EXHIBIT 99.1
ITEM 1. BUSINESS

REGULATION

We are subject to regulation by various federal, state and local
governmental agencies, including the regulations described below.

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

As a subsidiary of a registered public utility holding company, we are
subject to a comprehensive regulatory scheme imposed by the Securities and
Exchange Commission (SEC) in order to protect customers, investors and the
public interest. Although the SEC does not regulate rates and charges under the
1935 Act, it does regulate the structure, financing, lines of business and
internal transactions of public utility holding companies and their system
companies. In order to obtain financing, acquire additional public utility
assets or stock, or engage in other significant transactions, we are required to
obtain approval from the SEC under the 1935 Act.

CenterPoint Energy received an order from the SEC under the 1935 Act on
June 30, 2003 and supplemental orders thereafter relating to its financing
activities and those of its regulated subsidiaries, including us, as well as
other matters. The orders are effective until June 30, 2005. As of December 31,
2003, the orders generally permitted CenterPoint Energy and its subsidiaries,
including us, to issue securities to refinance indebtedness outstanding at June
30, 2003, and authorized CenterPoint Energy and its subsidiaries, including us,
to issue certain incremental external debt securities and common and preferred
stock through June 30, 2005, without prior authorization from the SEC. The
orders also contain certain requirements regarding ratings of CenterPoint
Energy's securities, interest rates, maturities, issuance expenses and use of
proceeds. The orders require that we maintain a ratio of common equity to total
capitalization of at least 30%.

FEDERAL ENERGY REGULATORY COMMISSION

We are not a "public utility" under the Federal Power Act and therefore are
not generally regulated by the Federal Energy Regulatory Commission, although
certain of our transactions are subject to limited FERC jurisdiction.

STATE AND LOCAL REGULATION

We conduct operations pursuant to a certificate of convenience and
necessity issued by the Texas Utility Commission that covers our present service
area and facilities. In addition, we hold non-exclusive franchises, typically
having a term of forty years, from the incorporated municipalities in our
service territory. These franchises give us the right to construct, operate and
maintain our transmission and distribution system within the streets and public
ways of these municipalities for the purpose of delivering electric service to
the municipality, its residents and businesses in exchange for payment of a fee.
The franchise for the City of Houston is scheduled to expire in 2007.

All retail electric providers in our service area pay the same rates and
other charges for transmission and distribution services.

Our distribution rates charged to retail electric providers for residential
customers are based on amounts of energy delivered whereas distribution rates
for a majority of commercial and industrial customers are based on peak demand.
Transmission rates charged to other distribution companies are based on amounts
of energy transmitted under "postage stamp" rates that do not vary with the
distance the energy is being transmitted. All distribution companies in ERCOT
pay us the same rates and other charges for transmission services. Our current
transmission and distribution rates have been in effect since January 1, 2002,
when electric competition began. This regulated delivery charge includes the
transmission and distribution rate (which includes costs for nuclear
decommissioning and municipal franchise fees), a system benefit fund fee imposed
by the Texas electric restructuring law, a transition charge associated with
securitization of regulatory assets and an excess mitigation credit imposed by
the Texas Utility Commission.

ENVIRONMENTAL MATTERS

We are subject to a number of federal, state and local laws and regulations
relating to the protection of the environment and the safety and health of
company personnel and the public. These requirements relate to a broad range of
our activities, including:

- the discharge of pollutants into the air, water and soil;

- the identification, generation, storage, handling, transportation,
disposal, record keeping, labeling and reporting of, and the emergency
response in connection with, hazardous and toxic materials and wastes,
including asbestos, associated with our operations;

- noise emissions from our facilities; and

- safety and health standards, practices and procedures that apply to
the workplace and the operation of our facilities.

In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:

- construct or acquire new equipment; and

- modify or replace existing and proposed equipment.

If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose upon us civil fines or
liabilities for property damage, personal injury and possibly other costs.

Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), owners and operators of facilities from which
there has been a release or threatened release of hazardous substances, together
with those who have transported or arranged for the disposal of those
substances, are liable for:

- the costs of responding to that release or threatened release; and

- the restoration of natural resources damaged by any such release.

LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION

Asbestos and Other. As a result of their age, many of our facilities contain
significant amounts of asbestos insulation, other asbestos-containing materials
and lead-based paint. Existing state and federal rules require the proper
management and disposal of these potentially toxic materials. We have planned
for the proper management, abatement and disposal of asbestos and lead-based
paint at our facilities.

We have been named, along with numerous others, as a defendant in a large
number of lawsuits filed by a number of individuals who claim injury due to
exposure to asbestos while working at sites along the Texas Gulf Coast. We
anticipate that additional claims like those received may be asserted in the
future, and we intend to continue our practice of vigorously contesting claims
that we do not consider to have merit.

RISK FACTORS

PRINCIPAL RISK FACTORS ASSOCIATED WITH OUR BUSINESS

WE MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF OUR TRUE-UP
COMPONENTS.

We expect to make a filing on March 31, 2004 in a true-up proceeding
provided for by the Texas electric restructuring law. The purpose of this
proceeding will be to quantify and reconcile the following costs or true-up
components:

- "stranded costs," which consist of the positive excess of the
regulatory net book value of generation assets, as defined, over the
market value of the assets;

- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market
prices for generation as determined in the state-mandated capacity
auctions during that period;

- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets
and liabilities (offset and adjusted by specified amounts) in their
audited financial statements for 1998;

- final fuel over- or under-recovery; less

- "price to beat" clawback components.

We will be required to establish and support the amounts we seek to recover
in the 2004 True-Up Proceeding. We expect these amounts to be substantial. Third
parties will have the opportunity and are expected to challenge our calculation
of these amounts. To the extent recovery of a portion of these amounts is denied
or if we agree to forego recovery of a portion of the request under a settlement
agreement, we would be unable to recover these costs in the future.
Additionally, in October 2003, a group of intervenors filed a petition asking
the Texas Utility Commission to open a rulemaking proceeding and reconsider
certain aspects of its true-up rules. In November 2003, the Texas Utility
Commission voted to deny the petition. Despite the denial of the petition, we
expect that issues could be raised in the 2004 True-Up Proceeding regarding our
compliance with the Texas Utility Commission's rules regarding ECOM recovery,
including whether Texas Genco has auctioned all capacity it is required to
auction in view of the fact that some capacity has failed to sell in the
state-mandated auctions. We believe Texas Genco has complied with the
requirements under the applicable rules, including re-offering the unsold
capacity in subsequent auctions. If events were to occur during the 2004 True-Up
Proceeding that made the recovery of the ECOM true-up regulatory asset no longer
probable, we would write off the unrecoverable balance of such asset as a charge
against earnings.

In the event we have not begun to recover the amounts established in the
2004 True-Up Proceeding prior to our $1.3 billion term loan maturity date in
November 2005, our ability to repay or refinance this term loan may be adversely
affected.

The Texas Utility Commission's ruling that the 2004 True-Up Proceeding
filing will be made on March 31, 2004 means that the calculation of the market
value of a share of Texas Genco common stock for purposes of the Texas Utility
Commission's stranded cost determination will be based on market prices during
the 120 trading days ending on March 30, 2004 plus a control premium, if any, up
to a maximum of 10%. If Texas Genco is sold to a third party at a lower price
than the market value used by the Texas Utility Commission, we would be unable
to recover the difference.

OUR RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL ELECTRIC
PROVIDERS.

Our receivables from the distribution of electricity are collected from
retail electric providers that supply the electricity we distribute to their
customers. Currently, we do business with approximately 43 retail electric
providers. Adverse economic conditions, structural problems in the new ERCOT
market or financial difficulties of one or more retail electric providers could
impair the ability of these retail providers to pay for our services or could
cause them to delay such payments. We depend on these retail electric providers
to remit payments on a timely basis. Any delay or default in payment could
adversely affect our cash flows, financial condition and results of operations.
Reliant Resources, through its subsidiaries, is our largest customer.
Approximately 70% of our $83 million in billed receivables from retail electric
providers at December 31, 2003 was owed by subsidiaries of Reliant Resources.
Pursuant to the Texas electric restructuring law, Reliant Resources will be
obligated to make a "price to beat" clawback payment to us in 2004 which is
currently estimated by Reliant Resources to be $175 million. Our financial
condition may be adversely affected if Reliant Resources is unable to meet these
obligations.

RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR FULL RECOVERY OF OUR
COSTS.

Our rates are regulated by certain municipalities and the Texas Utility
Commission based on an analysis of our invested capital and expenses incurred in
a test year. Thus, the rates that we are allowed to charge may not match our
expenses at any given time. While rate regulation in Texas is premised on
providing a reasonable opportunity to recover reasonable and necessary operating
expenses and to earn a reasonable return on our invested capital, there can be
no assurance that the Texas Utility Commission will judge all of our costs to be
reasonable or necessary or that the regulatory process in which rates are
determined will always result in rates that will produce full recovery of our
costs.

DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT OUR SALES OF TRANSMISSION AND DISTRIBUTION SERVICES.

We depend on power generation facilities owned by third parties to provide
retail electric providers with electric power which we transmit and distribute
to customers of the retail electric providers. We do not own or operate any
power generation facilities. If power generation is disrupted or if power
generation capacity is inadequate, our services may be interrupted, and our
results of operations, financial condition and cash flows may be adversely
affected.

OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A portion of our revenues is derived from rates that we collect from each
retail electric provider based on the amount of electricity we distribute on
behalf of each retail electric provider. Thus, our revenues and results of
operations are subject to seasonality, weather conditions and other changes in
electricity usage, with revenues being higher during the warmer months.

RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION

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.

As of December 31, 2003, we had $3.9 billion of outstanding indebtedness on
a consolidated basis, including a $1.3 billion collateralized term loan due in
2005. In addition, the capital constraints and other factors currently impacting
our business may require our future indebtedness to include terms that are more
restrictive or burdensome than those of our current indebtedness. These terms
may negatively impact our ability to operate our business or adversely affect
our financial condition and results of operations. The success of our future
financing efforts may depend, at least in part, on:

- our ability to recover the true-up components;

- general economic and capital market conditions;

- credit availability from financial institutions and other lenders;

- investor confidence in us and the market in which we operate;

- maintenance of acceptable credit ratings by us and by CenterPoint
Energy;

- market expectations regarding our future earnings and probable cash
flows;

- market perceptions of our ability to access capital markets on
reasonable terms;

- our exposure to Reliant Resources as our customer and in connection
with Reliant Resources' indemnification obligations arising in
connection with its separation from CenterPoint Energy;

- provisions of relevant tax and securities laws; and

- our ability to obtain specific approval of specific financing
transactions under the 1935 Act.

Our capital structure and liquidity will be significantly impacted in the
2004/2005 period by our ability to recover the true-up components through the
regulatory process beginning in March 2004. To the extent our recovery is denied
or materially reduced, our liquidity and financial condition will be materially
adversely affected.

As of March 1, 2004, we have $3.2 billion principal amount of general
mortgage bonds outstanding and $382 million of first mortgage bonds outstanding.
We may issue additional general mortgage bonds on the basis of retired bonds,
70% of property additions or cash deposited with the trustee. Although
approximately $400 million of additional first mortgage and general mortgage
bonds could be issued on the basis of retired bonds and 70% of property
additions as of December 31, 2003, we have agreed under the $1.3 billion
collateralized term loan maturing in 2005 to not issue, subject to certain
exceptions, more than $200 million of incremental secured or unsecured debt. In
addition, we are contractually prohibited, subject to certain exceptions, from
issuing additional first mortgage bonds.

Our current credit ratings are discussed in our "Management's Narrative
Analysis of Results of Operations--Liquidity--Impact on Liquidity of a Downgrade
in Credit Ratings" in Item 7 of Part II of this report. We cannot assure you
that these credit 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. 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 access
capital on acceptable terms.

AN INCREASE IN SHORT-TERM INTEREST RATES COULD ADVERSELY AFFECT OUR CASH
FLOWS.

As of December 31, 2003, we had $1.3 billion of outstanding floating-rate
debt owed to third parties. The interest rate spreads on such debt are
substantially above our historical interest rate spreads. In addition, any
floating-rate debt issued by us in the future could be at interest rates
substantially above our historical borrowing rates. While we may seek to use
interest rate swaps in order to hedge portions of our floating-rate debt, we may
not be successful in obtaining hedges on acceptable terms. An increase in
short-term interest rates could result in higher interest costs and could
adversely affect our results of operations, financial condition and cash flows.

THE FINANCIAL CONDITION AND LIQUIDITY OF OUR PARENT COMPANY COULD AFFECT OUR
ACCESS TO CAPITAL, OUR CREDIT STANDING AND OUR FINANCIAL CONDITION.

Our ratings and credit may be impacted by CenterPoint Energy's credit
standing. CenterPoint Energy and its subsidiaries other than us have
approximately $2.2 billion principal amount of debt required to be paid through
2006. This amount excludes amounts related to capital leases, securitization
debt and indexed debt securities obligations. We cannot assure you that
CenterPoint Energy and its other subsidiaries will be able to pay or refinance
these amounts. If CenterPoint Energy were to experience a

deterioration in its credit standing or liquidity difficulties, our access to
credit and our ratings could be adversely affected and the repayment of notes
receivable from CenterPoint Energy in the amount of $815 million as of December
31, 2003 could be adversely affected.

WE ARE A WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY. CENTERPOINT ENERGY
CAN EXERCISE SUBSTANTIAL CONTROL OVER OUR BUSINESS AND OPERATIONS AND COULD
DO SO IN A MANNER THAT IS ADVERSE TO OUR INTERESTS.

We are managed by officers and employees of CenterPoint Energy. Our
management will make determinations with respect to the following:

- our payment of dividends;

- decisions on our financings and our capital raising activities;

- mergers or other business combinations; and

- our acquisition or disposition of assets.

There are no contractual restrictions on our ability to pay dividends to
CenterPoint Energy. Our management could decide to increase our dividends to
CenterPoint Energy to support its cash needs. This could adversely affect our
liquidity. Under the 1935 Act, our ability to pay dividends is restricted by the
SEC's requirement that common equity as a percentage of total capitalization
must be at least 30% after the payment of any dividend.

OTHER RISKS

WE COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES AND ASSETS WE HAVE
TRANSFERRED TO OTHERS.

Under some circumstances, we could incur liabilities associated with assets
and businesses we no longer own. These assets and businesses were previously
owned by Reliant Energy directly or through subsidiaries and include:

- those transferred to Reliant Resources or its subsidiaries in
connection with the organization and capitalization of Reliant
Resources prior to its initial public offering in 2001;

- those transferred to Texas Genco in connection with its organization
and capitalization; and

- those transferred to CenterPoint Energy and us in connection with the
August 2002 restructuring of Reliant Energy.

In connection with the organization and capitalization of Reliant
Resources, Reliant Resources and its subsidiaries assumed liabilities associated
with various assets and businesses Reliant Energy transferred to them. Reliant
Resources also agreed to indemnify, and cause the applicable transferee
subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including
us, with respect to liabilities associated with the transferred assets and
businesses. The indemnity provisions were intended to place sole financial
responsibility on Reliant Resources and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Reliant
Resources, regardless of the time those liabilities arose. If Reliant Resources
is unable to satisfy a liability that has been so assumed in circumstances in
which Reliant Energy has not been released from the liability in connection with
the transfer, CenterPoint Energy or us could be responsible for satisfying the
liability.

Reliant Resources reported in its Annual Report on Form 10-K for the year
ended December 31, 2003 that as of December 31, 2003 it had $6.1 billion of
total debt and its unsecured debt ratings are currently below investment grade.
If Reliant Resources were unable to meet its obligations, it would need to
consider, among various options, restructuring under the bankruptcy laws, in
which event Reliant Resources might not honor its indemnification obligations
and claims by Reliant Resources' creditors might be made against us as its
former owner.

Reliant Energy and Reliant Resources are named as defendants in a number of
lawsuits arising out of power sales in California and other West Coast markets
and financial reporting matters. Although these matters relate to

the business and operations of Reliant Resources, claims against Reliant Energy
have been made on grounds that include the effect of Reliant Resources'
financial results on Reliant Energy's historical financial statements and
liability of Reliant Energy as a controlling shareholder of Reliant Resources.
We could incur liability if claims in one or more of these lawsuits were
successfully asserted against us and indemnification from Reliant Resources were
determined to be unavailable or if Reliant Resources were unable to satisfy
indemnification obligations owed to us with respect to those claims.

In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy
and its subsidiaries, including us, with respect to liabilities associated with
the transferred assets and businesses. In many cases the liabilities assumed
were held by us and we were not released by third parties from these
liabilities. The indemnity provisions were intended generally to place sole
financial responsibility on Texas Genco and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Texas
Genco, regardless of the time those liabilities arose. If Texas Genco were
unable to satisfy a liability that had been so assumed or indemnified against,
and provided Reliant Energy had not been released from the liability in
connection with the transfer, we could be responsible for satisfying the
liability.

WE, AS A SUBSIDIARY OF CENTERPOINT ENERGY, A HOLDING COMPANY, ARE SUBJECT TO
REGULATION UNDER THE 1935 ACT. THE 1935 ACT AND RELATED RULES AND REGULATIONS
IMPOSE A NUMBER OF RESTRICTIONS ON OUR ACTIVITIES.

CenterPoint Energy and its subsidiaries, including us but excluding Texas
Genco, are subject to regulation by the SEC under the 1935 Act. The 1935 Act,
among other things, limits the ability of a holding company and its regulated
subsidiaries to issue debt and equity securities without prior authorization,
restricts the source of dividend payments to current and retained earnings
without prior authorization, regulates sales and acquisitions of certain assets
and businesses and governs affiliate transactions.

CenterPoint Energy and its subsidiaries, including us, received an order
from the SEC under the 1935 Act on June 30, 2003 relating to financing
activities, which is effective until June 30, 2005. We must seek a new order
before the expiration date. Although authorized levels of financing, together
with current levels of liquidity, are believed to be adequate during the period
the order is effective, unforeseen events could result in capital needs in
excess of authorized amounts, necessitating further authorization from the SEC.
Approval of filings under the 1935 Act can take extended periods.

The United States Congress is currently considering legislation that has a
provision that would repeal the 1935 Act. We cannot predict at this time whether
this legislation or any variation thereof will be adopted or, if adopted, the
effect of any such law on our business.

WE DO NOT MAINTAIN INSURANCE COVERAGE ON OUR TRANSMISSION AND DISTRIBUTION
SYSTEM. INSUFFICIENT INSURANCE COVERAGE AND INCREASED INSURANCE COSTS COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH
FLOWS.

In common with other companies in our line of business that serve coastal
regions, we do not have insurance covering our transmission and distribution
system because we believe it to be cost prohibitive. If we were to sustain any
loss of or damage to our transmission and distribution properties, we would be
entitled to seek to recover such loss or damage through a change in our
regulated rates, although there is no assurance that we would ultimately obtain
any such rate recovery or that any such rate recovery would be timely granted.
Therefore, we cannot assure you that we will be able to restore any loss of or
damage to any of our transmission and distribution properties without negative
impact on our results of operations, financial condition and cash flows.

ITEM 3. LEGAL PROCEEDINGS

For a brief description of certain legal and regulatory proceedings
affecting us, please read "Regulation" and "Environmental Matters" in Item 1 of
this report and Notes 4 and 9(b) to our consolidated financial statements, which
information is incorporated herein by reference.

In addition to the matters incorporated herein by reference, the following
matter that we previously reported has been resolved:

In August and October 2003, class action lawsuits were filed against
CenterPoint Houston and Reliant Energy Services in federal court in New York on
behalf of purchasers of natural gas futures contracts on the New York Mercantile
Exchange. A third, similar class action was filed in the same court in November
2003. The complaints alleged that the defendants manipulated the price of
natural gas through their gas trading activities and price reporting practices
in violation of the Commodity Exchange Act during the period January 1, 2000
through December 31, 2002. The plaintiffs sought damages based on the effect of
such alleged manipulation on the value of the gas futures contracts they bought
or sold. In January 2004, the plaintiffs voluntarily dismissed CenterPoint
Houston from these lawsuits.

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

Our past earnings are not necessarily indicative of our future earnings and
results of operations. The magnitude of our future earnings and results of our
operations will depend on or be affected by numerous factors including:

- the timing and outcome of the regulatory process leading to the
determination and recovery of the true-up components and the
securitization of these amounts;

- 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:

- allowed rates of return;

- rate structures;

- recovery of investments; and

- operation and construction of facilities;

- termination of accruals of ECOM true-up after 2003;

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

- changes in interest rates or rates of inflation;

- weather variations and other natural phenomena;

- 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;

- actions by rating agencies;

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

- the outcome of the pending securities lawsuits against us, Reliant
Energy and Reliant Resources;

- the ability of Reliant Resources to satisfy its obligations to us
including indemnity obligations and obligations to pay the "price to
beat" clawback; and

- other factors discussed in Item 1 of this report under "Risk Factors."

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(e) REGULATORY ASSETS AND LIABILITIES

The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). The
following is a list of regulatory assets/liabilities reflected on the Company's
Consolidated Balance Sheets as of December 31, 2002 and 2003:

DECEMBER 31,
--------------------
2002 2003
-------- --------
(IN MILLIONS)

Recoverable Electric Generation-Related Regulatory Assets, net:
Recoverable electric generation plant mitigation .................. 2,051 2,116
Excess mitigation liability ....................................... (969) (778)
-------- --------
Net electric generation plant mitigation asset ................ 1,082 1,338
Excess cost over market (ECOM/capacity auction) true-up ........... 697 1,357
Texas Genco distribution/impairment ............................... -- 399
Regulatory tax asset .............................................. 175 119
Final fuel under/(over) recovery balance .......................... 64 (98)
Other 2004 True-Up Proceeding items ............................... 53 119
-------- --------
Total 2004 Recoverable Electric Generation-Related Regulatory
Assets............................................................ 2,071 3,234
Securitized regulatory asset ......................................... 706 682
Unamortized loss on reacquired debt .................................. 58 80
Estimated removal costs .............................................. -- (232)
Other long-term regulatory assets/liabilities ........................ 26 24
-------- --------
Total .............................................................. $ 2,861 $ 3,788
======== ========

If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write off or
write down these regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment of the carrying costs of plant and
inventory assets. Because estimates of the fair value of Texas Genco are
required, the financial impacts of the Texas electric restructuring law with
respect to the final determination of stranded costs 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. See
Note 4(a) for additional discussion of regulatory assets.

(4) REGULATORY MATTERS

(a) TRUE-UP COMPONENTS AND SECURITIZATION

The Texas Electric Restructuring Law. In June 1999, the Texas legislature
adopted the Texas Electric Choice Plan (the Texas electric restructuring law),
which substantially amended the regulatory structure governing electric
utilities in order to allow and encourage retail competition which began in
January 2002. The Texas electric restructuring law required the separation of
the generation, transmission and distribution, and retail sales functions of
electric utilities into three different units. Under the law, neither the
generation function nor the retail function is subject to traditional cost of
service regulation, and the generation and the retail function are each operated
on a competitive basis. The transmission and distribution function that the
Company performs remains subject to traditional utility rate regulation. The
Company recovers the cost of its service through an energy delivery charge
approved by the Texas Utility Commission.

Under the Texas electric restructuring law, transmission and distribution
utilities in Texas, such as the Company, whose generation assets were
"unbundled" may recover, following a regulatory proceeding to be held in 2004
(2004 True-Up Proceeding) as further discussed below in "--2004 True-Up
Proceeding":

- "stranded costs," which consist of the positive excess of the net
regulatory book value of generation assets, as defined, over the
market value of the assets, taking specified factors into account;

- final fuel over- or under-recovery; less

- "price to beat" clawback components.

The Texas electric restructuring law permits transmission and distribution
utilities to recover the true-up components through transition charges on retail
electric customers' bills, to the extent that such components are established in
certain regulatory proceedings. These transition charges are non-bypassable,
meaning that they must be paid by essentially all customers and cannot, except
in limited circumstances, be avoided by switching to self-generation. The law
also authorizes the Texas Utility Commission to permit those utilities to issue
transition bonds based on the securitization of revenues associated with the
transition charges. The Company recovered a portion of its regulatory assets in
2001 through the issuance of transition bonds. For a further discussion of these
matters, see "--Securitization" below.

The Texas electric restructuring law also provides specific regulatory
remedies to reduce or mitigate a utility's stranded cost exposure. During a base
rate freeze period from 1999 through 2001, earnings above the utility's
authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for transmission and distribution-related assets could be
redirected to generation assets for regulatory purposes during that period if
the utility was expected to have stranded costs. The Company undertook both of
these remedies provided in the Texas electric restructuring law, but in a rate
order issued in October 2001,

the Texas Utility Commission required the Company to reverse those actions. For
a further discussion of these matters, see "--Mitigation" below.

2004 True-Up Proceeding. In 2004, the Texas Utility Commission will conduct
true-up proceedings for investor-owned utilities. The purpose of the true-up
proceeding is to quantify and reconcile the amount of the true-up components.
The true-up proceeding will result in either additional charges being assessed
on, or credits being issued to, retail electric customers. The Company expects
to make the filing to initiate its final true-up proceeding on March 31, 2004.
The Texas electric restructuring law requires a final order to be issued by the
Texas Utility Commission not more than 150 days after a proper filing is made by
the regulated utility, although under its rules the Texas Utility Commission can
extend the 150-day deadline for good cause. Any delay in the final order date
will result in a delay in the securitization of the Company's true-up components
and the implementation of the non-bypassable charges to described above, and
could delay the recovery of carrying costs on the true-up components determined
by the Texas Utility Commission.

The Company will be required to establish and support the amounts it seeks
to recover in the 2004 True-Up Proceeding. Third parties will have the
opportunity and are expected to challenge the Company's calculation of these
amounts. To the extent recovery of a portion of these amounts is denied or if
the Company agrees to forego recovery of a portion of the request under a
settlement agreement, the Company would be unable to recover those amounts in
the future.

Following adoption of the true-up rule by the Texas Utility Commission in
2001, the Company appealed certain provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as the Company contends is required by law. On January 30, 2004,
the Texas Supreme Court granted the Company's petition for review of the true-up
rule. Oral arguments were heard on February 18, 2004. The decision by the Court
is pending. The Company has not accrued interest income on stranded costs in its
consolidated financial statements, but estimates such interest income would be
material to the Company's consolidated financial statements.

Stranded Cost Component. The Company will be entitled to recover stranded
costs through a transition charge to its customers if the regulatory net book
value of generating plant assets exceeds the market value of those assets. The
regulatory net book value of generating plant assets is the balance as of
December 31, 2001 plus certain costs incurred for reductions in emissions of
oxides of nitrogen (NOx), any above-market purchased power contracts and certain
other amounts. The market value will be equal to the average daily closing price
on The New York Stock Exchange for publicly held shares of Texas Genco common
stock for 30 consecutive trading days chosen by the Texas Utility Commission out
of the last 120 trading days immediately preceding the true-up filing, plus a
control premium, up to a maximum of 10%, to the extent included in the valuation
determination made by the Texas Utility Commission. If Texas Genco is sold to a
third party at a lower price than the market value used by the Texas Utility
Commission, the Company would be unable to recover the difference.

ECOM True-Up Component. The Texas Utility Commission used a computer model
or projection, called an excess cost over market (ECOM) model, to estimate
stranded costs related to generation plant assets. Accordingly, the Texas
Utility Commission estimated the market power prices that would be received in
the generation capacity auctions mandated by the Texas electric restructuring
law during 2002 and 2003. Any difference between the Texas Utility Commission's
projected market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated capacity
auctions during that period will be a component of the 2004 True-Up Proceeding.
In accordance with the Texas Utility Commission's rules regarding the ECOM
True-Up, for the years ended December 31, 2002 and 2003, the Company recorded
approximately $697 million and $661 million, respectively, in non-cash ECOM
True-Up revenue. ECOM True-Up revenue is recorded as a regulatory asset and
totaled $1.4 billion as of December 31, 2003.

In 2003, some parties sought modifications to the true-up rules. Although
the Texas Utility Commission denied that request, the Company expects that
issues could be raised in the 2004 True-Up Proceeding regarding its compliance
with the Texas Utility Commission's rules regarding the ECOM true-up, including
whether Texas Genco has auctioned all capacity it is required to auction in view
of the fact that some capacity has failed to sell in the state-mandated
auctions. The Company believes Texas Genco has complied with the requirements
under the applicable rules, including re-offering the unsold capacity in
subsequent auctions. If events were to occur during the

2004 True-Up Proceeding that made the recovery of the ECOM true-up regulatory
asset no longer probable, the Company would write off the unrecoverable balance
of that asset as a charge against earnings.

Fuel Over/Under Recovery Component. The Company and Texas Genco filed
their joint application to reconcile fuel revenues and expenses with the Texas
Utility Commission in July 2002. This final fuel reconciliation filing covered
reconcilable fuel expense and interest of approximately $8.5 billion incurred
from August 1, 1997 through January 30, 2002. In January 2003, a settlement
agreement was reached, as a result of which certain items totaling $24 million
were written off during the fourth quarter of 2002 and items totaling $203
million were carried forward for later resolution by the Texas Utility
Commission. In late 2003, a hearing was concluded on those remaining issues. On
March 4, 2004, an Administrative Law Judge (ALJ) recommended that CenterPoint
Houston not be allowed to recover $87 million in fuel expenses incurred during
the reconciliation period. CenterPoint Houston will contest this recommendation
when the Texas Utility Commission considers the ALJ's conclusions on April 15,
2004. However, since the recovery of this portion of the regulatory asset is no
longer probable, CenterPoint Houston reserved $117 million, including interest,
in the fourth quarter of 2003. The ALJ also recommended that $46 million be
recovered in the 2004 True-Up Proceeding rather than in the fuel proceeding. The
results of the Texas Utility Commission's decision will be a component of the
2004 True-Up Proceeding.

"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 the "price to beat" in excess of the market price of
electricity if 40% of the "price to beat" load is not served by a other retail
electric providers by January 1, 2004. Pursuant to the Texas electric
restructuring law and a master separation agreement entered into in connection
with the September 30, 2002 spin-off of the CenterPoint Energy's interest in
Reliant Resources, Inc. (Reliant Resources) to its shareholders, Reliant
Resources is obligated to pay the Company for the clawback component of the
true-up. Based on an order issued on February 13, 2004 by the Texas Utility
Commission, the clawback will equal $150 times the number of residential
customers served by Reliant Resources in the Company's service territory, less
the number of residential customers served by Reliant Resources outside the
Company's service territory, on January 1, 2004. As reported in Reliant
Resources' Annual Report on Form 10-K for the year ended December 31, 2003,
Reliant Resources expects that the clawback payment will be $175 million. The
clawback will reduce the amount of recoverable costs to be determined in the
2004 True-Up Proceeding.

Securitization. The Texas electric restructuring law provides for the use
of special purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, a special purpose subsidiary of the Company
issued $749 million of transition bonds to securitize certain generation-related
regulatory assets. These transition bonds have a final maturity date of
September 15, 2015 and are non-recourse to the Company and its subsidiaries
other than to the special purpose issuer. Payments on the transition bonds are
made out of funds from non-bypassable transition charges.

The Company expects that upon completion of the 2004 True-Up Proceeding, it
will seek to securitize the amounts established for the true-up components.
Before the Company can securitize these amounts, the Texas Utility Commission
must conduct a proceeding and issue a financing order authorizing the Company to
do so. Under the Texas electric restructuring law, the Company is entitled to
recover any portion of the true-up balance not securitized by transition bonds
through a non-bypassable competition transition charge.

Mitigation. In an order issued in October 2001, the Texas Utility
Commission established the transmission and distribution rates that became
effective in January 2002. The Texas Utility Commission determined that the
Company has overmitigated its stranded costs by redirecting transmission and
distribution depreciation and by accelerating depreciation of generation assets
as provided under its transition plan and the Texas electric restructuring law.
In this final order, the Company was required to reverse the amount of
redirected depreciation ($841 million) and accelerated depreciation ($1.1
billion) taken for regulatory purposes as allowed under the transition plan and
the Texas electric restructuring law. In accordance with the order, the Company
recorded a regulatory liability of $1.1 billion to reflect the prospective
refund of the accelerated depreciation, and in January

2002 the Company began refunding excess mitigation credits, which are to be
refunded over a seven-year period. The annual refund of excess mitigation
credits is approximately $238 million. As of December 31, 2002 and 2003, the
Company had recorded net electric plant mitigation regulatory assets of $1.1
billion and $1.3 billion, respectively, based on the Company's expectation that
these amounts will be recovered in the 2004 True-Up Proceeding as stranded
costs. In the event that the excess mitigation credits prove to have been
unnecessary and the Company is determined to have stranded costs, excess
mitigation credits will be included in the stranded costs to be recovered. In
June 2003, the Company sought authority from the Texas Utility Commission to
terminate these credits based on then current estimates of what that final
determination would be. The Texas Utility Commission denied the request in
January 2004.

(b) AGREEMENTS RELATED TO TEXAS GENERATING ASSETS

Texas Genco is the beneficiary of decommissioning trusts that have been
established to provide funding for decontamination and decommissioning of the
South Texas Project in which Texas Genco owns a 30.8% interest. The Company
collects through rates or other authorized charges to its electric utility
customers amounts designated for funding the decommissioning trusts, and
deposits these amounts into the decommissioning trusts. Upon decommissioning of
the facility, in the event funds from the trusts are inadequate, the Company or
its successor will be required to collect through rates or other authorized
charges to customers as contemplated by the Texas Utilities Code all additional
amounts required to fund Texas Genco's obligations relating to the
decommissioning of the facility. Following the completion of the
decommissioning, if surplus funds remain in the decommissioning trusts, the
excess will be refunded to the ratepayers of the Company or its successor. The
Company currently funds $2.9 million a year to trusts established to fund Texas
Genco's share of the decommissioning costs for the South Texas Project.

(7) EMPLOYEE BENEFIT PLANS

(a) PENSION PLANS

Substantially all of the Company's employees participate in CenterPoint
Energy's qualified non-contributory pension plan. Under the cash balance
formula, participants accumulate a retirement benefit based upon 4% of eligible
earnings and accrued interest. Prior to 1999, the pension plan accrued benefits
based on years of service, final average pay and covered compensation. As a
result, certain employees participating in the plan as of December 31, 1998 are
eligible to receive the greater of the accrued benefit calculated under the
prior plan through 2008 or the cash balance formula.

CenterPoint Energy's funding policy is to review amounts annually in
accordance with applicable regulations in order to achieve adequate funding of
projected benefit obligations. Pension expense is allocated to the Company based
on covered employees. This calculation is intended to allocate pension costs in
the same manner as a separate employer plan. Assets of the plan are not
segregated or restricted by CenterPoint Energy's participating subsidiaries.
Pension benefit was $6 million for the year ended December 31, 2001. The Company
recognized pension expense of $7 million and $26 million for the years ended
December 31, 2002 and 2003, respectively.

In addition to the plan, the Company participates in CenterPoint Energy's
non-qualified benefit restoration plan, which allows participants to retain the
benefits to which they would have been entitled under the non-contributory
pension plan except for federally mandated limits on these benefits or on the
level of compensation on which these benefits may be calculated. The expense
associated with the non-qualified pension plan was less than $1 million for the
years ended December 31, 2001, 2002 and 2003, respectively.

(9) COMMITMENTS AND CONTINGENCIES

(a) LEASE COMMITMENTS

The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2003, which primarily consist of rental agreements for building space, data
processing equipment and vehicles, including major work equipment (in millions).

2004.......................... $ 6
2005.......................... 6
2006.......................... 6
2007.......................... 6
2008.......................... 3
------
Total $ 27
======

Total lease expense for all operating leases was approximately $5 million
during each of the years ended December 31, 2001, 2002 and 2003, respectively.

(b) LEGAL MATTERS

Legal Matters

Reliant Resources Indemnified Litigation.

The Company, CenterPoint Energy or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between Reliant Energy and
Reliant Resources, CenterPoint Energy and its subsidiaries are entitled to be
indemnified by Reliant Resources for any losses, including attorneys' fees and
other costs, arising out of the lawsuits described below under Electricity and
Gas Market Manipulation Cases and Other Class Action Lawsuits. Pursuant to the
indemnification obligation, Reliant Resources is defending CenterPoint Energy
and its subsidiaries to the extent named in these lawsuits. The ultimate outcome
of these matters cannot be predicted at this time.

Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
but most of the lawsuits remain in early procedural stages. CenterPoint Energy's
former subsidiary, Reliant Resources, was a participant in the California
markets, owning generating plants in the state and participating in both
electricity and natural gas trading in that state and in western power markets
generally. Reliant Resources, some of its subsidiaries and in some cases,
corporate officers of some of those companies, have been named as defendants in
these suits. The Company, CenterPoint Energy or their predecessor, Reliant
Energy, have also been named in approximately 25 of these lawsuits, which were
instituted in 2002 and 2003 and are pending in state courts in San Diego, San
Francisco and Los Angeles Counties and in federal district courts in San
Francisco, San Diego, Los Angeles and Nevada. However, neither CenterPoint
Energy nor Reliant Energy was a participant in the electricity or natural gas in
California. The Company and Reliant Energy have been dismissed from certain of
the lawsuits, either voluntarily by the plaintiffs or by order of the court and
the Company believes it is not a proper defendant in the remaining cases and
will continue to seek dismissal from the remaining cases.

Other Class Action Lawsuits. 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 initial public offering of Reliant Resources common stock in
May 2001 (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 purchasers of common
stock of Reliant Energy or Reliant Resources during certain time periods ranging
from February 2000 to May 2002, including purchasers of common stock that can be
traced 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 January 2004 the trial judge dismissed
the plaintiffs' allegations that the defendants had engaged in fraud but claims
based on alleged misrepresentations in the registration statement issued in the
Reliant Resources Offering remain.

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. In January 2004 the
trial judge ordered dismissal of plaintiffs' claims on the ground that they did
not set forth a claim, but granted the plaintiffs leave to amend their
complaint.

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 on behalf
of the plans and 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 January 2004 the trial judge dismissed the
complaints against a number of defendants, but allowed the case to proceed
against members of the Reliant Energy benefits committee.

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

CenterPoint Energy's board of directors investigated that demand and
similar allegations made in a June 28, 2002 demand letter sent on behalf of a
CenterPoint Energy shareholder. The latter letter demanded that CenterPoint
Energy take several actions in response to alleged round-trip trades occurring
in 1999, 2000, and 2001. In June 2003, the Board determined that these proposed
actions would not be in the best interests of CenterPoint Energy.

CenterPoint Energy believes that none of the lawsuits described under
"Other Class Action 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.

Other Legal Matters

Texas Antitrust Action. In July 2003, Texas Commercial Energy filed a
lawsuit against Reliant Energy, Reliant Resources, Reliant Electric Solutions,
LLC, several other Reliant Resources subsidiaries and several other participants
in the ERCOT power market in federal court in Corpus Christi, Texas. The
plaintiff, a retail electricity provider in the Texas market served by ERCOT,
alleges that the defendants conspired to illegally fix and artificially increase
the price of electricity in violation of state and federal antitrust laws and
committed fraud and negligent misrepresentation. The lawsuit seeks damages in
excess of $500 million, exemplary damages, treble damages, interest, costs of
suit and attorneys' fees. In February 2004, this complaint was amended to add
the Company and CenterPoint Energy, as successors to Reliant Energy, and Texas
Genco, LP as defendants. The plaintiff's principal allegations have previously
been investigated by the Texas Utility Commission and found to be without merit.
The Company also believes the plaintiff's allegations are without merit and will
seek their dismissal.

Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton,
Galveston and Pasadena (Three Cities) 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 the Company's predecessor, Reliant Energy) alleging
underpayment of municipal franchise fees. The plaintiffs claimed that they were
entitled to 4% of all receipts of any kind for business conducted within these
cities over the previous four decades. After a jury trial of the original
claimant cities (but not the class of cities), the trial court decertified the
class and reduced the damages awarded by the jury to $1.7 million, including
interest, plus an award of $13.7 million in legal fees. Despite other jury
findings for the plaintiffs, the trail court's judgment was based on the jury's
finding 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. Following this ruling, 45 cities filed
individual suits against Reliant Energy in the District Court of Harris County.

On February 27, 2003, a state court of appeals in Houston rendered an
opinion reversing the judgment against the CenterPoint Energy 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 Three Cities filed a petition for review at the Texas Supreme Court
which declined to hear the case, although the time period for the Three Cities
to file a motion for rehearing has not yet expired. The extent to which issues
in the Three Cities case may affect the claims of the other cities served by the
Company cannot be assessed until judgments are final and no longer subject to
appeal.

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.