ML20150B337

Central Power & Light Co,Annual Rept 1987

ML20150B337
Person / Time
Site:	South Texas
Issue date:	12/31/1987
From:	Shockley T CENTRAL POWER & LIGHT CO.
To:
Shared Package
ML20150B316	List: ML20150B321 ML20150B337 ML20150B342 ST-HL-AE-2661, Forwards Annual Financial Repts for 1987
References
NUDOCS 8807110490
Download: ML20150B337 (81)

Text

,S i,...*

= -

.?

>*.s w

s ~.3' 4

w-

. g jp -. 9.

w.

. ~ :, +....

< ~

r

',.. -.y.

y.

~

+,

... j

?

g,.

g& <

. g+.-:

y jn,.

4-,.

a..-

c'

-o.-

.. =

- j_,, '-

'~

w-

. y. s..: - _.. ~.,,

4

'.4.

1 M..w ' ' '.f

• f

~

p>

,4 8*

$-l.., ', (. I..

w.

-r e

+.. -

. c

..,s r*

s

,... 'g-"*[.:

4 g

,,t

,,e %. -

.k

, %, J

• e

,/.-.

i

• .~

5' g w s

~*

~.,')sE *.

.a

.?-

.. - - * --.'1

.,y.;

>n 9 og ' '

'd' u

+

y 1-

.y%

'q

n 2

E '

' -< ' f *

...W....

I.

' ' ~..

- '.h T..

r

~

e s

-4 t

4

' ^ '" f.c Q T.~ y ~- y-R &,% '.. ? l? ;f..,j, Q[pll?q \\ -l;.

~? %.. h.

N.,

Q l {.~

l.*

![ jh,4 Q),r.:g.[..

l-

~; _f

.'s

}

.h-;

.. ; k,

,..Q j

C.p; 3,sf

- pit

< h,, t,,

.. g ~,p.., j,}_, %j,.) I ag ; f,+,.,q.-;;Q,g y,;y,.,

g.,A,_.g 3 :. p.pg a.- c,,.,._ j _

.,(

gee

s. L.

3_3,-

y 2-j-

E

' s, ip. f, 3 f 2 p;.

. *h a.h.., M- %'..s* 2 a. *., ;p. ' x

['-

E>'

' y-[

. %y g'm '

v p',

..w u

_ T [l c.'

s' s-

-,--,*s t.

+.

45,

-y -.. g.4,y 4,..g

.g w

4,

-* *Qsf lNy Q. ' 3.

'g.'

'f4 -

'})

.._-u s

s

-h 4 -[

, e..

E...ta1, W

';..h WW '

j'.4 4.3 uj '

m(.k4 %^g

-n..

,Th

, - *N t.

.f.

.,.a IW fg gf% ^g,.eW. ' c

.@.y ~'

$$1 [

.lY (

g p

g.

,pe A v,

?/'

.M

!y pp.

.s.

.e

q. \\ p

. '4 a

?

~

j"6 ( '

6

,. ~

v A..

,j.

4-

...,g

. ?-

.. -i

. >^

'8-

,h j of. k..

Q*.5 ?.

}

4 1'

3 te

' : 1.m '

- y, _,;. \\f

._,;'Q)

, 4._ q.. f_. _'s

..g,,

.

,;. %l s

^

k.'. k,..;, $...;V. - } s '.. r.k, -

ki $% 5,.

.g' l1

. \\.

{.

?-

- k' ' '. b f"'

-p F+ ~

w

,,j, Ck^Q ' k NQ.>Y'}rl

f.R.'

I

}

..8 /

y

^

3

,i s

.s o.

yU v

.I U.'4C

/

(

..u h.g;,

m. t. ;%

/ g,M

-p f

,p

_.s

• 4 i

4 a

-s

.L, r,. ry - -

....}.,

'i

'~ '

3 ' ( *i.. -

..J msl r ' '

1 l-

. -./A m : s. +.

.. ;.,,. ; p.;' ep.O

. f l

s ma 2

ca ta g((*5 W%

i fy.

), ' ',.-

,'. Q,j 4[

W

'(/

' ' ', fdfv.y',." '

.f...,

j j

-g

-t f.e 4

w '

3 M..*

_.: g -L

,4 7., [ e,

' Q f(f..

. h ;,g_.

% ',

• y.

f,y 3

y f *' -%,

y.

- y j;J., T 4~ p.. A j%, y.

,,.?... D,,g -. +

y.

- 6.p9 ;..]*T

--~

.g,

.ja

,e

. Q.My

(

3.,

k,.

.. :e.

t.

.. /.. # '

2-7 s.:.

. ,u-a 7

-, / ,. ;. *,5 f

...,. p% g==

o.

y

) [. O J-t i

a

, 2

-. 3+

j t,

, p f,,

. (

4 ),

7 1

Wt

.a 7%t wi y

.r. t.

f*

2 e

m s.

e, W.

. t e

9. 7,.. f. sc,gg'...,%<...

.a#

45

-(-=. g

,,,,'.e,

~ ~..

.. g..

g

(; c y

a.;-

g-

.. '.i,,'

. > g, m ',..

w,1 '

Y

-}.?

~...

'Ia W

' G e

c._..,

+

.c. '.r 3

hM k"[.

3

', (

g,

}

,, i. ' ]

• '..., s d '

,3, A

4%. *

+

g s.y

.^ 4 -

. 'pq g

."',4

.i-

.v v

,w... ay

.QM e;

- *4

,...u..c 4 ~ j%....T.*

.,.. 6. ' '.

.o

.n.6 ?? pb.;.Ty \\ ",,,? '%..

~

-'. 1.:

f?

.. jf s

~.4-

. - y.,.

y

' '...,.T.

f (~y [,#*

.?,s.,[

A w

,4,

.~ -

~.

(, ' b j:4.n ~ %

y -

[.

(

+.,r%, ;

g.

r y

+

..w;. t% K <!

m,. s.

8 y

Q,

..W

,f,7.

F...,'

.mer 4.

...* 4 w

f ' ; ' '. -

• p-j s

hb

w. -

h

[h N.hn.k'.Q?.a 3.Tt

.MM~W%T v. N:65 p4afM. ;.6 "Q %. %< : % w.;.

v :Q n M.p-

. w..n

s.. -

m. a y w,c..< n. :.

-. ;. w,

n:

,.. w... :

m

.e..

. a.

w

. a.

.y a Centnl Power and Light J7 Company supplies electric senice to a 44,000-square-mile area which reached into 44 counties of South Texas. The Company is a subsidian> of h/.Iy Central and South West Corpora-7

b.,-

tion, a recistered holdine compam>.

w

_ m At the en'd of 1987, Cedtral Power and Licht Company sened 532,546 customers in 224' communities v

and the surroundine area. The e

Company also supplies, at

' " V ~-

wholesale, a part or all of the electric regllirements 0[ flVe Rlra}

electric Co0peratiVes and tWO lij !

k!f l

f.,

telTit0ly sen'ed by the Company municipal electric systems. The

'h.

N.

'a a n ;'

has a population of approximately l.8 million. Principal executive f3yj[

....i offices are located at 565 N.

• w

Carancahua Street, Corpus Christi, Texas. Telephone: (512) 881-5300.

f...

el ',f od 4

1 L

I

. u,,

r -

e,-_.

s Ni i

,s%

,a J % -'.\\\\

], aseL J ra k

' \\-

Y

( >

• ~.,-...~ ~ +, \\

k 7,

n

^

A

/

\\

.m

-g

~g

-u

.K. o

.c, g

- :4 w s.

-.(

I Unw.

+

./

e

[

m _'

./4 1

9'*

)

r.# m..mm.

,e

~

i

,w j

i g

g, c*. owe j

ij ammes

/

. Snushpw mw co.c me ew

.,c'

.+.

y u

i W

J

' :s l'f s

T em c Nd beau f~

t r

3<.,

y s !m %

i

\\

'M NTRAL jc i..p,3,.glt 4

1. REGION 4W e

no v,,,. ~

\\

fM

/

i y.

I s

i

' J )-

[t 0

e I l'el'l.1 (4 Mt \\lU )

g l

j,.. ~

\\

,f" u

r

~ _ _ - _ _ _ _ _ _, - -. _.,

..,.._..,.,* _ _ m T

_.... _ _RANSMISSION _1.!NFL._.

.-m

_,.u__,._ _ :..

._ w... m...,. m :..

,.,m.,

M. 5.000 VOITS....a, m... J 1

'aus-

.......~......s.-...._......_,nw..

=

J L _. _ 2 _ - w

.w g,

.yg.. m _,,

g

==

138,000 VOLTS 6_ -._. m' <.-m...m-._w._m m-j r ~ f<*

INTERCON_NE_C'~ IO_N' -~%_51i.OrilER SY_STE_MS._'

- - ~ - - - - - T

~~~>~-*

- v -tc ar

.-.a_J r, _-.

._.m_.m

- S _".. REGION _ OFFICE 5'. -..,.,..

,. _.,,...a 7

....,c...

.f. m. _ -

.,.w..,,.. -.........

. _..-._.._...,~

..c g

u,,, s -

.. GAS FIRED..G.F. NERATING ST.AT.. IONS

.n.

-,,.:~

..-......,.w.

. -... ~,..,..,...,.

t.$. HYDRO GENERA 11NG FTATION. aa.

9p..

tt

._..,J u,

.. _.. ~, _ _. ~.,

........_-....m..._

g. -

y.

L C. OAL.F_ IRED.GE. NFRATING..STA_TI.O_N.

_ _ _ _2 -i

-, _. l.. -

w.

u. &_..

-... -......NUCLEA_R PIANT UNDER CO_NSTRUC_ TION _

t

)

2ba /

1 Presic ent's Letter During 1987, Central Power and any reductions not impair the quality of Light Company made siginlicant progress seniee to our customers, toward long and short tenn objectives that Most of the reduction will be accom-will enable us to meet current and future plished through an early retirement challenges.

package that was offered to employees Nearly two decades ago the Company near the end of 1987. Of the 268 eligi-initiated a plaa 'o end its almost total ble employees, 236 or 88%, elected to j

dependence on natural gas as a boiler accept it.

fuel. That plan, which consisted of add.

The reorganization pan, which ing both coal and nuclear capacity, will affected virtually all work groups, was be culnnaatnl with the completion of the announced near the end of the year.

(

South Texas Project nuclear plant. Unit 1 Under the new structure, the Company's

/

of SFP has been completed and is ex-six distribution districts and four trans-pected to be in senice prior to our mission divisions were consolidated into summer f.eak, and Unit 2 is scheduled four operating regions. Where feasible, for operation in 1989. The diversification h> cal manager positions were reduced by

..f our fuel base will assure both price combining the respmtsibilities for several 1

and supply stability, benefitting communities under one area manager.

customers and investors.

Likewise, power plants in reasonable Despite the diilicuhies of Nuikling and proximity to each other were combined i

licensing nuclear plants, Sir will be an under the supenision of a single asset to South Texas and will be the manager. The reorganization also scuree of reliable power at a stable price.

reduced power plant personnel, cut the CPL's rates have been ameng the lowest size of line crews and eliminated many in the state for a number of years, and supenisory positions throughout the

.r we believe our balanced fuel unx will organization. Several top and middle 1

e**Y help us maintain a competitive position.

management positions wera also elimi-

"p Preparations for a rate increase filing nated. Overall, we reduced our senior gic0*po M

to include the cost of SFP Unit 1 in rate management by 26%

3 i

WS j

base are in progress and will be filed in Other cost-control measures are in 8f,, co*

cik,,t po3,w '*

the coming months. The filing will pro-effect. The most significant of these is o

3 dM pose that new rates be phased in so as our fuel procurement strategy. CPL's fuel

1. g d

to minimize the impact on customers, diversification pmgnun, aggressive contract

g. (ped '

yet protect the Company's financial negotiations and the creation of mom p.

etB'g od standing.

competition among fuel suppliers is

1. ge**p Preparing our Company for major saving our customers millions of dollars changes that are occurring throughout annually. During the year we took some a

the utility industry is also vital to our okler, gas-fired generators out of senice, future. We have initiated a variety of Seven units will be "mothballed" to help responses to these changes. For example, cut costs. A major factor in the decision we inaugurated a program in 1987 to to take these units ou'. of service is the enhance CPL's prmluctivity. Even though low cost of nuclear fuel, which will soon the Company consistently has been be a pcut of our fuel mix. The procedures among the country's most efficiently used to store these units will enable us to operated utilities, we made a thorough return them to operational status when study of our organization to define the tney are needed to sene future load relative contributions of all ftmetions to growth.

our opennions and to identify ways of As another means of impnning the re-further enhancing our efficiency. We suhs of our operations, and thereby

_eveiopal a reorganization plan that will lessen the need for higher rates, we have

-duce our total employee force by 11%

intensified our marketing ef forts. The Throughou' the study and planning Company's marketing pmgram focuses stages, we considered it imperative that on electrical applications that improve 3

hh p'

geg pmjj t;

i

. V lh w;

I g,tz h,m 1;p $;. c v

.n_-y x

! + C 1",~.

,... sll 4 Xl? ssM=sgi ::i jgI h e+!

_r- -- -C

.c d

I

-2 E -. :-

.A-.,

<nw yc

j. )

- - =% -

3 u

.e lCGYh=&N5 ud f

%s.,;

3,

'O

- % :55

~

il kn~,, ig ;.;'-

, rh t

• ~

g it M1 i i :n==

ju. p,.

.n s

1. ier?u--ee.

r,J h

,, g '..

-J... -

s

)

Qul1.Q l

1

~-

1

]

l

g

Y

Ql

\\pf m.A....

.a haJfaa nAa_

, t:!n ss s <

.\\lanagement is grateful -

( 'N

< tour;>: Ju ta O s

n

< n.;q, s

2:a sc ; ans:s

,j p,

us j'r. 'e r.i n a k i t n j':.;/. <

J n;,

. e ;

\\. lib t:1 a NJ Cli.

• i;; s

.t :

,a!)' j i

s ri i

i

r. !' i i T ;I \\ D i:!; '

.is

'. 1 :

';. : !q

,i l ^ \\l' t

r s

em;!

as.s !. s

, i.

j u r

s M:( nls !. i

').

' +

i L

'IN t\\s s,

s j ',. s j ' Tt );T t e ill s

( h; i: k. i.;

s

'l, i

ll,!,

L'

('.

(;T i j'rt ;

J' a

t 1; n n; ;':

1

.a s d;!ll

.\\

e.

t ;

j o.

is ;;, wn

! J t '.

y

.<;- i T. V. Shockley,111 c-s.

Ci 1 Ot l'

i (t )

.l.

-(

i

.ti:

t I.

' tr s'

i ff

(

i

e l

2 1

A Q'] f i-

-m

?

mm ath:,

9 s

k mua=-

L m.m.

3

[-

9 s

.3

.,mr.~

4 i

=

s "J

4 l

1 4

--r n 0 Customers Pa]- Lower Price Revenues Dec.ine. m; I

marketing program IIIha thfgh [nj For the fourth consecutive year, the base rates wtre of f by approximately i

reduced fuel costs resuhed in lower 2% while fuel revenues declined 20'E i

appilcarton.s. the most,'

citicient lighting prices for CI'l,'s customers, keeping the Kilowatt hour sales were down by

?]

tech,,olog aiallabic. ]

Company's rates among the lowest in the more than 10%.

state. Average revenue per kilowatt-hour 1(esidential customers increased their from residential customers dropped from average armual use of electricity from 6.22 cents to 5.90 cents during the year.

10,338 kilowatt-hours to 10,369 In 1983 the average price of a residential kilowatt-hours, an inervase of less than kilowatt-hour was 26% higher than the 1%. 'lhe number of customers in this present price.

category also inervased slightly. Inwer fuel costs, however, of fset these small TEX AS COSTOF ELECTRICITY gains and pnxtueed a revenue reduction (nimma n n u q u u n.u i.s n n iooo s"")

of almost 4%.

k;i In the conuncreial category there were p#S Q-also slight increases in kilowatt hour

. l

]

sales and in the number of customers.

gi 9

' 560.44 1(evenues in this class were down by

}

- /

SQ 4.5% because of the lower fuel recoveries h@;%g&ptb.a %

Industrial revenues declined by ap-

=

3 fa proximately 22%, as did kilowatt-hour fj

- -}

sales. The major reasons for these nJue-

?

m g

tions are the loss af load to cogenerators

• gigJ and the shut down in 1986 of the Com-i

[ /"". r pany's largest customer.

x v

N Net income Increases,1)espite the nu sma om o m cuoc no u o s ns ns' decline in revenue, the Company's net

'Ibtal revenues dechned by almost 11%

income increased from $174.2 million in from 1986 because of several factors.

1986 to $191,9 million in 1987, a gain Included among them were lower fuel of more than 10%. The inercase is at-costs, a soit economy, a llat customer tnbutable to a 2.7% reduction in

=

2 gmwth cune, losses of industrial load, operating expenses and taxes and a 21%

and a reduction in economy sales to increase in allowance for funds used 5

other utilities.1(evenues coilected under during construction (Al'UI)C).

d 3

O in Vole,,,

'll, N4t),,

1), />%se.

C'#ll/tydi"

' !! j L' an

[$E'$%55'"'$f,!N3 0/*

of et, ll} SN' SO/jfl an#6 Nis '>t ag , $# "EdtqMkh1y4 18 4 fdtc,q !Utit 'l 1 f,,$ffy055k'4 y / re, O 4tio,, 3

Cafj,

'l' $!E M[h,hM$;)ld!c/,'U! U1. j 7UVL1 1 2 $hy$ Er aff,'I<{ge,, I 1 Ule k!','!'h"f!!$,!' 55,)'k "Uk y"z I i

1. 'l ra i!'$p"fddy O! dj

"!c 00g />( "It\\/ A 'ateq'UnityS '$de Co, etion k $df 'dSeq ll j,, se(, L'ony,, Yio,, .(gc,%gofUlc / k'etyf iecjg.'llif, g 4 'Llity,, g ' 'Oler h*/y

1. C' /

"4t/g,"l' era, in,g!!! (,og' 4 lig, IIott ' ' ' // ife, 'ht q., gj,g l'fojeg,, '"' !'5f, h[h' h )'lE're y 'Vicy fory,,pi Q!c/, tof,, ec7 ( 'A ce, f'lLl en #" c,,,,. 7 l1 '// 'Ule( ,, Alld O!nj>j, l I'hyce,fatg[r Qt !!s,dl j, S er />y, "" *o>t, ';,j ' /

• Co

'liogs I'h /) "3 t<f 'ilt> 41 4 "' co ofSg 193 !!)o, ' Ula,, ~~~~' Texas h of the &nst m '4, nits % of the nboth u ke, H,4 Whe dogc pability sen eIn ~ ct a r a Q .5 Pw}e neu '.k -k. ,2 mpa y'sge / n 3'. .a; ~44/ 4' Co 'D MS M cle. ar nu .y u111 be "'*\\ $} I 'h Mb c., ^~ ~~ M' Y W i w Egg 4p,;. 4 %), sf M. t* p o 9 \\ N

Unit 2 of STP was 90% complete pnduce 2,500 inegawatts of electricity. and slightly ahead of schedule as of the CPils share,030 m mawatts, will ae-end of.lanuary 1988. Itased on the cur-count for 14.4% of the Company's total rent schedule, the unit will load fuel in generating capacity. 1)ecember 198S and will achi, conuncreial operation in. lune 18 9 lletai llate Pr0p0Sa. In January 19S0, the l'ublic l'tility Conunission of ' limas opened a docket for the purpose ol detennining the pru-TieE TO STP Ooeration dence and ellieienev of the planning and i d manacement of the' construction of NFP Preliminary work has been done p In.\\iarch 1988, the ' limas Conunission's on a rate liling pnmarily designed to in-

• ae General Counsel hired a second auditor clude the first unit of Sl'P in the to assist in analy/ing NFP prtJence Company's rate base. Actual timing of issues liased on this and other factors, the filing is dependent on the schedule hearings have been suspended for declaring the unit in conunercial indelinitelv hv the hearines examiner.

operation. Present estimates are that The partie's a're currently working l! nit I will achieve that status hy the together to arrive at a leasible schedule. sununer peak. c, M iii lly in 1985 a docket was instituted to The Company plans to file a proposal E g. pather evidence conecrning the cennomic that phases in higher rates for l' nit 1 over \\ y y 1 E. viabihty of NFP Unit 2. llearings in this a period of several years. When linit J is i 4n docket were completed in October 198 <. m conunercial operation, a phase in 4 _, y J Ilowever, in November 1987 the Supreme proposal will likewise be filed to include _.. --. c ~ Court of ' limas stayed all hearings and that unit's costs in rate base. actions in the docket pending resolution The phase in approach was selected as ip d of a dispute concerning the Attorney the most practical way of meeting the General's right to represent other state needs of customers and stockhoklers. The agencies in ' limas Corr nission phase-in cushions !be impact of higher L. ~ proceedings. rates on Custotuers and would gradually l X *- *: *- With both units conunercial opera-improve the Company's financial integrity 3 m tion, STP will han the capability to indicators. 9 Etp ), 1 ~. 3., g bb 7' 7y y gs/7 y w W h @b &,y / j W.. l - (p v.l. ,Q ){ 'l ~ 'yle /%$ 3 4-w f!L ?.. / q \\

~

n ,- t - t - 2, u ork progrcucJ on V! ' " ? ~ l <trur turc ot str i nit t? t ~, the unit's reactor head (; l s, u g a ucm bly. F + j g ~ , q; r h - / _o .__ _ _ \\ 6

N s L a"1 Fue Strategies Promote m. amm,1 Competmon, State Costs u x For well over a decade the single ,An ~ most significant element in the price of electricity to Cpi, customers has been the cost of fuel. For many of the years since 1973 fuel costs accounted for more than ?, half of the Com;uny's o}rrating expenses. Accordingly, one of our highest pnorities is the continuing development of fuel procurement and utilization strategies that result in the lowest possible fuel expense compatible with future cost stability and reliability of senice. The basic elements of our strategy are

1) to diversify our fuel base as a hedge against price or supply instability,2) to 73'g

? increase the number of our supply v;4 sources as a way of reduciag fuel costs, and 3) to maintain a balanced mix of ci.i shon tenu and long tenu procurement arrangements as a means of ensuring both market sensiti ity and price stability. market-sensitive arrangements. g The use orcoal as a bona lhe diversih, eau.on of. our fuel base will During 1987 CPL had 36 suppliers '"## C ""P he complete in 1989 when the second who fed thmugh 12 direct pipelines to 3,,,jon 3,',mes cpf.,"" unit of the STP nuclear plant achieves pur power stations. Our supply sources y customus mnnons of Jonars commercial operating status, in tenus of melu e aght ma.jor pipeline compames, since the stanon began generating capability, our fuel mix at that a number of large and small producers commncl'l or"ddoa5 la point will be approximately e l b natural in South Texas, and suppliers actine as x thirdPMv ym m mah natd p h gas,15 % coal, and 14% nuclear.11y 1990 nuclear fuel,s expected to account to cpl, from producers who lost their i for approximately.1% of our fuel re-uadidom! mh for p

g., g.

gg g quirenients at a unit cost of about one d dom MN lifth that of natural gas. ,gg g gy, g7 g gg e 17' ESTIMATEI) supplier situation. These computerized rild@h / ' FUEL USE systems, which provide operator control 4 and state-of.the-art measurement, allow s/J, 1990 n - dispatchers to selectively use the most economical discretionary gas supply. The i Company's purchasing strategv for natural y' gas has saved CPL and its customers g millions of dollars during the past three years. Cpl obtained its lowest level weighted average cost of gas since 1978 during the summer of 19S7. Additional millions of dollars in fuel costs have been saved during the The Company's strategy of aggres-past seven years by CPL's decision to sively managing its fuel supplies has constniel Coleto Creek Power Station, a enabled it to panicipate heavily in the coal-fired generating unit that began spot gas market over the past few years, conuncreial operation in 1980. Our 'lhis was accomplished through several ef forts to increase the amount of savings contract renegotiations which reduced from the use of coal are continuing on minimum-take commitments under our several fronts. long-tenn arrangements. Over 30% of First, we have aegressively pursued the our gas supply is now resened for pur-renegotiation of contracts with our prin-chase, when desirable, under shon-tenn, cipal coal supplier and the railroads that g l i l

Jchm ' oal 'n on t "h o aJ" ( h u most WACOl',VS.WAC( X ; g g g,.g. nm nt cu. n emJus ca a m n J usu.,n m inu J< hs cicsi s ost Nes onJh w < h.n t uh leascJ our as tn J,.{ 11 \\ lit the [ lIlal Lct, w his h n<>w su[phes an ,x una t cl.s a q u.u t er ol iu r s ial necJs at t he (l'!cto ('reck li.u ct 3.0 Stanon t 'll i sp o .ial hiJJer s hst has approxunatch l(ul potential supphers, both lorcien anJ Jianc ns We h.n c e x P""^"U""'"""hk"*""'"I'""""' I 2." WACOP s t ilit })ctll h ul.!!hl.t r c e s jib irllld lipilt >H s that uill rcJus e the ost of our soal .g 2.2 /' 't silj'}illes (Ill! clli rt s lins llhled (fle i 3 / L-5 ['llt s fl.lse t il I r ).il a r Q( >N ll1 l'Ib [ lli till y 83 .\\ tist l.lll<l llld ('t ib t!Ill)la

f. <

'q A.- 87 Our strategies t., rcJus e the s ost ut b9 luc! IcJ lii twii ref unas til lilcl rest atics 91 lit 14S'i in.\\ugust, we rclilitJeJ $ 14 4 !!Uhpin Icsulting trian lucl sicings Jttring 1 , 3,, i. m. t he iniin,i.s ist I.intiars (ltrisugh lunc. , urn o mt ; r t i Ikugning rates to help .\\p,ql icy $j] j gnilji.sn u.as reltlilJed ni i s t ,s .o ' s. r i: ci ( l'l remain c omperern e s i. i.< ru i.: .a t u i .4 ; i.< l.h 14SS liir litel st\\ lngs betw ecit n as a major part of the uork load /or the \\ "U'll)csclnher Sluce IM( the ('ompens i rarr Jrpart (lin1[i.tn.s has reluilded,ippr xinnitelv inent Junny IVA 7 i l li'i inillniti ill liic] s,is ings $, p. - : 27sey R.f k~,l. r,4.-- c. n,.1 . 4 ~h g

j { ?.

• f

. 7&.,

1 p.;: tp}h 4 - '4 . <,, _ae 'Lg X G 'y q' M( N ppf p( fy W r-M ' %n wm us n n.., m * .1. re, Jf)

- r

-b i. W Wi l s g^ 4 f 3-5 M. !, .T fi li R, s .y I st .,y + u k 1 @s f r s yr t s. .y g c .v k 4 / 'o e t s / N. \\ I g / f 1 l O \\ g.. e.

y

• ew p 3

~ ""*M l s W ] gg. F y 1 q '] 14 U l h; { ~~ t ) I, l, istge industries such as this i [,. petwchernical plant are eligible for CPUs new insinstrial rate. ,+L -Lc r M g ue-w w - J m 7 'a i g -ty a y g iSTenr Rates Hep ligt ting and floodlighting were approved b in m ne ma ne,an o.wau Cd) Meet competition security licht provides an additional opcon>o,,e,memiai en tomw,,. me New rates that went into elfeet in new raws for leged upodHghting also '^ 1987 are keepine the Company competi-expand the chowes of semees available tive with alternat'ive sources. hi Aucust to our emunwrcial custonm the Public Utility Conunission of Texas Also in 1987 we achieved a favor-approved a nde'r that reduced the cost of able canclusion to a rate application for power to our large industrial customers. our wholesale and municipal customers. The reduction amounted to eight-tenths whose rates are regulated by the Federal of a cent per kilowatt-hour for those Energy Regulatory Commission. A seule-customers agreeing to purchase at least ment among parties was agreed upon 12,500 kilovolt-amperes annually that increased rates by $2.2 million per through 1900. We agreed that a revenue year through June 1987 and 51.3 loss of $13.2 million per year would be million thereafter. The decrease refleets absorbed by our stockholders unal new bendas to customers resulting from retail rates are put into elfeet. Ten of the lower tax expense under the new federal Company's 12 existing large industrial income tax law. The settlement contains customers have accepted the new rate. provisions for customers to be individu- ,; 4 L f ed, - j-During 1988 we will apply for a rate that ally assigned the annual costs of STP , v1 n woull allow qualifying large industrial Unit I after that unit goes into service. i Wg> sf , sedge * -f'/pe $ge f}eQp/*/}f customers to provide natural gas to Cpl These costs will be repaid by the al- / lor the purpose of producing electricity feeted customers over a five-year period P 5 (# vQpdo$,/ 9 for their use. The f uel option rate will af ter rates reflecting STP Unit 1 in rate 3 f g IPf,3f g' @p >*3 g,./ y supplant the inJustrial rider. base are placed in ellect. The settlement g f f in November, the Texas Commission provides cpl. a small amount of relief approved a new contract for service to now and also assures that the wholesale Occidental Chemical Corporation's and municipal customers will ultimately 'f ' ped f caustic chlorine taality on the north pay their fair share of STP costs. 'j#', shore of Corpus Christi P>ay near Fuel revenue refunds, which have ingleside. The contract provides for a amounted to $ 197 million since 1983, combination of linn and interruptible are expected to diminish in 1988 be-service to the f acility, which p~viously cause of price increases on the spot had been owned and operated by Du market for natural gas. The price in-r Pont. The Company expects to receive creases make it less likely that the fuel more than $25 million per year f rom the lactor used to calculate fuel rses to plant's operations. Similar pricing customers can be lowered during 1988. arrangements were approved for other The f uel f actor will be moJilied to tellect new customers of the same class. the luel savings from STP Unit I after Several new rate schedules for security that unit goes into operation.

g

,/ - / / l New Mar <etin5a Pro am '"""-'"-""'c"""'""""""* gish economy, reduced population growth, and a depressed construction Acseves Success ieauxtry - maae ma,ketieg e,peciaiiy ddlieuh. Nevertheless, the program Primarily because of increasing resuhed in additional sales of more than competition and slow cennomie 300 million kilowatt hours on an annu-growth, marketing at Cpl has taken on ali/ed basis. The 1987 ef fort added renewed emphasis. Greater elfort is 1916 megawans of connected load to being applied to the Company's sales the Comp.my's lines. programs as a means of producing addi- 'lhe primary aims of our marketing ef-tional revenue and of creating greater forts for the nest decade will be strategie ef ficiencies both for the Company and load gmwth, the retention af high load for its customers. factor customers, an increase in of f-peak Satisfying our revenue requirements by consumption, and the addition of new means of sales, especially of f. peak sales, customers. Specilie objectives include the is in th* Interests of all concerned. To the following: extent that required revenues can be at-tained by marketing, rate increases can . Continue competitive load sales. be diminished. . Minimi/e loatl and revenue emsion. Our marketing pmgram locuses on el- . promote energy elliefency in all liciency - elfielency for the customer by aspects of the marketing cifon. l-of fering options that pennit maximum . Encourage off peak kwh sales to i savings, and cf ticiency for the Company improve system load factor, by helping make optimum use of our . Increase direct customer contact and facihties. Also because of competition, buikt business relationships. ef fective marketing is, to a greater extent . Increase customer knowledge of than in the past, an essential element in energy ahernatives. maintaining the Company's financial . Encourage and support employee integrity. involvement in the marketing cpl!s new marketing program, program. inaugurated in mid-1986, experienced a in the residential category, the Good full year of implementation in 1987 and (ents program in new homes will con-achieved significant successes. Several tinue as the centerpiece of the marketing to *# 60*# (Wi ) t ,ge* j 9 1# 58 j$ g#9 j> gad" pc8 ' ,f pi m 6*g\\Y y s; .g d ,( 5 ged*Ip.

1. 8

\\ d j IWeause ofincrea< lag n ) \\ competition, marActing emplosers are facing t greater thallenges than

j. lj

} .t es er bcfore. l l ,y y 4, .e j w I [b ,q i s. 11 p 1 1 = L=

~ 'c ~~~

v e. 7, f l,

+ n '. e n s y \\ iy.. 1 ) lw W. b f ] f'/ ( ,? i f l l -\\'

1. ( jq

mm

]' b s 'a v.y i J Y Y }'lan. 'lhe (entsahle proer.tni, a corn-lighting progr tins are h.tsed on the use ,g, panion to Good Cents that apphes to of high intensity disch.irce type li;'htins t 2 the ri'I. cenruble itome ,g exisung residences, will be promoted applications, the most etlicient hghting [4 mrd are highty citi.icnr in he.tvily as a me.uis.il compensating f or technology available. g tcrno o/cncrgi use. the downtrend in the new home market. Sales to conunercial customers will he f! ileat pumps, another essential element encouraged in such applications as fooJ W in the resisle!1tla} pl.In.IIL$ ConWrValion WrTiJe eqtiipnlclit, heat ptitups, anJ til enerQ', %)ll he [Tilfiloted with the inJ<uir outsl<>or lighting. We will continue contmuation ol cash mcentives. Ihe olleri: g conunercial lighting and heating, ('sti hl (ents, (cH(salile, and lle.it [Ulup vellt;!Ition and iir ciirulitioning slesicil t proer.uns.ill olier siemlicant etliciencies assist mee as a means of promotine t(t Clisttilners, el liJle n JV. Dnring 1987, with the participa-tion of many employees in all areas A new industrial load retennon of the Company, the sales goal of 5,000 program, iJennlied as I?ctter Tht rmal instJ)lalhins it r seClirlty llgbting % ls k'tlli/alHin, Will prtW]de Cllsttilucrs U\\ Cees lcd I)y ahn(W! It hir tlines. lilese in-eneTQ' ctht reJtictnin iiptiinns thrInigh I stalianons udl coninhute more than !S waste he.n recovery appheauons. ( nalhon kilowan hours to oil peak ' ales irricauon pumpine tests will conunue on an annuah/cJ heis. That proer.un, in LOSS, anJ conunued agtibusmess abine With a licW llik h{llghtlne pringr.IIn. suppiirt %111 he prtWhled (tl the etiln mli-Will })e itintinued In !OM 'llte Ctilnl\\uly's nities We serve. IJ

......m "f } 4

_,y

-. f e====d*% * 'L. w _. ; -;y4 Mqir;;m. Os*h d )',k ~ Ground has been 4 WW ' btvlen for construction v) 'q'Q[m[&&,;; ; '_m %y - S QN&lk '.euunn. of Nas al Station 'b , a, Y InglesiJe, the futuir 4.. r e '"q Q.n + ? h &.,aL, iM ' mv home of the battleship 5 O% UM Wisconsin, the a p " ** P- #y.g r ',s,=. aircraft carrier CU h _'_ [.l" ^ -- n leatngton, and earral l t,;,.; ~ surrorn hip,. g .w, - . E1.g ec'..

• $..., LL.,

s.% -* b y, .,s e 1 / 4 ,"( Area Concentrates Energies On New Kincs 0!Inc ustly Sonth Texas isn't waiting for oil the Corpus Christi area's bid prevailed 8 to come back. over those of 14 other sites along the That is not said to discount some Gulf Coast. credible evidence that the petroleum Groundbreaking ceremonies for indusuy can expect some nmdest gains llomeport, now ollicially named Naval in 1988. At the very least there seems to Station Ingleside, were held on be a consensus that the industry's de-February 20, 1988. Completion is eline has bottomed out. lint there is also expected in 1990. Overall, Naval a consensus that a recovery will be slow. Station ingleside is expected to improve y taking at least the better part of a dee-the area's ceonon by $300 million g w( s 3F prices on the natural gas spot market, an in 1987 Occideraal Chemical 1_y ade. Encouraging signs include a rise in annually. j E increase some forecasters say could be Corporation (Oxys hem) purchased ,c substantial by year's end. Also, refineries the chlor-alkali facilititt rear Ingleside, os e v<* g ci*i and petrochemical companies are operat-which had been previous!y owned and ing profitably. operated by E.1. du Pont (it Nemours & p "'go( *g,p T,, C*'ge Nevenheless, South 'R xas communities Co. The plant had been shut dom, n 0 an1 economie development agencies are 1986 and was scheduled to be dis-3*#g N" g, h>oking elsewhere for future growth. mantled by year's end. With estimated Cp

• • 3 pts
• god**,1 Throughout the area there is a detei-usage of approximately 100 million

1. e5*ig O'jed mination to make better use of other kilowatt-hours per month. Oxychem will i

A

1. oc*

existing resources, to promote the muhi-he cpl ls largest customer. The plant was @' th d tude ni advantages that are available to operating again in h1 arch 1988. od /p/,g\\*8 / p' iadustry and business, and to compete Oxychem has already announced 0*i*,s. clicetiv'elv for industries that have the expansion of its newIy acquired facilities, o' *0 o'

• i. sc3k freedom io choose among a variety of indicating that a $40 million ethylene l

0 c(* 'go locations. dichloride plant will be construeted and pth',/ 'lhe most promintnt example of this operating by late 1989. Representatives ( f competitive spirit is the successful 1985 of CPI, played a key role in getting this / campaign to win the it.S. Nasy's selee-load back on line. tion of a homepon for the refurbished An entirely new kind of industry battleship liSS Wisconsin, an aircralt for South Texas may emerge in the Rio carrier, and-several suppon ships. With Grande Valley - paoer manufacturing. A the combin d support of citi/ ens, local $300-million newsprint mill near hicAllen governmen s, state and national elected is being planned. Raw material for the oflicials, b.tsiness and industry, and plant wouki be kenaf, a hemp like plant 33 many puble and private organizations, that grows well in the area and can be

used as an inexpensive substitute for than 10% per year in hiexico. The U. S. wood in the paper making process. At Govenunent Accounting Office estimates liarlingen, General Dynamics will open a that 60% of impons from hiexico come manufacturing plant for refurbishing through Texas. Iaredo is the largest port aircraft and electronic systems. of enuy. The GAO expects continued growth for the maquiladoras, predicting IIllex Poly Company of Los 1,500 plants and a million workers by Angeles has staned operations in a 1995. That compares with 789 twin factory at Victoria to manufacture plants and 217,000 workers in 1985. grocery and other plastic bags. The finn 'Iburism in all parts of South Texas is has already announced expansion plans. expected to continue gnming. The Winter Also in Victoria, the New Ilusiness Texan busmess, especially in the Rio Incubator Project has begun operating. It Grande Valley, will show gradual in-is a publiciprivate coalition aimed at en-creases according to state tourist offi-coaraging the development of small finns. cials. 'lk Texas State Aquarium, due for g Along the border, growth of maquila-groundbreaking in Corpus Christi this N doras, or twin plants, is nmning at more year, will be a top tourist attraction. ' '1' d',', y'"f,3' South Texas communities in L their efforts to attract new ) business and Industry. ','**~~... *****...

b 1

J( k -4 1 - * .,, Qt[ i V;- .J.' { 'WJl * ' t ~ f. f.,, %.)._ 3

t ?,

i t g g 'h 3 ~. ? nwdMKi ,,7[ t JTZy> - ~ 'i ~ . 34 MI i t- ,s, w ,,.~[~ l Y g -l ~.V1 y, m, 4 y_ g .a ['f t cp 74 f l \\ 1: el l t ~. L - br n 9 \\ .h y FM h ~MJ'

=

s t1 j s / i 4 is tm f ,_v 7 p* ,f .] p ,~ 73,' p. w. - e ' ',' a ,2~ 4::;.%~ '.'l. y 9 .k s. -..+

'x -_4 Ns N N b s / j / k = / s 'r .lf,'. II /4,,,* ), ' t,, 'tr r l' c $5 / h. / l i / s 7 E i j t R-~1 p A l11 area,5 a,% g, 'Y,,j nn.,, .:..n,;ri,c ',;ceci.4,,c,y,'an,,. rkc Hu..,"i 1,,c ca y b,,y,nc,, "b %,,ang'cej,'ns,;i f ai, l rice D,y. ca,,, 5' 19. c,,,j%,u,',h, ns O' Cop i,,, (y,, 'bYY, ,,,, * / q, 'c,,7 ' t,i, .n. j c c,,,, mv,, .'...,cn.,,;n!.n,, (.c, 51,g !r 1, .',.,, cn,,,;11,v f'in, i i,, g, i nd,y'N i,.,. / ,,,n,,,;vc,.,'notgMy,lIn'n-hea,,'?'ry*'n,<li?.ni, is ,l' N*en A feac j w >"* J"'"a to r k' ')l fhI,'

,;;;~"c.,,anca,,

hw??;',,,w,," meur .rco sm:r >c,,,, /__a ,c, v - n Jay. ou, s4';&n'>glQ<,,;i,,;;;i:"- cy r n s,,,, .a poJ jel>.. <m: i + s

nua, e

h' '"",SmpA,,cn,.;4";;;iq ,, ~ns, ,c s < u,c, ),;'yk s::';;ncn.;, u,c c.n,u,,;v a ,a,,y,a,y;',n, cn Uon ,,.g nug,n,cn,pi;74,,,d) k ;hl n,.,picn, d,,x',g',hkl,$,:&,..,;s ,>u.,fccv,,,>n,ai, c si,, u c;', n u,,,,cni, n.,,;;'c'cr. ,a a ni,'~ u,,; 'h',,',,., Q,.'? e,,,,,.,,,;;'.,,: nos !* :sicc kn. [iscagnoc,, o,. ;naac,;;>;;;>;<nsp,,n,;n, ';i s. , U! ?;,'*_ rh.

• naq cc sp's ang mejcuci, v'. :khil',lciu"l 4;,

1%g is ,,, '* c n x Nx \\ \\ 4p \\ N N\\ 'x

Financino l b Hetirement Plus, as the plan is In October the Company issued called, offered sever:.1 enhanced benefits. $100 million of first mortgage The plan eliminated the pension ieduc-bonds, substantially all of which has tions that nonnally apply to those who been used to pay off shon-tenu loans retire before age 62; it used the employ-and finance capital expenditures. The ee's salary as of December 31,1987 to issue was purchased by Kidder, Peabody calculate pension benefits instead of the and Company, Inc., at a coupon rate of usual highest 36-month average pay; 9.75% and a cost to the Company of and it will pay a supplemental benefit, in 10.04%. Due date of the bonds is No-addition to the pension, equal to the vember 1,1994. amount of Social Security offset in the During the year the Company re-pension fonnula, deemed the remaining $15,742,000 of Of the 268 employees eligible for the the Series 1982,15-%% debentures due plan, 236, or 88% elected to accept it. April 1,2012 and $230,000 of the Those who chose to retire under the plan Guadalupe Illar.co River Authority were given the option to choose their 1977-A Series,6% pollution control own retirement date between January I revenue bonds. and June 1,1988. Factoring of unbilled revenue through Commenting on the restructuring, GW Credit, Inc., bmught in $43 million on President and Chief Executive T. V. a timelv basis at a discount rate lower Shockley Ill, said: "This new organiza-than ra'tes for short-tenn borrowing. tion renects a streamlined way of doing On February 17,1988, the Company business that shouki sene the Company accepted pricing temis on $85 million of well in the future. A leaner organization Auction Preferred Stock, Series A and will emerge, and we will be better Series 13, at an initial rate of 5.50%. equip [ui to fulfill our future obligations." Proceeds from the stock sales will be P used to repay a portion of the CFL local oInce earlofres Company's short-tenu debt, which was C "'l" "' ' 5" "K di' loa of w stayingla close touch nIth incurred primarily to pay STI, commy,j,y,,,g,,,j,,,j,, constmetion costs. / ma \\ \\ b a.d 1 ( '. s - sman n l i y 7 h/ y- ? ja .I. n ,y ~ z AM ? = J; lll. ? L fjh Q 'e 2g y - i n_. ,e s [ g l 9 l

• Q,f '-

w L .j 's '?f y' ,i.J._ hl 1 i y/ h v _) a a 1

h< V k o g e n h. -r .,,h i 0 ,no L' - :.a s i. w ~, ..s s o- .g '~ = ) I

gf

^ l e ' ~. i g ... j e N s g Outstanding ? Ta(ina Care a, Business d their j bs well, who make this a re*'=""' 67 individual cruployees 5 better organization simply by takm, g care and mark groups help of business. (Ac Co'urar achl Football is won on the line of Iany Ikmduch, a Seniceman in '"d ' ""'l""',"[' p scrimmage; business succeeds on the liened,'v, accounted for 166 security 'ight basis of daily perfonnance. Cliches, yes, saks in the hiid Coast District. In but still the truth. In an era of increasing addition, he cc,ntributed more pmductive competition, it becomes more and more leads for Good Cene 110mes and for imponant not only that we shape our commercial and food service equipment r,rganization to meet the coming than any other employee in the district. challenges, but that we also recognize Iany earned the district's hlarketing the incalculable contributions of those Pacesetter of the hionth Award for five who, by excelling at their jobs, help the consecutive months. Company achieve higher standards of in 11easanton, Shirley lester, a Senior excellence. We take this space, then, to Customer Accounts Clerk, tumed in mention only a few of the many indi. more than 35 heat pump leads to the vidual employees and work groups who Winter Garden htarketing Department. g

l 'Ikenty-one led to sales. CPI. auditors, Sam Barrett and Jacinta In Corpus Cluisti, the district's entire Davenport, saved the Company at least residential marketing staff outworked the $1.8 million. They discovered that CPI, competition and succeeded at turning the and the other panners in SEP had been 1987 Parade of Ilomes into a showcase unintentionally overbilled for certain of electrie iiving. Of the 23 homes entered plant expenses since 1982. The contin-in the parade, 21 were all-electric and uing error had never been discovered by 13 earned the Good Cents award. KfP's managing panner, by their outside When Du Pont shut down a large part auditer, or by the other partners who of the Ingleside operations in 1986, CPI, were also being overbilled. lost its largest customer. Du Pont was Benha Vargas, Equipment Operator considering selling the plant as scrap with the liarlingen Undergrour i Crew, metal. But 'Ihm Curlee, Director of Area sold more than 700 security ligats dur-Developmeni and I,arge Industrials, started ing 1987, mostly on.'ier own time. That making phone calls. After others had was 14% of the goal for the entire given up on trying to sell the plant intact, Company. Bertha may have been an 'lbm found live bidders for it. 'lhe winning inspiration to other employees because bidder, Oxychem, will be CPUs largest the goal of 5,000 was eclipsed by actual

customer, sales of nearly 20,000.

'IFe persistence and diligence of two New Officers Anc Directors Eectec, W On June 1,1987, T. V. Shockley, included the election of Richard P Verret, Ill, was elected to succeed E. R. Brooks Vice President, Power to Vice President as President and Chief Executive Ollieer. and Chief Engineering Officer; the retire-Afr. Brooks was named to the new posi-ment of William C. Price as Vice President, tion of Executive Vice President of Electric Strategic Planning; the retirement of Operations for Central and South West Florine Gupton as Assistant Secretary; Corporation CPI,'s parent company. Afr. and the election of Alary E. Sullivan as Bmoks had be(n the Company's Treasurer to replace Jerry J. hiatula, who President and Chief Executive Of ficer transferred to a position in operations. ~, since January,1986. lie joined CPI,in Three new members were elected 1982 after sening more than 20 years in to the Board of Directors. They are a y various engineering and management Ronald I.. Kellett of Kingsville, a Certified positions and as Vice President and a Public Accountant, and Vice President Director at West Texas Utilities and Controller of the King Ranch; II. Lee Company, a CSW subsidiary. Richards of Ilarlingen, President of f lygeia p' gge hir. Shockley has been with CPI, for Dairy Company, President of CollYCO, 3,5

• g 3

W#,p more than 10 years. lie worked in ine., and a Director of flarlingen National f do A'g 'O several enginevng capacities for the Com-Bank; and Richard 11. Bremer, CPI,'s b 01, po " ic3, pany, and was electe.1 a Director and Vice President, Finance. 2 Chief Engineering Office:r on January Outgoing Directors were flerbert I.. C # ed p # de'* a 3 14,1986. h1 iller and W. C. Price. , f ge $p c 6go e #i ptW"' w Other changes among Company ollieers / c p** 3# ed " s D0 gd' g o* f f 18

'k f _. _ p ,og -I m f Q ^ J j -\\ N;,_ x; 'i }: 'I 7 _.-,7 [ c I 1 g jt e x 4%

s' h/\\

.\\ 1, ([" i t

1 l l D~ r 1 / 'g, 9 -~ ? l , ;r,

A n

L. ~ + !; O l J' \\' f . ', 's i 9 _f..

~..

L, c-... 1 i IlOARD OF I)lRI:CTORS OITICERS TRANSFER A(iENT REGISTRAR OF STOCK l ~l \\1 Nhew kle), lli i \\ _ Nhiw kit). lli t l'ent r al and Niuih N st R. bv rt I. R a n ge N n is cs. Ins l'. ( ) Ibn 6tol64 i)ur n ooJ C halk e r I)allas, le u s 7 ~> J t>6 IT. r, 4 o;- ..t; i 15 % leagur John % t ruf 6 hlit lJ ,3, Mallt r \\. Rats lill n ( I ' 'T,j l * % H l a r q u h a r. f r. g . i s i ir l l i 4 iF i, i, j R u be n M. (ia rt ta llayttin R hirk u 4 . I f i i .J. i i , ((] (,v rald % lu ker 3, l Ros< ri.\\. u.'"' " hiO'" uan i w uis an Ntirla !. b t'l Cl( il Ite RisharJs y, litrht rt C l's in, f r i lorine (,u pton < R 'st rt i Range

1. R.15r oo k s, lit rbe rt 1. Mille r -

Ris harJ ll Ibt nit r fC 3i

E w \\ Financia Summan C$252MSN?EDTMW4f32.%T.LTs3M*MEMK*?2HM*MMMMMMA*TW255C%~.TTEB CIW1RAL IWT.R AND IJGHT CoMlWNY SUhlAfAltY OF FINANCIAL, AND OPEllATING STATISTICS 1987 1986 %CilANGE FINANCI AL STATISTICS (Thousands) Operating Revenues .S 768,264 S 859,975 (11)% Fuel and Pttrchased Power 317,307 397,404

• (20)

Other Operating Expenses '220,282 211,630 4 State, Local and Other'Ihxes 38,177 36,388 5 Federal Income 'Ihxes 50,063 '69,087 (28) Operating income 142,435 145,466 < a (2) Net income 191,927 174,165 10

• OPEltNi"ING STATISTICS Kilowatt-hour Sales (Thousands) 14,028,160 15,640,017.

(10)' ~ System Maximum Demand (Kilowatts) 2,881,000 2,974,000 (3) _ Electric Customers (Year-end) 532,546 527,392 1 Average Kilowatt-hour Sales Per Residential Customer 10,369 10,338 Average Residential Rate Per Kilowatt-hour 5.90e 6.22e (5) / m.myp?mnn B:W% r_ yhfmj;ycegg : zwmanq;yMggdhggfw 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS / To the Stockholders and Ikurd of Directors of ' Central 1%vr and Light Company; We have examined the balance sheets and auditing procedures as we considered necessaiy in the statements of capitalization of Central Power and circumstances. Light c*ompany (a Texas corporation and wholly in,our opinion, the linancial statements referred to - owned subsidiary of Central and South West above present fairly the financial position of Centr'd. Corporation) as of Deermber 31,1987 and 1986, Ibwer and Light Company'as of December 31,1987 and the related statements of income,' retained and 1986, and the resuhs ofits operations and funds camings and funds provided for gross additions to providal for gross additions to electric utility plant for electrie utility plant for each of the three years in the each of the three years in the period ended December. period ended Decemb r 31,1987. Our exantinations 31,1987, in conformity with generally accepted were made in adeordance with generally accepted accounting piinciples applied on a consisten_t basis. auditing standqJs and, accordingly, included such tests of the accounting records and sui:h other ggg [ Dallas, Texas Adhur Andersen & Co. s February 8,1988 - o a s 21 1 o f L

7inan'ciaLReview- .l REPORT OF htANAGEAtENT htanagement is responsible for the preparation,. report thereon. Their examination was conducted in integrity and objectisity of the financial statements of accordance with generally accepted auditing ~ Central Power and 1.ight Company as well as all other standards. Such standards require a review of intemal information contained in this Annual Report. He controls, examination of selected transactions ~and financial statements have been prepared in conformity other procedures sufficient to provide reasonable with generally accepted accounung priticiples applied' assurance that the financial statements are neither s on a consistent basis and, in some cases, reject. misleading nor contain material errors, No material a amounts based on the best estimates and judgments intemal ecntrol' weaknesses were reponed to of management, giving due consideration to management by the independent auditors during. materiality. Financial information contained elsewhere 1987. %e Report of Independent Public Accountants ' in this Annual Report is consistent with that in the does not limit-the responsibility of management for financial statements. information contained in the financial statements and: %e Company maintains an adequate system of elsewhere in the Annual Repon. . intemal e mtrols to provide reasonable assurance that transactio ts are executed in accordance with management's. authorization, fmancial st'atements are prepared in accordance with generally accepted accounting principles and that the assets of the Company are properly safeguarded.The sv~ stem of T V Shockley lil. intemal controls is documented, evaluated and tested I' resident and Chkf Executive Officer by the Compmy's intemal auditors on a continuing basis. No intemal control system can pnnide absolute 0 assurance that ermrs and irregularities will not occur ~k due to the inherent limitations of the cffectiveness of Robert L. Rang internal controls; however, management strives to Executive vice nesident maintain a bala'nce recognizing that the cost of such a system shotdd not exceed the benents 'duived. Anhur Andersen & Co. was engaged to examine the financial statements of the Company and issue a March 10.1988 . l REPORT OF. AUDIT COhtAllTTEE 1 The Audit Committes of the Ibard of Directors is the independent public accountants the overall scope composed of seven outside directortue members of and specific plans for their respective audits. ne. the Audit Committee are: 11. C. Petry, Jr., Chairman,- Cwanittee also discusses the Company's~ financial John W. Crutchfield, Ruben M. Garcia, W. R. statements and the adequacy of internal controls. ne Farquhar, Jr., Roben A. McAllen, Ronald L Kellett Committee meets regularly with the Company's i and 11. Ire Richards. The Committee held two intemal auditors and independent public accountants, - meetings dunng 198 <. wahout management present, to discuss the resuhs of The Audit Committee oversees the Company's their examinations, their evaluations of intemal financia! reporting process on behalf of the Ibard of controls, and the overall quality of the Company *s Directors. In fulfilling its responsibility, the Committee financial reporting. The meetings are designed to, recommends to the Ibard of Directors, subject to facilitate any private communication with the shareholder approval, the selection of the Company's Committee desired by the intemal auditors or. independent public accountants. He Audit independent public accountants. 1 Committee dis.:tsses with the intemal audiints and o y je l1. C. Peuy,'Jr. Chairman. Audit Comndttee March 10,1988 s 4

+ -( 4 Statements O! Income CENINALlu\\1R AND IJGIrr COMD\\NY ' hr the Yean 1-hksi I Awmlu 31 19M7 1986 19M (thtusarwis) i s s lictric Oguaung ikwnucs - i . Residential $273,223 $284,345 $295,038 I Ownnxnt! 231,(XM 241,773 -252,1M Industrial 198,481 2M,626 300,915 - . & des he resale 30,034 47,239 46,945 l Other 35,522 31,992 29,676 f 768,2(l 859 175 924,908 Oguating F.xpenses ark!'liws 303,867-392,5k5 482,959 Ftrl 1brehased pmvr IJ,T40 4,8 m 10,225 Other rpraung 124,276 115,153 1(H,159 Maintenance 40,891 44,254 44,170 ikpndatxn 55,115 52,223 48,577 hes, other than Fnkral inamie 38,177 36,188 32,940 _ j 50,D63 69,087-62,966 Faleral inavne t.ucs 625,829 714,509 7&5,996 142,435 145,466 138,912 Opratine Inamie Other inavne arxl I Astuctkus Alkmurar kr equity funds usal dunng emstnxnm 103,340 &3,846 78,958 Other 825 3,(15 3 M 1(M. I 65 86,899 79,022 Inavne lkixv Interest Oura s 246,600 ' 232,365 217,934 j truenst Ouges ligerest on kog4cnn dda 108,038 107,521 101,325 -Intenst m shcet4erm delt arwl other 12,172 6,770 14,M 5 Alkwarwr for lunmul hats usai during anstnxnm (65,537)- (56,091) (50,200) 54,673 58,200 65.770 i s 4 Nd inavne , 191,927 174,165 152,lM liefeinst Stock Dniknds l$,820 16,010 15,991 Net Inavne he Ownym Stock $176,107 $158,155 $136,173 \\ -Statements O!Retainec hmings E M M M E25W Ant w a riMPJcc g 11% s em?dX CFNIHAL IG51R AND 1JOIff G)MihNY hx the Wrs 1hksi L Awmin 31 1987 1986 19 0 (tlwusarkit) Iktainni Eanurys, at ikpnrung of br $459,555 $397,555 $347,917 Net Income kx Omunm Swk I76,107 158,155 136,173 Ikshxt Ornnym Suk Dniknis 50,000. 96,155 86,515 ' 1 iktami Eamite, at End of Wr $585,662 $459,555 $397/Jii 23 3 L w wncomm wi Smu uenua m an mcw nm.m e amnu. s a

s 5 -Bilance'8 bets ~ [fM M.adP M"MP.edsawCLI:ssrc,42nATM nu,L.#4TM*5""~3*RWNMM*f-WCI! CFNFRAL LOWER AND LIGlfr COMD\\NY As of December 31 1987 1986 4' 'l (thousands) i ASSETS Electric Utility I'lant - Itoduction $ 727,686 $ 715,779 'llansmission ' 289,618 268,648 Distnbution 555,914 534,081 General ' 190,048-162,081 1 Construction work in progress 1,987,786 1,646,332 Nuc_ lear fuel 102;516 100,048 ' 3,853,568 3,426,969 Less - Accumulated dqs* tion 589,909 546,285 3.263,659 2,880,684 Current Assets Cash and temporary cash imestments 737 1,002 Advances to affiliates 2,129 Accounts receivable 14,866 16,666 4fateriah and supphes, at average cost 10,145 10,579 Fuel inventory, at average cost 27,039 19,575 lYepayments and other 12,074 6,917 64,861 56,868 Deferred Charces and Other Assets 13,429 12.577 3,341,949 2,950,129 /. CAPITALIZATION AND LIAllILITIES Capitalization Common stock, $25 par nlue, authoriied 12,000,000 shares, issued and outstanding 6,755,535 shares 168,888 168,888 j Paid in capital 405,000 405,000 Retained eamines 585,662 459.555 Total Common Su>ek Equity 1.159,550 1.C 'd,443 1 i lYelerred stock - Not subject to mandatory redemption 166,782 166,705 Subject to mandatory redemption 46,660 46,355, leng-term debt 1,179,456 1,048,987 'Ibtal Capitalization 2,552,448-2,295,490 Current Liabilities ' long-term debt due within twehr months' 12,140 131 J Advances from affiliates 42,430 Accounts payable 44,309 39,020 ) Fuel refund due customers 20,188 37,349 Customer deposits 8,799 8,517 Accrued taxes , 23,850 25,209 Accrued interest 44,375 37,572 Other 14,702 13,828 '210,793 161,026 Deferred Credits Unbilled customer accounts so!J 35.917 Income taxes 347,697 312,220 Imtstment tax credits 195,094 180,793 578,708 493,013 $3,341,949 $2,950,129 A 24 1he acmr.panying rues to finarkial micments are an integral part of these statemenu s

Statements 0Runc.s Provic.ec 7 r Gross Ac citionsTo lectric Utility P ant 0 .? . :.. / z CINIRAL IUWER AND 1.lGitT COMinNY lor the Sears ljkled December,11 19M7 1986 19F* (thousands) Funds lYmided from Operstias $174,165 $ 152.164 s Net inmme $191,9J 7 Ikpreciation 61,751 61,078 58.207 Iklerral income taxes 35,477 42,834 40,210 Deferral imystment in credits 14,30 t _ 19,748 11,606 . Allowanee for funds used dunny construction (16M,8 7 7)__ (139,937) (129,158) l'unds IYmidal from Operations ' 134,580 157,888 133,029 las - thvidends 65,820 112.165 102,526 Reinwstal Funds Itmided imm Operations 68,760 45,723 30,503 funds itmided (Used) liy Inwstors 70,000 _ Cayital contnbutions trum parent company Sale of long-temi debt 100,000 260,000 251,700 Sale of preferred stock 75,000 Retirement of longerm debt (131) (10,123) (116) _Italenyion of preferrut stock (17,915) (212,501) (141,240) Reaequisition of long-tenn debt (42,853) Funds hekt for pollution control fauhties. 58,462 __ 19,977 23,950 140,416 89.5no 201,294 Other Fur ds l'rtvidtd (Used) Advances tn from allihates 44,559 ',0.323 (38,257) Unbilled customer acetets sold 35,917 Fuel refund due customers (17,161) 13,555 (36,769) Materials, supphes and fuel inventory (7,030) 23,569 (2,755) Acerued interest 6,803 1,MS 13,80 i Aewunts payable 5,289 5 t25,217) 2,841 Pre [uyments and oil:et (5,157) (3,761) 26,817 i Accounta receivable 1_,800 (6,908) 45,667 Aecmed taxes (1,359) 23,217 (4,846) Uash and temporary eash inwsunents 265 48,521 (49,041) ~ Sale of electrie utihty gnt 50,537 n_ Settlement on South Texas Itoject s 146,826 Other 2,744 (2,583) (12.089)' 66,670 157,901 92,196 Net AJdnions to llectrie UtihtE ant 275,846 293,124 326,993 li 168,877 139,937 129,158 Allowance for funds used danne cortstruction Grms Addalons to lleetne Utihtv 11 ant $444,723 - $ 433,061 $456,151 W ylD$ Del 5 LO (liblTh'5JI tlAlffnetti AN An tDlfpal lWt of thoc Swenwen N O 4 s

Statements of Ca3itaization-cy L :.; rea: ;, y. _ w y, M* _n CENTRAL IVWER AND UGIfT COh!PANY As of Deecmber 31 19M7 1986 (thousands) COhlh10N STOCK EQUITY $ 1,159,550 $ 1.033,443 PREFERRED STOCK Cumulauw $100 par value, authorized 3,035,000 shares Nuraber of Shares Current Series Outstanding.- Redemption Price Not subject to mandatory redemption ~ 4.00% 100,(XX) $105.75 10,000 10,000 4.20% 75,000 103.75 7,500 7,500 7.12% 260,000 103.13 26,000 26,000 8.72% 500,000 105.82 50,000 50,000 7,98% 750,000 102.00 75,000 75,000 issuance expense (1,7 I 8) (1,795) 166,782' 166.705 Subject to mandatory redemption / 10.05% 500,000 104.76 50,000 50,000 1ssuance expen<e (792) (792) Unamortized redemption costs (2,548) (2,853) 46,660 46,355 LONO/l rCR31 DEllT First mortgage bonds & ries 11,4%, due February 1,1988 12,0(X) Series I, 4 h%, due Apn! 1,1989 ' 11,000 11,000 Senes J. 6YA, due Januarv 1,1998 28,000 28,000 Series K 8h%, due January 1,2000 25,000 25,000 Senes L, 7%, due February 1, 2001 36,000 36,000-Series A1,8%, due Nowmber 1, 2003 46,000 46.000 Series N,9h%, due June 1,2004 40,000 40,000 Senes 0,8%%, due October 1,2007 75,000 75,000 Series H 8%%, due September 1, 2008 75,000 75,000 Series T, adjustable rate,9% to Decemixt 14,1989, due December 15,2014 (net of $4,768,000 held by trustee in 1986) 111.700 106,932 Series U,9 %%, due July 1,2015 (net of $4,606,000 he!J by trustee in 1986) 81,700 77,094 Series \\' 11h%, due Aucust 1,2015 85,000 ~ 200,000 85,000 i Series W. 8%%, due Kla,$' 1,1996 200,000 Series X,9%%, due November 1,1994 100,000 Debentures Series 1982, IST A, due Apri! 1, 2012 85,000 85,000 15,742 Series 1985,12%, due September 1,2015 installment sales agreements - Ibilution control bonds 7%%, due June 1,2004 9,825 9,825 ' 6%, due November 1, 2007 34,235 34,465 7%%, due September 15, 2014 (net of $148,000 held by trustee in 1986) 6,330 6,182 10h%, due October 15,2014 139,200 139,200 7%%, due December 1,2016 (net of $9,920,000 and $58,860,000 held by trustee) 50,080 1,140 Notes payable,6%%, due December 8,1995 1,498 1,637 Unamortized discount (18,696) -(18,214) Unamortized costs of reacquired debt (42,416) (43,016) I,179,456 1,048,987 TOTAL CAPITALIZATION $ 2,552,448 $2.295.490 W ensnymg n.<e. to on.uual aunena are an usyaen of tw ucnwnt $ 26 W

~ Notes To Financia. Statements mamacma:sassasemararmissenemust

1. SUhlMARY OF SIGNIFICANT ACCOUNTING FOLICIES Central Power and IJght Company (the Company or Depreciation. For financial reporting purposes, :

CPI.) follows the Uniform System of Accounts pre-pmvisions for depreciation of electric utility plant'are scribed by the Federal Energ Regulatory Commission ' computed using the straight line method, generally at (the FERC). The Company, as a member of the Central individual rates applied to the various classes of I and South West System (the CSW System), engages depreciable pmpeny. %e annual composite rates aver-in transactions and coordinates its activities and op. aged 3.55%, 3.60% and 3.52% for the years 1987, l ' erations with other memixts of the GW System. The 1986 and 1985, more significant accounting policies are summarized Electric Revenues and Fuel. Revenues are l below" generaUy recorded at the tinje biuings are made to Electric Utility Plant. Electric utility plant is customers on a cycle' billing basis and the cost of fuel stated at the original cost of construction wideh includes is charged to, expense as etmsumed. %e Company re. j ,\\ the cost of contracted senices, direct labor, materials, covers fuel costs applicable to sales to its wholesale overhead items and atowances for borrowed and customers, regulated by the FERC, through an auto- ^ equity funds used during construction, maiic fuel adjustment clause. Allowance for Funds Used During Under rules established by the Public Utility Constructior.. ne allowance for funds used during Commission of Texas (the Texas Commission) the ~ construction (AFUDC) is the result of an accounting Company recovers fuel costs as a Cxed corrponent.of pmeedure whereby amounts, based upon the lorl of - base rates. The difference between fuel rnvr es billed construction work in pmgress (CWlP), representing and fuel expense acurred is recorded as an addition the interest on bormwed funds and a retum on equity to or a reduction of revenues, with a cwresponding capital used to finance construction, are reflected as entry to accounts receivable or fuel refund due cus-credits in the statements of income and charges to tomers, as appropriate. Over-reemtries of fuel are to CWlR AFUDC does not represent a current source of he refunded to customers; under-recoveries may lx cash funds. Under establishi.! regulatory rate'prac. bided to customers after Texas Commission appnwal. tices, a retum on and recovery of such costs is Prepaid Federal income taxes are recorded on the pemiitted in determining the rates charged for utility cumulative over-rmnuies. senices. He gmss composite rates averaged 11.9%, Unbilled Customer Accounts Sold.ne 1 12.2% and 12.5% for the years 1987,1986 and Company sells accounts receivable, without recourse, to 1985. De tax cffe:t applicable to the debt CSW Credit, ine., a whoUy owned subsidiary of Central component is recorded as a charge to deferrn! income -and South West Corporation. In February 1987, the tax expense.The Company cxcludes from the calculation Company began selling receivables for electric service. I of AFUDC that porjon of CWlP included m us rate p.ided but not yet billed to customers. hase for rate-making purposes.

2. FEDEltAL INCOhlE TAXES 4

ne Company, wgether with other members.of the retum. Details of Federal income tans are as foDows: CSW System, files a consolidated Federatincome tax 1987 lu86 19e 0hous,uxis) Included in Operaung ISpenses and 'laxes Cumnt $ 6,8 hl $ 6,589 $( 16,709) Iklertal income taxes ~Al'UDC - bornwn! 25,409 26.243 22,114 lkpreciauon ddlerences 8,606 8,129 10S87 Deterrai fuel (6,5M8) 11,859) 27,859 Reacquttni debt costs (258) 10,405 9.801 Other 1,720 - il68) (2,3M l 2 8,MMV 42,750 68.0o9 Ikferrni imestmmt tax enshts lWlon 20,349 23.039 14,il . Anmrthaem (6.048) (3.201) (2,933) ~ 14,301 19.748 11 S06 50,063' 69.087 62,966 indudal in Other inmme and i kdumons ,g (1,3721 j ( @ 2) 5,294 g _Currou ikferrni 34 (1,507) ' t,4 27 o# ( 1,7 MX) 3,787 55 $4M 275 $72.874 $63,021

^ ~ -r CENTrtA1, POWER AND LIGl'fI' COMPANY ', j i . Taxes deferred in prior years are credited to income Total income taxes differ from the amounts com-when book ded rtions exceed the related tax deductions. puted by ' applying the statutory Federal income tax - he deferred investment tax credits are included in rates to income before taxes. He reasons for the income over the lives of the related propenies. di'.Ierences are as follows: (dollars in thousands) 19M7 1986 1985 ) 'lhx at statutory rates - $96,081 40.0 $113,638 46.0 $98,985 46.0 Differences . ^ AFUDC-equity -(41,336) (17.2) (38,569) (15.6) (36,320) (16.9) Investment tax credit (6,048) (2.5) (3,291), -(1.3) (2,933), (I A) Other (422) (0.2) 1,096 0.4 3,289 1.6 $48,275 . 20.1 $72.874 ,29.5 $63,021 29.3. ) At December 31,1987, the cumulative net amount effect amounted to approximately $34,38 f,000 and 'of income tax timing differences for which deferred $ 13,752,000. ' taxes had not been provided and the related tax / s w '3. LONG-TERM DEBT

• i The mortgage indenture, as amended and supple-permitting the payment of dividends not otherwise mented, secunng first mongage bonds issued by the permitted under the Company's tr.ost restrictive s

Company, constitutes a direct first mortgage lien'en supplementai indentures. The SEC's order requires substantially all electrie utility plant. that any dividends paid out of amounts that would Annual 1:equirements, The annual sinking fund , therwise be restricted are limited to net income requirements are generally 1% of first mortgage bonds camed in the twelve months immediately preceding outstanding. nese requirements may be, and have rvment of the dhidends. At December 31,1987, historically been,. satisfied by the application of net $459,555,000 of retained earntngs were not available , expenditu'res for bondable property in an amount f r payment of cash dhidends. equal to 166%% of the annual requirements. Sale of Long-term Debt, in November 1987, the At December 31,' 1987, the annual sinking fund Company issued $100 million of 9%%, Series X First requirements exclusive of maturities, and the annual ht ngage Bonds due November 1,1994.The proceeds. aggn gate maturities including sinking fund require, fr m the issue were used to reduce the Company's short-ments, of long-term debt are as follows: term debt and to finance construction expenditures. Reacquired Long-term Debt. In April 1987, the Annual sinking Annual Aggregate Company reacquired the outstanding $16 :.illion of Fund Requirements Maturities 15%% Series 1982 debentures. s ~ (thousands) In h!ay 1986, the Company issued $200 million of 196o $7,210 $ 19,350.__ 8%%, Serics W, First hiongage Bonds, due Afay 1, 1989 7,100 18,249 1996. He proceeds from this issue wen. used to. 1990 7,100 7.453 reacquire its outstanding $75 milliott of 12%%, Series 1991 7,100 7A79 Q, First Afortgage Bonds: $56 million of 12%%, 1992 7.100 7,505 Series S, First Afortgage IMnds; and for the financing of the Company's construction program, in Qetober. i 1986, the Company reacquired the remaining balance ) of $44 million of ' cries S, First hfortgage 13onds. I Limitations on Dividends. %e mortgage inden-ture of the Company contains cenain restrictiora on The premium and related reacquisition costs of l the payment of common stock dhidends. In accordance long-term debt are classified as a reduction to long with provisions of ccnain of the Company's supple. term debt en the balance sheet and are being amor-mentalindentures, the Securities and Exchange tized over 10 to 30 years. Commission (the SEC) has entered an order 28 A u

N6tes To Financia Statements c, .3 .- _ e, .x.. 3. ca, v. ' 4, PREFERRED STOCK 1he dhidend on the Company's hioney hfarket 2001, and a siveined nuinivr o! shares in each Preferred Stock is adjusted every 49 days based on twehe-month perial thereafter. The sinking fund. current market rates.1he dividend rate averaged redemption price is $100 per share. 5.16% and 4.62% during 1987 and 1986, Fach series of the preferrW stock is redeemable at In h!ay 1986, the 10.10% Series Preferral Stock, the opdon of the Company t,Imn 30 days nodee at par value $100 per share, was called for redempdon. the curTent redemption price per share. Redemption 1he premium and related redemption costs are classi-prices of the 7.12%,8.72% and 10.05% Series decline tied as a nduedon to preferred stock on the balance at siveitial intervals in future years. 'lhe 10.05% Series sheet and are being amonfred o';ct 10 years. is not refundable until 1994.1he hioney hlarkst 'lhe Company's 10.05% Series, $ 100 par value pre, Prefetd may also be redeemed on any dividend pay-lenal stock rvyuines a mniatory smking fiuwt suf ficient tuent date ati Nden t on price of $100 per share to retire 35,250 shares in each twelve month perial plus axmd dhiden beginning February 1,1990 and ending Jamtary 1, 5, SIIORT. TERM AND OTilER FINANCING 'lhe Company, together with other members of the aggregatiny $200,000,000, inehiding the Company's CSW System, has established a Systcm money pul to lines of cralit, have been obtained. These lines of 4 coordinate short tenn bormwings and to make bor-credit generally require ecmivm.atmg balances or an rowings outside the money pel through the issuance annual fee. Shon tenu cash surphtses transferred to i of commercial Fir.r and from banks. In connation the money piel receive interest income in acconlance l therewith, System 24 month lunk lines of credit with the mnney pol arrangement. -l i 6, BENEFIT PLANS wvre a discount rate of 7.5%, a lon(ting tmder S lhe Company, together with other members of the Assumpions usal in the acenta g tenn rate of com-CSW System, participates in a non-contributory defined bendit pension plan covenng substamially all its em-pensadon increase of 63 and a nium on plan assets ' ployees. liepefits are based on employees' years of of 8.5%. senice, age at retirement and compensation. 'Ihe CSW h of Deamber 31,1987 and Jammy 1,1986, the System's f unding policy is based on actuarially deter' plan's net asc-et> excealed the total actua'nal present nunal contribadons taking into account amounts v.due of mumilad Idt obligadons. 'lhe Cirapmy's deductible for income tax purposes and udnimum ivnsion cost accruals were $5,642,000 and coniributions required by the Employec lietirtment $5,W),000 for the years 1986 and 1.985.. Income Security Act of 1974, r.s amended. In additmn to the pension plan, the Company also lhe CSW System adoptal Statement of Financial Ae-panicipaes, with other members of the CSW System, counting Staxlants No. 87, Empkwers' Accounting for in medical and death benellt plans for substant'ially - Pemions (SI%S 87), during 1987.1his change in ,au adive employees and employees who retire with accuunting did not have a nutuial elfeet on the ~the CSW System ne comomy's cmt of roviding P Company's results of olvrations or financial condition those benefits was $6,646,000 in 1981, covering Pension costs and related disdosures for the plan in 2.602 active empkiyees and 669 retirees; in 1986, 1986 and 19&i were detenninal and are presented the ehst wa $5,958,000, covering 2,671 aedve em-tmder the pmvisiors of proious axounting principles. ployees and 646 retirees; and in 1985, the cost was lhe components of net pension emt for 1987 are $5,929,000, emering 2,630 active emph ws and 3 as f 11ow 610 retirees. 9 (thomands) Senice cost $d,802 Interest cost on proja1ed bendit oblipuon 9,794 Actual return on plan aswt3. (7,235) 29 Net.unortitation and deferral (2,590) <l,77 L. \\. t .I,

CFNDL\\L lt)WER AND IJGirr COMPANY ucc m :c.v: s,wn:w sp 7 5 n7 ;

7. JOINTLY OWNED ELECTRIC UTILITY PLANT

- The Company has enteral into a panicipation agree-provides financing for its share of the project which ment with three non affiliated endues covering the was placed in senice in December 1986. He statec construction of the South Texas Project consiting of two ments of income reDect the Company's p>rtion of the nuclear generating units. (Reference is made to operating costs of the plant, in August 1986, the Note 8.) ne Company also has a joint ownership Company sok! 67.6 megawatts, a 10.2% interest in agreement with other members of the CSW System Oklaunion to the Public Unlities Board of the City of s and non-affiliated enuties to proside for the I rownsville for approximately $50.5 million. At construction and operadon of *he 6M megawatt, December 31,1987, the Cornpany's participation in coal fired Oklaunion Power Station Unit No. I the jointly owned ~ plants is shown below: s (Oklaunion) and its related facilities. Each panicipant South Texas Project Oklaunion (douars m thovsanda) s Ilant in senice 5 $35,6m, Accumulatal depreciation 1,171 liant untler consuuetion 1,948,45' liant capacity.\\fegawatts 2,500 665 Partici[ution - 25?% 7.8% "h re of capacity.\\levawatts 630 52 8, LITIGATION ANI REGULATORY PROCEEDINGS SOUTH TEXAS PROJECT Company's peak load typically occurs during August Introduction. The Company owm 25.2% of the of each year. Unit 2 is scheduled for conuncreial Touth Teus Project (STP) nuelcar power plant under operation in June 1989. The construction Iwrmit for construe

• ion at a site near Bay City, Texas. In addition Unit 2 expires in December 1989.

to the Company's share, llouston IJghting and Power De delayed in senice date of Sl? Unit 1 is not Company (Ill.P), the proje'tt manager, owm 30.8%; expected to have a significant effect on the' estimated the City of San Antonio (San Antonio) oww 28.0%; cash cost. Assuming an in-senice date for Unit I of and the City of Austin (Ausun) own 10.0% June 1988, the Company's cost of Srl! based upon Project Cost and Schedule, ia September 1987, infornution furnished by fil.P is $2,246 million, if LP ar ' Bethwl Energy Corporation, the plant's including AFUDC of $836 million. The estimated archit :eengineer, presented a compledon assessment total cost, net of related deferred taxes of $156 report for SFP to the SIP Managerhent Committee. In mill;on, is $2,090 million. If the actual in senice date that report Illt' projected dut the in senice date of varies from June, the estimated amount of AFUDC SIT Unit I would be delayed until Februarv 1988 woukt increase or decrease by approximately $ 12 4 due to a Jelay in the receipt of the low pder million a month, accordingly. operating license unul Au mst 1987. Ill.P also NRC Investigation, %e NRC conducted in-estimated the completed cash cost of STP to be January 1988 an on-site investigation of a' legations approximately $5.3 billion. made liy the Government Accountability Project in November 1987, the projected in-senice date for (GAP), a consumer group, that SIT has safety rebted Unit I was delayed to March 1988, reDeeting defects that have not been reported. Based on the difficuhjes encounteral with cenain equipment during resuh of this investigadon, the NRC will determine pre-critical testing. lijuipment probkms idehtified whether further investigation is warrantal. Althcagh J have been corrected. management cannot predict the resuhs of this ne Nuclear Remlatory Conunission (NRC), after weqa n, ie Company believes that any concems completing an operationa'l readiness nsiew in January that nught have been raised by GAP have been p us invesugated and aMrened. 1988, identified a need for additional operator traipng, which has been undertaken. Cenain celays Brown & Root Settlement, As the result of have postponed lilFs appheation to the NRC for'a litigation fikd in Deceneer 1981, each of the owners full power license, and 'vhile the Company is certain received a pro rata share of $750 million from Brown that the plant will not begin conunercial operation in & Root, Inc. (Brown & Root), the former architeet. March as previously scheduled, the Company does engineer and constructor of the project, payable in believe that Unit I will be in operation prior to its quarterly papuents ovtr ssven years, without interest. peak load of 1988,' assuming that no aJJitionaj The Company elected to receive $146.8 million, the tiebys are required as a result of any findings from present value ofits $189 million share of the 30 the NRC's current Imystigation (desaibed belowfor settlement, in December 1985. He amount has been as a result of other now u"nidentified difficuhies. Tne recorded as a reduction in the cost of Sl?.

- n1 s l\\"0tes-To,n,nancia Statements T ~ n. r . Litigation. CSW and the Company received in %e Agreement is subject to conditions induding ' January 1983 a copy of a Bini Pany Petition (the execution of definitive contractual documents, approval ov the Texas Commission and NRC, and - Petition), which IILP filed in Dallas Coun'y in the 101st Judicial District, asking the Coun for authonry ' waiver of the right offirst refusal by the Company and to add the Company, CSW and San Antonio as panies San Antonio relating to acquiring Austin's S1T to a sch (the Austin Suit) between llLP and Austin. interest. liLP has publidy reponed that subsumtial %e Austin Suit was filed in January 1983 md is . differences with respect to several. issues remain pending'in the same Court. Austin filed a motion to unresohed, and IILP can make no prediction as to I' strike theJ'etition and to not allow the adding of the whether a settlement with Austin can be achieved. additional panies. IiLP has also filed an briginal Consultant's Report. In 198S, the Texas complamt m Matagorda County against the Company, Commission hired a consultant to rniew the prudence ' CSW and San Antonio n: questing the same relief as ' and efficiency in the construction of SFP A report, - requested in the Petiuon. which coYers the period 1973 thmugh January 1983, 4 At a hearity on January 27,1988, the Coun ut was submitted to the Texas Commission on June 30, the pending suit between Austin and liLP for trial the 1986, by the consuhing firm. The consultant daims first week in June 1988.The Court allowed IILP to in its r part that $1.1 billion to.$1.3 billion of direct serve the Petition on the Company, CSW an'd San costs were spent imprudently on STP by all parties. . Antonio without prejudice to the right o t e Company, , According to the consuhant's report, these amounts fh CSW and San Antonio to assert at a later hearing tnat do not indude adowance for funds used during con-the Petition should be dishtissed, sevtred for a sepa-struction or rate effects that, the consuhant rate trial in the Austin Suit, or severed into a sepne conduded, substantially offset each oth'er. The docket independent of the Austin Suit. The Coun also amount does not take into account the proceeds of the' advised the panies that in no event would the P> town & Root settlement. %e repon recommends Company, CSW and San Antonio be required to' _ that the Texas Commission'dedine to resiew tue panicipate in the June 1988 trial between liLP and merits of the Brown & Root settlement and condudes Austin. CSW and the Company are reviewing their "that it was not unreasonable for the STP owners to procedural alternatives. liowever, management be-settle the liegation on the terms they did." lieves that lit does not have a. sustainable claim for; %e consuhant n commends that thi Texas Comm%sion contribution or mdemnity against the Company or CS%. inquiry into the economic vial 6ay of Unii 2 be IILP has a'sened in the Petition that if it is liable to expanded to consider both Sl? units and that a funher" s hwestigation of whether Sl? should have been can-Ai stin for any damages in the Austin Suit (which is ' t described below), IILP is entitled to contribution or celled in 1982 may be warranted. indemnity from the Company, CSW and Sut Antonio pecause all the activities complained of were decisions Texas Commission Proceedings. In 1986, the or aethities of the STP Management Committee, Texas Conumssion opened a docket for the purpose of which had members from all SrP panicipants, rather detemumng the pmdence and efficiency of planrung, than ifLP's decisions as pmject manager, or that ilLP managunent and construction of STP ne Company was acting as an agent for the other panicipants and, and liLP filed initial direct tesumony in December therefon, all panicipants ;.re liable for the actions 1986 and will file supplemental direct testimony in complained of by Austin. February 1988. Ileanngs were schedule'd to begin in June 1988. A new schedule is currently under rdw, Originally m. January 1983, Austin filcd suit against which is expected to delay h'eanngs until thb fall of IILI and its parent company, llouston Indastnes 1988l Additionally, niw consuhants are expected to be-Incori rated (Fiouston Industries), allegmg that IILP appointed by the Texas Conumssion in early 1988 to b had nusrepresented the capabiliues of the ongmal rniew separately (ILP's and the Company's prudence architect-engineer and constructor of the pmject and related to SIT! I't is expected thatihe consuhants would j had failed to properly per orm its dunes as project primanly roiew and evaluate ahea' y prepared f d manager. Austin seeks in excess of $800 million. materials, which indude the[to be filed by ll rior consuhant's rart,' materials previously filed an The Company was informed in September 1987 that ilLP and Austin VJ reached an apement in prin-the Company covering the complete plannirg and con-ciple (the Agreement) undet which I!LP would struction period for SrP and third pany reports acquire all of Austin's interest in STP, Ausfm wouki prepared separately for flLP and the Company. It is not c acquire an interest in a llLP coal plant and all expected that the newly appointed consultants will litigation between llLP and Ausun wouki be dismissed undenake a comprehenshiaudit of STl! ~ 31 l t d 9

^ r ciwrRAI, FOWL:R AND UGIfr COMI'ANY mamarmurssammmenmmmmwamamnessesr aryrturarertsmuunt7munessusussunemessuumis If the Texas Commission' finds a ponion of the SrP prudent, the investment in SD'is recoverable through ~ costs in excess of the Ikuwn & Root settlement to be - rates or othemise, and STP is necessuy for the future imprudent, current accounting rules wuuld require im-reliable energy supply of south Texas. mediate wTite-off against amings fe,r any such costs Nuclear insurance.The Price Anderson Act cur-that are not recoverable through rates or othemise. n ntly limits the public liabihty from a nuclear incident In March 1985, a docket was initiated for the pur. to a maximum amouru of $720. million. Private pose of gathering evidence concerning the economic insurance for this exposure has beenpurchased by viability of SFP Unit 2. Initial hearings were held in the participants in SrP in the maximum available January 1987 for the purpose o[deterndning the amount, presently $160 million. In the event of a appropriate computer model to be used for the eco-nuclear incident invohing any commercial nucien nonde study. Hearings in the final phase were held in facility in the counuy that results in d.unages in October 1987 to consider the appropriate inputs for excess of the private insurance, the SFP tutticipants the study. An Examiner's report is expected to be could be assessed retrospective prendums up te $5 issued in 1988. million ($1.26 million for the Company's share) per Although management cannot predict the outcome incident, but not more than $10 million ($2.52 of these matters, the Company n mains fully committed milli n for the Conipany s share) in any calendar year to the completion of FTP. The' Company d'isagrees f r multiple incidents. strongly with the amount specified in the consultant's 'lhe Price-Anderson Act expired August 1,1987. report because management believes the settlement Congress is currently considering bills that would ex-was fair, reasonable and sufficiently& Root. compensatory for tend the Price-Anderson Act and could substantially the problems attributable to Brm n increase the liability for the nuclear industry. Until a Management believes that the Company's participa-new law is passed, the provisions of the Act will tion in the project and its performance have been continue to be applicable to Srl!

9. COh!AllTAIENTS AND CONTINGENT LIABILITIES It is estimated that the Company will spend

$123,742,000). Substantial;eomnutments have been approximately $321,719,000 for construction made by the Company inyonnection with the purposes in 1988 (including Al'UDC of construction pngram. s

10. Q.UARTERLY INFORA1 ATION (UNAUDITED)

The following unaudited quanerly information in-(consisting only of normal recurring adjustments) neces-cludes, in the Company's opinion, all adjustments sary for a fair presentation of such amounts. 1:lettric Operating Operating Net Quarter I:nded Revenues income income (thousando 1987 hlarch 31 $ 168,212 $27,947 - $37.514 June 30 188,883 L sl4 45,527 September 30 227.559 4a.388 62.138 December 31 183,610 33,086 46,748 1986 h1 arch 31 $ 196,758 $ h,W4 $33.154 June 30 220,(64 35,250 41,065 September 30 250 439 49,704 58.017 December 31 19J 214 34.738 41,929 infonnation for quaterly periods is afTeeted by seawnal variations in sales, rate changes and other factors. 32

'Sdectec Financia Jata s.,,.- y,;A m nj.. m n :,. c A ca ^ 1he folkming selected financial data for each of the ' prosided to highlight signilleant trends in the financial live years in the period endetf Deecmber 31,1987, are condition and resuhs of operations for the Company. l 1987 1980 19M5 1984 1983 Ohonunas, exetyt ratioss llectric O vrating Revenues - $ 768,264 $ 859,975 $ _924,908

f. 972,18I

$ 946,281 ) l I Net income -191,927 174 165 152,164 - 137,734 121,568 g lYeferred Stock Dividends 15,820 10.010 15,991 16,005 11,120 i Net income for Comrnon Stock 176,107 158,l_55 130,173 121,729 110,448 - %tal bssets 3,341,949 2,950,129 2,723.301 2,455,412 2,129I7E ltelerred Stock i Not Subject to hiandatory Redempoon 166,782 166,705 _ 93,115 93,115 93,115_ Subject to Mandatory Redemption 46.W) 46,355 88,864 88,874 88,909 long Tenn Ikht 1,179.456 1,048,987 981,481 866,551 728,149 iUtI5 of Mammgs to lhed 3.37 3.52 chargSEC Method) 3.00 3.16 2.86 1 Capitaliiation Rauos Common Stock thusy 45.4% 45.0% 45.5% 44.8% 44 3 Iteferred Suk 8.4 9.3 S.5 9.6 11.1 Innelimi I kbt 46.2 45.7 40.0 45.0 44.6 i ~ Management's Discussion anc Anaysis of ,Oaerations 'Inancia. CORClt10n anc. 30su..tS 0: Reference is made to the Financial Statements 1987, in addition, the Company refunded over-and related Notes to Financial Statements in-recovered fuel costs of $34 million in January eluded on pages 27 to 32 and the Selected 1987, $19 million in August 1987 and $21 Financial Data included on page 33. The million in February 1988, including interest, infonnatio'i contained therein should be read in in September 1986, the Company filed an l conjunction with and is essential in understan i-application with the FF.RC for an increase in s ing the following discussion and analysis, base rates charged to its wholesale customers, The final order increased rates by $2.2 million - ItEGULATORY M ATTERS per year through June 1987 and $1,3 million thereafter. During 1987, the Company received Under rules established by the has approximately $1,9 million in rate relief from Commission, the Company recovers fuel costs as wholesale custmners, a fixed component of base rates as discussed in in anticipation of the cornpletion of SfP Unit Note 1 of the Notes to Financial Statements. In ' 1, the Company filed with the 'lexas Conunission accordance with this rule, the Company lowered in June 1987, a petition for appmval of deferred its fuel factor in April 1986 and again in January accounting treatment of cenain costs related to s .L

i CENTRAL IOWER AND !JGIfr COMPANY , v N n y nf r _ :; 7-n .3 p i STP Unit l. In October 1987, the Company in September 1987, the Texas Commission supplemented its fding to include new infom a-approved the Company's request to reduce rates tion on STP available at that time and the effects for its large industrial customers; effective retro-of Statement of Financial Accounting Standards actively to August 1937. This reduction is in ~ No. 92 (SFAS 92), Regulated Enterprises - response to competitive conditions in the energy j Accotmting for Phase-in Plans, an amendment of market in south Texas. Reduced rates will 'i the Financial Accounting St'andards Board remain in effect only until new rates are (FASB) Statement No. 71. SFAS 92 changed the detennined in the Company's general rate increase accounting rules for capitalization of canying filing discussed above. As a conditon of ' charges associated with deferred accounting receiving the discounted rate, the industrial orders for fmancial reporting purposes. customers must agree to purchase firm power 'from the Company until 1991. Through the end j llearings on the Comphny's petition have of 1987,10 of the 16 eligible customers have been stayed by order of the Supreme Court of become a part of this program. The annual ' Texas. Tlus order is in response to an appeal of mvenue reduction to the Company is estimated a 'lexas Commission ruling that demed inter ^ to be $13 million. venor status to the Texas State Agencies because they were represented by the Attomey General of Reference is made to Note 8 of the Notes to Texas. The Supreme Cou' rt heard the appeal in - Financial Statements for a discussion of current December 1987, and a decision is expected dur. actions by the Texas Commission regarding STR ing the first half of 1988. All hearings and actions in the deferred accounting filing are CONSTRUCTION PROGRAM suspended until a decision is reached by the Coun,. In February 1988. the Company filed rhe Company's need for capital results pri-a motion with the Supreme Court to lift the stay nurily from its construction program which is~ m dus proceedmg. designed to provide reliable electric service to its The Company's supplemental petition ) customers. Dunng 1987, the Company continued anticipates a to'tal deferral of $232 million g its construction program which is expected to expenses and carning charges over an assumed decline during the next three years due to the ll-month period lietween conunercial operation scheduled completion of SFP It is estimated that and the time rates are placed in effect reDecting construction expenditures du ing the 1938 Unit 1 in senice. Included in this deferral is an through 1990 period will aggregate $611 million $87 million portion of canying char (including AFUDC of $163 million). This is a the Company has requested be treat'ges, which ed as inter. decrease of 54% as compared to the three years est to the extent interest has been incurred. The ended December 31,1987. Company estimates that $26 million of the total The routh Texas Project nuclear plant is canying charges could not be deferred under expected to account for approximately 49% of SFAS 92 for financial reponing purposes. Ilow-the Company's construction expenditures over ever, SFAS 92 does not restrict the Texas the next thre'e years. Unit 1 of SFP is scheduled Commission from allowing the Company to to begin commercial operation prior to the recover all deferred costs related to SFP Unit 1, summer peak of 1988 and Unit 2 in June including all canying charges. This petition would 1989. As of January 31,1988, construction of provide for an after-tax effect of $144 million. Unit I was complete and Unit 2 was 90% The Company is currently reviewing its options, e mplete. Reference is made to Notes 7 and 8 including alternatives to the deferred accounting f the accompanying Notes to hnancial petition and phase-in plans, before filing with Statements. After the completion of SfP, no .the T :as Commission for a ceneral rate increase base-load power plants are currently planned-to reflect the effects of STP o'n its financial posi-until after the year 2000, tion and results of operadons. It is expected tlut new rates reflecting SFP Unit 1 in base rates will be in effect during the second quaner of 1989. 34 i

s Management's Discussion anc Anaysis of i 41nancla Conc'illon anc Resuh 0:,0 aerations m, ~, simn-tenn leans an: repaid with the ameeeds FINANCING AND CAPITAL fun pennanent fmancing, and dwiore diese ItESOURCES loans are'not considemi a pan of the Company's pemunent capit I structure. 'lhe Company's The ability of the ComPan>* to finance its shon-tenn bonowing hmit from the money pml is planned construedon pmgram is depende~n't $200 million and bommings will be made during upon numerous factors, the most significant of 1988 as m which is the receipt of rate relief. Rate relief amount of duired. Dunng 1987, the average wn tenn bommings outstanding at must be sufficient to provide adequate coverage month-end was $37,335,000 at a wighted rauos necessary for additional extemal financing average annual intenst rate of 7.00%. 'lhe and for a fair retum on invested capital. In nuximum amount of shon-term bormwings _1987, the Company obtamed 25% of its capital outstanding at any month-end dunng 1987 was nxiuirements fmm mtemal sources and anucipates $73,383,000 and at December 31,1987, approximately 58% of constructia funds $42,430,000 was outstanding. reymred during the 1988 through 1990 time period will be provided from intemal sources. During 1987, the Company issued $100 ACCOUNTING AND TAK million of First Mongage lkids. The pmcesis DEVELOPMENTS were used to mduce short-tenu debt and finance capital expenditures. The Com 3any reacquired In August 1987, the FASB issued SFAS No. 92,' Regtdated Enterprises Accotmting for lhase in $16 million of high-coupon delt, including $2plans, an amendment of SFAS No. 71. 'lhls a premium and related reacquisition costs of nullion, as discussed in Note 3 of the Notes to standani, which is effective in 1988, sets criteria - Financial Statements. that must be met if a company is allowed to Ahhough the Company is committed to nuin-e piudize the costs deferred under phase-in taining a stmng financial position and flexibility of alans, it also restricts the applicauon of AFUDC its financial plans, if forces bevond the Comi ny's )y'n t permitting capitalization of the equity d control prevent it from raisin'g adequate amounts e mfonent f canymg charges, other than of capital in the future, the Company's construe. dunng constructbn or as pan of a phase-in tion program would have to be modified. long-pl n. As prev usly discussed in Regtdatory term financing may be required during the h1 tiers, the Company has ryodified its deferred 1988-1990 period, however the nature, amndng application to reflect the requirements f dus standant. ] amounts and timing thereof have not been hi December 1987, the FASin issued SFAS detennined. s No. 96, Accounting for income Taxes. Th's in August 1985, the Company began selling its accounts receivable to CSW Credit, Inc., a standard requires changes in accountmg for wholly-owned subsidiary of CSW.The sales income taxes and 13 expe-ted to be implemented provide the Company iith cash immediately by the CSW System m 1989. The changes re-and reduce working capital and revenue require-quired by this statement will not have a material effect n die results of opaadons. ments. The monthly average and year-end amounts of accounts receivable factored were $76,246,000 and $64,912,000 in 1987, as llFSUlil'S OF OPERATIONS compared to $41,261,000 and $33,630,000 in 1986. The increase in 1987 amounts was due Electric Operating Revenues. Total electric - to the sale of receivables for electne service operating revenues decreased $92 million, or pnided but not yet biUed to customers. 11% from 1986 as fuel revenue decreased $81 The Company, together sith other members of million due to recovery of lower fuel costs and the CSW System, has establishal a System mon y fewer kilowatt hour sales. lower sales.are the ,00160 cmnlinate shon-tenn bommings. 'lhese main reason for the $11 million d(crease in base oans aie unsecuned demand obligations at rates retenue. Customer growth averaged 1% during appmxinuting the System's conunercial paper 1987, with year-end customers approximating d bomming cests, periodically, all of the Company's 533,000. r l 35

) ~ 4-3 1 I CENTRAIJOwER AND IJGIfr COMI%NY Residential kilowatt-hour sales incteased by including costs associated with placing Oklaunion s t 1% over 1986 reflecting a slight increase in in senice and to increased costs from the sales of customer growth and kilowatt hbur usage, accounts receivable. He increased costs from the ~ Revenue per cw mmer was $612 in'1987, a sales of accounts receivable were substantially decrease of $32 from 1986. The decre'se was offset by decreases in interest expense. a - mainly due to lower fuel revenue. Industrial '

Inflation rates, as measured by the Consumer sales ' decreased in 1987 primarily due to the Price Index, have averaged about 3.1% for the' 1

closing of a major ytrochemical plant. He loss three-year period ending December 31,1987. 1 'of kilowatt-hour sa es is offset, in part, by - The Company believes that inflation, at the'se revenues from demand charges which were paid ~ levels, does not traterially affect its results of ~ until the end of 1987. His plant has been operations or financial condition. liowever, aurchased by another pany and is expected to under existing regulatory practice, only the 3e using approximately the same amount of' historical cost of plant is recoverable from J kilowatt-hours as before its closing by the end of customers. As a resuh, cash flows designed to 1988. Industrial kilowatt-hour sales were also ' provide recovery of historical plant costs may affected in 1987 by the Company's loss of not be adequate to replace plant in future years. approximately 500 thousand megawatt hours A scheduled decrease in plant overhauls for annually to cogeneration. Refer to Regulatory 1987 attributed to the decrease in maintenance Matters for a discussion of the Company's expense. Depreciation expense increased due to response to the competitive energy market in ~ additional plant placed in senice. south Texas. Sales for resale decreased 33% The decrease in 1987 Federal income taxes from the same period in 1986 as a result of competitive market conditions, was due primarily to lower income tax rates s under the Thx Re' form Act of 1986. The changes. Changes in kilowatt-hour sales by customer in Federal income taxes in other years generally class for each of the years 1985 through 1987 reDeeted the increases or decreases in the amount 3 are shown in the following chan: of income before taxes and the equity component ~ of AFUDC. ' 1 im im ms Residential 1.4% 2.2% 6.2% Interest Expense. Intercst on long-term ~ Dontmerefal 1.9 6.1 debt increased primarily due to the issuance of industrial (21.7) ' (7.8) (4.7) N ~ first mongage bonds in mid 1986 and in 1987. )

other, (26.4) 21.0 28.8 The issuance of poDution control bonds late in,

i (10.3) 0.1 3.4 1986 also contrib'uted to the increase. The Total Sales increase was substantially offset by the reacquisi-Fuel. Iower unit costs are responsible for tion of several high interest bonds. He increase half of the decrease in total fuel expense. The in interest on short term debt resulted mainly average cost of fuel for the year was $2.08 per from an increase in short term borrowings, million Btu, down'from $2.33 in 1986. The Allo _wance for Funds Used During average cost of natural gas, which was used to Construction. The 1987 increase in AFUDC generate 68% of the Company's kilowatt-hour. was primarily related to the increased level of ( requirements, was $2.10 per million Bru, an CWIP n,t included in rate base. The Company ) l $0.18 decrease from the prior year. The average requests inclusions of CWIP in rate base when cost of coal was $2.05 per million litu, down - rate increase applications are filed. He Company- $0.44 from last year. The Company was able to records AFUDC on the portion of CWIP not. ~ achieve these overall lowr fuel costs by mnegoti-included in rate bas'. ~ l e l ating long-term fuel contracts and taking Other income and Deduedons. In 1986 advantage of favorable prices in the natural gas the Company sold an interest in the Oklaunion and coal spot market. De Company als Power Station that resuhed in a net gain. Other ' purchases economy eneqv when available. income'also decreased due to lower interest Fewer kilowatt-hour sales are also responsible income on advances <to aftiliates and odter in-i for the decrease in total fuel ' xpense. ' vestments. These decreases were partially offset R e Expenses and nxescA slight increase in by the allocation of consolidated tax savings to operating expenses reflects a number of factors tiie Company by CSW. 2 36 i% 4 l s

Comaarative Statistica. Recorc LW m2LMW::EWX.E%'hTMLL"L1 Cl ? dt. lOWl:R ANI) l.lGill' COMit\\NY 1987 1986 1985 l <Wi: RAGE NUMllER Ol' CUSTOMEllS Residential 446,548 441,849 432,906 Commercial 70,008 69,719 68,720 Industrial 6,548' 6,713 6,827 All other 3,277 3.254 3,268 ' Intal 526,381 521,535 511,7211 NUMllER OF CUSTOMERS - E 'l) OF l'ERIGI) 532,546 527,392 521,281l SA1.ES - Kll.OWA'1"I'ilOUHS (l'housands), Residential 4,630,356 4,567,961 4,469.884 Cominereial 3,736,151 3,734,321 3,604,447 Indu'strial 4,325,326 5,521,205 5,985,326 All other 1,336,327 1,810,470 1,501,630, ' Intal 14,02M,160 15,640,017 15,621,28 7 l R EV ENUl'S (l'hnusands)_ $2 73,223 S284,345 S295,038 Residential Conunercial 231,004 y41,773 252,334 Industrial 198.481 254,026 300,915 All other 65,556 79,231 76,621 ' Intal S768,264 5859,975 $924,90MI RESil)ENTI Al. AVER AGES __ ] Kilowatt-homs per customer 10,369 10,338 10,325; Revenues per customer $611,86 5643.53 5681.53 Revenues per kilowatt hour-5,90c

6. 2 2,*

6.6t' SYSTEM cal'AllllJTY AT l'EAK (Kilowatts) CI'l. stations 3,698,000 3,703,000 3.688,00( liirehase contracts 1htal system 3,69M,000 3.703,000 3,688,00( SYSTEM M AXIMUM I)EMAND (Kilowatis) 2,881,000 2,974,000 3,022,00( FUEL, El'I'!CIENCY DATA , Avtrage itTU per net KWil 10,l.64 10,174 10,04( Cost per inillion liTU S2,08 S2.33 S2,S' Cost per KWil vencrated (mills) 21,17 23.70 29.01 IL\\l.ANCI: SIIEET DATA (l'housandy) S3,426,969 $ 3,056,61' Elcetrie utility plant - $ 3,853,568 Annual constructed additions 444,723 433,001 456,15' Accumulated depreciation 589,909 546,285 503.40! IVreentage of accumulated depreciation to orieinal cost d 5,31 %, 15.94's, 16.4' CAlllTAl.lZXI lON (l'housands)__ Common stock equity $ 1,159.550 $ 1,033,4 43 5971,44. lietened stock 213,442 213,060 181,97c _ ten,e-term Jeht 1,179,456 1.048,987 981,48 r' e s

/ !1984 1983 1982 1981 1980 1979 1978 1977 420,487 407,006 394,437 376,444 361,181 347,746 334,046 322,607 67,217 65,359 63,581 60,386 57,901 56,023 53,768 50,071 6,717 6,652 6,560 6,322 6,014 5,771 5,619 5,434 3.206 3,185 3,174 3,108 3,051 2.981 2,948 2,885 1497,627 482,202 467,752 446,260 428,147 412,521 396.381 380,997 l 507,402 492,712 477,892 459,003 437,438 422,298 406,447 389,875 o209,063 3,863,798 3,988,111 ' 3,736,235 3,574,451 3,202,513 3,108,160 2,908,231 e452,989 3,268,206 3,278,005 3,085,744 2,884,986 2,723,446 2,640,039 2,517,413 ,280,810 5,910,999 5.532,386 5.867,785 5,675,723 5,663,115 5,488,879 5,354,236 ,166,087 '1,116,201 l',111,941 1,531,250 1,251,973 1,131,052 1,210,460 847,157 > 108,949 14,159,204 13,910,443 14,221,014 13,387,133 12,720,126 12,447,538 11,627,037 298,186 $286,182 $282,616 S233,593 S203,214 $ 159,701 S150,511 $ 138,446 255,879 249,255 242,215 202,819 171,047 127,s3 119,240 109,870 ,l 342,900 336,604 303,933 277,829 234,906 .189,017 175,764 164,649 75,219 74,240 70,422 79,701 60,429 42,125 41,980 28,401 1972,184 $946,281 $899,186 S793,942 $669,596 - $518,586 S487,495 $441,366 10,010 9,J93 10,111 9,925 9,897 9,209 9,305 9,015 $709.14 $703.14 $716.50 $620.53 $562.64 $459.24 $450.57 $429,15 7.08e 7.41e 7.09e 6.25e 5.69e 4.99e 4.84e 4.76e 667,000 3,625,000 3,523,000 3,523,000 2,954,000 2,976,000 2,976,000 3,044,000 10,000 10,000 10,000 $67,000 3,625,000 3,523,000 3,523,000 2,954,000 2,986,000 2,986,000 3,054,000 lS32,000 2,869,000 2,825,000 2.734,000 2,505,000 2,390,000 2,262,000 2,247,000 10,298 10,231 10,236 10,171 10,374 10,262 10,325 10,372 $3.27 $3.47 $3.51 S3.04 $ 2.55 $ 2,20 $ 2.07 S1.96 33.65 35.47 35.97 30.93 20.43 22.58 21.39 20.33 758,977 S2,385,489 $2.110,440 $ 1.880,395 S1,687,124 S i,461,916. $ 1,241,935 $ 1,054,778 t 386,952 286,524 237,251 199,519 231,858 228,631 195,362 190,209~ 458,834 ' 418,037 377,738 339,497 301,299 269,212 243,464 221401 16.63% 17.52% 17.90% 18.05% 17.86% 18.42% 19.60% 21.01% H51,805 $723,254 $635,049 $555,245 $478,191 $426,184 $377,534 $323,553 Il81,989 182,024 13 >,770 132,770 132,796 93,136 43,569 43,569 H66,551 728,149 647,404 573,427 509,024 434,590 444,628 369,909 s ' l38 1

i 1 f./?? ' " :;W,;s /m. - ..g f l g$ ?:%- y ?;1 . lh. s. n,%W;p. s,s. v.f:} l 4 ',g +% ,.j-rf r1 13UIR RATE ' pdj !! O. Ikw 2121, Corpus Christi, Texas 78403-2121 U.S. l'O$ RAGE 1%lD l'ERMlf NO.182 'j AJdress Correcti<in Requested 4% A Member of the Central and South West System CORI'US ClIRISTI, TEXAS 78403 pf St*,p ,. > ' \\t n' ) 0~~ A))5[b A[ ./ y .,. f.x **y 'S . W *- y l -:p

9' Y

-k: ,m ,,e f:',AY. ' ' - W f p d l-1 1 1 l i i

SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K 2\\NNUAL IlEPOIlT PUllSUANT TO SECTION 13 OIt 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,1987 COMMISSION FILE NUMBER 0-346 CENTRAL POWER AND LIGHT COMPANY (Exact name of registrant as specified in its charter) TEXAS 74 0550600 (State or otherjurisdiction of (IIIS Employer incorporation or organization) Identification No.) 565 North Caraneahua Street, Corpus Christi, Texas 78401 2802 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: 512/861-5300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock, $100 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has 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) has been subject to such filing requirements for the past 90 days. Yes x No Number of shares of Common St.,ck outstanding at December 31,1987: 6,755,535 (None of such shares are held by non affiliates.) DOCUMENTS INCORPOllATED BY ItEFERENCE Pages 21-3G of Central Power and Light Company's Annual Report to Stockholders for the year ended December 31,1987 are incorporated mta Part 11 nereof,

DEFINITIONS The following abbreviations or acronyms used in this text are defined below: Abbreviation or Acronym Term A FUDC...... Allowance for funds used during construction AS LB.. Atomic Safety and Licensing Board Austin.............. Municipal electric system of Austin, Texas Bechtel......... Bechtel Energy Corporation Brown & Root........ Brown & Root, Inc. Btu......... British thermal unit CE0................. Chief Executive Officer CERCLA.............. Comprehensive Environmental Response, Compensation and Liability Act of 1980 Company.......... Central Power and Light Company, Corpus Christi, Texas CSW................. Central and South West Corporation, Dallas, Texas CSW System.......... CSW and the electric operating companies DTPA.......... Texas Deceptive Trade Practices. Consumer Protection Act Ebasco.............. Ebasco Services, Inc. Electric operating companies......... The Company, PSO, SWEPCO and WTU EPA................. United States Environmental Protection Agency ERCOT........... Electric Reliability Council of Texas FERC... Federal Energy Regulatory Commission HLP................. Houston Lighting & Power Company Holding Company Act. Public Utility Holding Company Act of 1935 Houston Industries.. Houston Industries Incorporated HVdc................ High-voltage direct-current Kw.................. Kilowatt Kwh... Kilowatt-hour LCRA................ Lower Colorado River Authority Mcf................. 1,000 cubic feet Mw............ Megawatt NPDES............... National Pollution Discharge Elimination System NRC..... Nuclear Regulatory Commission Oklaunion........... Oklaunion Power Station Unit No. 1 PCB................. Polychlorinated biphenyl PSD................. Prevention of Significant Deterioration PS0.............. Public Service Company of Oklahoma, Tulsa, Oklahoma RCRA................ Federal Resource Conservation and Recovery Act of 1976 Rose. Martha C. Rose Chemicals, Inc. San Antonio......... Municipal electric system of San Antonio, Texas SEC... Securities and Exchange Commission STP................. South Texas Nuclear Project SWEPCO..... Southwestern Electric Power Company, Shreveport, Louisiana TACB........ Texas Air Control Board Texas Commission.... Public Utility Commission of Ter.as TWC................. Texas Water Commission WTU................. West Texas Utilities Company, Abilene, Texas 2

i i PART I ITEM 1. BUSINESS. The Company. The Company, a Texas corporation, is a public utility engaged in generating, purchasing, transmitting, distributing and selling electricity in south Texas. It is a wholly owned subsidiary of CSW, a registered public utility holding company. At December 31,

1987, the Company supplied electric service to approximately 533,000 retail customers in a 44,000 square mile area in so'ith Texas, with an estimated population of 1,835,000.

It supplied at wholesale all or a portion of the electric energy requirements of five rural electric cooperatives and two municipal electric systems. The three largest cities served by the Company, and their estimated populations, are Corpus Christi, 260,000; Laredo, 109,000; and McAllen, 68,000. Manufacturing, metal refining, petroleum, agriculture and tourism comprise the economic base for the Company's service territory. In 1987, industrial customers accounted for 26% of the Company's total operating revenues. Contracts with substantially all industrial customers provide for both demand and energy charges. Demand charges continue under such contracts even during periods of reduced industrial

activity, thus mitigating the effect of reduced activity on operating income.

The Company carries on a continuing construction program, the nature and extent of which is based upon current and estimated future loads of its system. (See "ITEM 2. PROPERTIES Construction"). REGULATION AND RATES Rcr.ulatten. The Company, as a subsidiary of CSW, is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance, acquisition and sale of securities; acquisition and sale of certain assets or any interest in any business, including certain aspects of fuel exploration and development programs; accounting practices and other matters. The FERC has jurisdiction under the Federal Power Act over certain of the Company's electric utility facilities and operations, including wholesale rates, and cettain other matters. The Texas Commission has exclusive jurisdiction over

accounts, cettification of utility service territories, sale or acquisition of certain utility property, mergers and certain other matters.

Neither the governing bodies of incorporated municipalities nor the Texas Commission have jurisdiction over the iss'innce of securities. Rates. The Texas Commission has original jurisdiction over retail raten in all unincorporated areas. The governing bodies of incorporated municipalities have such jurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender this jurisdiction to the Texas Commission. The Texas Cemission has appellate jurisdiction on a "de novo" basis over rates set by incorporated municipalities. 3

Electric utilities in Texas are not allowed to make automatic adjustmente to recover changes in fuel costs from retail customers. A utility is allowed to recover its known and reasonably predictable fuel costs through a fixed fuel factor established during a general rate case, fuel reconciliation proceeding or interim f".el proceeding. An interim fuel a utility has proceeding is conducted at the request of a utility when materially over-recovered and projects to materially over-recover its known or reasonably predictable fuel costs or under such other circumstances upon the initiative of the Texas, Commission. In the event that reasonably unforeseeable circumstances have resulted in a material under-recovery of known or reasonably predictable fuel costs, a utility may petition the Texas Commission for an emergency interim fuel factor; the Texas Commission must act on such petition within 30 days. In the case of an over recovery in excess of 4% of annual fuel costs, a utility must file a petition to make interim refunds and such petition may be granted by the Texas Commission without a hearing. Final reconciliation of fuel costs are made at the time of the utility's general rate case or a reconciliation proceeding. In the event that the utility does not recover all of its fuel costs under these procedures, such event could have an adverse impact on net income. Under the Texas Commission's rules the Company made refunds of over re : overed fuel costs in 1987. In September 1986, the Company filed an application with the FERC for an increase in base rates charged to its wholesale customers. The application regnested a two-step increase of $2.6 million and $4.9 million, respectively. The FERC granted the Company's request to place the $2.6 million increase in effect in December 1986, subject to refund. A settlement among parties was agreed on in the final order which increased rates by $2.2 million per year through June 1987 and $1.3 million thereafter. The settlement provides for customers to be individually assigned annual costs of STP Unit 1 and defers charges of $9.2 million per j year to be repaid by affected customers over a five-year period after rates J reflecting STP Unit 1 in rate base are placed into effect. In August 1987, the Texas Commission approved a rider which reduced the cost of power to the Company's large industrial customers and results in a $13.2 million per year revenue loss that will be absorbed by the Company's stockholders until rates reflecting the Company's investment in STP in rate base are put into effect. In November 1987, the Texas Commission approved a new contract for Occidental Chemical Corporation's caustic chlorine facility on the north i shore of Corpus Christi Bay, neer Ingleside. The contract provides for a combination of firm and interruptible service to the facility and results in l more than $5 million per year for the Company from the plant's operation. I Similar pricing arrangements are available to other new customers of the same class. All of the Company's contracts with its wholesale customers contain fuel adjustment provisions that permit it to automatically pass actual fuel costs (including those associated with purchased power) through to its Customers. STP Construction" for information as to See "ITEM 2. PROPERTIES l rates relating to STP. 4 i l

I j l OPERATIONS Peak Loads and Canability. The following table sots forth for the years 1985 through 1987 the not capability of the Company (including the net of contracted purchases and contracted sales) at the time of peak demand, the maximum coincident sys tern demand on a one hour integrated basis (exclusive of sales to other electric utilities), and the respective amounts and percentages of peak demand generated by the Company and purchased from and sold to others: Percent Increase Maxircurn (Decrease) Not Purchases Coincident In Peak Generation at (Sales) at Not System System Demand Tirne of Peak Time of Peak Capability Demand Over Prior Year Mw Mw Period Mw n Mw g 1985 3,587 3,022 6,7 3,205 106.1 (183) (6.1) 1986 3,661 2,974 (1.6) 3,156 106.1 (182) (6.1) 1987 3,644* 2,881 (3.1) 2.674 92.8 207 7.2

• This total does not include the 107 Mw of system capability represented by the generating plants in storage as described under "ITEM 2.

PROPERTIES Facilities." The Company is a mernber of ERCOT, which also includes Texas Utilities Electric Company, llLP, WTU, Texas Municipal Power Agency, Texas Municipal Power Pool,

LCRA, tha inunicipal systems of San Antonio, Austin and Brownsville, the South Texas and Medina Electric Cooperatives, and several other interconnected sys teins and cooperatives.

The ERCOT members interchange power and energy on firm, economy and einergency bases. The Company also engages in economy interchanges with the other electric operating cornpanies in the CSW System. The Company, along with the remainder of the CSW System, operates on an interstate basis. The electric operating companies are installing IIVdc transtnission interconnections to facilitate exchanges of power. The first link, the North IIVdc Tie, a 200,000 Kw tie at Oklaunion between and owned by WTU (25,000 Kw) and FSO (175,000 Kw), was cornpleted in Decernber 1984 The second link, known as the South IIVdc Tic, was planned as a 500,000 Kw interconnection between SWEPCO and STP. In Novernbe r 1987, the Texas Comtnission disinissed the application by the Company, SWEPCO and llLP to build the South IIVdc Tie. As a result of delays in the application for the South IIVdc Tie, the co-owners of this second link filed an application in May 1986 with FERC requesting approval to tnove this sewnd link to a new location in Titus County in east Texas. This new project, referred to as the East llVdc Tie, is presently proposed to be a 600,000 Kw back-to-back direct current terminal built at SWEPCO's Welsh Power Plant near Cason, Texas and a 16 mile, 345 kilovolt alternating current t ransini s s ion line frorn the Welsh terminal to Texas Utilities Electric Comoany's Monticello power plant near Mount Pleasant, Texas. The East ilVdc T ,s presently proposed to be owned 50% by the Cornpany and SWEPCO with the

• _ nce to be owned by non-affiliated 5

I third parties. The FERC has approved the request to build the East HVdc Tie but a Certificate of Convenience and Necessity still must be '.obtained from the Texas Commission, Emoloyees, At December 31, 1987, the Company'had 2,650 employees. l ~ I i i J i e ] a 1 l 6

CENTRAL POWER AND LIGilT COMPANY OPERATING STATISTICS Year Ended December 31, 1987 1986 1985 KIIDVATT.110UR SALES (Millions): Residential.................. 4,630 4,568 4,470 Commercial................... 3,736 3,734 3,664 Industrial 4,325 5,5.12 5,985 Electric utilities and other., 325 351 347 Sales to retail customers 13,046 14,175 14,466 Sales for resale 982 1,465 1,155 Total.................... 14.028 15,640 15,621 NUMBER OF ELECTRIC CUSTOMERS AT END OF PERIOD: Residential.................. 452,449 447,554 441,411 Commercial................... 70,310 70,017 69,799 Industrial................... 6,503 6,599 6,824 Electric utilities and other., 3,284 3,222 3,247 Total 532,546 527,392 521,281 RESIDENTIAL SALES AVERAGES: Kwh per customer............. 10,369 10,338 10.325 Revenue per customer...... $612 $644 $682 Revenue per Kwh.......... 5.90s 6.22e 6.60s REVENUES PER KWil ON TOTAL S/.LES 5.48e 5.50e 5.92 FUEL COST DATA: Average Btu per not Kwh...... 10,164 10,174 10,040 Cost por million Btu......... $2.08 $2.33 $2.89 Cost per Kwh generated....... 2.12e 2.37e 2.90s Cost as a percentage of revenue 39.6 45.6 52.2 i I 7

The Company has experienced some loss of industrial load due to plants either closing or installing cogeneration facilities. It is expected that further losses may occur. The Con.pany plans to file economic development tariffs with the Texas Commission in early 1988. These tariffs are designed to provide rate incentives for present and new industrial customers to promote Kwh sales to this class. The Company cannot predict the outcome of these actions. FUEL SUPPLY General. The Company's present electric generating plants and those under construction, shewing the type of fuel used and to be used, are set forth under "ITEM 2. PROPERTIES." All planned base load units are expected to use coal or nuclear fuel. During 1987, approxiuately 70% of Kwh generation we.s from gas and 30% from coal. Natural gas requirements totaled 98,199,000 Mef and coal requirements were 2,075,000 tons. Natural Gas. The Company's eight gas fired electric generating plants are supplied by 23 separate long term natural gas purchase agreements accounting for approximately 52% of the total gas requirements in 1987. The balance of the Company's natural gas requirements could have been supplied under existing long-term arrangements. However, with the soft spot market existing during the period, the Company elected to purchase most of these requirements under spot market arrangements. The Company's principal long-term gas supplies are those provided under the long-term firm agreements with Valero Transmission Company, Enron Industrial Natural Gas Co. and Corpus Christi Gas Marketing, Inc. They supplied approximately 14%, 14% and 5%, respectively, of the Company's total natural gas purchases. These agreements expire in 1992, 1990 and 1991, respectively. Including spot market suppliers, the Company had 36 individual suppliers of natural gas during 1987. .Q.g.al. The Company's two coal-fired electric generating plants, Coleto Creek and Oklaunion, are both primarily supplied by single long-term coal purchase agreements. At Coleto Creek, the long-term agreement, which expirus in 1994, is with Colowyc Coal Company and provides approximately 75% ) of the coal requirements of the plant. The coal is mined in northwestern Colorado and is transported approximately 1,400 miles under a long-term rail agreement with the Denver & Rio Grande Western Railroad Company, the Burlington Northern Railroad

Company, and the Southern Pacific Transportstion Company.

The balance of the Coleto Creek requirements are currently being procured on the spot market. At year-end 1987 the Company had approximately 325,000 tons of ceal in inventory at Coleto Creek. At Oklaunion, the long-u nn coal supply is provided under a twenty year agreement with Exxon Coal USA, Inc. This agreement is for Wyoming coal which is railed approximately 1,100 miles to the plant by the Burlington Northern Railroad Company. All of the 1987 Ohleunion coal requirements were supplied under the Exxon Agreement. The December 31, 1987 coal inventory at Oklaunion was approximately 298,000 tons. Nuclear Fuel. The nuclear fuel cycle entails several steps, including purchase of uranium concentrate, conversion of uranium concentrate to uranium hexafluoride, enrichment of uranium hexafluoride in the isotope 8

U235, fabrication of the enriched uranium into fuel rods and fuel a:semblies, and reprocessing of spent fuel rods.

Fuel requirements for STP STP Construction") are being handled by a (see "ITEM 2. PROPERTIES committee comprised of representatives of all participants in STP. The Company and the other STP participants have entered into contracts with suppliers for an equivalent of approximately 12 million pounds of uranium concentrate, which quantity would be sufficient for the initial cores and 10 years of fuel reloads for both STP units. Enrichment contracts have been secured for a 30-year period for each unit. Contracts have been secured for conversion of the initial cores and approximately six annual reloads for both units.

Also, fuel fabrication services have been contracted for the initiel cores ard 16 years of operation of each unit.

The Company believes it will be able to obtain adequate supplies of nuclear fuel components and services that will be required for STP. No commercial nuclear fuel reprocessing is presently permitted in the United States. If spent fuel cannot be reprocessed, it must either be stored permanently or treated as waste for disposal. No permanent waste disposal facilities are currently available. The Nuclear Waste Policy Act of 1982 provides that the Federal government, beginning not later than January 31, 1998, will dispose of spent nuclear fuel in return for the payment of certain fees. These fees will be established by the Federal government to allow full cost recovery. It also requires the Federal government to take title to the spent fuel at the reactor site and assigns the responsibility for transportation of the spent fuel to the Federal government. STP is currently planned to have on site storage facilities with the capability to store up to 30 years of spent fuel discharged from each unit. Governmentel Reculation. 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 Company's ability to meet economically the needs of its customers and could require it 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 additional expenditures for construction and could have a significant adverse effect on the Company's financial position, revenues and income. Fuel Costs. In recent years, the Company has been able to reduce unit fuel costs by taking advantage of favorable pricing in the natural gas

market, renegotiating some of its long-term contracts to allow more volume / price flexibility and making spot purchases of coal at reduced prices.

Information as to historic costs of fuel appears under "0PERATING STATISTICS." The Company is unable to predict accurately the cost of fuel in the future. ENVIRONMENTAL MATTERS The Company is subject te regulation with respect to air and water quailty and solid.uata stankr#, along with other environmental matters, 9

by various Federal, state and local authorities. These authorities have continuing jurisdiction in most cases to require modifications in the Company's facilities and operations. The Company is not a party te any litigation or administrative proceedings with respect to environmental matters, except as described below. Air Ouality. The TACB has jurisdiction over air quality standards and emission limitations, except for standards imposed by the PSD program which the EPA administers. The Company complies with regulations of the TACB, which require permits for all generating units on which construction is commenced or units that are substantially modified af ter the effective date of the applicable regulations. The Company believes that all of its present units comply in all material respects with existing Federal, state and local air quality and emission regulations. Permits have been received for the STP plant, subj ect to final operating approval on the basis of start-up tests to be conducted during initial operations. The EPA has approved and may enforce air standards and limitations, which have been adopted by the TACB, and has adopted ambient air quality standards for all new or substantially modified generating units. Currently, no modifications of existing plancs are expected which may require permits or permit amendments under current EPA or TACB regulations. The Clean Air Act Amendments of 1977 provide for limitations on certain new or expanded emission sources and require use of emission control devices or precombustion fuel cleaning for such

sources, except under limited circumstances.

Such requirements could affect the siting, construction and cost of future genera' ring units. Water Ouality. The TWC and EPA have jurisdiction over all waste water discharges in':o waters of the state. The TWC has jurisdiction for establishing v.ater quality standards and issuing permits covering discharges which might affect the grality of state waters. The EPA has jurisdiction over "point source" discharges through the NPDES provisions of the Clean Water Act. The Company has obtained or is renewing all required Federal and state waste water permits for facilities currently in operation. The project manager has obtained Federal and state permits for STP. Solid Waste Disposal. The EPA and the TWC solid waste rules provide for comprehensive control of all solid wastes from generation to final disposal. The TWC has received authorization from EPA to administer the RCRA program 11 the State of Texas. The Company believes it is in compliance with all such applicable regulations. l CERCIA and Other. Under CERCIA, owners, operators, transporters and/or generators of hazardous substances for disposal can be held liable for the cicanup of hazardous substance disposal sites which pose or may pose an imminent risk to the public or environment. Similar liabilities for hazardous substance disposal can arise under applicable state law. I In November 1985, the Texas Attorney General's office brought suit against the Company under the Solid Waste Disposal Act, alleging that the l Company was one of the parties responsible for PCB contamination at the Industrial Road Site in Corpus Christi, Texas and therefor should be i responsible for the cleanup of the site. The site was used by several metal salvage companies, electric utilities, including the Company, and other l 10

companies for the salvage of various materials. Depositions continue to be taken in this case. In December 1986, the EPA named 650 entities including the Company as potentially responsible parties for cleaning up PCB contamination at a processing facility in iloiden, Missouri, formerly operated by Rose. In September 1984, the Company shipped 11 ttausformers containing PCBs to the site for treatment and disposal. In April 1985, the Company received certificates of processing from Rose which indicated that all of the Company's transformers had been properly treated and disposed. In March 1986, Rose ceased operation.= and abandoned its Holden facility, leaving large quantities of PCB materials untreated and/or improperly disposed. Subsequently, major shippers of materials to the site formed a generator's group to work with the EPA on a site assessment and appropriate response actions. The Company is a member of the generator's group and has agreed to cooperate in the site investigation and, to the extent of its liability, to participate in the site cleanup process. The Company is presently unable to ascertain what portion of the ultimate cleanup costs will be assessed to it. ITEM 2. PROPERTIES. Facilities. At December 31, 1987, the Company owned and operated the following electric generating plants (or portion thereof in the case of the jointly owned Oklaunion plant). (See "ITEM 1. BUSINESS -- FUEL SUPPLY"). l 1 ) 11

l Type of Net Dependable Fuel Capability Plant Name and Location Primary / Secondary Mw Barney M. Davis gae/ oil (a) 334 Corpus Christi, Texas gas / oil 338 Coleto Creek coal 605 Goliad. Texas Lon C. Hill gas / oil (a) 557 Corpus Christi, Texas Nueces Bay gas / oil (a) 536 Corpus Christi, Texas Victoria gas / oil (a) 246(b) Victoria, Texas La Palma gas / oil 43 San Benito, Texas gas / oil (a) 156(b) E. S. Joslin gas / oil (a) 257 Point Comfort, Texas J. L. Bates gas / oil (a) 183 Minuion, Texas Laredo gas / oil (a) 65 Laredo, Texas gas / oil 104 Eagle Pass Eagle Pass, Texas hydro 6 Oklaunion(c) coal 52 Vernon, Texas 3,482 (a) For extended periods of operation, oil can be used only in combination with gas. Use of oil in facilities primarily designed to burn gas results in increased maintenance expense and a reduction of 5% to 10% in capability, l 1 229 Mw at Victoria and 47 Mw at (b) Excludes units in long. term storage La Palma. (c) The Company owns 7.81% of the 665 Mw unit operated by WTU. ) 12

All of the generating plants described above are located on land owned by the Company, The Company's e?.ectric transmission and distribution facilities are for the most part located over or under highways, streets and other public pinces or propstty owned by others, for which perraits, grants, e asentents or licenses (deemed satisfactory, but without examination of underlying land titles) have been obtained. The principal plants and properties of the Company are subject to the lien of the first mortgage indenture under which the Company's first mortgago bonds are issued. Con s t ruc '12n. The estimated total capital expenditures (including ARJDC) for the years 1988 1990 are as follows: 1988 1989 1990 Total (Millions) Generation.... $252 $ 64 $ 15 $331 Transmission...................... 11 49 30 90 Distribution....................... 32 39 41 112 Fuel.............................. 19 20 14 53 Other............................. 8 8 9 25 Total (a) $322 $180 $109 $611 (a) Includes AFUDC in the following amounts: 1988 $124,000,000; 1989 $34,000,000; 1990. $5,000,000, i The following table shows the Company's estimated costs and expenditures (including AFUDC) for its 25.2% interest in each of the 1,250 Mw units at STP that are jointly owned with non affiliated participants. Scheduled Estimated Cost Expenditures Planned For Service Through Plant 6 Capability (peak Total Dec. 31, 1987 Unit No. Fuel Mw season) (Millions) Per Kw (Millions) STP Unit No. 1 Nu:1 car 315 1988) ) $2.246(*) $3,565(*) $1,948 STP Unit ) No. 2 Nuclear 315 1989) (*) The proj ect 's estimated cost net of related deferred taxes of $156 million is approximately $2,090 million or $3,317 per Kw. Information in the foregoing tables is subject to change due to numerous factors, including the rate of load growth, escalation of construction costs, changes in nuclear and environmental regulation, delays 13

l i in obtaining permits and from regulatory hearings, the adequacy of rate relief and the availability of necessary external capital (see "Financing" below). Changes in these and other factors could result in the adjustment of the ownership percentage of CSW joint units, or cause the Company to defer or accelerate constructicn or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. STP - General. STP is a two unit, 2,500 Mw nuclear power plant under construction near Bay City, Texas. In addition to the Company's 25.2% share in STP, HLP owns a 30.8% interest, San Antonio owns 28.0%, and Austin owns 16.0%. IlLP is the proj ec t manager, Bechtel is responsible for the engineering, design and construction management services and Ebasco is the proj ec t constructor. Unit 1 has been completed and in August 1987 IILP received a lictnse from the NRC authorizing fuel loading and low power testing of the unit. As of the end of 1987, construction was estimated by Bechtel to be 88% complete on Unit 2 and 95% complete on the overall project. The nuclear fuel for Unit I was loaded in August, and low-power testing began. Unit 1 began using nuclear fuel to generate thermal output in early March 1988. The NRC is expected to vote on granting a full-power operating license for Unit 1 prior to April 1988. The steps remaining before Unit 1 can be placed into commercial operation are satisfactory completion of the low =po m operation and the receipt from the NRC of a full-power operating license. In September 1987, llLP and Bechtel released the 1987 Completion Assessment (the "Assessment"), which increased the forecasted completion cost of the plant by $300 million. Including the proceeds received from the Brown 6 Root litigation settlement (described below), the total forecasted cost of the plant was reduced from approximately $5.5 billion to $5.3 billion, assuming an in service date in February 1988. In November 1987, the projected in service date for Unit 1 was delayed to March 1988, reflecting difficulties encountered with certain equipment during pre-critical testing. Epipment problems identified have been corrected. The NRC, after completing an operational readiness review of Unit 1 in January 1988, identified a need for additional operator training which has been undertaken. Certain delays have postponed llLP's application to the NRC for a full power license, and while the Company and CSV are certain that the plant will not begin commercial operation in March as previously scheduled, they do believe that Unit I will be in operation prior to the peak load of 1988, assuming that no additional delays are required as a result of any findings from the NRC's current investigation (described below) or as a 'l result of other now unidentified difficulties. The peak load typically occurs during August of each year. The delayed in service date of STP Unit i 1 is not expected to have a significant effect on the estimated e. ash cost. Assuming an in-service date for Unit 1 of June 1988 for the purpose of determining costs only, the Company's estimated cost of STP, including AFUDC of $836 million, is $2,246 million. The estimated total cost, net of related deferred taxes of $156 million, is $2,090 million. If the actual in service date varies from June, the estimated amount of AFUDC would I increase or decrease by approximately $12 million a month, accordingly, l l 14 l

I f Nuclear Licensine. The construction and operation of STP are subject to the jurisdiction of the NRC. A construction permit was issued for STP in December 1975. In 1981, operating license hearings were instituted by the NRC's ASLB. In March 1984, the ASLB issued a Partial Initial Decision in Phase I of the hearings, concluding that the quality of construction at STP was acceptable and that HLP was managing the proj ect in a manner that provided reasonable assurance that STP will be completed in accordance 91th NRC requirements. The ASLB completed Phase II hearings in June 1986, rullng that HLP had the character and competence to build and operate STP safely. In August 1986, the ASLB issued its final Partial Initial Decision. This decision authorized the Director of Nuclear Reactor Regulation to issue, following com;1etion of the NRC staff review, licenses for fuel loading and operation of STP Unit i up to 54 poser and, upon completion of requisito testing, licenses for full-power operation. The ASLB affirmed this decision in Octobet 1986 (" ALAB-849"). In December 1986 the Secretary of the NRC notified all parties that the NRC has declined any review of AIAB 849 and that the ASLB's decision became final agency action as of December 1, 1986. This marked the favorable completion of the operating license hearings for STP. A license for the fuel loading and low power testing of STP Unit 2 is scheduled to be obtained from the NRC by December 1988. Unit 2 is sr.heduled f >r commercial operation in June 1989. The construction permit for Unit 2 expires in December 1989. NRC Investigation. The NRC conducted in January 1988 an on site investigation of allegations made by the Government Accountability Project ("GAP"), a consumer group, that STP has safety related defects that have not been reported. Based on the result of this investigation, the NRC will determine whether further investigation is warranted. Although management cannot predict the results of this investigation, the Company and CSW believe that any concerns that might have been raised by GAP have been previously investigated and addressed, i In February 1988, llLP received a notice of violation and proposed imposition of civil penalty from the NRC, resulting from reports made by HLP and the operational readiness review concluded in January 1988. The l violations cited by the NRC involved the failure to satisfy certain technical specification requirements during the testing of STP Unit 1. The notice specified a civil penalty of $75,000 for the violations which HLP has ) paid. Additionally, in March 1988, llLP received another notice of violation and proposed imposition of civil penalty from the NRC specifying a $50,000 l civil penalty for violations documented in 1987 by NRC inspectors reviewing the security plan and its implementation at STP, The Company cannot predict J whether HLP will receive additional penalties from che NRC. The Company has been assured by HLP that the operational and security ) violations have been corrected. Management of the Company and CSW believe that these penalties will not result in additional delays in the in service date for STP Unit 1. Prudence Review. In 1985, the Texas Commission hired a consultant to review the prudence and efficiency of the construction of STP, In June l 1986, the consultant submitted a report to the Texas Commission, covering i the period from 1973 through January 1983. The consultant claimed in its 15

report that $1.1-to $1.3 billion of direct costs were spent imprudently on STP by all parties. According to the consultant's report, these amounts do not include AFUDC or rate effects

that, r.he consultant concluded, substantially offset each other.

The amounts also do not take into account the proceeds from the Brown & Root settlement (described below). The report recommended that the Texas Commission decline to review the merits of the Brown & Root settlement and concluded "that it was not unreasonable for the STP owners to settle the litigation on the terms they did," The consultant recommended that the Texas Commission inquiry into the economic viability of Unit 2 be expanded to consider both STP units and that a further investigation of whether STP should have been cancelled in 1982 may be warranted. The Company disagrees strongly with the amount specified in the consultant's report because management believes the settlement was fair, reasonable and sufficiently compensatory for the problems attributable to Brown & Root, In January 1986, the Texas Commission staf f opened a docket for the purpose of determining the prudence and efficiency of planning, management and construction of STP. The accounting treatment of the Brown & Root settlement proceeds (described below) has been consolidated with this docket. 'Ihe Company and HLP filed initial direct testimony in December 1986 and supplemental direct testimony in February 1988. A new schedule for hearings is currently under review, which is expected to delay hearings until the fall of 1988. Additionally, new consultants are expected to be appointed by the Texas Commission in early 1988 to review separately HLP's and the Company's prudence related to STP, It is expected that the consultants would review and evaluate already prepared materials, uhich include the prior consultant's report, rnaterials previously flied and to be filed by HLP and the Company covering the complete planning and construction period for STP, and third party reports prepared separately for HLP and the Cortpany. It is not expected that the newly appointed consultants will undertake a comprehensive audit of STP. Company officials will present evidence at that hearing to reee t the burden of proof regarding their l participation in STP. If the Texas Commission finds a portion of the STP costs in excess of the Brown & Root settlement to be imprudent, current accounting rules would require immediate write-off against earnings for any such costs that are not recoverable through rates or otherwise, l i I l Viability Review. In March 1985, a docket was initiated for the l purpose of gathering evidence concerning the economic viability of STP Unit 2. Initial hearings were held in January 1987 for the purpose of determining the appropriate computer model to be used for the economic study. Hearings in the final phase were held in October 1987 to consider the appropriate inputs for the study. An Examiner's report is expected to 1 be issued in 1988. Deferred Accounting and Rates. In anticipation of the completion of STP Unit 1, the Company filed with the Texas Commission in June 1987, a petition for approval of deferred accounting treatment of certain costs l related to STP Unit 1. In October 1987, the Company supplemented its filing I to include new information on STP available at the time and the effects of Statement of Financial Accounting Standards No. 92 ("SFAS 92"), Regulated Accounting for Phase-in Plans, an amendment of FASB staternent 1 Enterprises 16

No. 71. SFAS 92 changed the accounting rules for capitalization of carrying charges associated with deferred accounting orders for financial reporting purposes. 1 The Company's supplemental petition anticipates a total deferral of $232 million of expenses and carrying charges over an assumed 11-month period between commercial operation and the time rates are placed in effect reflecting Unit 1 in service. Included in this deferral is an $87 million portion of carrying costs which the Cornpany has requested be treated as interest to the extent interest has been incurred. The Company estimates that $26 million of the total carrying charges could not be deferred, under SFAS 92, for financial reporting purposes, llowaver, the Texas Corniniscion is not restricted from allowing the Cornpany to recover all deferred costs related to Unit 1, including all carrying costs. The petition would provide for an after tax effect of $144 million, llearings on the deferred accounting petition which were scheduled to begin December 1, 1987, have been stayed by the Suprerne Court of Texas by a Writ of Mandamus. The order is in response to an appeal of a Texas Commission ruling that denied intervenor status to the Texas State Agencies becauae they were represented by the Attorney General of Texas. The Suprerne Court heard the appeal in December 1987, and a decision is expected during the first half of 1988. All hearings and actions in the deferred accounting filing are suspended until a decision is reached by the Court. In February 1988, the Company filed a motion with the Supreme Court to lift the stay in this proceeding. Manage: rent has no reason to believe that the Texas Cornmission will deny the Company's petition for deferred accounting treatment. Iloweve r, if the Texas Commission were to deny the petition, or to disallow recording the carrying cost as interest to the extent interest expense is incurred, there could be a material adverse effect on the results of operations during the deferr.:1 period. If the Texas Commission does allow the Company to record the carrying cost as interest to the extent interest expense is incurred, there would still be an adverse effect on the results of operations but the arnount would be considerably reduced. The Company will need significant rate relief when STP Unit 1 is placed in commercial operation. The Company is currently reviewing its options, including alternatives to the deferred accounting petition and phase in j plans, before filing with the Texas Comrnission for a general rate increase to reflect the effects of STP on its financial position and results of operations. Under the current rules of the Texas Cornmission, post-tert year adj us troents are not permitted. Under a proposed rulo pending before the Texas Commission, post test year adjustinents would be perrnitted in certain circumstances. Managernent cannot predict whether the propose d rule will he adopted or what form of ruic may be adopted. If the Texas Commission does not adopt a rule allowing post test year adjustments, the Company's request for rate relief could be significantly delayed. If timely rate relief is not granted by the Texas Commission allowing recovery of STP costs, it could have a material adverse effect on the results of operations. l STP Litigation. Brown 6 Root Suit. In December 1981, llLP filed suit i against Brown & Root, the former architect, engineer and constructor for STP, and its parent company. The Company and the other participants joined i t 17

HLP in the suit, which alleged that Brown 6 Root breached engineering and construction contract agreements on the project. In December 1985, the Company and the other participants settled the lawsuit. The settlement agreement provided that each of the owners would receive a pro rata share of $750 million from Brown & Root, payable in quarterly payments over seven years, without interest. The Company elected to receive $146.8 million, the present value of its $189 million share of the settlement, in December 1985. This amount has been recorded as a reduction in the cost of STP, HLP Suit. The Company and CSW have received a copy of a First Amended Original Third Party Petition (the "Petition"), which HLP filed in vallas County in the 101st Judicit 1 District, asking the Court for authority to add the Company, CSW and San Antonio as parties to a suit (the "Austin Suit") between HLP and Austin. The Austin Suit (described below) was filed in January 1983. Austin filed a motion to strike the Petition and not allow the adding of the additional parties. HLP has also filed an original complaint in Matagorda County against the Company, CSW and San Antonio requesting the same relief as requested in the Petition. At a hearing on January 27, 1988, the Court set the Austin Suit for trial the first week in June 1988. The Court allowed HLP to serve the Petition on the Company, CSW and San Antonio without prejudice to the right of the Company, CSW and San Antonio to assert at a later hearing that the Petition should be dismissed, severed for a separate trial in the Austin Suit or severed into a separate docket independent of the Austin Suit. A date for the subsequent hearing on this matter will be set in the near future. The Court also advised the parties that in no event would the Company, CSW and San Antonio be required to participate in the June 1988 trial between HLP and Austin. Management believes that HLP does not have a sustainable claim for contribution or indemnity against CSW or the Company. HLP has asserted in the Petition that if it is liable to Austin for any damages in the Austin Suit, HLP is entitled to contribution or indemnity from the Company, CSW and San Antonio because all the activities complained of were decisions or activities of the STP Management Committee, which had members from all STP participants, rather than HLP's decisions as Proj ect Manager, or that HLP was acting as an agent for the other participants ano, therefore, all participants are liable for the actions complained of by Austin. HLP has alleged that CSW is a proper party to this suit because it participated through control of and direction of the Company in all major STP decisions. HLP is also seeking a declaratory judgment construing the STP Participation Agreement to the effect that HLP, as Project Manager, has no i liability to Austin, San Antonio, the Company or CSW for its actions relating to any matter complained of in the Austin Suit. HLP has also j requested the Court to direct implementation of alternative methods of dispute resolution as authorized by Texas

law, such as nonbinding arbitration, in order to settle the disputes related to STP.

i In June 1985, HLP, the Company and San Antonio entered into a Reservation of Rights ("Rights Agreement") in which the parties agreed. subject to certain exceptions, that "in order to maintain their cooperative efforts to construct, license and operate the South Texas Proj e c c, " they j would forbear any formal arsertion of any claims among themselves relating l to STP until the commercial operation of STP Unit 2 (currently scheduled for I l 18

~ ~. June 1989), but in no event beyond December 31, 1990, llLP, while claitning it has the right to file suit pursuant to an exception in the Rights Agreement, is also seeking to enforce a delay or abatement of the STP litigation until the earlier of Decernber 31, 1990 or the commercial operation of Unit 2, allegedly pursuant to the Rights Agreement. On March 3, 1988, pursuant to the STP Participation Agreement, the Company and San Antonio called for binding arbitration of the disputes with llLP. The arbitration call stated that llLP as Project Manager has breached its duties and obligations to the other STP participants and is li N e to the Company and San Antonio for damages and that the Company and San Antonio have no liability to llLP for any portion of the damages alleged against llLP by Austin, Also on that date, the Company filed with the District Court its response to the Petition. In that response the Company requested the Court to abate both of IlLP's petitions until the conclusion of arbitration, limit i all action to the arbitration orocedure and compel arbitration in accordance with the STP Participation Agreement in the event ilLP refu es to arbitrate, Subject to its request for abatement, the Company has counterclaimed against HLP for damages in an unspecified arnount related to llLP's breach of duties and obligations pursuant to the STP Participation Agreement, requested that all relief sought against the Company and CSW in the Petition be denied, requested that the Court enter a declaratory judgment construing the STP Participation Agreement and declare llLP liable to the Company for breacbes thereunder and stated that CSW is not a proper party to the action. Austin Suit. In January 1983, Austin filed suit against llLP and its parent company, llouston Industries, alleging that ilLP had misrepresented the capabilities of Brown 6 Root as the original architect engineer and construction manager of the project and had failed to properly perfortn its duties as proj ec t manager, Austin requested, among other things, (a) a reformation of the STP Participation Agreement with Austin conveying to HLP its 16% interest in STP, (b) a refund from llLP of the approximately $437 inillion expended by Austin to that date, and of all suma expended by Austin on STP thereafter, and (c) darnages in an additional unspecified amount. In December 1985, Austin filed an amended petition that asserted additional claims against ilLP under the DTPA and sought, from llLP and flouston Industries, either (i) an unspecified amount of damages, including treble damages to the extent proper under the DTPA, as well as pre -j udgment interest costs and attorneys' fees, or (ii) a reformation or rescission of the STP Participation Agreement requiring HLP to return to Austin all of the monies expended by Austin with respect to its 16% interest in STP to the date of the judgment, with interest, relieving Austin of all future obligations with respect to its interest in STP and providing for a concurrent transfer by Austin of such interest to llLP. ) l on May 27, 1987, Au= tin filed another amended petition in which it specified $938 million as the maxinum amount of damages claimed (all or some portion of which was alleged to be subject to trebling under the DTPA), l exclusive of attorneys fees and court costs, Austin and llLP have filed motions for partial summary judgment, On j j October 10, 1986, the trial judge ruled that Austin is not entitled to reformation or rescission of the STP Participation Agreement. The trial judge denied HLP's motion for partial surnmary judgment directed at Austin's allegations asserting a cause of action under the DTPA and HLP's motion for

l i partial summary judgment directed at Austin's allegations that there was fraud in the inducement relating to Austin's entry into the STP Participation Agreement. On June 29, 1987, a newly appointed trial judge denied Austin's motfson seeking to hold HLP responsible for the actions of the former architect-engineer. The judge denied, however, HLP's request for summary judgment on all claims relating to the Participation Agreement. The judge ruled that Austin must prove that HLP breached the Participation Agreement by failing to report material information and must prove damages specifically related to such failure to provide information. The judge permitted Austin to maintain its claim for $830 million under this theory of recovery if it could show that the owners would have cancelled STP in 1976, l and that Austin would have built a coal plant in lieu of STP. On August 10, i 1987, Austin provided an updated calculation of its alleged damages under that claim, dropping its claim under this theory of recovery to $740 million. On August 11, 1987, the judge reversed the earlier order, denying HLP'e motion for summary judgment as to Austin's DTPA claims. In September 1987, HLP announced that HLP and Austin had reached an agreement in principle under which HLP would acquire all of Austin's interest in STP, Austin would acquire an interest in an HLP coal plant and all litigation between HLP and Austin would be dismissed. The agreement in principle is subj e c t to conditions including execution of definitive contractual documents, approval by the Texas Gnmmission and the NRC, and waiver of the right of first refusal by the Company and San Antonio relating to acquiring Austin's STP interest. HL? has publicly reported that substantial differences with respect to several issues remain unrcsolved, and HLP can make no prediction as to whether a settlement with Austin can be achieved. Eyelear Insurance. In connection with the licensing and operation of STP, the participants have purchased the maximum limits of nuclear liability insurance available from private

sources, and have executed an l

indemnification agreement with the NRC, in accordance with the financial protection requiremen:s of the Price-Anderson Act. i The owners of STP are insured against $720 million of liability claims, l the full amount to which claims are limited under the Price-Anderson Act, which may result from a nuclear incident. Nuclear liability insurance limits available from private sources are presently $160 million and the Secondary l Financial Protection (indemnification) provisions of the Price-Anderson Act presently provide a limit of liability of = $560 million based upon an i assessment of $5 million per reactor per each incident, $10 million per reactor annual aggregate. There are currently 112 remetors included in the Secondary Financial Protection Program. The most recent 10 year extension of the Price-Anderson Act expired on l August 1, 1987, and at this date the Congress has not approved an extension of I the provisions of the Act. Various bills have been introduced to amend the Act, which will increase the limit of liability under the Act and will increase the level of assessments to reactor operators who participate in ths Secondary Financial Protection Program. The participants have obtained from American Nuclear Insurers ("ANI") and Nuclear Electric Insurance Limited ("NEIL") nuclear property insurance and decontamination liability and excess property insurance with limits 20

totaling $1.23 billion. The STP Management Committee has given approval to obtain an additional $165 million of decontamination liability and excess property insurance, available frora NEIL, at the time the full power litense fot STP Unit 1 is obtained. Further consideration is being given to obtaining an additional $130 million of property insurance, now available from ANI. Present NRC regulations require reactor operators to obtain $1.06 billion of nuclear property insurance and decontamination liability and excess property insurance. The participants are continuously reviewing the STP nuclear property insurance program and plan to maintain such nuclear property insurance coverages and limits as are customary in the industry for similar nucicar generating stations. As a member insured of NEIL, CPL will become subj ec t to its share of annual assesstnents, which could arnount to approximately $9 million for the

• otal project, in the event of a nuclear incidcnt at a NEIL member facility.

Under the South Texas Project Nucicar Property Insurance Proj ec t Agreement, each of the participants share pro rata, baced upon ownership interest, in the premiums and assessments incurred under the NEIL program, and premiums incurred under the ANI nuclear property insurance program. Financing. Long term financing will be required during the 1988-1990 period, but, except for the Auction Preferred Stock of the Company (#APS") described below, the nature, amount and timing of the financing have not been determined. In February 1988, the Company issued and sold 425,000 shares of APS, Series A and 425,000 shares of APS, Series B in a negotiated underwriting. In addition to funds raquired for its construction program, the Company will require $23,000,000 to retire first mortgage bonds maturing in the period. The Cornpany anticipates that approximately 79% (including AFUDC) and 58% (excluding AFUDC) of the funds required for its 1988-1990 construction program will be provided from internal sources and pollution control funds held by a trustee and anticipates that the balance of the funds required for that period will come frem long-term financing. The issuance and sale of first mortgage honds and preferred stock by the Company are subj ec t to compliance with earnings coverage and other requirements of its first mortgage indenture and its articles of incorporation. The respective earnings coverage provisions require, in general, (i) for the issuance of additional first mortgage bonds, a minimum before income-tax earnings coverage of two times the pro forma annual interest charges on first mortgage bonds and indebtedness secured by a prior or equal ranking lien, and (ii) for the issuance of additional preferred

stock, a minimum after-income-tax earnings coverage of one and one half times pro forma annual interest charges and preferred stock dividend requirements, in each case for a 12-month period ending within a specified period na more than 90 days preceding issuance.

Earnings used in calculating such coverages include, in the case of the preferred stock coverage, all non operating items including ARJDC and, in the case of the first mortgage bond coverage, such items to the extent they do not exceed 10t of earnings. The Company's first mortgage indenture requires in effect that the Company certify proporty additions to the extent that expenditures for maintenance and repairs are less than 15% of utility operating revenues after deducting the cost of electr' city purchased for resale. The Company has been required to certify property additions to satisfy deficiencies 21

under this requirement. However, the Company's present projections do not indicate any shortage of property additions usable as a basis for issuance of first mortgage bonds expected to be issued at least through 1990. The earnings coverage provisions under the first mortgage indenture with respect to the issuance of additional first mortgage bonds similarly require minimum deductions from carnings for maintenance, repairs and depreciation equal to at least 15% of such revenues after deducting the cost of electricity purchased for resale. This requirement has reduced earnings coverage. Although not presently anticipated, the earnings coverage provisions may require the use of alternative debt financing by the Company at intervals during the next three years which could result in higher financing costs to the Company. The .iortgage bond indenture cannot be amended to alter the above described provisions until the bonds of all series inaturing during or before 2004 are retired or unless there is approval by 100% of such bondholders. The Company's articles of incorporation generally prohibit the issuance or assumption, without the affirmative vote by the holders of a majority of the pre fe rred stock, of any unsecured debt obligations if, after such issuance or assumption, (1) the principal amount of unsecured debt would exceed 20% of the aggregate of the principal amount of secured indebtedness and total capital stock and surplus or (ii) the principal amount of unsecured debt rnaturing in less than 10 years would exceed 10% of such aggregate. An unsecured borrowing which has a maturity of more than 10 years at the date of issuance is not considered an unsectired obligation maturing in less than 10 years until the principal thereof shall be due within three years. These limitations are not etpected to interfere with any presently projected requirements for unsecured debt for the 1988-1990 period. The projections upon which the foregoing statements and estimates are riade are based on a number of general assumptions as to revenues, earnings, const ruction and other costs, the adequacy and timeliness of rate increases, interest rates and other factors. Actual experience may vary significantly from these assumptions. ITEM 3. LEGAL PROCEEDINGS. I See "ITEM 1. BUSINESS -- REGULATION AND RATES" for information l relating to regulatory proceedings. l See "ITEM 1. BUSINESS -- OPERATIONS" for information relating to system interconnection. See "ITEM 1. BUSINESS ENVIRONMENTAL MATTERS" for information relating to environmental proceedings. See "ITEM 2. PROPERTIES -- STP Construction" for information as to pending legal proceedings relating to STP. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 22

.~.. _ = - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND REIATED STOCKHOLDER MATTERS. All of th'e outstanding shares of Common Stock of'the Company are owned by its parent, CSW. ITEM 6. SELECTED FINANCIAL DATA. The information rrsquired by Item 6 is incorporated by reference:to page 33 of the Company's 1987 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is incorporated by reference to pages 33 36 of the Company's-1987 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 0 is incorporated by reference to pages 21-32 of the Company's 1987 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISACREEMENTS WITil ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. i 23

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) The following is a list of directors of the Company, together with certain information with respect to each of them: Shares Beneficially owned by Directors (l) Name, ase. principal Year First occupation, business expetience Became CSW Company and other directorships Director Common Preferred RICHARD H. BREMER AGE - 39 1987 5,681 Vice President. Finance of the Company from 1986 to 1988. Vice President and Controller from 1980 to 1986.(2) DURWOOD CHALKER AGE. 64 1979 79,654 Chairman, President and CEO of CSW. Director of CSW, each of its subsidiaries and MCorp, Dallas, Texas. JOHN W. CRUTCHFIELD ACd - 68 1972 President and owner of John W. Crutchfield & Company (capital investments) Corpus Christi, Texas. Director of First City Bank of Corpus Christi, Corpus Christi, Texas. W. R. FARQUHAR, JR. ACE. 67 1984 1,000 Retired. Prior to his retirement Mr. Farquhar was General Manager and Chief Executive Officer of Lavaca Navidad River Authority, Edna, Texas. RUBEN M. GARCIA AGE. 56 1981 i President or principal of several i firms engaged primarily in con. struction and land development in the Laredo, Texas area. Director of Federal Reserve Bank of Dallas, San Antonio Branch, San Antonio, Texas. { l 24 l l

1 Shares Beneficially owned by Directors (l) Name, age, principal Year First -occupation, business. experience Became-CSW Company and other-directorships - Director-Common Preferred RONALD LEE KELLETT ACE 47-1987. Vice President and-Controller of King Ranch, Inc., Kingsville, Texas. ROBERT A. McALLEN AGE 53 1983-Pres 1'ent, CEO and director of d Texas Valley Baneshares and subsidiaries. Vice Chairman and director of Hidalgo County Bank and Trust Company, Mercedes, Texas. Chairman and director of National Bank of Commerce, Edinburg, Texas, llERBERT C. PETRY, JR. AGE 70 1964 300 Partner in the law firm of Petry & Petry, Carrizo Springs, Texas. Director of Union State Bank, Carrizo Springs. Texas. ROBERT L. RANCE AGE. 54 1979 6,818 Executive Vice President of the

Company,

11. LEE RICilARDS ACE 53 1987 President of Ilygein Dairy Company, liarlingen, Texas. Director of liarlingen National Bank.

liarlingen, Texas. ) T. V. SIIOCKLEY, III ACE. 42 1986 726 l l President'and CEO of the Company since June 1987. Senior Vice President and Chief Engineering Officer of the Company from 1986 { to 1987. Other executive and managerial positions with the Company from 1983 to 1985. 25 ~. ~ - - - J

Shares Beneficially Owned by Directors (1). Name, age, principal Year First occupation,. business experience Became CSW Company and other directorships Director Common Preferred ' B. W. TEAGUE . AGE - 49 1984 3,0461 Senior Vice President,. Regional Operations of the Company. All 17 directors and executive 103,262 officers of the Company as a group. (1) All directors' and executive officers' shares owned as of January.1, 1988 as indicated are owned directly, and aggregate less than 1.0% of the outstanding shares of such class. (2) Mr. Bremer will resign.as Vice President. Finance and from the Board of Directors in April 1988 to assume the dut ies of General Manager.. Central Region of the Company. All directors presently serving as executive officers of the Company have been employed in a. managerial or executive capacity with a member or members of the CSW System for at least the past five years, and all outside directors have engaged in their respective principal occupations listed above for a period of more than five years unless otherwise indicated. (b) The following is a list of the executive officers who are not directors of the Company, together with certain information with respect to each of them: Year First Elected to Present Name Age Present Position Position Walter A. Ratcliff 57 Vice President Corporate Services 1983 i and Sacretary Clayton R. Kirk 58 Vice President. Business Development 1986 Richard P. Verret 41 Vice President and Chief Engineering 1986 Officer Gerald W. Tucker 41 Controller 1986 Mary E. Sullivan 31 Treasurer 1988 Each of the directors and executive officers of the Company is elected 1 to hold office until the first meeting of the Company's Board of Directors after the 1988 annual meeting of stockholders, presently. scheduled to be held on April 14, 1988. Each of the executive officers listed in the table above has been employed by the Company or an affiliate in the CSW System in an executive or managerial capacity for more than the last five years, l 26 l

except for Mr. Tucker. Mr. Tucker was with the Certified Public Accounting firm of Knuckols, Duvall and Hallum in 1986 and held various managerial positions with SWEPC0 prior to 1986. ITEM 11. EXECUTIVE COMPENSATION. The following table contains information with respect to cash compensation paid by the Company to each of the five most highly compensated executive officers of the Company for all services rendered during 1987 and the aggregate cash compensation so paid by the Company during 1987 to all of the Company's executive officers as a group: Name of Individual or Cash Number in Group Capacities In Which Served Compensation T. V. Shockley, III President and CEO $123,326 Robert L. Range Executive Vice President 118,419 B. W. Teague Senior Vice President, 88,893 District Operations Clayton R. Kirk Vice President - Business 86,078 Development Richard H. Bremer Vice President - Finance 81,812 All 11 executive officers of the company as a group (a) $857,057 (a) Pursuant to the rules of the SEC, this total excludes the aggregate incremental cost to the Company of certain non-cach benefits mado available to executive officers. CSW provides an Employees' Stock Ownership Plan for the benefit of CSW System employees. Employees are eli ible to participate in b Le Plan as of b January 1 of the year in which they complete one year of service. Consistent with previous Federal tax law, the Plan allowed CSW to contribute CSW common Stock for the benefit of CSW System employees in an amount equal to 1/2 of 1% of the aggregate compensation paid to employees covered by the Plan for the tax years 1983 through 1986. CSW's contribution to this Plan is of fset by Federal income tax credits. Contributions, if made, are allocated among Plan participants pro rata on the basis of each participant's eligible compensation for the year in respect of which the contribution is made. CSW common Stock allocated to employees' accounts may not be withdrawn for a period of 85 months or until retirement, resignation or death. Allocationa in 1987 to Messrs. Shockley, Range, Teague, Kirk and Bremer were $451, $503, $440, $387 and $411, respectively. Allocations to all 11 oxecutive officers as a group in 1987 totaled $3,799. CSW provides an Employees' Thrift Plan to all CSW System employees over the age of 20 who have completed one year of service. The Plan is a savings plan which allows employees to contribute up to 10% of annual compensation. 27

i Tne first 6% of contributed employee compensation is matched 50% by the Company; 75% if the eaployee has over ;0 years of service. Deposits and Company contributions for certain ptrticipants, including executive officers, may be limited as required by the Tax Re form Act of 1986. Employee contributions up to the 6% level and matching Company contributions may be invested at the employee's option in CSW Common Stock, in a guaranteed fixed income program or split equally between the two. Contributions over 6% are not matched by the Company and must be invested in the guaranteed fixed income program. Employees are vested as to the Company's contributions after three years of participation or five years service. Employees may withdraw all their contributions from the Plan at any ti<ne. The Company's contributions and investment gains on employee and Company contributions may not be withdrawn until retirement, resignation or death. All employees listed in the table participated in the Plan in 1987. Company matching contributions during 1987 for Messrs. Shockley, Range, Teague, Kirk and Bremer were $2,646, $5,211, $3,698, $3,510 and $2,340, respectively. Total Company contributions to all 11 executive officers as a group in 1987 were $26,789. CSW shareholders approved the establishment of the CSW Restricted Stock Plan at the 1984 annual meeting. The purpose of the Plan is to assist CSW and its subsidiaries in securing and retaining key executive employees of outstanding ability, and to recognize their best efforts on behalf of CSW and its subsidiaries, through awards of CSW Common Stock. Any employee who is responsible for the management, growth or protection of the business of CSW or its subsidiaries is eligible for awards under the Plan. The Plan permirs CSW's Board of Dircctors (or a committee thereof), at its discretion, to award up to a maximum of 500,000 shares of CSW Common Stock, in the aggregate, to eligible employees subject to certain adjustments for a change in classification, subdivision or combination of shares. In addition, in connection with any such award, CSW's Board of Directors determines the group of eligible employees and the restricted period over which such award will vest. No shares may be awarded beyond April 19, 1994, the tenth anniversary of the Plan's effective date. j l Awards under the Plan were made to Vice Presidents and above of CSW and its subsidiaries on January 2, 1987. All the executives included in the compensation table included herein received an award in 1987. Messrs. I Shockley, Range, Teague, Kirk and Bremer were awarded 393, 413, 345, 232 and l 164 shares, respectively. Eight of the 11 executive officers as a groy were awarded 2,895 shares in 1987. The restricted period for the 1987 awards has lapsed or will lapse as to 20% of the awards on January 2, 1988, 1989 and 1900 and as to the remaining 40% on January 2, 1991. Each participant must render substantial services to the Company on a regular basis during the restricted period. If such service is not rendered for such period, except by reason of the participant's death, total disability or no mal retirement, the participant will forfeit those sharos which were l previously awarded and are still subject to the restricted period. During i l the restricted period, the participant will have all the rights of a l sharebolder, including the right to receive dividends paid on such shares, l except that the participant may not soll, assign, transfer, pledge or otherwise encumber the shares. The fair market value of shares to which restrictions lapsed in 1987 awarded to Messrs. Shockley, Range, Teague and Bremer was $2,024, $14,733, $6,071 and $6,603, respectively. Messrs. Sheckley, Range, Teague and Bremer were the only executive officers listed 28

in the compensation table for which restrictions lapsed in 1987 on shares previously awarded. The fair market value of shares to which restrictions lapsed in 1987 awarded to all 11 executive officers as a group was $59,676. Executive officers, like other employees, are also eligible to participate in the CSW System Pension Plan, and all eligible persons whose compensation is reported in the table participated in this Plan. Contributions to the Plan are determined actuarially and cannot be readily calculated with respect to any individual participant or small group of participants. The amount of such contribution is thus omitted from the table. For purposes of determining Plan benefits, compensation for each of the individuals listed in the table is substantially the same as the amounts set forth in the table, Plan benefits depend upon years of credited service, age at retirement and amount of compensation. Compensation under the Plan includes base salaries, exclusive of bonuses, overtime, expense allowances and other compensation. Assuming retirement at age 65, a Plan participant would be eligible at retirement for a maximum annual pension benefit as follows (reduced by half of primary Social Security benefits payable at age 65): Annual Benefits After Specified Years of Service Average Earnings 20 25 30 or more $100,000 $ 33,333 $ 41,667 $ 50,000 150,000 50,000 62,500 75,000 200,000...... 66,667 83,333 100,000 250,000... 83,333 104,167 125,000 300,000.... 100,000 125,000 150,000 Messrs. Shockley, Range, Teague, Kirk and Bremer had 11, 30, 26, 30 and 10 years, respectively, of credited service under the Pension Plan at December 31, 1987. "Average earnings" treans the average annual earnings during the 36 consecutive months of highest pay during the 120 months prior to retirement. CSW shareholders approved the establishment of the CSW Stock Option Plan at the 1986 annual meeting. The purpose of the Plan is to assist CSW and its subsidiaries in securing and retaining key executive employees of outstanding ability and to recognize their best efforts on behalf of CSW and ] its subsidiaries. The Plan authorizes the grant of options to purchase shares of CSW Common Stock and stock appreciation rights to officers and key ) employees of CSW and its subsidiaries. Any employee who is responsible for the management, growth or protection of the business of CSW or its subsidiaries is eligible for such selection. The Plan is administered by a committee of not less than three directors appointed by the Board of Directors of CSW (the "Committee"). Under the Plan, the Committee is ' authorized to grant stock options at an option price not less than the fair market value of the shares covered by the option at the time the option is granted. The Plan also permits the Committee to grant stock appreciation rights which permit an optionee to receive from CSW, upon exercise, cash or shares of CSW common Stock with an aggregate fair market value equal to the aggregate appreciation in value of the shares in respect of which the right was exercised. Stock appreciation rights may be granted with respect to 29

stock options granted under the Plan. Options granted under the Plan may be options that are intended to qualify under particular provisions of the Internal Revenue Code of 1986 (the "Code"), as in effect from time to time ("incentive stock options"), options that are not intended so to qualify under the Code ("nonqualified stock options") or combinations of the foregoing. No option can run for more than ten years, and no option is exercisable until the optionee has been continuously employed by CSW or any subsidiary for one year from the date the option was granted. The Plan does not limit either the number of persons who are eligible to receive options or stock appreciation rights or the number of shares subject to nonqualified options or stock appreciation rights that may be granted to any one person. The Plan does not limit the aggregate number of stock options and stock appreciation rights that may be granted; only the number of shares authorized for issuance and sale and the number of shares with respect to which stock appreciation rights may be exercised are limited. The maximum namber of shares of CSW Common Stock to be issued and sold under the Plan is 1,500,000, subj ect to adjustments to reflect stock splits and certain other changes in the number and kind of outstanding shares. The maximum number of shares with respect to which stock appreciation rights may be granted pursuant to any particular award shall not exceed 50% of the shares subject to the options granted under such award. On April 16, 19G7, 36 key employees of CSW and its subsidiaries received incentive stock options and stock appreciation rights pursuant to the Plan. As of January 1, 1988, 1,310,200 shares of CSW Common Stock were not subject to ou* standing options and remained available for issuance under the Plan, while an aggregate of 189,800 shares of CSW Common Stock were subject to outstanding options under the Plan. Incentive stock options and stock appreciation rights granted on April 16, 1987 each had a per share exercise price of $32.50 and an expiration date of April 1997. The closing sale price of CSW Common Stock on April 16, 1987, as reported in the composite quotations of the Wall Street Journal, was $32.50 per share. Mr. Shockley received 2,500 incentive stock options and 1,250 related stock appreciation rights, Mr. Range received 3,000 incentive stock options and 1,500 related stock appreciation rights and Mr. Teague received 2,500 incentive stock options and 1,250 related stock appreciation rights. l Messrs. Shockley, Range and Teague were the only executive officers listed I in the compensation table to receive incentivo stock options or stock l appreciation rights in 1987. Total options and related stock appreciation rights granted to 4 of the 11 executive officers as a group in 1987 were 9,500 incentive stock options and 4,750 related stock appreciation rights. l Other Information Respecting Director Compensation: l \\ The Board of Directors held 5 meetings during 1987. Directors who are not also executive officers or employees of the Company or its affiliates receive $4,800 annually for service on the Board and $200 plus expenses for cach meeting and each audit committee meeting attended. Directors who are not also officers and employees of the Company were eligible in 1987 to participate in a deferred compensation plan. Under this plan, directora could elect to defer payment of annual directors' and meeting fees until they retire from the Board or as they otherwise direct. J 30

I ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. All 6,755,535 shares of the Company's outstanding common stock, $25 par value, are owned beneficially and of record by CSW, 2121 San Jacinto Street, Dallas, Texas 75201. For information regarding the !anount of each class of equity securities of the Company and of CSW beneficially owned directly or indirectly by all directors and executive officers of the Company, see "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." ITEM 13. CERTAIN-REIATIONSHIPS AND RELATED TRANSACTIONS. The Company retains as legal counsel the law firm of Petry & Petry, Carrizo Springs, Texas, of which Mr. Herbert C. Petry, Jr., a director, is a partner. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8.K. The financial statements included in the Company's 1987 Annual Report to Stockholders are hereby incorporated by reference and made a part of this report. Page Reference 1987 Annual 1987 Report to 10 K Stockholders (a) Financial Statements (Included under "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"): Report of Independent Public Accountants. 21 Statements of Income for the years ended-23 December 31, 1987, 1986 and 1985. Statements of Retained Earnings for the 23 years ended December 31, 1987, 1986 and 1985. Balance Sheets as of December 31, 1987 24 and 1986. Statements of Funds Provided for Gross 25 Additions to Electric Utility Plant for the years ended December 31, 1987, 1986 i and 1985. 1 Statements of Capitclization as of 26 December 31, 1987 and 1986. 31

Page Reference 1987 Annual 1987 Report to 10-K Stockholders Notes to Financial Statements. 27-32 (b) Reports on Form 8-K: On October 16, 1987, a Form 8-K was filed by the Company, reporting Item 5. "Other Events." (c) Exhibits: 3. (a) Restated Articles of Incorporation, as amended, of the Company (incorporated herein by reference to Exhibit 4(a)_to the Company's Registration Statement No. 33-4897, Exhibits 5 and 7 to Form U-1 File No. 70-7171, Exhibits 5, 8.1, 8.2 and 19 to Form U-1 File No. 70 7472). (b) Bylaws, as amended, of the Company (incorporated herein by reference to Exhibit 6 to Form U-1 File No. 70-7472.) 4. (a) Indenture of Mortgage or Deed of Trust dated November 1, 1943, exe-cuted by the Company to The First National Bank of Chicago and Robert L. Grinnell, as Trustees, as amended through October 1, 1977 (incorpo-rated herein by reference to Exhibit 5.01 in File No. 2-60712), and the Supplemental Indentures of the Company dated September 1, 1978, 1 January 1,1980, January 1,1981, March 1, 1983 (incorporated herein by reference to Exhibit 2.02 in File No. 2-62271, Exhibit 2.02 in File No. 2-66202, Exhibit 2.02 in File No. 2-69943, Exhibit 4.02 in File No. 2 76811 and Exhibit 4(b) in File No. 2-82095 and Exhibit 12 to Form U-1 File No. 70-6821) and December 15, 1984, July 1, 1985, August 1, 1985, May 1, 1986 and November 1, 1987 (incorporated herein by reference to Exhibit 17 to Form U-1 File No. 70-7003, Exhibit 4(b) in File No. 2-98944, Exhibit 4 to Form U-1 File L No. 70 7128, Exhibit 4 to Form U 1 File No. 10-7236 and Exhibit 4 to Form U-1 File No. 70-7249). 32 lL

Page Reference 1987 Annual 1987 Report to 10-K Stockholders-(b) Debenture Indenture. dated April'1, 1982 executed by the Company to The Bank of New York, as Trustee (incorporated here-in by reference to Exhibit 4.01 in File No. 2 76811) and the Supplemental Inden-ture of the Company dated September 1, 1985 (incorporated herein by reference to Exhibit 18 to Form U-1 File No. 70 7128). 12. Statement re computation of Ratio of 40 Earnings to Fixed Charges for the five years ended December 31, 1987. 13. 1987 Annual Report to Stockholders. Filed Herewith 24. Consent of Independent Public 41 Accountants, 25. Powers of /ttorney. Filed Herewith (d) Schedules: 1 Report of Independent Public 35 Accountants on Supplemental Schedules and Exhibit, V. Property, Plant and Equipment'for the 36 years ended December 31, 1987, 1986 and 1985. VI. Accumulated Depreciation, Depletion 37 j and Amortization of Property, Plant and F,quipment for the years ended December 31, 1987, 1986 and 1985. IX. Short Term Borrowings for the years 38 ended December 31, 1987, 1986 and 1985. X. Supplementary Income Statement In-39 formation for the years ended December 31, 1987, 1986 and 1985. All other. exhibits and schedules are omitted because of the absence of the conditions under which they are required or-because the required information is included in the financial statements and related notes to financial statements. 33

i SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be i signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 1988. CENTRAL POWER AND LIGHT COMPANY By /s/ Robert L. Range Robert L. Range Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 18, 1988. Signature Title

• T.

V. Shockley, III President and CEO and Director (Principal executive officer)

• Robert L. Range Executive Vice President (Principal financial officer)
• Gerald W. Tucker Controller (Principal accounting officer)
• Richard H. Bremer Director
• Durwood Chalker Director
• John W. Crutchfield Director
• W.

R. Farquhar, Jr. Director

• Ruben M. Garcia Director
• Ronald Leo Kellett Director l
• Robert A. McAllen Director l
• Herbert C. Petry, Jr.

Director j

• H. Lee Richards Director i
• B. W. Teague Director l

l

• By: /s/ Robert L. Ranne Robert L. Range Attorney-in-Fact 34

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES AND EXHIBIT To Central Power and Light Company: In connection with our examinations of the financial statements included in Central Power and Light Company's Annual Report to Stockholders and incorporated by reference in this Form 10.K, we have also examined the supplemental schedules V, VI, IX and X and Exhibit 12. Our examinations of the financial statements were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules and exhibit are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The schedules and exhibit have been subjected to the auditing procedures applied in the examinations of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Dallas, Texas February 8, 1988 l 35

SCHEDULE V CENTRAL P0kER AND LICHT COMPANY PROPERTY, FIANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1987, 1986 and 1985 Column A Column B Column C Column D Column E Column F Balance Other Beginning Additions Retirements Changes Balance Classification of Year at Cost at Cost Add /(Deduct) End of Year (Thousands) Year 1987 Electric Utility Plant: Production $ 715,779 $ 12,323 393 (23) $ 727,686 Transmission 268,643 14,764 1,716 7,922 289,618 Distribution 534,081 38,976 9,339 (7,804) 555,914 General 162,081 34,704 2,557 (4,180) 190,048 Construction work in progress 1,646,332 341,454 1,987,786 Nuclear fuel 100,048 2,502 (34) 102,516 $3,426,969 $ 444,723 $ 14,005 (4,119) $3,853,568 Year 1986 Electric Utility Plant: j Production $ 670,242 $ 49,874 4,337 $ 715,779 j Transmission 261,984 16,399 1,129 (8,606) 268,648 Distribution 497,466 35,489 7,915 9,041 534,081 Ceneral 157,786 7,060 2,303 (462) 162,081 Construction work in progress 1,375,267 318,065 (47,000) 1,646,332 100,048 l Nuclear fuel 93,874 6,174 $3,056,619 0 433,061 $ 15,684 (47,027) $3,426.969 Year 1985 Electric Utility Plant: 1 Production $ 662,240 8,805 748 (55) 670,242 l Transmission 241,038 21,024 947 (31) 261,984 Distribution 456,909 48,436 7,851 (28) 497,466 General 139,252 20,557 1,693 (330) 157,786 Construction work (146,826) 1,375,267 in progress 1,171,503 350,590 93,874 Nuclear fuel 88,035 5,839 $2,758,977 $ 456,151 $ 11,239 $(147,270) $ 3,056,619 36

SCHEDULE VI CENTRAL POWER AND LICHT COMPANY ACCUNULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND. EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1987, 1986 AND 1985 Column A Column B Column C Column D Column E ' Column F i Additions Charged to Costs and Expenses Other Balance Changes. . Balance Beginning Other-Classification of Year-Depreciation Accounts Retirements (*). Add /- End of (Deduct) Year (Thousands) -Year 1987 Electric Utility Plant: Production $ 264,750 $ 23,817 $ 1,090 394 (68) $289,195 Transmission 84,314 8,235 1,716 (45G) -90,377 Dtstribution 142,028 20,800 9,339 (1,841) 151,648 General 55,193 2,263 5,547 2,406 (1,908) 58,689 $ 546,285 $ 55,115 $ 6,637 $ 13,855 $(4,273) $589,909 Year 1986 Electric Utility Plant: Production $ 245,245 $ 22,905 $ 1,090 $ 4,336 (154) $264,750 Transmission 77,630 7,954 1,129 (141) 84,314 Distribution 132,783 19,386 7,914 (2,227) -142,028 General 47,747 1,978 7,765 2,296 (1) 55,193 $ 503,405 $ 52,223 $ 8,855 $ 15,675 $ (2,523) $546,285 Year 1985 l Electric Utility Plant: Production $ 223,158 $ 22,005 $ 1,090 748 (260)' $245,245 Transmission 71,218 7,335 935 12 77,630 Distribution 124,923 17,926 7,850 (2,216) 132,783 General 39,535 1,311 8,540 1,693 54 47,747 i $ 458,834 $ 48,577 $ 9,630 $ 11,226 $ (2,410) $503,405 (*) Retirements are at original cost, not of removal costs and salvage. l 37 l i ,--.,m.--n- ,,. =.- ,-n. was --~ --r e-v-----r.-- e.n-- --,,-..-rw-,mnr. ---e

SCHEDULE IX CENTRAL POWER AND LIGHT COMPANY SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1987, 1986 AND 1985 Column A Column B Column C Column D Column E Column F Maximum Average Weighted Category of Balance Weighted Amount Amount Average Aggregate at End Average Outstanding Outstanding Interest Short-term of Interest at any During Rate During Borrowings Period Rate Month-end the Period the Period (Thousands) Year Ended December 31, 1987 Advances from Affiliates $42,430 8.3% $73,383 $37,335 7.0% December 31, 1986 Advances from Affiliates 0- $ 5,178 432 7.3% December 31, 1985 Advances from Affiliates -0 $72,726 $30,501 8.1% l 4 1 1 ( l 38 l l

SCllEDULE X CENTRAL POWER AND LICllT COMPANY SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR Tile YEARS ENDED DECEMBER 31, 1987, 1986 and 1985 Year Ended December 31 1987 1986 1985 (Thousands) Real estate and personal property taxes $15,174 $13,429 $12,479 State gross receipts taxes 8,b79 9,346 9,079 Payroll taxes 4,860 4,727 4,179 Franchise taxes 8,031 7,278 5,608 State utility commission assessments 1,220 1,407 1,418 Other taxes 213 201 177 $38,177 $36,388 $32,940 The amounts of taxes, depreciation and maintenance charged to accounts other than income and expense accounts were not significant.

Rents, royalties, advertising and research and development costs during these years were not significant.

39

i EXHIBIT 12 CENTRAL POWER AND LIGHT COMPANY RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE YEARS ENDED DECEMBER 31, 1987 1987 1986 1985 1984 1983 (Thousands except Ratios) Operating income $142,435 $145,466 $138,912 $143,923 $145,248 Adj us tments : Federal income taxes 6,873 6,589 (16,709) 31,642 33,057 Provision for deferred Federal income taxes 28,889 42,750 68,069 11,006 15,080 Deferred investment tax credits 14,301 19,748 11,606 24,258 19,122 Other income ard deductions (963) 6,840 119 1,145 1,578 Allowance for borrowed and equity funds used.during construction 168,877 139,937 129,158 79,765 50,800 Earnings $360,412 $361,330 $331,155 $291,739 $264,883 Fixed charges: Interest on long term debt $108,038 $107,521 $101,325 $ 77,667 $ 73,376 Interest on short. term debt and other 12,172 6,770 14,645 8,905 1,956 Fixed Charges $120,210 $114,291 $115,970 $ 86,572 $ 75,332 Ratio of Earnings to Fixed Charges 3.00 3.16 2.86 3.37 3.52 40

EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACc0UNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the registration statements of Central Power 1 and Light Compcny on Form S.3 (File No. 2 82387 and 33 4897) of our reports dated February 8, 1988, included herein and incorporated by reference in this Form 10.K. It should be noted that we have not e::amined any financial statements of the Company subsequent to December 31, l'.37 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN & CO. Dallas, Texas March 18, 1988 l l I 41 j}}