsidiary of AEP
AFUDC ..................Allowance for funds used during construction
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO ...................Accumulated Post-retirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
Cajun ..................Cajun Electric Power Cooperative, Inc.
CERCLA .................Comprehensive Environmental Response, Compensation and
Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's
rate case Docket No, 14965, including both the order
received on September 10, 1997 and the revised order
received on October 16, 1997
CPL 1996 Fuel Agreement.Fuel settlement agreement entered into by CPL and other
parties
CSW ....................Central and South West Corporation, Dallas, Texas
CSW Credit .............CSW Credit, Inc., Dallas, Texas
CSW Energy .............CSW Energy, Inc., Dallas, Texas
CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas
CSW International ......CSW International, Inc., Dallas, Texas
CSW Investments ........CSW Investments, an unlimited company organized in the
United Kingdom through which CSW International owns
SEEBOARD
CSW Leasing ............CSW Leasing, Inc., Dallas, Texas
CSW Power Marketing ....CSW Power Marketing, Inc., Dallas, Texas
CSW Services ...........Central and South West Services, Inc., Dallas, Texas and
Tulsa, Oklahoma
CSW System .............CSW and its subsidiaries
CSW UK Finance Company .An unlimited company organized in the United Kingdom
through which CSW International owns CSW Investments
CWIP ...................Construction work in progress
DGES ...................Director General of Electricity Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EITF....................Emerging Issues Task Force
EITF Issue 98-10........Accounting for Contracts Involved in Energy Trading and
Risk Management Activities
El Paso ................El Paso Electric Company
EnerACT.................Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
FUCO ...................Foreign utility company as defined by the Holding
Company Act
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit

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

Abbreviation or Acronym.......Definition
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Long-Tern Incentive Plan
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
National Grid ..........National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
OASIS ..................Open access same time information system
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. I
OPEB ...................Other post-retirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement..............Joint stipulation agreement reached by PSO
and other parties to settle PSO's rate inquiry
PURPA ..................Public Utility Regulatory Policies Act of 1978
Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RUS ....................Rural Utilities Service of the federal government
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted
to U.S.Generally Accepted Accounting Principles
SFAS ...................Statement of Financial Accounting Standards
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87 ............Employers' Accounting for Pensions
SFAS No. 106 ...........Employers' Accounting for Post-retirement Benefits Other
than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 123 ...........Accounting for Stock-Based Compensation
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
Post-retirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
Activities
SOP 98-5 ...............Statement of Position 98-5, Reporting on the Costs of
Start-up Activities
SPP ....................Southwest Power Pool
STP ....................South Texas Project nuclear electric generating station
STPNOC .................STP Nuclear Operating Company, a non-profit Texas
corporation, jointly owned by CPL, HL&P, City of Austin,
and City of San Antonio
SWEPCO .................Southwestern Electric Power Company, Shreveport,
Louisiana
SWEPCO Plan ............The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on March 18, 1998 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Tejas ..................Tejas Gas Corporation
Texas Commission .......Public Utility Commission of Texas
TNRCC ..................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
Trust Preferred
Securities.............Collective term for securities issued by business trusts
of CPL, PSO and SWEPCO classified on the balance sheet
as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated,
mandatorily redeemable preferred securities of
subsidiary trusts holding solely Junior Subordinated
Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)"

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

Abbreviation or Acronym.......Definition
U.K. Electric...........SEEBOARD U.S.A.
U.S. Electric Operating
Companies or U.S.
Electrics..............CPL, PSO, SWEPCO and WTU
Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a
Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire plc, a regional electricity company in the
United Kingdom