CENTERPOINT ENERGY RESOURCES CORP - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO _______________

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

Commission file number 1-13265

CENTERPOINT ENERGY RESOURCES CORP.

(Exact name of registrant as specified in its charter)

Delaware 76-0511406
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)

(713) 207-3000
(Registrant's telephone number, including area code)

RELIANT ENERGY RESOURCES CORP.
(Former name, former address and
former fiscal year, if changed
since last report)

CENTERPOINT ENERGY RESOURCES CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

As of November 9, 2002, all 1,000 shares of CenterPoint Energy Resources Corp.
common stock were held by CenterPoint Energy, Inc.

CENTERPOINT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.................................................................1

Statements of Consolidated Operations
Three Months and Nine Months Ended September 30, 2001 and 2002 (unaudited)............1

Consolidated Balance Sheets
December 31, 2001 and September 30, 2002 (unaudited)..................................2

Statements of Consolidated Cash Flows
Three Months and Nine Months Ended September 30, 2001 and 2002 (unaudited)............4

Notes to Unaudited Consolidated Financial Statements.....................................5

Item 2. Management's Narrative Analysis of the Results of Operations of
CenterPoint Energy Resources Corp. and Subsidiaries.....................................15

Item 4. Controls and Procedures.............................................................21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings...................................................................22

Item 5. Other Information...................................................................22

Item 6. Exhibits and Reports on Form 8-K....................................................23

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)

See Notes to CERC's Interim Financial Statements

1

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)

ASSETS

See Notes to CERC's Interim Financial Statements

2

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)

LIABILITIES AND STOCKHOLDER'S EQUITY

See Notes to CERC's Interim Financial Statements

3

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)

See Notes to CERC's Interim Financial Statements

4

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

Included in this Quarterly Report on Form 10-Q (Form 10-Q) for CenterPoint
Energy Resources Corp. (CERC Corp.), formerly Reliant Energy Resources Corp.
(RERC Corp.), together with its subsidiaries (CERC), are CERC's consolidated
interim financial statements and notes (Interim Financial Statements) including
its wholly owned and majority owned subsidiaries. The Interim Financial
Statements are unaudited, omit certain financial statement disclosures and
should be read with the amended Annual Report on Form 10-K/A (Amendment No. 1)
of RERC Corp. (RERC Corp. Form 10-K/A) for the year ended December 31, 2001,
which was filed with the Securities and Exchange Commission (SEC) on July 15,
2002, and the Quarterly Reports on Form 10-Q of RERC Corp. for the quarters
ended March 31, 2002 and June 30, 2002.

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

CERC's Interim Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the respective periods.
Amounts reported in CERC's Statements of Consolidated Operations are not
necessarily indicative of amounts expected for a full year period due to the
effects of, among other things, (a) seasonal variations in energy consumption,
(b) timing of maintenance and other expenditures and (c) acquisitions and
dispositions of assets and other interests. In addition, certain amounts from
the prior year have been reclassified to conform to CERC's presentation of
financial statements in the current year. These reclassifications do not affect
earnings of CERC.

The following notes to the consolidated financial statements in the RERC
Corp. Form 10-K/A relate to certain contingencies. These notes, as updated
herein, are incorporated herein by reference:

Notes to Consolidated Financial Statements (RERC Corp. 10-K/A Notes): Note
3(f) (Regulatory Assets), Note 5 (Derivative Instruments) and Note 10
(Commitments and Contingencies).

For information regarding environmental matters and legal proceedings, see
Note 11.

(2) NEW ACCOUNTING PRONOUNCEMENTS

See Note 3 for a discussion of CERC's adoption of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended (SFAS No. 133), on January 1, 2001. See Note 6
for a discussion of CERC's adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142) on January 1, 2002.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting SFAS No. 141 "Business Combinations" (SFAS No.
141). SFAS No. 141 requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting and broadens the
criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being transferred to goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. CERC adopted the provisions of the statement
which apply to goodwill and intangible assets acquired prior to June 30, 2001 on
January 1, 2002. The adoption of SFAS No. 141 did not have a material impact on
CERC's historical results of operations or financial position.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
a liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value

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each period, and the capitalized cost is depreciated over the useful life of the
related asset. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged. SFAS No. 143 requires entities to
record a cumulative effect of change in accounting principle in the income
statement in the period of adoption. CERC plans to adopt SFAS No. 143 on January
1, 2003, and is in the process of determining the effect of adoption on its
consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," while retaining many of the requirements of these two
statements. Under SFAS No. 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from the ongoing operations of the entity
and the entity will not have any significant continuing involvement in the
operations prospectively. SFAS No. 144 did not materially change the methods
used by CERC to measure impairment losses on long-lived assets, but may result
in more future dispositions being reported as discontinued operations than would
previously have been permitted. CERC adopted SFAS No. 144 on January 1, 2002.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent.
SFAS No. 145 also requires that capital leases that are modified so that the
resulting lease agreement is classified as an operating lease be accounted for
as a sale-leaseback transaction. The changes related to debt extinguishment are
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting are effective for transactions occurring after May 15, 2002.
CERC has applied this guidance prospectively.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" (EITF No. 94-3). The principal difference between SFAS No.
146 and EITF No. 94-3 relates to the requirements for recognition of a liability
for costs associated with an exit or disposal activity. SFAS No. 146 requires
that a liability be recognized for a cost associated with an exit or disposal
activity when it is incurred. A liability is incurred when a transaction or
event occurs that leaves an entity little or no discretion to avoid the future
transfer or use of assets to settle the liability. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. In addition, SFAS No. 146 also requires that a liability for a
cost associated with an exit or disposal activity be recognized at its fair
value when it is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 with early application
encouraged. CERC will apply the provisions of SFAS No. 146 to all exit or
disposal activities initiated after December 31, 2002.

(3) DERIVATIVE INSTRUMENTS

Adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
after-tax increase in accumulated other comprehensive income of $38 million.

Cash Flow Hedges. During the nine months ended September 30, 2002, there
was no hedge ineffectiveness recognized in earnings from derivatives that are
designated and qualify as cash flow hedges. No component of the derivative
instruments' gain or loss was excluded from the assessment of effectiveness.
During the nine months ended September 30, 2002, a $0.9 million deferred loss
was recognized in earnings as a result of the discontinuance of a cash flow
hedge because it was no longer probable that the forecasted transaction would
occur due to credit problems of a customer. As of September 30, 2002, CERC
expects a gain of $8 million in accumulated other comprehensive income to be
reclassified into net income during the next twelve months.

6

(4) RELIANT ENERGY'S SEPARATION PLAN

In December 2000, Reliant Energy, Incorporated (Reliant Energy) transferred
a significant portion of its unregulated businesses to Reliant Resources, Inc.
(Reliant Resources), which, at the time, was a wholly owned subsidiary. Reliant
Resources conducted an initial public offering of approximately 20% of its
common stock in May 2001. In December 2001, Reliant Energy's shareholders
approved an agreement and plan of merger pursuant to which the following
occurred on August 31, 2002 (which is referred to herein as the Restructuring):

o CenterPoint Energy, Inc. (CenterPoint Energy) became the holding
company for the Reliant Energy group of companies;

o Reliant Energy and its subsidiaries, including CERC, became
subsidiaries of CenterPoint Energy; and

o each share of Reliant Energy common stock was converted into one share
of CenterPoint Energy common stock.

After the Restructuring, CenterPoint Energy distributed the shares of
common stock of Reliant Resources that it owned to CenterPoint Energy's
shareholders (which is referred to herein as the Distribution) in a tax-free
transaction.

Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the SEC to regulate, among other things, financings, sales
or acquisitions of assets and intra-system transactions.

In connection with the Restructuring, in order to enable CenterPoint Energy
to satisfy the requirements for an exemption from regulation as a registered
holding company under the 1935 Act, CenterPoint Energy has obtained authority
from its state regulators to divide the gas distribution businesses conducted by
CERC Corp.'s three unincorporated gas distribution divisions, CenterPoint Energy
Entex, CenterPoint Energy Arkla and CenterPoint Energy Minnegasco, among three
separate entities. The entity that would hold the CenterPoint Energy Entex
assets would also hold ownership of CERC Corp.'s natural gas pipelines and
gathering business. CenterPoint Energy must also receive approval of these
transactions under the 1935 Act. Although CERC Corp. expects this business
restructuring of CERC Corp. can be completed, CERC Corp. can provide no
assurance that this will, in fact, occur, or that CenterPoint Energy will
ultimately be exempt from registration under the 1935 Act. For further
information on the CERC Corp. restructuring, see "Our Business -- Status of
Business Separation" in Item 1 of the RERC Corp. Form 10-K/A, which is
incorporated by reference herein.

(5) REGULATORY MATTERS

(a) Arkansas Rate Case.

In November 2001, CenterPoint Energy Arkla (Arkla) filed a rate request in
Arkansas seeking rates to yield approximately $47 million in additional annual
gross revenue. On August 9, 2002, a settlement was approved by the Arkansas
Public Service Commission (APSC) which will result in an increase in base rates
of approximately $32 million annually. In addition, the APSC approved a gas main
replacement surcharge which is expected to provide $2 million of additional
gross revenue in 2003 and additional amounts in subsequent years. The new rates
included in the final settlement were effective with all bills rendered on and
after September 21, 2002.

(b) Oklahoma Rate Case.

On May 28, 2002, Arkla filed a request in Oklahoma to increase its base
rates by $13.7 million annually. In filed testimony, the Oklahoma Corporate
Commission staff and the Oklahoma Attorney General have recommended annual base
rate increases of $4.6 million and $7.5 million, respectively. Completion of the
case is expected sometime during late December 2002 with new rates becoming
effective in January 2003.

(c) City of Tyler, Texas Hearing on Gas Costs.

By letter to CenterPoint Energy Entex (Entex) dated July 31, 2002, the City
of Tyler, Texas expressed "serious concerns" regarding amounts that Entex has
paid for gas purchased for resale to residential and small commercial

7

customers in that city under supply agreements in effect since 1992. Entex's gas
costs for its Tyler system are recovered from customers pursuant to tariffs
approved by the City and filed with both the City and the Railroad Commission of
Texas. In the July 31 letter, the City forwarded various computations of what it
believes to be excessive costs ranging from approximately $2.8 million to $39.2
million. The City had called a hearing for September 25, 2002. The Company filed
a Petition for Injunction and Declaratory Relief in Travis County District Court
and a Petition for a Declaratory Order at the Railroad Commission of Texas. In
response to these filings, the City agreed to indefinitely postpone its hearing.
As reflected in its petitions, the Company believes (i) that all gas costs for
Entex's Tyler distribution system have been properly included and recovered from
customers pursuant to Entex's filed tariffs, (ii) that the City has no legal or
factual support for the statements made in its letter and (iii) that the City
has no authority to require or demand refunds of any amounts Entex has charged
its customers in the City of Tyler.

(6) GOODWILL AND INTANGIBLES

In July 2001, the FASB issued SFAS No. 142, which provides for a
nonamortization approach, whereby goodwill and certain intangibles with
indefinite lives will not be amortized into results of operations, but instead
will be reviewed periodically for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles with indefinite lives is more than its fair
value. On January 1, 2002, CERC adopted the provisions of the statement which
apply to goodwill and intangible assets acquired prior to June 30, 2001.

With the adoption of SFAS No. 142, CERC ceased amortization of goodwill as
of January 1, 2002. A reconciliation of previously reported net income to the
amounts adjusted for the exclusion of goodwill amortization follows:

The components of CERC's other intangible assets consist of the following:

CERC recognizes specifically identifiable intangibles when specific rights
and contracts are acquired. CERC amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives. CERC has no intangible assets with indefinite lives recorded as of
September 30, 2002. CERC amortizes other acquired intangibles on a straight-line
basis over the lesser of their contractual or estimated useful lives that range
from 47 to 75 years for land rights and 4 to 25 years for other intangibles.

Amortization expense for other intangibles for the three and nine months
ended September 30, 2001 was $0.2 million and $0.5 million, respectively.
Amortization expense for other intangibles for the three and nine months ended
September 30, 2002 was $0.3 million and $0.8 million, respectively. Estimated
amortization expense for the remainder of 2002 is approximately $0.3 million and
is approximately $2 million per year for the five succeeding fiscal years.

8

Goodwill as of September 30, 2002 by reportable business segment is as
follows (in millions):

CERC completed its review of goodwill impairment during the second quarter
of 2002 for its reporting units pursuant to SFAS No. 142. No impairment was
indicated as a result of this assessment.

(7) SHORT-TERM BORROWINGS

CERC Corp. has a receivables facility under which it sells certain of its
and its subsidiaries' customer accounts receivable. Advances under this facility
are reflected in the Consolidated Balance Sheets as short-term debt. In the
first quarter of 2002, CERC Corp. reduced this trade receivables facility from
$350 million to $150 million. Borrowings under the receivables facility
aggregating $196 million were repaid in January 2002 with proceeds from the
issuance of commercial paper under CERC Corp.'s $350 million revolving credit
facility and from the liquidation of short-term investments. The $150 million
CERC Corp. receivables facility expires on November 15, 2002. CERC Corp. is
currently in negotiations to replace it with a one-year receivables facility.
There can be no assurance that CERC Corp. will be successful in replacing this
facility or that the terms and conditions of any such facility would not be
less advantageous to CERC Corp. than the terms and conditions of the existing
receivables facility. At September 30, 2002, CERC Corp. had $2.5 million of
letters of credit outstanding under the revolving credit facility. CERC had no
commercial paper or bank loans outstanding at September 30, 2002. The $350
million CERC Corp. revolving credit facility expires March 31, 2003. CERC Corp.
expects to refinance borrowings under the revolving credit facility on or prior
to the March 31, 2003 expiration date of the facility. Refinancing may be
accomplished through the issuance of long-term debt, short-term debt or a
combination. See Note 10 for discussion of borrowing under the revolving credit
facility subsequent to September 30, 2002.

The weighted average interest rate on short-term borrowings as of
December 31, 2001 and September 30, 2002 was 2.04% and 1.75%, respectively.

(8) TRUST PREFERRED SECURITIES

A statutory business trust created by CERC Corp. (RERC Trust) has issued
convertible trust preferred securities, the terms of which, and the related
series of convertible junior subordinated debentures, are described below (in
millions):

For additional information regarding the convertible preferred securities,
see Note 7 to the RERC Corp. 10-K/A Notes, which is incorporated herein by
reference. The sole asset of the trust consists of convertible junior
subordinated debentures of CERC Corp. having an interest rate and maturity date
that correspond to the distribution rate and mandatory redemption date of the
convertible preferred securities, and a principal amount corresponding to the
common and convertible preferred securities issued by the trust.

9

(9) COMPREHENSIVE INCOME (LOSS)

The following table summarizes the components of total comprehensive income
(loss):

(10) RELATED PARTY TRANSACTIONS

From time to time, CERC has advanced money to, or borrowed money from,
CenterPoint Energy or its subsidiaries. As of December 31, 2001, CERC had net
short-term receivables, included in accounts and notes receivable-affiliated
companies, of $132 million, partially offset by net accounts payable of $93
million. As of September 30, 2002, CERC had net short-term borrowings, included
in accounts and notes payable-affiliated companies, of $340 million and net
accounts payable of $12 million. As of December 31, 2001, CERC had net long-term
borrowings, included in notes payable-affiliated companies, totaling $27
million. As of September 30, 2002, CERC had net long-term receivables, included
in notes receivable-affiliated companies, of $5 million. In August 2002, CERC
paid a dividend of $350 million to CenterPoint Energy in the form of an
intercompany note payable. In October 2002, CERC paid the intercompany note
payable. Substantially all of the funds for repayment were obtained from
borrowings under CERC Corp.'s revolving credit facility. For the three and nine
months ended September 30, 2002, CERC had net interest expense related to
affiliate borrowings of $2 million and $1 million, respectively.

In 2001 and 2002, CERC supplied natural gas to Reliant Energy Services,
Inc. (RES), a subsidiary of Reliant Resources. For the three and nine months
ended September 30, 2001, the sales and services by CERC to CenterPoint Energy
and its affiliates totaled $15 million and $148 million, respectively. For the
three and nine months ended September 30, 2002, the sales and services by CERC
to CenterPoint Energy and its affiliates totaled $24 million and $66 million,
respectively. Purchases of natural gas by CERC from CenterPoint Energy and its
affiliates were $85 million and $516 million for the three and nine months ended
September 30, 2001, respectively, and $28 million and $186 million for the three
and nine months ended September 30, 2002, respectively.

CenterPoint Energy provides some corporate services to CERC. The costs of
services have been directly charged to CERC using methods that management
believes are reasonable. These methods include negotiated usage rates, dedicated
asset assignment, and proportionate corporate formulas based on assets,
operating expenses and employees. These charges are not necessarily indicative
of what would have been incurred had CERC not been an affiliate. Amounts charged
to CERC for these services were $18 million and $55 million for the three and
nine months ended September 30, 2001, respectively, and $24 million and $76
million for the three and nine months ended September 30, 2002, respectively,
and are included primarily in operation and maintenance expenses.

The 1935 Act generally prohibits borrowings by CenterPoint Energy from its
subsidiaries, including CERC.

10

(11) ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS

(a) Environmental Matters.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company, Inc. (REGT), Reliant Energy
Pipeline Services, Inc., RERC, RES, other Reliant Energy entities and third
parties (Docket No. 460, 916-Div. "B"), in the 1st Judicial District Court,
Caddo Parish, Louisiana. The petition has now been supplemented five times. As
of July 29, 2002, there were 649 plaintiffs, a majority of whom are Louisiana
residents. In addition to the Reliant Energy entities, the plaintiffs have sued
the State of Louisiana through its Department of Environmental Quality, several
individuals, some of whom are present employees of the State of Louisiana, the
Bayou South Gas Gathering Company, L.L.C., Martin Timber Company, Inc., and
several trusts. Additionally on April 4, 2002, two plaintiffs filed a separate
suit with identical allegations against the same parties (Docket No. 465,
944-Div. "B") in the same court.

The suits allege that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer which lies beneath property owned or leased by certain of the defendants
and which is the sole or primary drinking water aquifer in the area. The primary
source of the contamination is alleged by the plaintiffs to be a gas processing
facility in Haughton, Bossier Parish, Louisiana known as the "Sligo Facility."
This facility was purportedly used for gathering natural gas from surrounding
wells, separating gasoline and hydrocarbons from the natural gas for marketing,
and transmission of natural gas for distribution. This site was originally
leased and operated by predecessors of REGT in the late 1940s and was operated
until Arkansas Louisiana Gas Company ceased operations of the plant in the late
1970s.

Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of September
30, 2002, CERC is unable to estimate the monetary damages, if any, that the
plaintiffs may be awarded in these matters.

Manufactured Gas Plant Sites. CERC and its predecessors operated a
manufactured gas plant (MGP) until 1960 adjacent to the Mississippi River in
Minnesota, formerly known as Minneapolis Gas Works (MGW). CERC has substantially
completed remediation of the main site other than ongoing water monitoring and
treatment. The manufactured gas was stored in separate holders. CERC is
negotiating clean-up of one such holder. There are six other former MGP sites in
the Minnesota service territory. Remediation has been completed on one site. Of
the remaining five sites, CERC believes that two were neither owned nor operated
by CERC. CERC believes it has no liability with respect to the sites it neither
owned nor operated.

At September 30, 2002, CERC had accrued $23 million for remediation of the
Minnesota sites. At September 30, 2002, the estimated range of possible
remediation costs was $10 million to $49 million. The cost estimates of the MGW
site are based on studies of that site. The remediation costs for the other
sites are based on industry average costs for remediation of sites of similar
size. The actual remediation costs will be dependent upon the number of sites
remediated, the participation of other potentially responsible parties (PRP), if
any, and the remediation methods used.

Issues relating to the identification and remediation of MGPs are common in
the natural gas distribution industry. CERC has received notices from the United
States Environmental Protection Agency and others regarding its status as a PRP
for other sites. Based on current information, CERC has not been able to
quantify a range of environmental expenditures for potential remediation
expenditures with respect to other MGP sites.

Other Minnesota Matters. At September 30, 2002, CERC had recorded accruals
of $5 million for other environmental matters in Minnesota for which remediation
may be required. At September 30, 2002, the estimated range of possible
remediation costs was $3 million to $8 million.

11

Mercury Contamination. CERC's pipeline and distribution operations have in
the past employed elemental mercury in measuring and regulating equipment. It is
possible that small amounts of mercury may have been spilled in the course of
normal maintenance and replacement operations and that these spills may have
contaminated the immediate area with elemental mercury. This type of
contamination has been found by CERC at some sites in the past, and CERC has
conducted remediation at these sites. It is possible that other contaminated
sites may exist and that remediation costs may be incurred for these sites.
Although the total amount of these costs cannot be known at this time, based on
experience by CERC and that of others in the natural gas industry to date and on
the current regulations regarding remediation of these sites, CERC believes that
the costs of any remediation of these sites will not be material to CERC's
financial position, results of operations or cash flows.

Potentially Responsible Party Notifications. From time to time CERC has
received notices from regulatory authorities or others regarding its status as a
PRP in connection with sites found to require remediation due to the presence of
environmental contaminants. Considering the information currently known about
such sites and the involvement of CERC in activities at these sites, CERC does
not believe that these matters will have a material adverse effect on CERC's
financial position, results of operations or cash flows.

(b) Other Legal Matters.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claim Act against RERC, REGT and Reliant Energy Field Services,
Inc. (REFS) alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the U.S. District Court for the District
of Columbia on grounds of improper joinder and lack of jurisdiction. As a
result, the various individual complaints were filed in numerous courts
throughout the country. This case was consolidated, together with the other
similar False Claim Act cases filed and transferred to the District of Wyoming.
Motions to dismiss were denied. The defendants intend to vigorously contest this
case.

In addition, RERC, REGT, REFS and Mississippi River Transmission
Corporation (MRT) have been named as defendants in a class action filed in May
1999 against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants, including certain Reliant Energy entities, for
more than 25 years. The plaintiffs seek compensatory damages, along with
statutory penalties, treble damages, interest, costs and fees. The action is
currently pending in state court in Stevens County, Kansas. Plaintiffs initially
sued RES, but that company was dismissed without prejudice on June 8, 2001.
Other Reliant Energy entities that were misnamed or duplicative have also been
dismissed. MRT and REFS have filed motions to dismiss for lack of personal
jurisdiction and are currently responding to discovery on personal jurisdiction.
All of the defendants have joined in a motion to dismiss.

The defendants plan to raise significant affirmative defenses based on the
terms of the applicable contracts, as well as on the broad waivers and releases
in take or pay settlements that were granted by the producer-sellers of natural
gas who are putative class members.

Other Proceedings. On October 2, 2002, John and Heather Maher filed a
suit in the 23rd Judicial District Court in Wharton County, Texas, against
CenterPoint Energy, CERC, Entex Gas Marketing Company, and others alleging
fraud, violations of the Texas Deceptive Trade Practices Act, violations of the
Texas Utility Code and civil conspiracy. The plaintiffs seek class
certification, but no class has been certified at this time. The plaintiffs
allege that defendants inflated the prices charged to consumers for the sale of
natural gas for residential purposes. The plaintiffs seek actual, exemplary and
statutory damages and civil penalties. CenterPoint Energy has been served but
has not yet filed an answer. The ultimate outcome of the lawsuit cannot be
predicted with any degree of certainty at this time. However, CenterPoint Energy
believes, based on its analysis to date of the claims asserted in these lawsuits
and the underlying facts, that resolution of these lawsuits will not have a
material adverse effect on its financial condition, results of operations, or
cash flows.

Other. CERC is a party to litigation (other than that specifically noted)
which arises in the normal course of business. Management regularly analyzes
current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effects, if any, from the disposition of these matters will not have a
material adverse effect on CERC's financial position, results of operations or
cash flows.

(12) REPORTABLE BUSINESS SEGMENTS

Because CERC Corp. is a wholly owned subsidiary of CenterPoint Energy,
CERC's determination of reportable business segments considers the strategic
operating units under which CenterPoint Energy manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments.

12

CERC's reportable business segments include the following: Natural Gas
Distribution, Pipelines and Gathering and Other Operations. For descriptions of
the reportable business segments, see Note 13 to the RERC Corp. 10-K/A Notes,
which is incorporated herein by reference.

Beginning in the first quarter of 2002, CERC began to evaluate performance
on an earnings (loss) before interest expense, distribution on trust preferred
securities and income taxes (EBIT) basis. Prior to 2002, CERC evaluated
performance on the basis of operating income. EBIT, as defined, is shown because
CERC believes it is a measure of financial performance that may be used as a
means to analyze and compare companies on the basis of operating performance.
CERC expects that some analysts and investors will want to review this measure
when evaluating CERC. EBIT is not defined under accounting principles generally
accepted in the United States (GAAP), and should not be considered in isolation
or as a substitute for a measure of performance prepared in accordance with GAAP
and is not indicative of operating income from operations as determined under
GAAP. Reportable business segments from previous years have been restated to
conform to the 2002 presentation. Additionally, CERC's computation of EBIT may
not be comparable to other similarly titled measures computed by other
companies, because all companies do not calculate it in the same fashion.

The following table summarizes financial data for the reportable business
segments:

Reconciliation of Operating Income to EBIT and EBIT to Net Income:

14

ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES

The following narrative analysis should be read in combination with CERC
Corp.'s Interim Financial Statements and notes contained in this Form 10-Q.

In December 2000, Reliant Energy, Incorporated (Reliant Energy) transferred
a significant portion of its unregulated businesses to Reliant Resources, Inc.
(Reliant Resources), which, at the time, was a wholly owned subsidiary of
Reliant Energy. Reliant Resources conducted an initial public offering of
approximately 20% of its common stock in May 2001. In December 2001, Reliant
Energy's shareholders approved an agreement and plan of merger pursuant to which
the following occurred on August 31, 2002 (which is referred to herein as the
Restructuring):

o CenterPoint Energy, Inc. (CenterPoint Energy) became the holding
company for the Reliant Energy group of companies;

o Reliant Energy and its subsidiaries, including CERC, became
subsidiaries of CenterPoint Energy; and

o each share of Reliant Energy common stock was converted into one share
of CenterPoint Energy common stock.

After the Restructuring, CenterPoint Energy distributed the shares of
common stock of Reliant Resources that it owned to CenterPoint Energy's
shareholders (which is referred to herein as the Distribution) in a tax-free
transaction.

Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, financings, sales or acquisitions of assets and intra-system
transactions.

In connection with the Restructuring, in order to enable CenterPoint Energy
to satisfy the requirements for an exemption from regulation as a registered
holding company under the 1935 Act, CenterPoint Energy has obtained authority
from its state regulators to divide the gas distribution businesses conducted by
CERC Corp.'s three unincorporated gas distribution divisions, CenterPoint Energy
Entex, CenterPoint Energy Arkla and CenterPoint Energy Minnegasco, among three
separate entities. The entity that would hold the CenterPoint Energy Entex
assets would also hold ownership of CERC Corp.'s natural gas pipelines and
gathering business. CenterPoint Energy must also receive approval of these
transactions under the 1935 Act. Although CERC Corp. expects this business
restructuring of CERC Corp. may be completed, CERC Corp. can provide no
assurance that this will, in fact, occur, or that CenterPoint Energy will
ultimately be exempt from registration under the 1935 Act. For further
information on the CERC Corp. restructuring, see "Our Business -- Status of
Business Separation" in Item 1 of the RERC Corp. Form 10-K/A, which is
incorporated by reference herein.

CERC Corp. meets the conditions specified in General Instruction H(1)(a)
and (b) to Form 10-Q and is therefore permitted to use the reduced disclosure
format for wholly owned subsidiaries of reporting companies. Accordingly, CERC
Corp. has omitted from this report the information called for by Item 3
(Quantitative and Qualitative Disclosures About Market Risk) of Part I and the
following Part II items of Form 10-Q: Item 2 (Changes in Securities and Use of
Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of
Matters to a Vote of Security Holders). The following discussion explains
material changes in the amount of revenue and expense items of CERC between the
three months and nine months ended September 30, 2002 and the three months and
nine months ended September 30, 2001. Reference is made to Management's
Narrative Analysis of the Results of Operations of Reliant Energy Resources
Corp. and its Subsidiaries in Item 7 of the RERC Corp. Form 10-K/A, which is
incorporated by reference herein.

15

CONSOLIDATED RESULTS OF OPERATIONS

For the third quarter of 2002, CERC's net loss was $5 million compared to a
net loss of $27 million for the same period in 2001. The $22 million decrease
was primarily due to:

o a significant reduction in bad debt expense in the Natural Gas
Distribution business segment as a result of improved collections and
lower gas prices in 2002; and

o decreased amortization expense of approximately $12 million as a
result of the discontinuance of goodwill amortization in accordance
with Statement of Financial Accounting Standards No. 142, "Accounting
for Goodwill and Intangible Assets" (SFAS No. 142).

For the first nine months of 2002, CERC's net income was $72 million
compared to net income of $19 million for the same period in 2001. The $53
million increase was primarily due to:

o a significant reduction in bad debt expense in the Natural Gas
Distribution business segment as a result of improved collections and
lower gas prices in 2002;

o decreased amortization expense of approximately $37 million as a
result of the discontinuance of goodwill amortization in accordance
with SFAS No. 142 as discussed above; and

o changes in estimates of unbilled revenues and deferred gas costs which
negatively impacted the second quarter of 2001.

The above items were partially offset by milder weather during the first
nine months of 2002 compared to 2001.

CERC's operating revenues for the three and nine months ended September 30,
2002, were $0.7 billion and $2.8 billion, respectively, compared to $0.7 billion
and $4.1 billion, respectively, for the same periods in 2001. The year to date
decrease was primarily due to significantly milder weather and lower gas prices
in 2002 compared to 2001, partially offset by customer growth in 2002.

CERC's operating expenses for the three and nine months ended September
30, 2002, were $0.7 billion and $2.6 billion, respectively, compared to $0.7
billion and $3.9 billion, respectively, for the same periods in 2001. The year
to date decrease was primarily due to the same reasons for the decreases in
revenues discussed above.

CERC recorded income tax expense of $3 million on a pre-tax loss of $2
million for the three months ended September 30, 2002, versus a tax benefit of
$6 million on a pre-tax loss of $33 million for the three months ended September
30, 2001. The increase in tax expense is the result of higher state tax expense.

CERC's effective tax rate for the first nine months of 2002 was 41%
compared to 66% for the same period in 2001. The decrease in the effective rate
was primarily the result of an increase in pre-tax income, which diluted the

16

impact of the permanent items on CERC's effective tax rate, and a decrease in
the effective state tax rate on CERC's pre-tax income.

Seasonality and Other Factors. CERC's results of operations are affected by
seasonal fluctuations in the demand for and, to a lesser extent, the price of
natural gas. CERC's results of operations are also affected by, among other
things, the actions of various federal and state governmental authorities having
jurisdiction over rates charged by CERC, competition in CERC's various business
operations, debt service costs and income tax expense.

For a discussion of certain other factors that may affect CERC's future
earnings, please read "Management's Narrative Analysis of Financial Condition
and Results of Operations of Reliant Energy Resources Corp. and its Consolidated
Subsidiaries -- Certain Factors Affecting Our Future Earnings -- Factors
Affecting the Results of RERC Operations" in the RERC Form 10-K/A, which
information is incorporated herein by reference.

LIQUIDITY

Long-Term Debt and Trust Preferred Securities. Of the $1.95 billion of CERC
Corp. debt outstanding at September 30, 2002, approximately $1.8 billion
principal amount is senior and unsecured and, approximately $79.4 million
principal amount with a final maturity of 2012 is subordinated. In addition, the
aggregate principal amount of CERC Corp. debentures relating to the trust
preferred securities, issued by a statutory business-trust subsidiary of CERC
Corp., are subordinated.

The issuance of secured debt by CERC Corp. is limited under an indenture
between CERC Corp. (successor to Arkla, Inc.) and Citibank N.A. dated December
1, 1986 relating to approximately $145 million principal amount of debt maturing
in 2006 which provides for equal and ratable security for such debt in the event
debt secured by "principal property" (as defined in the indenture) is issued.
Other than this indenture, agreements relating to the issuance of long-term debt
do not restrict the issuance of secured debt. Additionally, our $350 million
credit agreement expiring in March 2003 prohibits the issuance of debt secured
by "principal property". The definition is similar to that contained in the
indenture described above. Finally, our ability to issue secured debt may be
limited under the terms of agreements entered into by CenterPoint Energy.

Short-Term Debt. During the balance of 2002 and 2003, our bank facilities
are scheduled to terminate on the dates indicated below.

The revolving credit facility contains various business and financial
covenants including a covenant restricting CERC Corp.'s debt as a percentage of
its total capitalization to 55%. At September 30, 2002, CERC Corp.'s debt to
total capitalization ratio was 53.7%.

We expect to refinance borrowings under the revolving credit facility at
CERC Corp. on or prior to the March 31, 2003 expiration date of the facility.
Refinancing may be accomplished through the issuance of long-term debt,
short-term debt or a combination.

CERC Corp. is currently in negotiations to replace the $150 million
receivables facility with a new facility having a one-year term. There can be no
assurance that CERC Corp. will be successful in replacing this facility or that
the terms and conditions of any such facility would not be less advantageous to
CERC Corp. than the terms and conditions of the existing receivables facility.

Capital Requirements. We anticipate investing up to $1.3 billion in capital
expenditures in the years 2002 through 2006, including $188 million expended
during the nine months ended September 30, 2002. We anticipate capital
expenditures to be approximately $259 million and $267 million in 2002 and 2003,
respectively.

Cash Requirements in 2002 and 2003. Our liquidity and capital requirements
are affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash
requirements during the fourth quarter of 2002 include the following:

17

o approximately $71 million of capital expenditures;

o the repurchase of $120 million of receivables under a $150 million
receivables facility or the cessation of sales of receivables unless
a replacement facility is arranged; and

Our principal cash requirements during 2003 include the following:

o approximately $267 million of capital expenditures;

o the replacement of a $350 million bank facility or the refinancing of
borrowings under such facility; and

o remarketing or refinancing of $500 million of debt.

We expect to meet our capital requirements with cash flows from operations,
short-term borrowings and proceeds from debt offerings. We believe that our
current liquidity, along with anticipated cash flows from operations and
proceeds from short-term borrowings, including the renewal, extension or
replacement of existing bank facilities, and anticipated sales of securities in
the capital markets will be sufficient to meet our cash needs.

At September 30, 2002, $50 million principal amount of debt securities was
registered with the SEC. These debt securities may be sold in a public offering.
The amount of any debt issuance, whether registered or unregistered, is expected
to be affected by the market's perception of our creditworthiness, market
conditions and factors affecting our industry. Proceeds from the sales of
securities are expected to be used primarily to refinance existing long-term and
short-term debt.

Impact on Liquidity of a Downgrade in Credit Ratings. As of November 4,
2002, Moody's Investors Service, Inc. (Moody's), Standard & Poor's, a division
of The McGraw Hill Companies (S&P) and Fitch, Inc. (Fitch) had assigned the
following credit ratings to senior debt of CERC Corp.:

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

(1) A "negative" outlook from Moody's reflects concerns over the next
12 to 18 months which will either lead to a review for a
potential downgrade or a return to a stable outlook.

(2) S&P's CreditWatch "negative" indicates a potential for a
downgrade within a relatively short period of time usually
related to a specific event.

(3) A "negative" outlook from Fitch encompasses a one- to two-year
horizon as to the likely rating direction.

We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. Any future reduction or withdrawal of one
or more of our credit ratings could have a material adverse impact on our
ability to obtain short- and long-term financing, the cost of such financings
and the execution of our commercial strategies.

A decline in credit ratings would increase commitment fees and borrowing
costs under our existing bank facilities. A decline in credit ratings would also
increase the interest rate on long-term debt to be issued in the capital markets
and would negatively impact our ability to complete capital market transactions.

18

Our bank facilities contain "material adverse change" clauses that could
impact our ability to borrow under these facilities. The "material adverse
change" clause in our revolving credit facility applies to new borrowings under
the facility and relates to changes since the most recent financial statements
delivered to the banks. Financial statements are delivered quarterly.

The $150 million receivables facility of CERC Corp. requires the
maintenance of credit ratings of at least BB from S&P and Ba2 from Moody's.
Receivables would need to be repurchased or receivables would cease to be sold
in the event a credit rating fell below the threshold. The credit thresholds
contained in the receivables facility which is expected to replace the existing
facility may differ.

CenterPoint Energy Gas Resources Corp., a wholly owned subsidiary,
provides comprehensive natural gas sales and services to industrial and
commercial customers who are primarily located within or near the territories
served by our pipelines and distribution subsidiaries. In order to hedge its
exposure to natural gas prices, CenterPoint Energy Gas Resources Corp. has
agreements with provisions standard to the industry that establish credit
thresholds and then require a party to provide additional collateral on two
business days' notice when that party's rating or the rating of a credit
support provider for that party (CERC Corp. in this case), falls below those
levels. The senior unsecured debt of CERC Corp. is currently rated BBB by S&P
and Ba1 by Moody's. Based on these ratings, we estimate that unsecured credit
limits extended to CenterPoint Energy Gas Resources Corp. by counterparties
could aggregate $25 million; however, utilized credit capacity is significantly
lower.

Cross Defaults. Our debentures and borrowings generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debentures, revolving credit facility or receivables facility. A payment default
at CERC Corp. exceeding $50 million will cause a default under CenterPoint
Energy's $3.85 billion bank facility.

Pension and Postretirement Benefits Funding. We make contributions to
achieve adequate funding of parent company sponsored pension and
postretirement benefits in accordance with applicable regulations and rate
orders. Due to the decline in current market value of the pension plan's assets,
the value of the plan's assets is less than our accumulated pension benefit
obligation. As a result, we may be required to record a non-cash minimum pension
liability adjustment to other comprehensive income during the fourth quarter of
2002, which could be material. Recording a minimum liability adjustment will
not effect our results of operations or our ability to meet any existing
financial covenants related to our debt facilities. Additionally, we are not
required to make any pension contributions in 2002 and 2003.

Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:

o the need to provide cash collateral in connection with certain
contracts;

o acceleration of payment dates on certain gas supply contracts under
certain circumstances;

o various regulatory actions

Money Pool. We participate in a "money pool" through which we and certain
of our affiliates can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The money pool's net funding requirements are generally met with
short-term borrowings of, and/or cash held by, CenterPoint Energy. The terms of
the money pool are in accordance with requirements applicable to registered
public utility holding companies under the 1935 Act.

Capitalization. Factors affecting our capitalization include:

o covenants in our bank facilities and other borrowing agreements; and

o limitations imposed on us because our parent is a registered holding
company.

In connection with our parent company's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
CERC Corp.'s external borrowings to $2.7 billion, and the SEC has placed
limitations on our dividends and requires that common equity as a percentage of
our total capitalization must be at least 30% after the payment of such
dividends.

Restructuring. Our parent company has obtained authority from its state
regulators to restructure the businesses of CERC in order to satisfy the
requirements for an exemption from regulation as a registered holding company
under the 1935 Act. Although it is expected that this business restructuring of
CERC Corp. may be completed, we can provide no assurance that it will, in fact,
occur, or that our parent will be exempt from registration under the 1935 Act.

19

Relationship with CenterPoint Energy. We are a wholly-owned subsidiary of
CenterPoint Energy. As a result of this relationship, the financial condition
and liquidity of our parent company could affect our access to capital, our
credit standing and our financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" (SFAS No. 141). SFAS No. 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting and broadens the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against these
new criteria and may result in certain intangibles being transferred to
goodwill, or alternatively, amounts initially recorded as goodwill may be
separately identified and recognized apart from goodwill. We adopted the
provisions of the statement which apply to goodwill and intangible assets
acquired prior to June 30, 2001 on January 1, 2002. The adoption of SFAS No. 141
did not have a material impact on our historical results of operations or
financial position.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
a liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged. SFAS No. 143 requires
entities to record a cumulative effect of change in accounting principle in the
income statement in the period of adoption. We plan to adopt SFAS No. 143 on
January 1, 2003, and are in the process of determining the effect of adoption on
our consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," while retaining many of the requirements of these two
statements. Under SFAS No. 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from the ongoing operations of the entity
and the entity will not have any significant continuing involvement in the
operations prospectively. SFAS No. 144 did not materially change the methods we
use to measure impairment losses on long-lived assets, but may result in more
future dispositions being reported as discontinued operations than would
previously have been permitted. We adopted SFAS No. 144 on January 1, 2002.

See Note 3 for a discussion of our adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133) on
January 1, 2001. See Note 6 for a discussion of our adoption of SFAS No. 142
"Goodwill and Other Intangible Assets" (SFAS No. 142) on January 1, 2002.

20

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent.
SFAS No. 145 also requires that capital leases that are modified so that the
resulting lease agreement is classified as an operating lease be accounted for
as a sale-leaseback transaction. The changes related to debt extinguishment are
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting are effective for transactions occurring after May 15, 2002.
We have applied this guidance prospectively.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" (EITF No. 94-3). The principal difference between SFAS No.
146 and EITF No. 94-3 relates to the requirements for recognition of a liability
for costs associated with an exit or disposal activity. SFAS No. 146 requires
that a liability be recognized for a cost associated with an exit or disposal
activity when it is incurred. A liability is incurred when a transaction or
event occurs that leaves an entity little or no discretion to avoid the future
transfer or use of assets to settle the liability. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. In addition, SFAS No. 146 also requires that a liability for a
cost associated with an exit or disposal activity be recognized at its fair
value when it is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 with early application
encouraged. We will apply the provisions of SFAS No. 146 to all exit or disposal
activities initiated after December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

21

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a description of legal proceedings affecting CERC, please review Note
11 to CERC's Interim Financial Statements, Item 3 of the RERC Corp. Form 10-K/A
and Note 10 to the RERC Corp. 10-K/A Notes, which are incorporated herein by
reference.

ITEM 5. OTHER INFORMATION.

Forward-Looking Statements. From time to time, CERC Corp. makes statements
concerning its expectations, beliefs, plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are not historical facts. These statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Actual results may differ materially from those expressed or implied by
these statements. You can generally identify the forward-looking statements by
the words "anticipate," "believe," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should," "will," "forecast,"
"goal," "objective," "projection," or other similar words.

CERC Corp. has based its forward-looking statements on its management's
beliefs and assumptions based on information available to its management at the
time the statements are made. CERC Corp. cautions you that assumptions, beliefs,
expectations, intentions and projections about future events may and often do
vary materially from actual results. Therefore, CERC Corp. cannot assure you
that actual results will not differ materially from those expressed or implied
by its forward-looking statements.

The following are some of the factors that could cause actual results to
differ materially from those expressed or implied in forward-looking statements:

o state and federal legislative and regulatory actions or developments,
constraints placed on our activities or business by the Public Utility
Holding Company Act of 1935, changes in or application of environmental
and other laws or regulations applicable to other aspects of our
business;

o the successful and timely completion of our capital projects;

o industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;

o our pursuit of potential business strategies, including acquisitions
or disposition of assets;

o changes in business strategy or development plans;

o changes in interest rates or rates of inflation;

o unanticipated changes in operating expenses and capital expenditures;

o weather variations and other natural phenomena;

o the timing and extent of changes in commodity prices, particularly
natural gas;

o commercial bank and financial market conditions, our access to
capital, the costs of such capital and the results of our financing
and refinancing efforts, including availability of funds in the debt
capital markets for transmission and distribution companies;

o actions by rating agencies;

o legal and administrative proceedings and settlements;

o changes in tax laws;

22

o inability of various counterparties to meet their obligations with
respect to our financial instruments;

o any lack of effectiveness of our disclosure controls and procedures;

o changes in technology;

o significant changes in our relationship with our employees, including
the availability of qualified personnel and the potential adverse
effects if labor disputes or grievances were to occur;

o acts of terrorism or war, including any direct or indirect effect on
our business resulting from terrorist attacks such as occurred on
September 11, 2001 or any similar incidents or responses to those
incidents;

o the availability and price of insurance;

o political, legal regulatory and economic conditions and developments
in the United States; and

o other factors we discuss in the RERC Corp. Form 10-K/A, including
those outlined in "Management's Narrative Analysis of Results of
Operations of Reliant Energy Resources Corp. and its Consolidated
Subsidiaries -- Certain Factors Affecting Our Future Earnings."

You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and CERC Corp. undertakes no obligation to publicly update or revise
any forward-looking statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

The following exhibits are filed herewith:

Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by
reference to a prior filing as indicated.

(b) Reports on Form 8-K.

On August 14, 2002, we filed a Current Report on Form 8-K dated August 14,
2002, furnishing certifications of our financial statements by our Chief
Executive Officer and Chief Financial Officer related to our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.

On September 3, 2002, we filed a Current Report on Form 8-K dated August
31, 2002, to announce the restructuring of Reliant Energy, Incorporated.

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CENTERPOINT ENERGY RESOURCES CORP.

By: /s/ James S. Brian
------------------------------
James S. Brian
Senior Vice President and
Chief Accounting Officer

Date: November 14, 2002

25

CERTIFICATIONS

I, David M. McClanahan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CenterPoint
Energy Resources Corp.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 14, 2002

By: /s/ David M. McClanahan
-----------------------------------------
David M. McClanahan
President and Chief Executive Officer

26

I, Gary L. Whitlock, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CenterPoint
Energy Resources Corp.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 14, 2002

By: /s/ Gary L. Whitlock
--------------------------------------------------------
Gary L. Whitlock
Executive Vice President and Chief Financial Officer

27

EXHIBIT INDEX

Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by
reference to a prior filing as indicated.