Exhibit
99.1
 
 
 Item 1A. Risk
Factors
 
 Material payment delays or a loss on
investments in the transition bonds may occur because the source of funds for
payment is limited.
 
 The only source of funds for payment of
transition bonds are our assets, which consist of the transition property
securing the transition bonds, including:
 
 •
              
              the
      right to impose, collect and receive related transition
      charges;•
              
              the
      funds on deposit in the accounts held by the trustee;•
              
              our
      rights under various contracts; and•
              
              the
      credit enhancement.
 
 The transition bonds are not a charge
on the full faith and credit or taxing power of the State of Texas or any
governmental agency or instrumentality, nor are the transition bonds insured or
guaranteed by CenterPoint Houston, including in its capacity as the servicer, or
by its ultimate parent, CenterPoint Energy, Inc., any of its affiliates (other
than us), the trustee or by any other person or entity. Thus, holders of
transition bonds (bondholders) must rely for payment of transition bonds
solely upon collections of the transition charges, funds on deposit in the
related accounts held by the trustee and the credit enhancement described under
“Business—Transition Property” in Item 1. Our organizational documents
restrict our right to acquire other assets unrelated to the transactions
described under “Business—General” in Item 1.
 
 Risks
Associated with Potential Judicial, Legislative or Regulatory
Actions
 
 Future
judicial action could reduce the value of the transition bonds.
 
 The transition property is the creation
of the 1999 utility restructuring amendments to the Public Utility Regulatory
Act of Texas (Restructuring Act) and the financing order. There is uncertainty
associated with investing in bonds payable from an asset that depends for its
existence on legislation because there is limited judicial or regulatory
experience implementing and interpreting the legislation. Because the transition
property is a creation of the Restructuring Act, any judicial determination
affecting the validity of or interpreting the Restructuring Act, the transition
property or our ability to make payments on the transition bonds might have an
adverse effect on the transition bonds.
 
 Other states have passed electric
utility deregulation laws similar to the Restructuring Act, and some of these
laws have been challenged by judicial actions. To date, none of these challenges
has succeeded, but future judicial challenges might be made. An unfavorable
decision regarding another state’s law would not automatically invalidate the
Restructuring Act or the financing order, but it might provoke a challenge to
the Restructuring Act, establish a legal precedent for a successful challenge to
the Restructuring Act or heighten awareness of the political and other risks of
the transition bonds, and in that way may limit the liquidity and value of the
transition bonds. Therefore, legal activity in other states may indirectly
affect the value of the transition bonds.
 
 The
federal government might preempt the Restructuring Act without full
compensation.
 
 In the past, bills have been introduced
in Congress that would prohibit the recovery of all or some types of stranded
costs, but none of those bills was enacted. Congress could, however, pass a law
or adopt a rule or regulation negating the existence of or reducing the value of
the transition property.
 
 If federal legislation preempting
the Restructuring Act or the financing order is enacted, there is no assurance
that the courts would consider it a “taking” under the United States
Constitution for which the government
  
  would be
required to pay just compensation or, if it is considered a “taking,” that any
amount provided as compensation would be sufficient to pay the full amount of
principal of and interest on the transition bonds or to pay these amounts on a
timely basis.
 
 Future
state legislative action could reduce the value of the transition
bonds.
 
 Despite its pledge in the Restructuring
Act not to take or permit certain actions that would impair the value of the
transition property or the transition charges, the Texas legislature might
attempt to repeal or amend the Restructuring Act in a manner that limits or
alters the transition property so as to reduce its value. It might be possible
for the Texas legislature to repeal or amend the Restructuring Act
notwithstanding the State’s pledge if the legislature acts in order to serve a
significant and legitimate public purpose. Any such action, as well as the
costly and time-consuming litigation that likely would ensue, might adversely
affect the price and liquidity, the dates of payment of interest and principal
and the weighted average lives of the transition bonds. Moreover, the outcome of
any litigation cannot be predicted. Accordingly, bondholders might incur a loss
on or delay in recovery of their investment in the transition
bonds.
 
 If an action of the Texas legislature
adversely affecting the transition property or the ability to collect transition
charges were considered a “taking” under the United States or Texas
Constitutions, the State of Texas might be obligated to pay compensation for the
taking. However, even in that event, there is no assurance that any amount
provided as compensation would be sufficient for bondholders to recover fully
their investment in the transition bonds or to offset interest lost pending such
recovery.
 
 The
Texas Utility Commission might take actions that could reduce the value of the
transition bonds.
 
 The Restructuring Act provides that a
financing order is irrevocable and that the Texas Utility Commission may not
directly or indirectly, by any subsequent action, rescind or amend a financing
order or reduce or impair the transition charges authorized under a financing
order, except for the true-up adjustments to the transition charges. However,
the Texas Utility Commission retains the power to adopt, revise or rescind rules
or regulations affecting CenterPoint Houston. The Texas Utility Commission also
retains the power to interpret the financing order, and in that capacity might
be called upon to rule on the meanings of provisions of the order that might
need further elaboration. Any new or amended regulations or orders from the
Texas Utility Commission might affect the ability of the servicer to collect the
transition charges in full and on a timely basis, the rating of the transition
bonds or their price and, accordingly, the amortization of the transition bonds
and their weighted average lives.
 
 The servicer is required to file with
the Texas Utility Commission, on our behalf, certain adjustments of the
transition charges. True-up adjustment procedures have been challenged in the
past and may be challenged in the future. Challenges to or delays in the true-up
process might adversely affect the market perception and valuation of the
transition bonds. Also, any litigation might materially delay transition charge
collections due to delayed implementation of true-up adjustments and might
result in missing payments or payment delays and lengthened weighted average
life of the transition bonds.
 
 Servicing
Risks
 
 Inaccurate
consumption forecasting or unanticipated delinquencies or charge-offs might
reduce scheduled payments on the transition bonds.
 
 The transition charges are generally
assessed based on forecasted customer usage. The amount and the rate of
transition charge collections depend in part on actual electricity usage and the
amount of collections and write-offs for each customer class. If the servicer
inaccurately forecasts electricity consumption or uses inaccurate customer
delinquency or charge-off data when setting or adjusting the transition charges,
there could be a shortfall or material delay in transition charge collections,
which might result in missed or delayed payments of principal and interest and
lengthened weighted average life of the transition bonds.
 
 The servicer has experienced
difficulties from time to time in making accurate forecasts of electricity
consumption because of unexpected weather conditions. Inaccurate forecasting of
electricity consumption by the servicer might result from, among other things,
unanticipated weather or economic conditions, resulting in less
  
  electricity
consumption than forecast; general economic conditions being worse than
expected, causing retail electric customers to migrate from CenterPoint
Houston’s service territory or reduce their electricity consumption; the
occurrence of a natural disaster or an act of terrorism or other catastrophic
event; changes in the market structure of the electric industry; customers
consuming less electricity because of increased energy prices or conservation
effort; or customers switching to alternative sources of energy, including
self-generation of electric power.
 
 The servicer’s use of inaccurate
delinquency or charge-off rates might result also from, among other things,
unexpected deterioration of the economy or the declaration of a moratorium on
terminating electric service to customers in the event of extreme weather,
either of which would cause greater delinquencies or charge-offs than expected
or force CenterPoint Houston or REPs to grant additional payment relief to more
customers, or any other change in law that makes it more difficult for
CenterPoint Houston or REPs to terminate service to non-paying customers or that
requires CenterPoint Houston or REPs to apply more lenient credit standards in
accepting retail electric customers.
 
 We
depend on CenterPoint Houston or its successor or assignee, acting as servicer
of the transition property.
 
 CenterPoint Houston, as servicer, is
responsible for, among other things, calculating, billing and collecting the
transition charges from REPs, submitting requests to the Texas Utility
Commission to adjust these charges, monitoring the collateral for the transition
bonds and taking certain actions in the event of non-payment by a REP. The
trustee’s receipt of collections in respect of the transition charges, which are
used to make payments on the transition bonds, depends in part on the skill and
diligence of the servicer in performing these functions. The systems the State
of Texas and the servicer have in place for transition charge billings and
collections might, in particular circumstances, cause the servicer to experience
difficulty in performing these functions in a timely and completely accurate
manner. If the servicer fails to make collections for any reason, then the
servicer’s payments to the trustee in respect of the transition charges might be
delayed or reduced. In that event, our payments on the transition bonds might be
delayed or reduced.
 
 If
we replace CenterPoint Houston as the servicer, we may experience difficulties
finding and using a replacement servicer.
 
 If CenterPoint Houston ceases to
service the transition property, it might be difficult to find a successor
servicer. Also, any successor servicer might have less experience and ability
than CenterPoint Houston and might experience difficulties in collecting
transition charges and determining appropriate adjustments to the transition
charges and billing and/or payment arrangements may change, resulting in
collection disruption. A successor servicer might charge fees that, while
permitted under the financing order, are substantially higher than the fees paid
to CenterPoint Houston as servicer. In the event of the commencement of a case
by or against the servicer under the United States Bankruptcy Code or similar
laws, we and the trustee might be prevented from effecting a transfer of
servicing due to operation of the bankruptcy code. Any of these factors and
others might delay the timing of payments and may reduce the value of the
transition bonds.
 
 It
might be difficult to collect transition charges from REPs.
 
 As required by the Restructuring Act,
retail electric customers pay the transition charges to REPs who supply them
with electric power. The REPs are obligated to remit payments of the transition
charges, less a specified percentage allowance for charge-offs of delinquent
customer accounts, within 35 days of billing from the servicer, even if
they do not collect the transition charges from retail electric customers.
Because the REPs bill most retail electric customers for the transition charges,
we have to rely on a relatively small number of entities for the collection of
the bulk of the transition charges. As of December 31, 2007, CenterPoint
Houston did business with 74 REPs. Reliant Energy, Inc. (RRI) through its
subsidiaries, is CenterPoint Houston’s largest customer, accounting for
approximately 48% of CenterPoint Houston’s outstanding receivables from REPs as
of December 31, 2007.
 
 Failure by the REPs to remit transition
charges to the servicer might cause delays in payments on the transition bonds
and adversely affect the value of the transition bonds. The servicer does not
pay any shortfalls resulting from the failure of any REP to forward transition
charge collections.
  
  Adjustments to the transition charges
and any credit support provided by a REP, while available to compensate for a
failure by a REP to pay the transition charges to the servicer, might not be
sufficient to protect the value of the transition bonds.
 
 The Restructuring Act provides for one
or more REPs in each area to be designated the “provider of last resort” for
that area or a specified customer class. The provider of last resort is required
to offer basic electric service to retail electric customers in its designated
area, regardless of the creditworthiness of the customers. The provider of last
resort might face greater difficulty in bill collection than other REPs and
therefore the servicer may face greater difficulty in collecting transition
charges from the provider of last resort.
 
 REPs may issue a single bill to retail
customers that include all charges related to the purchase of electricity,
without separately itemizing the transition charge component of the bill. A
REP’s use of a consolidated bill might increase the risk that customers who have
claims against the REP will attempt to offset those claims against transition
charges or increase the risk that, in the event of a bankruptcy of a REP, a
bankruptcy court would find that the REP has an interest in the transition
property and would make it more difficult to terminate the services of a
bankrupt REP or collect transition charges from its customers.
 
 Competitive
metering services might result in unexpected problems in receiving accurate
metering data.
 
 Under the Restructuring Act, commercial
and industrial retail customers that are required by the Electric Reliability
Council of Texas to have an interval data recorder meter may choose to own the
settlement and billing meters that are used to measure electric energy delivered
to their location or to have those meters owned by a REP, the transmission and
distribution utility or another person authorized by the customer. As of
December 31, 2007, CenterPoint Houston continued to provide metering
services related to the installation and removal of meters, meter testing and
calibration, data collection and data management. Should the Texas Utility
Commission allow third parties to perform those metering services in CenterPoint
Houston’s service territory, there might be problems converting to the third
party’s metering system, taking accurate meter readings and collecting and
processing accurate metering data. Inaccurate metering data might lead to
inaccuracies in the calculation and imposition of transition charges and might
give rise to disputes between the servicer and REPs regarding payments and
payment shortfalls resulting in missing or delayed payments of principal and
interest and lengthened weighted average life of the transition
bonds.
 
 Changes
to billing and collection practices might reduce the value of the transition
bonds.
 
 The financing order specifies the
methodology for determining the amount of the transition charges we may impose.
The servicer may not change this methodology without approval from the Texas
Utility Commission. However, the servicer may set its own billing and collection
arrangements with REPs and retail electric customers, if any, from whom it
collects transition charges directly, provided that these arrangements comply
with the Texas Utility Commission’s customer safeguards. For example, to recover
part of an outstanding bill, the servicer may agree to extend a REP’s payment
schedule or to write off the remaining portion of the bill, including the
transition charges. Also, the servicer may change billing and collection
practices, which might adversely impact the timing and amount of retail electric
customer payments and might reduce transition charge collections, thereby
limiting our ability to make scheduled payments on the transition bonds.
Separately, the Texas Utility Commission might require changes to these
practices. Any changes in billing and collection practices regulations might
make it more difficult for the servicer to collect the transition charges and
adversely affect the value of the transition bonds.
 
 Limits
on rights to terminate service might make it more difficult to collect the
transition charges.
 
 Texas statutory requirements and the
rules and regulations of the Texas Utility Commission, which may change from
time to time, regulate and control the right of the REP to initiate
disconnection of service. For example, REPs generally may not terminate service
to a customer (1) on a holiday or weekend day or the day immediately preceding a
holiday or weekend, (2) during certain extreme weather conditions,
(3) if such disconnection would cause a person to become seriously ill or
more seriously ill, (4) if such customer is an energy assistance client
under certain circumstances or (5) if the customer is a master-metered
apartment complex unless certain notices are given. To the extent these retail
electric customers do not pay for their electric service, REPs will not be able
to collect transition charges from these retail electric customers. Although
REPs have to pay the servicer the transition charges
  
  on behalf
of those customers (subject to any charge-off allowance and reconciliation
rights), required service to non-paying customers could affect the ability of
REPs to make such payment.
 
 Future
adjustments to transition charges by customer class might result in insufficient
collections.
 
 The customers who pay transition
charges are divided into customer classes. Transition charges are allocated
among customer classes and assessed in accordance with the formula required
under the Restructuring Act and specified in the financing order. A shortfall in
collections of transition charges in one customer class may be corrected by
making adjustments to the transition charges payable by that customer class and
any other customer class. If customers in a class fail to pay transition charges
or cease to be customers, the servicer might have to substantially increase the
transition charges for the remaining customers in that customer class and for
other customer classes. This effect might be more extreme in the case of the
large industrial and the interruptible customer classes, which consist of a
small number of large customers. These increases could lead to further failures
by the remaining customers to pay transition charges, thereby increasing the
risk of a shortfall in funds to pay debt service on the transition
bonds.
 
 Risks
Associated with the Unusual Nature of the Transition Property
 
 We
will not receive transition charges in respect of electric service provided more
than 15 years from the date of issuance of the transition
bonds.
 
 CenterPoint Houston will not be
entitled to charge transition charges for electricity delivered after the
fifteenth anniversary of the issuance of the transition bonds. If transition
charges collected for electricity delivered through the fifteenth anniversary of
the transition bonds, or from any credit enhancement funds, are not sufficient
to repay the transition bonds in full, no other funds will be available to pay
the unpaid balance due on the transition bonds.
 
 Foreclosure
of the trustee’s lien on the transition property might not be practical, and
acceleration of the transition bonds before maturity might have little practical
effect.
 
 Under the Restructuring Act and the
indenture, the trustee or the bondholders have the right to foreclose or
otherwise enforce the lien on the transition property securing the transition
bonds. However, in the event of foreclosure, there is likely to be a limited
market, if any, for the transition property. Therefore, foreclosure might not be
a realistic or practical remedy. Moreover, although principal of the transition
bonds will be due and payable upon acceleration of the transition bonds before
maturity, the transition charges likely would not be accelerated and the nature
of our business will result in principal of the transition bonds being paid as
funds become available. If there is an acceleration of the transition bonds, all
tranches of the transition bonds will be paid pro rata; therefore, some tranches
might be paid earlier than expected and some tranches might be paid later than
expected.
 
 Risks
Associated with Potential Bankruptcy Proceedings of CenterPoint Houston or a
Successor Servicer
 
 The
servicer will commingle the transition charges with other revenues it collects,
which might obstruct access to the transition charges in case of the servicer’s
bankruptcy and reduce the value of the transition bonds.
 
 The servicer is required to remit
collections to the trustee within two business days of receipt. The servicer
does not segregate the transition charges from the other funds it collects from
retail electric customers or REPs or its general funds. The transition charges
are segregated only when the servicer pays them to the trustee.
 
 Despite this requirement, the servicer
might fail to pay the full amount of the transition charges to the trustee or
might fail to do so on a timely basis. This failure, whether voluntary or
involuntary, might materially reduce the amount of transition charge collections
available to make payments on the transition bonds.
 
 The Restructuring Act provides that our
rights to the transition property are not affected by the commingling of these
funds with any other funds of the servicer. In a bankruptcy of the servicer,
however, a bankruptcy court might rule that federal bankruptcy law does not
recognize our right to collections of the transition charges that are commingled
with other funds of the servicer as of the date of bankruptcy. If so, the
collections of
  
  the
transition charges held by the servicer as of the date of bankruptcy would not
be available to pay amounts owing on the transition bonds. In this case, we
would have only a general unsecured claim against the servicer for those
amounts. This decision could cause material delays in payments of principal or
interest, or losses, on the transition bonds and could materially reduce the
value of the transition bonds, particularly if it occurred in the fifteenth year
of the transition bonds after the completion of which no transition charges can
be charged.
 
 The
bankruptcy of CenterPoint Houston, as seller of the transition property, might
result in losses or delays in payments on the transition bonds.
 
 The Restructuring Act and the financing
order provide that as a matter of Texas state law:
 
 •
              
              the
      rights and interests of a selling utility under a financing order,
      including the right to impose, collect and receive transition charges, are
      contract rights of the seller;•
              
              the
      seller may make a present transfer of its rights under a financing order,
      including the right to impose, collect and receive future transition
      charges that retail customers do not yet owe;•
              
              upon
      the transfer to us, the rights became transition property, and transition
      property constitutes a present property right, even though the imposition
      and collection of transition charges depend on further acts that have not
      yet occurred; and•
              
              a
      transfer of the transition property from the seller, or its affiliate, to
      us that expressly states the transfer is a sale or other absolute transfer
      is a true sale of the transition property, not a pledge of the transition
      property to secure a financing by the
seller.
 
 These
provisions are important to maintaining payments on the transition bonds in
accordance with their terms during any bankruptcy of CenterPoint
Houston.
 
 A bankruptcy court generally follows
state property law on issues such as those addressed by the state law provisions
described above. However, a bankruptcy court does not follow state law if it
determines that the state law is contrary to a paramount federal bankruptcy
policy or interest. If a bankruptcy court in a CenterPoint Houston bankruptcy
refused to enforce one or more of the state property law provisions described
above, the effect of this decision on beneficial owners of the transition bonds
might be similar to the treatment they would receive in a CenterPoint Houston
bankruptcy if the transition bonds had been issued directly by CenterPoint
Houston. A decision by the bankruptcy court that, despite our separateness from
CenterPoint Houston, our assets and liabilities and those of CenterPoint Houston
should be consolidated would have a similar effect on bondholders.
 
 We have taken steps together with
CenterPoint Houston, as seller of the transition property, to reduce the risk
that in the event the seller or an affiliate of the seller were to become the
debtor in a bankruptcy case, a court would order that our assets and liabilities
be substantively consolidated with those of CenterPoint Houston or an affiliate.
Nonetheless, these steps might not be completely effective, and thus if
CenterPoint Houston or one of its affiliates were to become a debtor in a
bankruptcy case, a court might order that our assets and liabilities be
consolidated with those of CenterPoint Houston or such affiliate. This might
cause material delays in payment of, or losses on, the transition bonds and
might materially reduce the value of the transition bonds. For
example:
  
 
 •
              
              without
      permission from the bankruptcy court, the trustee might be prevented from
      taking actions against CenterPoint Houston or recovering or using funds on
      behalf of bondholders or replacing CenterPoint Houston as the
      servicer;•
              
              the
      bankruptcy court might order the trustee to exchange the transition
      property for other property, of lower value;•
              
              tax
      or other government liens on CenterPoint Houston’s property might have
      priority over the trustee’s lien and might be paid from collected
      transition charges before payments on the transition
  bonds;•
              
              the
      trustee’s lien might not be properly perfected in the collected transition
      property collections prior to or as of the date of CenterPoint Houston’s
      bankruptcy, with the result that the transition bonds would represent only
      general unsecured claims against CenterPoint Houston;•
              
              the
      bankruptcy court might rule that neither our property interest nor the
      trustee’s lien extends to transition charges in respect of electricity
      consumed after the commencement of CenterPoint Houston’s bankruptcy case,
      with the result that the transition bonds would represent only general
      unsecured claims against CenterPoint Houston;•
              
              we
      and CenterPoint Houston might be relieved of any obligation to make any
      payments on the transition bonds during the pendency of the bankruptcy
      case and might be relieved of any obligation to pay interest accruing
      after the commencement of the bankruptcy case;•
              
              CenterPoint
      Houston might be able to alter the terms of the transition bonds as part
      of its plan of reorganization;•
              
              the
      bankruptcy court might rule that the transition charges should be used to
      pay, or that we should be charged for, a portion of the cost of providing
      electric service; or•
              
              the
      bankruptcy court might rule that the remedy provisions of the transition
      property sale agreement are unenforceable, leaving us with an unsecured
      claim for actual damages against CenterPoint Houston that may be difficult
      to prove or, if proven, to collect in
full.
 
 Furthermore, if CenterPoint Houston
enters bankruptcy proceedings, it might be permitted to stop acting as servicer
and it may be difficult to find a third party to act as servicer. The failure of
the servicer to perform its duties or the inability to find a successor servicer
might cause payment delays or losses on the transition bonds. Also, the mere
fact of a servicer or seller bankruptcy proceeding might have an adverse effect
on the resale market for the transition bonds and on the value of the transition
bonds.
 
 The
sale of the transition property might be construed as a financing and not a sale
in a case of CenterPoint Houston’s bankruptcy which might delay or limit
payments on the transition bonds.
 
 The Restructuring Act provides that the
characterization of a transfer of transition property as a sale or other
absolute transfer will not be affected or impaired by treatment of the transfer
as a financing for federal or state tax purposes or financial reporting
purposes. We and CenterPoint Houston treated the transaction as a sale under
applicable law, although for financial reporting and state income and franchise
tax purposes the transaction was intended to be treated as a financing. In the
event of a bankruptcy of CenterPoint Houston, a party in interest in the
bankruptcy might assert that the sale of the transition property to us was a
financing transaction and not a “sale or other absolute transfer” and that the
treatment of the transaction for financial reporting and tax purposes as a
financing and not a sale lends weight to that position. If a court were to
characterize the transaction as a financing, we expect that we would, on behalf
of ourselves and the trustee, be treated as a secured creditor of CenterPoint
Houston in the bankruptcy proceedings, although a court might determine that we
only have an unsecured claim against CenterPoint Houston. See “—The servicer
will commingle the transition charges with other revenues it collects, which
might obstruct access to the transition charges in case of the servicer’s
bankruptcy and reduce the value of the transition bonds” above. Even if we had a
security interest in the transition property, we would not likely have access to
the related transition charge collections during the bankruptcy and would be
subject to the risks
  
  of a
secured creditor in a bankruptcy case, including the possible bankruptcy risks
described in the immediately preceding risk factor. As a result, repayment of
the transition bonds might be significantly delayed and a plan of reorganization
in the bankruptcy might permanently modify the amount and timing of payments to
us of the related transition charge collections and therefore the amount and
timing of funds available to us to pay bondholders.
 
 If
the servicer enters bankruptcy proceedings, the collections of the transition
charges held by the servicer as of the date of bankruptcy might constitute
preferences, which means these funds might be unavailable to pay amounts owing
on the transition bonds.
 
 In the event of a bankruptcy of the
servicer, a party in interest might take the position that the remittance of
funds prior to bankruptcy of the servicer, pursuant to the servicing agreement
or intercreditor agreement, constitutes a preference under bankruptcy law if the
remittance of those funds was deemed to be paid on account of a
pre-existing debt. If a court were to hold that the remittance of funds
constitutes a preference, any such remittance within 90 days of the filing
of the bankruptcy petition could be avoidable, and the funds could be required
to be returned to the bankruptcy estate of the servicer. To the extent that
transition charges have been commingled with the general funds of the servicer,
the risk that a court would hold that a remittance of funds was a preference
would increase. Also, we or the servicer may be considered an “insider” with any
REP that is affiliated with us or the servicer. If the servicer or we are
considered to be an “insider” of the REP, any such remittance made within one
year of the filing of the bankruptcy petition could be avoidable as well if the
court were to hold that such remittance constitutes a preference. In either
case, we or the trustee would merely be an unsecured creditor of the
servicer.
 
 Claims
against CenterPoint Houston might be limited in the event of its
bankruptcy.
 
 If CenterPoint Houston were to become a
debtor in a bankruptcy case, claims, including indemnity claims, by us against
it, as seller, under the transition property sale agreement and the other
documents executed in connection with the transition property sale agreement
would be unsecured claims and would be disposed of in the bankruptcy case. In
addition, the bankruptcy court might estimate any contingent claims that we have
against the seller and, if it determines that the contingency giving rise to
these claims is unlikely to occur, estimate the claims at a lower amount. A
party in interest in the bankruptcy of the seller might challenge the
enforceability of the indemnity provisions in the transition property sale
agreement. If a court were to hold that the indemnity provisions were
unenforceable, we would be left with a claim for actual damages against the
seller based on breach of contract principles, which would be subject to
estimation and/or calculation by the court. We cannot give any assurance as to
the result if any of the above-described actions or claims were made.
Furthermore, we cannot give any assurance as to what percentage of their claims,
if any, unsecured creditors would receive in any bankruptcy proceeding involving
the seller.
 
 The
bankruptcy of CenterPoint Houston might limit the remedies available to the
trustee.
 
 Upon an event of default under the
indenture, the Restructuring Act permits the trustee to enforce the security
interest in the transition property in accordance with the terms of the
indenture. In this capacity, the trustee is permitted to request the Texas
Utility Commission or a Travis County, Texas district court to order the
sequestration and payment to bondholders of all revenues arising with respect to
the transition property. There can be no assurance, however, that the Texas
Utility Commission or the Travis County, Texas district court would issue this
order after a CenterPoint Houston bankruptcy in light of the automatic stay
provisions of Section 362 of the United States Bankruptcy Code. In that
event, the trustee would be required to seek an order from the bankruptcy court
lifting the automatic stay to permit this action by the Texas court, and an
order requiring an accounting and segregation of the revenues arising from the
transition property. There can be no assurance that a court would grant either
order.
 
 Risks
Associated with Potential Bankruptcy Proceedings of REPs
 
 REPs
may commingle the transition charges with other revenues they collect. This may
cause losses on or reduce the value of the transition bonds in the event a REP
enters bankruptcy proceedings.
 
 A REP is not required to segregate from
its general funds the transition charges it collects but is required to remit to
the servicer amounts billed to it for transition charges, less an amount
relating to expected customer charge-
  
  offs,
within 35 days of the billing by the servicer. A REP nevertheless might
fail to remit the full amount of the transition charges owed to the servicer or
might fail to do so on a timely basis. This failure, whether voluntary or
involuntary, might materially reduce the amount of transition charge collections
available on the next payment date to make timely payments on the transition
bonds.
 
 The Restructuring Act provides that our
rights to the transition property are not affected by the commingling of these
funds with other funds. In a bankruptcy of a REP, however, a bankruptcy court
might rule that federal bankruptcy law takes precedence over the Restructuring
Act and does not recognize our right to receive the collected transition charges
that are commingled with other funds of a REP as of the date of bankruptcy. If
so, the collections of the transition charges held by a REP as of the date of
bankruptcy would not be available to pay amounts owing on the transition bonds.
In this case, we would have only a general unsecured claim against the REP for
those amounts. This decision might cause material delays in payments of
principal or interest or losses on the transition bonds and could materially
reduce the value of the transition bonds, particularly if it occurred in the
fifteenth year of the transition bonds after the completion of which no
transition charges can be charged.
 
 If
a REP enters bankruptcy proceedings, any cash deposit of the REP held by the
trustee might not be available to cover amounts owed by the REP.
 
 If a REP does not have the credit
rating required by the financing order, it may nevertheless qualify to act as a
REP if, among other alternatives, it provides a cash deposit equal to two
months’ maximum expected transition charge collections. That cash deposit will
be held by the trustee under the indenture. However, it is unclear whether the
Restructuring Act creates a lien on the cash deposit in favor of the trustee. If
the REP becomes bankrupt, the trustee would be stayed from applying that cash
deposit to cover amounts owed by the REP, and the trustee might be required to
return that cash deposit to the REP’s bankruptcy estate if the bankruptcy court
determines there is no valid right of set-off or recoupment. In that case, the
issuer might only have an unsecured claim for any amounts owed by the REP in the
REP’s bankruptcy proceedings. Several REPs with which CenterPoint Houston has
done business have filed for bankruptcy. CenterPoint Houston, as servicer of the
transition bonds, was able to recover the full amount or a substantial majority
of the transition charges from cash deposits or a combination of cash deposits
and payments from these REPs, but there is no assurance that CenterPoint Houston
will be able to recover such amounts from any bankrupt REPs in the
future.
 
 If
a REP enters bankruptcy proceedings, transition charge payments made by that REP
to the servicer might constitute preferences, and the servicer may be required
to return such funds to the bankruptcy estate of the REP.
 
 In the event of a bankruptcy of a REP,
a party in interest might take the position that the remittance of funds by the
REP to the servicer, pursuant to the financing order, prior to bankruptcy
constitutes a preference under bankruptcy law if the remittance of those funds
was deemed to be paid on account of a pre-existing debt. If a court were to hold
that the remittance of funds constitutes preferences, any remittance of such
funds made within 90 days of the filing of the bankruptcy petition might be
avoidable, and the funds might be required to be returned to the bankruptcy
estate of the REP by us or the servicer. To the extent that transition charges
have been commingled with the general funds of the REP, the risk that a court
would hold that a remittance of funds was a preference would increase. Also, we
or the servicer might be considered an “insider” with any REP that is affiliated
with us or the servicer. If the servicer or we are considered to be an “insider”
of the REP, any such remittance made within one year of the filing of the
bankruptcy petition could be avoidable as well if the court were to hold that
such remittance constitutes a preference. In either case, we or the servicer
would merely be an unsecured creditor of the REP.
 
 Furthermore, the mere fact of a REP
bankruptcy proceeding could have an adverse effect on the resale market for the
transition bonds and on the value of the transition bonds.
 
 Other
Risks Associated with an Investment in the Transition Bonds
 
 We
may incur expenses in excess of caps on such expenses provided in the financing
order.
 
 Under the financing order, transition
charges may not be imposed for certain of our ongoing expenses to the extent
they exceed caps provided in the financing order for such amounts. In addition,
our other assets, substantially all of which are pledged to the trustee under
the indenture, may not be used by the trustee to pay such
  
  excess
amounts. Examples of these caps include payment of specified fees and expenses
of the trustee and the servicer and other specified operating expenses. We
cannot be sure that we will not incur expenses for these purposes in excess of
the cap levels and, if this were to occur, we would not have funds to make
payments for these excess amounts. Creditors of ours which are owed these
amounts and not paid may obtain judgment liens against our assets or seek to
place us in bankruptcy.
 
 CenterPoint
Houston’s indemnification obligations under the transition property sale and
servicing agreements are limited and might not be sufficient to protect the
value of the transition bonds.
 
 CenterPoint Houston is obligated under
the transition property sale agreement to indemnify us and the trustee, for
itself and on behalf of the bondholders, only in specified circumstances and
will not be obligated to repurchase the transition property in the event of a
breach of any of its representations, warranties or covenants regarding the
transition property. Similarly, CenterPoint Houston is obligated under the
transition property servicing agreement to indemnify us, the trustee, for itself
and on behalf of the bondholders, and the Texas Utility Commission only in
specified circumstances.
 
 Neither the trustee nor the bondholders
have the right to accelerate payments on the transition bonds as a result of a
breach under the transition property sale agreement or the transition property
servicing agreement, absent an event of default under the indenture.
Furthermore, CenterPoint Houston might not have sufficient funds available to
satisfy its indemnification obligations under these agreements, and the amount
of any indemnification paid by CenterPoint Houston might not be sufficient for
bondholders to recover all of their investment in the transition bonds. In
addition, if CenterPoint Houston becomes obligated to indemnify bondholders, the
ratings on the transition bonds will likely be downgraded as a result of the
circumstances causing the breach and the fact that bondholders will be unsecured
creditors of CenterPoint Houston with respect to any of these indemnification
amounts.
 
 CenterPoint
Houston’s ratings might affect the market value of the transition
bonds.
 
 A downgrading of the credit ratings on
the debt of CenterPoint Houston might have an adverse effect on the market value
of the transition bonds.
 
 Alternatives
to purchasing electricity through CenterPoint Houston’s distribution facilities
may be more widely utilized by retail electric customers in the
future.
 
 Broader use of distributed generation
by retail electric customers may result from customers’ changing perceptions of
the merits of utilizing existing generation technology or from technological
developments resulting in smaller-scale, more fuel efficient, more
environmentally friendly and/or more cost effective distributed generation.
Electric customers within CenterPoint Houston’s service territory whose load is
served by an on-site power production facility with a rated capacity of 10
megawatts or less are not required to pay transition charges under the
Restructuring Act except for transition charges associated with services
actually provided by the transmission and distribution utility. Therefore, more
widespread use of distributed generation might allow greater numbers of retail
customers to reduce or eliminate their payment of transition charges causing
transition charges to remaining customers to increase.
 
 Bondholders
might receive principal payments on the transition bonds later than
expected.
 
 The amount and the rate of collection
of the transition charges, together with the related transition charge
adjustments, will generally determine whether there is a delay in the scheduled
repayments of transition bond principal. If the servicer collects the transition
charges at a slower rate than expected from any REP, it might have to request
adjustments of the transition charges. If those adjustments are not timely and
accurate, bondholders might experience a delay in payments of principal and
interest and a decrease in the value of the transition bonds.