<PAGE>
 
                                                                   EXHIBIT 4.6-B
================================================================================


                              GUARANTEE AGREEMENT


                      (Relating to HL&P Capital Trust II)


                                    Between


                        HOUSTON LIGHTING & POWER COMPANY
                                 (as Guarantor)


                                      and


                              THE BANK OF NEW YORK
                                  (as Trustee)


                                  dated as of



                                February 4, 1997


================================================================================
<PAGE>
 
                            CROSS-REFERENCE TABLE*

<TABLE> 
<CAPTION> 

Section of
Trust Indenture Act                                     Section of
of 1939, as amended                                 Guarantee Agreement
-------------------                                 -------------------
<S>                                                       <C> 
310(a)                                                     4.1(a)
310(b)                                                     4.l(c), 2.8
310(c)                                                     Inapplicable
311(a)                                                     2.2(b)
311(b)                                                     2.2(b)
31l(c)                                                     Inapplicable
312(a)                                                     2.2(a)
312(b)                                                     2.2(b)
313                                                        2.3
314(a)                                                     2.4
314(b)                                                     Inapplicable
314(c)                                                     2.5
314(d)                                                     Inapplicable
314(e)                                                     1.1, 2.5, 3.2
314(f)                                                     2.1, 3.2
315(a)                                                     3.1(d)
315(b)                                                     2.7
315(c)                                                     3.1
315(d)                                                     3.1(d)
316(a)                                                     1.1, 2.6, 5.4
316(b)                                                     5.3
316(c)                                                     8.2
317(a)                                                     Inapplicable
317(b)                                                     Inapplicable
318(a)                                                     2.1(b)
318(b)                                                     2.1
318(c)                                                     2.1(a)
</TABLE>



________________________
     *  This Cross-Reference Table does not constitute part of the Guarantee
        Agreement and shall not affect the interpretation of any of its terms or
        provisions.


                                       i
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
                                                                        Page
                                                                        ----
<S>                                                                     <C> 
ARTICLE I.  DEFINITIONS                                                    1
  SECTION 1.1.  DEFINITIONS                                                1
 
ARTICLE II.  TRUST INDENTURE ACT                                           4
  SECTION 2.1.  TRUST INDENTURE ACT; APPLICATION                           4
  SECTION 2.2.  LIST OF HOLDERS                                            4
  SECTION 2.3.  REPORTS BY THE GUARANTEE TRUSTEE                           4
  SECTION 2.4.  PERIODIC REPORTS TO THE GUARANTEE TRUSTEE                  4
  SECTION 2.5.  EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT           5
  SECTION 2.6.  EVENTS OF DEFAULT; WAIVER                                  5
  SECTION 2.7.  EVENTS OF DEFAULT; NOTICE                                  5
  SECTION 2.8.  CONFLICTING INTERESTS                                      5
 
ARTICLE III.  POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE           6
  SECTION 3.1.  POWERS AND DUTIES OF THE GUARANTEE TRUSTEE                 6
  SECTION 3.2.  CERTAIN RIGHTS OF THE GUARANTEE TRUSTEE                    7
  SECTION 3.3.  INDEMNITY                                                  9
  SECTION 3.4.  COMPENSATION AND REIMBURSEMENT                             9
 
ARTICLE IV.  GUARANTEE TRUSTEE                                             9
  SECTION 4.1.  GUARANTEE TRUSTEE; ELIGIBILITY                             9
  SECTION 4.2.  APPOINTMENT, REMOVAL AND RESIGNATION OF THE 
                GUARANTEE TRUSTEE                                         10
 
ARTICLE V.  GUARANTEE                                                     11
  SECTION 5.1.  GUARANTEE                                                 11
  SECTION 5.2.  WAIVER OF NOTICE AND DEMAND                               11
  SECTION 5.3.  OBLIGATIONS NOT AFFECTED                                  11
  SECTION 5.4.  RIGHTS OF HOLDERS                                         12
  SECTION 5.5.  GUARANTEE OF PAYMENT                                      12
  SECTION 5.6.  SUBROGATION                                               12
  SECTION 5.7.  INDEPENDENT OBLIGATIONS                                   13
 
ARTICLE VI.  COVENANTS AND SUBORDINATION                                  13
  SECTION 6.1.  SUBORDINATION                                             13
  SECTION 6.2.  PARI PASSU GUARANTEES                                     13
 
ARTICLE VII.  TERMINATION                                                 13
  SECTION 7.1.  TERMINATION                                               13
 
</TABLE>

                                      ii
<PAGE>
 
<TABLE>
<CAPTION> 

<S>                                                                      <C>
ARTICLE VIII.  MISCELLANEOUS                                              14
  SECTION 8.1.  SUCCESSORS AND ASSIGNS                                    14
  SECTION 8.2.  AMENDMENTS                                                14
  SECTION 8.3.  NOTICES                                                   14
  SECTION 8.4.  BENEFIT                                                   15
  SECTION 8.5.  INTERPRETATION                                            15
  SECTION 8.6.  GOVERNING LAW                                             16
  SECTION 8.7.  LIMITED LIABILITY                                         16
</TABLE>

                                      iii
<PAGE>
 
                              GUARANTEE AGREEMENT


     This GUARANTEE AGREEMENT, dated as of February 4, 1997, is executed and
delivered by HOUSTON LIGHTING & POWER COMPANY, a Texas corporation (the
"Guarantor"), having its principal office at Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas  77002, and The Bank of New York, a New York
banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of
the Holders (as defined herein) from time to time of the Capital Securities and
the Common Securities (each as defined herein and, together, the "Securities")
of HL&P CAPITAL TRUST II, a Delaware statutory business trust (the "Issuer").

     WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as of
February 4, 1997 (the "Trust Agreement"), among the Guarantor, as Depositor, the
Property Trustee, the Delaware Trustee and the Administrative Trustees named
therein and the Holders from time to time of undivided beneficial interests in
the assets of the Issuer, the Issuer is issuing $100,000,000 aggregate
Liquidation Amount (as defined in the Trust Agreement) of its 8.257% Capital
Securities, Series B, Liquidation Amount $1,000 per capital security (the
"Capital Securities"), and $3,093,000 aggregate Liquidation Amount (as defined
in the Trust Agreement) of its Common Securities, Series B, Liquidation Amount
$1,000 per common security (the "Common Securities"), each representing
undivided beneficial interests in the assets of the Issuer and having the terms
set forth in the Trust Agreement;

     WHEREAS, the Issuer will use the proceeds of the issuance of the Securities
to purchase the Debentures (as defined in the Trust Agreement) of the Guarantor,
which will be deposited with The Bank of New York, a New York banking
corporation, as Property Trustee under the Trust Agreement, as trust assets; and

     WHEREAS, as an incentive for the Holders to purchase Securities, the
Guarantor desires irrevocably and unconditionally to agree, to the extent set
forth herein, to pay to the Holders of the Securities the Guarantee Payments (as
defined herein) and to make certain other payments on the terms and conditions
set forth herein.

     NOW, THEREFORE, in consideration of the purchase by each Holder of
Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the
benefit of the Holders from time to time of the Securities.

                            ARTICLE I.  DEFINITIONS

     SECTION 1.1.  DEFINITIONS.

     As used in this Guarantee Agreement, the terms set forth below shall,
unless the context otherwise requires, have the following meanings.  Capitalized
or otherwise defined terms used but
<PAGE>
 
not otherwise defined herein shall have the meanings assigned to such terms in
the Trust Agreement as in effect on the date hereof.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.  For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

     "Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Issuer.

     "Debentures" has the meaning specified in the Trust Agreement.

     "Event of Default" means a default by the Guarantor on any of its payments
or other obligations under this Guarantee Agreement; provided, however, that,
except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default and shall not have cured such
default within 60 days after receipt of such notice.

     "Guarantee Payments" means the following payments or distributions, without
duplication, with respect to the Securities, to the extent not paid or made by
or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as
defined in the Trust Agreement) required to be paid on the Securities, to the
extent the Issuer shall have funds on hand available therefor at such time, (ii)
the redemption price, including all accrued and unpaid Distributions to the date
of redemption (the "Redemption Price"), with respect to any Securities called
for redemption by the Issuer, to the extent the Issuer shall have funds on hand
available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of the Issuer, unless Debentures are
distributed to the Holders, the lesser of (a) the aggregate of the Liquidation
Amount of $1,000 per Security plus accrued and unpaid Distributions on the
Securities to the date of payment and (b) the amount of assets of the Issuer
remaining available for distribution to Holders in liquidation of the Issuer
after satisfaction of liabilities to creditors of the Issuer as required by
applicable law (in either case, the "Liquidation Distribution").

     "Guarantee Trustee" means The Bank of New York, a New York banking
corporation, until a Successor Guarantee Trustee has been appointed and has
accepted such appointment pursuant to the terms of this Guarantee Agreement, and
thereafter means each such Successor Guarantee Trustee.

     "Holder" means any holder, as registered on the books and records of the
Securities Registrar, of any Securities; provided, however, that in determining
whether the holders of the requisite percentage of Securities have given any
request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor, the Guarantee Trustee, or any Affiliate of the Guarantor or the
Guarantee Trustee.

                                      -2-
<PAGE>
 
     "Indenture" means the Junior Subordinated Indenture, dated as of February
1, 1997, as supplemented and amended, between the Guarantor and The Bank of New
York, a New York banking corporation, as trustee.

     "List of Holders" has the meaning specified in Section 2.2(a).

     "Majority in Liquidation Amount of the Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the Liquidation Amount of all then outstanding
Securities issued by the Issuer.

     "Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman and Chief Executive Officer, President or a Vice
President, and by the Treasurer, an Associate Treasurer, an Assistant Treasurer,
the Controller, the Secretary or an Assistant Secretary, of such Person, and
delivered to the Guarantee Trustee.  One of the officers signing an Officers'
Certificate given pursuant to Section 2.5 shall be the principal executive,
financial or accounting officer of the Guarantor.  Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Guarantee Agreement shall include:

     (a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions relating thereto;

     (b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;

     (c) a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and

     (d) a statement as to whether, in the opinion of each officer, such
condition or covenant has been complied with.

     "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.

     "Responsible Officer" means, with respect to the Guarantee Trustee, any
Vice President, any Assistant Vice President, the Secretary, any Assistant
Secretary, any Assistant Treasurer, any Trust Officer or any other officer of
the principal corporate trust office of the Guarantee Trustee and also means,
with respect to a particular corporate trust matter, any other officer to whom
such matter is referred because of that officer's knowledge of and familiarity
with the particular subject.

                                      -3-
<PAGE>
 
     "Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.

     "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.

                        ARTICLE II.  TRUST INDENTURE ACT

     SECTION 2.1.  TRUST INDENTURE ACT; APPLICATION.

     (a) This Guarantee Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.

     (b) If and to the extent that any provision of this Guarantee Agreement
limits, qualifies or conflicts with the duties imposed by Sections 310 to 317,
inclusive, of the Trust Indenture Act, such imposed duties shall control.

     SECTION 2.2.  LIST OF HOLDERS.

     (a) The Guarantor will furnish or cause to be furnished to the Guarantee
Trustee: (i) semiannually, not more than 15 days after June 15 and December 15
in each year, a list, in such form as the Guarantee Trustee may reasonably
require, of the names and addresses of the Holders as of such June 15 and
December 15, and (ii) at such other times as the Guarantee Trustee may request
in writing, within 30 days after the receipt by the Guarantor of any such
request, a list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished, excluding from any such list names and
addresses received by the Guarantee Trustee in its capacity as Securities
Registrar.

     (b) The Guarantee Trustee shall comply with its obligations under Section
311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.

     SECTION 2.3.  REPORTS BY THE GUARANTEE TRUSTEE.

     Not later than January 31 of each year, commencing January 31, 1998, the
Guarantee Trustee shall provide to the Holders such reports as are required by
Section 313 of the Trust Indenture Act, if any, in the form and in the manner
provided by Section 313 of the Trust Indenture Act.  The Guarantee Trustee shall
also comply with the requirements of Section 313(d) of the Trust Indenture Act.

     SECTION 2.4.  PERIODIC REPORTS TO THE GUARANTEE TRUSTEE.

     The Guarantor shall provide to the Guarantee Trustee, the Securities and
Exchange Commission and the Holders such documents, reports and information, if
any, as required by

                                      -4-
<PAGE>
 
Section 314 of the Trust Indenture Act and the compliance certificate required
by Section 314 of the Trust Indenture Act, in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.    Delivery of such
reports, information and documents to the Guarantee Trustee is for informational
purposes only and the Guarantee Trustee's receipt of such shall not constitute
constructive notice of any information contained therein or determinable from
information contained therein, including the Guarantor's compliance with any of
its covenants hereunder (as to which the Guarantee Trustee is entitled to rely
exclusively on Officers' Certificates).

      SECTION 2.5.  EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT.

     The Guarantor shall provide to the Guarantee Trustee such evidence of
compliance with such conditions precedent, if any, provided for in this
Guarantee Agreement that relate to any of the matters set forth in Section
314(c) of the Trust Indenture Act.  Any certificate or opinion required to be
given by an officer pursuant to Section 314(c)(1) may be given in the form of an
Officers' Certificate.

      SECTION 2.6.  EVENTS OF DEFAULT; WAIVER.

     The Holders of a Majority in Liquidation Amount of the Securities may, by
vote, on behalf of the Holders, waive any past Event of Default and its
consequences.  Upon such waiver, any such Event of Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Guarantee Agreement, but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent therefrom.

      SECTION 2.7.  EVENTS OF DEFAULT; NOTICE.

     (a) The Guarantee Trustee shall, within 90 days after the occurrence of an
Event of Default, transmit by mail, first class postage prepaid, to the Holders,
notices of all Events of Default actually known to a Responsible Officer of the
Guarantee Trustee, unless such defaults have been cured before the giving of
such notice, provided, that, except in the case of a default in the payment of a
Guarantee Payment, the Guarantee Trustee shall be protected in withholding such
notice if and so long as a committee of Responsible Officers of the Guarantee
Trustee in good faith determines that the withholding of such notice is in the
interests of the Holders.

     (b) The Guarantee Trustee shall not be deemed to have knowledge of any
Event of Default unless a Responsible Officer charged with the administration of
this Guarantee Agreement shall have obtained written notice of such Event of
Default.

      SECTION 2.8.  CONFLICTING INTERESTS.

     The Trust Agreement shall be deemed to be specifically described in this
Guarantee Agreement for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.

                                      -5-
<PAGE>
 
       ARTICLE III.  POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

      SECTION 3.1.  POWERS AND DUTIES OF THE GUARANTEE TRUSTEE.

     (a) This Guarantee Agreement shall be held by the Guarantee Trustee for the
benefit of the Holders, and the Guarantee Trustee shall not transfer this
Guarantee Agreement to any Person except a Holder exercising his or her rights
pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on acceptance by
such Successor Guarantee Trustee of its appointment to act as Successor
Guarantee Trustee.  The right, title and interest of the Guarantee Trustee shall
automatically vest in any Successor Guarantee Trustee, upon acceptance by such
Successor Guarantee Trustee of its appointment hereunder, and such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered pursuant to the appointment of such Successor
Guarantee Trustee.

     (b) If an Event of Default has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee Agreement for the benefit of the Holders.

     (c) The Guarantee Trustee, before the occurrence of any Event of Default
and after the curing of all Events of Default that may have occurred, shall
undertake to perform only such duties as are specifically set forth in this
Guarantee Agreement, and no implied covenants shall be read into this Guarantee
Agreement against the Guarantee Trustee.  In case an Event of Default has
occurred (that has not been cured or waived pursuant to Section 2.6), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.

     (d) No provision of this Guarantee Agreement shall be construed to relieve
the Guarantee Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:

         (i) prior to the occurrence of any Event of Default and after the
     curing or waiving of all such Events of Default that may have occurred:

             (A) the duties and obligations of the Guarantee Trustee shall be
         determined solely by the express provisions of this Guarantee
         Agreement, and the Guarantee Trustee shall not be liable except for the
         performance of such duties and obligations as are specifically set
         forth in this Guarantee Agreement; and

             (B) in the absence of bad faith on the part of the Guarantee
         Trustee, the Guarantee Trustee may conclusively rely, as to the truth
         of the statements and the correctness of the opinions expressed
         therein, upon any certificates or opinions furnished to the Guarantee
         Trustee and conforming to the requirements of this Guarantee Agreement;
         but in the case of any such certificates or opinions that by any

                                      -6-
<PAGE>
 
         provision hereof or of the Trust Indenture Act are specifically
         required to be furnished to the Guarantee Trustee, the Guarantee
         Trustee shall be under a duty to examine the same to determine whether
         or not they conform on their face to the requirements of this Guarantee
         Agreement;

              (ii) the Guarantee Trustee shall not be liable for any error of
         judgment made in good faith by a Responsible Officer of the Guarantee
         Trustee, unless it shall be proved that the Guarantee Trustee was
         negligent in ascertaining the pertinent facts upon which such judgment
         was made;

              (iii) the Guarantee Trustee shall not be liable with respect to
         any action taken or omitted to be taken by it in good faith in
         accordance with the direction of the Holders of not less than a
         Majority in Liquidation Amount of the Securities relating to the time,
         method and place of conducting any proceeding for any remedy available
         to the Guarantee Trustee, or exercising any trust or power conferred
         upon the Guarantee Trustee under this Guarantee Agreement; and

              (iv) no provision of this Guarantee Agreement shall require the
         Guarantee Trustee to expend or risk its own funds or otherwise incur
         personal financial liability in the performance of any of its duties or
         in the exercise of any of its rights or powers, if the Guarantee
         Trustee shall have reasonable grounds for believing that the repayment
         of such funds or liability is not reasonably assured to it under the
         terms of this Guarantee Agreement or adequate indemnity against such
         risk or liability is not reasonably assured to it.

      SECTION 3.2.  CERTAIN RIGHTS OF THE GUARANTEE TRUSTEE.

     (a) Subject to the provisions of Section 3.1:

              (i) The Guarantee Trustee may conclusively rely and shall be fully
         protected in acting or refraining from acting upon any resolution,
         certificate, statement, instrument, opinion, report, notice, request,
         direction, consent, order, bond, debenture, note, other evidence of
         indebtedness or other paper or document reasonably believed by it to be
         genuine and to have been signed, sent or presented by the proper party
         or parties.

              (ii) Any direction or act of the Guarantor contemplated by this
         Guarantee Agreement shall be sufficiently evidenced by an Officers'
         Certificate unless otherwise prescribed herein.

              (iii) Whenever, in the administration of this Guarantee Agreement,
         the Guarantee Trustee shall deem it desirable that a matter be proved
         or established before taking, suffering or omitting to take any action
         hereunder, the Guarantee Trustee (unless other evidence is herein
         specifically prescribed) may, in the absence of bad faith on its part,
         request and rely

                                      -7-
<PAGE>
 
upon an Officers' Certificate which, upon receipt of such request from the
Guarantee Trustee, shall be promptly delivered by the Guarantor.

               (iv) The Guarantee Trustee may consult with legal counsel of its
          selection, and the advice or opinion of such legal counsel with
          respect to legal matters shall be full and complete authorization and
          protection in respect of any action taken, suffered or omitted to be
          taken by it hereunder in good faith and in accordance with such advice
          or opinion. Such legal counsel may be legal counsel to the Guarantor
          or any of its Affiliates and may be one of its employees. The
          Guarantee Trustee shall have the right at any time to seek
          instructions concerning the administration of this Guarantee Agreement
          from any court of competent jurisdiction.

               (v) The Guarantee Trustee shall be under no obligation to
          exercise any of the rights or powers vested in it by this Guarantee
          Agreement at the request or direction of any Holder, unless such
          Holder shall have provided to the Guarantee Trustee such adequate
          security and indemnity as would satisfy a reasonable person in the
          position of the Guarantee Trustee, against the costs, expenses
          (including attorneys' fees and expenses) and liabilities that might be
          incurred by it in complying with such request or direction, including
          such reasonable advances as may be requested by the Guarantee Trustee;
          provided that, nothing contained in this Section 3.2(a)(v) shall be
          taken to relieve the Guarantee Trustee, upon the occurrence of an
          Event of Default, of its obligation to exercise the rights and powers
          vested in it by this Guarantee Agreement.

               (vi) The Guarantee Trustee shall not be bound to make any
          investigation into the facts or matters stated in any resolution,
          certificate, statement, instrument, opinion, report, notice, request,
          direction, consent, order, bond, debenture, note, other evidence of
          indebtedness or other paper or document, but the Guarantee Trustee, in
          its discretion, may make such further inquiry or investigation into
          such facts or matters as it may see fit.

               (vii) The Guarantee Trustee may execute any of the trusts or
          powers hereunder or perform any duties hereunder either directly or by
          or through its agents or attorneys, and the Guarantee Trustee shall
          not be responsible for any misconduct or negligence on the part of any
          such agent or attorney appointed with due care by it hereunder.

               (viii) Whenever in the administration of this Guarantee Agreement
          the Guarantee Trustee shall deem it desirable to receive instructions
          with respect to enforcing any remedy or right or taking any other
          action hereunder, the Guarantee Trustee (A) may request instructions
          from the Holders, (B) may refrain from enforcing such remedy or right
          or taking such other action until such instructions are received, and
          (C) shall be fully protected in acting in accordance with such
          instructions.

     (b) No provision of this Guarantee Agreement shall be deemed to impose any
duty or obligation on the Guarantee Trustee to perform any act or acts or
exercise any right, power, duty or

                                      -8-
<PAGE>
 
obligation conferred or imposed on it in any jurisdiction in which it shall be
illegal, or in which the Guarantee Trustee shall be unqualified or incompetent
in accordance with applicable law, to perform any such act or acts or to
exercise any such right, power, duty or obligation.  No permissive power or
authority available to the Guarantee Trustee shall be construed to be a duty to
act in accordance with such power and authority.

      SECTION 3.3.  INDEMNITY.

     The Guarantor agrees to indemnify the Guarantee Trustee for, and to hold it
harmless against, any and all loss, damage, claims, liability or expense,
including taxes (other than taxes based on the income of the Guarantee Trustee),
incurred without negligence or bad faith on the part of the Guarantee Trustee
arising out of or in connection with the acceptance or administration of this
Guarantee Agreement, including the costs and expenses of defending itself
against any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder. The Guarantee Trustee will not claim or
exact any lien or charge on any Guarantee Payments as a result of any amount due
to it under this Guarantee Agreement.  This indemnity shall survive the
termination of this Guarantee Agreement.

      SECTION 3.4.  COMPENSATION AND REIMBURSEMENT.

     The Guarantor agrees (i) to pay to the Guarantee Trustee from time to time
such compensation as the Guarantor and the Guarantee Trustee shall from time to
time agree in writing for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust) and (ii) except as otherwise
expressly provided herein, to reimburse the Guarantee Trustee upon its request
for all reasonable expenses, disbursements and advances incurred or made by the
Guarantee Trustee in accordance with any provision of this Guarantee Agreement
(including the compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith.  This Section 3.4 shall survive the
termination of this Guarantee Agreement.

                         ARTICLE IV.  GUARANTEE TRUSTEE

      SECTION 4.1.  GUARANTEE TRUSTEE; ELIGIBILITY.

     (a) There shall at all times be a Guarantee Trustee which shall:

         (i) not be an Affiliate of the Guarantor; and

         (ii) be a Person that is eligible pursuant to the Trust Indenture Act
     to act as such and has a combined capital and surplus of at least
     $50,000,000, and shall be a corporation meeting the requirements of Section
     310(a) of the Trust Indenture Act. If such corporation publishes reports of
     condition at least annually, pursuant to law or to the requirements of the

                                      -9-
<PAGE>
 
     supervising or examining authority, then, for the purposes of this Section
     and to the extent permitted by the Trust Indenture Act, the combined
     capital and surplus of such corporation shall be deemed to be its combined
     capital and surplus as set forth in its most recent report of condition so
     published.

     (b) If at any time the Guarantee Trustee shall cease to be eligible to so
act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the
manner and with the effect set out in Section 4.2(c).

     (c) If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and the Guarantor shall in all respects comply with the
provisions of Section 310(b) of the Trust Indenture Act.

      SECTION 4.2.  APPOINTMENT, REMOVAL AND RESIGNATION OF THE GUARANTEE
TRUSTEE.

     (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or
removed by the Guarantor (i) without cause at any time when an Event of Default
has not occurred and is continuing and (ii) at any time when the Guarantee
Trustee ceases to be eligible to act as the Guarantee Trustee pursuant to
Section 4.1 hereof or becomes incapable of acting or is adjudged a bankrupt or
insolvent or a receiver of the Guarantee Trustee or of its property is appointed
or any public officer takes charge or control of the Guarantee Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation.

     (b) The Guarantee Trustee shall not be removed until a Successor Guarantee
Trustee has been appointed and has accepted such appointment by written
instrument executed by such Successor Guarantee Trustee and delivered to the
Guarantor.

     (c) The Guarantee Trustee appointed hereunder shall hold office until a
Successor Guarantee Trustee shall have been appointed or until its removal or
resignation.  The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.

     (d) If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Guarantee Trustee.

                                     -10-
<PAGE>
 
                                  ARTICLE V.  GUARANTEE

          SECTION 5.1.  GUARANTEE.

          The Guarantor irrevocably and unconditionally agrees to pay in full to
the Holders the Guarantee Payments (without duplication of amounts theretofore
paid by or on behalf of the Issuer), as and when due, regardless of any defense,
right of setoff or counterclaim which the Issuer may have or assert.  The
Guarantor's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders.

          SECTION 5.2.  WAIVER OF NOTICE AND DEMAND.

          The Guarantor hereby waives notice of acceptance of the Guarantee
Agreement and of any liability to which it applies or may apply, presentment,
demand for payment, any right to require a proceeding first against the
Guarantee Trustee, the Issuer or any other Person before proceeding against the
Guarantor, protest, notice of nonpayment, notice of dishonor, notice of
redemption and all other notices and demands.

          SECTION 5.3.  OBLIGATIONS NOT AFFECTED.

          The obligations, covenants, agreements and duties of the Guarantor
under this Guarantee Agreement shall in no way be affected or impaired by reason
of the happening from time to time of any of the following:

          (a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer of any express or implied agreement,
covenant, term or condition relating to the Securities to be performed or
observed by the Issuer;

          (b) the extension of time for the payment by the Issuer of all or any
portion of the Distributions (other than an extension of time for payment of
Distributions that results from the extension of any interest payment period on
the Debentures as provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Securities;

          (c) any failure, omission, delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Securities, or any action
on the part of the Issuer granting indulgence or extension of any kind;

          (d) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization,

                                     -11-
<PAGE>
 
arrangement, composition or readjustment of debt of, or other similar
proceedings affecting, the Issuer or any of the assets of the Issuer;

          (e) any invalidity of, or defect or deficiency in, the Securities;

          (f) the settlement or compromise of any obligation guaranteed hereby
or hereby incurred; or

          (g) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Guarantor hereunder shall be
absolute and unconditional under any and all circumstances.

There shall be no obligation of the Holders to give notice to, or obtain the
consent of, the Guarantor with respect to the happening of any of the foregoing.

          SECTION 5.4.  RIGHTS OF HOLDERS.

          The Guarantor expressly acknowledges that: (i) this Guarantee
Agreement will be deposited with the Guarantee Trustee to be held for the
benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this
Guarantee Agreement on behalf of the Holders; (iii) the Holders of not less than
a Majority in Liquidation Amount of the Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of this Guarantee Agreement or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and (iv) any Holder may institute a legal proceeding directly against
the Guarantor to enforce its rights under this Guarantee Agreement, without
first instituting a legal proceeding against the Issuer or any other Person.

          SECTION 5.5.  GUARANTEE OF PAYMENT.

          This Guarantee Agreement creates a guarantee of payment and not of
collection.  This Guarantee Agreement will not be discharged except by payment
of the Guarantee Payments in full (without duplication of amounts theretofore
paid by the Issuer) or upon the distribution of Debentures to the Holders as
provided in the Trust Agreement.

          SECTION 5.6.  SUBROGATION.

          The Guarantor shall be subrogated to all (if any) rights of the
Holders against the Issuer in respect of any amounts paid to the Holders by the
Guarantor under this Guarantee Agreement and shall have the right to waive
payment by the Issuer pursuant to Section 5.1; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights which it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee Agreement, if, at the time of any
such payment, any amounts are due and unpaid under this

                                     -12-
<PAGE>
 
Guarantee Agreement.  If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.

          SECTION 5.7.  INDEPENDENT OBLIGATIONS.

          The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Issuer with respect to the Securities and
that the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee Agreement
notwithstanding the occurrence of any event referred to in subsections (a)
through (g), inclusive, of Section 5.3 hereof.

                    ARTICLE VI.  COVENANTS AND SUBORDINATION

          SECTION 6.1.  SUBORDINATION.

          The obligations of the Guarantor under this Guarantee Agreement will
constitute unsecured obligations of the Guarantor and will rank subordinate and
junior in right of payment to all Senior Debt (as defined in the Indenture) of
the Guarantor to the extent and in the manner set forth in the Indenture with
respect to the Debentures, and the provisions of Article XIII of the Indenture
will apply, mutatis mutandis, to the obligations of the Guarantor hereunder.
The obligations of the Guarantor hereunder do not constitute Senior Debt (as
defined in the Indenture) of the Guarantor.

          SECTION 6.2.  PARI PASSU GUARANTEES.

          The obligations of the Guarantor under this Guarantee Agreement shall
rank pari passu with the obligations of the Guarantor under any similar
Guarantee Agreements issued by the Guarantor on behalf of the holders of
preferred or capital securities issued by any HL&P Trust (as defined in the
Indenture).

                           ARTICLE VII.  TERMINATION

          SECTION 7.1.  TERMINATION.

          This Guarantee Agreement shall terminate and be of no further force
and effect upon (i) full payment of the Redemption Price of all Securities, (ii)
the distribution of Debentures to the Holders in exchange for all of the
Securities or (iii) full payment of the amounts payable in accordance with the
Trust Agreement upon liquidation of the Issuer.  Notwithstanding the foregoing,
this Guarantee Agreement will continue to be effective or will be reinstated, as
the case may be, if at any time any Holder must restore payment of any sums paid
with respect to Securities or this Guarantee Agreement.  This Guarantee
Agreement will not be discharged except by payment of the Guarantee Payments in
full to the extent not paid by the Issuer or upon distribution of Debentures to
the Holders as provided in the Trust Agreement.

                                     -13-
<PAGE>
 
                          ARTICLE VIII.  MISCELLANEOUS

          SECTION 8.1.  SUCCESSORS AND ASSIGNS.

          All guarantees and agreements contained in this Guarantee Agreement
shall bind the successors, assigns, receivers, trustees and representatives of
the Guarantor and shall inure to the benefit of the Holders of the Securities
then outstanding.  Except in connection with a consolidation, merger or sale
involving the Guarantor that is permitted under Article VIII of the Indenture
and pursuant to which the successor or assignee agrees in writing to perform the
Guarantor's obligations hereunder, the Guarantor shall not assign its
obligations hereunder.

          SECTION 8.2.  AMENDMENTS.

          Except with respect to any changes which do not adversely affect the
rights of the Holders in any material respect (in which case no consent of the
Holders will be required), this Guarantee Agreement may be amended only with the
prior approval of the Holders of not less than a Majority in Liquidation Amount
of the Securities.  The provisions of Article VI of the Trust Agreement
concerning meetings of the Holders shall apply to the giving of such approval.

          SECTION 8.3.  NOTICES.

          Any notice, request or other communication required or permitted to be
given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied or mailed by first class mail as follows:

          (a) if given to the Guarantor, to the address set forth below or such
other address, facsimile number or to the attention of such other Person as the
Guarantor may give notice to the Holders:

                   Houston Lighting & Power Company
                   Houston Industries Plaza
                   1111 Louisiana Street
                   Houston, Texas  77002
                   Facsimile No.:  (713) 207-3301
                   Attention: Treasurer

          (b) if given to the Issuer, in care of the Guarantee Trustee, at the
Issuer's (and the Guarantee Trustee's) address set forth below or such other
address as the Guarantee Trustee on behalf of the Issuer may give notice to the
Holders:

                                     -14-
<PAGE>
 
                   HL&P Capital Trust II
                   200 West 9th Street Plaza
                   Box 2105
                   Wilmington, Delaware  19899
                   Facsimile No.:  (302) 658-0468
                   Attention: Norman J. Shuman

            with a copy to:

                   The Bank of New York
                   101 Barclay Street, Floor 21 West
                   New York, New York   10286
                   Facsimile No.:  (212) 815-5915
                   Attention: Corporate Trust Trustee Administration
 
            and

                   Houston Industries Incorporated
                   Houston Industries Plaza
                   1111 Louisiana Street
                   Houston, Texas  77002
                   Facsimile No.:  (713) 207-3301
                   Attention: Treasurer

          (c) if given to any Holder, at the address set forth on the books and
records of the Issuer.

          All notices hereunder shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

          SECTION 8.4.  BENEFIT.

          This Guarantee Agreement is solely for the benefit of the Holders and
is not separately transferable from the Securities.

          SECTION 8.5.  INTERPRETATION.

          In this Guarantee Agreement, unless the context otherwise requires:

          (a) capitalized terms used in this Guarantee Agreement but not defined
in the preamble hereto have the respective meanings assigned to them in Section
1.1;

                                     -15-
<PAGE>
 
          (b) a term defined anywhere in this Guarantee Agreement has the same
meaning throughout;

          (c) all references to "the Guarantee Agreement" or "this Guarantee
Agreement" are to this Guarantee Agreement as modified, supplemented or amended
from time to time;

          (d) all references in this Guarantee Agreement to Articles and
Sections are to Articles and Sections of this Guarantee Agreement unless
otherwise specified;

          (e) a term defined in the Trust Indenture Act has the same meaning
when used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;

          (f) a reference to the singular includes the plural and vice versa;
and

          (g) the masculine, feminine or neuter gender used herein shall include
the masculine, feminine and neuter genders.

          SECTION 8.6.  GOVERNING LAW.

          THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

          SECTION 8.7.  LIMITED LIABILITY.

          The Holders of the Capital Securities, in their capacities as such,
shall not be personally liable for any liabilities or obligations of the Issuer
arising out of this Guarantee Agreement, and the parties hereto hereby agree
that the Holders of the Capital Securities, in their capacities as such, shall
be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware.

          This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

                                     -16-
<PAGE>
 
          THIS GUARANTEE AGREEMENT is executed as of the day and year first
above written.


                                HOUSTON LIGHTING & POWER COMPANY


                                By:  /s/ LINDA GEIGER
                                     ________________________________
                                     Name: Linda Geiger
                                     Title: Authorized Agent



                                THE BANK OF NEW YORK,
                                as Guarantee Trustee


                                By:  /s/ REMO J. REALE
                                     ________________________________
                                     Name:  Remo J. Reale
                                     Title: Assistant Vice President






                                     -17-