WEST TEXAS UTILITIES CO - 10-K Annual Report

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

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934]
FOR THE TRANSITION PERIOD FROM _____TO_____

COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.

1-1443 CENTRAL AND SOUTH WEST CORPORATION 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000

0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300

0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000

1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141

0-340 WEST TEXAS UTILITIES COMPANY 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED

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

Securities registered pursuant to Section 12(g) of the Act:

REGISTRANT TITLE OF EACH CLASS

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

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

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

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAVE BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K:

CENTRAL AND SOUTH WEST CORPORATION [ X ]
CENTRAL POWER AND LIGHT COMPANY [ ]
PUBLIC SERVICE COMPANY OF OKLAHOMA [ ]
SOUTHWESTERN ELECTRIC POWER COMPANY [ ]
WEST TEXAS UTILITIES COMPANY [ ]

AGGREGATE MARKET VALUE OF THE COMMON STOCK OF CENTRAL AND SOUTH WEST
CORPORATION AT MARCH 4, 1997 HELD BY NON-AFFILIATES WAS APPROXIMATELY $5.0
BILLION. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 4,
1997:212,140,504. CENTRAL AND SOUTH WEST CORPORATION IS THE SOLE HOLDER OF THE
COMMON STOCK OF CENTRAL POWER AND LIGHT COMPANY, PUBLIC SERVICE COMPANY OF
OKLAHOMA, SOUTHWESTERN ELECTRIC POWER COMPANY AND WEST TEXAS UTILITIES COMPANY.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Notice of Annual Meeting and Proxy Statement of
Central and South West Corporation dated March 7, 1997 are incorporated by
reference into Part III hereof.

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

i
TABLE OF CONTENTS

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

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

PART I

ITEM 1. BUSINESS
Overview.....................................................1-1
U.S. Utility Operations......................................1-3
United Kingdom Operations....................................1-25
Non-Utility Operations.......................................1-28
Other Information............................................1-30
ITEM 2. PROPERTIES...................................................1-31
ITEM 3. LEGAL PROCEEDINGS............................................1-31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........1-31

PART II

ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..........................................2-1
ITEM 6. SELECTED FINANCIAL DATA......................................2-4
Central Power and Light Company..............................2-76
Public Service Company of Oklahoma...........................2-102
Southwestern Electric Power Company..........................2-123
West Texas Utilities Company.................................2-147
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................2-5
Central Power and Light Company..............................2-77
Public Service Company of Oklahoma...........................2-103
Southwestern Electric Power Company..........................2-124
West Texas Utilities Company.................................2-148
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................2-34
Central Power and Light Company..............................2-92
Public Service Company of Oklahoma...........................2-113
Southwestern Electric Power Company..........................2-137
West Texas Utilities Company.................................2-160
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................2-169

PART III

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

PART IV

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

ii

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

ABBREVIATION OR ACRONYM DEFINITION
APBO................................Accumulated Postretirement Benefit
Obligation
AFUDC...............................Allowance for funds used during construction
ALJ.................................Administrative Law Judge
Alpek...............................Alpek S.A. de C.V.
ANI.................................American Nuclear Insurance
Arkansas Commission.................Arkansas Public Service Commission
Ash Creek...........................Ash Creek Mining Company, a wholly owned
subsidiary of PSO
Big Cajun I.........................A two unit, natural gas-fired power plant
owned and operated by Cajun and located in
New Roads, Louisiana
Big Cajun II........................A three unit, coal fired power plant owned
and operated by Cajun and located in New
Roads, Louisiana
BREMCO..............................Bossier Rural Electric Membership
Cooperative
Btu.................................British themal unit
Burlington Northern.................Burlington Northern Railroad Company
CAAA................................Clean Air Act/Clean Air Act Amendments
Cajun...............................Cajun Electric Power Cooperative, Inc.
Cajun Trustee.......................Cajun's court appointed trustee in
bankruptcy
CEO.................................Chief Executive Officer
CERCLA..............................Comprehensive Environmental Response,
Compensation and Liability Act of 1980
Court of Appeals....................Court of Appeals, Third District of Texas,
Austin, Texas
CPL.................................Central Power and Light Company, Corpus
Christi, Texas
CPL 1995 Agreement..................Settlement agreement filed by CPL with the
Texas Commission to settle certain CPL
regulatory matters
CPL 1996 Fuel Agreement.............Fuel settlement agreement entered into by
CPL and other parties to CPL's current rate
review matters
CSW.................................Central and South West Corporation, Dallas,
Texas
CSW Common..........................CSW common stock, $3.50 par value per share
CSW Communications..................CSW Communications, Inc., Austin, Texas
CSW Credit..........................CSW Credit, Inc., Dallas, Texas
CSW Credit Agreement................$850 million senior credit agreement
previously entered into by CSW with a
consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
CSW Energy..........................CSW Energy, 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 Investments Credit Facility.....(pound)1.0 billion senior credit facility
previously arranged by CSW Investments with
a consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
CSW Investments Group...............Consolidated SEEBOARD, SEEBOARD Group plc
(which has replaced CSW (UK) plc.) and CSW
Investments converted to U.S. Generally
Accepted Accounting Principles
CSW Leasing.........................CSW Leasing, Inc., Dallas, Texas
CSW Services........................CSW Services, Inc., Dallas, Texas and Tulsa,
Oklahoma
CSW System..........................CSW and its subsidiaries
CWIP................................Construction work in progress
DeSoto..............................Parish of DeSoto, State of Louisiana
pollution control revenue bond issuing
authority
DGES................................Director General Electricity Supply
DOE.................................United States Department of Energy
El Paso.............................El Paso Electric Company
El Paso Merger......................The proposed merger whereby El Paso would
have become a wholly owned subsidiary of
CSW
EMF.................................Electric and Magnetic Fields
Energy Policy Act...................National Energy Policy Act of 1992
EnerShop............................EnerShopSM Inc., Dallas, Texas
Entergy Gulf States.................Gulf States Utilities Company
EPA.................................United States Environmental Protection
Agency
EPS.................................Earnings per share
ERCOT...............................Electric Reliability Council of Texas
ERISA...............................Employee Retirement Income Security Act of
1974, as amended
Exchange Act........................Securities Exchange Act of 1934, as amended

iii

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

ABBREVIATION OR ACRONYM DEFINITION
EWG.................................Exempt Wholesale Generator
FASB................................Financial Accounting Standards Board
FCC.................................Federal Communications Commission
FERC................................Federal Energy Regulatory Commission
First Amended SWEPCO Plan...........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and Entergy
Gulf States on September 30, 1996 with the
U.S. Bankruptcy Court for the Middle
District of Louisiana
FMB.................................First Mortgage Bond
Guadalupe...........................Guadalupe-Blanco River Authority pollution
control revenue bond issuing authority
HLP.................................Houston Lighting & Power Company
Holding Company Act.................Public Utility Holding Company Act of 1935,
as amended
HVdc................................High-voltage direct-current
IPP.................................Independent Power Producer
IBEW................................International Brotherhood of Electrical
Workers
ISO.................................Independent System Operator
ITC.................................Investment tax credit
KW..................................Kilowatt
KWH.................................Kilowatt-hour
LIFO................................Last-in First-out (inventory accounting
method)
Louisiana Commission................Louisiana Public Service Commission
LTIP................................Long-Term Incentive Plan
Magic Valley........................Magic Valley Electric Cooperative
Matagorda...........................Matagorda County Navigation District Number
One (Texas) pollution control revenue bond
issuing authority
MD&A................................Management's Discussion and Analysis of
Financial Condition and Results of
Operations
MDEQ................................Mississippi Department of Environmental
Quality
Members Committee...................The members committee of Cajun, which
currently represents 8 of the 12 Louisiana
member distribution cooperatives that are
served by Cajun
Merger Agreement....................Agreement and Plan of Merger between El Paso
and CSW, dated as of May 3, 1993, as amended
MGP.................................Manufactured gas plant or coal gasification
plant
Mirror CWIP.........................Mirror construction work in progress
Mississippi Power...................Mississippi Power Company
MMbtu...............................Million Btu
Mmcf/d..............................Million cubic feet of gas per day
MTN.................................Medium-term note
MW..................................Megawatt
MWH.................................Megawatt-hour
National Grid.......................National Grid Group plc
NEIL................................Nuclear Electric Insurance Limited
NRC.................................Nuclear Regulatory Commission
OEFA................................Oklahoma Environmental Finance Authority
pollution control revenue bond issuing
authority
Oklahoma Commission.................Corporation Commission of the State of
Oklahoma
Oklaunion...........................Oklaunion Power Station Unit No. 1
ONEOK Gas...........................ONEOK Gas Marketing Company
OPEB................................Other Postretirement Benefits (other than
pension)
Original SWEPCO Plan................The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and
Entergy Gulf States on April 19, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana
PCB.................................Polychlorinated biphenyl
PCRB................................Pollution Control Revenue Bond
PowerShare..........................CSW's PowerShareSM Dividend Reinvestment and
Stock Purchase Plan
PRP.................................Potentially responsible party
PSO.................................Public Service Company of Oklahoma, Tulsa,
Oklahoma
PURA................................Public Utility Regulatory Act of Texas
(including amendments to the law)
PURPA...............................Public Utility Regulatory Policies Act of
1978

iv

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

ABBREVIATION OR ACRONYM DEFINITION
RCRA................................Federal Resource Conservation and Recovery
Act of 1976
Red River...........................Red River Authority of Texas pollution
control revenue bond issuing authority
Registrant(s).......................CSW, CPL, PSO, SWEPCO and WTU
RESCTA..............................Rural Electric Supplier Certified Territory
Act
RUS.................................Rural Utilities Service of the federal
government
Sabine..............................Sabine River Authority of Texas pollution
control revenue bond issuing authority
Siloam Springs......................City of Siloam Springs, Arkansas pollution
control revenue bond issuing authority
SAR.................................Stock Appreciation Right
SEC.................................United States Securities and Exchange
Commission
SEEBOARD............................SEEBOARD plc., Crawley, West Sussex, United
Kingdom
Second Amended SWEPCO Plan..........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and
Entergy Gulf States on October 26, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana (amends both the
Original SWEPCO Plan and the First Amended
SWEPCO Plan)
SERP................................Special Executive Retirement Plan
SFAS................................Statement of Financial Accounting Standards
SFAS No. 52.........................Foreign Currency Translation
SFAS No. 71.........................Accounting for the Effects of Certain Types
of Regulation
SFAS No. 106........................Employers' Accounting for Postemployment
Benefits
SFAS No. 121........................Accounting for the Impairment of Long-Lived
Assets
SFAS No. 123........................Accounting for Stock-Based Compensation
SFAS No. 125........................Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities
SFAS No. 128........................Earnings Per Share
SPP.................................Southwest Power Pool
STB.................................Surface Transportation Board of the United
States Department of Transportation
STP.................................South Texas Project nuclear electric
generating station
Supreme Court.......................Supreme Court of Texas
SWEPCO..............................Southwestern Electric Power Company,
Shreveport, Louisiana
Tender Offer........................CSW (UK)'s approximately $2.12 billion
tender offer in the United Kingdom for all
the outstanding share capital of SEEBOARD
Tejas...............................Tejas Gas Corporation
Texas Commission....................Public Utility Commission of Texas
Tex-La..............................Tex-La Electric Cooperative of Texas, Inc.
Titus County........................Titus County Fresh Water Supply District
No. 1 pollution control revenue bond issuing
authority
TNRCC...............................Texas Natural Resource Conservation
Commission
Transok.............................Transok, Inc. and subsidiaries, Tulsa,
Oklahoma
Trustee Plan........................The plan of reorganization for Cajun filed
by the Cajun Trustee on April 22, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana
UK RPI..............................United Kingdom Retail Price Index
U.S. Electric or U.S. Electric
Operating Companies............CPL, PSO, SWEPCO and WTU
WTU.................................West Texas Utilities Company, Abilene, Texas
WTU 1995 Stipulation and Agreement..Stipulation and Agreement to settle certain
WTU regulatory matters

v

FORWARD LOOKING INFORMATION

This report and other presentations made by CSW and its subsidiaries
contain forward looking statements within the meaning of Section 21E of the
Exchange Act. Although CSW and each of its subsidiaries believe that, in making
any such statements, its expectations are based on reasonable assumptions, any
such statements may be influenced by factors that could cause actual outcomes
and results to be materially different from those projected. Important factors
that could cause actual results to differ materially from those in the forward
looking statements include, but are not limited to: the impact of general
economic changes in the U.S. and in countries in which CSW either currently has
made or in the future may make investments; the impact of deregulation on the
U.S. electric utility business; increased competition and electric utility
industry restructuring in the U.S.; federal and state regulatory developments
and changes in law which may have a substantial adverse impact on the value of
CSW System assets; timing and adequacy of rate relief; adverse changes in
electric load and customer growth; climatic changes or unexpected changes in
weather patterns; changing fuel prices, generating plant and distribution
facility performance; decommissioning costs associated with nuclear generating
facilities; uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries; the effects of retail competition in the natural
gas and electricity distribution and supply businesses in the United Kingdom;
and the timing and success of efforts to develop domestic and international
power projects. In the non-utility area, the aforementioned factors would also
apply, and, in addition, would include: the ability to compete effectively in
new areas, including telecommunications, power marketing and brokering, and
other energy related services, as well as evolving federal and state regulatory
legislation and policies that may adversely affect those industries generally or
the CSW System's business in areas in which it operates.

1-1

PART I

ITEM 1. BUSINESS.

OVERVIEW

CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based
public utility holding company registered under the Holding Company Act. CSW
owns all of the outstanding shares of common stock of the U.S. Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International,
CSW Communications and EnerShop and indirectly owns all of the outstanding share
capital of SEEBOARD. In addition, CSW owns 80% of the outstanding shares of
common stock of CSW Leasing.

The U.S. Electric Operating Companies are public utility companies
engaged in generating, purchasing, transmitting, distributing and selling
electricity. Information concerning the incorporation of each of the U.S.
Electric Operating Companies is presented in the following table.

State of Year of
Registrant Incorporation Incorporation
- -------------------------- ------------------- -------------------

CPL Texas 1945
PSO Oklahoma 1913
SWEPCO Delaware 1912
WTU Texas 1927

The U.S. Electric Operating Companies serve approximately 1.7 million
customers in one of the largest combined service territories in the U.S.
covering approximately 152,000 square miles in portions of Texas, Oklahoma,
Louisiana and Arkansas. CPL and WTU operate in portions of south and central
west Texas, respectively. PSO operates in portions of eastern and southwestern
Oklahoma, and SWEPCO operates in portions of northeastern Texas, northwestern
Louisiana and western Arkansas. The U.S. Electric Operating Companies' customer
base includes a mix of residential, commercial and diversified industrial
customers.

SEEBOARD is one of the 12 regional electricity companies which came
into existence as a result of the restructuring and subsequent privatization of
the United Kingdom electricity industry in 1990. CSW acquired control of
SEEBOARD in April 1996, through intermediate subsidiaries, for an aggregate
adjusted purchase price of approximately $2.1 billion assuming average exchange
rates during the purchase period. SEEBOARD is headquartered in Crawley, West
Sussex and serves approximately two million customers with a distribution
territory in Southeast England that covers approximately 3,000 square miles.
SEEBOARD's principal regulated businesses are the distribution and supply of
electricity. SEEBOARD is also involved in other activities, including gas
supply, electricity generation, electrical contracting and retailing through
appliance shops and superstores.

On June 6, 1996, CSW sold Transok, an intrastate natural gas pipeline
and gas marketing company that was previously a wholly owned subsidiary of CSW,
to Tejas. See ITEM 7-MD&A AND ITEM 8-NOTE 14. TRANSOK DISCONTINUED OPERATIONS
for additional information related to the sale of Transok.

CSW is committed to expanding its electric utility business through
strategic domestic and international acquisitions and through marketing
initiatives inside and outside of the service territories of the U.S. Electric
Operating Companies. Acquisitions of utility assets must meet defined criteria,
including the potential to lower costs, increase long-term efficiency and
competitiveness and provide an acceptable rate of return to CSW.

1-2
CSW continues to seek opportunities to expand its non-utility business
in areas related to its core electric utility business. CSW Energy develops and
operates independent power and cogeneration projects. CSW International was
formed to invest internationally either alone or with local or other partners.
CSW International will continue CSW's efforts in Mexico and Brazil and will seek
to expand into other countries in Latin and South America, Europe and Asia that
meet CSW's investment criteria (The foregoing statement constitutes a forward
looking statement within the meaning of Section 21E of the Exchange Act. Actual
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION). CSW Communications
provides communications services to the U.S. Electric Operating Companies and
non-affiliated companies, including enhancement of services through fiber-optic
and other telecommunication technologies. EnerShop provides commercial,
industrial, institutional and governmental customers with energy management
services designed to control energy costs, enhance productivity and improve
convenience, safety and comfort.

CSW Services performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW System. In April 1996, CSW
announced organizational and executive changes to help prepare CSW for increased
competition and unbundling of the electric utility industry into generation,
transmission, distribution and service segments. As a result of these changes,
in 1996 CSW functionally reorganized its domestic utility operations into three
organizational units which are centrally managed from CSW Services.

CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.

CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.

CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.

Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.

CSW Credit purchases accounts receivable of the U.S. Electric Operating
Companies and certain non-affiliated utilities, and CSW Leasing has investments
in leveraged leases.

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

1-3

In 1996, the U.S. Electric Operating Companies, SEEBOARD and Transok
contributed the following percentages to aggregate operating revenues, operating
income and net income for CSW Common.

INVESTMENT
IN TOTAL
CPL PSO SWEPCO WTU SEEBOARD ELECTRIC TRANSOK(2) OTHER TOTAL
---------------------------------------------------------------------

Operating Revenues 25% 14% 17% 7% 36% 99% --(3) 1% 100%
Operating Income 38% 12% 12% 10% 24% 96% --(3) 4% 100%
Net Income for CSW Common 31% 7% 15% 4% 24% 81%(1) 3%(4) 16%(5) 100%

(1) Net Income for CSW common reflects a one-time charge associated with
certain investments for plant sites, engineering studies and lignite
reserves.
(2) On June 6, 1996, CSW sold Transok to Tejas. See ITEM 8-NOTE 14. TRANSOK
DISCONTINUED OPERATIONS.
(3) Transok's Operating Revenues and Operating Income are shown as Income from
Discontinued Operations in CSW's Consolidated Statements of Income.
(4) Net Income for CSW Common includes earnings from Transok for January
through May 1996 only.
(5) Includes CSW's gain on the sale of Transok.

The relative contributions of the U.S. Electric Operating Companies and
SEEBOARD to the aggregate operating revenues, operating income and net income
for CSW Common differ from year to year due to variations in weather, fuel costs
reflected in charges to customers, timing and amount of rate changes and other
factors, including changes in business conditions and the results of non-utility
businesses. For additional detail related to CSW's reportable business segments,
see ITEM 8-NOTE 13. BUSINESS SEGMENTS.

U.S. UTILITY OPERATIONS

GENERAL

Information concerning the service territories of the U.S. Electric
Operating Companies at December 31, 1996 is set forth in the following table.

Company and Largest Cities Estimated Approximate Retail Rural Electric
Served Population Square Miles Customers Municipalities Cooperatives
- ------------------------------------------------------------------------------------------------

CPL 1,525,000 44,000 625,000 1 4
Corpus Christi, Texas 278,000
Laredo, Texas 158,000
McAllen, Texas 107,000

PSO 1,101,000 30,000 479,000 2 2
Tulsa, Oklahoma 396,000
Lawton, Oklahoma 86,000
Bartlesville, Oklahoma 35,000

SWEPCO 973,000 25,000 414,000 3 8
Shreveport/Bossier City,
Louisiana 178,000
Longview, Texas 75,000
Texarkana, Texas and
Arkansas 56,000

WTU 404,000 53,000 186,000 2 13
Abilene, Texas 111,000
San Angelo, Texas 92,000

1-4
In 1996, approximately 64% of the U.S. Electric Operating Companies'
electric revenues were earned in Texas, 22% in Oklahoma, 8% in Louisiana and 6%
in Arkansas.

CPL
The economic base of CPL's service territory includes manufacturing,
mining, agricultural, transportation and public utilities sectors. Major
activities in these sectors include oil and gas extraction, food processing,
apparel, metal refining, chemical and petroleum refining, plastics and machinery
equipment. In 1996, excluding the effects of the provisions for rate refunds,
industrial customers accounted for approximately 23% of CPL's total operating
revenues. Contracts with substantially all large industrial customers provide
for both demand and energy charges. Demand charges continue under such contracts
even during periods of reduced industrial activity, thus mitigating the effect
of reduced activity on operating income.

PSO
The economic base of PSO's service territory includes mining, petroleum
products, manufacturing and agriculture. The principal industries in the
territory include natural gas and oil production, oil refining, steel
processing, aircraft maintenance, paper manufacturing and timber products,
glass, chemicals, cement and aircraft components.

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

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

COMPETITION AND INDUSTRY CHALLENGES

Competitive forces at work in the electric utility industry are
affecting 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 level in the future. As competition in the industry
increases, the U.S. Electric Operating Companies will have the opportunity to
seek new customers and at the same time be at risk of losing customers to other
competitors. Additionally, the U.S. Electric Operating Companies will continue
to compete with suppliers of alternative forms of energy, such as natural gas,
fuel oil and coal, some of which may be cheaper than electricity. As a whole,
the U.S. Electric Operating Companies believe that their prices for electricity
and the quality and reliability of their service currently place them in a
position to compete effectively in the marketplace (The foregoing statement
constitutes a forward looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD LOOKING
INFORMATION).

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

1-5

REGULATION

The CSW System is subject to the jurisdiction of the SEC under the
Holding Company Act. The Holding Company Act generally limits the operations of
a registered holding company to a single integrated public utility system, plus
such additional businesses as are functionally related to such system.

The U.S. Electric Operating Companies have been classified as public
utilities under the Federal Power Act, and accordingly, the FERC has
jurisdiction in certain respects over their electric utility facilities and
operations, wholesale rates, and in certain other matters.

The U.S. Electric Operating Companies are subject to the jurisdiction
of various state commissions as to retail rates, accounting matters, standards
of service and, in some cases, issuance of securities, certification of
facilities and extensions and division of service territory.

See ITEM 7-MD&A for a discussion of possible changes to the Holding
Company Act as well as discussion of current industry restructuring activities
that could have a significant impact on the CSW System.

NUCLEAR REGULATION - CPL
Ownership of an interest in a nuclear generating unit exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose licensing and safety-related requirements. Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the environmental aspects of nuclear reactors. The NRC has the authority to
impose fines and/or shut down a unit until compliance is achieved, depending
upon its assessment of the severity of the situation. For additional information
regarding STP, see ITEM 7-MD&A.

ENVIRONMENTAL REGULATION
For a discussion of regulation by the various environmental agencies
that applies to the U.S. Electric Operating Companies, see ENVIRONMENTAL MATTERS
below.

RATES

The retail rates of the U.S. Electric Operating Companies are subject
to regulation by the state utility commissions in the states in which they
operate. As discussed above, the wholesale rates of the U.S. Electric Operating
Companies are subject to regulation by the FERC. In addition, SWEPCO has
agreements, which have been approved by the FERC, with all of its wholesale
customers under which rates are based upon an agreed cost of service formula.
These rates are adjusted periodically to reflect the actual cost of providing
service.

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

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

1-6

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

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

FUEL RECOVERY

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

TEXAS FUEL RECOVERY - CPL, SWEPCO AND WTU
Electric utilities in Texas, including CPL, SWEPCO and WTU, are not
allowed to make automatic adjustments to recover changes in fuel costs from
retail customers. A utility is allowed to recover its known or reasonably
predictable fuel costs through a fixed fuel factor. The Texas Commission
established procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months according to a specified schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding. Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition the Texas Commission for a surcharge or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially under- or over-collect. Material
under- or over-collections including interest are defined as variances of four
percent or more of the most recent Texas Commission adopted annual estimated
fuel cost for the utility. A utility does not have to revise its fuel factor
when requesting a surcharge or refund. An interim emergency fuel factor order
must be issued by the Texas Commission within 30 days after such petition is
filed by the utility. Final reconciliation of fuel costs is made through a
reconciliation proceeding, which may contain a maximum of three years and a
minimum of one year of reconcilable data, and must be filed with the Texas
Commission no later than six months after the end of the period to be
reconciled. In addition, a utility must include a reconciliation of fuel costs
in any general rate proceeding regardless of the time since its last fuel
reconciliation proceeding. Any fuel costs that are determined unreasonably
incurred in a reconciliation proceeding are not recoverable from retail
customers.

OKLAHOMA FUEL RECOVERY - PSO
All KWH sales to PSO's retail customers were made under rates which
include a fuel cost adjustment clause. Oklahoma law requires that an examination
of PSO's retail fuel cost adjustment clause be performed annually by the
Oklahoma Commission which approves the utility's embedded fuel rate per KWH. The
fuel cost adjustment is computed for each month on the basis of the average cost
of fuel consumed in the month. The amount of any difference in such cost over or
under the embedded rate is applied on a KWH basis and reflected in adjustments
to customers' bills during the second month subsequent to the month in which the
difference occurred.

1-7

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

RECOVERABILITY OF FUEL
The inability of any U.S. Electric Operating Company to recover its
fuel costs under the procedures described above could have a material adverse
effect on such company's results of operations and financial condition.

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

OPERATING DATA

FACILITIES, PLANTS AND PROPERTIES
At December 31, 1996, the U.S. Electric Operating Companies owned the
following electric generating plants, or portions thereof in the case of jointly
owned plants, substantially all of which were steam electric units.

Net Dependable
Summer Rating
Principal Fuel Capability
Plant Name and Location Source (A) (MW) (B)
- -------------------------------------------------------------------------------

CPL
La Palma, San Benito, Texas Gas 205 (C)
Victoria, Victoria, Texas Gas 432 (C)
Nueces Bay, Corpus Christi, Texas Gas 560
Lon C. Hill, Corpus Christi, Texas Gas 547
Laredo, Laredo, Texas Gas 177
J. L. Bates, Mission, Texas Gas 182
E.S. Joslin, Point Comfort, Texas Gas 249
Barney M. Davis, Corpus Christi, Texas Gas 695
Coleto Creek, Goliad, Texas Coal 632
Oklaunion, Vernon, Texas (B) Coal 53
STP, Bay City, Texas (B) Nuclear 630
Eagle Pass, Eagle Pass, Texas Hydro 6
-----------
4,368
-----------
PSO
Tulsa, Tulsa, Oklahoma Gas 165 (C)
Oil 8
Riverside, Jenks, Oklahoma Gas 916
Oil 3
Northeastern, Oologah, Oklahoma Gas 637
Coal 900
Oil 4
Southwestern, Washita, Oklahoma Gas 475
Oil 2
Comanche, Lawton, Oklahoma Gas 273
Oil 4
Weleetka, Weleetka, Oklahoma Gas 151
Oil 4
Oklaunion, Vernon, Texas (B) Coal 106
----------
3,648
----------

1-8
Net Dependable
Summer Rating
Principal Fuel Capability
Plant Name and Location Source (A) (MW) (B)
- -------------------------------------------------------------------------------

SWEPCO
Arsenal Hill, Shreveport, Louisiana Gas 112
Lieberman, Mooringsport, Louisiana Gas 273
Knox Lee, Cherokee Lake, Texas Gas 478
Wilkes, Jefferson, Texas Gas 875
Lone Star, Daingerfield, Texas Gas 50
Welsh, Cason, Texas Coal 1,584
Flint Creek, Gentry, Arkansas (B) Coal 240
Henry W. Pirkey, Hallsville, Texas (B) Lignite 559
Dolet Hills, Mansfield, Louisiana (B) Lignite 262
----------
4,433
----------

WTU
Paint Creek, Haskell, Texas Gas 237
Rio Pecos, Girvin, Texas Gas 137
San Angelo, San Angelo, Texas Gas 125
Fort Phantom, Abilene, Texas Gas 362
Oak Creek, Bronte, Texas Gas 85
Abilene, Abilene, Texas Gas 7
Lake Pauline, Quanah, Texas Gas 45
Ft. Stockton, Ft. Stockton, Texas Gas 5
Vernon, Vernon, Texas Oil 9
Oklaunion, Vernon, Texas (B) Coal 370
Presidio, Presidio, Texas Oil 2
--------
1,384
--------

Total, excluding plant in storage 13,833
Plant in storage 358
--------
CSW TOTAL 14,191
--------

(A) Some plants have the capability of burning oil in combination with gas.
Use of oil in facilities primarily designed to burn gas results in
increased maintenance expense and a reduction of approximately 4% to 10%
in capability. PSO and WTU have 25 MW and 11 MW, respectively, of
facilities primarily designed to burn oil.
(B) Data reflects only the U.S. Electric Operating Companies' portion of
plants which are jointly owned with non-affiliates. For additional
information concerning jointly owned facilities see ITEM 8-NOTE 6.
JOINTLY OWNED ELECTRIC UTILITY PLANT.
(C) Excludes 358 MW from units in storage, consisting of 48 MW at La Palma
and 60 MW at Victoria for CPL and 250 MW at Tulsa for PSO. It is
currently anticipated that one unit in storage (85 MW) at Tulsa for PSO
will be dismantled in 1998. Refer to ITEM 7-MD&A for additional
information.

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

CONSTRUCTION EXPENDITURES
The U.S. Electric Operating Companies maintain a continuing
construction program, the nature and extent of which is based upon current and
estimated demands upon the system. See ITEM 7-MD&A for additional information
related to construction expenditures.

1-9

PEAK LOADS AND SYSTEM CAPABILITIES OF THE U.S. ELECTRIC OPERATING
COMPANIES
The following tables set forth for the last three years (i) the net
system capability, including the net amounts of contracted purchases and
contracted sales, at the time of peak demand, (ii) the maximum coincident system
demand on a one-hour integrated basis, exclusive of sales to other electric
utilities and (iii) the respective amounts and percentages of peak demand
generated by the U.S. Electric Operating Companies and net purchases and sales.

CSW 1996 1995 1994
- -----------------------------------------------------------------------------------------------

Net system capability (MW) 14,377 (1) 14,168 (1),(2) 13,549 (1),(3)
Maximum coincident system demand (MW) 12,613 12,314 11,434
Percentage increase (decrease) in peak demand
over prior period 2.4% 7.7% (0.3)%
Generation at time of peak (MW) 11,625 12,053 11,353
Percent of peak demand generated 92.2% 97.9% 99.3%
Net purchases at time of peak (MW) 988 261 81
Percent of net purchases at time of peak 7.8% 2.1% 0.7%
Date of maximum coincident system demand July 22 July 28 June 27

(1) Does not include 358 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 392 MW of system
capability in storage in 1995 and 557 MW of system capability in
storage in 1994.
(2) Does not include 54 MW of SWEPCO capability in 1995 that was not
available at the peak due to fuel procurement issues.
(3) Does not include 324 MW of SWEPCO capability in 1994 that was
unavailable due to inefficiencies as a result of slag build-ups
and fuel procurement issues.

CPL 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 4,380 (1) 4,200 (1) 3,969 (1)
Maximum coincident system demand (MW) 4,046 3,862 3,732
Percentage increase (decrease) in
peak demand over prior period 4.8% 3.5% 6.1%
Generation at time of peak (MW) 3,484 3,846 3,074
Percent of peak demand generated 86.1% 99.6% 82.4%
Net purchases (sales) at time of peak (MW) 562 16 658
Percent of net purchases (sales) at time
of peak 13.9% 0.4% 17.6%
Date of maximum coincident system demand August 13 July 26 August 18

(1) Does not include 108 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 142 MW of system
capability in storage in 1995 and 310 MW of system capability in
storage in 1994.

PSO 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 3,848 (1) 3,759 (1) 3,664 (1)
Maximum coincident system demand (MW) 3,360 3,292 3,167
Percentage increase (decrease) in peak
demand over prior period 2.1% 3.9% 0.6%
Generation at time of peak (MW) 3,009 3,025 2,645
Percent of peak demand generated 89.6% 91.9% 83.5%
Net purchases (sales) at time of peak (MW) 351 267 522
Percent of net purchases (sales) at time
of peak 10.4% 8.1% 16.5%
Date of maximum coincident system demand August 7 August 28 June 27

(1) Does not include 250 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 250 MW of system
capability in storage in 1995 and 247 MW of system capability in
storage in 1994.

1-10

SWEPCO 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 4,554 4,783 (1) 4,464 (2)
Maximum coincident system demand (MW) 4,018 3,932 3,526
Percentage increase (decrease) in peak
demand over prior period 2.2% 11.5% (3.4%)
Generation at time of peak (MW) 3,608 4,022 3,987
Percent of peak demand generated 89.8% 102.3% 113.1%
Net purchases (sales) at time of peak (MW) 410 (90) (461)
Percent of net purchases (sales) at time
of peak 10.2% (2.3%) (13.1%)
Date of maximum coincident system demand July 22 July 28 June 27

(1) Does not include 54 MW of capability in 1995 that was not available at
the peak due to fuel procurement issues. (2) Does not include 324 MW of
capability in 1994 that was unavailable due to inefficiencies as a
result of slag build-ups and fuel procurement issues.

WTU 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 1,595 1,426 1,459
Maximum coincident system demand (MW) 1,433 1,435 1,262
Percentage increase (decrease) in peak
demand over prior period (0.1)% 13.7% 5.1%
Generation at time of peak (MW) 1,048 1,167 1,401
Percent of peak demand generated 73.1% 81.3% 111.0%
Net purchases (sales) at time of peak (MW) 385 268 (139)
Percent of net purchases (sales) at time
of peak 26.9% 18.7% (11.0%)
Date of maximum coincident system demand July 8 July 28 June 27

1-11

U.S. ELECTRIC OPERATING STATISTICS

CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
(EXCLUDES SEEBOARD)
1996 1995 1994
----------------------------
Kilowatt-hour sales (millions)
Residential 17,883 16,872 16,368
Commercial 14,256 13,755 13,463
Industrial 20,266 19,321 18,869
Other retail 1,592 1,518 1,501
------ ------ -------
Sales to retail customers 53,997 51,466 50,201
Sales for resale 8,428 8,468 7,133
------ ------ -------
Total 62,425 59,934 57,334
------ ------ -------

Number of electric customers at end of period
(thousands)
Residential 1,456 1,437 1,417
Commercial 211 209 205
Industrial 23 24 24
Other 14 13 15
------ ------ -------
Total 1,704 1,683 1,661
------ ------ -------

Residential sales averages
KWH per customer 12,392 11,840 11,665
Revenue per customer (a), (b) $861 $799 $824
Revenue per KWH (cents) (a), (b) 6.95 6.75 7.06

Revenue per KWH on total sales (cents) (a), (b) 5.20 4.81 5.35

Fuel cost data (a)
Average Btu per net KWH 10,440 10,299 10,344
Cost per MMBtu $1.81 $1.58 $1.82
Cost per KWH generated (cents) 1.89 1.63 1.88
Cost, including purchased power, as a
percentage of revenue (b) 37.4% 35.0% 36.7%

(a) These statistics reflect the outage at STP in early 1994.
(b) These statistics reflect the refunds and fuel disallowances that
occurred as a result of the CPL 1995 Agreement, the CPL 1996 Fuel
Agreement, management's judgment concerning the effect of the probable
outcome of CPL's pending rate case and the WTU 1995 Stipulation and
Agreement. For additional information, see ITEM 8-NOTE 2 LITIGATION
AND REGULATORY PROCEEDINGS.

1-12

OPERATING STATISTICS

CENTRAL POWER AND LIGHT COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 6,680 6,223 5,954
Commercial 4,773 4,656 4,523
Industrial 7,610 7,250 6,910
Other retail 499 465 457
------- ------- -------
Sales to retail customers 19,562 18,594 17,844
Sales for resale 2,029 1,680 1,286
------- ------- -------
Total 21,591 20,274 19,130
------- ------- -------

Number of electric customers at end of period
Residential 536,504 526,909 516,355
Commercial 78,890 77,743 76,739
Industrial 5,702 5,731 5,864
Other 3,855 3,561 3,577
------- ------- -------
Total 624,951 613,944 602,535
------- ------- -------

Residential sales averages
KWH per customer 12,623 11,985 11,729
Revenue per customer (a), (b) $1,000 $896 $935
Revenue per KWH (cents) (a), (b) 7.92 7.48 7.97

Revenue per KWH on total sales (cents) (a), (b) 6.02 5.29 6.37

Fuel cost data (a)
Average Btu per net KWH 10,391 10,175 10,289
Cost per MMBtu $1.62 $1.37 $1.75
Cost per KWH generated (cents) 1.68 1.39 1.80
Cost, including purchased power, as a
percentage of revenue (b) 30.8% 28.7% 30.4%

(a) These statistics reflect the outage at STP in early 1994.
(b) These statistics reflect the refund and fuel disallowance that
occurred as a result of the CPL 1995 Agreement, the refund associated
with the CPL 1996 Fuel Agreement and management's judgment concerning
the effect of the probable outcome of CPL's pending rate case. For
additional information, see ITEM 8-NOTE 2 LITIGATION AND REGULATORY
PROCEEDINGS.

1-13

OPERATING STATISTICS

PUBLIC SERVICE COMPANY OF OKLAHOMA
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 5,098 4,753 4,749
Commercial 4,621 4,427 4,434
Industrial 4,581 4,307 4,360
Other retail 81 80 89
------- ------- -------
Sales to retail customers 14,381 13,567 13,632
Sales for resale 1,487 1,617 1,509
------- ------- -------
Total 15,868 15,184 15,141
------- ------- -------

Number of electric customers at end of period
Residential 417,158 412,765 409,675
Commercial 54,849 54,102 53,454
Industrial 5,158 5,205 5,156
Other 1,390 1,353 1,287
------- ------- -------
Total 478,555 473,425 469,572
------- ------- -------

Residential sales averages
KWH per customer 12,290 11,563 11,640
Revenue per customer $722 $682 $726
Revenue per KWH (cents) 5.89 5.89 6.24

Revenue per KWH on total sales (cents) 4.63 4.55 4.89

Fuel cost data
Average Btu per net KWH 10,225 10,151 10,231
Cost per MMBtu $2.04 $1.73 $1.96
Cost per KWH generated (cents) 2.09 1.75 2.00
Cost, including purchased power, as a
percentage of revenue 45.1% 43.0% 47.5%

1-14

OPERATING STATISTICS

SOUTHWESTERN ELECTRIC POWER COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 4,487 4,406 4,157
Commercial 3,658 3,521 3,378
Industrial 6,833 6,531 6,357
Other retail 432 424 400
------- ------- -------
Sales to retail customers 15,410 14,882 14,292
Sales for resale 6,395 5,002 5,189
------- ------- -------
Total 21,805 19,884 19,481
------- ------- -------

Number of electric customers at end of period
Residential 355,095 351,131 346,227
Commercial 50,091 49,123 48,153
Industrial 5,915 5,864 5,747
Other 2,727 2,615 2,609
------- ------- -------
Total 413,828 408,733 402,736
------- ------- -------

Residential sales averages
KWH per customer 12,704 12,627 12,107
Revenue per customer $821 $798 $776
Revenue per KWH (cents) 6.46 6.32 6.41

Revenue per KWH on total sales (cents) 4.22 4.21 4.24

Fuel cost data
Average Btu per net KWH 10,606 10,531 10,489
Cost per MMBtu $1.76 $1.61 $1.75
Cost per KWH generated (cents) 1.87 1.70 1.84
Cost, including purchased power, as a
percentage of revenue 45.1% 40.3% 43.2%

1-15

OPERATING STATISTICS

WEST TEXAS UTILITIES COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 1,620 1,490 1,508
Commercial 1,203 1,152 1,128
Industrial 1,241 1,233 1,241
Other retail 581 549 556
------- ------- -------
Sales to retail customers 4,645 4,424 4,433
Sales for resale 2,411 2,268 2,051
------- ------- -------
Total 7,056 6,692 6,484
------- ------- -------

Number of electric customers at end of period
Residential 146,607 146,235 144,966
Commercial 27,645 27,243 26,618
Industrial 6,019 7,317 7,392
Other 5,837 5,685 5,533
------- ------- -------
Total 186,108 186,480 184,509
------- ------- -------

Residential sales averages
KWH per customer 11,059 10,224 10,449
Revenue per customer (a) $848 $784 $822
Revenue per KWH (cents) (a) 7.67 7.67 7.86

Revenue per KWH on total sales (cents) (a) 5.34 4.78 5.29

Fuel cost data
Average Btu per net KWH 10,568 10,370 10,424
Cost per MMBtu $2.01 $1.83 $1.88
Cost per KWH generated (cents) 2.12 1.90 1.96
Cost, including purchased power, as a
percentage of revenue (a) 43.5% 42.1% 39.8%

(a) These statistics reflect the refund and lower rates that occurred as a
result of the WTU 1995 Stipulation and Agreement. See ITEM 8-NOTE 2
LITIGATION AND REGULATORY PROCEEDINGS.

1-16

POWER PURCHASES AND SALES

Various municipalities, electric cooperatives and public power
authorities are served by the U.S. Electric Operating Companies. The U.S.
Electric Operating Companies exchange power on an emergency or economy basis
with various neighboring systems and engage in economy interchanges with each
other. In addition, they contract with certain suppliers including power
marketers and independent power producers for the purchase or sale of power on a
unit capacity basis, firm energy, responsive reserves and other wholesale
services.

CPL - MAGIC VALLEY
Magic Valley, CPL's largest wholesale customer, is currently served
under an agreement that requires a five year notice of termination. During 1996,
Magic Valley exercised such notice of termination. Pursuant to Texas Commission
rules, Magic Valley has issued a solicitation for 250 MW of load beginning in
2001. CPL has submitted a bid in response to the solicitation. Magic Valley
anticipates a final decision regarding the solicitation in late 1997.

SWEPCO - BREMCO
As part of the agreement to acquire BREMCO, SWEPCO entered into a
long-term purchased power contract with Cajun, BREMCO's previous
full-requirements wholesale supplier. The contract covered the purchase of
energy and capacity.

SWEPCO AND WTU - TEX-LA
WTU serves approximately 120 MW of load for Tex-La. WTU will serve this
load until Tex-La facilities are completed to connect Tex-La to SWEPCO, at which
time SWEPCO will serve approximately 85 MW and WTU will continue to serve
approximately 35 MW of the load. To date, approximately 15 MW of this load has
been transferred to SWEPCO.

SWEPCO - CAJUN
See ITEM 7-MD&A for information regarding SWEPCO's pending proposal to
acquire all of Cajun's non-nuclear assets.

WTU - CITY OF WEATHERFORD, TEXAS
On January 1, 1997, the City of Weatherford, Texas became a new
wholesale customer of WTU. WTU initially served 25 MW of load for the city,
until February 1, 1997, when it began serving the entire load of approximately
55 MW.

OTHER OPERATIONAL INFORMATION

SYSTEM INTERCONNECTION
The CSW U.S. Electric system operates on an interstate basis to
facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW
North HVdc transmission interconnection. SWEPCO and CPL are interconnected
through the 600 MW East HVdc transmission interconnection which became
operational in August, 1996.

CPL and WTU are members of ERCOT which operates in Texas. Other ERCOT
members include Texas Utilities Electric Company, HLP, Texas Municipal Power
Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the
municipal systems of San Antonio, Austin and Brownsville, the South Texas and
Medina Electric Cooperatives, and several other interconnected systems and
cooperatives. PSO and SWEPCO are members of the SPP, which is comprised of 43
members, including 17 investor-owned utilities, 12 municipalities, 10
cooperatives, 3 state and 1 federal agency operating in the states of Arkansas,
Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and

1-17
Texas. ERCOT members interchange power and energy with one another on a firm,
economy and emergency basis, as do the members of the SPP.

SEASONALITY
Sales of electricity by the U.S. Electric Operating Companies tend to
increase during warmer summer months and, to a lesser extent, cooler winter
months, because of higher demand for power.

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

FUEL SUPPLY

GENERAL
The U.S. Electric Operating Companies' present net dependable summer
rating power generation capabilities and the type of fuel used are set forth in
FACILITIES, PLANTS AND PROPERTIES above. The fuel mix of the U.S. Electric
Operating Companies' generating capability and generation mix for 1996 is set
forth in the tables presented below.

Aggregate Capability
(MW) CSW CPL PSO SWEPCO WTU
- ----------------------------------------------------------------------------

Natural Gas 8,455 3,047 2,617 1,788 1,003
Coal 3,885 685 1,006 1,824 370
Lignite 821 -- -- 821 --
Nuclear 630 630 -- -- --
Hydro and Oil 42 6 25 -- 11
------------------------------------------------------
13,833 4,368 3,648 4,433 1,384
Plant in Storage 358 108 250 -- --
------------------------------------------------------
Total 14,191 4,476 3,898 4,433 1,384
------------------------------------------------------

Generation Mix
(as a % of MWH) CSW CPL PSO SWEPCO WTU
- ---------------------------------------------------------------------------

Natural Gas 39 49 49 17 57
Coal 43 25 51 54 43
Lignite 10 -- -- 29 --
Nuclear 8 26 -- -- --
Hydro and Oil -- -- -- -- --
-----------------------------------------------------
100 100 100 100 100
-----------------------------------------------------

While the CSW-installed capacity of natural gas-fired units is higher
than the capacity of solid-fuel units, the primary determinant for utilization
is fuel cost. Consequently, as solid-fuel prices were substantially less than
natural gas in 1996, the utilization of solid-fuel units was higher than natural
gas-fueled units.

NATURAL GAS
The U.S. Electric Operating Companies purchase their natural gas from a
number of suppliers operating in and around their service territories. In 1996,
approximately 45% of the U.S. Electric Operating Companies' total natural gas
purchases were made under long-term contracts and approximately 55% came from
short-term contracts and spot market purchases.

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CPL
CPL's eight gas-fired electric generating plants are supplied by a
portfolio of long-term and short-term natural gas purchase agreements through
multiple natural gas pipeline systems. Approximately 60% of CPL's total natural
gas requirements in 1996 were purchased under long-term arrangements
representing both purchase obligations and discretionary purchases. The balance
of CPL's natural gas requirements was acquired under short-term arrangements
from the spot market.

PSO
PSO's six gas-fired electric generating plants are supplied by a
portfolio of long-term and short-term natural gas purchase agreements. In 1996,
approximately 54% of PSO's natural gas requirements were provided under firm
contracts with the remaining requirements acquired from the spot market. These
natural gas supplies were transported to PSO facilities through the pipeline
system of Transok, a former affiliate. In accordance with an order issued by the
Oklahoma Commission in 1991, which required a phase-in of competitive bidding of
natural gas transportation requirements, PSO has entered into a five-year
natural gas transportation and sales agreement with ONEOK Gas. During 1997,
ONEOK will build pipelines to three of PSO's six natural gas-fired generating
stations and will begin providing natural gas transportation and supply on
January 1, 1998. CSW and PSO do not expect the sale of Transok to have an
adverse impact in its ability to secure natural gas in the future. Negotiations
are currently in progress with third party pipelines to provide additional
pipeline interconnections to other natural gas suppliers besides Transok.

SWEPCO
SWEPCO purchased approximately 89% of its natural gas requirements in
1996 pursuant to spot purchase contracts. Due to the peaking operation of
SWEPCO's five gas-fired electric generating plants, a majority of SWEPCO's
natural gas requirements will continue to be purchased on the spot market and
will be subject to market conditions.

WTU
WTU purchases its natural gas requirements from numerous suppliers. The
most significant contract is the long-term firm contract with Lone Star Gas
Company which provided approximately 11% of WTU's total natural gas requirements
in 1996. WTU purchased approximately 9% of its natural gas requirements from
supplemental firm contracts with several suppliers and the remaining 80% was
purchased from a number of suppliers on the spot market.

COAL AND LIGNITE
The U.S. Electric Operating Companies purchase coal from a number of
suppliers. In 1996, approximately 80% of the U.S. Electric Operating Companies'
total coal purchases were supplied under long-term contracts with the balance
procured on the spot market. The coal for the CSW U.S. Electric system plants
comes primarily from Wyoming or Colorado mines which are located between 1,000
and 1,700 rail miles from the generating plants.

OKLAUNION - CPL, PSO AND WTU
The jointly-owned Oklaunion plant is supplied coal under a coal supply
contract with Caballo Coal Company. Approximately 67% of the total 1996
Oklaunion coal requirements for WTU, 67% for CPL, and 68% for PSO were supplied
under the Caballo Coal Company contract with the balance procured on the spot
market. As of December 31, 1996, CPL's share of the year-end 1996 coal inventory
at Oklaunion was approximately 49,632 tons, representing approximately a 65-day
supply. PSO's share was approximately 91,053 tons, representing approximately a
59-day supply. WTU's share was approximately 349,277 tons, representing
approximately a 65-day supply.

Coal needed at Oklaunion is transported in Burlington Northern supplied
rail cars pursuant to a tariff filed with the Interstate Commerce Commission,
whose authority in the matter was transferred to the STB effective January 1,
1996. In a decision issued May 3, 1996, the STB declared the rate set forth in
Burlington Northern's tariff of $19.36 per ton to be unreasonably high and made

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certain other rulings having the effect of limiting the rate to a maximum of
$13.68 per ton. On July 2, 1996, Burlington Northern established such rate for
the transportation of coal to Oklaunion. Burlington Northern has appealed the
May 3, 1996, decision and a related June 25, 1996, decision to the U.S. Court of
Appeals for the District of Columbia Circuit. If the STB decisions are upheld,
WTU will be entitled to recovery, with interest, of excess charges between the
expiration of the contract and July 2, 1996. If the STB decisions are not
upheld, WTU will be required to reimburse Burlington Northern, with interest,
for the amount, if any, by which the rate ultimately determined to apply, up to
its tariff rate, exceeds the amount charged to WTU. WTU does not believe
resolution of this matter will have a material impact on its results of
operations or financial condition.

COLETO CREEK - CPL
CPL has a long-term coal supply agreement with Colowyo Coal Company
covering approximately 25% of the coal requirements of its Coleto Creek plant.
During 1996, this agreement was suspended and replaced with an agreement
pursuant to which both coal and coal transportation, using CPL-owned rail cars,
were provided by Colowyo Coal Company which, in turn, entered into
transportation arrangements with Southern Pacific Transportation Company.
Approximately 70% of Coleto Creek's requirements were furnished under this
agreement. The balance of the plant's requirements consisted of carry-over
tonnage shortfalls under the long-term Colowyo Contract and spot purchases of
Powder River Basin Coal that were delivered under spot rail transportation
agreements. At December 31, 1996, CPL had approximately 171,000 tons of coal in
inventory at Coleto Creek, representing approximately a 27-day supply.

CPL has entered into an agreement with Colowyo Coal Company for
deliveries in 1997 that is similar to the 1996 agreement. After 1997, CPL
intends to utilize Powder River Basin coal for all or a portion of the Coleto
Creek plant requirements and will transport such coal either in common carrier
rail service or pursuant to negotiated rail transportation arrangements. Powder
River Basin coal is transported approximately 1,700 miles, using either
Burlington Northern or Union Pacific as the originating carrier and Southern
Pacific Transportation Company as the destination carrier.

Southern Pacific Transportation Company is currently the only rail
carrier with access to the Coleto Creek Plant. In 1994, CPL instituted a
proceeding at the Interstate Commerce Commission requesting a reasonable rate
for the 16 mile movement from Victoria, Texas, a station served by another
carrier, to Coleto Creek. Southern Pacific Transportation Company moved to
dismiss the complaint and, in a decision issued December 31, 1996, the STB
granted the motion. CPL has appealed this decision to the U.S. Court of Appeals
for the Eighth Circuit.

NORTHEASTERN STATION - PSO
PSO has a contract with Kerr-McGee Coal Corporation, which
substantially covers the coal supply for PSO's Northeastern Station coal units
through at least 2004. Coal delivery is by unit trains from mines located in the
Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from
Northeastern Station. PSO owns sufficient rail cars and spares for operation of
six unit trains. Coal is transported to Northeastern Station pursuant to a
long-term contract with Burlington Northern. The plant also has physical access
to deliveries from Union Pacific. At December 31, 1996, PSO had approximately
321,000 tons of coal in inventory at Northeastern Station representing
approximately a 28-day supply.

WELSH AND FLINT CREEK - SWEPCO
Long-term coal supply for SWEPCO's Welsh plant and its 50 percent-owned
Flint Creek plant is provided under a contract with Cyprus/Amax. Coal under this
contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100
miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to
the plants under rail transportation contracts with Burlington Northern and the
Kansas City Southern Railroad Company having expiration dates ranging between
1997 and 2007. SWEPCO owns or leases under long-term leases sufficient railcars
and spares for operation of twelve unit trains. SWEPCO has supplemented its
railcar fleet from time to time with short-term leases. At December 31, 1996,

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SWEPCO had coal inventories of 1,175,000 tons at Welsh representing
approximately a 58-day supply and 437,000 tons at Flint Creek representing
approximately a 52-day supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional information.

PIRKEY AND DOLET HILLS - SWEPCO
SWEPCO has acquired lignite leases covering an aggregate of about
27,000 acres near the Henry W. Pirkey power plant. Sabine Mining Company is the
contract miner of these reserves. At December 31, 1996, 213,000 tons of lignite
were in SWEPCO's inventory at the Pirkey plant representing a 19-day supply.
Another 25,000 acres are jointly leased in equal portions by SWEPCO and Central
Louisiana Electric Company in the Dolet Hills area of Louisiana near Dolet Hills
Power Plant. The Dolet Hills Mining Venture is the contract miner for these
reserves. At December 31, 1996, SWEPCO had approximately 177,000 tons of lignite
in inventory at the Dolet Hills plant representing a 34-day supply. In the
opinion of the management of SWEPCO, the acreage under lease in these areas
contains sufficient reserves to cover the anticipated lignite requirements for
the estimated useful lives of the lignite-fired plants.

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

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

CPL and the other STP participants have entered into contracts with
suppliers for uranium concentrate and conversion service sufficient for the
operation of both STP units through May 1998. Additional flexible contracts are
in place to provide 50% of the uranium concentrate and 100% of the conversion
service needed for STP from mid-1998 through mid-1999. Enrichment contracts were
secured for a 30-year period from the initial operation of each unit. The STP
participants have canceled the enrichment requirements for the period from
October 2000 to September 2006 under a ten year no cost termination provision of
the enrichment contract. The STP participants believe that other, lower cost
options will be available in the future. Also, fuel fabrication services have
been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2.
Although CPL and the other STP owners cannot predict the availability of uranium
and related services, CPL and the other STP owners do not currently expect to
have difficulty obtaining uranium and related services required for the
remaining years of STP operation.

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

The Nuclear Waste Policy Act of 1982, as amended, requires the DOE to
develop a permanent high level waste disposal facility for the storage of spent
nuclear fuel by 1998. The DOE last estimated that the permanent facility will
not be available until 2010. The DOE will be taking possession of all spent fuel
generated at STP as a result of a contract CPL and other STP participants have
entered into with the DOE. STP has on-site storage facilities with the

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capability to store all the spent nuclear fuel generated by the STP units over
their lives. Therefore, the DOE delay in providing the disposal facility will
not impact the operation of the STP units. Under provisions of the Nuclear Waste
Policy Act of 1992, a one-mill per KWH assessment on electricity generated and
sold from nuclear reactors funds the DOE waste disposal program.

Risks of substantial liability could arise from the operation of STP
and from the use, handling, disposal and possible radioactive emissions
associated with nuclear fuel. While CPL carries insurance, the availability,
amount and coverage thereof is limited and may become more limited in the
future. The available insurance may not cover all types or amounts of loss or
expense which may be experienced in connection with the ownership of STP. See
ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for information relating
to nuclear insurance.

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

FUEL COSTS AND CONSUMPTION
Additional fuel cost data for the CSW U.S. Electric system appears
under U.S. ELECTRIC OPERATING STATISTICS above. Average fuel costs and
consumption by fuel type for 1996 are presented in the following table.

Average
Cost per Consumption
Fuel Type MMbtu (millions)
- -------------------------------------------------------------------
MMbtus Mcfs Tons
CPL
Natural gas $2.25 105 102
Coal 1.43 51 3
Nuclear 0.55 54
Composite 1.62

PSO
Natural gas $2.84 74 72
Coal 1.26 78 4
Composite 2.04

SWEPCO
Natural gas $2.64 39 39
Coal 1.77 116 7
Lignite 1.13 63 5
Composite 1.76

WTU
Natural gas $2.37 38 38
Coal 1.46 28 2
Composite 2.02

CSW
Natural gas $2.50 256 251
Coal 1.54 273 16
Lignite 1.16 63 5
Nuclear .55 54
Composite 1.81

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

ENVIRONMENTAL MATTERS

The U.S. Electric Operating Companies and CSW Energy are subject to
regulation with respect to air and water quality and solid waste standards and
other environmental matters by various federal, state and local authorities.
These authorities have continuing jurisdiction in most cases to require
modifications in the U.S. Electric Operating Companies' and CSW Energy
facilities and operations. Changes in environmental statutes or regulations
could require substantial additional expenditures to modify the U.S. Electric
Operating Companies' facilities and operations and CSW Energy could have a
material adverse effect on CSW's and each of the U.S. Electric Operating
Companies' and CSW Energy's results of operations and financial condition.
Violations of environmental statutes or regulations can result in fines and
other costs.

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

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

As a result of requirements imposed by the CAAA, CSW expects to spend
approximately $1.7 million over a three year period from 1995 to 1997 for annual
testing of, software modifications to, and maintenance of continuous emission
monitoring equipment. Of this, approximately $0.5 million was spent in 1995 and
$0.6 million in 1996.

The expected expenditures to meet CAAA requirements and the 1996 and
1995 expenditures for each of the U.S. Electric Operating Companies are
presented in the following table.

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

Total expected expenditures (1995-1997) $540 $329 $488 $309
Expenditures in 1996 190 108 172 112
Expenditures in 1995 146 98 131 86

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

1-23
Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide
control for coal units, the U.S. Electric Operating companies have early-elected
their units under an optional provision. This will eliminate any capital
expenses through 2007, if alternate standards are met.

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

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

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

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

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

PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
In 1989, PSO investigated a Sand Springs, Oklahoma PCB storage facility
and found some PCB contamination. The cleanup plan was approved by the EPA and
cleanup of the facility began in November 1994. In October 1996, EPA filed a
complaint against PSO alleging PSO failed to comply with provisions of the Toxic
Substances Control Act. The complaint has three counts, two of which pertain to
the Sand Springs facility and the third deals with a substation in Grandfield,
Oklahoma. The EPA alleges improper disposal of PCBs at the Sand Springs site due
to the length of time between discovery of the contamination and the actual
cleanup at the site. The complaint at the Grandfield site relates to failure to
date PCB articles at the site. The total proposed penalty for the three counts
is $479,500 which has been accrued by PSO. PSO has filed a response to the
complaint and is currently awaiting an answer from the EPA. PSO is unable to
predict the outcome of this matter.

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PSO COMPASS INDUSTRIES SUPERFUND SITE
PSO has received notice from the EPA that it is a PRP under CERCLA and
may be required to share in the reimbursement of cleanup costs for the Compass
Industries Superfund site which has been remediated. PSO has been named
defendant in a lawsuit filed in Federal District Court in Tulsa, Oklahoma on
August 29, 1994, for reimbursement of the cleanup costs. PSO's degree of
responsibility, if any, as a de minimis party appears to be insignificant and
management expects that PSO will have an opportunity to pay its share of costs
and remove itself from the case. Accordingly, in 1995, PSO accrued a $100,000
liability for this matter.

On March 19, 1996, a district judge ruled in favor of the defendants on
a summary judgment that the plaintiffs do not have a cause of action under
CERCLA and that the only action allowed the plaintiffs is a right to
contribution on funds expended after August 29, 1991. This severely limits PSO's
liability since most of the remediation was completed prior to this date. In
October, 1996, the plaintiffs appealed this ruling, and PSO is awaiting the
outcome of this matter.

PSO ASH CREEK COAL MINE RECLAMATION
In August 1994, PSO received approval from the Wyoming Department of
Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming,
owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3
million liability in 1993 for the estimated reclamation costs and subsequently
accrued an additional $500,000 in 1995. Actual reclamation work was completed in
August, 1996, at a total cost of $3.6 million. Surveillance monitoring will
continue for ten years after final reclamation. Management believes that
ultimate resolution of this matter will not have a material adverse effect on
CSW's or PSO's consolidated results of operations or financial condition.

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

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

A final range of cleanup costs has not been determined, but based on
preliminary estimates, SWEPCO has incurred to date approximately $200,000 for
its portion of the cleanup of this site and anticipates that an additional $2
million may be required. Accordingly, SWEPCO has accrued $2 million for the
cleanup.

SWEPCO SUSPECTED MGP SITE IN TEXARKANA, ARKANSAS
SWEPCO owns a suspected former MGP site in Texarkana, Arkansas. The EPA
ordered an initial investigation of this site. The contractor who performed the
investigation of the site recommended to the EPA that no further action be
taken. SWEPCO discovered that an underground storage tank in place at the site
was leaking and removed the tank in early 1995. Based on soil and ground water
quality results, SWEPCO received a closure letter for this project.

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SWEPCO SUSPECTED MGP SITE IN MARSHALL, TEXAS
SWEPCO owns a suspected former MGP site in Marshall, Texas. SWEPCO
notified the TNRCC that evidence of contamination was found at the site. After
soil, groundwater and other testing were completed during 1993 through 1995 with
satisfactory results, SWEPCO proceeded with closure of the site with the TNRCC.
Costs related to the site were substantially less than the preliminary $2
million estimate that was accrued in 1993. In 1996, both the TNRCC and the EPA
approved SWEPCO's closure request.

SWEPCO VODA PETROLEUM SUPERFUND SITE
On April 10, 1996, SWEPCO received correspondence from the EPA
providing notification that SWEPCO is a PRP to a cleanup action planned for the
Voda Petroleum Superfund Site located in Clarksville, Texas. At this time,
SWEPCO is conducting a records review to compile documentation relating to
SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site
is estimated by the EPA to cost approximately $2 million and to take
approximately twelve months to complete. An opportunity for over 30 PRPs to
conduct the cleanup in lieu of EPA conducting the cleanup is under
consideration. SWEPCO's liability associated with this project is not expected
to be material.

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

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

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

UNITED KINGDOM OPERATIONS

GENERAL

SEEBOARD's primary regulated businesses are the distribution and supply
of electricity within its Southeast England service area. During 1996, these two
businesses jointly generated approximately 97.6% of SEEBOARD's operating profits
on sales of 19.4 billion KWH for the distribution business and 16.0 billion KWH
for the supply business. SEEBOARD is also involved in other activities,
including gas supply, electricity generation, electrical contracting and
retailing. See ITEM 7-MD&A for additional information regarding the acquisition
of SEEBOARD and also SEEBOARD's operating results.

1-26

DISTRIBUTION AND SUPPLY BUSINESSES

SERVICE AREA
SEEBOARD's service area covers approximately 3,000 square miles in
Southeast England, extending from the outlying areas of London to the English
Channel, and including large towns such as Kingston-upon-Thames, Croydon,
Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas.
The area has a population of approximately 4.6 million people with significant
portions of the area, such as south London, having a high population density.
Over the past 25 years, the services sector of the area's economy has become
increasingly important, while the industrial sector has been in decline. There
has been considerable commercial development in a number of towns in the area
over the last ten years, in particular in the areas around Gatwick Airport and
the English Channel ports.

DISTRIBUTION BUSINESS
Distribution is the core business of SEEBOARD and involves the
distribution of electricity to consumers over SEEBOARD's distribution system.
Electricity is transported from generating plants across the United Kingdom via
the National Grid system to supply points within SEEBOARD's geographical area
where it is then transformed down and enters SEEBOARD's distribution system.
Almost all of the electricity that enters SEEBOARD's system is received at these
National Grid supply points. However, a small amount of electricity is received
from power stations within SEEBOARD's geographical area. At December 31, 1996,
SEEBOARD's distribution system consisted of approximately 7,650 miles of
overhead lines and approximately 19,900 miles of underground cables. The bulk of
SEEBOARD's tangible fixed assets is currently employed in the distribution
business.

SUPPLY BUSINESS
SEEBOARD's supply business consists of the bulk purchase of electricity
and its sale to customers. The majority of electricity sold by SEEBOARD in its
supply business is purchased through a pool created in 1990 for the bulk trading
of electricity. Pool prices are variable and difficult to predict. Accordingly,
in an effort to control exposure to prices, SEEBOARD has a portfolio of
contracts with major generators as a means of hedging price fluctuations in the
pool. The physical delivery of electricity via SEEBOARD's distribution network
results in a cost to the supply business and income to the distribution
business.

SEEBOARD currently has the sole right to supply substantially all of
the consumers in its authorized area, except where demand is above 100 KW. As a
part of the restructuring of the electricity industry in the United Kingdom,
competition is being introduced into the market for electricity supply on a
phased basis. The threshold for competitive supply was reduced from 1 MW to 100
KW effective April 1, 1994. SEEBOARD, as well as other licensed suppliers
(second-tier license), are permi