CENTERPOINT ENERGY INC - 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 _______________.

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Commission file number 1-31447

CENTERPOINT ENERGY, INC.

(Exact name of registrant as specified in its charter)

Texas 74-0694415
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

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

(713) 207-1111
(Registrant's telephone number, including area code)

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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 8, 2002, CenterPoint Energy, Inc. had 304,338,469 shares of
common stock outstanding, including 5,505,577 ESOP shares not deemed outstanding
for financial statement purposes and excluding 166 shares held as treasury
stock.

CENTERPOINT ENERGY, INC.
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 (unaudited)
Three and Nine Months Ended September 30, 2001 and 2002 ............................1
Consolidated Balance Sheets
December 31, 2001 and September 30, 2002 (unaudited)................................2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 2001 and 2002 (unaudited)...........................4
Notes to Unaudited Consolidated Financial Statements.....................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations of CenterPoint Energy and Subsidiaries.......................................30
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................51
Item 4. Controls and Procedures.............................................................52

PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................53
Item 5. Other Information...................................................................53
Item 6. Exhibits and Reports on Form 8-K....................................................54

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See Notes to the Company's Interim Financial Statements

1

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)

ASSETS

See Notes to the Company's Interim Financial Statements

2

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

See Notes to the Company's Interim Financial Statements

3

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)

See Notes to the Company's Interim Financial Statements

4

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) BACKGROUND AND BASIS OF PRESENTATION

Included in this Quarterly Report on Form 10-Q (Form 10-Q) for CenterPoint
Energy, Inc. (CenterPoint Energy), together with its subsidiaries (collectively,
the Company), are CenterPoint Energy's consolidated interim financial statements
and notes (Interim Financial Statements) including these companies' 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 Reliant Energy, Incorporated
(Reliant Energy) (Reliant Energy Form 10-K/A) for the year ended December 31,
2001 which was filed with the Securities and Exchange Commission (SEC) on July
5, 2002, and the Quarterly Reports on Form 10-Q of Reliant Energy for the
quarters ended March 31, 2002 (First Quarter 10-Q) and June 30, 2002 (Second
Quarter 10-Q) (commission File No. 1-3187).

RESTRUCTURING

CenterPoint Energy is a public utility holding company, created on August
31, 2002 as part of a corporate restructuring of Reliant Energy that implemented
certain requirements of the Texas electric restructuring law described below. In
December 2000, 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 steps occurred on August 31,
2002 (which is referred to herein as the Restructuring):

o CenterPoint Energy became the holding company for the Reliant Energy
group of companies;

o Reliant Energy and its subsidiaries became subsidiaries of CenterPoint
Energy; and

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

On September 5, 2002, CenterPoint Energy announced that its Board of
Directors had declared a distribution of all of the shares of Reliant Resources
common stock owned by CenterPoint Energy to its common shareholders on a
pro rata basis (the Distribution). The Distribution was made on September 30,
2002 to shareholders of record of CenterPoint Energy common stock as of the
close of business on September 20, 2002.

CenterPoint Energy is the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. The Company's
wholly owned operating subsidiaries own and operate electric generation plants,
electric transmission and distribution facilities, natural gas distribution
facilities and natural gas pipelines. The Company is subject to regulation as a
"registered holding company" under the Public Utility Holding Company Act of
1935 (1935 Act). The Company's wholly owned subsidiaries include:

o CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
engages in the electric transmission and distribution business in a
5,000-square mile area of the Texas Gulf Coast that includes Houston.

o Texas Genco Holdings, Inc. (Texas Genco), which owns and operates the
Texas generating plants formerly belonging to the integrated electric
utility that was a part of Reliant Energy. The Company intends to
distribute approximately 19% of the outstanding common stock of Texas
Genco to the Company's shareholders in late 2002 or early 2003.

o CenterPoint Energy Resources Corp. (CERC Corp., together with its
subsidiaries, CERC), formerly Reliant Energy Resources Corp. (RERC
Corp., together with its subsidiaries, RERC), which owns gas
distribution systems that together form one of the United States'
largest natural gas distribution operations in terms of customers
served. Through wholly owned subsidiaries, CERC owns two interstate
natural gas pipelines and gas gathering systems and provides various
ancillary services.

5

In June 1999, the Texas legislature enacted a law that substantially
amended the regulatory structure governing electric utilities in Texas in order
to implement retail electric competition (Texas electric restructuring law).
Under this law, the power generation and retail sales functions of integrated
utilities in Texas ceased to be subject to traditional cost-based regulation and
utilities were required to separate their generation, retail and transmission
and distribution functions into separate units. Since January 1, 2002, Texas
Genco has been selling generation capacity, energy and ancillary services to
wholesale purchasers at prices determined by the market. The Company's
transmission and distribution services remain subject to rate regulation. The
Company does not engage in retail electric sales.

BASIS OF PRESENTATION

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.

The 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 the Company's Statements of Consolidated Income are not necessarily
indicative of amounts expected for a full year period due to the effects of,
among other things, (a) seasonal fluctuations in demand for energy and energy
services, (b) changes in energy commodity prices, (c) timing of maintenance and
other expenditures and (d) acquisitions and dispositions of businesses, assets
and other interests. In addition, certain amounts from the prior year have been
reclassified to conform to the Company's presentation of financial statements in
the current year. These reclassifications do not affect the earnings of the
Company.

The Interim Financial Statements have been prepared to reflect the effects
of the Restructuring and Distribution as described above on the CenterPoint
Energy financial statements. The Interim Financial Statements present the
Reliant Resources businesses (previously reported as the Wholesale Energy,
European Energy, and Retail Energy business segments and related corporate
costs) as discontinued operations, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" (SFAS No. 144). Accordingly, the Interim Financial
Statements reflect these operations as discontinued operations for the three and
nine months ended September 30, 2001 and 2002.

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

Reliant Energy 10-K/A Notes: Note 2(e) (Long-Lived Assets and Intangibles),
Note 2(f) (Regulatory Assets and Liabilities), Note 4 (Regulatory Matters),
Note 5 (Derivative Financial Instruments), Note 8 (Indexed Debt Securities
(ACES and ZENS) and AOL Time Warner Securities) and Note 14 (Commitments
and Contingencies).

For information regarding certain legal, tax and regulatory proceedings and
environmental matters, see Note 13.

RETAIL ELECTRIC DEREGULATION

During 2001, the Electric Operations business segment was comprised of
regulated electric utility operations in Texas, including generation,
transmission and distribution, and retail electric sales. As of January 1, 2002,
with the opening of the Texas market to full retail electric competition,
generation and retail sales were deregulated. Retail electric sales involve the
sale of electricity and related services to end users of electricity and were
included as part of the bundled regulated electric utility business prior to
2002. Although the Company's former retail sales business is now conducted by
Reliant Resources, retail customers remained regulated customers of Reliant
Energy HL&P, an unincorporated division of Reliant Energy prior to the
restructuring of Reliant Energy, through the date of their first

6

meter reading in January 2002. Sales of electricity to retail customers in 2002
prior to this meter reading are reflected in the Electric Transmission and
Distribution business segment.

Beginning in 2002, CenterPoint Energy is reporting two new business
segments for what was the former Electric Operations business segment:

o Electric Transmission and Distribution; and

o Electric Generation.

The transmission and distribution function is now reported separately in
the Electric Transmission and Distribution business segment, which also includes
all revenues and the effects from generation-related regulatory assets
recoverable by the regulated utility, including the Excess Cost Over Market
(ECOM) true-up component of stranded costs. The previously regulated generation
operations in Texas, Texas Genco, are being reported in the new Electric
Generation business segment. For additional information regarding regulatory
matters affecting the Company's electric segments, see Note 4 to the Reliant
Energy 10-K/A Notes, which note is incorporated herein by reference, and Note 4
below.

(2) DISCONTINUED OPERATIONS

On September 30, 2002, CenterPoint Energy distributed to its shareholders
240 million shares of Reliant Resources common stock, which represented
CenterPoint Energy's approximately 83% ownership interest in Reliant Resources,
by means of a tax-free spin-off in the form of a dividend.

Holders of CenterPoint Energy common stock on the record date received
0.788603 shares of Reliant Resources common stock for each share of CenterPoint
Energy stock that they owned on the record date. The total value of the
distribution, after the impairment charge discussed below, was $847 million, or
$2.84 per diluted share of CenterPoint Energy stock.

As a result of the spin-off of Reliant Resources, CenterPoint Energy
recorded a non-cash loss on disposal of discontinued operations of $4.3 billion
in the third quarter of 2002. This loss represents the excess of the carrying
value of CenterPoint Energy's net investment in Reliant Resources over the
market value of Reliant Resources' common stock. CenterPoint Energy's financial
statements reflect Reliant Resources as "discontinued operations" for all
periods shown. Through the date of the spin-off, Reliant Resources' assets and
liabilities are shown in CenterPoint Energy's balance sheet as "current and
non-current assets and liabilities of discontinued operations".

Reliant Resources' revenues included in discontinued operations for the
three months ended September 30, 2001 and 2002 were $2.5 billion and $5.4
billion, respectively, and $5.7 billion and $9.5 billion for the nine months
ended September 30, 2001 and 2002, respectively. Income from discontinued
operations for the three months ended September 30, 2001 and 2002 is reported
net of income tax expense of $150 million and $142 million, respectively, and
$301 million and $290 million for the nine months ended September 30, 2001 and
2002, respectively. These amounts have been restated to reflect Reliant
Resources' adoption of Emerging Issues Task force (EITF) Issue No. 02-3,
"Recognition and Reporting Gains and Losses on Energy Trading Contracts under
Issues No. 98-10 and 00-17."

Restatement

Also as more fully described in Note 1 to the Reliant Energy 10-K/A Notes,
which is incorporated herein by reference, on May 9, 2002, Reliant Resources
determined that it had engaged in same-day commodity trading transactions
involving purchases and sales with the same counterparty for the same volume at
substantially the same price (round trip trades). The personnel who effected
these transactions apparently did so with the sole objective of increasing
volumes. Reliant Resources commenced a review to quantify the amount and assess
the impact of these trades. The Audit Committees of each of the Board of
Directors of Reliant Resources and Reliant Energy (Audit Committees) also
directed an internal investigation by outside legal counsel, with assistance by
outside accountants, of the facts and circumstances relating to the round trip
trades and related matters.

Prior to the third quarter of 2002, Reliant Resources reported all trading,
marketing and risk management services transactions on a gross basis with such
transactions being reported in revenues and expenses except primarily for
financial gas transactions such as swaps. Therefore, the round trip trades were
reflected in both the Company's revenues and expenses. The round trip trades
should not have been recognized in revenues or expenses (i.e., they should have
been reflected on a net basis). However, since the round trip trades were done
at the same volume and substantially the same price, they had no impact on the
Company's reported cash flows, operating income or net income.

Based on its review, Reliant Resources determined that it engaged in such
round trip trades in 1999, 2000 and 2001. The results of the Audit Committees'
investigation were consistent with the results of Reliant Resources' review. The
round trip trades were for 20 million megawatt hours (MWh) of power and 61
million MWh of power for the three and nine months ended September 30, 2001,
respectively, and 46 Billion cubic feet (Bcf) of natural gas for the nine months
ended September 30, 2001.

7

These round trip trades, collectively, had the effect of increasing each of
revenues and purchased power expense by $847 million for the three months ended
September 30, 2001 and increasing revenues, fuel and cost of gas sold expense
and purchased power expense by $3.5 billion, $180 million and $3.3 billion,
respectively, for the nine months ended September 30, 2001.

In the course of Reliant Resources' review, Reliant Resources also
identified and determined that it should record on a net basis several
transactions for energy related services (not involving round trip trades) that
totaled $13 million and $30 million for the three and nine months ended
September 30, 2001, respectively. These transactions were originally recorded on
a gross basis.

In addition, during the May 2001 through September 2001 time frame, Reliant
Resources entered into four structured transactions involving a series of
forward or swap contracts to buy and sell an energy commodity in 2001 and to buy
and sell an energy commodity in 2002 or 2003 (four structured transactions). The
four structured transactions were intended to increase future cash flow and
earnings and to increase certainty associated with future cash flow and
earnings, albeit at the expense of 2001 cash flow and earnings. Each series of
contracts in a structure were executed with the same counterparty. The contracts
in each structure were offsetting in the aggregate in terms of physical
attributes. The transactions that settled during the three and nine months ended
September 30, 2001 were previously recorded on a gross basis with such
transactions being reported in revenues and expenses which resulted in $700
million of revenues, $206 million in fuel and cost of gas sold and $494 million
of purchased power expense, and $1.0 billion of revenues, $367 million in fuel
and cost of gas sold and $656 million of purchased power expense being
recognized in each period, respectively. These transactions should have been
accounted for on a net basis.

Reliant Resources' consolidated financial statements for the three and nine
months ended September 30, 2001 have been restated from amounts previously
reported to reflect the transactions discussed above on a net basis. The
restatement decreased Reliant Resources' revenues and operating expenses for the
three months ended September 30, 2001 by $1.6 billion from total revenues of
$4.1 billion as previously reported, to $2.5 billion, as restated, and total
operating expenses of $3.7 billion as previously reported, to $2.1 billion, as
restated. The restatement decreased Reliant Resources' revenues and operating
expenses for the nine months ended September 30, 2001 by $4.5 billion from total
revenues of $10.2 billion, as previously reported, to $5.7 billion, as restated,
and total operating expenses of $9.5 billion as previously reported, to $5.0
billion, as restated.

In addition to the round trip trades described above, Reliant Resources'
review and the Audit Committees' investigation also considered other
transactions executed on the same day at the same volume, price and delivery
terms and with the same counterparty. These transactions were executed in the
normal course of Reliant Resources' trading and marketing activities, and were
historically reported on a gross basis, and were not material.

Also as more fully described in Note 1 to the Reliant Energy 10-K/A Notes,
during the fourth quarter of 2000, two power generation swap contracts with a
fair value of $261 million were terminated by Reliant Resources and replaced
with a substantially similar contract providing for physical delivery and
designated to hedge electric generation. The termination of the original
contracts and execution of the replacement contract represented a substantive
modification to the original contract. As a result, upon termination of the
original contracts, a contractual liability representing the fair value of the
original contracts and a deferred asset of equal amount should have been
recorded. As of January 1, 2001, in connection with the adoption of SFAS No.
133, the deferred asset should have been recorded as a transition adjustment to
other comprehensive loss totaling $170 million. The liability and transition
adjustment should have been amortized on a straight-line basis over the term of
the power generation contract replacing the terminated power generation
contracts (through May 2004). Reliant Resources previously did not give
accounting recognition to these transactions. As a result, the Company restated
its Consolidated Balance Sheets as of December 31, 2000 and 2001 and the
Statement of Consolidated Stockholder's Equity and Comprehensive Income for the
year ended December 31, 2001 in the Reliant Energy Form 10-K/A. The Company has
restated its comprehensive income disclosure related to its Reliant Resources'
discontinued operations for the three and nine months ended September 30, 2001
from amounts previously reported, to effect this transaction as

8

described above (Note 7). The restatement increased comprehensive income by $14
million from a total comprehensive income of $147 million, as previously
reported, to $161 million, as restated, for the three months ended September 30,
2001 and decreased comprehensive income by $132 million (including the $170
million transition adjustment discussed above) from a total comprehensive income
of $954 million, as previously reported, to $822 million, as restated, for the
nine months ended September 30, 2001. The restatement had no impact on the
Company's reported consolidated cash flows, operating income or net income.

Furthermore, in September 2002, during Reliant Resources' review of certain
trading transactions in connection with various pending investigations, Reliant
Resources identified four natural gas financial swap transactions that should
not have been reflected in its financial statements. Reliant Resources has
concluded, based on the offsetting nature of the transactions and manner in
which the transactions were documented, that none of the transactions should
have been given accounting recognition. Reliant Resources accounted for the
transactions in its financial statements as a reduction in revenues in December
2000 and an increase in revenues in January 2001, with the effect of decreasing
net income in the fourth quarter of 2000 and increasing net income in the first
quarter of 2001, in each case by $20 million pre-tax ($13 million after-tax),
and the effect of increasing basic and diluted earnings per share by $0.04 in
the first quarter of 2001. There were no cash flows associated with the
transactions. The Company has further concluded, after considering both
qualitative and quantitative factors, that a restatement of its financial
statements for this item is not required.

(3) NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued 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. The
Company 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 the Company'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 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. The Company 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. 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 the
Company 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. The Company adopted SFAS No. 144 on January 1,
2002. As a result of the adoption of SFAS No. 144, the Company's remaining Latin
America operations have been presented on a gross basis in the consolidated
financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64,

9

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.
The Company 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. The Company will apply the provisions of SFAS No. 146 to all exit or
disposal activities initiated after December 31, 2002.

See Note 5 for a discussion of the Company's adoption of SFAS No. 133 on
January 1, 2001 and adoption of subsequent cleared guidance. See Note 6 for a
discussion of the Company's adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142) on January 1, 2002.

(4) REGULATORY MATTERS

(a) Excess Cost Over Market (ECOM) True-Up.

Texas Genco sells, through auctions, entitlements to substantially all of
its installed electric generation capacity, excluding reserves for planned
forced outages. In September, October and December 2001, and March, July,
October and November 2002, it conducted auctions, as required by the Public
Utility Commission of Texas (Texas Utility Commission) and by its Master
Separation Agreement with Reliant Resources.

The capacity auctions were consummated at market-based prices that are
substantially below the estimate of those prices made by the Texas Utility
Commission in the spring of 2001. The Texas electric restructuring law provides
for the recovery in a "true-up" proceeding in 2004 (2004 True-Up Proceeding) of
any difference between market power prices and the earlier estimates of those
market prices by the Texas Utility Commission, using the prices received in the
auctions required by the Texas Utility Commission as the measure of market
prices (ECOM True-Up). For the three months and nine months ended September 30,
2002, respectively, CenterPoint Energy recorded approximately $240 million and
$551 million in revenue related to the recovery of the difference between the
market power prices and the Texas Utility Commission's earlier estimates. For
additional information regarding the capacity auctions and the related true-up
proceeding, please read Note 4(a) to the Reliant Energy 10-K/A Notes, which is
incorporated herein by reference.

(b) Generation Asset Impairment Contingency.

The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 144. As of September 30, 2002, no impairment had been
indicated in its Texas generation assets. The Company anticipates that future
events, such as the trading price of the stock after the expected distribution
to the Company's shareholders of up to 20% of the outstanding stock of Texas
Genco, a change in the estimated holding period of the Texas generation assets,
or a change in market demand for electricity, will require the Company to
re-evaluate these assets for impairment between now and 2004. If an impairment
is indicated, it could be material and may not be fully recoverable through the
2004 True-Up Proceeding.

10

The Texas electric restructuring law provides for the Company to recover
the regulatory book value of its Texas generating assets to the extent the
regulatory book value exceeds the estimated market value. If the Texas
generating assets are sold in the future, a loss on sale of these assets, or an
impairment of the recorded recoverable electric generation plant mitigation
regulatory asset, will occur to the extent the recorded book value of the Texas
generating assets exceeds the regulatory book value. As of September 30, 2002,
the recorded book value was $638 million in excess of the regulatory book value.
This amount declines as the recorded book value is depreciated and increases by
the amount of non-environmental capital expenditures. For further discussion of
the difference between the regulatory book value and the recorded book value,
see Note 4(a) to the Reliant Energy 10-K/A Notes.

(c) Regulatory Assets Contingency.

As of September 30, 2002, in contemplation of the 2004 True-up Proceeding,
CenterPoint Houston has recorded a regulatory asset of $2.0 billion representing
the estimated future recovery of previously incurred stranded costs, which
includes $1.0 billion of previously recorded accelerated depreciation (an amount
equal to earnings above a stated overall annual rate of return on invested
capital that was used to recover the Company's investment in generation assets)
plus redirected depreciation, both reversed in 2001. Offsetting this regulatory
asset is a $1.0 billion regulatory liability to refund the excess mitigation to
ratepayers. This estimated recovery is based upon current projections of the
market value of the Company's Texas generation assets to be covered by the 2004
True-up Proceeding calculations. The regulatory liability reflects a current
refund obligation arising from prior mitigation of stranded costs deemed
excessive by the Texas Utility Commission. CenterPoint Houston began refunding
excess mitigation credits with January 2002 bills. These credits are to be
refunded over a seven year period. Because accounting principles generally
accepted in the United States of America require the Company to estimate fair
market values in advance of the final reconciliation, the financial impacts of
the Texas electric restructuring law with respect to the final determination of
stranded costs in the 2004 True-Up Proceeding are subject to material changes.
Factors affecting such changes may include estimation risk, uncertainty of
future energy and commodity prices and the economic lives of the plants. If
events were to occur that made the recovery of some of the remaining generation
related regulatory assets no longer probable, the Company would write off the
unrecoverable balance of such assets as a charge against earnings.

(d) Fuel Reconciliation Contingency.

CenterPoint Houston filed its final fuel reconciliation proceeding with the
Texas Utility Commission on July 1, 2002, and subsequently amended its filing on
October 2, 2002 and on November 8, 2002. Although previous fuel reconciliation
proceedings have generally covered three-year periods, this filing covers fuel
expense and interest incurred from August 1, 1997 through January 30, 2002. Also
included in this amount is an under-recovery of $94 million, which was the
balance as of July 31, 1997 as approved in CenterPoint Houston's last fuel
reconciliation. CenterPoint Houston's filing related to this proceeding covers
$8.5 billion in fuel revenues and $8.6 billion in expenses and interest,
resulting in a current under-collection, including interest, of $128 million,
which is recorded as a regulatory asset in our consolidated balance sheet at
September 30, 2002. A procedural schedule has been set with a hearing scheduled
to begin January 28, 2003. Any over- or under-recovery, plus interest thereon,
will be either returned to or recovered from CenterPoint Houston's customers, as
appropriate, as a component of the 2004 True-Up Proceeding.

(e) 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.

11

(f) 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.

(g) 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 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.

(5) DERIVATIVE FINANCIAL INSTRUMENTS

Adoption of SFAS No. 133 on January 1, 2001 resulted in an after-tax
increase in net income of $59 million and a cumulative after-tax increase in
accumulated other comprehensive income of $38 million. For additional
information regarding the adoption of SFAS No. 133 and the Company's accounting
policies for derivative financial instruments, see Note 5 to the Reliant Energy
10-K/A Notes, which note is incorporated herein by reference.

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, except for the settlement of
forward-starting interest rate swaps discussed below. No component of the
derivative instruments' gain or loss was excluded from this 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
cash flow hedges because it was no longer probable that the forecasted
transaction would occur. As of September 30, 2002, the Company expects $8
million in accumulated other comprehensive loss to be reclassified into net
income during the next twelve months.

Interest Rate Swaps. As of September 30, 2002, the Company had outstanding
interest rate swaps with an aggregate notional amount of $750 million to fix the
interest rate applicable to floating rate short-term debt. These swaps do not
qualify as cash flow hedges under SFAS No. 133, and are marked to market in the
Company's Consolidated Balance Sheets with changes reflected in interest expense
in the Statements of Consolidated Income. During the three months ended
September 30, 2002, the Company settled its forward-starting interest rate swaps
having an aggregate notional amount of $1.5 billion at a cost of $156 million,
which was recorded in other comprehensive income and will be amortized into
interest expense in the same period during which the forecasted interest
payments affect earnings. Should the forecasted interest payments no longer be
probable, any remaining deferred amount will be recognized immediately as an
expense. During the nine months ended September 30, 2002, there was $5.3 million
in hedge ineffectiveness recognized in earnings related to these
forward-starting interest rate swaps.

(6) GOODWILL AND INTANGIBLES

In July 2001, the FASB issued SFAS No. 142, which provides that 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, the Company adopted the provisions
of the statement which apply to goodwill and intangible assets acquired prior to
June 30, 2001.

12

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

13

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

The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of
September 30, 2002. The Company amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives that range from 40 to 75 years for land rights and 4 to 25 years for other
intangibles.

Amortization expense for other intangibles for the three months ended
September 30, 2001 and 2002 was $0.2 million and $0.5 million, respectively.
Amortization expense for other intangibles for the nine months ended September
30, 2001 and 2002 was $1.0 million and $1.4 million, respectively. Estimated
amortization expense for the remainder of 2002 and the five succeeding fiscal
years is as follows (in millions):

2002........................................ $ 1
2003........................................ 2
2004........................................ 2
2005........................................ 2
2006........................................ 2
2007........................................ 3
---------
Total..................................... $ 12
=========

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

The Company completed its review during the second quarter of 2002 pursuant
to SFAS No. 142 for its reporting units in the Natural Gas Distribution,
Pipelines and Gathering and Other Operations business segments. No impairment
was indicated as a result of this assessment.

14

(7) COMPREHENSIVE INCOME (LOSS)

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

(8) SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Credit Facilities. As of September 30, 2002, CenterPoint Energy and its
subsidiaries had credit facilities that provided for an aggregate of $5.2
billion in committed credit. As of September 30, 2002, $4.6 billion was
outstanding under these facilities including $0.9 billion of commercial paper
supported by the facilities, borrowings of $3.7 billion and letters of credit of
$6.5 million. The weighted average interest rate on these short-term borrowings
at December 31, 2001 and September 30, 2002 was 2.9% and 4.7%, respectively. In
July 2002, the termination dates of facilities aggregating $4.7 billion were
extended from July 12, 2002 to October 10, 2002. Upon the Restructuring,
CenterPoint Energy became the borrower under facilities aggregating $4.3
billion, CenterPoint Houston remained the borrower under its $400 million
facility and CERC Corp. remained both the borrower under its $350 million
revolver and the seller under its $150 million receivables facility.

The following table summarizes amounts available under credit facilities of
CenterPoint Energy and its subsidiaries at September 30, 2002 (in millions):

On October 10, 2002, the agreements relating to $4.3 billion of bank
facilities at CenterPoint Energy and $400 million of bank facilities at
CenterPoint Houston were amended and extended. Effective October 10, 2002, the
commitments and unused amounts under the bank facilities of CenterPoint Energy
and its subsidiaries were as follows (in millions):

15

(1) CenterPoint Houston arranged a $1.3 billion loan on November 12, 2002, as
discussed further below. A portion of the $1.3 billion loan was used to
repay in full the $850 million in term loans outstanding under the
CenterPoint Houston facility and the facility was terminated. As a result
of the $1.3 billion loan arranged on November 12, 2002, $850 million of
short-term borrowings have been classified as long-term debt as of
September 30, 2002 in the Consolidated Balance Sheet. The CenterPoint
Energy bank facilities aggregating $3.85 billion have the following
mandatory commitment reductions, and to the extent necessitated by the
lower commitment levels, principal payment obligations:

On October 10, 2002, cash aggregating $606 million was invested in a money
market fund.

The $850 million bank facility of CenterPoint Houston was secured by $850
million aggregate principal amount of CenterPoint Houston's general mortgage
bonds issued under the General Mortgage Indenture dated as of October 10, 2002
between CenterPoint Houston and JPMorgan Chase Bank, as trustee. The lien of the
general mortgage indenture is junior to that of the Mortgage and Deed of Trust
dated as of November 1, 1944 between CenterPoint Houston (successor of Houston
Lighting & Power Company) and JPMorgan Chase Bank (successor of South Texas
Commercial National Bank), as trustee. The $850 million of general mortgage
bonds were released by the banks upon the November 2002 repayment and
termination of the facility.

Under the CenterPoint Energy credit facilities and the former CenterPoint
Houston facility, if any capital stock or indebtedness is issued, proceeds are
to be applied (subject to a $100 million basket, and other limited exceptions)
to repay bank loans and reduce bank commitments. If we receive cash proceeds
from a sale of assets of more than $30 million or, if less, a group of sales
aggregating more than $100 million, then such proceeds are to be applied to
prepay bank loans and to reduce bank commitments, except that proceeds of up to
$120 million (including the $100 million basket discussed above) can be
reinvested in our businesses. Proceeds of $850 million from the $1.3 billion
loan arranged in November 2002 were used to repay $850 million of loans under
the CenterPoint Houston facility and the facility was terminated. Proceeds of
$300 million from the $1.3 billion loan will be used to repay $300 million of
debt maturing on November 15, 2002. Proceeds of $100 million from the $1.3
billion loan are expected to be used to purchase $100 million of pollution
control bonds that are subject to mandatory tender on December 1, 2002. Because
remaining proceeds from the $1.3 billion loan were used to pay transaction
costs, CenterPoint Energy continues to have a $100 million basket under its $3.9
billion bank facility.

In October 2002, the termination date of the $150 million CERC Corp.
receivables facility was extended to November 15, 2002. The facility is expected
to be replaced with a one-year receivables facility in November 2002. The $350
million CERC Corp. revolving credit facility expires March 31, 2003. We expect
to refinance borrowings under the revolving credit facility of CERC Corp. on or
prior to the March 31, 2003 expiration date of the facility. Refinancings may be
accomplished through the issuance of long-term debt, short-term debt or a
combination.

The bank facilities contain various business and financial covenants. The
borrowers are currently in compliance with the covenants under the applicable
credit agreements.

At the beginning of the second quarter, commercial paper programs
aggregated $5 billion. In July 2002, the aggregate amount of the commercial
paper programs was reduced to $3.2 billion. In October 2002, the aggregate
amount of the commercial paper programs was further reduced to $1.9 billion. In
each case, the reduction in the size of the commercial paper programs occurred
because revolving credit facilities were converted to term loan facilities.
Revolving credit facilities are needed to support commercial paper programs. As
of October 10, 2002, the revolving credit facility of CenterPoint Energy
supports a commercial paper program at CenterPoint Energy of $1.5 billion and
the revolving credit facility of CERC Corp. supports a commercial paper program
at CERC Corp. of

16

$350 million. The maximum amount of each issuer's outstanding commercial paper
is limited to the amount of its revolving credit facility less any direct loans
or letters of credit obtained under its revolver. Short-term borrowing needs in
the third quarter were met with a combination of commercial paper and bank
loans. In October 2002, all commercial paper was repaid with proceeds from bank
loans. The extent to which commercial paper will be issued in lieu of bank loans
will depend, in part, on market conditions and the credit ratings of the
commercial paper issuers.

Long-Term Debt. On November 12, 2002, CenterPoint Houston entered into a
$1.3 billion loan maturing November 2005. The interest rate on the loan is the
London inter-bank offered rate (LIBOR) plus 9.75 percent, subject to a minimum
LIBOR rate of 3 percent. The loan is secured by CenterPoint Houston's general
mortgage bonds. Proceeds from the loan were used to repay CenterPoint Houston's
$850 million term loan and to pay costs of issuance. Additional proceeds from
the loan are expected to be used to repay $300 million of debt that will mature
on November 15, 2002 and to repay intercompany notes to the Company, which will
use the proceeds to purchase or retire $100 million of pollution control bonds
on December 1, 2002. As a result of the $1.3 billion loan arranged on November
12, 2002, the $300 million current portion of subsidiary debt due November 15,
2002 and $850 million of outstanding indebtedness under the Company's credit
facilities have been classified as long-term debt as of September 30, 2002 in
the Consolidated Balance Sheet. The loan agreement contains various business and
financial covenants including a covenant restricting CenterPoint Houston's debt
as a percent of its total capitalization to 68%. The loan agreement also limits
incremental secured debt that may be issued at CenterPoint Houston to $300
million.

(9) EXCHANGE OF ZERO-PREMIUM EXCHANGEABLE SUBORDINATED NOTES DUE 2029 (ZENS).

From January 1, 2002 through September 30, 2002, holders of approximately
16% of the 17.2 million ZENS units originally issued exercised their right to
exchange their ZENS for cash, resulting in aggregate cash payments by
CenterPoint Energy of approximately $45 million. Holders of ZENS submitted for
exchange are entitled to receive a cash payment equal to 95% of the market value
of the reference shares of AOL Time Warner (AOL TW) common stock. There are 1.5
reference shares of AOL TW common stock for each of the 17.2 million ZENS units
originally issued. The exchange market value is calculated using the average
closing price per share of AOL TW common stock on the New York Stock Exchange on
one or more trading days following the notice date. Payment must be made no
later than ten trading days following the notice date. The Company recorded a
net pre-tax gain of $12 million related to the ZENS exchanged.

A subsidiary of CenterPoint Energy owns the reference shares of AOL TW
common stock and elected to liquidate a portion of such holdings to make the
cash payments. In connection with exchanges from January 1, 2002 through
September 30, 2002, CenterPoint Energy has received net proceeds of
approximately $43 million from the liquidation of approximately 4.1 million
shares of AOL TW common stock at an average price of $10.56 per share.

17

(10) EARNINGS PER SHARE

The following table presents CenterPoint Energy's basic and diluted
earnings per share (EPS) calculation:

- ----------

(1) For the three months ended September 30, 2001 and 2002, the computation of
diluted EPS excludes 2,319,488 and 9,971,384 purchase options,
respectively, for shares of common stock that have exercise prices (ranging
from $31.73 to $50.00 per share and $12.87 to $36.25 per share for the
third quarter 2001 and 2002, respectively) greater than the per share
average market price for the period and would thus be anti-dilutive if
exercised.

For the nine months ended September 30, 2001 and 2002, the computation of
diluted EPS excludes 2,005,338 and 6,182,661 purchase options,
respectively, for shares of common stock that have exercise prices (ranging
from $39.53 to $50.00 per share and $16.15 to $36.25 per share for the
first nine months of 2001 and 2002, respectively) greater than the per
share average market price for the period and would thus be anti-dilutive
if exercised.

18

(11) CAPITAL STOCK

Effective with the restructuring of Reliant Energy, all outstanding shares
of Reliant Energy no par value stock were exchanged for CenterPoint Energy
shares with a par value of $0.01 per share. The capital accounts of CenterPoint
Energy have been restated as of December 31, 2001 to give effect to the change
in par value per share. CenterPoint Energy has 1,020,000,000 authorized shares
of capital stock, comprised of 1,000,000,000 shares of $0.01 par value common
stock and 20,000,000 shares of $0.01 par value preferred stock. At December 31,
2001, 302,943,709 shares of Reliant Energy common stock were issued and
295,873,820 shares of Reliant Energy common stock were outstanding. At September
30, 2002, 304,335,457 shares of CenterPoint Energy common stock were issued and
299,418,905 shares of CenterPoint Energy common stock were outstanding.
Outstanding common shares exclude (a) shares pledged to secure a loan to
CenterPoint Energy's Employee Stock Ownership Plan (7,069,889 and 4,916,552 at
December 31, 2001 and September 30, 2002, respectively) and (b) treasury shares
(-0- and 166 at December 31, 2001 and September 30, 2002, respectively).
CenterPoint Energy, or Reliant Energy prior to August 31, 2002, declared
dividends of $0.375 per share and $0.16 per share in the third quarter of 2001
and 2002, respectively and $1.125 per share and $0.91 per share in the first
nine months of 2001 and 2002, respectively.

(12) TRUST PREFERRED SECURITIES

(a) CenterPoint Energy.

Statutory business trusts created by CenterPoint Energy have issued trust
preferred securities, the terms of which, and the related series of junior
subordinated debentures, are described below (in millions):

For additional information regarding these securities, see Note 11 to the
Reliant Energy 10-K/A Notes, which note is incorporated herein by reference. The
sole asset of each trust consists of junior subordinated debentures of
CenterPoint Energy having interest rates and maturity dates that correspond to
the distribution rates and the mandatory redemption dates for each series of
preferred securities or capital securities, and the principal amounts
corresponding to the common and preferred securities or capital securities
issued by that trust.

(b) CERC Corp.

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):

19

For additional information regarding the convertible preferred securities,
see Note 11 to the Reliant Energy 10-K/A Notes. The sole asset of the trust
consists of convertible junior subordinated debentures of CERC having an
interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities, and the
principal amount corresponding to the common and convertible preferred
securities issued by the trust.

(13) COMMITMENTS AND CONTINGENCIES

(a) Legal Matters.

The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries have been named as defendants in several lawsuits described below.
Under a master separation agreement between Reliant Energy and Reliant
Resources, the Company and its subsidiaries are entitled to be indemnified by
Reliant Resources for any losses arising out of the lawsuits described under
"Southern California Class Actions," "Northern California Class Actions" and
"Trading and Marketing Activities," including attorneys' fees and other costs.
Pursuant to the indemnification obligation, Reliant Resources is defending the
Company and its subsidiaries to the extent named in these lawsuits. The ultimate
outcome of these matters cannot be predicted at this time.

Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy's electric
service area, against Reliant Energy and Houston Industries Finance, Inc.
(formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of
municipal franchise fees. Plaintiffs claim that they are entitled to 4% of all
receipts of any kind for business conducted within these cities over the
previous four decades. A jury trial of the original claimant cities (but not the
class of cities) in the 269th Judicial District Court for Harris County, Texas,
ended in April 2000 (the Three Cities case). Although the jury found for Reliant
Energy on many issues, they found in favor of the original claimant cities on
three issues, and assessed a total of $4 million in actual and $30 million in
punitive damages. However, the jury also found in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began. The
trial court in the Three Cities case granted most of Reliant Energy's motions to
disregard the jury's findings. The trial court's rulings reduced the judgment to
$1.7 million, including interest, plus an award of $13.7 million in legal fees.
In addition, the trial court granted Reliant Energy's motion to decertify the
class. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.

The Three Cities case has been appealed. The Company believes that the
damage award resulted from serious errors of law and that it will be set aside
by the Texas appellate courts. In addition, the Company believes that because of
an agreement between the parties limiting fees to a percentage of the damages,
reversal of the award of attorneys' fees is probable.

The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the trial court's rulings
disregarding most of the jury's findings are consistent with Texas Supreme Court
opinions. The Company estimates the range of possible outcomes for recovery by
the plaintiffs in the Three Cities case to be between zero and $18 million
inclusive of interest and attorneys' fees.

Southern California Class Actions. Reliant Energy, Reliant Energy Services,
Inc. (Reliant Energy Services), Reliant Energy Power Generation, Inc. (REPG) and
several other subsidiaries of Reliant Resources, as well as two former officers
and one present officer of some of these companies, have been named as
defendants in class action lawsuits and other lawsuits filed against a number of
companies that own generation plants in California and other sellers of
electricity in California markets. Three of these lawsuits were filed in the
Superior Court of the State of California, San Diego County; two were filed in
the Superior Court in San Francisco County; and one was filed in the Superior
Court of Los Angeles County. While the plaintiffs allege various violations by
the defendants of state antitrust laws and state laws against unfair and
unlawful business practices, each of the lawsuits is grounded on the central
allegation that defendants conspired to drive up the wholesale price of
electricity. In addition to injunctive relief, the plaintiffs in these lawsuits
seek treble the amount of damages alleged, restitution of alleged overpayments,
disgorgement of alleged unlawful profits for sales of electricity, costs of suit
and attorneys' fees. Plaintiffs have voluntarily dismissed Reliant Energy from
two of the three class actions in which it was named as a defendant.

20

The cases were initially removed to federal court and were then assigned to
Judge Robert H. Whaley, United States District Judge, pursuant to the federal
procedures for multi-district litigation. On July 30, 2001, Judge Whaley
remanded the cases to state court. Upon remand to state court, the cases were
assigned to Superior Court Judge Janis L. Sammartino pursuant to the California
state coordination procedures. On March 4, 2002, Judge Sammartino adopted a
schedule proposed by the parties that would result in a trial beginning on March
1, 2004. On March 8, 2002, the plaintiffs filed a single, consolidated complaint
naming numerous defendants, including Reliant Energy Services and other Reliant
Resources' subsidiaries, that restated the allegations described above and
alleged that damages against all defendants could be as much as $1 billion. On
April 22 and 23, 2002, Reliant Resources and Duke Energy filed cross complaints
in the coordinated proceedings seeking, in an alternative pleading, relief
against other market participants in California, the surrounding states, Canada
and Mexico including Powerex Corp., the Los Angeles Department of Water and
Power and the Bonneville Power Administration. Powerex Corp. and Bonneville
Power Administration removed the cases once again to federal court where it was
reassigned to Judge Whaley. On July 10, 2002, a motion to dismiss was filed in
coordinated proceedings seeking dismissal of the complaints on the basis of the
filed rate doctrine and federal preemption.

On March 11, 2002, the California Attorney General filed a civil lawsuit in
San Francisco Superior Court naming Reliant Energy, Reliant Resources, Reliant
Energy Services, REPG, and several other subsidiaries of Reliant Resources as
defendants. The Attorney General alleges various violations by the defendants of
state laws against unfair and unlawful business practices arising out of
transactions in the markets for ancillary services run by the California
Independent System Operator. In addition to injunctive relief, the Attorney
General seeks restitution and disgorgement of alleged unlawful profits for sales
of electricity, and civil penalties. Reliant Resources removed this lawsuit to
federal court in April 2002, where it has been assigned to Judge Vaughn Walker
in the Northern District of California.

On April 15, 2002, the California Attorney General filed a lawsuit in San
Francisco County Superior Court against Reliant Energy, Reliant Resources,
Reliant Energy Services and several other subsidiaries of Reliant Resources. The
complaint alleges that defendants violated their tariffs by failing to file
transaction specific information, violated Federal Energy Regulatory Commission
regulations concerning rate filings and charged unjust and unreasonable prices
for electricity. The complaint also alleges that Reliant Resources consistently
charged unjust and unreasonable prices for electricity, and that each instance
of overcharge violated California law. The lawsuit seeks fines, under California
law, of up to $2,500 for each alleged violation, and "other equitable relief as
appropriate." Reliant Resources has removed this case to federal court, where it
has been assigned to Judge Vaughn Walker in the Northern District of California.

On April 15, 2002, the California Attorney General and the California
Department of Water Resources filed a complaint in the United States District
Court for the Northern District of California against Reliant Energy, Reliant
Resources and a number of its subsidiaries. In this lawsuit, the Attorney
General alleges that Reliant Resources' acquisition of electric generating
facilities from Southern California Edison in 1998 violated Section 7 of the
Clayton Act, which prohibits mergers or acquisitions that substantially lessen
competition. The lawsuit claims that the acquisitions gave Reliant Resources
market power which it then exercised to overcharge California consumers for
electricity. The lawsuit seeks injunctive relief against alleged unfair
competition, divestiture of Reliant Resources' California facilities,
disgorgement of alleged illegal profits, damages, and civil penalties for each
alleged exercise of market power. This lawsuit also has been assigned to Judge
Vaughn Walker. Judge Walker has denied the California Attorney General's motion
to remand the two above-mentioned cases to state court and it is anticipated
that he will rule in the near future in Reliant Resources' motion to dismiss all
three cases.

Northern California Class Actions. In the wake of the filing of the
Attorney General cases, there have been seven new class action cases filed in
state courts in Northern California. Each of these purports to represent the
same class of California ratepayers, assert the same claims as asserted in the
Southern California class action cases, and in some instances repeat as well the
allegations in the Attorney General cases. All of these cases have been removed
to federal court and have been assigned to Judge Whaley by the Panel on
Multi-District Litigation.

Neither the Company nor Reliant Resources has answered any of these cases;
however, they have moved to dismiss the cases on the grounds that the claims are
barred by federal preemption and by the filed rate doctrine.

Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of Reliant Resources. Their ultimate outcome

21

and their effect on the Company cannot be predicted at this time. Additional
information regarding certain of these matters is set forth below.

In June 2002, the SEC advised Reliant Resources that it had issued a formal
order in connection with its investigation of Reliant Resources' financial
reporting, internal controls and related matters. The Company understands that
the investigation is focused on Reliant Resources' round trip trades and
structured transactions. These matters were previously the subject of an
informal inquiry by the SEC. The SEC's formal order is also addressed to Reliant
Energy. Reliant Resources and the Company are cooperating with the SEC staff.

In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the Electric Reliability Council of
Texas, Inc. (ERCOT) market on and after July 31, 2001, Reliant Energy and
Reliant Resources have provided information to the Texas Utility Commission
concerning their scheduling and trading activities.

In May, June and July 2002, ten class action lawsuits were filed in federal
court for the Southern District of Texas in Houston and one class action lawsuit
was filed in federal court for the Eastern District of Texas in Texarkana on
behalf of purchasers of securities of Reliant Resources and/or Reliant Energy.
Reliant Resources and certain of its executive officers are named as defendants.
Reliant Energy is also named as a defendant in three of the lawsuits. Two of the
lawsuits also name as defendants the underwriters of the initial public offering
of Reliant Resources. One lawsuit names Reliant Resources' and Reliant Energy's
independent auditors as a defendant. The dates of filing of these lawsuits are
as follows: two lawsuits on May 15, 2002; two lawsuits on May 16, 2002; one
lawsuit on May 17, 2002; one lawsuit on May 20, 2002; one lawsuit on May 21,
2002; one lawsuit on May 23, 2002; one lawsuit on June 19, 2002; one lawsuit on
June 20, 2002; and one lawsuit on July 1, 2002. The complaints allege that the
defendants overstated the revenues of Reliant Energy and Reliant Resources by
including transactions involving the purchase and sale of commodities with the
same counterparty at the same price and that Reliant Energy and Reliant
Resources improperly accounted for certain other transactions, among other
things. The complaints seek monetary damages, and in one of the lawsuits
rescission, on behalf of a supposed class. In eight of the lawsuits, the
supposed class is composed of persons who purchased or otherwise acquired
Reliant Resources and/or Reliant Energy securities during specified class
periods. The three lawsuits that include Reliant Energy as a named defendant
were also filed on behalf of purchasers of securities of Reliant Resources
and/or Reliant Energy during specified class periods.

Additionally, in May and June 2002, four class action lawsuits were filed
on behalf of purchasers of securities of Reliant Energy. Reliant Energy and
several of its executive officers are named as defendants. The dates of filing
of the four lawsuits are as follows: one on May 16, 2002; one on May 21, 2002;
one on June 13, 2002; and one on June 17, 2002. The lawsuits were filed in
federal district court for the Southern District of Texas in Houston. The
plaintiffs allege that the defendants made false and misleading statements as
part of an alleged scheme to artificially inflate trading volumes and revenues
by including transactions involving the purchase and sale of commodities with
the same counterparty at the same price, to spin-off Reliant Resources to avoid
exposure to Reliant Resources' liabilities and to cause the price of Reliant
Resources' stock to rise artificially, among other things. The complaints seek
monetary damages on behalf of persons who purchased Reliant Energy securities
during specified class periods.

Fourteen of the fifteen securities cases were filed in the United States
District Court for the Southern District of Texas, Houston Division. By Order
dated August 1, 2002, the Court consolidated ten of the Houston cases. By Order
dated August 27, 2002, the Court consolidated the remaining four Houston cases.
In the same Order, the Court appointed the Boca Raton Police & Firefighters
Retirement System and the Louisiana Retirement Funds to be lead plaintiffs in
the consolidated securities cases.

By Order dated August 22, 2002, the remaining securities case was
transferred from the United States District court of the Eastern District of
Texas, Texarkana Division, to the Southern District of Texas, Houston Division.
By Order dated September 20, 2002, the Court consolidated the case originally
filed in the Texarkana Division with the fourteen cases previously consolidated
in the Houston Division.

In May 2002, three class action lawsuits were filed in federal district
court for the Southern District of Texas in Houston on behalf of participants in
various employee benefits plans sponsored by Reliant Energy. Reliant Energy and
its directors are named as defendants in all of the lawsuits. The lawsuits were
filed on May 29, 2002, May 30, 2002, and May 31, 2002. Two of the lawsuits have
been dismissed without prejudice. The remaining

22

lawsuit alleges that the defendants breached their fiduciary duties to various
employee benefits plans directly or indirectly sponsored by Reliant Energy, in
violation of the Employee Retirement Income Security Act. The plaintiffs allege
that the defendants permitted the plans to purchase or hold securities issued by
Reliant Energy when it was imprudent to do so, including after the prices for
such securities became artificially inflated because of alleged securities fraud
engaged in by the defendants. The complaints seek monetary damages for losses
suffered by a putative class of plan participants whose accounts held Reliant
Energy or Reliant Resources securities, as well as equitable relief in the form
of restitution.

Reliant Resources is defending the Company and its subsidiaries in these
class action suits relating to Reliant Resources' trading and marketing
activities pursuant to its indemnification obligations under the master
separation agreement between Reliant Resources and Reliant Energy.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claim Act against RERC Corp. and certain of its subsidiaries
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 Corp., Reliant Energy Gas Transmission Company (REGT),
Reliant Energy Field Services, Inc. (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 Reliant Energy Services, 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 four Reliant Energy 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 the
Company, 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. The Company 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, the Company believes, based on its
analysis to date of the claims asserted in this lawsuit and the underlying
facts, that resolution of these lawsuits will not have a material adverse effect
on the Company's financial condition, results of operations, or cash flows.

The Company is involved in other proceedings before various courts,
regulatory commissions and governmental agencies regarding matters arising in
the ordinary course of business. The Company's management currently believes
that the disposition of these matters will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.

(b) Environmental Matters.

Clean Air Standards. Based on current limitations of the Texas Commission
on Environmental Quality (TCEQ) regarding emission of oxides of nitrogen (NOx)
in the Houston area, the Company anticipates investing up to $672

23

million for emission control equipment through 2005, including $519 million
expended from January 1, 1999 through September 30, 2002, with possible
additional expenditures after 2005.

The Texas electric restructuring law provides for stranded cost recovery
for expenditures incurred before May 1, 2003 to achieve the NOx reduction
requirements. Incurred costs include costs for which contractual obligations
have been made. The Texas Utility Commission has determined that the Company's
emission control plan is the most effective control option and that up to $699
million is eligible for cost recovery, the exact amount to be determined in the
2004 True-up Proceeding. In addition, the Company is required to provide $16.2
million in funding for certain NOx reduction projects associated with East Texas
pipeline companies. These funds are also eligible for cost recovery.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company, Inc. (REGT), Reliant Energy
Pipeline Services, Inc., RERC Corp., Reliant Energy Services, 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, the Company 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, the Company has not been able to

24

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.

Mercury Contamination. The Company'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 the Company at some sites in the past,
and the Company 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 the Company and that of others in the natural
gas industry to date and on the current regulations regarding remediation of
these sites, the Company believes that the costs of any remediation of these
sites will not be material to the Company's financial position, results of
operations or cash flows.

Other. From time to time the Company 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.
In addition, the Company has been named as a defendant in litigation related to
such sites and in recent years has been named, along with numerous others, as a
defendant in several lawsuits filed by a large number of individuals who claim
injury due to exposure to asbestos while working at sites along the Texas Gulf
Coast. Most of these claimants have been workers who participated in
construction of various industrial facilities, including power plants, and some
of the claimants have worked at locations owned by the Company. The Company
anticipates that additional claims like those received may be asserted in the
future and intends to continue vigorously contesting claims which it does not
consider to have merit. Although their ultimate outcome cannot be predicted at
this time, the Company does not believe, based on its experience to date, that
these matters, either individually or in the aggregate, will have a material
adverse effect on the Company's financial position, results of operations or
cash flows.

(c) Other Legal and Environmental Matters.

The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

(d) Nuclear Insurance.

The Company's Texas Genco subsidiary has a 30.8% interest in the South
Texas Project Electric Generating Station (South Texas Project), which consists
of two 1,250 MW nuclear generating units and bears a corresponding 30.8% share
of capital and operating costs associated with the project. The South Texas
Project is owned as a tenancy in common among its four co-owners, with each
owner retaining its undivided ownership interest in the two nuclear-fueled
generating units and the electrical output from those units. Texas Genco and the
other owners of the South Texas Project maintain nuclear property and nuclear
liability insurance coverage as required by law and periodically review
available limits and coverage for additional protection. The owners of the South
Texas Project currently maintain $2.75 billion in property damage insurance
coverage, which is above the legally required minimum, but is less than the
total amount of insurance currently available for such losses.

Pursuant to the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $9.3 billion as of September 30, 2002. Owners
are required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan under which the owners
of the South Texas Project are subject to maximum retrospective assessments in
the

25

aggregate per incident of up to $88 million per reactor. The owners are jointly
and severally liable at a rate not to exceed $10 million per incident per year.

There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.

(e) Nuclear Decommissioning.

The Company contributed $14.8 million in 2001 to trusts established to fund
its share of the decommissioning costs for the South Texas Project. At the
Restructuring, beneficial ownership of this trust was transferred to Texas Genco
as the licensee of the Company's interest in the South Texas Project. Pursuant
to an October 3, 2001 Order from the Texas Utility Commission, beginning in
2002, CenterPoint Houston will collect $2.9 million per year relating to
decommissioning funding from customers and will transfer these amounts collected
to Texas Genco for deposit into the decommissioning trusts. There are various
investment restrictions imposed upon the Company by the Texas Utility Commission
and the Nuclear Regulatory Commission (NRC) relating to the nuclear
decommissioning trusts. Additionally, the boards of directors of the Company and
Texas Genco have appointed the Nuclear Decommissioning Trust Investment
Committee to establish the investment policy of the trusts and oversee the
investment of the trusts' assets. The securities held by the trusts for
decommissioning costs had an estimated fair value of $160 million as of
September 30, 2002, of which approximately 50% were debt securities and the
remaining 50% were equity securities. For a discussion of the accounting
treatment for the securities held in the nuclear decommissioning trusts, see
Note 2(l) to the Reliant Energy 10-K/A Notes, which note is incorporated herein
by reference. In July 1999, an outside consultant estimated the Company's
portion of decommissioning costs to be approximately $363 million. While the
current funding levels exceed minimum NRC requirements, no assurance can be
given that the amounts held in trust will be adequate to cover the actual
decommissioning costs of the South Texas Project. Such costs may vary because of
changes in the assumed date of decommissioning and changes in regulatory
requirements, technology and costs of labor, materials and equipment. Pursuant
to the Texas electric restructuring law, costs associated with nuclear
decommissioning that have not been recovered as of January 1, 2002, will
continue to be subject to cost-of-service rate regulation and will be included
in a charge to transmission and distribution customers.

Pursuant to the terms of the master separation agreement between Reliant
Energy and Reliant Resources and the applicable NRC regulations, the
responsibility for the decommissioning trusts transferred to Texas Genco at the
time of the Restructuring.

(14) REPORTABLE BUSINESS SEGMENTS

The Company's determination of reportable business segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The Company has
identified the following reportable business segments: Electric Transmission and
Distribution, Electric Generation, Natural Gas Distribution, Pipelines and
Gathering, and Other Operations. Effective with the deregulation of the Texas
electric industry beginning January 1, 2002, the basis of business segment
reporting has changed for the Company's electric operations. Although retail
sales are now conducted by Reliant Resources, retail customers remained
regulated customers of Reliant Energy HL&P through the date of their first meter
reading in January 2002. Sales of electricity in 2002 prior to such meter
reading are reflected in the Electric Transmission and Distribution business
segment. The Texas generation operations of Reliant Energy's former integrated
electric utility, Reliant Energy HL&P, are now a separate reportable business
segment, whereas they previously had been part of the Electric Operations
business segment. The remaining transmission and distribution function is now
reported separately in the Electric Transmission and Distribution business
segment, which also includes all impacts from generation-related regulatory
assets recoverable by the regulated utility, including the ECOM true-up
component of stranded costs. In 2001, Latin America was a separate business
segment, but beginning in 2002 is reported in the Other Operations business
segment. Reportable business segments from 2001 have been restated to conform to
the 2002 presentation. Reportable business segments presented herein do not
include Wholesale Energy, European Energy and Retail Energy as these business
segments have operated within Reliant Resources which is presented as
discontinued operations within these Interim Financial Statements. Note that
estimates have been used to separate historical, (pre-January 1, 2002) Electric
Generation business segment data from the Electric Transmission and Distribution
segment data (see notes to the following tables). For descriptions of these
reportable business segments, see Note 1 to the Reliant Energy 10-K/A Notes.

26

Beginning in the first quarter of 2002, the Company began to evaluate
business segment performance on an earnings (loss) before interest expense,
distribution on trust preferred securities, and income taxes (EBIT) basis. Prior
to 2002, the Company evaluated performance based upon operating income. EBIT, as
defined, is shown because the Company 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. The Company expects that some analysts and
investors will want to review EBIT when evaluating the Company. EBIT is not
defined under accounting principles generally accepted in the United States of
America (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. Additionally, the
Company'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.

Financial data for the reportable business segments are as follows:

- ----------

(1) Retail customers remained regulated customers of Reliant Energy HL&P, then
an unincorporated division of Reliant Energy, through the date of their
first meter reading in January 2002. Sales of electricity to retail
customers in 2002 prior to this meter reading are reflected in the Electric
Transmission and Distribution business segment.

(2) For 2001, revenues were derived based on an allowed regulatory rate of
return on rate base with Reliant Energy HL&P being the sole customer of the
Electric Generation business segment. Expenses, such as fuel and cost of
gas sold, operations and maintenance and depreciation and amortization, and
assets, such as property, plant and equipment and inventory, were
specifically identified by function and reported accordingly. Various
allocations were used to disaggregate other common expenses, assets and
liabilities between the Electric Generation and the Electric Transmission
and Distribution business segments. Interest expense was calculated based
upon an allocation methodology that charged the Electric Generation
business segment with financing and equity costs from Reliant Energy in
proportion to its share of total net assets prior to the effects of
deregulation. For 2002, the Electric Generation business segment's
operations reflect market prices for power established by capacity
auctions.

(3) Included in Revenues from Non-Affiliates are revenues from sales to Reliant
Resources, a former affiliate, of $16 million and $651 million for the
three months ended September 30, 2001 and 2002, respectively, and $149
million and $1.5 billion for the nine months ended September 30, 2001 and
2002, respectively.

28

Reconciliation of Operating Income to EBIT and EBIT to Net Income (Loss)
Attributable to Common Stockholders:

29

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CENTERPOINT ENERGY AND SUBSIDIARIES

The following discussion and analysis should be read in combination with
our Interim Financial Statements contained in this Form 10-Q.

OVERVIEW

We are a public utility holding company, created on August 31, 2002 as part
of a corporate restructuring of Reliant Energy, Incorporated (Reliant Energy) in
compliance with requirements of the Texas electric restructuring law. We are the
successor to Reliant Energy for financial reporting purposes under the
Securities Exchange Act of 1934. Our wholly owned operating subsidiaries own and
operate electric generation plants, electric transmission and distribution
facilities, natural gas distribution facilities and natural gas pipelines. We
are subject to regulation as a "registered holding company" under the Public
Utility Holding Company Act of 1935 (1935 Act). Our wholly owned subsidiaries
include:

o CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
engages in our electric transmission and distribution business in the
Texas Gulf Coast area;

o Texas Genco Holdings, Inc. (Texas Genco), which owns and operates our
Texas generating plants; and

o CenterPoint Energy Resources Corp. (CERC Corp.), together with its
subsidiaries (CERC), which owns and operates our local gas
distribution companies, gas gathering systems and interstate
pipelines.

Our 83%-ownership interest in Reliant Resources, Inc. (Reliant Resources)
was distributed to our shareholders on September 30, 2002 (the Distribution).

In this section we discuss our results from continuing operations on a
consolidated basis and individually for each of our business segments. We also
discuss our liquidity, capital resources and critical accounting policies. Our
financial reporting business segments include the following:

o Electric Transmission and Distribution;

o Electric Generation;

o Natural Gas Distribution;

o Pipelines and Gathering; and

o Other Operations.

Effective with the full deregulation of sales of electric energy to retail
customers in Texas beginning January 1, 2002, power generators and retail
electric providers in Texas ceased to be subject to traditional cost-based
regulation. Since that date, we have sold generation capacity, energy and
ancillary services related to power generation at prices determined by the
market. Our transmission and distribution services remain subject to rate
regulation.

Beginning January 1, 2002, the basis of business segment reporting has
changed for our Texas electric operations. Although our former retail sales
business is no longer conducted by us, retail customers remained regulated
customers of our former integrated electric utility, Reliant Energy HL&P,
through the date of their first meter reading in 2002. Sales of electricity to
retail customers in 2002 prior to this meter reading are reflected in the
Electric Transmission and Distribution business segment. The Texas generation
operations of Reliant Energy HL&P are now a separate reportable business
segment, Electric Generation, whereas they previously had been part of the
Electric Operations business segment. The remaining transmission and
distribution function is now reported separately in the Electric Transmission
and Distribution business segment. In 2001, Latin America was a separate
business segment, but is now reported in the Other Operations business segment
beginning in 2002. Reportable business segments from 2001 have been restated to
conform to the 2002 presentation. For business segment reporting information,
please read Notes 1 and 14 to our Interim Financial Statements, which notes are
incorporated by reference herein.

The Interim Financial Statements have been prepared to reflect the effect
of the Distribution as described above on the CenterPoint Energy financial
statements. The Interim Financial Statements present the Reliant Resources
businesses (Wholesale Energy, European Energy, Retail Energy and related
corporate costs) as discontinued

30

operations, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
Accordingly, the Interim Financial Statements reflect these operations as
discontinued operations for the three and nine months ended September 30, 2001
and 2002.

As a result of the spin-off of Reliant Resources, we recorded a non-cash
loss on disposal of discontinued operations of $4.3 billion in the third quarter
of 2002. This loss represents the excess of the carrying value of our net
investment in Reliant Resources over the market value of Reliant Resources'
common stock. Through the date of the spin-off, Reliant Resources' assets and
liabilities are shown in our balance sheet as "current and non-current assets
and liabilities of discontinued operations."

The Restructuring

In December 2000, Reliant Energy transferred a significant portion of its
unregulated businesses to 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 we
refer to herein as the Restructuring):

o CenterPoint Energy became the holding company for the Reliant Energy
group of companies;

o Reliant Energy and its subsidiaries 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, we distributed the shares of common stock of
Reliant Resources that we owned to our shareholders (which we refer 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 public
utility holding company system under the 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, we have obtained authority from our 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's natural gas pipelines and gathering business. We
must also receive approval of these transactions under the 1935 Act. Although we
expect this business restructuring of CERC may be completed, we can provide no
assurance that this will, in fact, occur, or that we will ultimately be exempt
from registration under the 1935 Act. For further information on the CERC
restructuring, see "Our Business --RERC Corp. Restructuring" in Item 1 of the
Reliant Energy Form 10-K/A, which is incorporated by reference herein.

Recent Plant Mothballing

In October 2002, Texas Genco announced a plan to temporarily remove from
service, or "mothball," approximately 3,400 MW of our gas-fired generating units
through at least May 2003. We decided to mothball these units because of
unfavorable market conditions in the ERCOT market, including a surplus of
generating capacity and a lack of bids for the output of these units in previous
capacity auctions. In connection with our plan, the ERCOT independent system
operator has determined that the mothballed units are not required to remain in
service for reliability reasons through May 2003.

The mothballed units represent approximately one third of our total
gas-fired generating capacity. The capacity to be mothballed includes all 2,213
MW of capacity at the P.H. Robinson facility, 229 MW of capacity at the T.H.

31

Wharton facility, 406 MW of capacity at the Greens Bayou facility, 374 MW of
capacity at the Webster facility and all 174 MW of capacity at the Deepwater
facility. We may decide to mothball additional gas-fired generating units
through May 2003 if market demand for units continuing in service is
insufficient. Given the results of our recent capacity auctions, we expect to
return some or all of the mothballed facilities to service during the summer.

In connection with the decision to mothball these units, Texas Genco
extended a voluntary early retirement package in November 2002 to approximately
140 Texas Genco employees. The Company does not believe the cost of this package
will have a material impact on its results of operations or cash flows.

CONSOLIDATED RESULTS OF OPERATIONS

Three months ended September 30, 2001 compared to three months ended September
30, 2002

Income from Continuing Operations. We reported income from continuing
operations before the cumulative effect of accounting change of $161 million
($0.54 per diluted share) for the three months ended September 30, 2002. For the
same period of 2001, and prior to the full implementation of the Texas electric
restructuring law, income from continuing operations before the cumulative
effect of accounting change was $183 million ($0.63 per diluted share).
Effective January 1, 2002, we discontinued amortizing goodwill in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). During the third quarter of 2001, we
recognized $12 million of goodwill amortization expense. The decrease in income
from continuing operations before the cumulative effect of accounting change for
the third quarter of 2002 as compared to the third quarter of 2001 was primarily
due to the following:

32

o a $41 million decrease in earnings before interest and taxes (EBIT)
from our Electric business segments, reflecting the movement of a
portion of this business to Reliant Resources' Retail Energy business
segment and depressed capacity auction prices for our generation
products; and

o a $30 million increase in interest expense from higher borrowing
costs.

The above items were partially offset by:

o a $14 million positive impact related to our investment in AOL Time
Warner securities and related indexed debt securities;

o a $20 million increase in EBIT from our Natural Gas Distribution
business segment; and

o a $9 million increase in EBIT from our Pipelines and Gathering
business segment.

Earnings Before Interest and Income Taxes. For an explanation of changes in
EBIT, please read the discussion below under "- Earnings Before Interest and
Income Taxes by Business Segment."

Interest Expense. We incurred interest expense of $171 million during the
three months ended September 30, 2002 compared to $141 million in the same
period of 2001. The increase in interest expense of $30 million resulted
primarily from higher borrowing costs and increased debt levels.

Income Tax Expense. During the three months ended September 30, 2002 and
2001, our effective tax rate was 36.6% and 35.0%, respectively. The increase in
the effective tax rate for the third quarter of 2002 compared to the third
quarter of 2001 was primarily due to an increase in state taxes, offset by the
discontinuance of goodwill amortization in accordance with SFAS No. 142.

Nine months ended September 30, 2001 compared to nine months ended September 30,
2002

Income from Continuing Operations. We reported income from continuing
operations before the cumulative effect of accounting change of $394 million
($1.32 per diluted share) for the nine months ended September 30, 2002 compared
to $427 million ($1.46 per diluted share) for the nine months ended September
30, 2001. Effective January 1, 2002, we discontinued amortizing goodwill in
accordance with SFAS No. 142. During the first nine months of 2001, we
recognized $37 million of goodwill amortization expense. The decrease in income
from continuing operations before the cumulative effect of accounting change for
the nine months ended September 30, 2002 as compared to the same period in 2001
was primarily due to the following:

o a $136 million decrease in EBIT from our Electric business segments,
reflecting the movement of a portion of this business to Reliant
Resources' Retail Energy business segment and depressed capacity
auction prices for our generation products;

o a $16 million negative impact related to our investment in AOL Time
Warner securities and related indexed debt securities; and

o a $6 million increase in interest expense from higher borrowing costs.

The above items were partially offset by:

o a $48 million increase in EBIT from our Natural Gas Distribution
business segment;

o a $15 million increase in EBIT from our Pipelines and Gathering
business segment;

o a $15 million increase in EBIT from our Other Operations business
segment; and

o a $36 million decrease in income tax expense.

33

Earnings Before Interest and Income Taxes. For an explanation of changes in
EBIT, please read the discussion below under "- Earnings Before Interest and
Income Taxes by Business Segment."

Interest Expense. We incurred interest expense of $428 million during the
nine months ended September 30, 2002 compared to $422 million in the same period
of 2001. The increase in interest expense of $6 million resulted primarily from
higher borrowing costs.

Income Tax Expense. During the nine months ended September 30, 2002 and
2001, our effective tax rate was 34.5% and 36.2%, respectively. The decrease in
the effective tax rate for the first nine months of 2002 compared to the first
nine months of 2001 was primarily due to the discontinuance of goodwill
amortization in accordance with SFAS No. 142 and increased benefits related to
the Employee Stock Ownership Plan.

Cumulative Effect of Accounting Change. The 2001 results reflect a $59
million after-tax non-cash gain from the adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133).
For additional discussion of the adoption of SFAS No. 133, please read Note 5 to
the Reliant Energy 10-K/A Notes, which note is incorporated herein by reference.

EARNINGS BEFORE INTEREST AND INCOME TAXES BY BUSINESS SEGMENT

The following table presents EBIT for each of our business segments for the
three and nine months ended September 30, 2001 and 2002. EBIT represents
earnings (loss) before interest expense, distribution on trust preferred
securities, and income taxes. EBIT, as defined, is shown because we believe 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. We expect that some
analysts and investors will want to review EBIT when evaluating our Company. It
is not defined under generally accepted accounting principles, and should not be
considered in isolation or as a substitute for a measure of performance prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) and is not indicative of operating income from operations as determined
under GAAP. Additionally, our 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. For a reconciliation of our business
segments' operating income (loss) to EBIT and EBIT to net income (loss), please
read Note 14 to our Interim Financial Statements.

ELECTRIC BUSINESS SEGMENTS

For information regarding factors that may affect the future results of
operations of our Electric business segments, please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Affecting Our Future Earnings -- Factors Affecting the Results
of Our Electric Operations" in the Reliant Energy Form 10-K/A, which is
incorporated herein by reference.

The following tables provide summary data, including EBIT, of our Electric
business segments for the three months and nine months ended September 30, 2001
and 2002:

34

- ----------

(1) Gigawatt hours

35

36

During 2001, our Electric Operations business segment reflected the
regulated electric utility business, including generation, transmission and
distribution, and retail electric sales. As of January 1, 2002, with the opening
of the Texas market to full retail electric competition, generation and retail
sales are no longer subject to cost of service regulation. Retail electric sales
involve the sale of electricity and related services to end users of electricity
and were included as part of the bundled regulated service prior to 2002.

Beginning in 2002, we are reporting two new business segments for what was
the former Electric Operations business segment:

o Electric Transmission and Distribution; and

o Electric Generation.

The Electric Transmission and Distribution business segment will report
results from two sources. This business segment includes the regulated electric
transmission and distribution operations as well as impacts of
generation-related stranded costs recoverable by the regulated utility. The
previously regulated generation operations in Texas are being reported in the
new Electric Generation business segment.

As a result of the implementation of deregulation and the corresponding new
business segments, the regulated transmission and distribution utility recovers
the cost of its service through an energy delivery charge, and not as a
component of the prior bundled rate, which included energy and delivery charges.
Accordingly, there are no meaningful comparisons for these business segments
against prior periods. The design of the new energy delivery rate differs from
the prior bundled rate. The winter/summer rate differential for residential
customers has been eliminated and the energy component of the rate structure has
been removed, which will tend to lessen some of the pronounced seasonal
variation of revenues which has been experienced in prior periods. For estimates
of historical Electric Generation revenues, please read Note 14 to our Interim
Financial Statements.

Although our former retail sales business is no longer conducted by us,
retail customers remained regulated customers of Reliant Energy HL&P through the
date of their first meter reading in 2002. Operations during this transition
period, reflected in the Electric Transmission and Distribution business
segment, produced a $4 million loss before interest and taxes for the three
months ended September 30, 2002 and EBIT of $3 million for the nine months ended
September 30, 2002. We expect to incur additional transition expenses during the
remainder of the year which are expected to offset a substantial portion of the
earnings from retail sales in January 2002.

The new Electric Generation business segment, Texas Genco, is comprised of
over 14,000 megawatts of electric generation located entirely in the state of
Texas. This business segment reported EBIT of $7 million for the three months
ended September 30, 2002 and a loss before interest and taxes of $71 million for
the nine months ended September 30, 2002, primarily due to low natural gas
prices and ample generating capacity in Texas, which created a weak price
environment when the capacity auctions described below were conducted in late
2001 and early 2002.

The new Electric Transmission and Distribution business segment,
CenterPoint Houston, reported EBIT of $407 million for the three months ended
September 30, 2002, consisting of EBIT of $171 million for the regulated
electric transmission and distribution business, loss before interest and taxes
of $4 million from retail sales during the transition period as discussed above
and EBIT of $240 million associated with certain generation-related regulatory
assets, or Excess Cost Over Market (ECOM), recorded pursuant to the Texas
electric restructuring law as explained below. The Electric Transmission and
Distribution business segment reported EBIT of $943 million for the nine months
ended September 30, 2002, consisting of EBIT of $389 million for the regulated
electric transmission and distribution business, EBIT of $3 million from retail
sales during the transition period as discussed above and EBIT of $551 million
associated with the ECOM true-up.

Under the Texas electric restructuring law, each power generator that is
unbundled from an integrated electric utility in Texas has an obligation to
conduct state-mandated capacity auctions of 15% of its capacity. In addition,
under a master separation agreement between CenterPoint Energy and Reliant
Resources, Texas Genco is contractually obligated to auction all capacity in
excess of the state-mandated capacity auctions. The auctions conducted
periodically between September 2001 and October 2002 were consummated at prices
below those used in

37

the ECOM model by the Public Utility Commission of Texas (Texas Utility
Commission). Under the Texas electric restructuring law, a regulated utility may
recover in a regulatory proceeding scheduled for 2004 any difference between
market prices received through the state-mandated auctions and the Texas Utility
Commission's earlier estimates of those market prices. This difference, recorded
as a regulatory asset, produced $240 million of EBIT in the third quarter of
2002 and $551 million of EBIT in the first nine months of 2002.

In the Electric Transmission and Distribution business segment, throughput
remained level during the third quarter of 2002, and declined 5% during the nine
months ended September 30, 2002 as compared to the prior periods in 2001. The
decrease was primarily due to reduced energy delivery in the industrial sector
resulting from self-generation by several major customers, partially offset by
increased residential usage due to warmer weather and increased demand from
non-weather related factors such as price elasticity. Additionally, despite a
slowing economy, total metered customers continued to grow at an approximate
annual growth rate of 2% during the quarter.

Operation and maintenance expenses decreased by $27 million and $63 million
for the quarter and nine months ended September 30, 2002, respectively, compared
to the same periods in 2001. The decrease was primarily due to the elimination
of factoring expense ($17 million and $43 million for the quarter and nine
months, respectively) as a result of the termination of an agreement under which
the former Electric Operations business segment had sold its customer accounts
receivable and fewer plant outages in 2002 ($5 million and $21 million for the
quarter and nine months, respectively), partially offset by higher benefits
expense ($5 million and $11 million for the quarter and nine months,
respectively).

Depreciation and amortization decreased $47 million for both the three and
nine months ended September 30, 2002, compared to the same periods in 2001. The
decrease was primarily due to decreased amortization of the impairment loss
recorded in June 1999, which was fully amortized in December 2001, offset by the
discontinuance of redirection of depreciation expense related to Electric
Transmission and Distribution assets.

Other operating expense in the third quarter of 2002 decreased $49 million
compared to the same period in 2001. The decrease was primarily due to lower
gross receipts taxes ($19 million) which became the responsibility of the retail
electric provider upon deregulation and lower franchise fees ($11 million).
Other operating expense decreased $96 million in the nine months ended September
30, 2002, compared to the same period in 2001, primarily due to lower property
($17 million) and gross receipts taxes ($52 million) and lower franchise fees
($24 million).

38

NATURAL GAS DISTRIBUTION

Our Natural Gas Distribution business segment's operations consist of
intrastate natural gas sales to, and natural gas transportation for residential,
commercial and industrial customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas. This business segment's operations also include
non-rate regulated natural gas sales to and transportation services for
commercial and industrial customers in Illinois, Missouri and Wisconsin in
addition to the six states listed above.

For information regarding factors that may affect the future results of
operations of our Natural Gas Distribution business segment, please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Our Future Earnings -- Factors Affecting
the Results of RERC's Operations" in the Reliant Energy Form 10-K/A, which is
incorporated herein by reference.

The following table provides summary data, including EBIT, of our Natural
Gas Distribution business segment for the three months and nine months ended
September 30, 2001 and 2002:

- ----------

(1) Billion cubic feet.

Our Natural Gas Distribution business segment's EBIT increased $20 million
and $48 million for the three months and nine months ended September 30, 2002,
respectively, as compared to the same periods in 2001. The increase for the
three months ended September 30, 2002 was primarily due to a reduction in bad
debt expense as a result of improved collections and lower gas costs in 2002 and
the discontinuance of goodwill amortization in 2002. For the nine months ended
September 30, 2002, the increase was primarily due to a significant reduction in
bad debt expense in the second and third quarters of 2002 as a result of
improved collections and lower gas prices in 2002 and changes in estimates of
unbilled revenues and deferred gas costs in 2001, as well as the discontinuance
of goodwill amortization in 2002. For the nine months ended September 30, 2002,
the above increases were partially offset by decreased earnings due to
significantly milder weather and the resulting decreased usage in 2002 as
compared to 2001. Depreciation and amortization expense decreased approximately
$5 million and $16 million for the three months and nine months ended September
30, 2002, respectively, primarily as a result of the discontinuance of goodwill
amortization in accordance with SFAS No. 142 as further discussed in Note 6 to
our Interim Financial Statements, which note is incorporated by reference
herein. Goodwill amortization was $8 million and $23 million for the three
months and nine months ended September 30, 2001, respectively. Other operating
expenses remained flat in the third quarter but decreased $16 million for the
nine months ended September 30, 2002 as compared to the same period in 2001, due
primarily to reduced franchise fees as a result of decreased revenues.

39

PIPELINES AND GATHERING

Our Pipelines and Gathering business segment operates two interstate
natural gas pipelines and provides gathering and pipeline services.

For information regarding factors that may affect the future results of
operations of our Pipelines and Gathering business segment, please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Our Future Earnings -- Factors Affecting
the Results of RERC's Operations" in the Reliant Energy Form 10-K/A, which is
incorporated herein by reference.

The following table provides summary data, including EBIT, of our Pipelines
and Gathering business segment for the three months and nine months ended
September 30, 2001 and 2002:

- ----------

(1) Elimination of volumes both transported and sold.

Our Pipelines and Gathering business segment's EBIT for the three months
and nine months ended September 30, 2002 compared to the same periods in 2001,
increased $9 million and $15 million, respectively. Operation and maintenance
expenses decreased $4 million for the three months ended September 30, 2002 and
increased $9 million for the nine months ended September 30, 2002, compared to
the same periods in 2001 primarily due to project work consisting of
construction management, material acquisition, engineering, project planning and
other services. Project work expenses are offset by revenues billed for these
services. Depreciation and amortization expense decreased $4 million and $13
million for the three months and nine months ended September 30, 2002,
respectively, as compared to the same periods in 2001, primarily as a result of
the discontinuance of goodwill amortization in accordance with SFAS No. 142 as
further discussed in Note 6 to our Interim Financial Statements. Other income
increased $2 million for the nine months ended September 30, 2002 as compared to
the same periods in 2001, primarily due to interest accrued on a fuel-related
sales tax refund.

OTHER OPERATIONS

Our Other Operations business segment includes our Latin America
operations, the operations of CenterPoint Energy Management Services, Inc.,
CenterPoint Energy Power Systems, Inc., office buildings and other real estate
used in our business operations and unallocated corporate costs.

40

The following table shows EBIT of our Other Operations business segment for
the three months and nine months ended September 30, 2001 and 2002:

Our Other Operations business segment's loss before interest and income
taxes decreased by $18 million and $15 million for the three months and nine
months ended September 30, 2002, respectively, compared to the same periods in
2001. The decline in loss before interest and income taxes for the three months
was primarily due to a net gain of $5 million in 2002 as compared to a $9
million net loss in 2001 on our AOL Time Warner investment and related indexed
debt securities. The decline in loss before interest and income taxes for the
nine months was primarily due to reduced other operating costs partially offset
by an increased net loss of $16 million on our AOL Time Warner investment and
related indexed debt securities for 2002 as compared to 2001.

CERTAIN FACTORS AFFECTING OUR FUTURE EARNINGS

For information on other developments, factors and trends that may have an
impact on our future earnings, including information relating to an anticipated
decline in earnings of our electric business segments due to deregulation of the
Texas electric industry, please read "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Affecting Our
Future Earnings" in the Reliant Energy Form 10-K/A, which is incorporated herein
by reference.

In addition to the factors incorporated from the Reliant Energy 10-K/A,
increased borrowing costs and increased pension expense are expected to
negatively impact our earnings in 2003.

LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL CASH FLOWS

The following table summarizes the net cash provided by (used in)
operating, investing and financing activities for the nine months ended
September 30, 2001 and 2002:

Net cash provided by operating activities during the nine months ended
September 30, 2002 decreased $1.9 billion compared to the same period in 2001
primarily due to (a) significant reductions in accounts receivable and accounts
payable during the nine months ended September 30, 2001 compared to the same
period in 2002 as a result of higher natural gas prices experienced in late 2000
and early 2001, (b) a decrease in current taxes payable primarily due to the
deferral of taxes related to the ECOM true-up and excess mitigation refund
revenue components of our Electric Transmission and Distribution business
segment; and (c) an increase in net regulatory assets and liabilities of our
Electric Transmission and Distribution business segment primarily due to a $722
million increase in the ECOM true-up component of revenue as discussed in Note 4
to our Interim Financial Statements and $121 million refunds of excess
mitigation costs to our ratepayers.

41

Net cash used in investing activities decreased $228 million during the
nine months ended September 30, 2002 compared to the same period in 2001
primarily due to a decrease in capital expenditures related to our Electric
Transmission and Distribution business segment attributed to fewer transmission
interconnection projects and fewer infrastructure and facilities projects
required prior to deregulation and business separation.

Cash flows provided by financing activities increased $1.8 billion during
the nine months ended September 30, 2002 compared to the same period in 2001
primarily due to a $2.2 billion increase in short-term borrowings, partially
offset by a $541 million decrease in proceeds from long-term debt.

FUTURE SOURCES AND USES OF CASH FLOWS

Long-Term Debt. Our long-term debt consists of our obligations and
obligations of our subsidiaries, including transition bonds issued by an
indirect subsidiary ("the transition bonds").

One of our indirect finance subsidiaries, CenterPoint Energy Transition
Bond Company, LLC, has $736 million aggregate principal amount of outstanding
transition bonds that were issued in 2001 in accordance with the Texas electric
restructuring law. Classes of the transition bonds have final maturity dates of
September 15, 2007, September 15, 2009, September 15, 2011 and September 15,
2015 and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively.
The transition bonds are secured by "transition property," as defined in the
Texas electric restructuring law, which includes the irrevocable right to
recover, through non-bypassable transition charges payable by retail electric
customers, qualified costs provided in the Texas electric restructuring law and
a tariff issued by the Texas Utility Commission. The transition bonds are
reported as our long-term debt, although the holders of the transition bonds
have no recourse to any of our assets or revenues, and our creditors have no
recourse to any assets or revenues (including, without limitation, the
transition charges) of the transition bond company. CenterPoint Houston has no
payment obligations with respect to the transition bonds except to remit
collections of transition charges as set forth in a servicing agreement between
CenterPoint Houston and the transition bond company and in an intercreditor
agreement among CenterPoint Houston, our indirect transition bond subsidiary and
other parties.

We purchased $75 million principal amount of outstanding pollution control
bonds on November 1, 2002 at 100% of their principal amount. On December 1,
2002, we will remarket, purchase or retire $100 million principal amount of
outstanding 5.2% pollution control bonds in connection with mandatory tender
provisions. If market conditions permit, we will remarket the $75 million
principal amount of pollution control bonds purchased in November and the $100
million principal amount of pollution control bonds that will be purchased in
December in either the fourth quarter of 2002 or the first quarter of 2003.
Maturities during the balance of 2002 include $300 million of notes of a
financing subsidiary of CenterPoint Houston that mature on November 15, 2002.
CenterPoint Houston provides limited credit support for these notes.

On November 12, 2002, CenterPoint Houston entered into a $1.3 billion loan
maturing November 2005. The interest rate on the loan is the London inter-bank
offered rate (LIBOR) plus 9.75 percent, subject to a minimum LIBOR rate of 3
percent. The loan is secured by CenterPoint Houston's general mortgage bonds.
Proceeds from the loan were used to repay CenterPoint Houston's $850 million
term loan and to pay costs of issuance. Additional proceeds from the loan are
expected to be used to repay $300 million of debt that will mature on November
15, 2002 and to purchase or retire $100 million of pollution control bonds on
December 1, 2002. The loan agreement contains various business and financial
covenants including a covenant restricting CenterPoint Houston's debt as a
percent of its total capitalization to 68%. The loan agreement also limits
incremental secured debt that may be issued at CenterPoint Houston to $300
million.

Long-term debt maturities in 2003 include $150 million principal amount of
medium-term notes maturing in April 2003 and $16.6 million principal amount of
pollution control bonds maturing in December 2003. In addition, CERC Corp. has
$500 million principal amount of Term Enhanced Remarketable Securities that must
be repaid or remarketed in November 2003.

We have $840 million of outstanding Zero-Premium Exchangeable Subordinated
Notes (ZENS) that may be exchanged for cash at any time. Holders of ZENS
submitted for exchange are entitled to receive a cash payment equal to 95% of
the market value of the reference shares of AOL Time Warner (AOL TW) common
stock. There are 1.5 reference shares of AOL TW common stock for each of the
17.2 million ZENS units originally issued (of which approximately 16% were
exchanged for cash of approximately $45 million in 2002). The exchange market

42

value is calculated using the average closing price per share of AOL TW common
stock on the New York Stock Exchange on one or more trading days following the
notice date. One of our subsidiaries owns the reference shares of AOL TW common
stock and generally liquidates such holdings to the extent of ZENS exchanged.
Cash proceeds from such liquidations are used to fund ZENS exchanged for cash.
Although proceeds from the sale of AOL TW stock offset the cash paid on
exchanges, ZENS exchanges result in a cash outflow because deferred taxes
related to the ZENS and AOL TW stock become current tax obligations when ZENS
are exchanged and AOL TW stock is sold. Current tax obligations in 2002
increased by $58 million as a result of the exchanges, during the nine months
ended September 30, 2002, of ZENS having a principal amount of $160 million and
the related sale of 4.1 million shares of AOL TW stock.

CenterPoint Houston has issued approximately $1.2 billion aggregate
principal amount of first mortgage bonds and approximately $1.8 billion
aggregate principal amount of general mortgage bonds, of which approximately
$1.1 billion combined aggregate principal amount of first mortgage bonds and
general mortgage bonds collateralizes debt of CenterPoint Energy, Inc. The
general mortgage bonds are issued under the General Mortgage Indenture dated as
of October 10, 2002 between CenterPoint Houston and JPMorgan Chase Bank, as
trustee. The lien of the general mortgage indenture is junior to that of the
Mortgage and Deed of Trust dated as of November 1, 1944 between CenterPoint
Houston (successor of Houston Lighting & Power Company) and JPMorgan Chase Bank
(successor of South Texas Commercial National Bank), as trustee, pursuant to
which the first mortgage bonds are issued. The aggregate amount of general
mortgage bonds and first mortgage bonds that could be issued is approximately
$3.9 billion based on estimates of the value of property encumbered by the
general mortgage, the cost of such property and the 70% bonding ratio contained
in the general mortgage. As of November 13, 2002, outstanding first mortgage
bonds and general mortgage bonds aggregated approximately $3.0 billion.

Short-Term Debt. During the balance of 2002 and 2003, the following bank
facilities are scheduled to terminate, or may terminate pursuant to their terms,
on the dates indicated.

(1) The bank facilities aggregating $3.85 billion have the
following mandatory commitment reductions and, to the extent
necessitated by lower commitment levels, principal payment
obligations:

Borrowings under the CenterPoint Energy facility bear interest based on
LIBOR rates under a pricing grid tied to our credit rating. Interest rates for
the term loans at our current ratings would be the LIBOR rate plus 450 basis

43

points. As part of these agreements, (1) we paid a one percent fee upon closing,
(2) we paid approximately $14 million upon the termination of the CenterPoint
Houston facility and (3) we will pay an additional $38.5 million on November 15,
2002, approximately $41 million at the end of February 2003, and approximately
$20 million at the end of June 2003.

On October 31, 2002, CERC Corp. had received proceeds from the sale of
receivables of approximately $120 million under its $150 million receivables
facility and our remaining bank facilities were fully drawn or utilized in the
form of letters of credit. On such date, we had $646 million of temporary
investments.

Under the CenterPoint Energy credit facilities, if we issue any capital
stock or indebtedness, proceeds are to be applied (subject to a $100 million
basket, and other limited exceptions) to repay bank loans and reduce bank
commitments. If we receive cash proceeds from a sale of assets of more than $30
million or, if less, a group of sales aggregating more than $100 million, then
such proceeds are to be applied to prepay bank loans and to reduce bank
commitments, except that proceeds of up to $120 million (including the $100
million basket discussed above) can be reinvested in our businesses. Proceeds of
$850 million from the $1.3 billion loan arranged in November 2002 were used to
repay $850 million of loans under the CenterPoint Houston facility and the
facility was terminated. Proceeds of $300 million from the $1.3 billion loan
will be used to repay $300 million of debt maturing on November 15, 2002.
Proceeds of $100 million from the $1.3 billion loan are expected to be used to
purchase $100 million of pollution control bonds that are subject to mandatory
tender on December 1, 2002. Because remaining proceeds from the $1.3 billion
loan were used to pay costs of issuance, CenterPoint Energy continues to have a
$100 million basket under its $3.9 billion bank facility.

Capital Requirements. We expect capital requirements to be met with cash
flows from operations as well as proceeds from debt offerings and other
borrowings. We anticipate investing up to $3.3 billion in capital expenditures
during the years 2002 through 2006, including $659 million expended during the
nine months ended September 30, 2002. We anticipate capital expenditures to be
approximately $860 million and $675 million in 2002 and 2003, respectively.

The largest component of our estimated construction expenditures are
additions to our electric distribution network arising from estimated load
growth comprising approximately $120 million per year over the next five years.

Refunds to CenterPoint Houston Customers. An order issued by the Texas
Utility Commission on October 3, 2001 (October 3, 2001 Order) established the
transmission and distribution rates that became effective in January 2002. The
Texas Utility Commission determined that CenterPoint Houston had overmitigated
its stranded costs by redirecting transmission and distribution depreciation and
by accelerating depreciation of generation assets (an amount equal to earnings
above a stated overall rate of return on rate base that was used to recover our
investment in generation assets) as provided under the 1998 transition plan and
the Texas electric restructuring law. In this final order, CenterPoint Houston
is required to reverse the amount of redirected depreciation and accelerated
depreciation taken for regulatory purposes as allowed under the transition plan
and the Texas electric restructuring law. Per the October 3, 2001 Order,
CenterPoint Houston recorded a regulatory liability to reflect the prospective
refund of the accelerated depreciation. CenterPoint Houston began refunding
excess mitigation credits with the January 2002 unbundled bills, to be refunded
over a seven year period. The annual cash flow impact of the reversal of both
redirected and accelerated depreciation is a decrease of approximately $225
million. Under the Texas electric restructuring law, a final settlement of these
stranded costs will occur in 2004.

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:

o transaction costs of approximately $175 million related to debt
financings;

o approximately $200 million of capital expenditures;

o $300 million of debt of our indirect subsidiary Reliant Energy
FinanceCo II LP maturing November 15, 2002;

44

o an estimated $60 million which we are obligated to return to
customers as a result of the Texas Utility Commission's finding of
over-mitigation of stranded costs;

o $175 million of pollution control bonds on which we pay debt service
and which we must remarket, purchase or retire;

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

o a dividend payment of $48 million.

Our principal cash requirements during 2003 include the following:

o $167 million of maturing long-term debt;

o approximately $675 million of capital expenditures;

o an estimated $240 million which we are obligated to return to
customers as a result of the Texas Utility Commission's findings of
over-mitigation of stranded costs;

o remarketing or refinancing of $500 million of debt of CERC Corp.;

o repayments of short-term debt as a result of mandatory commitment
reductions of $1.2 billion under our bank facilities;

o payments in connection with the termination of bank facilities
expected to aggregate $3.2 billion at the time of the termination
unless a replacement facility is arranged;

o credit agreement payments of $41 million in February 2003 and $20
million in June 2003; and

o expected dividend payments of $193 million.

We expect to meet our capital requirements through cash flows from
operations, short-term borrowings and proceeds from debt and/or equity
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.

The following table lists shelf registration statements existing at
September 30, 2002 for securities that may be sold in public offerings. The
estimated market value of common stock is based on the number of shares
registered as of September 30, 2002 and the closing market price of CenterPoint
Energy common stock on that date.

The amount of any debt security or any security having equity
characteristics that we can issue, whether registered or unregistered, or
whether debt is secured or unsecured, 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 repay short-term borrowings.

Principal Factors Affecting Cash Requirements in 2004 and 2005. We expect
to sell Texas Genco in 2004. Proceeds from such sale, plus proceeds from the
securitization in 2004 or 2005 of stranded costs related to generating assets of
Texas Genco and generation related regulatory assets, are expected to aggregate
in excess of $5 billion. In late 2002 or early 2003, approximately 19% of the
outstanding stock of Texas Genco is expected to be distributed to holders of our
common stock. The value of this publicly traded Texas Genco stock will be used
to determine the value of Texas Genco for purposes of determining stranded
costs.

We expect to issue securitization bonds in 2004 or 2005 to monetize and
recover the balance of stranded costs relating to previously owned electric
generation assets and other qualified costs as determined in the 2004 True-up
Proceeding. The issuance will be done pursuant to a financing order issued by
the Texas Utility Commission. As with the debt of

45

our existing transition bond company, payments on these new securitization bonds
would also be made out of funds from non-bypassable charges assessed to retail
electric customers required to take delivery service from us. The holders of the
securitization bonds would not have recourse to any of our assets or revenues,
and our creditors would not have recourse to any assets or revenues of the
entity issuing the securitization bonds. All or a portion of the proceeds from
the issuance of securitization bonds remaining after repayment of the $1.3
billion loan executed by CenterPoint Houston in November 2002 are expected to be
utilized to retire our existing 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 CenterPoint Energy and certain
subsidiaries:

- ----------

(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. A "stable" outlook from Moody's indicates that
Moody's does not expect to put the rating on review for an upgrade or
downgrade within 18 months from when the outlook was assigned or last
affirmed.

(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 credit 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.

Our bank facilities contain "material adverse change" clauses that could
impact our ability to make new borrowings under these facilities. The "material
adverse change" clauses in most of our bank facilities relate to an event,
development or circumstance that has or would reasonably be expected to have a
material adverse effect on (a) the business, financial condition or operations
of the borrower and its subsidiaries taken as a whole, or (b) the legality,
validity or enforceability of the loan documents.

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 any receivables facility that replaces the existing facility may
differ.

Each ZENS note is exchangeable at the holder's option at any time for an
amount of cash equal to 95% of the market value of the reference shares of AOL
TW common stock attributable to each ZENS note. If our creditworthiness were to
drop such that ZENS note holders thought our liquidity was adversely affected or
the market for the ZENS notes were to become illiquid, some ZENS holders might
decide to exchange their ZENS for cash. Funds for the payment of cash upon
exchange could be obtained from the sale of the AOL TW common stock that we own
or from other sources. We own shares of AOL TW common stock equal to 100% of the
"reference

46

shares" used to calculate our obligation to the holders of the ZENS notes. ZENS
exchanges result in a cash outflow because deferred tax liabilities related to
the ZENS and AOL TW stock become current tax obligations when ZENS are
exchanged and AOL TW stock is sold.

Six of Texas Genco's contracts for the sale of capacity contain
requirements potentially obliging Texas Genco to put up additional security in
the event of a decline in our credit rating below investment grade. Given the
recent downgrade by Moody's, the purchasers could be entitled to call upon Texas
Genco to provide collateral to secure Texas Genco's obligations in a
"commercially reasonable" amount within three business days of notice. Failure
to provide this collateral entitles the other party to terminate the agreement
and unwind all pending transactions under the agreement. Texas Genco is always
the seller under these agreements, and its performance obligation in all cases
is one of delivery, rather than payment. Accordingly, it is difficult to
quantify the amount of collateral Texas Genco would be required to provide as
assurance for these delivery obligations. We believe that any such
quantification should be predicated on Texas Genco's ultimate exposure under
these agreements. Texas Genco has no exposure until (1) it cannot deliver power
as called for in the agreements and (2) the market cost of replacement power has
increased above the contract price. In the unlikely event that Texas Genco could
not deliver any of this power as agreed, we estimate that Texas Genco's total
exposure under these contracts at November 8, 2002 would be approximately $2
million.

As part of its normal business operations, Texas Genco has also entered
into power purchase and sale agreements with counterparties that contain similar
provisions that require a party to provide additional collateral on three
business days notice when that party's rating falls below BBB- from S&P or Baa3
from Moody's. Texas Genco both buys and sells under these agreements, and Texas
Genco uses them whenever possible either to locate less expensive power than
Texas Genco's marginal cost of generation or to sell power to another party who
is willing to pay more than Texas Genco's marginal cost of generation. The risk
of providing additional collateral is mitigated because most of the purchases
and sales under these arrangements take place over relatively short time
periods; typically these transactions are for one-day deliveries and rarely
exceed periods of one month.

CenterPoint Energy Gas Resources Corp., a wholly owned subsidiary of CERC
Corp., 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 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.

Recovery of Fuel Costs. We filed our final fuel reconciliation proceeding
with the Texas Utility Commission on July 1, 2002, and subsequently amended our
filing on October 2, 2002 and November 8, 2002. Although previous fuel
reconciliation proceedings have generally covered three-year periods, this
filing covers fuel expense and interest incurred from August 1, 1997 through
January 30, 2002. Also included in this amount is an under-recovery of $94
million, which was the balance as of July 31, 1997 as approved in our last fuel
reconciliation. Our filing related to this proceeding covers $8.5 billion in
fuel revenues and $8.6 billion in expenses and interest resulting in a current
under-collection, including interest, of $128 million. A procedural schedule has
been set with a hearing scheduled to begin January 28, 2003. Any over- or
under-recovery, plus interest thereon, will be either returned to or recovered
from CenterPoint Houston's customers, as appropriate, as a component of the 2004
True-Up Proceeding.

Cross Defaults. Under our bank facility, a payment default by us or any of
our significant subsidiaries on any indebtedness exceeding $50 million will
cause a default.

47

Pension and Postretirement Benefits Funding. We make contributions to
achieve adequate funding of 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
affect our results of operations during 2002 or our ability to meet any existing
financial covenants related to our debt facilities. Additionally, we are not
required to make any pension contribution 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; and

o the ability of Reliant Resources and its subsidiaries to satisfy
its obligations as a principal customer of CenterPoint Houston
and Texas Genco and in respect of its indemnity obligation to us.

Money Pool. We have a "money pool" through which we and our participating
subsidiaries 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
commercial paper and/or bank loans. 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 and our subsidiaries' bank facilities and other
borrowing agreements; and

o limitations imposed on us as a registered public utility holding
company.

The bank facilities of CenterPoint Houston and CERC Corp. restrict debt as
a percentage of total capitalization. Our $3.85 billion credit agreement limits
dividend payments to $0.16 per share of common stock per quarter, contains a
debt to EBITDA covenant, an EBITDA to interest covenant and restrictions on the
use of proceeds from debt issuances and asset sales.

In connection with our registration as a public utility holding company
under the 1935 Act, the SEC has placed the following limitations on external
debt:

o the aggregate amount of CenterPoint Houston's external borrowings
has been limited to $3.55 billion;

o the aggregate amount of CERC Corp.'s external borrowings has been
limited to $2.7 billion; and

o the aggregate amount of Texas Genco's external borrowings has
been limited to $500 million.

In connection with our registration as a public utility holding company
under the 1935 Act, the SEC has placed limitations on our dividends and the
dividends of our subsidiaries which require that common equity as a percentage
of total capitalization for CenterPoint Houston, CERC Corp. and Texas Genco must
be at least 30% after the payment of such dividends.

We have obtained authority from our state regulators to restructure the
businesses of CERC in order to enable us to satisfy the requirements for an
exemption from regulation as a registered holding company under the 1935 Act. We
must also receive approval under the 1935 Act. Although we expect that this
business restructuring of CERC Corp. can be completed, we can provide no
assurance that it will, in fact, occur, or that we will ultimately be exempt
from registration under the 1935 Act.

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both important to the portrayal
of our financial condition and results of operations and requires management to
make difficult, subjective or complex judgments. The circumstances that make
these judgments difficult, subjective and/or complex have to do with the need to
make estimates about the

48

effect of matters that are inherently uncertain. Estimates and assumptions about
future events and their effects cannot be perceived with certainty. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments. These estimates may change as new events occur, as
more experience is acquired, as additional information is obtained and as our
operating environment changes.

We believe the following are the most significant estimates used in the
preparation of our consolidated financial statements.

ACCOUNTING FOR RATE REGULATION

SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. Our rate-regulated businesses follow
the accounting and reporting requirements of SFAS No. 71. Certain expenses and
revenues subject to utility regulation or rate determination normally reflected
in income are deferred on the balance sheet and are recognized in income as the
related amounts are included in service rates and recovered from or refunded to
customers. The total amounts of regulatory assets and liabilities reflected in
the Consolidated Balance Sheets are $3.3 billion and $1.4 billion at December
31, 2001, respectively, and $3.7 billion and $1.1 billion at September 30, 2002,
respectively.

Application of SFAS No. 71 to the generation portion of our business was
discontinued as of June 30, 1999. Only the electric transmission and
distribution business, the natural gas distribution companies and one of our
interstate pipelines are subject to SFAS No. 71 after January 1, 2002. We have
recorded regulatory assets and liabilities related to stranded costs associated
with our electric generation operations. Under the Texas electric restructuring
law, a final settlement of these stranded costs will occur in 2004. In the event
that regulation significantly changes the probability for us to recover our
costs in the future, a write-down of all or a portion of our existing regulatory
assets and liabilities could result.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, which include property, plant and equipment, goodwill
and other intangibles and equity investments comprise a significant amount of
our total assets. We make judgments and estimates in conjunction with the
carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires us to
make long-term forecasts of future revenues and costs related to the assets
subject to review. These forecasts require assumptions about demand for our
products and services, future market conditions and regulatory developments.
Significant and unanticipated changes to these assumptions could require a
provision for impairment in a future period.

UNBILLED ENERGY REVENUES

Revenues related to the sale and/or delivery of electricity or gas (energy)
are generally recorded when energy is delivered to customers. However, the
determination of the energy sales to individual customers is based on the
reading of their meters which are read on a systematic basis throughout the
month. At the end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. Unbilled electric delivery revenue is estimated each month
based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. Unbilled natural gas sales are
estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. Accrued unbilled revenues
recorded in the Consolidated Balance Sheet as of December 31, 2001 were $33
million related to our Electric Transmission and Distribution business segment
and $188 million related to our Natural Gas Distribution business segment.
Accrued unbilled revenues recorded in the Consolidated Balance Sheet as of
September 30, 2002 were $83 million related to our Electric Transmission and
Distribution business segment and $42 million related to our Natural Gas
Distribution business segment.

49

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued 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
used by us 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.

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.
The Company 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 Emerging Issues Task Force (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.

50

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.

See Note 5 to our Interim Financial Statements for a discussion of our
adoption of SFAS No. 133 on January 1, 2001 and adoption of subsequent cleared
guidance. See Note 6 to our Interim Financial Statements for a discussion of our
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

We assess the risk of our non-trading derivatives (Energy Derivatives)
using a sensitivity analysis method.

The sensitivity analysis performed on our Energy Derivatives measures the
potential loss based on a hypothetical 10% movement in energy prices. A
decrease of 10% in the market prices of energy commodities from their September
30, 2002 levels would have decreased the fair value of our Energy Derivatives
from their levels on those respective dates by $11 million.

We cannot assure you that market volatility, failure of counterparties to
meet their contractual obligations, transactions entered into after the date of
this Form 10-Q or a failure of risk controls will not lead to significant
losses from our use of non-trading energy derivatives.

INTEREST RATE RISK

We have outstanding long-term debt, bank loans, mandatory redeemable
preferred securities of subsidiary trusts holding solely our junior subordinated
debentures (Trust Preferred Securities), securities held in our nuclear
decommissioning trusts, some lease obligations and our obligations under the
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) that subject
us to the risk of loss associated with movements in market interest rates. We
utilize interest-rate swaps in order to hedge a portion of our floating-rate
debt.

Our floating-rate obligations borrowed from third parties aggregated $4.6
billion at September 30, 2002. If the floating rates were to increase by 10%
from September 30, 2002 rates, our combined interest expense to third parties
would increase by a total of $1.8 million each month in which such increase
continued.

At September 30, 2002, we had outstanding fixed-rate debt (excluding
indexed debt securities) and Trust Preferred Securities aggregating $5.9 billion
in principal amount and having a fair value of $5.8 billion. These instruments
are fixed-rate and, therefore, do not expose us to the risk of loss in earnings
due to changes in market interest rates. However, the fair value of these
instruments would increase by approximately $0.3 billion if interest rates were
to decline by 10% from their levels at September 30, 2002. In general, such an
increase in fair value would impact earnings and cash flows only if we were to
reacquire all or a portion of these instruments in the open market prior to
their maturity.

As discussed in Note 14(k) to the Reliant Energy 10-K/A Notes, which note
is incorporated herein by reference, we contributed $14.8 million in 2001 to
trusts established to fund our share of the decommissioning costs for the South
Texas Project. In 2002, we began contributing $2.9 million per year to these
trusts. The securities held by the trusts for decommissioning costs had an
estimated fair value of $160 million as of September 30, 2002, of which
approximately 50% were debt securities that subject us to risk of loss of fair
value with movements in market interest rates. If interest rates were to
increase by 10% from their levels at September 30, 2002, the fair value of the
fixed-rate debt securities would decrease by approximately $1 million. Any
unrealized gains or losses are accounted for in accordance with SFAS No. 71 as a
regulatory asset/liability because we believe that our future contributions,
which are currently recovered through the ratemaking process, will be adjusted
for these gains and losses. For further discussion regarding the recovery of
decommissioning costs pursuant to the Texas electric restructuring law, please
read Note 4(a) to the Reliant Energy 10-K/A Notes.

As discussed in Note 10(b) to the Reliant Energy 10-K/A Notes, which note
is incorporated herein by reference, CERC Corp.'s $500 million aggregate
principal amount of 6 3/8% Term Enhanced Remarketable Securities

51

(TERMS) include an embedded option to remarket the securities. The option is
expected to be exercised in the event that the ten-year Treasury rate is below
5.66% at the time of the remarketing that would occur in anticipation of the
November 1, 2003 mandatory tender date of the TERMS. At September 30, 2002, we
could terminate the option at a cost of $69 million. A decrease of 10% in the
September 30, 2002 level of interest rates would increase the cost of
termination of the option by approximately $17 million.

As discussed in Note 8 to the Reliant Energy 10-K/A Notes, which note is
incorporated herein by reference, upon adoption of SFAS No. 133 effective
January 1, 2001, the ZENS obligation was bifurcated into a debt component of
$122 million and a derivative component of $788 million. The debt component is a
fixed-rate obligation and, therefore, does not expose us to the risk of loss in
earnings due to changes in market interest rates. However, the fair value of the
debt component would increase by approximately $15 million if interest rates
were to decline by 10% from levels at September 30, 2002. Changes in the fair
value of the derivative component will be recorded in our Statements of
Consolidated Income and, therefore, we are exposed to changes in the fair value
of the derivative component as a result of changes in the underlying risk-free
interest rate. If the risk-free interest rate were to increase by 10% from
September 30, 2002 levels, the fair value of the derivative component would
increase by approximately $4 million, which would be recorded as a loss in our
Statements of Consolidated Income.

As of September 30, 2002, we have interest rate swaps with an aggregate
notional amount of $750 million that fix the interest rate applicable to
floating rate short-term debt. At September 30, 2002, the swaps relating to
short-term debt could be terminated at a cost of $17 million. These swaps do not
qualify as cash flow hedges under SFAS No. 133, and are marked to market in the
Company's Consolidated Balance Sheets with changes reflected in interest expense
in the Statements of Consolidated Income. A decrease of 10% in the September 30,
2002 level of interest rates would increase the cost of terminating the swaps at
September 30, 2002 by $1 million.

During the three months ended September 30, 2002, we settled our
forward-starting interest rate swaps having an aggregate notional amount of $1.5
billion at a cost of $156 million.

EQUITY MARKET VALUE RISK

We are exposed to equity market value risk through our ownership of
approximately 22 million shares of AOL TW common stock, which we hold
to facilitate our ability to meet our obligations under the ZENS. Please read
Note 8 to the Reliant Energy 10-K/A Notes for a discussion of the effect of
adoption of SFAS No. 133 on our ZENS obligation and our historical accounting
treatment of our ZENS obligation. Subsequent to adoption of SFAS No. 133, a
decrease of 10% from the September 30, 2002 market value of AOL Time Warner
common stock would result in a net loss of approximately $3 million, which would
be recorded as a loss in our Statements of Consolidated Income.

As discussed above under "-- Interest Rate Risk," we contribute to trusts
established to fund our share of the decommissioning costs for the South Texas
Project, which held debt and equity securities as of September 30, 2002. The
equity securities expose us to losses in fair value. If the market prices of the
individual equity securities were to decrease by 10% from their levels at
September 30, 2002, the resulting loss in fair value of these securities would
be approximately $8 million. Currently, the risk of an economic loss is
mitigated as discussed above under "-- Interest Rate Risk."

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.

52

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a description of legal proceedings affecting CenterPoint Energy, please
read Note 13 to our Interim Financial Statements, the discussion under "Our
Business -- Environmental Matters" and Item 3 of the Reliant Energy Form 10-K/A
and Notes 4 and 14 to the Reliant Energy 10-K/A Notes, all of which are
incorporated herein by reference.

ITEM 5. OTHER INFORMATION.

Forward-Looking Statements. From time to time, we make statements
concerning our 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 our 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.

We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our 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,
including deregulation, re-regulation and restructuring of the
electric utility industry, constraints placed on our activities or
business by the Public Utility Holding Company Act of 1935, changes in
or application of laws or regulations applicable to other aspects of
our business and actions with respect to:

o approval of stranded costs;

o allowed rates of return;

o rate structures;

o recovery of investments; and

o operation and construction of facilities;

o non-payment for our services due to financial distress of our
customers, including Reliant Resources, Inc.;

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 changes in business strategy or development plans;

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

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;

53

o commercial bank and financial market conditions, our access to
capital, the cost of such capital, receipt of certain approvals under
the Public Utility Holding Company Act of 1935, and the results of our
financing and refinancing efforts, including availability of funds in
the debt capital markets;

o actions by rating agencies;

o legal and administrative proceedings and settlements;

o changes in tax laws;

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 significant changes in critical accounting policies material to us;

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 the outcome of the pending securities lawsuits against Reliant Energy,
Incorporated and Reliant Resources, Inc.;

o the outcome of the SEC investigation relating to the treatment in our
consolidated financial statements of certain activities of Reliant
Resources, Inc.;

o the ability of Reliant Resources, Inc. to satisfy its indemnity
obligations to us;

o the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in our service
territory, including the systems owned and operated by the independent
system operator in the Electric Reliability Council of Texas, Inc.;

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

o other factors we discuss in the Reliant Energy Form 10-K/A, including
those outlined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- 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 we undertake 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 of CenterPoint Energy, Inc. or CenterPoint
Energy Houston Electric, LLC, as indicated.

54

58

(b) Reports on Form 8-K.

On July 5, 2002, we filed a Current Report on Form 8-K dated July 5, 2002,
in order to provide updated information regarding certain investigations,
litigation and governmental proceedings involving Reliant Energy and/or its
subsidiaries, including its approximately 83% owned subsidiary Reliant
Resources, Inc.

On July 15, 2002, we filed a Current Report on Form 8-K dated July 12,
2002, announcing the extension of $4.7 billion in credit facilities of Reliant
Energy.

On July 25, 2002, we filed a Current Report on Form 8-K dated July 25,
2002, relating to the announcement of second quarter 2002 results.

On August 1, 2002, we filed a Current Report on Form 8-K dated July 31,
2002, announcing that on July 31, 2002, Moody's Investors Service, Inc. and
Standard & Poor's Rating Services took various actions related to the credit
ratings of Reliant Energy, Incorporated and its subsidiaries. Also on July 31,
2002, Reliant Energy announced that the Internal Revenue Service had issued a
supplemental ruling confirming that the proposed spin-off of Reliant Resources
from Reliant Energy will be tax-free to Reliant Energy and its shareholders.

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.

On September 6, 2002, we refiled our Current Report on Form 8-K dated
August 31, 2002, on Form 8-K 12B.

On September 9, 2002, we filed a Current Report on Form 8-K dated September
5, 2002, to announce that our Board of Directors had declared a stock
distribution of our approximately 83% investment in Reliant Resources to
CenterPoint Energy shareholders to take place on September 30, 2002.

On September 12, 2002, we filed a Current Report on Form 8-K dated
September 12, 2002, to file a slide presentation to be presented to the
financial and investment community.

On September 13, 2002, we filed a Current Report on Form 8-K dated
September 5, 2002, to describe the distribution of our approximately 83%
investment in Reliant Resources to CenterPoint Energy shareholders and to
provide unaudited pro forma financial statements giving effect to the
distribution.

On September 24, 2002, we filed a Current Report on Form 8-K dated
September 20, 2002, to announce the distribution ratio for the spin-off of
Reliant Resources.

On October 1, 2002, we filed a Current Report on Form 8-K dated September
30, 2002, announcing that our Board of Directors had declared a distribution of
all of the shares of Reliant Resources, Inc. common stock owned by CenterPoint
Energy to our common shareholders on a pro rata basis. The distribution was
completed on September 30, 2002 to CenterPoint Energy shareholders of record as
of the close of business on September 20, 2002.

On November 8, 2002, we filed a Current Report on Form 8-K dated November
8, 2002, to announce that CenterPoint Energy, Inc., the parent company of
CenterPoint Energy Houston Electric, LLC, had successfully negotiated a new
$1.31 billion senior secured credit facility at CenterPoint Energy Houston
Electric, LLC.

59

SIGNATURE

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, INC.

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

Date: November 14, 2002

60

CERTIFICATIONS

I, David M. McClanahan, certify that:

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

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

61

I, Gary L. Whitlock, certify that:

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

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

62

EXHIBIT INDEX

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 of CenterPoint Energy, Inc. or CenterPoint
Energy Houston Electric, LLC, as indicated.