CENTERPOINT ENERGY INC - 10-Q Quarterly Report

Back to GetFilings.com

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 MARCH 31, 2003

OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO _______________.

----------

Commission file number 1-31447

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 (713) 207-1111
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)

----------

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of May 2, 2003, CenterPoint Energy, Inc. had 305,480,329 shares of common
stock outstanding, including 1,407,306 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 MARCH 31, 2003

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.................................................................1
Statements of Consolidated Income
Three Months Ended March 31, 2002 and 2003 (unaudited)..............................1
Consolidated Balance Sheets
December 31, 2002 and March 31, 2003 (unaudited)....................................2
Statements of Consolidated Cash Flows
Three Months Ended March 31, 2002 and 2003 (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.......................................27
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................48
Item 4. Controls and Procedures.............................................................49

PART II. OTHER INFORMATION

Item 1. Legal Proceedings...................................................................50
Item 2. Changes in Securities and Use of Proceeds...........................................50
Item 5. Other Information...................................................................50
Item 6. Exhibits and Reports on Form 8-K....................................................52

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(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 SHAREHOLDERS' 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) of 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 Company has filed a Current Report on Form
8-K dated May 12, 2003 (May 12 Form 8-K). The May 12 Form 8-K gives effect to
certain reclassifications that have been made to the Company's historical
financial statements as presented in the Annual Report on Form 10-K of
CenterPoint Energy (CenterPoint Energy Form 10-K) for the year ended December
31, 2002. The Interim Financial Statements are unaudited, omit certain financial
statement disclosures and should be read with the May 12 Form 8-K.

RESTRUCTURING

CenterPoint Energy is a public utility holding company, created on August
31, 2002 as part of a corporate restructuring of Reliant Energy, Incorporated
(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 (the Reliant Resources
Offering). 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 (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 Reliant Resources Distribution). The Reliant Resources
Distribution was made on September 30, 2002.

CenterPoint Energy is the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. The Company's
operating subsidiaries own and operate electric transmission and distribution
facilities, natural gas distribution facilities, natural gas pipelines and
electric generating plants. The Company is subject to regulation as a
"registered holding company" under the Public Utility Holding Company Act of
1935 (1935 Act). As of March 31, 2003, the Company's indirect wholly owned
subsidiaries include:

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

o CenterPoint Energy Resources Corp. (CERC Corp., and, together with its
subsidiaries, CERC), formerly Reliant Energy Resources Corp. (RERC
Corp., and, 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 number of
customers served. Through wholly owned subsidiaries, CERC owns two
interstate natural gas pipelines and gas gathering systems and
provides various ancillary services.

The Company also has an approximately 81% ownership interest in 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 distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to the Company's shareholders
on January 6, 2003. As a result of the distribution of

5

Texas Genco common stock, CenterPoint Energy recorded an impairment charge of
$396 million, which is reflected as a regulatory asset representing stranded
costs in the Consolidated Balance Sheets as of March 31, 2003. This impairment
charge represents the excess of the carrying value of CenterPoint Energy's net
investment in Texas Genco over the market value of the Texas Genco common stock
that was distributed. The financial impact of this impairment was offset by
recording a $396 million regulatory asset reflecting the Company's expectation
of stranded cost recovery of such impairment. See Note 4(c) for a discussion of
generation related regulatory assets. Additionally, in connection with the
distribution, CenterPoint Energy recorded minority interest ownership in Texas
Genco of $146 million in its Consolidated Balance Sheets in the first quarter of
2003.

BASIS OF PRESENTATION

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) 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 net income.

Subsequent to December 31, 2002, the Company sold all of its remaining
Latin America operations. The Interim Financial Statements present these
remaining Latin America operations 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 months ended March 31, 2002 and 2003.

The Interim Financial Statements have been prepared to reflect the effects
of the Restructuring and the Reliant Resources 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 SFAS No. 144.
Accordingly, the Interim Financial Statements reflect these operations as
discontinued operations for the three months ended March 31, 2002.

The following notes to the consolidated financial statements in the May 12
Form 8-K (CenterPoint Energy Notes) relate to certain contingencies. These
notes, as updated herein, are incorporated herein by reference.

CenterPoint Energy Notes: Note 3(d) (Long-Lived Assets and Intangibles),
Note 3(e) (Regulatory Assets and Liabilities), Note 4 (Regulatory Matters),
Note 5 (Derivative Instruments), Note 7 (Indexed Debt Securities (ACES and
ZENS) and AOL Time Warner Securities) and Note 13 (Commitments and
Contingencies).

For information regarding certain legal, tax and regulatory proceedings and
environmental matters, see Note 12.

6

(2) DISCONTINUED OPERATIONS

Latin America. In February 2003, the Company sold its interest in Argener,
a cogeneration facility in Argentina, for $23.1 million. The carrying value of
this investment was approximately $11 million as of December 31, 2002. The
Company recorded an after-tax gain of $7 million from the sale of Argener in the
first quarter of 2003.

Revenues related to the Company's Latin America operations included in
discontinued operations for the three months ended March 31, 2002 and 2003 were
$4.5 million and $1.7 million, respectively. Income from these discontinued
operations for the three months ended March 31, 2002 and 2003 is reported net of
income tax expense of $3.2 million and $0 million, respectively.

Reliant Resources. On September 30, 2002, CenterPoint Energy distributed to
its shareholders its 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 Reliant Resources Distribution was recorded in the third
quarter of 2002.

Reliant Resources' revenues included in discontinued operations for the
three months ended March 31, 2002 were $1.8 billion, as reported in Reliant
Resources' Annual Report on Form 10-K/A, Amendment No. 1, filed with the SEC on
April 30, 2003. Income from these discontinued operations for the three months
ended March 31, 2002 is reported net of income tax expense of $43 million. These
amounts have been restated to reflect Reliant Resources' adoption of Emerging
Issues Task Force (EITF) Issue No. 02-3, "Issues Related to Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" during the
third quarter of 2002.

(3) NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair
value of an asset retirement obligation to be recognized as a liability is
incurred and capitalized as part of the cost of the related tangible long-lived
assets. 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. Retirement obligations associated with long-lived assets included within
the scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel.

The Company has identified retirement obligations for nuclear
decommissioning at the South Texas Project Electric Generating Station (South
Texas Project) and for lignite mine operations at the Jewett mine supplying the
Limestone electric generation facility. Prior to adoption of SFAS No. 143, the
Company had recorded liabilities for nuclear decommissioning and the reclamation
of the lignite mine. Liabilities were recorded for estimated decommissioning
obligations of $139.7 million and $39.7 million for reclamation of the lignite
at December 31, 2002. Upon adoption of SFAS No. 143 on January 1, 2003, the
Company reversed the $139.7 million previously accrued for the nuclear
decommissioning of the South Texas Project and recorded a plant asset of $99.1
million offset by accumulated depreciation of $35.8 million as well as a
retirement obligation of $186.7 million. The $16.3 million difference between
amounts previously recorded and the amounts recorded upon adoption of SFAS No.
143 is being deferred as a liability due to regulatory requirements. The Company
also reversed the $39.7 million it had previously recorded for the Jewett mine
reclamation and recorded a plant asset of $1.9 million offset by accumulated
depreciation of $0.4 million as well as a retirement obligation of $3.8 million.
The $37.4 million difference between amounts previously recorded and the amounts
recorded upon adoption of SFAS No. 143 was recorded as a cumulative effect of
accounting change. The Company has also identified other asset retirement
obligations that cannot be calculated because the assets associated with the
retirement obligations have an indeterminate life.

7

The following represents the balances of the asset retirement obligation as
of January 1, 2003 and the additions and accretion of the asset retirement
obligation for the three months ended March 31, 2003:

The following represents the pro-forma effect on the Company's net income
for the three months ended March 31, 2002, as if the Company had adopted SFAS
No. 143 as of January 1, 2002:

The following represents the Company's asset retirement obligations on a
pro-forma basis as if it had adopted SFAS No. 143 as of December 31, 2002:

The Company's rate-regulated businesses have previously recognized removal
costs as a component of depreciation expense in accordance with regulatory
treatment. As of March 31, 2003, these previously recognized removal costs of
$639 million do not represent SFAS No. 143 asset retirement obligations, but
rather embedded regulatory liabilities. The Company's non-rate regulated
businesses have also previously recognized removal costs as component of
depreciation expense. The Company reversed $115 million in the three months
ended March 31, 2003 of previously recognized removal costs with respect to
these non-rate-regulated businesses as a cumulative effect of accounting change.
The total cumulative effect of accounting change from adoption of SFAS No, 143
was $152 million. Excluded from the $80 million after-tax cumulative effect of
accounting change recorded for the three months ended March 31, 2003, is
minority interest of $19 million related to the Texas Genco stock not owned by
CenterPoint Energy.

In April 2002, the Financial Accounting Standards Board (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

8

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 as it relates to lease accounting and the accounting
provision related to debt extinguishment. Upon adoption of SFAS No. 145, any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods will be reclassified. No such reclassification was
required in the three month period ended March 31, 2002. The Company has
reclassified the $26 million loss on debt extinguishment related to the fourth
quarter of 2002 from an extraordinary item to interest expense.

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

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect the
Company's consolidated financial statements.

In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not expect the
adoption of FIN 46 to have a material impact on its results of operations or
financial condition.

(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 and
forced outages. From September 2001 through March 2003, it conducted auctions,
as required by the Public Utility Commission of Texas (Texas Utility Commission)
and by the Company's master separation agreement with Reliant Resources. Texas
Genco will conduct the final auction mandated by the Texas Utility Commission
for the purposes of the ECOM True-Up in July 2003.

The capacity auctions continue to be 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

9

market prices (ECOM True-Up). For the three months ended March 31, 2002 and
2003, CenterPoint Energy recorded approximately $141 million and $132 million,
respectively, in non-cash revenue related to the cost 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 Notes 3(e) and 4(a) to the CenterPoint
Energy Notes, which are 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 March 31, 2003, no impairment had been
indicated in its Texas generation assets. The Company anticipates that future
events, such as changes in the market value of the Texas Genco stock, 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.

The Texas electric restructuring law provides for the Company to recover
the regulatory book value of its Texas generating assets (as defined in the
Texas electric restructuring law) 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 March 31, 2003, the recorded book value was $518
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 incurred prior to May 1, 2003. For
further discussion of the difference between the regulatory book value and the
recorded book value, see Note 4(a) to the CenterPoint Energy Notes.

(c) Regulatory Assets Contingency.

As of March 31, 2003, in contemplation of the 2004 True-Up Proceeding,
CenterPoint Houston has recorded a regulatory asset of $2.5 billion representing
the estimated future recovery of previously incurred stranded costs. This amount
includes $1.1 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)
and redirected depreciation of $841 million, both reversed in 2001 as well as
$396 million related to the Texas Genco distribution as discussed in Note 1.
Offsetting this regulatory asset is a $932 million 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 GAAP requires
CenterPoint Houston 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 and Texas Genco filed their joint application to
reconcile fuel revenues and expenses with the Texas Utility Commission on July
1, 2002. This final fuel reconciliation filing covers reconcilable fuel revenue,
fuel expense and interest of approximately $8.5 billion 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 at July 31, 1997 as approved in
CenterPoint Houston's last fuel reconciliation. On March 3, 2003, a settlement
agreement was filed under which certain items totaling $24 million would be
written off during the fourth quarter of 2002 and items totaling $203 million
would be carried forward for resolution by the Texas Utility Commission in late
2003 or early 2004.

10

(5) DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes in cash flows of
its natural gas businesses on its operating results and cash flows.

Cash Flow Hedges. During the three months ended March 31, 2003, no hedge
ineffectiveness was recognized in earnings from derivatives that are designated
and qualify as cash flow hedges. No component of the derivative instruments'
gain or loss was excluded from the assessment of effectiveness. During the three
months ended March 31, 2003, there was no effect on earnings as a result of the
discontinuance of cash flow hedges. As of March 31, 2003, the Company expects
$2.3 million in accumulated other comprehensive income to be reclassified into
net income during the next twelve months.

Interest Rate Swaps. As of March 31, 2003, the Company had outstanding
interest rate swaps with an aggregate notional amount of $750 million to fix the
interest rate applicable to floating rate long-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 2002, the Company settled its forward-starting interest rate swaps
having a notional amount of $1.5 billion at a cost of $156 million, which was
recorded in other comprehensive income, and reclassified $36 million to interest
expense in 2002 as a result of interest payments it believes are no longer
probable of occurring for certain periods including the first three months of
2003. The remaining $120 million in other comprehensive income will be amortized
into interest expense in the same period during which the forecasted payments
affect earnings. No amortization of this amount was recognized in the first
three months of 2003. Based on the expected timing of the forecasted
transactions hedged by the forward-starting interest rate swaps, amortization of
amounts deferred in accumulated other comprehensive income will be amortized
into earnings beginning in April 2003 and are expected to amount to $11.9
million in 2003.

(6) GOODWILL AND INTANGIBLES

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 March
31, 2003. 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 use rights and 4 to 25 years for other intangibles.

Amortization expense for other intangibles for the three months ended March
31, 2002 and 2003 was $0.4 million and $0.5 million, respectively. Estimated
amortization expense for the remainder of 2003 and the five succeeding fiscal
years is as follows (in millions):

11

2003........................................ $ 1.6
2004........................................ 2.4
2005........................................ 2.6
2006........................................ 2.8
2007........................................ 3.0
2008........................................ 3.3
---------
Total..................................... $ 15.7
=========

Goodwill as of December 31, 2002 and March 31, 2003 by reportable business
segment is as follows (in millions):

Natural Gas Distribution....... $ 1,085
Pipelines and Gathering........ 601
Other Operations............... 55
------------
Total........................ $ 1,741
============

(7) COMPREHENSIVE INCOME

The following table summarizes the components of total comprehensive
income:

(8) CAPITAL STOCK

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, 2002, 305,017,330
shares of CenterPoint Energy common stock were issued and 300,101,587 shares of
CenterPoint Energy common stock were outstanding. At March 31, 2003, 305,436,836
shares of CenterPoint Energy common stock were issued and 301,664,118 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 (4,915,577 and 3,772,552 at December 31, 2002 and March 31,
2003, respectively) and (b) treasury shares (166 at both December 31, 2002 and
March 31, 2003). Reliant Energy declared a dividend of $0.375 per share in the
first quarter of 2002 and CenterPoint Energy declared a dividend of $0.10 per
share in the first quarter of 2003.

(9) SHORT-TERM BORROWINGS, LONG-TERM DEBT AND RECEIVABLES FACILITY

(a) Short-term Borrowings.

Credit Facilities. As of March 31, 2003, a subsidiary of CenterPoint Energy
had credit facilities that provided for an aggregate of $200 million in
committed credit that is classified as short-term. As of March 31, 2003, such
credit facilities were not utilized. As of March 31, 2003, cash aggregating $279
million was invested in a money market fund.

On February 28, 2003, the Company's $3.85 billion bank facility was amended
and extended to June 2005 as discussed below in " -- Long-term Debt." Loans
under this facility are recorded as long-term debt in the Consolidated Balance
Sheets at both December 31, 2002 and March 31, 2003.

12

On March 25, 2003, CERC obtained a $200 million revolving credit facility
referenced above that terminates on March 23, 2004. Rates for borrowings under
this facility, including the facility fee, are LIBOR plus 250 basis points based
on current credit ratings and the applicable pricing grid. There were no amounts
outstanding under this facility as of March 31, 2003.

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

(b) Long-term Debt.

On February 28, 2003, the Company reached agreement with a syndicate of
banks on a second amendment to its $3.85 billion bank facility (Second
Amendment). Under the Second Amendment, the maturity date of the bank facility
was extended from October 2003 to June 30, 2005, and the $1.2 billion in
mandatory prepayments that would have been required in 2003 (including $600
million due on February 28, 2003) were eliminated. At the time of the Second
Amendment, the facility consisted of a $2.35 billion term loan and a $1.5
billion revolver. In March 2003, a $50 million repayment of the term loan
reduced the term loan to $2.30 billion. At March 31, 2003, the revolver was
fully utilized. Borrowings bear interest based on LIBOR rates under a pricing
grid tied to the Company's credit rating. At the Company's current credit
ratings, the pricing for loans remains the same. The drawn cost for the facility
at the Company's current ratings is LIBOR plus 450 basis points. The Company has
agreed to pay the banks an extension fee of 75 basis points on the amounts
outstanding under the bank facility on October 9, 2003. The Company also paid
$41 million in fees that were due on February 28, 2003, along with $20 million
in fees that had been due on June 30, 2003.

In addition, the interest rate will be increased by 25 basis points
beginning May 28, 2003 if the Company does not grant the banks a security
interest in its 81% stock ownership of Texas Genco. Granting the security
interest in the stock of Texas Genco requires approval from the SEC under the
1935 Act, which is currently being sought. That security interest would be
released at the time of a sale of Texas Genco, which may occur as early as 2004.
Proceeds from any sale will be used to reduce the bank facility.

Also under the Second Amendment, on or before May 28, 2003, the Company
agreed to grant to the banks warrants to purchase up to 10%, on a fully diluted
basis, of its common stock at a price equal to the greater of $6.56 per share or
110% of the closing price on the New York Stock Exchange on the date the
warrants are issued. The warrants would not be exercisable for a year after
issuance but would remain outstanding for four years; provided, that if the
Company reduces the term loans owed under the bank facility during 2003 by
specified amounts, the warrants will be extinguished. To the extent that the
Company reduces the term loans owed under the bank facility by up to $400
million on or before May 28, 2003, up to half of the warrants will be
extinguished on a basis proportionate to the reduction in the credit facility.
To the extent such warrants are not extinguished on or before May 28, 2003, they
will vest and become exercisable in accordance with their terms. At March 31,
2003, the Company had reduced the term loans owed under the bank facility by
$50 million. Whether or not the Company is able to extinguish warrants on or
before May 28, 2003, the remaining 50% of the warrants will be extinguished,
again on a proportionate basis, if the Company reduces the term loans owed
under the bank facility by up to $400 million by the end of 2003. The Company
plans to eliminate the warrants entirely before they vest by accessing the
capital markets to fund the total payments of $800 million during 2003; however,
there can be no assurance that the Company will be able to extinguish the
warrants or to do so on favorable terms.

The warrants and the underlying common stock would be registered with the
SEC and could be exercised either through the payment of the purchase price or
on a "cashless" basis under which the Company would issue a number of shares
based upon the difference between the then-current market price and the warrant
exercise price. Issuance of the warrants is also subject to obtaining SEC
approval under the 1935 Act, which is currently being sought. If that approval
is not obtained on or before May 28, 2003, the Company will provide the banks
equivalent cash compensation over the term that its warrants would have been
exercisable to the extent they are not otherwise extinguished.

In the Second Amendment, the Company also agreed that its quarterly common
stock dividend will not exceed $0.10 per share. If the Company has not reduced
the bank facility by a total of at least $400 million by the end of 2003, of
which at least $200 million has come from the issuance of capital stock or
securities linked to capital stock (such as convertible debt), the maximum
dividend payable during 2004 and for the balance of the term of the facility

13

is subject to an additional test. Under that test the maximum permitted
quarterly dividend will be the lesser of (i) $0.10 per share or (ii) 12.5% of
the Company's net income per share for the 12 months ended on the last day of
the previous quarter.

The Second Amendment provides that proceeds from capital stock or
indebtedness issued or incurred by the Company must be applied (subject to a
$200 million basket for CERC and another $250 million basket for borrowings by
the Company, certain permitted refinancings of existing debt and other limited
exceptions) to repay bank loans and permanently reduce the bank facility.
Similarly, cash proceeds from the sale of assets of more than $30 million or, if
less, a group of sales aggregating more than $100 million, must be applied to
repay bank loans and reduce the bank facility, except that proceeds of up to
$120 million can be reinvested in the Company's businesses.

On March 18, 2003, CenterPoint Houston issued $762.3 million aggregate
principal amount of general mortgage bonds composed of $450 million principal
amount of 10-year bonds with an interest rate of 5.7% and $312.3 million
principal amount of 30-year bonds with an interest rate of 6.95%. Proceeds were
used to repay $150 million aggregate principal amount of medium-term notes
maturing on April 21, 2003, to redeem approximately $312.3 million aggregate
principal amount of CenterPoint Houston's first mortgage bonds and to repay $279
million of a $537 million intercompany note payable to CenterPoint Energy by
CenterPoint Houston. Proceeds from the note repayment were ultimately used by
CenterPoint Energy to repay borrowings under CenterPoint Energy's $3.85 billion
credit facility and to permanently reduce the term loan component of the credit
facility by $50 million.

On March 25 and April 14, 2003, CERC issued $650 million and $112 million,
respectively, aggregate principal amount of 7.875% senior unsecured notes due in
2013. A portion of the proceeds were used to refinance $360 million aggregate
principal amount of CERC's 6 3/8% Term Enhanced ReMarketable Securities (TERM
Notes) and to pay costs associated with the refinancing. Proceeds were also used
to repay borrowings under CERC's $350 million revolving credit facility prior to
its expiration on March 31, 2003. The remaining $140 million aggregate principal
amount of TERM Notes are due to be refinanced or remarketed in November 2003.

On April 9, 2003, the Company remarketed $175 million aggregate principal
amount of pollution control bonds that it had owned since the fourth quarter of
2002. Remarketed bonds maturing in 2029 have a principal amount of $75 million
and an interest rate of 8%. Remarketed bonds maturing in 2018 have a principal
amount of $100 million and an interest rate of 7.75%. Proceeds from the
remarketing were used to repay bank debt. At December 31, 2002, the $175 million
of bonds owned by the Company were not reflected as outstanding debt in the
Company's Consolidated Balance Sheets.

(c) Receivables Facility.

In connection with CERC's November 2002 amendment and extension of its $150
million receivables facility, CERC Corp. formed a bankruptcy remote subsidiary
for the sole purpose of buying and selling receivables created by CERC. This
transaction is accounted for as a sale of receivables under the provisions of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and, as a result, the related receivables are
excluded from the Consolidated Balance Sheets. As of December 31, 2002 and March
31, 2003, CERC had utilized $107 million and $150 million of its receivables
facility, respectively.

14

(10) 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 10 to the
CenterPoint Energy 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. has issued convertible
preferred securities. The convertible preferred securities are mandatorily
redeemable upon the repayment of the convertible junior subordinated debentures
at their stated maturity or earlier redemption. Effective January 7, 2003, the
convertible preferred securities are convertible at the option of the holder
into $33.62 of cash and 2.34 shares of CenterPoint Energy common stock for each
$50 of liquidation value. As of December 31, 2002 and March 31, 2003, $0.4
million liquidation amount of convertible preferred securities were outstanding.
The securities, and their underlying convertible junior subordinated debentures,
bear interest at 6.25% and mature in June 2026.

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 the mandatory redemption date of the convertible
preferred securities, and the principal amount corresponding to the common and
convertible preferred securities issued by the trust. For additional information
regarding these securities, see Note 10 to the CenterPoint Energy Notes, which
note is incorporated herein by reference.

15

(11) STOCK-BASED INCENTIVE COMPENSATION PLANS

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), and SFAS No. 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure -- an Amendment of SFAS No. 123," the Company applies
the guidance contained in Accounting Principles Board Opinion No. 25 and
discloses the required pro forma effect on net income of the fair value based
method of accounting for stock compensation.

Pro forma information for the three months ended March 31, 2002 and 2003 is
provided to take into account the amortization of stock-based compensation to
expense on a straight-line basis over the vesting period. Had compensation costs
been determined as prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been as follows:

(12) COMMITMENTS AND CONTINGENCIES

(a) Legal Matters.

The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries are 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 "California Class
Actions and Attorney General Cases," "Long-Term Contract Class Action,"
"Washington and Oregon Class Actions," "Bustamante Price Reporting Class
Action," "Gas Trading Class Action" 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.

California Class Actions and Attorney General Cases. Reliant Energy,
Reliant Resources, 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. While the plaintiffs allege various violations by the
defendants of antitrust laws and state laws against unfair and unlawful business
practices, each of the lawsuits is grounded on the central allegation that the
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.
The first six of these suits originally were filed in state courts in San Diego,
San Francisco and Los Angeles Counties. The suits in San Diego and Los Angeles
Counties were consolidated and removed to the federal district court in San
Diego, but on December 13, 2002, that court remanded the suits to the state
courts. Prior to the remand, Reliant Energy was voluntarily dismissed from two
of the suits. Several parties, including the Reliant defendants, have appealed
the judge's remand decision. The United States court of appeals has entered a
briefing schedule that could result in oral arguments by summer of

16

2003 and stayed the remand order pending the appeal.

In March and April 2002, the California Attorney General filed three
complaints, two in state court in San Francisco and one in the federal district
court in San Francisco, against Reliant Energy, Reliant Resources, Reliant
Energy Services and other subsidiaries of Reliant Resources alleging, among
other matters, 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 systems operator, charging
unjust and unreasonable prices for electricity, in violation of antitrust laws
in connection with the acquisition in 1998 of electric generating facilities
located in California. The complaints variously seek restitution and
disgorgement of alleged unlawful profits for sales of electricity, civil
penalties and fines, injunctive relief against unfair competition, divestment of
Reliant Resources' generation capacity and undefined equitable relief. Reliant
Resources removed the two state court cases to the federal district court in San
Francisco. In August 2002, the district court dismissed the two cases originally
filed in state court and also dismissed the damages claims asserted in the
antitrust case. The Attorney General has appealed the dismissal of these cases
to the court of appeals.

Following the filing of the Attorney General cases, seven additional class
action cases were 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 other 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 district court in San Diego. Reliant
Resources has not filed an answer in any of these cases.

In all of these cases pending before the federal and state courts in
California, the Reliant defendants have filed or intend to file motions to
dismiss on grounds that the claims are barred by federal preemption and the
filed rate doctrine.

Long-Term Contract Class Action. In October 2002, a class action was filed
in state court in Los Angeles against Reliant Energy and several subsidiaries of
Reliant Resources. The complaint in this case repeats the allegations asserted
in the California class actions as well as the Attorney General cases and also
alleges misconduct related to long-term contracts purportedly entered into by
the California Department of Water Resources. None of the Reliant entities,
however, has a long-term contract with the Department of Water Resources. This
case has been removed to federal district court in San Diego. The Reliant
defendants intend to file motions to dismiss on grounds that the claims are
barred by federal preemption and the filed rate doctrine.

Washington and Oregon Class Actions. In December 2002, a lawsuit was filed
in Circuit Court of the State of Oregon for the County of Multnomah on behalf of
a class of all Oregon purchasers of electricity and natural gas. Reliant Energy,
Reliant Resources and several Reliant Resources subsidiaries are named as
defendants, along with many other electricity generators and marketers. Like the
other lawsuits filed in California, the plaintiffs claim the defendants
manipulated wholesale power prices in violation of state and federal law. The
plaintiffs seek injunctive relief and payment of damages based on alleged
overcharges for electricity. Also in December 2002, a nearly identical lawsuit
on behalf of consumers in the State of Washington was filed in federal district
court in Seattle. Reliant Resources has removed the Oregon suit to federal
district court in Portland. It is anticipated that before answering the
lawsuits, the defendants will file motions to dismiss on the grounds that the
claims are barred by federal preemption and by the filed rate doctrine.

Bustamante Price Reporting Class Action. In November 2002, California
Lieutenant Governor Cruz Bustamante filed a lawsuit in state court in Los
Angeles on behalf of a class of purchasers of gas and power alleging violations
of state antitrust laws and state laws against unfair and unlawful business
practices based on an alleged conspiracy to report and publish false and
fraudulent natural gas prices with an intent to affect the market prices of
natural gas and electricity in California. Reliant Energy, Reliant Resources and
several Reliant Resources subsidiaries are named as defendants, along with other
market participants and publishers of some of the price indices. The complaint
seeks injunctive relief, compensatory and punitive damages, restitution of
alleged overpayment, disgorgement of all profits and funds acquired by the
alleged unlawful conduct, costs of suit and attorneys' fees. The Reliant
defendants intend to deny both their alleged violation of any laws and their
alleged participation in any conspiracy.

Gas Trading Class Action. The Company, Reliant Resources and Reliant
Energy, have been named as defendants in a lawsuit filed in April 2003 in state
court in Los Angeles County, California on behalf

17

of a class of purchasers of natural gas alleging violations of state antitrust
laws and state laws against unfair and unlawful business practices based on an
alleged conspiracy with Enron Corp. to manipulate the California natural gas
markets in 2000 and 2001. The complaint is based on certain conclusions in a
report by the staff of the Federal Energy Regulatory Commission that has not
been subject to procedures designed to allow parties to either discover or test
the basis for the conclusions. The complaint seeks injunctive and declaratory
relief, compensatory and punitive damages, restitution, costs of suit and
attorneys' fees. The complaint alleges that there were "well over one billion
dollars in excess charges to California consumers during the 2000 through 2001
time period." The plaintiffs are seeking a trebling of any damages award. While
Reliant Resources has not yet filed an answer, the Company understands that
Reliant Resources intends to deny both the alleged violation of any laws and the
participation in a conspiracy with Enron. Neither the Company nor Reliant Energy
was a party in the proceedings in which the report was submitted. Further,
neither the Company nor any of its current subsidiaries has ever engaged in gas
trading in California.

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 its former subsidiary, Reliant Resources.

In June 2002, the SEC advised Reliant Resources and Reliant Energy that it
had issued a formal order in connection with its investigation of Reliant
Resources' and Reliant Energy's financial reporting, internal controls and
related matters. The Company understands that the investigation is focused on
Reliant Resources' same-day commodity trading transactions involving purchases
and sales with the same counterparty for the same volume at substantially the
same price and certain structured transactions. These matters were previously
the subject of an informal inquiry by the SEC. On May 12, 2003, the SEC advised
Reliant Resources and Reliant Energy that it had issued a formal order in
connection with this investigation. Reliant Energy, through its successor and
our subsidiary, CenterPoint Houston, has entered into a settlement with the SEC
that concludes this investigation. Under the settlement, Reliant Resources and
Reliant Energy consented to the entry of an administrative cease-and-desist
order with respect to future violations of certain provisions of the Securities
Act of 1933 and the Securities Exchange Act of 1934, without admitting or
denying the SEC's findings that violations of these laws had occurred. The SEC
did not assess monetary penalties or fines against Reliant Energy, us or any of
our subsidiaries.

In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the 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.

Fifteen class action lawsuits filed in May, June and July 2002 on behalf of
purchasers of securities of Reliant Resources and/or Reliant Energy have been
consolidated in federal district court in Houston. Reliant Resources and certain
of its former and current executive officers are named as defendants. Reliant
Energy is also named as a defendant in seven of the lawsuits. Two of the
lawsuits also name as defendants the underwriters of the Reliant Resources
initial public offering (Reliant Resources Offering). One lawsuit names Reliant
Resources' and Reliant Energy's independent auditors as a defendant. The
consolidated amended complaint seeks monetary relief purportedly on behalf of
three classes: (1) purchasers of Reliant Energy common stock from February 3,
2000 to May 13, 2002; (2) purchasers of Reliant Resources common stock on the
open market from May 1, 2001 to May 13, 2002; and (3) purchasers of Reliant
Resources common stock in the Reliant Resources Offering or purchasers of shares
that are traceable to the Reliant Resources Offering. The plaintiffs allege,
among other things, that the defendants misrepresented their revenues and
trading volumes by engaging in round-trip trades and improperly accounted for
certain structured transactions as cash-flow hedges, which resulted in earnings
from these transactions being accounted for as future earnings rather than being
accounted for as earnings in fiscal year 2001.

In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law. The defendants expect
to file a motion to transfer this lawsuit to the federal district court in
Houston and to consolidate this lawsuit with the consolidated lawsuits described
above.

18

The Company believes that none of these lawsuits has merit because, among
other reasons, the alleged misstatements and omissions were not material and did
not result in any damages to any of the plaintiffs.

In May 2002, three class action lawsuits were filed in federal district
court 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. Two of the lawsuits have been dismissed
without prejudice. The remaining 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.

In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of the Company. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused the Company to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off and the Reliant
Resources Offering. The complaint seeks monetary damages on behalf of the
Company as well as equitable relief in the form of a constructive trust on the
compensation paid to the defendants. On March 13, 2003, the court dismissed this
case on the grounds that the plaintiff did not make an adequate demand on the
Company before filing suit. On March 26, 2003, the plaintiff sent another demand
asserting the same claims.

The Company's board of directors is investigating that demand and similar
allegations made in a June 28, 2002 demand letter sent on behalf of a Company
shareholder. The latter letter states that the shareholder and other
shareholders are considering filing a derivative suit on behalf of the Company
and demands that the Company take several actions in response to alleged
round-trip trades occurring in 1999, 2000, and 2001. The Board is reviewing the
demands made by the shareholders to determine if these proposed actions are in
the best interests of the Company.

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. The 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, it 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.

On February 27, 2003, the state court of appeals in Houston rendered an
opinion reversing the judgment against the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals found that
the jury's finding of laches barred all of the Three Cities' claims and that the
Three Cities were not entitled to recovery of any attorneys' fees. The judgment
of the court of appeals is subject to an appeal to the Texas Supreme Court.

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 court of appeals' ruling
appears to be 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 $-0- and $18 million inclusive of

19

interest and attorneys' fees.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claims Act against RERC Corp. (now CERC 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 federal 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 has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.

In addition, CERC Corp., CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, Inc., and CenterPoint Energy-Mississippi
River Transmission Corporation are 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 for more than 25 years. The plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. On April 10, 2003, the judge denied the plaintiffs' motion to
certify the requested class. Plaintiffs have requested and secured 30 days to
amend their petition and may seek to redefine the class to comply with the
judge's findings. The action is currently pending in state court in Stevens
County, Kansas.

City of Tyler, Texas, Gas Costs Review. By letter to CenterPoint Energy
Entex (Entex) dated July 31, 2002, the City of Tyler, Texas, forwarded various
computations of what it believes to be excessive costs ranging from $2.8 million
to $39.2 million for gas purchased by Entex 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 (the Railroad Commission). Pursuant to an agreement, on
January 29, 2003, Entex and the city filed a Joint Petition for Review of
Charges for Gas Sales (Joint Petition) with the Railroad Commission. The Joint
Petition requests that the Railroad Commission determine whether Entex has
properly and lawfully charged and collected for gas service to its residential
and commercial customers in its Tyler distribution system for the period
beginning November 1, 1992, and ending October 31, 2002. The Company believes
that all costs for Entex's Tyler distribution system have been properly included
and recovered from customers pursuant to Entex's filed tariffs and that the city
has no legal or factual support for the statements made in its letter.

Gas Cost Recovery Suits. In October 2002, a suit was filed in state
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, civil conspiracy and
violations of the Texas Free Enterprise and Antitrust Act. The plaintiffs seek
class certification, but no class has been certified. The plaintiffs allege that
defendants inflated the prices charged to certain consumers of natural gas. In
February 2003, a similar suit was filed against CERC in state court in Caddo
Parish, Louisiana purportedly on behalf of a class of residential or business
customers in Louisiana who allegedly have been overcharged for gas or gas
service provided by CERC. The plaintiffs in both cases seek restitution for the
alleged overcharges, exemplary damages and penalties. The Company denies that
CERC has overcharged any of its customers for natural gas and believes that the
amounts recovered for purchased gas have been in accordance with what is
permitted by state regulatory authorities.

Supplier Suits. Texas Genco is currently engaged in a dispute with its fuel
supplier at its Limestone electric generation facility over the terms and
pricing for fuel supplied to that facility under a 1999 settlement agreement
between the parties and under ancillary obligations. On May 6, 2003, Texas
Genco filed suit for a declaratory judgment against the supplier, Northwestern
Resources Co. (NWR), in Harris County, Texas, and NWR filed similar claims for a
declaratory judgment in an action previously filed against Reliant Energy in
Limestone County, Texas. NWR claims Texas Genco has breached its obligations by
modifying its generation facility to burn coal from the Powder River Basin and
by purchasing coal from the Powder River Basin without first giving NWR a right
of first refusal to supply lignite at a price that is equal to or less than coal
from the Powder River Basin. NWR also contends that Texas Genco is not entitled
to certain production royalties. In its suit, Texas Genco seeks rulings that it
has not breached its obligations regarding the modification of its facilities
and the burning of Powder River Basin coal but that, instead, NWR has breached
its

20

obligations by failing to pay production royalties and in other respects. The
ultimate outcome of this dispute cannot be determined at this time.

Other Proceedings. 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. The Texas electric restructuring law and regulations
adopted by the Texas Commission on Environmental Quality in 2001 require
substantial reductions in emission of oxides of nitrogen (NOx) from electric
generating units. The Company is currently installing cost-effective controls at
its generating plants to comply with these requirements. Through March 31, 2003,
the Company has invested $582 million for NOx emission control, and plans to
make expenditures of up to approximately $200 million for the remainder of 2003
through 2007. 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 cost-effective option for achieving
compliance with applicable air quality standards for the Company's generating
facilities and the final amount for recovery will be determined in the 2004
True-Up Proceeding.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company (REGT), Reliant Energy Pipeline
Services, Inc., RERC Corp., RES, other Reliant Energy entities and third parties
in the 1st Judicial District Court, Caddo Parish, Louisiana. The petition has
now been supplemented seven times. As of May 1, 2003, there were 572 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 in the same court. More recently, on January 6, 2003, two other
plaintiffs filed a third suit of similar allegations against the Company, as
well as other defendants, in Bossier Parish (26th Judicial District 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 December
31, 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
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes were neither owned or operated by CERC, and for which CERC
believes it has no liability.

At March 31, 2003, CERC had accrued $19 million for remediation of the
Minnesota sites. At March 31, 2003, the estimated range of possible remediation
costs was $8 million to $44 million based on remediation continuing for

21

30 to 50 years. The cost estimates are based on studies of a site or industry
average costs for remediation of sites of similar size. The actual remediation
costs will be dependent upon the number of sites to be remediated, the
participation of other potentially responsible parties (PRP), if any, and the
remediation methods used. CERC has utilized an environmental expense tracker
mechanism in its rates in Minnesota to recover estimated costs in excess of
insurance recovery. CERC has collected $12.2 million at March 31, 2003 to be
used for future environmental remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. Recently, the
Company was informed that CERC has been named as a defendant in a third party
complaint in the U.S. District Court for Maine under which contribution is
sought for the cost to remediate a former MGP site in Bangor, Maine. The claim
is based on the previous ownership of the site by a former affiliate of one of
CERC's divisions. CERC has not been served with the complaint and presently is
not aware of details regarding the site, the extent of any legal obligation to
contribute to site remediation or the estimated cost of remediation. Based on
current information, the Company has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

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 condition, results of
operations or cash flows.

Other Environmental. 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
condition, results of operations or cash flows.

(c) Department of Transportation.

In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002. This legislation applies to the Company's interstate pipelines as well as
its intra-state pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires companies to assess the integrity of their pipeline transmission and
distribution facilities in areas of high population concentration and further
requires companies to perform remediation activities, in accordance with the
requirements of the legislation, over a 10-year period.

In January 2003, the U.S. Department of Transportation published a notice
of proposed rulemaking to implement provisions of the legislation. The
Department of Transportation is expected to issue final rules by the end of
2003.

While the Company anticipates that increased capital and operating expenses
will be required to comply with the requirements of the legislation, it will not
be able to quantify the level of spending required until the Department of
Transportation's final rules are issued.

22

(d) Other Proceedings.

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.

(e) Nuclear Insurance.

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 March 31, 2003. 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.

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.

(f) Nuclear Decommissioning.

Texas Genco contributed $2.9 million in 2002 to trusts established to fund
its share of the decommissioning costs for the South Texas Project, and expects
to contribute $2.9 million in 2003. There are various investment restrictions
imposed upon Texas Genco by the Texas Utility Commission and the United States
Nuclear Regulatory Commission (NRC) relating to Texas Genco's nuclear
decommissioning trusts. Additionally, Texas Genco and CenterPoint Energy have
each appointed two members to the Nuclear Decommissioning Trust Investment
Committee which establishes the investment policy of the trusts and oversees the
investment of the trusts' assets. The securities held by the trusts for
decommissioning costs had an estimated fair value of $158 million as of March
31, 2003, of which approximately 48% were fixed-rate debt securities and the
remaining 52% were equity securities. For a discussion of the accounting
treatment for the securities held in the nuclear decommissioning trust, see Note
3(k) to the CenterPoint Energy Notes, which note is incorporated herein by
reference. In July 1999, an outside consultant estimated Texas Genco's portion
of decommissioning costs to be approximately $363 million. While the funding
levels currently 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. CenterPoint Energy is contractually obligated to
indemnify Texas Genco from and against any obligations relating to the
decommissioning not otherwise satisfied through collections by CenterPoint
Houston. For information regarding the effect of the business separation plan on
funding of the nuclear decommissioning trust fund, see Note 4(b) to the
CenterPoint Energy Notes, which note is incorporated herein by reference.

(g) "Price to Beat" Clawback Component.

In connection with the implementation of the Texas electric restructuring
law, the Texas Utility Commission has set a "price to beat" that retail electric
providers affiliated or formerly affiliated with a former integrated utility
must charge residential and small commercial customers within their affiliated
electric utility's service area. The true-up provides for a clawback of "price
to beat" in excess of the market price of electricity if 40% of the "price to
beat" load is not served by a non-affiliated retail electric provider by January
1, 2004. Pursuant to the Texas electric

23

restructuring law and the master separation agreement between Reliant Energy and
Reliant Resources, Reliant Resources is obligated to pay CenterPoint Houston for
the clawback component of the true-up. The clawback may not exceed $150 times
the number of customers served by the affiliated retail electric provider in the
transmission and distribution utility's service territory, less the number of
customers served by the affiliated retail electric provider outside the
transmission and distribution utility's service territory, on January 1, 2004.

(13) EARNINGS PER SHARE

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

- ----------

(1) For the three months ended March 31, 2002 and 2003, the computation of
diluted EPS excludes 5,595,200 and 10,249,849 purchase options,
respectively, for shares of common stock that have exercise prices (ranging
from $24.38 to $50.00 per share and $7.86 to $34.17 per share for the first
quarter of 2002 and 2003, respectively) greater than the per share average
market price for the period and would thus be anti-dilutive if exercised.

24

(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 &
Distribution, Electric Generation, Natural Gas Distribution, Pipelines and
Gathering and Other Operations. Reportable business segments presented herein do
not include Wholesale Energy, European Energy, Retail Energy and related
corporate costs as these business segments operated within Reliant Resources,
which is presented as discontinued operations within these consolidated
financial statements. Additionally, the Company's Latin America operations,
which were previously reported in the Other Operations business segment, are
presented as discontinued operations within these consolidated financial
statements. Reportable business segments for all prior periods presented have
been restated to conform to the 2003 presentation.

The Company evaluates business segment performance on an earnings (loss)
before interest expense, distribution on trust preferred securities, income
taxes, minority interest, extraordinary item and cumulative effect of accounting
change (EBIT) basis. EBIT, as defined, is shown because it is a measure the
Company uses to evaluate the performance of its business segments, and 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 GAAP, 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 Company's 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

25

customers in 2002 prior to this meter reading are reflected in the Electric
Transmission & Distribution business segment.

(2) Sales to subsidiaries of Reliant Resources for the three months ended
March 31, 2002 and 2003 represented approximately $117 million and $212
million, respectively, of CenterPoint Houston's transmission and
distribution revenues since deregulation began in 2002.

(3) Sales to subsidiaries of Reliant Resources for the three months ended
March 31, 2002 and 2003 represented approximately 53% and 68%,
respectively, of Texas Genco's total revenues. Sales to BP Energy for
the three months ended March 31, 2003 represented approximately 10% of
Texas Genco's total revenues.

Reconciliation of Operating Income to EBIT and EBIT to Net Income
Attributable to Common Shareholders:

(15) GUARANTOR DISCLOSURES

CenterPoint Energy has entered standard indemnification agreements with
various surety companies to support the issuance of surety bonds on behalf of
CenterPoint Energy and its subsidiaries. These indemnification agreements vary
in duration to coincide with the term of the bonds issued. As of March 31, 2003,
these agreements covered surety bonds in the aggregate amount of $14.1 million.
In addition, CenterPoint Energy has provided $9.6 million in cash deposits to
secure its indemnity to one surety company.

(16) SUBSEQUENT EVENT

During a routine refueling and maintenance outage in early April 2003,
engineers found a small quantity of residue from reactor cooling water in the
South Texas Project Unit 1 reactor containment building. No other residue was
found in Unit 1 or in the plant's twin Unit 2 reactor when it was inspected
during a refueling outage in the fall of 2002. Upon discovery of the residue,
South Texas Project officials immediately reported their findings to the NRC.
The South Texas Project's managers and engineers are conferring with industry
experts to develop a corrective action plan. The NRC must approve any corrective
action plan before it is implemented.

Although Unit 1 was originally scheduled to be returned to service by May
2003, it will remain shut down until any necessary corrective action is
completed. While the unit remains out of service, Texas Genco will meet its
existing power sales obligations from other generating units and/or from
purchases from third parties. A protracted outage at Unit 1 would adversely
affect Texas Genco's operating results. Until inspections are completed and an
acceptable corrective action plan has been developed, Texas Genco is unable to
predict the extent of the economic impact of this outage and when the unit will
be returned to service. Texas Genco does not expect Unit 1 will return to
service before late summer of 2003.

26

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 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 indirect 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; and

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

We also have an approximately 81% ownership interest in Texas Genco
Holdings, Inc. (Texas Genco), which owns and operates our Texas generating
plants formerly belonging to the integrated electric utility that was a part of
Reliant Energy. We distributed the remaining 19% of the outstanding common stock
of Texas Genco to our shareholders on January 6, 2003.

At the time of Reliant Energy's corporate restructuring, it owned an
83% interest in Reliant Resources, Inc. (Reliant Resources), which conducts
non-utility wholesale and retail energy operations primarily in North America
and Western Europe. On September 30, 2002, we distributed that interest to our
shareholders (the Reliant Resources 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
reportable business segments include the following:

o Electric Transmission & 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 in January 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. 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 & Distribution business
segment. For business segment reporting information, please read Notes 1 and 14
to our Interim Financial Statements.

27

Subsequent to December 31, 2002, we sold our remaining Latin America
operations. The Interim Financial Statements present these Latin America
operations 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
months ended March 31, 2002 and 2003.

The Interim Financial Statements have been prepared to reflect the effect
of the Reliant Resources Distribution on the CenterPoint Energy financial
statements. The Interim Financial Statements present the Reliant Resources
businesses (previously reported as Wholesale Energy, European Energy and Retail
Energy business segments and related corporate costs) as discontinued
operations, in accordance with SFAS No. 144. Accordingly, the Interim Financial
Statements include the necessary reclassifications to reflect these operations
as discontinued operations for the three months ended March 31, 2002.

RECENT DEVELOPMENTS

During a routine refueling and maintenance outage in early April 2003,
engineers found a small quantity of residue from reactor cooling water in the
South Texas Project Electric Generating Station (South Texas Project) Unit 1
reactor containment building. No other residue was found in Unit 1 or in the
plant's twin Unit 2 reactor when it was inspected during a refueling outage in
the fall of 2002. Upon discovery of the residue, South Texas Project officials
immediately reported their findings to the Nuclear Regulatory Commission (NRC).
The South Texas Project's managers and engineers are conferring with industry
experts to develop a corrective action plan. The NRC must approve any corrective
action plan before it is implemented.

Although Unit 1 was originally scheduled to be returned to service by May
2003, it will remain shut down until any necessary corrective action is
completed. While the unit remains out of service, Texas Genco will meet its
existing power sales obligations from other generating units and/or from
purchases from third parties. A protracted outage at Unit 1 would adversely
affect Texas Genco's operating results. Until inspections are completed and an
acceptable corrective action plan has been developed, Texas Genco is unable to
predict the extent of the economic impact of this outage and when the unit will
be returned to service. Texas Genco does not expect Unit 1 (Texas Genco's share
is 385 MW) will return to service before late summer of 2003. In order to
mitigate the financial impact of forced outages at its generating units, Texas
Genco does not auction 750 MW of coal and lignite base-load capacity and 500 MW
of gas-fired capacity. However, nuclear generation from the South Texas Project
is Texas Genco's least expensive source of power because the cost of nuclear
fuel is substantially less than that of coal, lignite or natural gas.
Accordingly, while Unit 1 is shut down, Texas Genco will be required to satisfy
capacity entitlements with significantly more expensive power and its ability
to make opportunity sales and serve gas auction entitlements from South Texas
Project production will be reduced. For example, Texas Genco's base-load
capacity generally operates at an approximate energy cost of between $16/Mwh and
$17/Mwh and gas fired capacity ranges between $55/Mwh and $60/Mwh based on
current natural gas prices, while its nuclear generation capacity generally
operates at an approximate energy cost of between $4/Mwh and $5/Mwh.

28

CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of consolidated results of operations and results
of operations by business segment is based on earnings from continuing
operations before interest expense, distribution on trust preferred securities,
income taxes, minority interest and cumulative effect of accounting change
(EBIT). EBIT, as defined, is shown because it is a financial measure we use to
evaluate the performance of our business segments and 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. EBIT is not
defined under accounting principles generally accepted in the United States
(GAAP), 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, 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. We consider operating income to be a comparable measure under
GAAP. We believe the difference between operating income and EBIT on both a
consolidated and business segment basis is not material. We have provided a
reconciliation of consolidated operating income to EBIT and EBIT to net income
below as well as in the individual business segment discussion that follows.

29

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Income from Continuing Operations. We reported income from continuing
operations before cumulative effect of accounting change of $81 million ($0.27
per diluted share) for the three months ended March 31, 2003 as compared to $145
million ($0.49 per diluted share) for the same period in 2002. The decrease in
income from continuing operations of $64 million was primarily due to the
following:

o a $106 million increase in interest expense due to higher borrowing
costs and increased debt levels; and

o a $45 million decrease in EBIT from our Electric Transmission &
Distribution business segment.

The above items were partially offset by:

o a $35 million increase in EBIT from our Electric Generation business
segment;

o a $24 million increase in EBIT from our Natural Gas Distribution
business segment; and

o a $27 million decrease in income tax expense.

The derivation of the foregoing EBIT and its reconciliation to Operating
Income is provided in the discussion of our business segments that follows.

Income Tax Expense. During the three months ended March 31, 2003 and 2002,
our effective tax rates were 33.2% and 31.9%, respectively. The increase in the
effective tax rate for the first quarter of 2003 compared to the first quarter
of 2002 was primarily the result of an increase in state taxes and a decrease in
benefits related to the employee stock ownership plan, offset by a decrease in
pretax income which amplified the effect of the permanent items on our effective
tax rate.

Cumulative Effect of Accounting Change. In connection with the adoption of
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143), we
have completed an assessment of the applicability and implications of SFAS No.
143. As a result of the assessment, we have identified retirement obligations
for nuclear decommissioning at the South Texas Project and for lignite mine
operations at the Jewett mine supplying the Limestone electric generation
facility. The net difference between the amounts determined under SFAS No. 143
and the previous method of accounting for estimated mine reclamation costs was
$37 million and has been

30

recorded as a cumulative effect of accounting change. Upon adoption of SFAS No.
143, we reversed $115 million of previously recognized removal costs with
respect to our non-rate regulated businesses as a cumulative effect of
accounting change. The total cumulative effect of accounting change from
adoption of SFAS No, 143 was $152 million. Excluded from the $80 million
after-tax cumulative effect of accounting change recorded for the three months
ended March 31, 2003, is minority interest of $19 million related to the Texas
Genco stock not owned by CenterPoint Energy. For additional discussion of the
adoption of SFAS No. 143, please read Note 3 to our Interim Financial
Statements.

EARNINGS BEFORE INTEREST AND INCOME TAXES BY BUSINESS SEGMENT

The following table presents EBIT for each of our business segments for the
three months ended March 31, 2002 and 2003. Some amounts from the previous year
have been reclassified to conform to the 2003 presentation of the financial
statements. These reclassifications do no affect consolidated net income.

Reconcilations of EBIT compared to operating income are shown in the
following discussions of our business segments.

ELECTRIC TRANSMISSION & DISTRIBUTION

For information regarding factors that may affect the future results of
operations of our Electric Transmission & Distribution business segment, please
read "Business -- Risk Factors -- Risk Factors Affecting the Results of Our
Electric Transmission & Distribution Business" in Item 1 of the CenterPoint
Energy Form 10-K, which is incorporated herein by reference.

31

The following tables provide summary data, including EBIT, of our Electric
Transmission & Distribution business segment for the three months ended March
31, 2002 and 2003:

Our Electric Transmission & Distribution business segment reported EBIT of
$214 million for the three months ended March 31, 2003, consisting of $82
million for the regulated electric transmission & distribution utility and
non-cash EBIT of $132 million associated with generation-related regulatory
assets, or Excess Cost Over Market (ECOM), as described below. For the three
months ended March 31, 2002, EBIT was $259 million, consisting of $104 million
for the regulated electric transmission & distribution utility, non-cash EBIT of
$141 associated with ECOM, and $14 million related to the transition to the
deregulated electric market. Although our former retail sales business is no
longer conducted by us, retail customers remained regulated customers of the
regulated utility through the date of their first meter reading in 2002. The
purchased power costs of $60 million for the three months ended March 31, 2002
relate to operation of the regulated utility during this transition period.

The regulated electric transmission & distribution utility, excluding ECOM
and transition related-EBIT, continues to benefit from solid customer growth.
Reduced revenues from industrial customers ($9 million) and higher employee
benefit and insurance costs ($8 million) more than offset increased revenues
from the addition of over 50,000 metered customers since March 2002 ($8
million).

Under the Texas electric restructuring law, a regulated utility may
recover, in its 2004 stranded cost true-up proceeding, any difference between
market prices received through the state mandated auctions and the Texas Utility
Commission's earlier estimates of those market prices. During 2002 and 2003,
this difference, referred to as ECOM, produces non-cash EBIT and is recorded as
a regulatory asset. The reduction in ECOM of $9 million from 2002 to 2003
resulted from an increase in capacity auction prices at Texas Genco.

Operation and maintenance expense decreased $8 million for the three months
ended March 31, 2003 as compared to the same period in 2002. The decrease was
primarily due to a reduction in bad debt expense of $17 million related to the
2002 transition period (bundled) revenues ($14 million) and the termination of a
factoring program ($3 million). This decrease in bad debt expense was partially
offset by increased employee benefit expenses primarily due to increased pension
costs ($5 million) and increased insurance expenses ($3 million).

32

Depreciation and amortization expense increased $2 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily due
to increases in plant in service ($4 million) partially offset by decreased
amortization on securitized assets ($2 million).

Taxes other than income taxes decreased $6 million for the three months
ended March 31, 2003 as compared to the same period in 2002 primarily due to
gross receipts tax associated with transition period revenue in the first
quarter of 2002.

ELECTRIC GENERATION

For information regarding factors that may affect the future results of
operations of our Electric Generation business segment, please read "Business --
Risk Factors -- Risk Factors Affecting the Results of Our Electric Generation
Business" in Item 1 of the CenterPoint Energy Form 10-K, which is incorporated
herein by reference.

The following tables provide summary data, including Loss Before Interest
and Income Taxes, of our Electric Generation business segment for the three
months ended March 31, 2002 and 2003:

Our Electric Generation business segment's loss before interest and income
taxes for the three months ended March 31, 2003 was $17 million compared to a
loss before interest and income taxes of $52 million for the same period in
2002. The improvement is primarily attributable to increased gross margins as a
result of higher capacity auction prices driven by higher gas prices, partially
offset by increased operation and maintenance expenses due to unplanned forced
outages in the first quarter of 2003 and higher property insurance expense. The
first quarter is typically Texas Genco's lowest performing quarter due to
seasonal revenue effects and the scheduling of planned maintenance on its
generating units. South Texas Project Unit 2 was taken out of service in
December 2002 as a result of non-safety related mechanical failures and was
returned to service on March 14, 2003. The added cost of replacement energy
negatively impacted gross margin by approximately $23 million for the first
quarter of 2003.

Operation and maintenance expense increased $10 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily due
to the Unit 2 outage discussed above ($4 million), a scheduled re-fueling outage
on Unit 1 ($2 million) and higher property insurance expense ($1 million).

Taxes other than income taxes decreased $2 million for the three months
ended March 31, 2003 as compared to the same period in 2002. This decrease was
attributable to a reduction in property taxes.

33

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 the six states listed above as well as
several other Midwestern states.

For information regarding factors that may affect the future results of
operations of our Natural Gas Distribution business segment, please read
"Business -- Risk Factors -- Risk Factors Affecting the Results of Our Natural
Gas Distribution and Pipelines and Gathering Businesses" in Item 1 of the
CenterPoint Energy Form 10-K, 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 ended March 31, 2002 and
2003:

Our Natural Gas Distribution business segment's EBIT increased $24 million
for the three months ended March 31, 2003 as compared to the same period in
2002. Operating margins (revenues less fuel costs) for the three months ended
March 31, 2003 were $56 million higher than in the same period in 2002 primarily
because of:

o continued customer growth ($4 million);

o higher revenues from rate increases late in 2002 ($11 million);

o colder weather ($7 million);

o improved margins from our unregulated commercial and industrial sales
($9 million); and

o franchise fees billed to customers ($11 million).

These increases were partially offset by increased operating expenses as
discussed below.

Operations and maintenance expense increased $16 million for the three
months ended March 31, 2003 as compared to the same period in 2002. The increase
in operations and maintenance expense was primarily due to:

o certain costs being included in operating expense subsequent to the
amendment of a receivables facility in November 2002 as compared with
being included in interest expense in the prior year ($4 million);

34

o increased bad debt expense primarily due to colder weather and higher
gas prices ($4 million); and

o higher employee benefit expenses primarily due to increased pension
costs ($4 million).

Depreciation and amortization expense increased approximately $3 million
for the three months ended March 31, 2003 as compared to the same period in 2002
primarily as a result of increases in plant in service.

Taxes other than income taxes increased $13 million for the three months
ended March 31, 2003 as compared to the same period in 2002, primarily due to
increased franchise fees resulting from higher revenues ($11 million).

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
"Business -- Risk Factors -- Risk Factors Affecting the Results of Our Natural
Gas Distribution and Pipelines and Gathering Businesses" in Item 1 of the
CenterPoint Energy Form 10-K, 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 ended March 31, 2002 and
2003:

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

(1) Elimination of volumes both transported and sold.

Our Pipelines and Gathering business segment's EBIT for the three months
ended March 31, 2003 compared to the same period in 2002, increased $7 million.
Operating margins were $3 million higher for the three months ended March 31,
2003 than in the same period in 2002 primarily due to increased margins
resulting from higher gas and liquid commodity prices ($9 million), which were
partially offset by reduced project related revenues ($5 million).

Operation and maintenance expenses decreased $4 million for the three
months ended March 31, 2003 compared to the same period in 2002 primarily due to
a decrease in project related costs ($5 million), partially offset by an
increase in employee benefit expenses primarily due to increased pension costs
($1 million).

35

Depreciation and amortization expense increased $1 million for the three
months ended March 31, 2003, as compared to the same period in 2002 primarily as
a result of increases in plant in service.

OTHER OPERATIONS

Our Other Operations business segment includes district cooling operations
in the central business district in downtown Houston, energy management services
and other corporate operations which support all of our business operations.

The following table shows EBIT of our Other Operations business segment for
the three months ended March 31, 2002 and 2003:

Our Other Operations business segment's loss before interest and income
taxes decreased by $3 million for the three months ended March 31, 2003 compared
to the same period in 2002. The decline for the three months was primarily due
to a net loss of $6 million in 2003 as compared to a net loss of $14 million in
2002 on our AOL Time Warner investment and related indexed debt securities,
partially offset by an increase in unallocated corporate costs and corporate
accruals.

DISCONTINUED OPERATIONS

In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23.1 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. We have
completed our strategy of exiting Latin America. The Interim Financial
Statements present these Latin America operations as discontinued operations in
accordance with SFAS No. 144 for the three months ended March 31, 2002 and 2003.

On September 30, 2002, we distributed to our shareholders on a pro rata
basis all of the shares of Reliant Resources common stock owned by us. The
Interim Financial Statements have been prepared to reflect the effect of the
Reliant Resources Distribution as described above on our Interim Financial
Statements. The Interim Financial Statements present the Reliant Resources
businesses (Wholesale Energy, European Energy, Retail Energy and related
corporate costs) as discontinued operations for the three months ended March 31,
2002. We recorded an after-tax loss from discontinued operations of $113 million
for the three months ended March 31, 2002 related to the operations of Reliant
Resources.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an
impact on our future earnings, please read "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors Affecting
Future Earnings" in Exhibit 99.1 to our Current Report on Form 8-K dated May 12,
2003 (May 12 Form 8-K), which is incorporated herein by reference.

In addition to the factors incorporated by reference from the May 12
Form 8-K, increased borrowing costs and increased pension expense are expected
to negatively impact our earnings in 2003. Additionally, please read the
discussion of the South Texas Project Unit 1 forced outage under
"-- Overview -- Recent Developments."

36

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 three months ended March
31, 2002 and 2003:

Net cash provided by operating activities during the three months ended
March 31, 2003 increased $196 million compared to the same period in 2002
primarily due to increased accounts payable, partially offset by decreased
accrued taxes and interest and increases in net regulatory assets.

Net cash used in investing activities decreased $45 million during the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due to lower capital expenditures in 2003.

Net cash provided by financing activities decreased $271 million during the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due a decrease in short-term borrowings, partially offset by an increase in net
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 wholly owned subsidiary (transition bonds).

On February 28, 2003, we reached agreement with a syndicate of banks on a
second amendment to our $3.85 billion bank facility (Second Amendment). Under
the Second Amendment, the maturity date of the bank facility was extended from
October 2003 to June 30, 2005, and the $1.2 billion in mandatory prepayments
that would have been required in 2003 (including $600 million due on February
28, 2003) were eliminated. At the time of the Second Amendment, the facility
consisted of a $2.35 billion term loan and a $1.5 billion revolver. In March
2003, a $50 million repayment of the term loan reduced the term loan to $2.30
billion. The revolver was fully utilized on March 31, 2003. Borrowings bear
interest based on the London interbank offered rate (LIBOR) under a pricing grid
tied to our credit rating. At our current credit ratings, the pricing for loans
remains the same. The drawn cost at our current ratings is LIBOR plus 450 basis
points. We have agreed to pay the banks an extension fee of 75 basis points on
the amounts outstanding under the bank facility on October 9, 2003. We also paid
$41 million in fees that were due on February 28, 2003, along with $20 million
in fees that had been due on June 30, 2003.

In addition, the interest rate will be increased by 25 basis points
beginning May 28, 2003 if we do not grant the banks a security interest in our
81% stock ownership of Texas Genco. Granting the security interest in the stock
of Texas Genco requires approval from the Securities and Exchange Commission
(SEC) under the 1935 Act, which is currently being sought. That security
interest would be released at the time of a sale of Texas Genco, which may occur
as early as 2004. Proceeds from any sale will be used to reduce the bank
facility.

Also under the Second Amendment, on or before May 28, 2003, we agreed to
grant to the banks warrants to purchase up to 10%, on a fully diluted basis, of
our common stock at a price equal to the greater of $6.56 per share or 110% of
the closing price on the New York Stock Exchange on the date the warrants are
issued. The warrants would not be exercisable for a year after issuance but
would remain outstanding for four years; provided, that if we reduce the term
loans owed under the bank facility during 2003 by specified amounts, the
warrants will be extinguished. To the extent that we reduce the term loans owed
under the bank facility by up to $400 million on or before May 28, 2003, up to
half of the warrants will be extinguished on a basis proportionate to the
reduction in the credit facility. To the extent such warrants are not
extinguished on or before May 28, 2003, they will vest and become exercisable in
accordance with their terms. At

37

March 31, 2003, we had reduced the term loans owed under the bank facility by
$50 million. Whether or not we are able to extinguish warrants on or before May
28, 2003, the remaining 50% of the warrants will be extinguished, again on a
proportionate basis, if we reduce the term loans owed under the bank facility by
up to $400 million by the end of 2003. We plan to eliminate the warrants
entirely before they vest by accessing the capital markets to fund the total
payments of $800 million during 2003; however there can be no assurance that we
will be able to extinguish the warrants or to do so on favorable terms.

The warrants and the underlying common stock would be registered with the
SEC and could be exercised either through the payment of the purchase price or
on a "cashless" basis under which we would issue a number of shares based upon
the difference between the then-current market price and the warrant exercise
price. Issuance of the warrants is also subject to obtaining SEC approval under
the 1935 Act, which is currently being sought. If that approval is not obtained
on or before May 28, 2003, we will provide the banks equivalent cash
compensation over the term that our warrants would have been exercisable to the
extent they are not otherwise extinguished.

In the Second Amendment, we also agreed that our quarterly common stock
dividend will not exceed $0.10 per share. If we have not reduced the bank
facility by a total of at least $400 million by the end of 2003, of which at
least $200 million has come from the issuance of capital stock or securities
linked to capital stock (such as convertible debt), the maximum dividend payable
during 2004 and for the balance of the term of the facility is subject to an
additional test. Under that test the maximum permitted quarterly dividend will
be the lesser of (i) $0.10 per share or (ii) 12.5% of our net income per share
for the 12 months ended on the last day of the previous quarter.

The Second Amendment provides that proceeds from capital stock or
indebtedness issued or incurred by us must be applied (subject to a $200 million
basket for CERC and another $250 million basket for borrowings by us, certain
permitted refinancings of existing debt and other limited exceptions) to repay
bank loans and permanently reduce the bank facility. Similarly, cash proceeds
from the sale of assets of more than $30 million or, if less, a group of sales
aggregating more than $100 million, must be applied to repay bank loans and
reduce the bank facility, except that proceeds of up to $120 million can be
reinvested in our businesses.

On March 18, 2003, CenterPoint Houston issued $762.3 million aggregate
principal amount of general mortgage bonds composed of $450 million principal
amount of 10-year bonds with an interest rate of 5.7% and $312.3 million
principal amount of 30-year bonds with an interest rate of 6.95%. Proceeds were
used to repay $150 million aggregate principal amount of medium-term notes
maturing on April 21, 2003, to redeem approximately $312.3 million aggregate
principal amount of CenterPoint Houston's first mortgage bonds and to repay $279
million of a $537 million intercompany note payable to CenterPoint Energy by
CenterPoint Houston. Proceeds from the note repayment were ultimately used to
repay borrowings under our $3.85 billion credit facility and to permanently
reduce the term loan component of the credit facility by $50 million.

On March 25 and April 14, 2003, CERC issued $650 million and $112 million,
respectively, aggregate principal amount of 7.875% senior unsecured notes due in
2013. A portion of the proceeds were used to refinance $360 million aggregate
principal amount of CERC's 6 3/8% Term Enhanced ReMarketable Securities (TERM
Notes) and to pay costs associated with the refinancing. Proceeds were also used
to repay borrowings under CERC's $350 million revolving credit facility prior to
its expiration on March 31, 2003. The remaining $140 million aggregate principal
amount of TERM Notes are due to be refinanced or remarketed in November 2003.

On April 9, 2003, we remarketed $175 million aggregate principal amount of
pollution control bonds that we had owned since the fourth quarter of 2002.
Remarketed bonds maturing in 2029 have a principal amount of $75 million and an
interest rate of 8%. Remarketed bonds maturing in 2018 have a principal amount
of $100 million and an interest rate of 7.75%. Proceeds from the remarketing
were used to repay bank debt. We are obligated to make payments sufficient to
service the pollution control bonds.

In addition to the $140 million of TERM Notes, remaining maturities in 2003
include $16.6 million principal amount of pollution control bonds and $12
million of expected maturities of transition bonds which are discussed below.

We have $840 million of outstanding 2.0% Zero-Premium Exchangeable
Subordinated Notes due 2029 (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
common stock (AOL TW Common). There are 1.5 reference shares of AOL TW Common
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

38

market value is calculated using the average closing price per share of AOL TW
Common on the New York Stock Exchange on one or more trading days following the
notice date for the exchange. One of our subsidiaries owns the reference shares
of AOL TW Common 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 Common offset the cash paid
on exchanges, ZENS exchanges result in a cash outflow because deferred tax
liabilities related to the ZENS and AOL TW Common become current tax obligations
when ZENS are exchanged and AOL TW Common is sold. There have been no exchanges
in 2003.

CenterPoint Houston has outstanding approximately $699 million aggregate
principal amount of first mortgage bonds and approximately $2.6 billion
aggregate principal amount of general mortgage bonds, of which approximately
$924 million combined aggregate principal amount of first mortgage bonds and
general mortgage bonds collateralizes debt of CenterPoint Energy. The general
mortgage bonds are issued under the General Mortgage Indenture dated as of
October 10, 2002. The lien of the general mortgage indenture is junior to that
of the Mortgage, pursuant to which the first mortgage bonds are issued. The
aggregate amount of additional general mortgage bonds and first mortgage bonds
that could be issued is approximately $600 million 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 a result of
contractual limitations expiring in November 2005, the aggregate amount of first
mortgage and general mortgage bonds cannot be increased above current levels.

One of our indirect finance subsidiaries, CenterPoint Energy Transition
Bond Company, LLC, has $729 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. 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.

Short-Term Debt and Receivables Facility. CERC's revolver and receivables
facility are scheduled to terminate on the dates indicated. Please read Note
9(a) to our Interim Financial Statements regarding CERC's receivables facility.

On February 28, 2003, our $3.85 billion bank facility was amended and
extended to June 2005 as discussed above in " -- Long-Term Debt." Loans under
this facility are recorded as long-term debt in the Consolidated Balance Sheets
at both December 31, 2002 and March 31, 2003.

On March 25, 2003, CERC obtained a $200 million revolving credit facility
that terminates on March 23, 2004. Rates for borrowings under this facility,
including the facility fee, are LIBOR plus 250 basis points based on current
credit ratings and the applicable pricing grid.

On March 31, 2003, we had $279 million of temporary investments.

Refunds to CenterPoint Houston Customers. An order issued by the Texas
Utility Commission on October 3, 2001 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

39

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 refund of excess earnings is approximately $237 million. Under the Texas
electric restructuring law, a final determination of these stranded costs will
occur in 2004.

Cash Requirements in 2003. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs.

On April 30, 2003 we had no temporary investments and unutilized capacity
of $657 million under our bank facilities and receivables facility.

Our principal remaining cash requirements during 2003 include the following:

o approximately $543 million of capital expenditures;

o an estimated $185 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 $140 million of CERC Corp. debt,
plus the possible payment of option termination costs, which will
be determined at the time of remarketing or refinancing
(estimated to be $18.2 million as of March 31, 2003) as discussed
in "Quantitative and Qualitative Disclosures About Market Risk --
Interest Rate Risk" in Item 3 of this report;

o dividend payments on CenterPoint Energy common stock; and

o $29 million of maturing long-term debt.

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. However, the mandatory prepayments required under our $3.85 billion bank
facility and disruptions in our ability to access the capital markets on a
timely basis could adversely affect our liquidity. Limits on our ability to
issue secured debt, as described in this report, may adversely affect our
ability to issue debt securities. Please read "Business -- Risk Factors -- Risk
Factors Associated with Financial Condition and Other Risks -- If we are unable
to arrange future financings on acceptable terms, our ability to fund future
capital expenditures and refinance existing indebtedness could be limited" in
Item 1 of the CenterPoint Energy 10-K, which is incorporated herein by
reference.

At March 31, 2003, CenterPoint Energy had a shelf registration statement
for 15 million shares of common stock and CERC Corp. had a shelf registration
statement covering $50 million of debt securities. 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,
general market conditions and factors affecting our industry. Proceeds from the
sales of securities are expected to be used primarily to refinance debt.

40

Principal Factors Affecting Cash Requirements in 2004 and 2005. We
anticipate selling our 81% ownership interest in Texas Genco in 2004. Should
Reliant Resources decline to exercise its option to purchase our interest in
Texas Genco, we will explore other alternatives to monetize Texas Genco's
assets, including possible sale of our ownership interest in Texas Genco or of
its individual generating assets, which may significantly affect the timing of
any cash proceeds. Proceeds from that 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.

We expect to issue securitization bonds in 2004 or 2005 to monetize and
recover the balance of stranded costs relating to 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 to be issued by the Texas Utility
Commission. As with the debt of our existing transition bond company, payments
on these new securitization bonds would also be made from funds obtained through
non-bypassable charges assessed to retail electric customers required to take
delivery service from CenterPoint Houston. 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 CenterPoint
Houston's $1.3 billion collateralized term loan are expected to be utilized to
retire other existing debt.

Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2003,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, 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) A "stable" outlook from S&P indicates that the rating is not likely to
change over the intermediate to longer term.

(3) A "stable" outlook from Fitch indicates the direction a rating is likely to
move over a one- to two-year period.

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. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. 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 facility 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 our bank facilities generally 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

41

legality, validity or enforceability of the loan documents.

The $150 million receivables facility of CERC requires the maintenance of
credit ratings of at least BB from S&P and Ba2 from Moody's. Receivables would
cease to be sold in the event a credit rating fell below the threshold.

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 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 that we own or
from other sources. We own shares of AOL TW Common equal to 100% of the
reference 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 Common become current tax obligations when ZENS
are exchanged and AOL TW Common is sold.

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 for 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. As of May 1,
2003, the senior unsecured debt of CERC Corp. was 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 $39 million; however, utilized credit capacity is significantly lower.

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. A default by CenterPoint Energy would not trigger a default
under our subsidiaries' debt instruments.

Pension Plan. As discussed in Note 11 of the notes to the consolidated
financial statements in the May 12 Form 8-K (CenterPoint Energy Notes), which is
incorporated herein by reference, we maintain a non-contributory pension plan
covering substantially all employees. At December 31, 2002, the projected
benefit obligation exceeded the market value of plan assets by $496 million. We
are not required and do not anticipate making any contributions to our pension
plans prior to 2004. Changes in interest rates and the market values of the
securities held by the plans during 2003 could materially, positively or
negatively, change our underfunded status and affect the level of pension
expense and required contributions in 2004 and beyond. For example, every .5%
difference in our actual 2003 asset returns versus our assumed 9% long-term
asset return rate would increase or decrease the underfunded status of our plans
by approximately $5 million and our 2004 pension expense by approximately $1
million. Similarly, a .5% change in the discount rate used to value pension
liabilities at December 31, 2003, could increase or decrease the underfunded
status of our plans by approximately $100 million and 2004 pension expense by
approximately $14 million. Actual investment returns and changes in the discount
rate during 2003 will have no effect on our 2003 pension expense. Additionally,
we expect that a separate pension plan will be established for Texas Genco in
2004. Texas Genco would receive an allocation of assets from the CenterPoint
Energy pension plan pursuant to rules and regulations under the Employee
Retirement Income Security Act of 1974 and record its pension obligations in
accordance with SFAS 87, "Employer's Accounting for Pensions". It is anticipated
that a plan established for Texas Genco would be underfunded and that such
underfunding could be significant. Changes in interest rates and the market
values of the securities held by the CenterPoint Energy pension plan during 2003
could materially, positively or negatively, change the funding status of a plan
established for Texas Genco.

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, as a result of increased gas prices and
concentration of suppliers;

42

o increased costs related to the acquisition of gas for storage;

o increases in interest expense in connection with debt refinancings;

o various regulatory actions; and

o the ability of Reliant Resources and its subsidiaries to satisfy their
obligations as the principal customers of CenterPoint Houston and
Texas Genco and in respect of its indemnity obligations 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 expected to be met with
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 and other provisions 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 collateralized term loan of CenterPoint Houston limits CenterPoint
Houston's debt, excluding transition bonds, as a percentage of its total
capitalization to 68%. CERC Corp.'s bank facility and its receivables facility
limit CERC's debt as a percentage of its total capitalization to 60% and contain
an earnings before interest, taxes, depreciation and amortization (EBITDA) to
interest covenant. CERC Corp.'s bank facility also contains a provision that
could, under certain circumstances, limit the amount of dividends that could be
paid by CERC Corp. Our $3.85 billion credit agreement limits dividend payments
as described above, 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 our 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.

Additionally, the SEC has placed limitations on our dividends and the
dividends of our subsidiaries that require common equity as a percentage of
total capitalization for CenterPoint Houston, CERC Corp. and Texas Genco to be
at least 30% after the payment of such dividends. The order issued by the SEC
that authorizes our financing program expires on June 30, 2003, and we must seek
a new financing order before that date. Any new order may contain restrictions
or authorizations different from those described above.

Security Interest in Receivables. Effective March 28, 2003, Texas Genco,
LP, a subsidiary of Texas Genco, amended a Master Power Purchase and Sale
Agreement with a subsidiary of Reliant Resources related to ERCOT power sales.
Texas Genco, LP was granted a security interest in accounts receivable and/or
securitization notes associated with the accounts receivable of certain
subsidiaries of Reliant Resources to secure up to $250 million in purchase
obligations.

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates

43

described below require us to make assumptions about matters that are highly
uncertain at the time the estimate is made. Additionally, different estimates
that we could have used or changes in an accounting estimate that are reasonably
likely to occur could have a material impact on the presentation of our
financial condition or results of operations. The circumstances that make these
judgments difficult, subjective and/or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain. Estimates
and assumptions about future events and their effects cannot be predicted with
certainty. We base our estimates on historical experience and on various other
assumptions that we believe 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
critical accounting policies involve the application of accounting estimates for
which a change in the estimate is inseparable from the effect of a change in
accounting principle. Accordingly, these accounting policies have been reviewed
and discussed with the audit committee of the board of directors.

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. Application of SFAS No. 71 to the
electric generation portion of our business was discontinued as of June 30,
1999. Our Electric Transmission & Distribution business continues to apply SFAS
No. 71 which results in our accounting for the regulatory effects of recovery of
"stranded costs" and other "regulatory assets" resulting from the unbundling of
the transmission and distribution business from our electric generation
operations in our consolidated financial statements. 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. Regulatory assets reflected in our Consolidated Balance Sheets
aggregated $4.0 billion and $4.6 billion as of December 31, 2002 and March 31,
2003, respectively. Additionally, regulatory liabilities reflected in our
consolidated Balance Sheets aggregated $1.1 billion at both December 31, 2002
and March 31, 2003. Significant accounting estimates embedded within the
application of SFAS No. 71 with respect to our Electric Transmission &
Distribution business segment relate to $2.5 billion of recoverable electric
generation plant mitigation assets (stranded costs) and $829 million of ECOM
true-up as of March 31, 2003. The stranded costs are comprised of $1.1 billion
of previously recorded accelerated depreciation and $841 million of previously
redirected depreciation as well as $396 million related to the Texas Genco
distribution. These stranded costs are recoverable under the provisions of the
Texas electric restructuring law. The ultimate amount of stranded cost recovery
is subject to a final determination which will occur in 2004 and is contingent
upon the market value of Texas Genco. Any significant changes in our accounting
estimate of stranded costs as a result of current market conditions or changes
in the regulatory recovery mechanism currently in place could result in a
material write-down of all or a portion of these regulatory assets. Regulatory
assets related to ECOM true-up represent the regulatory assets associated with
costs incurred as a result of mandated capacity auctions conducted beginning in
2002 by our Electric Generation business being consummated at market-based
prices that have been substantially below the estimate of those prices made by
the Texas Utility Commission in the spring of 2001. Any significant changes in
our estimate of our regulatory asset associated with ECOM true-up could have a
significant effect on our financial condition and results of operations.
Additionally, any significant changes in our estimated stranded costs or ECOM
true-up recovery could significantly affect our liquidity subsequent to the
final true-up proceedings conducted by the Texas Utility Commission which are
expected to conclude in late 2004.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets recorded in our Consolidated Balance Sheets primarily
consist of property, plant and equipment (PP&E). Net PP&E comprises $11.2
billion or 55% of our total assets as of March 31, 2003. 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. We evaluate our PP&E for impairment whenever indicators of impairment
exist. Accounting standards require that if the sum of the undiscounted expected
future cash flows from a company's asset is less than the carrying value of the
asset, an asset impairment must be recognized in the financial statements. The
amount of impairment recognized is calculated by subtracting the fair value of
the asset from the carrying value of the asset.

44

As a result of the distribution of approximately 19% of Texas Genco's
common stock to our shareholders on January 6, 2003, we re-evaluated our
electric generation assets for impairment as of December 31, 2002. This analysis
required us to make long-term estimates of future cash receipts associated with
the operation or sale of these electric generation assets and related cash
outflows. These forecasts require assumptions about demand for electricity
within the ERCOT market, future ERCOT market conditions, commodity prices and
regulatory developments. As of December 31, 2002, no impairment had been
indicated because the estimated cash flows associated with the operations of
their assets exceeded their carrying value. However, the effects of competition
within the ERCOT market, the results of our capacity auctions, and the timing
and extent of changes in commodity prices, particularly natural gas prices,
could have a significant effect on our future cash flows and, therefore, affect
any future determination of asset impairment.

IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

We evaluate our goodwill and other indefinite-lived intangible assets for
impairment at least annually and more frequently when indicators of impairment
exist. Accounting standards require that if the fair value of a reporting unit
is less than its carrying value, including goodwill, a charge for impairment of
goodwill must be recognized. To measure the amount of the impairment loss, we
would compare the implied fair value of the reporting unit's goodwill with its
carrying value.

We recorded goodwill associated with the acquisition of our Natural Gas
Distribution and Pipelines and Gathering operations in 1997. We reviewed our
goodwill for impairment as of January 1, 2003. We computed the fair value of the
Natural Gas Distribution and the Pipelines and Gathering operations as the sum
of the discounted estimated net future cash flows applicable to each of these
operations. We determined that the fair value for each of the Natural Gas
Distribution operations and the Pipelines and Gathering operations exceeded
their corresponding carrying value, including unallocated goodwill. We also
concluded that no interim impairment indicators existed subsequent to this
initial evaluation. As of March 31, 2003 we had recorded $1.7 billion of
goodwill. Future evaluations of the carrying value of goodwill could be
significantly impacted by our estimates of cash flows associated with our
Natural Gas Distribution and Pipelines and Gathering operations, regulatory
matters, and estimated operating costs.

UNBILLED ENERGY REVENUES

Revenues related to the sale and/or delivery of electricity or natural gas
(energy) are generally recorded when energy is delivered to customers. However,
the determination of energy sales to individual customers is based on the
reading of their meters, which is performed 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 Sheets as of December 31, 2002 were $70
million related to our Electric Transmission & Distribution business segment and
$284 million related to our Natural Gas Distribution business segment. Accrued
unbilled revenues recorded in the Consolidated Balance Sheets as of March 31,
2003 were $61 million related to our Electric Transmission & Distribution
business segment and $277 million related to our Natural Gas Distribution
business segment.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, we adopted SFAS No. 143. SFAS No. 143 requires
the fair value of an asset retirement obligation to be recognized as a liability
is incurred and capitalized as part of the cost of the related tangible
long-lived assets. 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. Retirement obligations associated with long-lived assets included
within the scope of SFAS No. 143 are those for which a legal obligation exists
under enacted laws, statutes and written or oral contracts, including
obligations arising under the doctrine of promissory estoppel.

We have identified retirement obligations for nuclear decommissioning at
the South Texas Project and for lignite mine operations at the Jewett mine
supplying the Limestone

45

electric generation facility. Prior to adoption of SFAS No. 143, we had recorded
liabilities for nuclear decommissioning and the reclamation of the lignite mine.
Liabilities were recorded for estimated decommissioning obligations of $139.7
million and $39.7 million for reclamation of the lignite at December 31, 2002.
Upon adoption of SFAS No. 143 on January 1, 2003, we reversed the $139.7 million
previously accrued for the nuclear decommissioning of the South Texas Project
and recorded a plant asset of $99.1 million offset by accumulated depreciation
of $35.8 million as well as a retirement obligation of $186.7 million. The $16.3
million difference between amounts previously recorded and the amounts recorded
upon adoption of SFAS No. 143 is being deferred as a liability due to regulatory
requirements. We also reversed the $39.7 million we had previously recorded for
the Jewett mine reclamation and recorded a plant asset of $1.9 million offset by
accumulated depreciation of $0.4 million as well as a retirement obligation of
$3.8 million. The $37.4 million difference between amounts previously recorded
and the amounts recorded upon adoption of SFAS No. 143 was recorded as a
cumulative effect of accounting change. We have also identified other asset
retirement obligations that cannot be calculated because the assets associated
with the retirement obligations have an indeterminate life.

The following represents the balances of the asset retirement obligation as
of January 1, 2003 and the additions and accretion of the asset retirement
obligation for the three months ended March 31, 2003:

The following represents the pro-forma effect on our net income for the
three months ended March 31, 2002, as if we had adopted SFAS No. 143 as of
January 1, 2002:

The following represents our asset retirement obligations on a pro-forma
basis as if we had adopted SFAS No. 143 as of December 31, 2002:

Our rate-regulated businesses have previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
March 31, 2003, these previously recognized removal costs of $639

46

million do not represent SFAS No. 143 asset retirement obligations, but rather
embedded regulatory liabilities. Our non-rate regulated businesses have also
previously recognized removal costs as component of depreciation expense. We
reversed $115 million in the three months ended March 31, 2003 of previously
recognized removal costs with respect to these non-rate-regulated businesses as
a cumulative effect of accounting change. The total cumulative effect of
accounting change from adoption of SFAS No. 143 was $152 million. Excluded from
the $80 million after-tax cumulative effect of accounting change recorded for
the three months ended March 31, 2003, is minority interest of $19 million
related to the Texas Genco stock not owned by us.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. We have applied this guidance
prospectively as it relates to lease accounting and will apply the accounting
provisions related to debt extinguishment in 2003. Upon adoption of SFAS No.
145, any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods will be reclassified. No such
reclassification was required in the three month period ended March 31, 2002. We
have reclassified the $26 million loss on debt extinguishment related to the
fourth quarter of 2002 from extraordinary item to interest expense.

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

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect our
consolidated financial statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We do not expect the adoption of
FIN 46 to have a material impact on our results of operations or financial
condition.

47

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 March 31, 2003
levels would have decreased the fair value of our Energy Derivatives from their
levels on that date by $28 million.

The above analysis of the Energy Derivatives utilized for hedging purposes
does not include the favorable impact that the same hypothetical price movement
would have on our physical purchases and sales of natural gas to which the
hedges relate. Furthermore, the Energy Derivative portfolio is managed to
complement the physical transaction portfolio, reducing overall risks within
limits. Therefore, the adverse impact to the fair value of the portfolio of
Energy Derivatives held for hedging purposes associated with the hypothetical
changes in commodity prices referenced above would be offset by a favorable
impact on the underlying hedged physical transactions.

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
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 to third parties aggregated $5.1 billion at
March 31, 2003. If the floating rates were to increase by 10% from March 31,
2003 rates, our combined interest expense to third parties would increase by a
total of $3.2 million each month in which such increase continued.

At March 31, 2003, we had outstanding fixed-rate debt (excluding indexed
debt securities) and Trust Preferred Securities aggregating $6.1 billion in
principal amount and having a fair value of $6.3 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 $332 million if interest rates were
to decline by 10% from their levels at March 31, 2003. 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 13(f) to the CenterPoint Energy Notes, which note is
incorporated herein by reference, we contribute $2.9 million per year to trusts
established to fund our share of the decommissioning costs for the South Texas
Project. The securities held by the trusts for decommissioning costs had an
estimated fair value of $158 million as of March 31, 2003, of which
approximately 48% 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 March 31, 2003, the fair value of the
fixed-rate debt securities would decrease by approximately $1 million. Any
unrealized gains or losses are accounted for as a long-term asset/liability as
we will not benefit from any gains, and losses will be recovered through the
rate making process. For further discussion regarding the recovery of
decommissioning costs pursuant to the Texas electric restructuring law, please
read Note 4(a) to the CenterPoint Energy Notes.

As discussed in Note 9(b) to the CenterPoint Energy Notes, which note is
incorporated herein by reference, CERC Corp.'s $240 million aggregate principal
amount of TERM Notes outstanding at March 31, 2003, 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 March 31, 2003, we could
terminate the option at a cost of $31 million. A decrease of 10% in the March
31, 2003 level of interest rates would increase the cost of termination of the
option by approximately $12 million. On April 14, 2003, CERC Corp. retired an
additional $100 million principal amount of its TERM Notes obligations, leaving
a remaining balance of $140 million of TERM Notes due November 1, 2003.

As discussed in Note 7 to the CenterPoint Energy 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 and a
derivative component. The debt component of $104 million at March 31, 2003 is a
fixed-rate

48

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 $16 million if interest rates were to
decline by 10% from levels at March 31, 2003. 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 March 31, 2003 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 March 31, 2003, 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 March 31, 2003, the swaps relating to
short-term debt could be terminated at a cost of $14 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 March 31,
2003 level of interest rates would increase the cost of terminating the swaps at
March 31, 2003 by $1 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
7 to the CenterPoint Energy 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 March 31, 2003 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 March 31, 2003. 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 March
31, 2003, 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.

49

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a description of certain legal and regulatory proceedings affecting
CenterPoint Energy, please read Note 12 to our Interim Financial Statements,
"Business -- Environmental Matters" in Item 1 of the CenterPoint Energy 10-K,
"Legal Proceedings" in Item 3 of the CenterPoint Energy Form 10-K and Notes 4
and 13 to the CenterPoint Energy Notes, all of which are incorporated herein
by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Our credit facility restricts our ability to pay dividends. Please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CenterPoint Energy and Subsidiaries--Liquidity and Capital
Resources--Future Sources and Uses of Cash Flows--Long-Term Debt" in Item 2 of
Part I of this report.

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,
that 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,"
"forecast," "goal," "intend," "may," "objective," "plan," "potential,"
"predict," "projection," "should," "will," 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
1935 Act, 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;

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;

50

o changes in interest rates or rates of inflation;

o unanticipated changes in operating expenses and capital expenditures;

o weather variations and other natural phenomena;

o commercial bank and financial market conditions, our access to capital, the
cost of such capital, receipt of certain approvals under the 1935 Act, 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 potential adverse effects if labor
disputes or grievances were to occur;

o significant changes in critical accounting policies;

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 us, Reliant Energy
and Reliant Resources;

o the outcome of the Securities and Exchange Commission investigation
relating to the treatment in our consolidated financial statements of
certain activities of Reliant Resources;

o the ability of Reliant Resources 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 market served by 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 CenterPoint Energy Form 10-K, including
those outlined in Item 1 under "Risk Factors".

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.

51

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.

(b) Reports on Form 8-K.

On January 7, 2003, we filed a Current Report on Form 8-K dated January 6,
2003, announcing that we had distributed approximately 19% of the 80 million
outstanding shares of Texas Genco common stock to our shareholders of record as
of the close of business on December 20, 2002.

On January 27, 2003, we filed a Current Report on Form 8-K to furnish
information under Item 9 of that form regarding earnings guidance for Texas
Genco and the filing of a post-effective amendment on Form U-1/A.

On February 13, 2003, we filed a Current Report on Form 8-K dated February
13, 2003, relating to the announcement of fourth quarter 2002 and year-end 2002
results.

On March 3, 2003, we filed a Current Report on Form 8-K dated February 28,
2003, announcing that we had amended and extended our $3.85 billion credit
facility from October 2003 to June 30, 2005.

On March 27, 2003, we filed a Current Report on Form 8-K dated March 18,
2003, announcing the pricing and closing of $650 million of senior notes of our
subsidiary, CenterPoint Energy Resources Corp., in a private placement with
institutions pursuant to Rule 144A under the Securities Act of 1933, as amended.

On March 27, 2003, we filed a Current Report on Form 8-K dated March 13,
2003, announcing the pricing and closing of $762.275 million of general mortgage
bonds by our subsidiary, CenterPoint Energy Houston Electric, LLC, in a private
placement with institutions pursuant to Rule 144A under the Securities Act of
1933, as amended.

On April 8, 2003, we filed a Current Report on Form 8-K to furnish
information under Item 9 of that form regarding our external debt balances as of
March 31, 2003.

On April 23, 2003, we filed a Current Report on Form 8-K dated April 16,
2003, reporting the filing of a class action lawsuit in California against
CenterPoint Energy, Inc. and others and the shutdown of a reactor at the South
Texas Project Nuclear Generating Station.

53

On April 24, 2003, we filed a Current Report on Form 8-K dated April 24,
2003, in which we announced first quarter 2003 earnings.

On May 1, 2003, we filed a Current Report on Form 8-K dated April 7, 2003,
announcing the pricing and closing of $112 million of senior notes of our
subsidiary, CenterPoint Energy Resources Corp., which will be added to and form
a single series with its prior existing 7.875% senior notes due on April 1,
2013, in a private placement with institutions pursuant to Rule 144A under the
Securities Act of 1933, as amended. We also furnished under Item 9 and Item 12
of Form 8-K transcripts of the earnings conference call held on April 24, 2003.

On May 12, 2003, we filed a Current Report on Form 8-K dated May 12, 2003,
to provide information giving effect to certain reclassifications within our
historical consolidated financial statements, Selected Financial Data, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations as reported on our Annual Report on Form 10-K for the year ended
December 31, 2002.

54

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: May 12, 2003

55

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: May 12, 2003

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

56

CERTIFICATIONS

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: May 12, 2003

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

57

EXHIBIT INDEX

Exhibits not incorporated by reference to a prior filing are designated by a
cross (+); all exhibits not so designated are incorporated by reference to a
prior filing of CenterPoint Energy, Inc.

EXHIBIT INDEX