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 generally
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,
2004, 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 in specified amounts, 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%. We intend to file an application
for approval of our post-June 30, 2005 financing activities.

The United States Congress from time to time considers legislation 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.

FEDERAL ENERGY REGULATORY COMMISSION

The FERC has jurisdiction under the Natural Gas Act and the Natural Gas
Policy Act of 1978, as amended, to regulate the transportation of natural gas in
interstate commerce and natural gas sales for resale in intrastate commerce that
are not first sales. The FERC regulates, among other things, the construction of
pipeline and related facilities used in the transportation and storage of
natural gas in interstate commerce, including the extension, expansion or
abandonment of these facilities. The rates charged by interstate pipelines for
interstate transportation and storage services are also regulated by the FERC.

Our natural gas pipeline subsidiaries may periodically file applications
with the FERC for changes in their generally available maximum rates and charges
designed to allow them to recover their costs of providing service to customers
(to the extent allowed by prevailing market conditions), including a reasonable
rate of return. These rates are normally allowed to become effective after a
suspension period and, in some cases, are subject to refund under applicable law
until such time as the FERC issues an order on the allowable level of rates.

On November 25, 2003, the FERC issued Order No. 2004, the final rule
modifying the Standards of Conduct applicable to electric and natural gas
transmission providers, governing the relationship between regulated
transmission providers and certain of their affiliates. During 2004, the FERC
Order was amended three times. The rule significantly changes and expands the
regulatory burdens of the Standards of Conduct and applies essentially the same
standards to jurisdictional electric transmission providers and natural gas
pipelines. On February 9, 2004, our natural gas pipeline subsidiaries filed
Implementation Plans required under the new rule. Those subsidiaries were
further required to post their Implementation Procedures on their websites by
September 22, 2004, and to be in compliance with the requirements of the new
rule by that date.

STATE AND LOCAL REGULATION

In almost all communities in which we provide natural gas distribution
services, we operate under franchises, certificates or licenses obtained from
state and local authorities. The terms of the franchises, with various
expiration dates, typically range from 10 to 30 years, though franchises in
Arkansas are perpetual. None of our material franchises expire in the near term.
We expect to be able to renew expiring franchises. In most cases, franchises to
provide natural gas utility services are not exclusive.

Substantially all of our retail natural gas sales by our local
distribution divisions are subject to traditional cost-of-service regulation at
rates regulated by the relevant state public utility commissions and, in Texas,
by the Railroad Commission of Texas (Railroad Commission) and municipalities we
serve.

In 2004, the City of Houston, 28 other cities and the Railroad Commission
approved a settlement that increased Houston Gas' base rate and service charge
revenues by approximately $14 million annually.

In February 2004, the Louisiana Public Service Commission (LPSC) approved
a settlement that increased Southern Gas Operations' base rate and service
charge revenues in its South Louisiana Division by approximately $2 million
annually.

In July 2004, Minnesota Gas filed an application for a general rate
increase of $22 million with the Minnesota Public Utilities Commission (MPUC).
Minnesota Gas and the Minnesota Department of Commerce have agreed to a
settlement of all issues, including an annualized increase in the amount of $9
million, subject to approval by the MPUC. A final decision on this rate relief
request is expected from the MPUC in the second quarter of 2005. Interim rates
of $17 million on an annualized basis became effective on October 1, 2004,
subject to refund.

In July 2004, the LPSC approved a settlement that increased Southern Gas
Operations' base rate and service charge revenues in its North Louisiana
Division by approximately $7 million annually.

In October 2004, Southern Gas Operations filed an application for a
general rate increase of approximately $3 million with the Railroad Commission
for rate relief in the unincorporated areas of its Beaumont, East Texas and
South Texas Divisions. The Railroad Commission staff has begun its review of the
request, and a decision is anticipated in April 2005.

In November 2004, Southern Gas Operations filed an application for a
general rate increase of approximately $34 million with the Arkansas Public
Service Commission (APSC). The APSC staff has begun its review of the request,
and a decision is anticipated in the second half of 2005.

In December 2004, the OCC approved a settlement that increased Southern
Gas Operations' base rate and service charge revenues in Oklahoma by
approximately $3 million annually.

DEPARTMENT OF TRANSPORTATION

In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002 (the Act). This legislation applies to our interstate pipelines as well as
our intrastate pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires pipeline and distribution companies to assess the integrity of their
pipeline transmission facilities in areas of high population concentration or
High Consequence Areas (HCA). The legislation further requires companies to
perform remediation activities, in accordance with the requirements of the
legislation, over a 10-year period.

In December 2003, the Department of Transportation Office of Pipeline
Safety issued the final regulations to implement the Act. These regulations
became effective on February 14, 2004 and provided guidance on, among other
things, the areas that should be classified as HCA. Our interstate pipelines
developed and implemented a written pipeline integrity management program in
2004, meeting the Department of Transportation Office of Pipeline Safety
requirement of having the program in place by December 17, 2004.

Our interstate and intrastate pipelines and our natural gas distribution
companies anticipate that compliance with the new regulations will require
increases in both capital and operating cost. The level of expenditures required
to comply with these regulations will be dependent on several factors, including
the age of the facility, the pressures at which the facility operates and the
number of facilities deemed to be located in areas designated as HCA. Based on
our interpretation of the rules and preliminary technical reviews, we anticipate
compliance will require average annual expenditures of approximately $15 to $20
million during the initial 10-year period.

ENVIRONMENTAL MATTERS

Our operations are subject to stringent and complex laws and regulations
pertaining to health, safety and the environment. As an owner or operator of
natural gas pipelines and gas gathering and processing systems, we must comply
with these laws and regulations at the federal, state and local levels. These
laws and regulations can restrict or impact our business activities in many
ways, such as:

- restricting the way we can handle or dispose of our wastes;

- limiting or prohibiting construction activities in sensitive areas
such as wetlands, coastal regions, or areas inhabited by endangered
species;

- requiring remedial action to mitigate pollution conditions caused by
our operations, or attributable to former operations; and

- enjoining the operations of facilities deemed in non-compliance with
permits issued pursuant to such environmental laws and regulations.

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;

- acquire permits for facility operations;

- modify or replace existing and proposed equipment; and

- clean up or decommission waste disposal areas, fuel storage and
management facilities and other locations and facilities.

Failure to comply with these laws and regulations may trigger a variety of
administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial requirements, and
the issuance of orders enjoining future operations. Certain environmental
statutes impose strict, joint and several liability for costs required to clean
up and restore sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other waste products into the
environment.

The trend in environmental regulation is to place more restrictions and
limitations on activities that may affect the environment, and thus there can be
no assurance as to the amount or timing of future expenditures for environmental
compliance or remediation, and actual future expenditures may be different from
the amounts we currently anticipate. We try to anticipate future regulatory
requirements that might be imposed and plan accordingly to remain in compliance
with changing environmental laws and regulations and to minimize the costs of
such compliance.

We do not believe that compliance with federal, state or local
environmental laws and regulations will have a material adverse effect on our
business, financial position or results of operations. In addition, we believe
that the various environmental remediation activities in which we are presently
engaged will not materially interrupt or diminish our operational ability. We
cannot assure you, however, that future events, such as changes in existing
laws, the promulgation of new laws, or the development or discovery of new facts
or conditions will not cause us to incur significant costs. The following is a
discussion of all material environmental and safety laws and regulations that
relate to our operations. We believe that we are in substantial compliance with
all of these environmental laws and regulations.

AIR EMISSIONS

Our operations are subject to the federal Clean Air Act and comparable
state laws and regulations. These laws and regulations regulate emissions of air
pollutants from various industrial sources, including our processing plants and
compressor stations, and also impose various monitoring and reporting
requirements. Such laws and regulations may require that we obtain pre-approval
for the construction or modification of certain projects or facilities expected
to produce air emissions or result in the increase of existing air emissions,
obtain and strictly comply with air permits containing various emissions and
operational limitations, or utilize specific emission control technologies to
limit emissions. Our failure to comply with these requirements could subject us
to monetary penalties, injunctions, conditions or restrictions on operations,
and potentially criminal enforcement actions. We may be required to incur
certain capital expenditures in the future for air pollution control equipment
in connection with obtaining and maintaining operating permits and approvals for
air emissions. We believe, however, that our operations will not be materially
adversely affected by such requirements, and the requirements are not expected
to be any more burdensome to us than to any other similarly situated companies.

WATER DISCHARGES

Our operations are subject to the Federal Water Pollution Control Act of
1972, as amended, also known as the Clean Water Act, and analogous state laws
and regulations. These laws and regulations impose detailed requirements and
strict controls regarding the discharge of pollutants into waters of the United
States. The unpermitted discharge of pollutants, including discharges resulting
from a spill or leak incident, is prohibited. The Clean Water Act and
regulations implemented thereunder also prohibit discharges of dredged and fill
material in wetlands and other waters of the United States unless authorized by
an appropriately issued permit. Any unpermitted release of petroleum or other
pollutants from our pipelines or facilities could result in fines or penalties
as well as significant remedial obligations.

HAZARDOUS WASTE

Our operations generate wastes, including some hazardous wastes, that are
subject to the federal Resource Conservation and Recovery Act (RCRA), and
comparable state laws, which impose detailed requirements for the handling,
storage, treatment and disposal of hazardous and solid waste. RCRA currently
exempts many natural gas gathering and field processing wastes from
classification as hazardous waste. Specifically, RCRA excludes from the
definition of hazardous waste produced waters and other wastes associated with
the exploration, development, or production of crude oil and natural gas.
However, these oil and gas exploration and production wastes are still regulated
under state law and the less stringent non-hazardous waste requirements of RCRA.
Moreover, ordinary industrial wastes such as paint wastes, waste solvents,
laboratory wastes, and waste compressor oils may be regulated as hazardous
waste. The transportation of natural gas in pipelines may also generate some
hazardous wastes that are subject to RCRA or comparable state law requirements.

LIABILITY FOR REMEDIATION

The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended (CERCLA), also known as "Superfund," and comparable state
laws impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons responsible for the release of hazardous
substances into the environment. Such classes of persons include the current and
past owners or operators of sites where a hazardous substance was released, and
companies that disposed or arranged for disposal of hazardous substances at
offsite locations such as landfills. Although petroleum as well as natural gas
is excluded from CERCLA's definition of "hazardous substance," in the course of
our ordinary operations we generate wastes that may fall within the definition
of a "hazardous substance." CERCLA authorizes the United States Environmental
Protection Agency (EPA) and, in some cases, third parties to take actions in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. Under
CERCLA, we could be subject to joint and several liability for the costs of
cleaning up and restoring sites where hazardous substances have been released,
for damages to natural resources, and for the costs of certain health studies.

LIABILITY FOR PREEXISTING CONDITIONS

Hydrocarbon Contamination. We and certain of our subsidiaries are among
the defendants in lawsuits filed beginning in August 2001 in Caddo Parish and
Bossier Parish, Louisiana. 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," which was formerly operated by a predecessor in interest of
CERC Corp. 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. Beginning about
1985, the predecessors of certain CERC Corp. defendants engaged in a voluntary
remediation of any subsurface contamination of the groundwater below the
property they owned or leased. 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. We believe
the ultimate cost associated with resolving this matter will not have a material
impact on our financial condition or results of operations.

Manufactured Gas Plant Sites. We and our predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, we have completed
remediation on two sites, other than ongoing monitoring and water treatment.
There are five remaining sites in our Minnesota service territory. We believe
that we have no liability with respect to two of these sites.

At December 31, 2004, we had accrued $18 million for remediation of
certain Minnesota sites. At December 31, 2004, the estimated range of possible
remediation costs for these sites was $7 million to $42 million based on
remediation continuing for 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. We have utilized an environmental
expense tracker mechanism in our rates in Minnesota to recover estimated costs
in excess of insurance recovery. As of December 31, 2004, we have collected or
accrued $13 million from insurance companies and ratepayers to be used for
future environmental remediation.

In addition to the Minnesota sites, the EPA and other regulators have
investigated MGP sites that we owned or operated or may have been owned or
operated by one of our former affiliates. We have been named as a defendant in
lawsuits under which contribution is sought by private parties for the cost to
remediate former MGP sites based on the previous ownership of such sites by our
former affiliates or divisions. We have also been identified as a PRP by the
State of Maine for a site that is the subject of one of the lawsuits. We are
investigating details regarding these sites and the range of environmental
expenditures for potential remediation. However, we believe we are not liable as
a former owner or operator of those sites under CERCLA and applicable state
statutes, and are vigorously contesting those suits and our designation as a
PRP.

Mercury Contamination. Our 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. We have found this type
of contamination at some sites in the past, and we have 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 our experience and that of
others in the natural gas industry to date and on the current regulations
regarding remediation of these sites, we believe that the costs of any
remediation of these sites will not be material to our financial condition,
results of operations or cash flows.

Other Environmental. From time to time, we have received notices from
regulatory authorities or others regarding our status as a PRP in connection
with sites found to require remediation due to the presence of environmental
contaminants. Although their ultimate outcome cannot be predicted at this time,
we do not believe, based on our experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on our
financial condition, results of operations or cash flows.

RISK FACTORS

PRINCIPAL RISK FACTORS ASSOCIATED WITH OUR BUSINESSES

RATE REGULATION OF OUR BUSINESS MAY DELAY OR DENY OUR ABILITY TO EARN A
REASONABLE RETURN AND FULLY RECOVER OUR COSTS.

Our rates for our local distribution companies are regulated by certain
municipalities and state commissions based on an analysis of our invested
capital and our 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 the applicable jurisdictions is, generally, premised on providing
an opportunity to recover reasonable and necessary operating expenses and to
earn a reasonable return on invested capital, there can be no assurance that the
regulatory process in which rates are determined will always result in rates
that will produce full recovery of our costs and enable us to earn a reasonable
return on our invested capital.

OUR BUSINESSES MUST COMPETE WITH ALTERNATIVE ENERGY SOURCES, AND OUR
PIPELINES AND GATHERING BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN
THE TRANSPORTATION, STORAGE, GATHERING, TREATING AND PROCESSING OF NATURAL
GAS.

We compete primarily with alternate energy sources such as electricity and
other fuel sources. In some areas, intrastate pipelines, other natural gas
distributors and marketers also compete directly with us for natural gas sales
to end-users. In addition, as a result of federal regulatory changes affecting
interstate pipelines, natural gas marketers operating on these pipelines may be
able to bypass our facilities and market, sell and/or transport natural gas
directly to commercial and industrial customers. Any reduction in the amount of
natural gas we market, sell or transport as a result of competition may have an
adverse impact on our results of operations, financial condition and cash flows.

Our two interstate pipelines and our gathering systems compete with other
interstate and intrastate pipelines and gathering systems in the transportation
and storage of natural gas. The principal elements of competition are rates,
terms of service, and flexibility and reliability of service. They also compete
indirectly with other forms of energy, including electricity, coal and fuel
oils. The primary competitive factor is price. The actions of our competitors
could lead to lower prices, which may have an adverse impact on our results of
operations, financial condition and cash flows.

OUR NATURAL GAS DISTRIBUTION BUSINESS IS SUBJECT TO FLUCTUATIONS IN
NATURAL GAS PRICING LEVELS.

We are subject to risk associated with price movements of natural gas.
Movements in natural gas prices might affect our ability to collect balances due
from our customers and, on the regulated side, could create the potential for
uncollectible accounts expense to exceed the recoverable levels built into our
tariff rates. In addition, a sustained period of high natural gas prices could
apply downward demand pressure on natural gas consumption in the areas in which
we operate and increase the risk that our suppliers or customers fail or are
unable to meet their obligations. Additionally, increasing gas prices could
create the need for us to provide collateral in order to purchase gas.

IF WE WERE TO FAIL TO EXTEND A CONTRACT WITH ONE OF OUR SIGNIFICANT
PIPELINE CUSTOMERS, THERE COULD BE AN ADVERSE IMPACT ON OUR OPERATIONS.

Our contract with Laclede Gas Company, one of our pipeline customers, is
currently scheduled to expire in 2007. To the extent the pipeline is unable to
extend this contract or the contract is renegotiated at rates substantially less
than the rates provided in the current contract, there could be an adverse
effect on our results of operations, financial condition and cash flows.

A DECLINE IN OUR CREDIT RATING COULD RESULT IN US HAVING TO PROVIDE
COLLATERAL IN ORDER TO PURCHASE GAS.

If our credit rating were to decline, we might be required to post cash
collateral in order to purchase natural gas. If a credit rating downgrade and
the resultant cash collateral requirement were to occur at a time when we were

experiencing significant working capital requirements or otherwise lacked
liquidity, we might be unable to obtain the necessary natural gas to meet our
contractual distribution obligations, and our results of operations, financial
condition and cash flows would be adversely affected.

OUR INTERSTATE PIPELINES' AND NATURAL GAS GATHERING AND PROCESSING
BUSINESS' REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO FLUCTUATIONS
IN THE SUPPLY OF GAS.

Our interstate pipelines and natural gas gathering and processing
businesses largely rely on gas sourced in the various supply basins located in
the Midcontinent region of the United States. To the extent the availability of
this supply is substantially reduced, it could have an adverse effect on our
results of operations, financial condition and cash flows.

OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A substantial portion of our revenues are derived from natural gas sales
and transportation. Thus, our revenues and results of operations are subject to
seasonality, weather conditions and other changes in natural gas usage, with
revenues being higher during the winter months.

RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION

IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR
ABILITY TO REFINANCE EXISTING INDEBTEDNESS COULD BE LIMITED.

As of December 31, 2004, we had $2.4 billion of outstanding indebtedness.
As of March 11, 2005, approximately $518 million principal amount of this debt
must be paid through 2006. The success of our future financing efforts may
depend, at least in part, on:

- general economic and capital market conditions;

- credit availability from financial institutions and other lenders;

- investor confidence in us and the markets 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;

- provisions of relevant tax and securities laws; and

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

Our current credit ratings are discussed in "Management's Narrative
Analysis of the 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.

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. As of March 11, 2005, CenterPoint Energy and its other subsidiaries
have approximately $1.3 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 credit ratings could be adversely affected.

WE ARE AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY.
CENTERPOINT ENERGY CAN EXERCISE SUBSTANTIAL CONTROL OVER OUR DIVIDEND POLICY
AND 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. Under our credit
facility and our receivables facility, our ability to pay dividends is
restricted by a covenant that debt as a percentage of total capitalization may
not exceed 60%.

THE USE OF DERIVATIVE CONTRACTS BY US AND OUR SUBSIDIARIES IN THE NORMAL
COURSE OF BUSINESS COULD RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT
OUR RESULTS OF OPERATIONS AND THOSE OF OUR SUBSIDIARIES.

We use derivative instruments, such as swaps, options, futures and
forwards, to manage our commodity and financial market risks. We could recognize
financial losses as a result of volatility in the market values of these
contracts, or if a counterparty fails to perform. In the absence of actively
quoted market prices and pricing information from external sources, the
valuation of these financial instruments can involve management's judgment or
use of estimates. As a result, changes in the underlying assumptions or use of
alternative valuation methods could affect the reported fair value of these
contracts.

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 3, 9(c) and 9(d) to our consolidated financial statements,
which information is incorporated herein by reference.

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

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

Our past earnings and results of operations 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:

- state and federal legislative and regulatory actions or
developments, 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;

- timely rate increases, including recovery of costs;

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

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

- changes in interest rates or rates of inflation;

- weather variations and other natural phenomena;

- the timing and extent of changes in the supply of natural gas;

- commercial bank and financial market conditions, our access to
capital, the costs of such capital, receipt of certain financing
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;

- inability of various counterparties to meet their obligations to us;

- non-payment of our services due to financial distress of our
customers;

- our ability to control costs;

- the investment performance of CenterPoint Energy's employee benefit
plans;

- our internal restructuring or other restructuring options that may
be pursued;

- our potential business strategies, including acquisitions or
dispositions of assets or businesses, which cannot be assured to be
completed or beneficial to us; and

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

CENTERPOINT ENERGY RESOURCES CORP. 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) to the
accounts of the utility operations of the Natural Gas Distribution business
segment and to some of the accounts of the Pipelines and Gathering business
segment.

The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2003 and 2004:

DECEMBER 31,
-----------------------
2003 2004
--------- ---------
(IN MILLIONS)

Regulatory assets in other long-term assets............... $ 34 $ 21
Regulatory liabilities in other long-term liabilities..... (434) (433)
--------- ---------
Total................................................... $ (400) $ (412)
========= =========

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.

The Company's rate-regulated businesses recognize removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2003 and 2004, these removal costs of $415 million and $428
million, respectively, are classified as regulatory liabilities in the
Consolidated Balance Sheets. The Company has also identified other asset
retirement obligations that cannot be estimated because the assets associated
with the retirement obligations have an indeterminate life.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. REGULATORY MATTERS

(a) RATE CASES

In 2004, the City of Houston, 28 other cities and the Railroad Commission
of Texas (Railroad Commission) approved a settlement that increased Houston Gas'
base rate and service charge revenues by approximately $14 million annually.

In July 2004, the LPSC approved a settlement that increased Southern Gas
Operations' base rate and service charge revenues in its North Louisiana
Division by approximately $7 million annually.

In December 2004, the Oklahoma Corporation Commission approved a
settlement that increased Southern Gas Operations' base rate and service charge
revenues in Oklahoma by approximately $3 million annually.

(b) CITY OF TYLER, TEXAS DISPUTE

In July 2002, the City of Tyler, Texas, asserted that Southern Gas
Operations had overcharged residential and small commercial customers in that
city for gas costs under supply agreements in effect since 1992. That dispute
has been referred to the Railroad Commission by agreement of the parties for a
determination of whether Southern Gas Operations has properly charged and
collected for gas service to its residential and commercial customers in its
Tyler distribution system in accordance with lawful filed tariffs during the
period beginning November 1, 1992, and ending October 31, 2002. In December
2004, the Railroad Commission conducted a hearing on the matter and is expected
to issue a ruling in March or April of 2005. In a parallel action now in the
Court of Appeals in Austin, Southern Gas Operations is challenging the scope of
the Railroad Commission's inquiry which goes beyond the issue of whether
Southern Gas Operations had properly followed its tariffs to include a review of
Southern Gas Operations' historical gas purchases. The Company believes such a
review is not permitted by law and is beyond what the parties requested in the
joint petition that initiated the proceeding at the Railroad Commission. The
Company believes that all costs for Southern Gas Operations' Tyler distribution
system have been properly included and recovered from customers pursuant to
Southern Gas Operations' filed tariffs.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. DERIVATIVE 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 its natural
gas businesses on its operating results and cash flows.

(a) NON-TRADING ACTIVITIES

Cash Flow Hedges. To reduce the risk from market fluctuations associated
with purchased gas costs, the Company enters into energy derivatives in order to
hedge certain expected purchases and sales of natural gas (non-trading energy
derivatives). The Company applies hedge accounting for its non-trading energy
derivatives utilized in non-trading activities only if there is a high
correlation between price movements in the derivative and the item designated as
being hedged. The Company analyzes its physical transaction portfolio to
determine its net exposure by delivery location and delivery period. Because the
Company's physical transactions with similar delivery locations and periods are
highly correlated and share similar risk exposures, the Company facilitates
hedging for customers by aggregating physical transactions and subsequently
entering into non-trading energy derivatives to mitigate exposures created by
the physical positions.

During 2004, hedge ineffectiveness of $0.4 million was recognized in
earnings from derivatives that are designated and qualify as Cash Flow Hedges,
and in 2003 and 2002, no hedge ineffectiveness was recognized. No component of
the derivative instruments' gain or loss was excluded from the assessment of
effectiveness. If it becomes probable that an anticipated transaction will not
occur, the Company realizes in net income the deferred gains and losses
recognized in accumulated other comprehensive loss. Once the anticipated
transaction occurs, the accumulated deferred gain or loss recognized in
accumulated other comprehensive loss is reclassified and included in the
Company's Statements of Consolidated Income under the caption "Natural Gas."
Cash flows resulting from these transactions in non-trading energy derivatives
are included in the Statements of Consolidated Cash Flows in the same category
as the item being hedged. As of December 31, 2004, the Company expects $5
million in accumulated other comprehensive income to be reclassified into net
income during the next twelve months.

The maximum length of time the Company is hedging its exposure to the
variability in future cash flows for forecasted transactions on existing
financial instruments is primarily two years with a limited amount of exposure
up to five years. The Company's policy is not to exceed five years in hedging
its exposure.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Derivative Financial Instruments. The Company also has natural gas
contracts which are derivatives which are not hedged. Load following services
that the Company offers its natural gas customers create an inherent tendency to
be either long or short natural gas supplies relative to customer purchase
commitments. The Company measures and values all of its volumetric imbalances on
a real time basis to minimize its exposure to commodity price and volume risk.
The aggregate Value at Risk (VaR) associated with these operations is calculated
daily and averaged $0.2 million with a high of $1 million during 2004. The
Company does not engage in proprietary or speculative commodity trading.
Unhedged positions are accounted for by adjusting the carrying amount of the
contracts to market and recognizing any gain or loss in operating income, net.
During 2004, the Company recognized net gains related to unhedged positions
amounting to $7 million and as of December 31, 2004 had recorded short-term risk
management assets and liabilities of $4 million and $5 million, respectively,
included in other current assets and other current liabilities, respectively.

(b) CREDIT RISKS

In addition to the risk associated with price movements, credit risk is
also inherent in the Company's non-trading derivative activities. Credit risk
relates to the risk of loss resulting from non-performance of contractual
obligations by a counterparty. The following table shows the composition of the
non-trading derivative assets of the Company as of December 31, 2003 and 2004
(in millions):

DECEMBER 31, 2003 DECEMBER 31, 2004
-------------------- ---------------------
INVESTMENT INVESTMENT
GRADE(1)(2) TOTAL GRADE(1)(2) TOTAL(3)
----------- ----- ----------- --------

Energy marketers........................................... $ 24 $ 35 $ 10 $ 17
Financial institutions..................................... 21 21 50 50
Other...................................................... -- 1 1 1
----- ----- ----- -----
Total.................................................... $ 45 $ 57 $ 61 $ 68
===== ===== ===== =====

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

(1) "Investment grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (such as parent
company guarantees) and collateral, which encompass cash and standby letters
of credit.

(2) For unrated counterparties, the Company performs financial statement
analysis, considering contractual rights and restrictions and collateral, to
create a synthetic credit rating.

(3) The $17 million non-trading derivative asset includes a $6 million asset
due to trades with Reliant Energy Services, Inc. (Reliant Energy Services),
a former affiliate. As of December 31, 2004, Reliant Energy Services did not
have an investment grade rating.

CenterPoint Energy has established a Risk Oversight Committee composed of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including the Company's trading, marketing, risk
management services and hedging activities. The committee's duties are to
establish the Company's commodity risk policies, allocate risk capital within
limits established by CenterPoint Energy's board of directors, approve trading
of new products and commodities, monitor risk positions and ensure compliance
with the Company's risk management policies and procedures and trading limits
established by the CenterPoint Energy's board of directors.

The Company's policies prohibit the use of leveraged financial
instruments. A leveraged financial instrument, for this purpose, is a
transaction involving a derivative whose financial impact will be based on an
amount other than the notional amount or volume of the instrument.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. COMMITMENTS AND CONTINGENCIES

(a) COMMITMENTS

Environmental Capital Commitments. The Company has various commitments for
capital and environmental expenditures. The Company anticipates no significant
capital and other special project expenditures between 2005 and 2009 for
environmental compliance.

Fuel Commitments. Fuel commitments include several long-term natural gas
contracts related to the Company's natural gas distribution operations, which
have various quantity requirements and durations that are not classified as
non-trading derivative assets and liabilities in the Company's Consolidated
Balance Sheets as of December 31, 2004 as these contracts meet the SFAS No. 133
exception to be classified as "normal purchases contracts" or do not meet the
definition of a derivative. Minimum payment obligations for natural gas supply
contracts are approximately $807 million in 2005, $401 million in 2006, $193
million in 2007, $29 million in 2008 and $1 million in 2009.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(b) LEASE COMMITMENTS

The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases, principally
consisting of rental agreements for building space, data processing equipment
and vehicles, including major work equipment (in millions):

2005.................................. $ 20
2006.................................. 16
2007.................................. 12
2008.................................. 11
2009.................................. 6
2010 and beyond....................... 26
------
Total........................... $ 91
======

Total rental expense for all operating leases was $31 million, $28 million
and $30 million in 2002, 2003 and 2004, respectively.

Natural Gas Measurement Lawsuits. CERC Corp. and certain of its
subsidiaries are defendants in a suit filed in 1997 under the Federal False
Claims Act 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. and certain of its subsidiaries are defendants in
two mismeasurement lawsuits brought against approximately 245 pipeline companies
and their affiliates pending in state court in Stevens County, Kansas. In one
case (originally filed in May 1999 and amended four times), the plaintiffs
purport to represent a class of royalty owners who allege that the defendants
have engaged in systematic mismeasurement of the volume of natural gas for more
than 25 years. The plaintiffs amended their petition in this suit in July 2003
in response to an order from the judge denying certification of the plaintiffs'
alleged class. In the amendment the plaintiffs dismissed their claims against
certain defendants (including two of the Company's subsidiaries), limited the
scope of the class of plaintiffs they purport to represent and eliminated
previously asserted claims based on mismeasurement of the Btu content of the
gas. The same plaintiffs then filed a second lawsuit, again as representatives
of a class of royalty owners, in which they assert their claims that the
defendants have engaged in systematic mismeasurement of the Btu content of
natural gas for more than 25 years. In both lawsuits, the plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. The Company believes that there has been no systematic
mismeasurement of gas and that the suits are without merit. The Company does not
expect that the ultimate outcome will have a material impact on its financial
condition or results of operations.

Gas Cost Recovery Litigation. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CenterPoint Energy,
Entex Gas Marketing Company, and certain non-affiliated companies alleging
fraud, violations of the Texas Deceptive Trade Practices Act, violations of the
Texas Utilities Code, civil conspiracy and violations of the Texas Free
Enterprise and Antitrust Act with respect to rates charged to certain consumers
of natural gas in the State of Texas. Subsequently the plaintiffs added as
defendants CenterPoint Energy Marketing Inc., CenterPoint Energy Gas
Transmission Company, United Gas, Inc., Louisiana Unit Gas Transmission Company,
CenterPoint Energy Pipeline Services, Inc., and CenterPoint Energy Trading and
Transportation Group, Inc. The plaintiffs allege that defendants inflated the
prices charged to certain consumers of natural gas. In February 2003, a similar
suit was filed in state court in Caddo Parish, Louisiana against the Company
with respect to rates charged to a purported class of certain consumers of
natural gas and gas service in the State of Louisiana. In February 2004, another
suit was filed in state court in Calcasieu Parish, Louisiana against the Company
seeking to recover alleged overcharges for gas or gas services allegedly
provided by Southern Gas

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Operations to a purported class of certain consumers of natural gas and gas
service without advance approval by the LPSC. In October 2004, a similar case
was filed in district court in Miller County, Arkansas against the Company,
CenterPoint Energy, Entex Gas Marketing Company, CenterPoint Energy Gas
Transmission Company, CenterPoint Energy Field Services, CenterPoint Energy
Pipeline Services, Inc., Mississippi River Transmission Corp. and other
non-affiliated companies alleging fraud, unjust enrichment and civil conspiracy
with respect to rates charged to certain consumers of natural gas in at least
the states of Arkansas, Louisiana, Mississippi, Oklahoma and Texas. At the time
of the filing of each of the Caddo and Calcasieu Parish cases, the plaintiffs in
those cases filed petitions with the LPSC relating to the same alleged rate
overcharges. The Caddo and Calcasieu Parish cases have been stayed pending the
resolution of the respective proceedings by the LPSC. The plaintiffs in the
Miller County case seek class certification, but the proposed class has not been
certified. In November 2004, the Miller case was removed to federal district
court in Texarkana, Arkansas. In February 2005, the Wharton County case was
removed to federal district court in Houston, Texas, and in March 2005, the
plaintiffs in the Wharton County case moved to dismiss the case and agreed not
to refile the claims asserted unless the Miller County case is not certified as
a class action or is later decertified. The range of relief sought by the
plaintiffs in these cases includes injunctive and declaratory relief,
restitution for the alleged overcharges, exemplary damages or trebling of actual
damages, civil penalties and attorney's fees. In these cases, the Company,
CenterPoint Energy and their affiliates deny that they have overcharged any of
their customers for natural gas and believe that the amounts recovered for
purchased gas have been in accordance with what is permitted by state regulatory
authorities. The Company and CenterPoint Energy do not anticipate that the
outcome of these matters will have a material impact on the financial condition
or results of operations of either the Company or CenterPoint Energy.

(d) ENVIRONMENTAL MATTERS

Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries are
among the defendants in lawsuits filed beginning in August 2001 in Caddo Parish
and Bossier Parish, Louisiana. 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," which was formerly operated by a
predecessor in interest of CERC Corp. 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.

Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. 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 Company believes the ultimate cost associated with resolving this
matter will not have a material impact on the financial condition or results of
operations of the Company.

Manufactured Gas Plant Sites. The Company and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, the Company has
completed remediation on two sites, other than ongoing monitoring and water
treatment. There are five remaining sites in the Company's Minnesota service
territory. The Company believes that it has no liability with respect to two of
these sites.

At December 31, 2004, the Company had accrued $18 million for remediation
of certain Minnesota sites. At December 31, 2004, the estimated range of
possible remediation costs for these sites was $7 million to $42 million based
on remediation continuing for 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. The Company has utilized an
environmental expense tracker mechanism in its rates in Minnesota to recover
estimated costs in excess of insurance recovery. As of December 31, 2004, the
Company has collected or accrued $13 million from insurance companies and
ratepayers to be used for future environmental remediation.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to the Minnesota sites, the United States Environmental
Protection Agency and other regulators have investigated MGP sites that were
owned or operated by the Company or may have been owned by one of its former
affiliates. The Company has been named as a defendant in lawsuits under which
contribution is sought by private parties for the cost to remediate former MGP
sites based on the previous ownership of such sites by former affiliates of the
Company or its divisions. The Company has also been identified as a PRP by the
State of Maine for a site that is the subject of one of the lawsuits. The
Company is investigating details regarding these sites and the range of
environmental expenditures for potential remediation. However, the Company
believes it is not liable as a former owner or operator of those sites under the
Comprehensive Environmental, Response, Compensation and Liability Act of 1980,
as amended, and applicable state statutes, and is vigorously contesting those
suits and its designation as a PRP.

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 from time to
time as a defendant in litigation related to such sites. Although the ultimate
outcome of such matters 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.

OTHER PROCEEDINGS

In 2005, the Company received a communication from a regulatory agency
indicating that the agency had ordered a predecessor company to remove certain
components from a portion of its distribution system prior to the date the
Company acquired it. Those components are not in compliance with current state
and federal codes, and it is possible that some of those components remain in
the Company's system. The Company has not completed its analysis of the cost to
locate and replace such components; however, the Company believes that the
disposition of this matter will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.

The Company is involved in other 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.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. REPORTABLE BUSINESS SEGMENTS

Because the Company is an indirect wholly owned subsidiary of CenterPoint
Energy, the Company's determination of reportable business segments considers
the strategic operating units under which CenterPoint Energy manages sales,
allocates resources and assesses performance of various products and services to
wholesale or retail customers in differing regulatory environments. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies except that some executive
benefit costs have not been allocated to business segments.

The Company's reportable business segments include the following: Natural
Gas Distribution, Pipelines and Gathering and Other Operations. Natural Gas
Distribution consists of intrastate natural gas sales to, and natural gas
transportation and distribution for, residential, commercial, industrial and
institutional customers and non-rate regulated retail gas marketing operations
for commercial and industrial customers. Pipelines and Gathering includes the
interstate natural gas pipeline operations and the natural gas gathering and
pipeline services businesses. Other Operations consists primarily of other
corporate operations which support all of the Company's business operations.

Long-lived assets include net property, plant and equipment, net goodwill
and other intangibles and equity investments in unconsolidated subsidiaries. The
Company accounts for intersegment sales as if the sales were to third parties,
that is, at current market prices.

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial data for business segments and products and services are as
follows:

NATURAL GAS PIPELINES AND OTHER RECONCILING
DISTRIBUTION GATHERING OPERATIONS ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ------------ ------------
(IN MILLIONS)

AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2002:
Revenues from external customers
and affiliates....................... 3,953 (1) 255 (2) -- -- 4,208
Intersegment revenues.................. 7 119 -- (126) --
Depreciation and amortization.......... 126 41 -- -- 167
Operating income....................... 198 153 2 -- 353
Total assets........................... 4,428 2,500 206 (685) 6,449
Expenditures for long-lived assets..... 196 70 -- -- 266
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2003:
Revenues from external customers
and affiliates....................... 5,406 (1) 244 (2) -- -- 5,650
Intersegment revenues.................. 29 163 9 (201) --
Depreciation and amortization.......... 136 40 -- -- 176
Operating income (loss)................ 202 158 (1) -- 359
Total assets........................... 4,661 2,519 388 (715) 6,853
Expenditures for long-lived assets..... 199 66 -- -- 265
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2004:
Revenues from external customers
and affiliates....................... 6,681 (1) 306 (2) (4) -- 6,983
Intersegment revenues.................. 3 145 5 (153) --
Depreciation and amortization.......... 143 44 -- -- 187
Operating income (loss)................ 222 180 (9) -- 393
Total assets........................... 4,798 2,637 792 (694) 7,533
Expenditures for long-lived assets..... 197 73 (1) -- 269

- ---------------------
(1) Included in the Natural Gas Distribution revenues from external customers
and affiliates are sales to RRI, a former affiliate, of $9 million for the
year ended December 31, 2002, and sales to Texas Genco, of $26 million, $28
million and $20 million for the years ended December 31, 2002, 2003 and
2004, respectively.

(2) Included in the Pipelines and Gathering revenues from external customers
and affiliates are sales to RRI, a former affiliate, of $33 million for the
year ended December 31, 2002, and sales to Texas Genco of $2 million, $3
million and $2 million for the years ended December 31, 2002, 2003 and 2004,
respectively.

YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
--------- --------- ---------
(IN MILLIONS)
REVENUES BY PRODUCTS AND SERVICES:

Retail gas sales.................................... $ 3,857 $ 5,310 $ 6,583
Gas transportation.................................. 255 244 306
Energy products and services........................ 96 96 94
--------- --------- ---------
Total............................................. $ 4,208 $ 5,650 $ 6,983
========= ========= =========