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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

<Table>
<C>        <S>
(Mark One)
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                  OR


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

           FOR THE TRANSITION PERIOD FROM           TO
</Table>

                         COMMISSION FILE NUMBER 1-13265

                       CENTERPOINT ENERGY RESOURCES CORP.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      76-0511406
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)

                1111 LOUISIANA
             HOUSTON, TEXAS 77002                              (713) 207-1111
      (Address and zip code of principal              (Registrant's telephone number,
              executive offices)                            including area code)
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
  NorAm Financing I 6 1/4% Convertible Trust
       Originated Preferred Securities                    New York Stock Exchange
  6% Convertible Subordinated Debentures due              New York Stock Exchange
                      2012
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      NONE

     CENTERPOINT ENERGY RESOURCES CORP. MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION I(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS
FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

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

     The aggregate market value of the common equity held by non-affiliates as
of June 28, 2002: None
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<PAGE>

                               TABLE OF CONTENTS

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<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   11
Item 3.   Legal Proceedings...........................................   12
Item 4.   Submission of Matters to a Vote of Security Holders.........   12

                                  PART II
Item 5.   Market for Common Stock and Related Stockholder Matters.....   12
Item 6.   Selected Financial Data.....................................   12
Item 7.   Management's Narrative Analysis of Results of Operations....   12
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   24
Item 8.   Financial Statements and Supplementary Data.................   27
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   61

                                  PART III
Item 10.  Directors and Executive Officers............................   61
Item 11.  Executive Compensation......................................   61
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management and Related Stockholder Matters..................   61
Item 13.  Certain Relationships and Related Transactions..............   61

                                  PART IV
Item 14.  Controls and Procedures.....................................   61
Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................   62
</Table>

                                        i
<PAGE>

     We meet the conditions specified in General Instruction I(1)(a) and (b) to
Form 10-K and are thereby permitted to use the reduced disclosure format for
wholly owned subsidiaries of reporting companies specified therein. Accordingly,
we have omitted from this report the information called for by Item 4
(Submission of Matters to a Vote of Security Holders), Item 10 (Directors and
Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12
(Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters) and Item 13 (Certain Relationships and Related Party
Transactions) of Form 10-K. In lieu of the information called for by Item 6
(Selected Financial Data) and Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of Form 10-K, we have included
under Item 7 a Management's Narrative Analysis of the Results of Operations to
explain material changes in the amount of revenue and expense items between
2000, 2001 and 2002.

           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. You can generally identify
our forward-looking statements by the words "anticipate," "believe," "continue,"
"could," "estimate," "expect," "intend," "may," "plan," "potential," "predict,"
"should," "will," "forecast," "goal," "objective," "projection," or other
similar words.

     We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.

     Some of the factors that could cause actual results to differ from those
expressed or implied by our forward-looking statements are described under "Risk
Factors" beginning on page 8 of this report.

     You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.

                                        ii
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

                                  OUR BUSINESS

GENERAL

     We own gas distribution systems that together form one of the United
States' largest natural gas distribution operations in terms of the number of
customers served. Through wholly owned subsidiaries, we own two interstate
natural gas pipelines and gathering systems and provide pipeline services. We
are a Delaware corporation, incorporated in 1996, formerly named Reliant Energy
Resources Corp. (RERC Corp.). In this report, we refer to CenterPoint Energy
Resources Corp. as "CERC Corp." and to CERC Corp. and its subsidiaries as
"CERC", "we", "our," or "us," unless the context clearly indicates otherwise. We
are an indirect wholly owned subsidiary of CenterPoint Energy, Inc., a public
utility holding company, created on August 31, 2002 as part of the corporate
restructuring of Reliant Energy, Incorporated (Reliant Energy). In this report,
we refer to CenterPoint Energy, Inc. as "CenterPoint Energy," unless the context
clearly indicates otherwise. Our executive offices are located at 1111
Louisiana, Houston, TX 77002 (telephone number 713-207-1111).

     We conduct our operations primarily in the natural gas industry. We conduct
our operations through our Natural Gas Distribution, Pipelines and Gathering and
Other Operations business segments.

THE RESTRUCTURING

     Reliant Energy completed the separation of the generation, transmission and
distribution, and retail sales functions of its Texas electric operations
pursuant to the following steps, which occurred on August 31, 2002 (the
Restructuring):

     - CenterPoint Energy became the holding company for the Reliant Energy
       group of companies;

     - Reliant Energy and its subsidiaries, including us, became subsidiaries of
       CenterPoint Energy; and

     - each share of Reliant Energy common stock was converted into one share of
       CenterPoint Energy common stock.

     After the Restructuring, CenterPoint Energy distributed to its shareholders
the shares of common stock of Reliant Resources, Inc. (Reliant Resources) that
it owned (the Distribution) in a tax-free transaction.

     Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, transactions among affiliates, sales or acquisitions of
assets, issuances of securities, distributions and permitted lines of business.

     In 2002, we obtained authority from each state in which such authority was
required to restructure in a manner that would allow CenterPoint Energy to claim
an exemption from registration under the 1935 Act. CenterPoint Energy has
concluded that a restructuring would not be beneficial and has elected to remain
a registered holding company under the 1935 Act.

     For additional information regarding the Restructuring and the
Distribution, please read Note 2 to our consolidated financial statements.

                            NATURAL GAS DISTRIBUTION

     Our Natural Gas Distribution business segment engages in intrastate natural
gas sales to, and natural gas transportation for, residential, commercial and
industrial customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas and some non-rate regulated retail gas marketing operations. We
currently

                                        1
<PAGE>

conduct intrastate natural gas sales to, and natural gas transportation for,
residential, commercial and industrial customers through three unincorporated
divisions: CenterPoint Energy Arkla (Arkla), CenterPoint Energy Entex (Entex)
and CenterPoint Energy Minnegasco (Minnegasco). These operations are regulated
as natural gas utility operations in the jurisdictions served by these
divisions.

     - Arkla.  Arkla provides natural gas distribution services in over 245
       communities in Arkansas, Louisiana, Oklahoma and Texas. The largest
       metropolitan areas served by Arkla are Little Rock, Arkansas and
       Shreveport, Louisiana. In 2002, approximately 65% of Arkla's total
       throughput was attributable to retail sales of natural gas and
       approximately 35% was attributable to transportation services.

     - Entex.  Entex provides natural gas distribution services in over 500
       communities in Louisiana, Mississippi and Texas. The largest metropolitan
       area served by Entex is Houston. In 2002, approximately 95% of Entex's
       total throughput was attributable to retail sales of natural gas and
       approximately 5% was attributable to transportation services.

     - Minnegasco.  Minnegasco provides natural gas distribution services in
       over 240 communities in Minnesota. The largest metropolitan area served
       by Minnegasco is Minneapolis. In 2002, approximately 93% of Minnegasco's
       total throughput was attributable to retail sales of natural gas and
       approximately 7% was attributable to transportation services.
       Additionally, Minnegasco provides heating, ventilating and air
       conditioning (HVAC) equipment and appliance repair services, HVAC and
       hearth equipment sales and home security monitoring which are unregulated
       services.

     The demand for intrastate natural gas sales to, and natural gas
transportation for, residential, commercial and industrial customers is
seasonal. In 2002, approximately 60% of the total throughput of our natural gas
distribution business occurred in the first and fourth quarters. These patterns
reflect the higher demand for natural gas for heating purposes during those
periods.

COMMERCIAL AND INDUSTRIAL SALES

     Our commercial and industrial sales group (C&I group) provides
comprehensive natural gas products and services to commercial and industrial
customers in the Gulf Coast and Midwestern regions of the United States. Most
services provided by the C&I group are not subject to rate regulation.
Subsidiaries making up the C&I group typically enter into fixed-volume forward
sales commitments with customers with contract lengths typically ranging from
one day to three years. Such sales are generally made on a monthly index price
basis, but are also made on daily index and fixed price bases. In the case of
fixed price commitments for delivery in future periods, the C&I group is exposed
to risks resulting from changes in market prices of natural gas during the term
of the contract. The C&I group engages in hedging activities with unaffiliated
third parties in order to mitigate this risk. In 2002, approximately 94% of the
C&I group's total throughput was attributable to natural gas sales; the
remainder was attributable to transportation services that the C&I group
provides for affiliates and third parties. For more information on the C&I
group's derivative instruments and hedging activities, please read "Quantitative
and Qualitative Disclosures About Market Risk -- Commodity Price Risk From
Non-Trading Activities" in Item 7A of this report and Note 5 to our consolidated
financial statements.

SUPPLY AND TRANSPORTATION

     Arkla.  In 2002, Arkla purchased approximately 56% of its natural gas
supply pursuant to third-party term contracts with terms ranging from three
months to one year, 29% of its natural gas supply from Reliant Energy Services,
Inc. (Reliant Energy Services), a subsidiary of Reliant Resources and our former
affiliate, under a contract expiring in March 2003 and 15% on the spot market.
Arkla's major third-party natural gas suppliers in 2002 included Oneok Gas
Marketing Company, BP Energy Company, Aquila Energy Marketing and Cross Timbers
Energy Services. Arkla transports substantially all of its natural gas supplies
under contracts with our pipeline subsidiaries.

     Entex.  In 2002, Entex purchased virtually all of its natural gas supply
pursuant to term contracts, with terms varying from one to five years. Entex's
major third-party natural gas suppliers in 2002 included AEP

                                        2
<PAGE>

Gas Marketing, Kinder Morgan Texas Pipeline, L.P., Gulf Energy Marketing, Island
Fuel Trading and Entergy Koch Trading. Entex transports its natural gas supplies
on both interstate and intrastate pipelines under long-term contracts with terms
varying from one to five years.

     Minnegasco.  In 2002, Minnegasco purchased approximately 74% of its natural
gas supply pursuant to term contracts, with terms varying from five months to
ten years, with more than 20 different suppliers. Minnegasco purchased the
remaining 26% on the daily or spot market. Most of the natural gas volumes under
long-term contracts are committed under terms providing for delivery during the
winter heating season, which extends from November through March. Minnegasco
purchased approximately 60% of its natural gas requirements from three
third-party suppliers in 2002: Tenaska Marketing Ventures, BP Canada Energy
Marketing and Mirant Americas Energy Marketing. Purchases from Reliant Energy
Services represented 10% of Minnegasco's total natural gas purchases in 2002.
Minnegasco transports its natural gas supplies through various interstate
pipelines under long-term contracts with terms varying from one to five years.

     Generally, the regulations of the states in which our natural gas
distribution business operates allow us to pass through changes in the costs of
natural gas to our customers through purchased gas adjustment provisions in our
tariffs. There is, however, a timing difference between our purchases of natural
gas and the ultimate recovery of these costs. Consequently, we may incur
carrying costs as a result of this timing difference that are not recoverable
from our customers.

     Arkla and Minnegasco use various leased or owned natural gas storage
facilities to meet peak-day requirements and to manage the daily changes in
demand due to changes in weather. Minnegasco also supplements contracted
supplies and storage from time to time with stored liquefied natural gas and
propane-air plant production.

     Minnegasco owns and operates an underground storage facility with a
capacity of 7.0 billion cubic feet (Bcf). It has a working capacity of 2.1 Bcf
available for use during a normal heating season and a maximum daily withdrawal
rate of 50 million cubic feet (MMcf). Minnegasco also owns nine propane-air
plants with a total capacity of 204 MMcf per day and on-site storage facilities
for 12 million gallons of propane (1.0 Bcf gas equivalent). Minnegasco owns a
liquefied natural gas facility with a 12 million-gallon liquefied natural gas
storage tank (1.0 Bcf gas equivalent) and a send-out capability of 72 MMcf per
day.

     Although available natural gas supplies have exceeded demand for several
years, currently supply and demand appear to be more balanced. We have
sufficient supplies and pipeline capacity under contract to meet our firm
customer requirements. However, from time to time, it is possible for limited
service disruptions to occur due to weather conditions, transportation
constraints and other events. As a result of these factors, supplies of natural
gas may become unavailable from time to time or prices may increase rapidly in
response to temporary supply constraints or other factors.

ASSETS

     As of December 31, 2002, we owned approximately 61,000 linear miles of gas
distribution mains, varying in size from one-half inch to 24 inches in diameter.
Generally, in each of the cities, towns and rural areas served by us, we own the
underground gas mains and service lines, metering and regulating equipment
located on customers' premises and the district regulating equipment necessary
for pressure maintenance. With a few exceptions, the measuring stations at which
we receive gas are owned, operated and maintained by others, and our
distribution facilities begin at the outlet of the measuring equipment. These
facilities, including odorizing equipment, are usually located on the land owned
by suppliers.

COMPETITION

     We compete primarily with alternate energy sources such as electricity and
other fuel sources. In some areas, intrastate pipelines, other gas distributors
and marketers also compete directly for gas sales to end-users. In addition, as
a result of federal regulatory changes affecting interstate pipelines, natural
gas marketers operating on these pipelines may be able to bypass our facilities
and markets and sell and/or transport natural gas directly to commercial and
industrial customers.

                                        3
<PAGE>

                            PIPELINES AND GATHERING

     Our Pipelines and Gathering business segment operates two interstate
natural gas pipelines as well as gas gathering facilities and also provides
pipeline services. Our pipeline operations are primarily conducted by two wholly
owned interstate pipeline subsidiaries which provide gas transportation and
storage services primarily to industrial customers and local distribution
companies. Our gathering and pipeline services operations are conducted by a
wholly owned gas gathering subsidiary and a wholly owned pipeline services
subsidiary. Through our gas gathering subsidiary, we provide natural gas
gathering and related services, including related liquids extraction and other
well operating services. Through our pipeline services subsidiary, we provide
pipeline project management and facility operation services to affiliates and
third parties.

     In 2002, approximately 27% of our total operating revenues from pipelines
and gathering was attributable to services provided to Arkla, and approximately
11% was attributable to services to Laclede Gas Company (Laclede), an
unaffiliated distribution company that provides natural gas utility service to
the greater St. Louis metropolitan area in Illinois and Missouri. An additional
8% of our operating revenues from pipelines and gathering was attributable to
the transportation of gas marketed by Reliant Energy Services. Services to Arkla
and Laclede are provided under several long-term firm storage and transportation
agreements. Contracts for firm transportation in Arkla's major service areas are
currently scheduled to expire in 2005. An agreement to extend the existing
service relationship with Laclede for a five-year period was entered into in
February 2002.

     Our pipelines and gathering business operations may be affected by changes
in the demand for natural gas, the available supply and relative price of
natural gas in the Midcontinent and Gulf Coast natural gas supply regions and
general economic conditions.

ASSETS

     We own and operate approximately 8,200 miles of gas transmission lines
primarily located in Missouri, Illinois, Arkansas, Louisiana, Oklahoma and
Texas. We also own and operate six natural gas storage fields with a combined
daily deliverability of approximately 1.2 Bcf and a combined working gas
capacity of approximately 64.3 Bcf. We also own a 10% interest, with Gulf South
Pipeline Company, LP, in the Bistineau storage facility with 73.8 Bcf of working
gas capacity and approximately 1.1 Bcf per day of deliverability. Our storage
capacity in the Bistineau facility is 8 Bcf of working gas with 100 MMcf per day
of deliverability. Most of our storage operations are in north Louisiana and
Oklahoma. We also own and operate approximately 4,300 miles of gathering
pipelines that collect gas from more than 300 separate systems located in major
producing fields in Arkansas, Louisiana, Oklahoma and Texas.

COMPETITION

     Our pipelines and gathering business competes with other interstate and
intrastate pipelines and gathering companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service, and flexibility and reliability of service. Our pipelines and
gathering business competes indirectly with other forms of energy available to
its customers, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability of energy and pipeline
capacity, the level of business activity, conservation and governmental
regulations, the capability to convert to alternative fuels, and other factors,
including weather, affect the demand for natural gas in areas we serve and the
level of competition for transportation and storage services. In addition,
competition for our gathering operations is impacted by commodity pricing levels
because of their influence on the level of drilling activity.

                                        4
<PAGE>

                                OTHER OPERATIONS

     In 2002, Other Operations included unallocated corporate costs and
inter-segment eliminations.

                                   REGULATION

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

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

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

     Prior to the Restructuring, CenterPoint Energy and Reliant Energy obtained
an order from the SEC that authorized the Restructuring transactions, including
the Distribution, and granted CenterPoint Energy certain authority with respect
to system financing, dividends and other matters. The financing authority
granted by that order will expire on June 30, 2003, and CenterPoint Energy must
obtain a further order from the SEC under the 1935 Act, related, among other
things, to the financing activities of CenterPoint Energy and its subsidiaries,
including us, subsequent to June 30, 2003.

     In a July 2002 order, the SEC limited the aggregate amount of our external
borrowings to $2.7 billion. Our ability to pay dividends is restricted by the
SEC's requirement that common equity as a percentage of total capitalization
must be at least 30% after the payment of any dividend. In addition, the order
restricts our ability to pay dividends out of capital accounts to the extent
current or retained earnings are insufficient for those dividends. Under these
restrictions, we are permitted to pay dividends in excess of our current or
retained earnings in an amount up to $100 million.

     In 2002, we obtained authority from each state in which such authority was
required to restructure in a manner that would allow CenterPoint Energy to claim
an exemption from registration under the 1935 Act. CenterPoint Energy has
concluded that a restructuring would not be beneficial and has elected to remain
a registered holding company under the 1935 Act.

FEDERAL ENERGY REGULATORY COMMISSION

     The transportation and sale or resale of natural gas in interstate commerce
is subject to regulation by the Federal Energy Regulatory Commission (FERC)
under the Natural Gas Act and the Natural Gas Policy Act of 1978, as amended.
The FERC has jurisdiction over, among other things, the construction of pipeline
and related facilities used in the transportation and storage of natural gas in
interstate commerce, including the extension, expansion or abandonment of these
facilities. The rates charged by interstate pipelines for interstate
transportation and storage services are also regulated by the FERC.

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

     In February 2000, the FERC issued Order No. 637, which introduced several
measures to increase competition for interstate pipeline transportation
services. Order No. 637 authorizes interstate pipelines to propose
term-differentiated and peak/off-peak rates, and requires pipelines to make
tariff filings to expand pipeline service options for customers. Both of our
natural gas pipeline subsidiaries made two Order No. 637
                                        5
<PAGE>

compliance filings in 2000, and both obtained uncontested settlements filed with
the FERC in 2001. In 2002, the FERC issued orders accepting both settlements,
subject to certain modifications. The FERC has denied requests for rehearing and
clarification of the orders and has accepted, with modification, the compliance
tariff filed under one of the orders and ordered additional revised tariff
sheets to be filed under the other order.

STATE AND LOCAL REGULATION

     In almost all communities in which we provide natural gas distribution
services, we operate under franchises, certificates or licenses obtained from
state and local authorities. The terms of the franchises, with various
expiration dates, typically range from 10 to 30 years. None of our material
franchises expires before 2005. We expect to be able to renew expiring
franchises. In most cases, franchises to provide natural gas utility services
are not exclusive.

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

     Arkansas Rate Case.  In November 2001, Arkla filed a rate request in
Arkansas seeking rates to yield approximately $47 million in additional annual
gross revenue. In August 2002, a settlement was approved by the Arkansas Public
Service Commission (APSC) which is expected to result in an increase in base
rates of approximately $32 million annually. In addition, the APSC approved a
gas main replacement surcharge which is expected to provide $2 million of
additional gross revenue in 2003 and additional amounts in subsequent years. The
new rates included in the final settlement were effective with all bills
rendered on and after September 21, 2002.

     Oklahoma Rate Case.  In May 2002, Arkla filed a request in Oklahoma to
increase its base rates by $13.7 million annually. In December 2002, a
settlement was approved by the Oklahoma Corporation Commission which is expected
to result in an increase in base rates of approximately $7.3 million annually.
The new rates included in the final settlement were effective with all bills
rendered on and after December 29, 2002.

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

DEPARTMENT OF TRANSPORTATION

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

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

                                        6
<PAGE>

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

                             ENVIRONMENTAL MATTERS

GENERAL ENVIRONMENTAL ISSUES

     We are subject to numerous federal, state and local requirements relating
to the protection of the environment and the safety and health of personnel and
the public. These requirements relate to a broad range of our activities,
including: the discharge of pollutants into water and soil; the proper handling
of solid, hazardous, and toxic materials; and waste, noise, and safety and
health standards applicable to the workplace. In order to comply with these
requirements, we will spend substantial amounts from time to time to construct,
modify and retrofit equipment, and to clean up or decommission disposal or fuel
storage areas and other locations as necessary.

     Our facilities are subject to state and federal laws and regulations
governing the discharge of pollutants into the air and waterways. In many cases
we must obtain permits or other governmental authorizations that prescribe the
parameters for discharges from our facilities. There are ongoing efforts to
modify standards relating to both the discharge of pollutants into streams and
waterways and to air quality. These efforts may result in more restrictive
regulations and permit terms applicable to our facilities in the future.

     We anticipate no significant capital and other special project expenditures
between 2002 and 2006 for environmental compliance. If we do not comply with
environmental requirements that apply to our operations, regulatory agencies
could seek to impose on us civil, administrative and/or criminal liabilities as
well as seek to curtail our operations. Under some statutes, private parties
could also seek to impose civil fines or liabilities for property damage,
personal injury and possibly other costs.

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

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

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

     We are not aware of any liabilities under CERCLA that would have a material
adverse effect on us, our financial position, results of operations or cash
flows.

LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION

     Manufactured Gas Plant Sites.  We and our predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in our Minnesota service territory, two of which we
believe were neither owned nor operated by us, and for which we believe we have
no liability.

     At December 31, 2002, we had accrued $19 million for remediation of the
Minnesota sites. At December 31, 2002, the estimated range of possible
remediation costs was $8 million to $44 million based on remediation continuing
for 30 to 50 years. The cost estimates are based on studies of a site or
industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites to be remediated,
the participation of other potentially responsible parties (PRP), if any, and
the remediation methods used. We have an environmental expense tracker mechanism
in our rates in Minnesota. We have collected $12 million at December 31, 2002 to
be used for future environmental remediation.

                                        7
<PAGE>

     We have received notices from the United States Environmental Protection
Agency and others regarding our status as a PRP for sites in other states. Based
on current information, we have not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

     Hydrocarbon Contamination.  In August 2001, a number of Louisiana residents
who live near the Wilcox Aquifer filed suit in the 1st Judicial District Court,
Caddo Parish, Louisiana against us and others. The suit alleges that we and the
other defendants allowed or caused hydrocarbon or chemical contamination of the
Wilcox Aquifer, which lies beneath property owned or leased by the defendants
and is the sole or primary drinking water aquifer in the area. The monetary
damages sought are unspecified. In April 2002, a separate suit with identical
allegations against the same parties was filed in the same court. Additionally
in January 2003, a third suit with similar allegations was filed against the
same parties in the 26th Judicial Court, Bossier Parish, Louisiana.

     Mercury Contamination.  Like similar companies, our pipeline and natural
gas distribution operations have in the past employed elemental mercury in
measuring and regulating equipment. It is possible that small amounts of mercury
may have been spilled in the course of normal maintenance and replacement
operations and that these spills may have contaminated the immediate area around
the meters with elemental mercury. We have found this type of contamination in
the past, and we have conducted remediation at sites found to be contaminated.
Although we are not aware of additional specific sites, it is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on our experience and that of others in the natural gas
industry to date and on the current regulations regarding remediation of these
sites, we believe that the cost of any remediation of these sites will not be
material to our financial position, results of operations or cash flows.

                                   EMPLOYEES

     As of December 31, 2002, we had 5,428 full-time employees. The following
table sets forth the number of our employees by business segment as of December
31, 2002:

<Table>
<Caption>
BUSINESS SEGMENT                                               NUMBER
----------------                                               ------
<S>                                                            <C>
Natural Gas Distribution....................................   4,797
Pipelines and Gathering.....................................     631
                                                               -----
  Total.....................................................   5,428
                                                               =====
</Table>

     As of December 31, 2002, 1,552 employees in the Natural Gas Distribution
business segment were represented by unions or other collective bargaining
groups. Collective bargaining agreements covering 261 employees in the Natural
Gas Distribution business segment expire in 2003.

                                  RISK FACTORS

RISKS RELATED TO OUR CORPORATE AND FINANCIAL STRUCTURE

  IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON REASONABLE TERMS, OUR ABILITY
  TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING INDEBTEDNESS COULD
  BE LIMITED.

     As a result of several recent events occurring in 2001 and 2002, including
the September 11, 2001 terrorist attacks, the bankruptcy of Enron Corp., the
downgrading of our credit rating and the credit ratings of several energy
companies and the unusual volatility in the U.S. financial markets, the
availability and cost of capital for our business have been adversely affected.
If we are unable to obtain affiliate or external financing on reasonable terms
to meet our future capital requirements on terms that are acceptable to us, our
financial condition and future results of operations could be materially
adversely affected. As of December 31, 2002, we had $2.3 billion of outstanding
indebtedness and trust preferred securities, including $850 million of debt that
must be refinanced in 2003. In addition, capital constraints impacting our
parent company's and our businesses over the next year may require our future
indebtedness to include terms that are more restrictive or

                                        8
<PAGE>

burdensome than those of our current indebtedness. These terms may negatively
impact our ability to operate our business. The success of our future financing
efforts may depend, at least in part, on:

     - general economic and capital market conditions;

     - credit availability from financial institutions and other lenders;

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

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

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

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

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

     - provisions of relevant tax and securities laws; and

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

     Our current credit ratings are discussed in "Management's Narrative
Analysis of Results of Operations -- Liquidity -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of this report. We cannot assure you that
these ratings will remain in effect for any given period of time or that one or
more of these ratings will not be lowered or withdrawn entirely by a rating
agency. We note that these credit ratings are not recommendations to buy, sell
or hold our securities. Each rating should be evaluated independently of any
other rating. Any future reduction or withdrawal of one or more of our credit
ratings could have a material adverse impact on our ability to access capital on
acceptable terms.

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

     Our ratings and credit may be impacted by CenterPoint Energy's credit
standing. CenterPoint Energy and its subsidiaries other than us have
approximately $293 million of debt, including capital leases, required to be
paid in 2003. We cannot assure you that CenterPoint Energy and its other
subsidiaries will be able to pay or refinance these amounts. If CenterPoint
Energy were to experience a deterioration in its credit standing or liquidity
difficulties, our access to credit and our ratings could be adversely affected.

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

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

     - our payment of dividends;

     - decisions on our financings and our capital raising activities;

     - mergers or other business combinations; and

     - our acquisition or disposition of assets.

     There are no contractual restrictions on our ability to pay dividends to
CenterPoint Energy. Our management could decide to increase our dividends to
CenterPoint Energy to support its cash needs. This could adversely affect our
liquidity. Under the 1935 Act, our ability to pay dividends is restricted by the
SEC's requirement that common equity as a percentage of total capitalization
must be at least 30% after the payment of any dividend. In addition, the order
restricts our ability to pay dividends out of capital accounts to the extent
current or retained earnings are insufficient for those dividends. Under these
restrictions, we are permitted to pay dividends in excess of the respective
current or retained earnings in an amount up to $100 million.

                                        9
<PAGE>

  IF CENTERPOINT ENERGY IS UNABLE TO OBTAIN AN EXTENSION OF ITS FINANCING ORDER
  UNDER THE 1935 ACT, WE WILL NOT BE ABLE TO ENGAGE IN FINANCING TRANSACTIONS
  AFTER JUNE 30, 2003.

     In connection with CenterPoint Energy's registration as a public utility
holding company under the 1935 Act, the SEC issued a financing order which
authorizes us to enter into a wide range of financing transactions. This
financing order expires on June 30, 2003. If CenterPoint Energy is unable to
obtain an extension of the financing order, we would generally be unable to
engage in any financing transactions, including the refinancing of existing
obligations after June 30, 2003.

RISK FACTORS AFFECTING THE RESULTS OF OUR BUSINESSES

 OUR NATURAL GAS DISTRIBUTION BUSINESS MUST COMPETE WITH ALTERNATIVE ENERGY
 SOURCES.

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

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

     We are subject to risk associated with upward price movements of natural
gas. High natural gas prices might affect our ability to collect balances due
from our customers and could create the potential for uncollectible accounts
expense to exceed the recoverable levels built into our tariff rates. In
addition, a sustained period of high natural gas prices could apply downward
demand pressure on natural gas consumers in our service territory.

 WE MAY INCUR CARRYING COSTS ASSOCIATED WITH PASSING THROUGH CHANGES IN THE
 COSTS OF NATURAL GAS.

     Generally, the regulations of the states in which we operate allow us to
pass through changes in the costs of natural gas to our customers through
purchased gas adjustment provisions in the applicable tariffs. There is,
however, a timing difference between our purchases of natural gas and the
ultimate recovery of these costs. Consequently, we may incur carrying costs as a
result of this timing difference that are not recoverable from our customers.
The failure to recover those additional carrying costs may have an adverse
effect on our results of operations, financial condition and cash flows.

 OUR PIPELINES AND GATHERING BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN THE
 TRANSPORTATION AND STORAGE OF NATURAL GAS AND INDIRECTLY WITH ALTERNATIVE FORMS
 OF ENERGY.

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

 IF WE FAIL TO EXTEND CONTRACTS WITH TWO OF OUR SIGNIFICANT INTERSTATE
 PIPELINES' CUSTOMERS, IT COULD HAVE AN ADVERSE IMPACT ON OUR OPERATIONS.

     Contracts with two of our interstate pipelines' significant customers,
Arkla and Laclede, are currently scheduled to expire in 2005 and 2007,
respectively. To the extent the pipelines are unable to extend these contracts
or the contracts are renegotiated at rates substantially different than the
rates provided in the current contracts, it could have an adverse effect on our
results of operations, financial condition and cash flows.

                                        10
<PAGE>

 OUR INTERSTATE PIPELINES ARE SUBJECT TO FLUCTUATIONS IN THE SUPPLY OF GAS.

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

  OUR REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

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

  OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT. INSUFFICIENT INSURANCE COVERAGE
  AND INCREASED INSURANCE COSTS COULD ADVERSELY IMPACT OUR RESULTS OF
  OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.

     We have insurance covering certain of our facilities, including property
damage insurance and public liability insurance in amounts that we consider
appropriate. Where we have such insurance policies in place, they are subject to
certain limits and deductibles and do not include business interruption
coverage. We cannot assure you that insurance coverage will be available in the
future on commercially reasonable terms or that the insurance proceeds received
for any loss of or any damage to any of our facilities will be sufficient to
restore the loss or damage without negative impact on our results of operations,
financial condition and cash flows. The costs of our insurance coverage have
increased significantly in recent months and may continue to increase in the
future.

 OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE BEYOND OUR
 CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR RELATED ACTS
 OF WAR.

     The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity may impact our results of operations and
financial condition in unpredictable ways. These actions could also result in
adverse changes in the insurance markets and disruptions of power and fuel
markets. In addition, our natural gas distribution and pipelines and gathering
facilities could be directly or indirectly harmed by future terrorist activity.
The occurrence or risk of occurrence of future terrorist attacks or related acts
of war could also adversely affect the United States economy. A lower level of
economic activity could result in a decline in energy consumption, which could
adversely affect our revenues and margins and limit our future growth prospects.
Also, these risks could cause instability in the financial markets and adversely
affect our ability to access capital.

ITEM 2.  PROPERTIES

CHARACTER OF OWNERSHIP

     We own our principal properties in fee. Also, most gas mains are located,
pursuant to easements and other rights, on public roads or on land owned by
others.

NATURAL GAS DISTRIBUTION

     For information regarding the properties of our Natural Gas Distribution
business segment, please read "Our Business -- Natural Gas Distribution" in Item
1 of this report, which information is incorporated herein by reference.

PIPELINES AND GATHERING

     For information regarding the properties of our Pipelines and Gathering
business segment, please read "Our Business -- Pipelines and Gathering" in Item
1 of this report, which information is incorporated herein by reference.

                                        11
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     For a brief descriptions of certain legal and regulatory proceedings
affecting us, see "Regulation" and "Environmental Matters" in Item 1 of this
report and Notes 10(c) and 10(d) to our consolidated financial statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The information called for by Item 4 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly-Owned
Subsidiaries).

                                    PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     All of the 1,000 outstanding shares of CERC Corp.'s common stock are held
by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy, Inc.

     Our ability to pay dividends is restricted by the SEC's requirement that
common equity as a percentage of total capitalization must be at least 30% after
the payment of any dividend. In addition, the order restricts our ability to pay
dividends out of capital accounts to the extent current or retained earnings are
insufficient for those dividends. Under these restrictions, we are permitted to
pay dividends in excess of the respective current or retained earnings in an
amount up to $100 million.

ITEM 6.  SELECTED FINANCIAL DATA

     The information called for by Item 6 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly-Owned
Subsidiaries).

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF
        CENTERPOINT ENERGY RESOURCES CORP. AND ITS CONSOLIDATED SUBSIDIARIES

     The following narrative analysis should be read in combination with our
consolidated financial statements and notes contained in Item 8 of this report.

     Because we are an indirect wholly owned subsidiary of CenterPoint Energy,
Inc. (CenterPoint Energy), our determination of reportable segments considers
the strategic operating units under which CenterPoint Energy manages sales,
allocates resources and assesses performance of various products and services to
wholesale or retail customers in differing regulatory environments. We have
identified the following reportable business segments: Natural Gas Distribution,
Pipelines and Gathering and Other Operations. Prior to 2001, we also conducted
business in the Wholesale Energy and European Energy business segments.
Wholesale Energy included wholesale energy trading, marketing, power origination
and risk management services in North America but excluded the operations of
Reliant Energy Power Generation, Inc., a wholly owned subsidiary of Reliant
Resources, Inc. (Reliant Resources) and formerly an indirect wholly owned
subsidiary of CenterPoint Energy's predecessor, Reliant Energy, Incorporated
(Reliant Energy). European Energy included the energy trading and marketing
operations initiated in the fourth quarter of 1999 in the Netherlands and other
countries in Europe but excluded Reliant Energy Power Generation Benelux N.V., a
Dutch power company.

     Reliant Energy completed the separation of the generation, transmission and
distribution, and retail sales functions of its Texas electric operations
pursuant to the following steps, which occurred on August 31, 2002 (the
Restructuring):

     - CenterPoint Energy became the holding company for the Reliant Energy
       group of companies;

     - Reliant Energy and its subsidiaries, including us, became subsidiaries of
       CenterPoint Energy; and

                                        12
<PAGE>

     - each share of Reliant Energy common stock was converted into one share of
       CenterPoint Energy common stock.

     After the Restructuring, CenterPoint Energy distributed to its shareholders
the shares of common stock of Reliant Resources that it owned (the Distribution)
in a tax-free transaction.

     Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, transactions among affiliates, sales or acquisitions of
assets, issuances of securities, distributions and permitted lines of business.

     In 2002, we obtained authority from each state in which such authority was
required to restructure in a manner that would allow CenterPoint Energy to claim
an exemption from registration under the 1935 Act. CenterPoint Energy has
concluded that a restructuring would not be beneficial and has elected to remain
a registered holding company under the 1935 Act.

     On December 31, 2000, CERC Corp. transferred all of the outstanding capital
stock (collectively, Stock Transfer) of Reliant Energy Services International,
Inc. (RESI), Arkla Finance Corporation (Arkla Finance) and Reliant Energy Europe
Trading & Marketing, Inc. (RE Europe Trading), all of which were wholly owned
subsidiaries of CERC Corp., to Reliant Resources. Both CERC Corp. and Reliant
Resources were wholly owned subsidiaries of Reliant Energy at that time. As a
result of the Stock Transfer, RESI, Arkla Finance and RE Europe Trading each
became a wholly owned subsidiary of Reliant Resources.

     Also, on December 31, 2000, a wholly owned subsidiary of Reliant Resources
merged with and into Reliant Energy Services, a wholly owned subsidiary of CERC
Corp., with Reliant Energy Services as the surviving corporation (Merger). As a
result of the Merger, Reliant Energy Services became a wholly owned subsidiary
of Reliant Resources. As consideration for the Stock Transfer and the Merger,
Reliant Resources paid $94 million to CERC Corp.

     Reliant Energy Services, together with RESI and RE Europe Trading,
conducted the Wholesale Energy business segment's trading, marketing, power
origination and risk management business and operations of Reliant Energy prior
to the formation of CenterPoint Energy. Arkla Finance is a company that holds an
investment in marketable equity securities.

     The Stock Transfer and the Merger were part of the Restructuring. We are
reporting the results of RE Europe Trading as discontinued operations for all
periods presented in our consolidated financial statements in accordance with
Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB
Opinion No. 30). The transfer of the operations of Reliant Energy Services, RESI
and Arkla Finance did not result in the disposal of a segment of business as
defined under APB NO. 30. For additional information regarding the operating
results of the entities transferred to Reliant Resources, please read Note 14 to
our consolidated financial statements.

                                        13
<PAGE>

                       CONSOLIDATED RESULTS OF OPERATIONS

     Our results of operations are affected by seasonal fluctuations in the
demand for natural gas and price movements of energy commodities. Our results of
operations are also affected by, among other things, the actions of various
federal and state governmental authorities having jurisdiction over rates we
charge, competition in our various business operations, debt service costs and
income tax expense.

     The following table sets forth selected financial data for the years ended
December 31, 2000, 2001 and 2002, followed by a discussion of our consolidated
results of operations based on earnings from continuing operations before
interest expense, distribution on trust preferred securities and income taxes
(EBIT). EBIT, as defined, is shown because it is a financial measure we use to
evaluate the performance of our business segments and we believe it is a measure
of financial performance that may be used as a means to analyze and compare
companies on the basis of operating performance. We expect that some analysts
and investors will want to review EBIT when evaluating our company. EBIT is not
defined under accounting principles generally accepted in the United States
(GAAP), should not be considered in isolation or as a substitute for a measure
of performance prepared in accordance with GAAP and is not indicative of
operating income from operations as determined under GAAP. Additionally, our
computation of EBIT may not be comparable to other similarly titled measures
computed by other companies, because all companies do not calculate it in the
same fashion. We consider operating income to be a comparable measure under
GAAP. We believe the difference between operating income and EBIT on both a
consolidated and business segment basis is not material. We have provided a
reconciliation of consolidated operating income to EBIT and EBIT to net income
below.

                           SELECTED FINANCIAL RESULTS

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                            2000(1)    2001     2002
                                                            -------   ------   ------
                                                                  (IN MILLIONS)
<S>                                                         <C>       <C>      <C>
Operating Revenues........................................  $21,589   $5,044   $4,208
                                                            -------   ------   ------
Operating Expenses:
  Natural gas and fuel....................................   13,030    3,781    2,901
  Purchased power.........................................    7,141       --       --
  Operation and maintenance...............................      759      657      667
  Depreciation and amortization...........................      214      207      167
  Taxes other than income taxes...........................      113      133      120
                                                            -------   ------   ------
          Total operating expenses........................   21,257    4,778    3,855
                                                            -------   ------   ------
Operating Income..........................................      332      266      353
Other Income, net.........................................        2       14        8
                                                            -------   ------   ------
EBIT......................................................      334      280      361
Interest Expense and Distribution on Trust Preferred
  Securities..............................................     (143)    (155)    (153)
                                                            -------   ------   ------
Income Before Income Taxes................................      191      125      208
Income Tax Expense........................................      (93)     (58)     (88)
                                                            -------   ------   ------
Income from Continuing Operations.........................       98       67      120
Loss from Discontinued Operations.........................      (24)      --       --
                                                            -------   ------   ------
          Net Income......................................  $    74   $   67   $  120
                                                            =======   ======   ======
</Table>

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

(1) The 2000 selected financial results include the results of operations of
    Reliant Energy Services, RESI and Arkla Finance. For further discussion,
    please read Notes 13 and 14 to our consolidated financial statements.

                                        14
<PAGE>

     2002 Compared to 2001.  We reported EBIT for 2002 of $361 million compared
to $280 million in 2001. The $81 million increase was primarily due to:

     - a $31 million increase in EBIT primarily as a result of improved
       operating margins (revenues less fuel costs) from rate increases in 2002,
       a 5% increase in throughput and changes in estimates of unbilled revenues
       and deferred gas costs, which reduced operating margins in 2001; and

     - a $49 million increase in EBIT as a result the discontinuance of goodwill
       amortization in accordance with Statement of Financial Accounting
       Standards (SFAS) SFAS No. 142, "Goodwill and Other Intangible Assets"
       (SFAS No. 142) in 2002.

     Operation and maintenance expenses increased $10 million in 2002 as
compared to 2001 primarily due to project work consisting of construction
management, material acquisition, engineering, project planning and other
services as well as increased benefit costs and higher general and
administrative expenses. These increases were partially offset by a reduction in
bad debt expense in 2002 as a result of improved collections and lower gas
prices.

     Depreciation and amortization expense decreased $40 million in 2002 as
compared to 2001 primarily as a result of the discontinuance of goodwill
amortization in accordance with SFAS No. 142 as further discussed in Note 3(d)
to our consolidated financial statements. Goodwill amortization was $49 million
for the year ended December 31, 2001. This was partially offset by an increase
in depreciation expense due to an increase in the asset base.

     Taxes other than income taxes decreased $13 million in 2002 as compared to
2001 due primarily to reduced franchise fees as a result of decreased revenues.

     Other income decreased $6 million in 2002 as compared to 2001 primarily due
to decreased interest income from affiliated parties.

     Our effective tax rates for 2002 and 2001 were 42.2% and 46.4%,
respectively. The decrease in the effective rate for 2002 compared to 2001 was
primarily the result of the discontinuance of goodwill amortization in
accordance with SFAS No. 142, offset by an increase in state income taxes.

     2001 Compared to 2000.  We reported EBIT for 2001 of $280 million compared
to $334 million in 2000. The $54 million decrease was primarily due to:

     - a $106 million decrease in EBIT resulting from the transfer of Reliant
       Energy Services to Reliant Resources pursuant to the Merger discussed
       above;

     - a $24 million increase in EBIT primarily resulting from increased
       operating margins (revenues less fuel costs) due to increased volumes in
       the first quarter of 2001 due to the effect of colder weather, partially
       offset by changes in estimates of unbilled revenues and recoverability of
       deferred gas accounts and other items; and

     - a $33 million increase in EBIT primarily resulting from a $27 million
       impairment loss on marketable equity securities classified as "available
       for sale" in 2000.

     Operation and maintenance expenses decreased $102 million in 2001 as
compared to 2000 primarily due to the transfer of Reliant Energy Services to
Reliant Resources pursuant to the Merger discussed above. This decrease was
partially offset by increased customer growth and usage and reduced operating
expenses due to exiting certain non-rate regulated retail gas markets outside of
our established market areas during 2000 in our Natural Gas Distribution
segment.

     Depreciation and amortization expense decreased $7 million in 2001 as
compared to 2000 primarily as a result of the transfer of Reliant Energy
Services to Reliant Resources, offset by an increase in depreciation expense due
to an increase in the asset base.

     Taxes other than income taxes increased $20 million in 2001 as compared to
2000 due primarily to increased franchise fees, state franchise taxes and state
gross receipts taxes.

                                        15
<PAGE>

     Other income increased $12 million in 2001 as compared to 2000 primarily
due to a $27 million impairment loss on marketable equity securities classified
as "available for sale" in 2000, partially offset by a $17 million reduction in
interest income in 2001.

     Interest expense increased $12 million in 2001 as compared to 2000
primarily due to increased long-term borrowings.

     Our effective tax rates for 2001 and 2000 were 46.4% and 48.7%,
respectively. The decrease in the effective tax rate for 2001 compared to 2000
was primarily due to a decrease in state income taxes.

     Loss from discontinued operations includes the results of RE Europe Trading
for all periods presented in our consolidated financial statements in accordance
with APB Opinion No. 30. For additional information, please read Note 14 to our
consolidated financial statements.

FLUCTUATIONS IN COMMODITY PRICES AND DERIVATIVE INSTRUMENTS

     For information regarding our exposure to risk as a result of fluctuations
in commodity prices and derivative instruments, please read "Quantitative and
Qualitative Disclosures About Market Risk" in Item 7A of this report.

                   CERTAIN FACTORS AFFECTING FUTURE EARNINGS

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

     - state and federal legislative and regulatory actions or developments,
       constraints placed on our activities or business by the 1935 Act, changes
       in or application of laws or regulations applicable to other aspects of
       our business and actions;

     - timely rate increases including recovery of costs;

     - the successful and timely completion of our capital projects;

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

     - our pursuit of potential business strategies, including acquisitions or
       dispositions of assets;

     - changes in business strategy or development plans;

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

     - changes in interest rates or rates of inflation;

     - unanticipated changes in operating expenses and capital expenditures;

     - weather variations and other natural phenomena;

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

     - commercial bank and financial market conditions, our access to capital,
       the costs of such capital and the results of our financing and
       refinancing efforts, including availability of funds in the debt capital
       markets;

     - actions by rating agencies;

     - legal and administrative proceedings and settlements;

     - changes in tax laws;

     - inability of various counterparties to meet their obligations with
       respect to our financial instruments;

                                        16
<PAGE>

     - any lack of effectiveness of our disclosure controls and procedures;

     - changes in technology;

     - significant changes in our relationship with our employees, including the
       availability of qualified personnel and the potential adverse effects if
       labor disputes or grievances were to occur;

     - significant changes in critical accounting policies;

     - acts of terrorism or war, including any direct or indirect effect on our
       business resulting from terrorist attacks such as occurred on September
       11, 2001 or any similar incidents or responses to those incidents;

     - the availability and price of insurance;

     - political, legal, regulatory and economic conditions and developments in
       the United States; and

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

                                   LIQUIDITY

     Long-Term Debt and Trust Preferred Securities.  Of the $1.96 billion of
debt outstanding at December 31, 2002, approximately $1.8 billion principal
amount is senior and unsecured and, approximately $79.4 million principal amount
with a final maturity of 2012 is subordinated. In addition, the debentures
relating to $0.4 million of trust preferred securities issued by our statutory
business-trust subsidiary are subordinated.

     The issuance of secured debt by us is limited under an indenture relating
to approximately $145 million principal amount of debt maturing in 2006 which
provides for equal and ratable security for such debt in the event debt secured
by "principal property" (as defined in the indenture) is issued. Other than this
indenture, agreements relating to the issuance of long-term debt do not restrict
the issuance of secured debt. Additionally, our $350 million credit agreement
expiring in March 2003 prohibits the issuance of debt secured by "principal
property". The definition is similar to that contained in the indenture
described above. Finally, our ability to issue secured debt may be limited under
the terms of agreements entered into by CenterPoint Energy. The assets that may
be pledged as security for our debt may be limited by the SEC because our parent
is a registered holding company.

     On February 28, 2003, CenterPoint Energy reached agreement with a syndicate
of banks on a second amendment to its existing $3.85 billion bank facility. The
amendment provides that proceeds from capital stock or indebtedness issued or
incurred by us must be applied (subject to a $200 million basket for us and
another $250 million basket for borrowings by CenterPoint Energy and other
limited exceptions) to repay bank loans and reduce the bank facility. Cash
proceeds from issuances of indebtedness to refinance indebtedness existing on
October 10, 2002 are not subject to this limitation.

     Short-Term Debt and Receivables Facility.  During 2003, our bank and
receivables facilities are scheduled to terminate on the dates indicated below.

<Table>
<Caption>
                                                                               TOTAL
                                                                             COMMITTED
TYPE OF FACILITY                                       TERMINATION DATE       CREDIT
----------------                                       -----------------   -------------
                                                                                (IN
                                                                             MILLIONS)
<S>                                                    <C>                 <C>
Revolver.............................................  March 31, 2003          $350
Receivables..........................................  November 14, 2003        150
                                                                               ----
                                                                               $500
                                                                               ====
</Table>

     As of December 31, 2002, there was $347 million borrowed under our $350
million revolving credit facility. On February 28, 2003, we executed a
commitment letter with a major bank for a $350 million, 180-day bridge facility,
which is subject to the satisfaction of various closing conditions. This
facility will be

                                        17
<PAGE>

available for repaying borrowings under our existing $350 million revolving
credit facility that expires on March 31, 2003 in the event sufficient proceeds
are not raised in the capital markets to repay such borrowings on or before
March 31, 2003. Final terms for the bridge facility have not been established,
but it is anticipated that the rates for borrowings under the facility will be
LIBOR plus 450 basis points. We paid a commitment fee of 25 basis points on the
committed amount and will be required to pay a facility fee of 75 basis points
of the amount funded and an additional 100 basis points on the amount funded and
outstanding for more than two months. In connection with this facility, we
expect to provide the lender with collateral in the form of a security interest
in the stock we own in our interstate natural gas pipeline subsidiaries.

     On December 31, 2002, we had received proceeds from the sale of receivables
of approximately $107 million under the $150 million receivables facility and
our $350 million bank facility was fully drawn or utilized in the form of
letters of credit. Advances under the $150 million receivables facility are not
recorded as a financing because the facility provides for the sale of
receivables to third parties as discussed in Note 3(i) to the consolidated
financial statements.

     On December 31, 2002, we had $74 million borrowed from affiliates. We
participate in a "money pool" through which we and certain of our affiliates can
borrow or invest on a short-term basis. Funding needs are aggregated and
external borrowing or investing is based on the net cash position. The money
pool's net funding requirements are generally met by borrowings of CenterPoint
Energy. The terms of the money pool are in accordance with requirements
applicable to registered public utility holding companies under the 1935 Act.
The money pool may not provide sufficient funds to meet our cash needs.

     Capital Requirements.  We anticipate investing up to an aggregate $1.3
billion in capital expenditures in the years 2003 through 2007, including
approximately $264 million and $279 million in 2003 and 2004, respectively.

     Cash Requirements in 2003.  Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash requirements
during 2003 include the following:

     - approximately $264 million of capital expenditures;

     - the refinancing of borrowings under our $350 million bank facility; and

     - remarketing or refinancing of $500 million of debt, plus the possible
       payment of option termination costs (currently estimated to be $61
       million) as discussed in "Quantitative and Qualitative Disclosures About
       Market Risk -- Interest Rate Risk" in Item 7A of this report.

     We expect to meet our capital requirements with cash flows from operations,
short-term borrowings and proceeds from debt offerings. We believe that our
current liquidity, along with anticipated cash flows from operations and
proceeds from short-term borrowings, including the renewal, extension or
replacement of existing bank facilities, and anticipated sales of securities in
the capital markets will be sufficient to meet our cash needs. However,
disruptions in our ability to access the capital markets on a timely basis could
adversely affect our liquidity. In addition, the cost of our debt issuances may
be high. Please read "Risk Factors -- Risks Related to Our Corporate and
Financial Structure -- If we are unable to arrange future financings on
reasonable terms, our ability to fund future capital expenditures and refinance
existing indebtedness could be limited" in Item 1 of this report.

     Prior to the Restructuring, Reliant Energy obtained an order from the SEC
that granted Reliant Energy certain authority with respect to financing,
dividends and other matters. The financing authority granted by that order will
expire on June 30, 2003, and CenterPoint Energy must obtain a further order from
the SEC under the 1935 Act in order for it and its subsidiaries, including us,
to engage in financing activities subsequent to that date.

     We have registered $50 million principal amount of debt securities with the
SEC for future issuance. These debt securities may be sold in a public offering.
The amount of any debt issuance, whether registered or unregistered, is expected
to be affected by the market's perception of our creditworthiness, general
market

                                        18
<PAGE>

conditions and factors affecting our industry. Proceeds from the sales of
securities are expected to be used primarily to refinance existing long-term and
short-term debt.

     The following table sets forth estimates of our contractual obligations to
make future payments for 2003 through 2007 and thereafter (in millions):

<Table>
<Caption>
                                                                                      2008 AND
CONTRACTUAL OBLIGATIONS                  TOTAL    2003   2004   2005   2006   2007   THEREAFTER
-----------------------                  ------   ----   ----   ----   ----   ----   ----------
<S>                                      <C>      <C>    <C>    <C>    <C>    <C>    <C>
Long-term debt.........................  $1,959   $518   $ 1    $368   $152   $ 7      $  913
Short-term borrowings, including credit
  facilities...........................     347    347    --      --     --    --          --
Trust preferred securities.............       1     --    --      --     --    --           1
Operating lease payments(1)............     126     15    12      10      8     7          74
Non-trading derivative liabilities.....      11     10     1      --     --    --          --
                                         ------   ----   ---    ----   ----   ---      ------
  Total contractual cash obligations...  $2,444   $890   $14    $378   $160   $14      $  988
                                         ======   ====   ===    ====   ====   ===      ======
</Table>

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

(1) For a discussion of operating leases, please read Note 10(b) to our
    consolidated financial statements

     Impact on Liquidity of a Downgrade in Credit Ratings.  As of March 4, 2003,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies (S&P) and Fitch, Inc. (Fitch) had assigned
the following credit ratings to senior unsecured debt of CERC Corp.:

<Table>
<Caption>
     MOODY'S                S&P                 FITCH
------------------  -------------------  -------------------
RATING  OUTLOOK(1)  RATING   OUTLOOK(2)  RATING   OUTLOOK(3)
------  ----------  ------   ----------  ------   ----------
<S>     <C>         <C>      <C>         <C>      <C>
 Ba1     Negative   BBB        Stable    BBB       Negative
</Table>

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

(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
    months which will either lead to a review for a potential downgrade or a
    return to a stable outlook.

(2) A "stable" outlook from S&P indicates that the rating is not likely to
    change over the intermediate to longer term.

(3) A "negative" outlook from Fitch encompasses a one- to two-year horizon as to
    the likely rating direction.

     We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings, the
willingness of suppliers to extend credit lines to us on an unsecured basis and
the execution of our commercial strategies.

     A decline in credit ratings would increase facility fees and borrowing
costs under our existing revolving credit facility. A decline in credit ratings
would also increase the interest rate on long-term debt to be issued in the
capital markets and would negatively impact our ability to complete capital
market transactions. The $150 million receivables facility of CERC Corp.
requires the maintenance of credit ratings of at least BB from S&P and Ba2 from
Moody's. Receivables would cease to be sold in the event a credit rating fell
below the threshold.

     Our bank facilities contain "material adverse change" clauses that could
impact our ability to borrow under these facilities. The "material adverse
change" clause in our revolving credit facility applies to new borrowings under
the facility and relates to changes since the most recent financial statements
delivered to the banks. Financial statements are delivered quarterly.

     CenterPoint Energy Gas Resources Corp., a wholly owned subsidiary, provides
comprehensive natural gas sales and services to industrial and commercial
customers that are primarily located within or near the

                                        19
<PAGE>

territories served by our pipelines and distribution subsidiaries. In order to
hedge its exposure to natural gas prices, CenterPoint Energy Gas Resources Corp.
has agreements with provisions standard for the industry that establish credit
thresholds and then require a party to provide additional collateral on two
business days' notice when that party's rating or the rating of a credit support
provider for that party (CERC Corp. in this case) falls below those levels. As
of March 4, 2003, the senior unsecured debt of CERC Corp. was rated BBB by S&P
and Ba1 by Moody's. Based on these ratings, we estimate that unsecured credit
limits extended to CenterPoint Energy Gas Resources Corp. by counterparties
could aggregate $25 million; however, utilized credit capacity is significantly
lower.

     Cross Defaults.  Our debentures and borrowings generally provide that a
default on obligations by CenterPoint Energy does not cause a default under our
debentures, revolving credit facility or receivables facility. A payment default
at CERC Corp. exceeding $50 million will cause a default under CenterPoint
Energy's $3.85 billion bank facility.

     Other Factors that Could Affect Cash Requirements.  In addition to the
above factors, our liquidity and capital resources could be affected by:

     - the potential need to provide cash collateral in connection with certain
       contracts;

     - acceleration of payment dates on certain gas supply contracts under
       certain circumstances; and

     - various regulatory actions.

     Capitalization.  Factors affecting our capitalization include:

     - covenants in our bank facilities and other borrowing agreements; and

     - limitations imposed on us because our parent is a registered holding
       company.

     In connection with our parent company's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
our external borrowings to $2.7 billion. Our ability to pay dividends is
restricted by the SEC's requirement that common equity as a percentage of total
capitalization must be at least 30% after the payment of any dividend. In
addition, the order restricts our ability to pay dividends out of capital
accounts to the extent current or retained earnings are insufficient for those
dividends. Under these restrictions, we are permitted to pay dividends in excess
of the respective current or retained earnings in an amount up to $100 million.

     Relationship with CenterPoint Energy.  We are an indirect wholly owned
subsidiary of CenterPoint Energy. As a result of this relationship, the
financial condition and liquidity of our parent company could affect our access
to capital, our credit standing and our financial condition.

     Pension Plan.  As discussed in Note 8(a) to the consolidated financial
statements, we participate in CenterPoint Energy's qualified non-contributory
pension plan covering substantially all employees. Pension expense for 2003 is
estimated to be $36 million based on an expected return on plan assets of 9.0%
and a discount rate of 6.75% as of December 31, 2002. Pension expense for the
year ended December 31, 2002 was $13 million. Future changes in plan asset
returns, assumed discount rates and various other factors related to the pension
will impact our future pension expense and liabilities. We cannot predict with
certainty what these factors will be in the future.

                          OFF BALANCE SHEET FINANCING

     In connection with the November 2002 amendment and extension of our $150
million receivables facility, we formed a bankruptcy remote subsidiary for the
sole purpose of buying and selling receivables created by us. This transaction
described above is accounted for as a sale of receivables under the provisions
of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", and, as a result, the related receivables are
excluded from our Consolidated Balance Sheets. For additional information
regarding this transaction, please read Note 3(i) to our consolidated financial
statements.

                                        20
<PAGE>

                          CRITICAL ACCOUNTING POLICIES

     A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. We believe the following accounting policies involve the application of
critical accounting estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

     Long-lived assets recorded in our Consolidated Balance Sheets primarily
consist of property, plant and equipment (PP&E). Net PP&E comprises $3.2 billion
or 54% of our total assets as of December 31, 2002. We make judgments and
estimates in conjunction with the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization methods and useful
lives. We evaluate our PP&E for impairment whenever indicators of impairment
exist. During 2002, no such indicators of impairment existed. Accounting
standards require that if the sum of the undiscounted expected future cash flows
from a company's asset is less than the carrying value of the asset, an asset
impairment must be recognized in the financial statements. The amount of
impairment recognized is calculated by subtracting the fair value of the asset
from the carrying value of the asset.

IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

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

     We recorded goodwill associated with the acquisition of our Natural Gas
Distribution and Pipelines and Gathering operations in 1997. We reviewed our
goodwill for impairment as of January 1, 2002. We computed the fair value of the
Natural Gas Distribution and the Pipelines and Gathering operations as the sum
of the discounted estimated net future cash flows applicable to each of these
operations. We determined that the fair value for each of the Natural Gas
Distribution operations and the Pipelines and Gathering operations exceeded
their corresponding carrying value, including unallocated goodwill. We also
concluded that no interim impairment indicators existed subsequent to this
initial evaluation. As of December 31, 2002 we had recorded $1.7 billion of
goodwill. Future evaluations of the carrying value of goodwill could be
significantly impacted by our estimates of cash flows associated with our
Natural Gas Distribution and Pipelines and Gathering operations, regulatory
matters, and estimated operating costs.

                                        21
<PAGE>

UNBILLED REVENUES

     Revenues related to the sale and/or delivery of natural gas are generally
recorded when natural gas is delivered to customers. However, the determination
of sales to individual customers is based on the reading of their meters, which
is performed on a systematic basis throughout the month. At the end of each
month, amounts of natural gas delivered to customers since the date of the last
meter reading are estimated and the corresponding unbilled revenue is estimated.
Unbilled natural gas sales are estimated based on estimated purchased gas
volumes, estimated lost and unaccounted for gas and tariffed rates in effect.
Accrued unbilled revenues recorded in the Consolidated Balance Sheet as of
December 31, 2001 and 2002 were $269 million and $284 million, respectively,
related to our Natural Gas Distribution business segment.

                         NEW ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" (SFAS No. 141). SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. Recorded goodwill and intangibles will be
evaluated against these new criteria and may result in certain intangibles being
transferred to goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. We
adopted the provisions of the statement which apply to goodwill and intangible
assets acquired prior to June 30, 2001 on January 1, 2002. The adoption of SFAS
No. 141 did not have any impact on our historical results of operations or
financial position.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
an asset retirement obligation to be recognized as a liability is incurred and
capitalized as part of the cost of the related tangible long-lived assets. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Retirement obligations associated with long-lived assets included within the
scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
SFAS No. 143 requires entities to record a cumulative effect of change in
accounting principle in the income statement in the period of adoption. We
adopted SFAS No. 143 on January 1, 2003.

     We have completed an assessment of the applicability and implications of
SFAS No. 143 and have identified no asset retirement obligations. Our
rate-regulated businesses have previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2002, these previously recognized removal costs of $378 million do
not represent SFAS No. 143 asset retirement obligations, but rather embedded
regulatory liabilities.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, while retaining
many of the requirements of these two statements. Under SFAS No. 144, assets
held for sale that are a component of an entity will be included in discontinued
operations if the operations and cash flows will be or have been eliminated from
the ongoing operations of the entity and the entity will not have any
significant continuing involvement in the operations prospectively. SFAS No. 144
was effective for fiscal years beginning after December 15, 2001, with early
adoption encouraged. SFAS No. 144 did not materially change the methods we use
to measure impairment losses on long-lived assets, but may result in additional
future dispositions being reported as discontinued operations than was
previously permitted. We adopted SFAS No. 144 on January 1, 2002.

                                        22
<PAGE>

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent.
SFAS No. 145 also requires that capital leases that are modified so that the
resulting lease agreement is classified as an operating lease be accounted for
as a sale-leaseback transaction. The changes related to debt extinguishment are
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting are effective for transactions occurring after May 15, 2002.
We have applied this guidance prospectively.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" (EITF No. 94-3).
The principal difference between SFAS No. 146 and EITF No. 94-3 relates to the
requirements for recognition of a liability for costs associated with an exit or
disposal activity. SFAS No. 146 requires that a liability be recognized for a
cost associated with an exit or disposal activity when it is incurred. A
liability is incurred when a transaction or event occurs that leaves an entity
little or no discretion to avoid the future transfer or use of assets to settle
the liability. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002 with early application encouraged. We will apply the provisions of SFAS No.
146 to all exit or disposal activities initiated after December 31, 2002.

     In June 2002, the Emerging Issues Task Force ("EITF") reached a consensus
that all mark-to-market gains and losses on energy trading contracts should be
shown net in the statement of consolidated income whether or not settled
physically. In October 2002, the EITF issued a consensus that superceded the
June 2002 consensus. The October 2002 consensus required, among other things,
that energy derivatives held for trading purposes be shown net in the statement
of consolidated income. This new consensus, EITF 02-3 "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," is effective for
fiscal periods beginning after December 15, 2002.

     Our former subsidiaries, RESI, RE Europe Trading and Reliant Energy
Services entered into energy derivatives held for trading purposes. On December
31, 2000, these subsidiaries were either sold or transferred to Reliant
Resources, an unconsolidated related party. See Note 2 to our consolidated
financial statements. For financial periods beginning subsequent to December 31,
2002, we will retroactively restate the financial statement presentation of
these energy trading activities. For the year ended December 31, 2000, RESI, RE
Europe Trading, and Reliant Energy Services reported combined revenues and
natural gas and purchased power expenses of $17.6 billion and $17.4 billion,
respectively. We are currently evaluating the effects on our Statements of
Consolidated Income of the net presentation of these trading activities for the
year ended December 31, 2000. Such presentation will not affect previously
reported operating income or net income.

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

     In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be

                                        23
<PAGE>

consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not expect the
adoption of FIN 46 to have a material impact on our results of operations and
financial condition.

     Please read Note 5 to our consolidated financial statements for a
discussion of our adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) on January 1, 2001 and
adoption of subsequent cleared guidance. Please read Note 3(d) to our
consolidated financial statements for a discussion of our adoption of SFAS No.
142.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

IMPACT OF CHANGES IN INTEREST RATES AND ENERGY COMMODITY PRICES

     We are exposed to various market risks. These risks arise from transactions
entered into in the normal course of business and are inherent in our
consolidated financial statements. Most of the revenues and income from our
business activities are impacted by market risks. Categories of market risk
include exposure to commodity prices through non-trading activities, interest
rates and equity prices. A description of each market risk is set forth below:

     - Commodity price risk results from exposures to changes in spot prices,
       forward prices and price volatilities of commodities, such as natural gas
       and other energy commodities risk.

     - Interest rate risk primarily results from exposures to changes in the
       level of borrowings and changes in interest rates.

     - Equity price risk results from exposures to changes in prices of
       individual equity securities.

     Management has established comprehensive risk management policies to
monitor and manage these market risks. We seek to manage these risk exposures
through the implementation of our risk management policies and framework. We
seek to manage our exposures through the use of derivative financial instruments
and derivative commodity instrument contracts. During the normal course of
business, we review our hedging strategies and determine the hedging approach we
deem appropriate based upon the circumstances of each situation.

     Derivative instruments such as futures, forward contracts, swaps and
options derive their value from underlying assets, indices, reference rates or a
combination of these factors. These derivative instruments include negotiated
contracts, which are referred to as over-the-counter derivatives, and
instruments that are listed and traded on an exchange.

     Derivative transactions are entered into in our non-trading operations to
manage and hedge certain exposures, such as exposure to changes in gas prices.
We believe that the associated market risk of these instruments can best be
understood relative to the underlying assets or risk being hedged.

INTEREST RATE RISK

     We have outstanding long-term debt, mandatorily redeemable preferred
securities of subsidiary trusts holding solely our junior subordinated
debentures (trust preferred securities), bank facilities, and some lease
obligations which subject us to the risk of loss associated with movements in
market interest rates.

     Our floating-rate obligations aggregated $0.3 billion in each of the years
ended December 31, 2001 and 2002, (please read Note 6 to our consolidated
financial statements), inclusive of (a) amounts borrowed under our short-term
credit facilities, (b) amounts obtained under a receivables facility and (c)
borrowings from affiliates. These floating-rate obligations expose us to the
risk of increased interest expense in the event of increases in short-term
interest rates. If the floating interest rates were to increase by 10% from
their levels at

                                        24
<PAGE>

December 31, 2002, our combined interest expense would increase by an immaterial
amount each month in which such increase continued.

     At December 31, 2001 and 2002, we had outstanding fixed-rate debt and trust
preferred securities aggregating $1.9 billion and $2.0 billion, respectively, in
principal amount and having a fair value of $1.9 billion and $2.1 billion,
respectively. These instruments are fixed-rate and, therefore, do not expose us
to the risk of loss in earnings due to changes in market interest rates (please
read Notes 6 and 7 to our consolidated financial statements). However, the fair
value of these instruments would increase by approximately $44 million if
interest rates were to decline by 10% from their levels at December 31, 2002. In
general, such an increase in fair value would impact earnings and cash flows
only if we were to reacquire all or a portion of these instruments in the open
market prior to their maturity.

     As discussed in Note 6(b) to our consolidated financial statements, our
$500 million aggregate principal amount of 6 3/8% Term Enhanced Remarketable
Securities (TERM Notes) include an embedded option to remarket the securities.
The option is expected to be exercised in the event that the ten-year Treasury
rate in 2003 is below 5.66%. At December 31, 2002, we could terminate the option
at a cost of $61 million. A decrease of 10% in the December 31, 2002 level of
interest rates would increase the cost of terminating the option by
approximately $17 million.

COMMODITY PRICE RISK FROM NON-TRADING ACTIVITIES

     To reduce our commodity price risk from market fluctuations in the revenues
derived from the sale of natural gas and related transportation, we enter into
forward contracts, swaps and options (Non-Trading Energy Derivatives) in order
to hedge some expected purchases of natural gas and sales of natural gas (a
portion of which are firm commitments at the inception of the hedge).
Non-Trading Energy Derivatives are also utilized to fix the price of compressor
fuel or other future operational gas requirements and to protect natural gas
distribution earnings against unseasonably warm weather during peak gas heating
months, although usage to date for this purpose has not been material.

     We use derivative instruments as economic hedges to offset the commodity
exposure inherent in our businesses. The stand-alone commodity risk created by
these instruments, without regard to the offsetting effect of the underlying
exposure these instruments are intended to hedge, is described below. We measure
the commodity risk of our Non-Trading Energy Derivatives using a sensitivity
analysis. The sensitivity analysis performed on our Non-Trading Energy
Derivatives measures the potential loss in earnings based on a hypothetical 10%
movement in energy prices. An increase of 10% in the market prices of energy
commodities from their December 31, 2001 levels would have decreased the fair
value of our Non-Trading Energy Derivatives by $14 million. A decrease of 10% in
the market prices of energy commodities from their December 31, 2002 levels
would have decreased the fair value of our Non-Trading Energy Derivatives by $12
million.

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

     - the Non-Trading Energy Derivatives are not closed out in advance of their
       expected term;

     - the Non-Trading Energy Derivatives continue to function effectively as
       hedges of the underlying risk; and

     - as applicable, anticipated underlying transactions settle as expected.

     If any of the above-mentioned assumptions ceases to be true, a loss on the
derivative instruments may occur, or the options might be worthless as
determined by the prevailing market value on their termination or

                                        25
<PAGE>

maturity date, whichever comes first. Non-Trading Energy Derivatives designated
and effective as hedges, may still have some percentage which is not effective.
The change in value of the Non-Trading Energy Derivatives that represents the
ineffective component of the hedges is recorded in our results of operations.
During 2002, we recognized a $0.9 million loss as a result of the discontinuance
of a cash flow hedge because it was no longer probable that the forecasted
transaction would occur.

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

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

                                        26
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

                       STATEMENTS OF CONSOLIDATED INCOME

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                          -------------------------------------
                                                             2000          2001         2002
                                                          -----------   ----------   ----------
                                                                     (IN THOUSANDS)
<S>                                                       <C>           <C>          <C>
REVENUES................................................  $21,588,678   $5,044,419   $4,207,836
                                                          -----------   ----------   ----------
EXPENSES:
  Natural gas and purchased power.......................   20,170,896    3,781,200    2,900,682
  Operation and maintenance.............................      758,824      657,515      666,502
  Depreciation and amortization.........................      214,259      207,203      167,456
  Taxes other than income taxes.........................      112,951      132,560      119,911
                                                          -----------   ----------   ----------
                                                           21,256,930    4,778,478    3,854,551
                                                          -----------   ----------   ----------
OPERATING INCOME........................................      331,748      265,941      353,285
                                                          -----------   ----------   ----------
OTHER INCOME (EXPENSE):
  Interest expense......................................     (142,861)    (154,965)    (153,688)
  Distribution on trust preferred securities............          (29)         (28)         (25)
  Other, net............................................        2,642       14,583        8,131
                                                          -----------   ----------   ----------
                                                             (140,248)    (140,410)    (145,582)
                                                          -----------   ----------   ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES...      191,500      125,531      207,703
  Income Tax Expense....................................       93,272       58,287       87,643
                                                          -----------   ----------   ----------
INCOME FROM CONTINUING OPERATIONS.......................       98,228       67,244      120,060
  Loss from Discontinued Operations.....................      (23,861)          --           --
                                                          -----------   ----------   ----------
NET INCOME..............................................  $    74,367   $   67,244   $  120,060
                                                          ===========   ==========   ==========
</Table>

          See Notes to the Company's Consolidated Financial Statements
                                        27
<PAGE>

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

                STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               2000       2001       2002
                                                              -------   --------   --------
                                                                     (IN THOUSANDS)
<S>                                                           <C>       <C>        <C>
Net income..................................................  $74,367   $ 67,244   $120,060
                                                              -------   --------   --------
Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustments from discontinued
     operations, (net of tax of $1,340).....................   (2,490)        --         --
  Unrealized loss on available-for-sale securities (net of
     tax of $1,492).........................................   (2,264)        --         --
  Reclassification adjustment for impairment loss on
     available-for-sale securities realized in net income
     (net of tax of $9,276).................................   17,228         --         --
  Additional minimum non-qualified pension liability
     adjustment (net of tax of $6,068, $4,703 and $790).....   (9,747)     8,279      1,468
  Cumulative effect of adoption of SFAS No. 133 (net of tax
     of $20,511)............................................       --     38,092         --
  Net deferred gain (loss) from cash flow hedges (net of tax
     of $23,821 and $35,142)................................       --    (11,826)    46,062
  Reclassification of net deferred loss (gain) from cash
     flow hedges realized in net income (net of tax of
     $18,947 and $5,681)....................................       --    (61,449)       381
                                                              -------   --------   --------
Other comprehensive income (loss)...........................    2,727    (26,904)    47,911
                                                              -------   --------   --------
Comprehensive income........................................  $77,094   $ 40,340   $167,971
                                                              =======   ========   ========
</Table>

          See Notes to the Company's Consolidated Financial Statements
                                        28
<PAGE>

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

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2001         2002
                                                              ----------   ----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>          <C>
                                       ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   16,425   $    9,237
  Accounts receivable, principally customers, net...........     398,229      384,772
  Accrued unbilled revenue..................................     269,475      284,112
  Accounts and notes receivable -- affiliated companies,
    net.....................................................      39,393           --
  Inventory.................................................     144,469      135,707
  Non-trading derivative assets.............................       6,996       27,275
  Prepaid expenses and other current assets.................      17,932       50,765
                                                              ----------   ----------
        Total current assets................................     892,919      891,868
                                                              ----------   ----------
PROPERTY, PLANT AND EQUIPMENT, NET..........................   3,147,077    3,235,672
                                                              ----------   ----------
OTHER ASSETS:
  Goodwill, net.............................................   1,740,510    1,740,510
  Other intangibles, net....................................      17,980       19,878
  Prepaid pension asset.....................................      94,022           --
  Non-trading derivative assets.............................       2,234        3,866
  Notes receivable -- affiliated companies, net.............       3,443       39,097
  Other.....................................................      94,221       55,571
                                                              ----------   ----------
        Total other assets..................................   1,952,410    1,858,922
                                                              ----------   ----------
        TOTAL ASSETS........................................  $5,992,406   $5,986,462
                                                              ==========   ==========

                        LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Short-term borrowings.....................................  $  345,527   $  347,000
  Current portion of long-term debt.........................          --      517,616
  Accounts payable, principally trade.......................     267,649      465,694
  Accounts and notes payable -- affiliated companies, net...          --      101,231
  Taxes accrued.............................................      53,693           --
  Interest accrued..........................................      44,795       49,084
  Customer deposits.........................................      52,089       54,081
  Non-trading derivative liabilities........................      61,358        9,973
  Other.....................................................      92,898      102,510
                                                              ----------   ----------
        Total current liabilities...........................     918,009    1,647,189
                                                              ----------   ----------
OTHER LIABILITIES:
  Accumulated deferred income taxes, net....................     555,387      595,889
  Non-trading derivative liabilities........................      11,159          873
  Benefit obligations.......................................     177,559      132,434
  Other.....................................................     141,116      125,876
                                                              ----------   ----------
        Total other liabilities.............................     885,221      855,072
                                                              ----------   ----------
LONG-TERM DEBT..............................................   1,968,039    1,441,264
                                                              ----------   ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
CERC OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
  SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
  SUBORDINATED DEBENTURES OF CERC...........................         555          508
                                                              ----------   ----------
STOCKHOLDER'S EQUITY........................................   2,220,582    2,042,429
                                                              ----------   ----------
        TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..........  $5,992,406   $5,986,462
                                                              ==========   ==========
</Table>

          See Notes to the Company's Consolidated Financial Statements

                                        29
<PAGE>

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

                     STATEMENTS OF CONSOLIDATED CASH FLOWS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                           -----------------------------------
                                                              2000         2001        2002
                                                           -----------   ---------   ---------
                                                                     (IN THOUSANDS)
<S>                                                        <C>           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.............................................  $    74,367   $  67,244   $ 120,060
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization.......................      214,259     207,203     167,456
     Deferred income taxes...............................       29,123      30,320      23,003
     Impairment of marketable equity securities..........       26,504          --          --
     Changes in other assets and liabilities:
       Accounts receivable and unbilled revenues, net....   (1,984,240)    677,383       3,276
       Accounts receivable/payable, affiliates...........       15,016      17,497      37,043
       Inventory.........................................      (16,539)    (22,048)      8,762
       Accounts payable..................................    1,789,841    (436,875)    198,045
       Fuel cost recovery................................       34,383       8,292      28,317
       Interest and taxes accrued........................       58,237      (7,114)    (53,860)
       Net non-trading derivative assets and
          liabilities....................................           --      20,559     (64,814)
       Margin deposits on energy trading activities......     (206,480)         --          --
       Federal tax refund................................       26,278          --          --
       Other current assets..............................      (96,403)    (29,573)    (32,832)
       Other current liabilities.........................        4,242      17,538       9,320
       Other assets......................................       50,691     (26,431)     91,988
       Other liabilities.................................      (41,396)    (20,792)    (11,441)
       Other, net........................................           --      (2,418)      3,876
                                                           -----------   ---------   ---------
          Net cash provided by (used in) operating
            activities...................................      (22,117)    500,785     528,199
                                                           -----------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures...................................     (290,565)   (263,257)   (266,208)
  Other, net.............................................        9,042       1,122      22,127
                                                           -----------   ---------   ---------
          Net cash used in investing activities..........     (281,523)   (262,135)   (244,081)
                                                           -----------   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments of long-term debt.............................     (221,500)   (155,569)     (6,653)
  Proceeds from long-term debt...........................      325,000     585,632          --
  Increase (decrease) in short-term borrowings, net......      100,416    (289,473)      1,473
  Increase (decrease) in notes with affiliates, net......       53,924    (216,758)     67,927
  Dividends..............................................           --    (400,000)   (350,000)
  Capital contribution from parent.......................           --     241,352          --
  Other, net.............................................      (11,751)     (9,985)     (4,053)
                                                           -----------   ---------   ---------
          Net cash provided by (used in) financing
            activities...................................      246,089    (244,801)   (291,306)
                                                           -----------   ---------   ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................      (57,551)     (6,151)     (7,188)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR.......       80,127      22,576      16,425
                                                           -----------   ---------   ---------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR.............  $    22,576   $  16,425   $   9,237
                                                           ===========   =========   =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash Payments:
     Interest............................................  $   138,365   $ 148,303   $ 146,244
     Income taxes........................................       62,144     116,272     156,271
</Table>

          See Notes to the Company's Consolidated Financial Statements
                                        30
<PAGE>

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

                STATEMENTS OF CONSOLIDATED STOCKHOLDER'S EQUITY

<Table>
<Caption>
                                                                                    ACCUMULATED
                                         COMMON STOCK                                  OTHER           TOTAL
                                        ---------------    PAID IN     RETAINED    COMPREHENSIVE   STOCKHOLDER'S
                                        SHARES   AMOUNT    CAPITAL     EARNINGS    INCOME (LOSS)      EQUITY
                                        ------   ------   ----------   ---------   -------------   -------------
                                                                     (IN THOUSANDS)
<S>                                     <C>      <C>      <C>          <C>         <C>             <C>
Balance at December 31, 1999..........  1,000    $   1    $2,463,831   $ 214,872     $(17,198)      $2,661,506
                                        -----    -----    ----------   ---------     --------       ----------
Net income............................     --       --            --      74,367           --           74,367
Other comprehensive income (loss), net
  of tax:
  Foreign currency translation
    adjustments from discontinued
    operations........................     --       --            --          --       (2,490)          (2,490)
  Unrealized loss on
    available-for-sale securities.....     --       --            --          --       (2,264)          (2,264)
  Reclassification adjustment for
    impairment loss on
    available-for-sale securities
    realized in net income............     --       --            --          --       17,228           17,228
  Additional minimum non-qualified
    pension liability adjustment......     --       --            --          --       (9,747)          (9,747)
Transfer of subsidiaries to Reliant
  Resources, Inc......................     --       --       (53,115)   (289,239)       4,724         (337,630)
                                        -----    -----    ----------   ---------     --------       ----------
Balance at December 31, 2000..........  1,000        1     2,410,716          --       (9,747)       2,400,970
                                        -----    -----    ----------   ---------     --------       ----------
Net income............................     --       --            --      67,244           --           67,244
Dividend to parent....................     --       --      (334,593)    (65,407)          --         (400,000)
Transfer of benefits to parent........     --       --       (62,080)         --           --          (62,080)
Contributions from parent.............     --       --       241,352          --           --          241,352
Other comprehensive income (loss), net
  of tax:
  Cumulative effect of adoption of
    SFAS No 133.......................     --       --            --          --       38,092           38,092
  Net deferred loss from cash flow
    hedges............................     --       --            --          --      (11,826)         (11,826)
  Reclassification of net deferred
    gain from cash flow hedges
    realized in net income............     --       --            --          --      (61,449)         (61,449)
  Additional minimum non-qualified
    pension liability adjustment......     --       --            --          --        8,279            8,279
                                        -----    -----    ----------   ---------     --------       ----------
Balance at December 31, 2001..........  1,000        1     2,255,395       1,837      (36,651)       2,220,582
                                        -----    -----    ----------   ---------     --------       ----------
Net income............................     --       --            --     120,060           --          120,060
Dividend to parent....................     --       --      (272,907)    (77,093)          --         (350,000)
Contributions from parent.............     --       --         3,876          --           --            3,876
Other comprehensive income, net of
  tax:
  Net deferred gain from cash flow
    hedges............................     --       --            --          --       46,062           46,062
  Reclassification of net deferred
    loss from cash flow hedges
    realized in net income............     --       --            --          --          381              381
  Additional minimum non-qualified
    pension liability adjustment......     --       --            --          --        1,468            1,468
                                        -----    -----    ----------   ---------     --------       ----------
Balance at December 31, 2002..........  1,000    $   1    $1,986,364   $  44,804     $ 11,260       $2,042,429
                                        =====    =====    ==========   =========     ========       ==========
</Table>

          See Notes to the Company's Consolidated Financial Statements
                                        31
<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BACKGROUND AND BASIS OF PRESENTATION

     CenterPoint Energy Resources Corp. (CERC Corp.) formerly named Reliant
Energy Resources Corp. (RERC Corp.), together with its subsidiaries
(collectively, CERC), distributes natural gas, transports natural gas through
its interstate pipelines and provides natural gas gathering and pipeline
services. Prior to 2001, CERC provided energy services including wholesale
energy trading, marketing, power origination and risk management services in
North America and Western Europe. CERC Corp. is a Delaware corporation and an
indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint
Energy).

     CERC's natural gas distribution operations (Natural Gas Distribution) are
conducted by three unincorporated divisions CenterPoint Energy Entex (Entex),
CenterPoint Energy Minnegasco (Minnegasco) and CenterPoint Energy Arkla (Arkla)
and other non-rate regulated retail gas marketing operations. CERC's pipelines
and gathering operations (Pipelines and Gathering) are primarily conducted by
two wholly owned pipeline subsidiaries, CenterPoint Energy Gas Transmission
Company (CEGT) and CenterPoint Energy-Mississippi River Transmission Corporation
(MRT), and a wholly owned gas gathering subsidiary, CenterPoint Energy Field
Services, Inc. (CEFS). CERC's principal operations are located in Arkansas,
Louisiana, Minnesota, Mississippi, Missouri, Oklahoma and Texas.

     Wholesale energy trading, marketing, power origination and risk management
activities in North America were conducted primarily by Reliant Energy Services,
Inc. (Reliant Energy Services), a wholly owned subsidiary of CERC prior to
January 1, 2001. European energy trading and marketing activities were conducted
by Reliant Energy Europe Trading & Marketing, Inc. (RE Europe Trading), an
indirect wholly owned subsidiary of CERC Corp. prior to January 1, 2001. See
Note 2 regarding the Restructuring.

2.  THE RESTRUCTURING

     Reliant Energy, Incorporated (Reliant Energy) completed the separation of
the generation, transmission and distribution, and retail sales functions of
Reliant Energy's Texas electric operations pursuant to the following steps,
which occurred on August 31, 2002 (the Restructuring):

     - CenterPoint Energy became the holding company for the Reliant Energy
       group of companies;

     - Reliant Energy and its subsidiaries, including CERC, became subsidiaries
       of CenterPoint Energy; and

     - each share of Reliant Energy common stock was converted into one share of
       CenterPoint Energy common stock.

     After the Restructuring, CenterPoint Energy distributed to its shareholders
the shares of common stock of Reliant Resources, Inc. (Reliant Resources) that
it owned (the Distribution) in a tax-free transaction.

     Contemporaneous with the Restructuring, CenterPoint Energy registered and
became subject, with its subsidiaries, to regulation as a registered holding
company system under the Public Utility Holding Company Act of 1935 (1935 Act).
The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate,
among other things, transactions among affiliates, sales or acquisitions of
assets, issuances of securities, distributions and permitted lines of business.
Prior to the Restructuring, CenterPoint Energy and Reliant Energy obtained an
order from the SEC that authorized the Restructuring transactions, including the
Distribution, and granted CenterPoint Energy certain authority with respect to
system financing, dividends and other matters. The financing authority granted
by that order will expire on June 30, 2003, and CenterPoint Energy must obtain a
further order from the SEC under the 1935 Act, related, among other things, to
the financing activities of CenterPoint Energy and its subsidiaries subsequent
to June 30, 2003.

                                        32
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with CenterPoint Energy's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
CERC's external borrowings to $2.7 billion. CERC's ability to pay dividends is
restricted by the SEC's requirement that common equity as a percentage of total
capitalization must be at least 30% after the payment of any dividend. In
addition, the order restricts CERC's ability to pay dividends out of capital
accounts to the extent current or retained earnings are insufficient for those
dividends. Under these restrictions, CERC is permitted to pay dividends in
excess of the respective current or retained earnings in an amount up to $100
million.

     In 2002, CERC obtained authority from each state in which such authority
was required to restructure in a manner that would allow CenterPoint Energy to
claim an exemption from registration under the 1935 Act. CenterPoint Energy has
concluded that a restructuring would not be beneficial and has elected to remain
a registered holding company under the 1935 Act.

     On December 31, 2000, CERC Corp. transferred all of the outstanding capital
stock (collectively, the Stock Transfer) of Reliant Energy Services
International, Inc. (RESI), Arkla Finance Corporation (Arkla Finance) and RE
Europe Trading, all wholly owned subsidiaries of CERC Corp., to Reliant
Resources. Both CERC Corp. and Reliant Resources were wholly owned subsidiaries
of Reliant Energy at that time. As a result of the Stock Transfer, RESI, Arkla
Finance and RE Europe Trading each became a wholly owned subsidiary of Reliant
Resources.

     Also, on December 31, 2000, a wholly owned subsidiary of Reliant Resources
merged with and into Reliant Energy Services, a wholly owned subsidiary of CERC
Corp., with Reliant Energy Services as the surviving corporation (Merger). As a
result of the Merger, Reliant Energy Services became a wholly owned subsidiary
of Reliant Resources. As consideration for the Merger, Reliant Resources paid
$94 million to CERC Corp.

     Prior to January 1, 2001, Reliant Energy Services, RESI and RE Europe
Trading conducted the trading, marketing, power origination and risk management
business and operations of CERC Corp. Arkla Finance is a company that holds an
investment in marketable equity securities. The Stock Transfer and the Merger
were part of the Restructuring.

     CERC accounted for the Stock Transfer and the Merger as the sale of a
business operation. Accordingly, the CERC consolidated financial statements
include the financial position and results of operations for the subsidiaries
included in these transactions for all periods prior to December 31, 2000.

     CERC is reporting the results of RE Europe Trading as discontinued
operations for all periods presented in CERC's consolidated financial statements
in accordance with Accounting Principles Board (APB) Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB Opinion No. 30).

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a) RECLASSIFICATIONS AND USE OF ESTIMATES

     Some amounts from the previous years have been reclassified to conform to
the 2002 presentation of financial statements. These reclassifications do not
affect net income.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                        33
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (b) PRINCIPLES OF CONSOLIDATION

     The accounts of CERC Corp. and its wholly owned and majority owned
subsidiaries are included in CERC's consolidated financial statements. All
significant intercompany transactions and balances are eliminated. Other
investments, excluding marketable securities, are carried at cost.

  (c) REVENUES

     CERC records natural gas sales and services under the accrual method and
these revenues are generally recognized upon delivery. Natural gas sales and
services not billed by month-end are accrued based upon estimated purchased gas
volumes, estimated lost and unaccounted for gas and tariffed rates in effect.
Pipelines and Gathering records revenues as transportation services are
provided. In 2000, Reliant Energy Services' energy trading and marketing
operations were accounted for under mark-to-market accounting, as discussed in
Note 5.

  (d) LONG-LIVED ASSETS AND INTANGIBLES

     CERC records property, plant and equipment at historical cost. CERC
expenses all repair and maintenance costs as incurred. The cost of utility plant
and equipment retirements is charged to accumulated depreciation. Property,
plant and equipment includes the following:

<Table>
<Caption>
                                                                           DECEMBER 31,
                                                       ESTIMATED USEFUL   ---------------
                                                        LIVES (YEARS)      2001     2002
                                                       ----------------   ------   ------
                                                                           (IN MILLIONS)
<S>                                                    <C>                <C>      <C>
Natural gas distribution.............................        5-50         $1,980   $2,151
Pipelines and gathering..............................        5-75          1,633    1,686
Other property.......................................        3-20             56       49
                                                                          ------   ------
  Total..............................................                      3,669    3,886
Accumulated depreciation.............................                       (522)    (650)
                                                                          ------   ------
  Property, plant and equipment, net.................                     $3,147   $3,236
                                                                          ======   ======
</Table>

     In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142), which provides for a nonamortization
approach, whereby goodwill and certain intangibles with indefinite lives will
not be amortized into results of operations, but instead will be reviewed
periodically for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles with indefinite lives is more than its fair value. On
January 1, 2002, CERC adopted the provisions of the statement which apply to
goodwill and intangible assets acquired prior to June 30, 2001.

     With the adoption of SFAS No. 142, CERC ceased amortization of goodwill as
of January 1, 2002. A reconciliation of previously reported net income to the
amounts adjusted for the exclusion of goodwill amortization follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Reported net income.........................................   $ 74     $ 67     $120
Add: Goodwill amortization, net of tax......................     50       49       --
                                                               ----     ----     ----
Adjusted net income.........................................   $124     $116     $120
                                                               ====     ====     ====
</Table>

                                        34
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The components of CERC's other intangible assets consist of the following:

<Table>
<Caption>
                                                DECEMBER 31, 2001         DECEMBER 31, 2002
                                             -----------------------   -----------------------
                                             CARRYING   ACCUMULATED    CARRYING   ACCUMULATED
                                              AMOUNT    AMORTIZATION    AMOUNT    AMORTIZATION
                                             --------   ------------   --------   ------------
                                                               (IN MILLIONS)
<S>                                          <C>        <C>            <C>        <C>
Land Use Rights............................    $ 7          $(2)         $ 7          $(2)
Other......................................     15           (2)          18           (3)
                                               ---          ---          ---          ---
Total......................................    $22          $(4)         $25          $(5)
                                               ===          ===          ===          ===
</Table>

     CERC recognizes specifically identifiable intangibles when specific rights
and contracts are acquired. CERC amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives. CERC has no intangible assets with indefinite lives recorded as of
December 31, 2002. CERC amortizes other acquired intangibles on a straight-line
basis over the lesser of their contractual or estimated useful lives that range
from 47 to 75 years for land rights and 4 to 25 years for other intangibles.

     Amortization expense for other intangibles for the years ended December
2000, 2001, and 2002 was $0.6 million, $0.8 million and $1.1 million,
respectively. Estimated amortization expense is approximately $1 million per
year for the five succeeding fiscal years.

     Goodwill by reportable business segment is as follows (in millions):

<Table>
<Caption>
                                                               DECEMBER 31,
                                                               2001 AND 2002
                                                               -------------
<S>                                                            <C>
Natural Gas Distribution....................................      $1,085
Pipelines and Gathering.....................................         601
Other Operations............................................          55
                                                                  ------
  Total.....................................................      $1,741
                                                                  ======
</Table>

     CERC completed its review of goodwill impairment during the second quarter
of 2002 for its reporting units pursuant to SFAS No. 142. No impairment was
indicated as a result of this assessment.

  (e) REGULATORY MATTERS

     CERC applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to the
accounts of the utility operations of Natural Gas Distribution and MRT. As of
December 31, 2001 and 2002, CERC had recorded $6 million and $12 million,
respectively, of net regulatory assets.

     If, as a result of changes in regulation or competition, CERC's ability to
recover these assets and liabilities would not be probable, CERC would be
required to write off or write down these regulatory assets and liabilities. In
addition, CERC would be required to determine any impairment of the carrying
costs of plant and inventory assets.

  Arkansas Rate Case

     In November 2001, Arkla filed a rate request in Arkansas seeking rates to
yield approximately $47 million in additional annual gross revenue. In August
2002, a settlement was approved by the Arkansas Public Service Commission (APSC)
that is expected to result in an increase in base rates of approximately $32
million annually. In addition, the APSC approved a gas main replacement
surcharge that is expected to

                                        35
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provide $2 million of additional gross revenue in 2003 and additional amounts in
subsequent years. The new rates included in the final settlement were effective
with all bills rendered on and after September 21, 2002.

  Oklahoma Rate Case

     In May 2002, Arkla filed a request in Oklahoma to increase its base rates
by $13.7 million annually. In December 2002, a settlement was approved by the
Oklahoma Corporation Commission that is expected to result in an increase in
base rates of approximately $7.3 million annually. The new rates included in the
final settlement were effective with all bills rendered on and after December
29, 2002.

  (f) DEPRECIATION AND AMORTIZATION EXPENSE

     Depreciation is computed using the straight-line method based on economic
lives or a regulatory mandated recovery period. Other amortization expense
includes amortization of regulatory assets and other intangibles.

     The following table presents depreciation, goodwill amortization and other
amortization expense for 2000, 2001 and 2002:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Depreciation expense........................................   $153     $146     $153
Goodwill amortization expense...............................     50       49       --
Other amortization expense..................................     11       12       14
                                                               ----     ----     ----
  Total depreciation and amortization.......................   $214     $207     $167
                                                               ====     ====     ====
</Table>

  (g) CAPITALIZATION OF INTEREST

     Interest and allowance for funds used during construction (AFUDC) related
to debt for subsidiaries that apply SFAS No. 71 are capitalized as a component
of projects under construction and will be amortized over the assets' estimated
useful lives. During 2000, 2001 and 2002, CERC capitalized interest and AFUDC
related to debt of $2.0 million, $0.2 million and $1.2 million, respectively.

  (h) INCOME TAXES

     CERC is included in the consolidated income tax returns of CenterPoint
Energy. CERC calculates its income tax provision on a separate return basis
under a tax sharing agreement with CenterPoint Energy. CERC uses the liability
method of accounting for deferred income taxes and measures deferred income
taxes for all significant income tax temporary differences. Investment tax
credits were deferred and are being amortized over the estimated lives of the
related property. Current federal and certain state income taxes are payable to
or receivable from CenterPoint Energy. For additional information regarding
income taxes, see Note 9.

  (i) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Accounts receivable, principally customers, net, are net of an allowance
for doubtful accounts of $33 million and $20 million at December 31, 2001 and
2002, respectively. The provisions for doubtful accounts in CERC's Statements of
Consolidated Income for 2000, 2001 and 2002 were $33 million, $46 million and
$15 million, respectively.

                                        36
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the first quarter of 2002, CERC reduced its trade receivables facility
from $350 million to $150 million. During 2001 and 2002, CERC sold its customer
accounts receivable and utilized $346 million of its $350 million receivables
facility at December 31, 2001 and $107 million of its $150 million receivables
facility at December 31, 2002. The amount of receivables sold will fluctuate
based on the amount of receivables created by CERC Corp.

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

  (j) INVENTORY

     Inventory consists principally of materials and supplies and natural gas
and is valued at the lower of average cost or market. Inventory includes the
following components:

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              -------------
                                                              2001    2002
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Materials and supplies......................................  $ 33    $ 32
Natural gas.................................................   111     104
                                                              ----    ----
  Total inventory...........................................  $144    $136
                                                              ====    ====
</Table>

  (k) INVESTMENT IN OTHER DEBT AND EQUITY SECURITIES

     In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), CERC reports "available-for-sale"
securities at estimated fair value in CERC's Consolidated Balance Sheets and any
unrealized gain or loss, net of tax, as a separate component of stockholder's
equity and accumulated other comprehensive income.

     During 2000, pursuant to SFAS No. 115, CERC incurred a pre-tax impairment
loss on marketable equity securities classified as "available-for-sale" equal to
$27 million of cumulative unrealized losses which was recorded in other income
(expense) in CERC's Statements of Consolidated Income. On December 31, 2000,
CERC transferred all of the outstanding capital stock of Arkla Finance, which
holds this investment, to Reliant Resources as described in Note 2. As of
December 31, 2001 and 2002, CERC held no "available-for-sale" securities.

  (l) ENVIRONMENTAL COSTS

     CERC expenses or capitalizes environmental expenditures, as appropriate,
depending on their future economic benefit. CERC expenses amounts that relate to
an existing condition caused by past operations and that do not have future
economic benefit. CERC records undiscounted liabilities related to these future
costs when environmental assessments and/or remediation activities are probable
and the costs can be reasonably estimated. Subject to SFAS No. 71, a
corresponding regulatory asset is recorded in anticipation of recovery through
the rate making process by subsidiaries that apply SFAS No. 71.

  (m) STATEMENTS OF CONSOLIDATED CASH FLOWS

     For purposes of reporting cash flows, CERC considers cash equivalents to be
short-term, highly liquid investments with maturities of three months or less
from the date of purchase.

                                        37
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (n) CHANGES IN ACCOUNTING PRINCIPLES AND NEW ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
No. 141). SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being transferred to goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. CERC adopted the provisions of the statement
which apply to goodwill and intangible assets acquired prior to June 30, 2001 on
January 1, 2002. The adoption of SFAS No. 141 did not have any impact on CERC's
historical results of operations or financial position.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
an asset retirement obligation to be recognized as a liability is incurred and
capitalized as part of the cost of the related tangible long-lived assets. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Retirement obligations associated with long-lived assets included within the
scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
SFAS No. 143 requires entities to record a cumulative effect of change in
accounting principle in the income statement in the period of adoption. CERC
adopted SFAS No. 143 on January 1, 2003.

     CERC has completed an assessment of the applicability and implications of
SFAS No. 143 and has identified no asset retirement obligations. CERC's
rate-regulated businesses have previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2002, these previously recognized removal costs of $378 million do
not represent SFAS No. 143 asset retirement obligations, but rather embedded
regulatory liabilities.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS No. 144). SFAS No. 144
provides new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS No. 144 supercedes
SFAS No. 121 and APB Opinion No. 30, while retaining many of the requirements of
these two statements. Under SFAS No. 144, assets held for sale that are a
component of an entity will be included in discontinued operations if the
operations and cash flows will be or have been eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations prospectively. SFAS No. 144 did not materially
change the methods used by CERC to measure impairment losses on long-lived
assets but may result in more future dispositions being reported as discontinued
operations than would previously have been permitted. CERC adopted SFAS No. 144
on January 1, 2002.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent.
SFAS No. 145 also requires that capital leases that are modified so that the
resulting lease agreement is classified as an operating lease be accounted for
as a sale-leaseback transaction. The changes related to debt extinguishment are
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting are effective for transactions occurring after May 15, 2002.
CERC has applied this guidance prospectively.

                                        38
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002 with early application encouraged. CERC will apply the provisions of SFAS
No. 146 to all exit or disposal activities initiated after December 31, 2002.

     In June 2002, the Emerging Issues Task Force ("EITF") reached a consensus
that all mark-to-market gains and losses on energy trading contracts should be
shown net in the statement of consolidated income whether or not settled
physically. In October 2002, the EITF issued a consensus that superceded the
June 2002 consensus. The October 2002 consensus required, among other things,
that energy derivatives held for trading purposes be shown net in the statement
of consolidated income. This new consensus, EITF 02-3 "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," is effective for
fiscal periods beginning after December 15, 2002.

     CERC's former subsidiaries, RESI, RE Europe Trading and Reliant Energy
Services entered into energy derivatives held for trading purposes. On December
31, 2000, these subsidiaries were either sold or transferred to Reliant
Resources, an unconsolidated related party (see Note 2). For financial periods
beginning subsequent to December 31, 2002, CERC will retroactively restate the
financial statement presentation of these energy trading activities. For the
year ended December 31, 2000, RESI, RE Europe Trading, and Reliant Energy
Services reported combined revenues and natural gas and purchased power expenses
of $17.6 billion and $17.4 billion, respectively. CERC is currently evaluating
the effects on its Statements of Consolidated Income of the net presentation of
these trading activities for the year ended December 31, 2000. Such presentation
will not affect previously reported operating income or net income.

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

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

                                        39
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period beginning after June 15, 2003. CERC does not expect the adoption of FIN
46 to have a material impact on its results of operations and financial
condition.

     See Note 5 for a discussion of CERC's adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133), on January 1,
2001 and adoption of subsequent cleared guidance. See Note 3(d) for a discussion
of CERC's adoption of SFAS No. 142 on January 1, 2002.

4.  RELATED PARTY TRANSACTIONS

     From time to time, CERC has advanced money to, or borrowed money from,
CenterPoint Energy or its subsidiaries. As of December 31, 2001, CERC had net
short-term receivables, included in accounts and notes receivable-affiliated
companies, of $132 million, partially offset by net accounts payable of $93
million. As of December 31, 2002, CERC had net short-term borrowings, included
in accounts and notes payable-affiliated companies, of $74 million and net
accounts payable of $27 million. As of December 31, 2001, CERC had net long-term
receivables, included in notes receivable-affiliated companies, totaling $3
million. As of December 31, 2002, CERC had net long-term receivables, included
in notes receivable-affiliated companies, of $39 million.

     In February 2001, CERC Corp. paid a dividend to CenterPoint Energy from the
proceeds of a debt offering as discussed in Note 6(b). In May 2001, CenterPoint
Energy made a $236 million capital contribution to CERC Corp., and CERC Corp.
subsequently invested the $236 million with an affiliate. In August 2002, CERC
paid a dividend of $350 million to CenterPoint Energy in the form of an
intercompany note payable. In October 2002, CERC paid the intercompany note
payable. Substantially all of the funds for repayment were obtained from
borrowings under CERC Corp.'s revolving credit facility. For the years ended
December 31, 2000 and 2001, CERC had net interest income related to affiliate
borrowings of $3 million and $5 million, respectively. For the year ended
December 31, 2002, CERC had net interest expense related to affiliate borrowings
of $2 million.

     In 2000, Reliant Energy Services supplied natural gas to, purchased
electricity for resale from, and provided marketing and risk management services
to, unregulated power plants in deregulated markets acquired or operated by
Reliant Energy Power Generation, Inc., an indirect wholly owned subsidiary of
Reliant Energy, or its subsidiaries. In 2001 and 2002, CERC supplied natural gas
to Reliant Energy Services, a subsidiary of Reliant Resources. During 2000, 2001
and 2002, the sales and services by CERC to Reliant Resources and its
subsidiaries totaled $816 million, $181 million and $42 million, respectively.
During 2002, the sales and services by CERC to CenterPoint Energy and its
affiliates totaled $28 million. Purchases of natural gas by CERC from Reliant
Resources and its subsidiaries were $391 million, $639 million and $204 million
in 2000, 2001 and 2002, respectively.

     CenterPoint Energy provides some corporate services to CERC. The costs of
services have been directly charged to CERC using methods that management
believes to be reasonable. These methods include negotiated usage rates,
dedicated asset assignment, and proportionate corporate formulas based on
assets, operating expenses and employees. These charges are not necessarily
indicative of what would have been incurred had CERC not been an affiliate.
Amounts charged to CERC for these services were $71 million, $72 million and
$107 million for 2000, 2001 and 2002, respectively, and are included primarily
in operation and maintenance expenses.

     The 1935 Act generally prohibits borrowings by CenterPoint Energy from its
subsidiaries, including CERC.

                                        40
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  DERIVATIVE INSTRUMENTS

     Effective January 1, 2001, CERC adopted SFAS No. 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement requires that derivatives be recognized at fair value in the
balance sheet and that changes in fair value be recognized either currently in
earnings or deferred as a component of other comprehensive income, depending on
the intended use of the derivative instrument as hedging (a) the exposure to
changes in the fair value of an asset or liability (Fair Value Hedge), (b) the
exposure to variability in expected future cash flows (Cash Flow Hedge), or (c)
the foreign currency exposure of a net investment in a foreign operation. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period it occurs.

     Adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
after-tax increase in accumulated other comprehensive income of $38 million. The
adoption also increased current assets, long-term assets, current liabilities
and long-term liabilities by approximately $88 million, $5 million, $53 million
and $2 million, respectively, in CERC's Consolidated Balance Sheet.

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

  (a) Non-Trading Activities

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

     During 2002, no hedge ineffectiveness was recognized in earnings from
derivatives that are designated and qualify as Cash Flow Hedges. No component of
the derivative instruments' gain or loss was excluded from the assessment of
effectiveness. If it becomes probable that an anticipated transaction will not
occur, CERC realizes in net income the deferred gains and losses recognized in
accumulated other comprehensive income. During the year ended December 31, 2002,
there was a $0.9 million deferred loss recognized in earnings as a result of the
discontinuance of cash flow hedges because it was no longer probable that the
forecasted transaction would occur. Once the anticipated transaction occurs, the
accumulated deferred gain or loss recognized in accumulated other comprehensive
income is reclassified and included in CERC's Statements of Consolidated Income
under the caption "Natural Gas and Purchased Power." Cash flows resulting from
these transactions in non-trading energy derivatives are included in the
Statements of Consolidated Cash Flows in the same category as the item being
hedged. As of December 31, 2002, CERC expects $17 million in accumulated other
comprehensive income to be reclassified into net income during the next twelve
months.

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

                                        41
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (b) CREDIT RISKS

     In addition to the risk associated with price movements, credit risk is
also inherent in CERC's non-trading derivative activities. Credit risk relates
to the risk of loss resulting from non-performance of contractual obligations by
a counterparty. The following table shows the composition of the non-trading
derivative assets of CERC as of December 31, 2001 and 2002:

<Table>
<Caption>
                                                DECEMBER 31, 2001      DECEMBER 31, 2002
                                               -------------------   ----------------------
                                               INVESTMENT            INVESTMENT
NON-TRADING DERIVATIVE ASSETS                  GRADE(1)(2)   TOTAL   GRADE(1)(2)   TOTAL(3)
-----------------------------                  -----------   -----   -----------   --------
                                                                (IN MILLIONS)
<S>                                            <C>           <C>     <C>           <C>
Energy marketers.............................     $   9      $  9        $ 7         $22
Financial institutions.......................        --        --          9           9
                                                  -----      -----       ---         ---
  Total......................................     $   9      $  9        $16         $31
                                                  =====      =====       ===         ===
</Table>

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

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

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

(3) The $22 million non-trading derivative asset includes a $15 million asset
    due to trades with Reliant Energy Services, an affiliate until the date of
    the Distribution. As of December 31, 2002, Reliant Energy Services did not
    have an Investment Grade rating.

  (c) GENERAL POLICY

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

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

                                        42
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  LONG-TERM DEBT AND SHORT-TERM BORROWINGS

<Table>
<Caption>
                                               DECEMBER 31, 2001        DECEMBER 31, 2002
                                             ----------------------   ----------------------
                                             LONG-TERM   CURRENT(1)   LONG-TERM   CURRENT(1)
                                             ---------   ----------   ---------   ----------
                                                              (IN MILLIONS)
<S>                                          <C>         <C>          <C>         <C>
Short-term borrowings:
  Receivables facility(2)..................                 $346                     $ --
  Bank loans...............................                   --                      347
                                                            ----                     ----
     Total short-term borrowings...........                  346                      347
                                                            ----                     ----
Long-term debt(3):
  Convertible debentures 6.0% due 2012.....   $   82          --       $   76          --
  Debentures 6.38% to 8.90% due 2003 to
     2011..................................    1,833          --        1,331         500
  Other....................................       41          --           36           5
Unamortized discount and premium...........       12          --           (2)         13
                                              ------        ----       ------        ----
     Total long-term debt..................    1,968          --        1,441         518
                                              ------        ----       ------        ----
     Total borrowings......................   $1,968        $346       $1,441        $865
                                              ======        ====       ======        ====
</Table>

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

(1) Includes amounts due within one year of the date.

(2) In the first quarter of 2002, CERC reduced its trade receivables facility
    from $350 million to $150 million. Advances under the receivables facility
    aggregating $196 million were repaid in January 2002 with proceeds from the
    issuance of commercial paper and from the liquidation of short-term
    investments. For further discussion of the receivables facility, see Note
    3(i).

(3) Included in long-term debt is additional unamortized premium related to fair
    value adjustments of long-term debt of $9 million and $7 million at December
    31, 2001 and 2002, respectively. These fair value adjustments resulted from
    Reliant Energy's acquisition of RERC and are being amortized over the
    remaining term of the related long-term debt.

  (a) SHORT-TERM BORROWINGS

     Credit Facilities.  At December 31, 2002, CERC Corp. had fully utilized its
$350 million bank facility through borrowings and $2.5 million of letters of
credit. CERC terminated its commercial paper program in 2002.

     As of December 31, 2002, there was $347 million borrowed under CERC's $350
million revolving credit facility. On February 28, 2003, CERC executed a
commitment letter with a major bank for a $350 million, 180-day bridge facility,
which is subject to the satisfaction of various closing conditions. This
facility will be available for repaying borrowings under CERC's existing $350
million revolving credit facility that expires on March 31, 2003 in the event
sufficient proceeds are not raised in the capital markets to repay such
borrowings on or before March 31, 2003. Final terms for the bridge facility have
not been established, but it is anticipated that the rates for borrowings under
the facility will be LIBOR plus 450 basis points. CERC paid a commitment fee of
25 basis points on the committed amount and will be required to pay a facility
fee of 75 basis points on the amount funded and an additional 100 basis points
on the amount funded and outstanding for more than two months. In connection
with this facility, CERC expects to provide the lender with collateral in the
form of a security interest in the stock it owns in its interstate natural gas
pipeline subsidiaries.

     Money Pool Borrowings.  On December 31, 2002, CERC Corp. had borrowed $74
million from its affiliates. CERC Corp. participates in a "money pool" through
which it and certain of its affiliates can borrow

                                        43
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or invest on a short-term basis. Funding needs are aggregated and external
borrowing or investing is based on the net cash position. The money pool's net
funding requirements are generally met with short-term borrowings of CenterPoint
Energy. The terms of the money pool are in accordance with requirements
applicable to registered public utility holding companies under the 1935 Act.

     The weighted average interest rate on external short-term borrowings as of
December 31, 2001 and 2002 was 2.0% and 1.7%, respectively.

  (b) LONG-TERM DEBT

     Consolidated maturities of long-term debt and sinking fund requirements for
CERC are $518 million in 2003 (of which $500 million may be remarketed by an
option holder to a maturity of 2013), $1 million in 2004, $368 million in 2005,
$152 million in 2006 and $7 million in 2007. The 2003 and 2004 amounts are net
of accumulated sinking fund payments that can be satisfied with bonds that had
been acquired and retired as of December 31, 2002.

     At December 31, 2001 and 2002, CERC Corp. had issued and outstanding $86
million and $79 million, respectively, aggregate principal amount ($82 million
and $76 million, respectively, carrying amount) of its 6% Convertible
Subordinated Debentures due 2012 (Subordinated Debentures). The holders of the
Subordinated Debentures receive interest quarterly and, prior to the
Restructuring, had the right at any time on or before the maturity date thereof
to convert each $50 Subordinated Debenture into 0.65 shares of Reliant Energy
common stock and $14.24 in cash. After the Restructuring, but prior to the
Distribution, each $50 Subordinated Debenture was convertible into 0.65 shares
of CenterPoint Energy common stock and $14.24 in cash. The Distribution and the
Texas Genco stock distribution changed the conversion rights for each
Subordinated Debenture as follows:

<Table>
<Caption>
                                                                           SHARES OF
                                                                       CENTERPOINT ENERGY
DATE                                EVENT                      CASH       COMMON STOCK
----               ----------------------------------------   ------   ------------------
<S>                <C>                                        <C>      <C>
October 1, 2002    Distribution of Reliant Resources common   $14.24          1.02
                     stock
December 21, 2002  Distribution of Texas Genco common stock   $14.24          1.11
</Table>

     During 2002, CERC Corp. purchased $6.6 million aggregate principal amount
of its Subordinated Debentures in anticipation of sinking fund requirements.

     CERC Corp.'s $500 million aggregate principal amount of 6 3/8% Term
Enhanced ReMarketable Securities (TERM Notes) provide an investment bank with a
call option that gives it the right to have the TERM Notes tendered to it by the
holders on November 1, 2003 and then remarketed if it chooses to exercise the
option. The TERM Notes are unsecured obligations of CERC Corp. that bear
interest at an annual rate of 6 3/8% through November 1, 2003. On November 1,
2003, the holders of the TERM Notes are required to tender their notes at 100%
of their principal amount. The portion of the proceeds attributable to the call
option premium will be amortized over the stated term of the securities. If the
option is not exercised by the investment bank, CERC Corp. will repurchase the
TERM Notes at 100% of their principal amount on November 1, 2003. If the option
is exercised, the TERM Notes will be remarketed on a date, selected by CERC
Corp., within the 52-week period beginning November 1, 2003. CERC Corp. may
elect into this 52-week remarketing window only if its senior unsecured debt
securities are rated at least Baa3 by Moody's Investors Service, Inc. and BBB-
by Standard & Poor's Ratings Services, a division of The McGraw Hill Companies
(unless the investment banker waives that requirement). During this period and
prior to remarketing, the TERM Notes will bear interest at rates, adjusted
weekly, based on an index selected by CERC Corp. CERC Corp. may elect to redeem
the TERM Notes in whole, but not in part, from the

                                        44
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investment bank prior to remarketing. If the TERM Notes are remarketed, the
final maturity date of the TERM Notes will be November 1, 2013, subject to
adjustment, and the effective interest rate on the remarketed TERM Notes will be
5.66% plus CERC Corp.'s applicable credit spread at the time of such
remarketing.

     In February 2001, CERC Corp. issued $550 million of unsecured notes that
bear interest at 7.75% per year and mature in February 2011. Net proceeds to
CERC Corp. were $545 million. CERC Corp. used the net proceeds from the sale of
the notes to pay a $400 million dividend to CenterPoint Energy and for general
corporate purposes. CenterPoint Energy used the $400 million proceeds from the
dividend for general corporate purposes, including the repayment of short-term
borrowings.

     A subsidiary of CERC Corp. had an agreement (ANR Agreement) with ANR
Pipeline Company (ANR) that contemplated that this subsidiary would transfer to
ANR an interest in some of CERC Corp.'s pipeline and related assets. In 2001,
this subsidiary was transferred to Reliant Resources as a result of CenterPoint
Energy's planned divestiture of certain unregulated business operations.
However, CERC retained the pipelines covered by the ANR Agreement. Therefore,
the subsequent divestiture of Reliant Resources by CenterPoint Energy on
September 30, 2002, resulted in a conversion of CERC's obligation to ANR into an
obligation to Reliant Resources. As of December 31, 2001, CERC had recorded $41
million in long-term debt and as of December 31, 2002, CERC had recorded $5
million and $36 million in current portion of long-term debt and long-term debt,
respectively, in CERC's Consolidated Balance Sheets to reflect this obligation
for the use of 130 million cubic feet (Mmcf)/day of capacity in some of CERC's
transportation facilities. The volume of transportation will decline to 100
Mmcf/day in the year 2003 with a refund by CERC of $5 million to Reliant
Resources. The ANR Agreement will terminate in 2005 with a refund of $36 million
to Reliant Resources.

  (c) RESTRICTIONS ON DEBT

     CERC Corp.'s credit facilities contain various business and financial
covenants requiring CERC Corp. to, among other things, maintain leverage (as
defined in the credit facilities), below specified ratios. These covenants are
not anticipated to materially restrict CERC Corp. from borrowing funds or
obtaining letters of credit under these facilities. As of December 31, 2002,
CERC Corp. was in compliance with these debt covenants.

7.  TRUST PREFERRED SECURITIES

     In June 1996, a Delaware statutory business trust created by CERC Corp.
(CERC Trust) issued $173 million aggregate amount of convertible preferred
securities to the public. CERC Corp. accounts for CERC Trust as a wholly owned
consolidated subsidiary. CERC Trust used the proceeds of the offering to
purchase convertible junior subordinated debentures issued by CERC Corp. having
an interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities. The
convertible junior subordinated debentures represent CERC Trust's sole asset and
its entire operations. CERC Corp. considers its obligation under the Amended and
Restated Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the convertible preferred securities.

     The convertible preferred securities are mandatorily redeemable upon the
repayment of the convertible junior subordinated debentures at their stated
maturity or earlier redemption. Effective January 7, 2003, the convertible
preferred securities are convertible at the option of the holder into $33.62 of
cash and 2.34 shares of CenterPoint Energy common stock for each $50 of
liquidation value. As of December 31, 2001 and 2002, $0.4 million liquidation
amount of convertible preferred securities were outstanding. The securities, and
their
                                        45
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

underlying convertible junior subordinated debentures, bear interest at 6.25%
and mature in June 2026. Subject to some limitations, CERC Corp. has the option
of deferring payments of interest on the convertible junior subordinated
debentures. During any deferral or event of default, CERC Corp. may not pay
dividends on its common stock to CenterPoint Energy. As of December 31, 2002, no
interest payments on the convertible junior subordinated debentures had been
deferred.

8.  EMPLOYEE BENEFIT PLANS

  (a) PENSION PLANS

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

     CenterPoint Energy's funding policy is to review amounts annually in
accordance with applicable regulations in order to achieve adequate funding of
projected benefit obligations. Pension expense is allocated to CERC based on
covered employees. This calculation is intended to allocate pension costs in the
same manner as a separate employer plan. Assets of the plan are not segregated
or restricted by CenterPoint Energy's participating subsidiaries. Pension
benefit was $21 million for the year ended December 31, 2000. CERC recognized
pension expense of $1 million and $13 million for the years ended December 31,
2001 and 2002, respectively.

     In addition to the Plan, CERC participates in CenterPoint Energy's
non-qualified pension plan, which allows participants to retain the benefits to
which they would have been entitled under the qualified pension plan except for
federally mandated limits on these benefits or on the level of salary on which
these benefits may be calculated. The expense associated with the non-qualified
pension plan was $13 million, $5 million and $2 million for the years ended
December 31, 2000, 2001 and 2002, respectively.

     As of December 31, 2001, CenterPoint Energy allocated $94 million of
pension assets, $40 million of non-qualified pension liabilities and $2 million
minimum pension liabilities to CERC. As of December 31, 2002, CenterPoint Energy
has not allocated such pension assets or liabilities to CERC. This change in
method of allocation had no impact on pension expense recorded for the year
ended December 31, 2002.

  (B) SAVINGS PLAN

     CERC participates in CenterPoint Energy's qualified savings plan, which
includes a cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended. Under the plan, participating employees may
contribute a portion of their compensation, on a pre-tax or after-tax basis,
generally up to a maximum of 16% of compensation. CenterPoint Energy matches 75%
of the first 6% of each employee's compensation contributed. CenterPoint Energy
may contribute an additional discretionary match of up to 50% of the first 6% of
each employee's compensation contributed. These matching contributions are fully
vested at all times. A substantial portion of the matching contribution is
initially invested in CenterPoint Energy common stock. CenterPoint Energy
allocates to CERC the savings plan benefit expense related to CERC's employees.

     Savings plan benefit expense was $18 million, $12 million and $17 million
for the years ended December 31, 2000, 2001 and 2002, respectively.

                                        46
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (c) POSTRETIREMENT BENEFITS

     CERC employees participate in CenterPoint Energy's plans which provide
certain health care and life insurance benefits for retired employees on a
contributory and non-contributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements at retirement, as
defined in the plans. Under plan amendments effective in early 1999, health care
benefits for future retirees were changed to limit employer contributions for
medical coverage. Such benefit costs are accrued over the active service period
of employees.

     CERC is required to fund a portion of its obligations in accordance with
rate orders. All other obligations are funded on a pay-as-you-go basis.

     The net postretirement benefit cost includes the following components:

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                              2000       2001        2002
                                                              ----   -------------   ----
                                                                     (IN MILLIONS)
<S>                                                           <C>    <C>             <C>
Service cost -- benefits earned during the period...........  $ 2         $ 2        $ 2
Interest cost on projected benefit obligation...............    9           9          9
Expected return on plan assets..............................   (1)         (1)        (2)
Net amortization............................................    1           2          2
                                                              ---         ---        ---
Net postretirement benefit cost.............................  $11         $12        $11
                                                              ===         ===        ===
</Table>

                                        47
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following are reconciliations of CERC's beginning and ending balances of
its postretirement benefit plans benefit obligation, plan assets and funded
status for 2001 and 2002.

<Table>
<Caption>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                              -------------
                                                              2001    2002
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year.......................  $ 130   $ 131
Service cost................................................      2       2
Interest cost...............................................      9       9
Benefits paid...............................................    (12)    (17)
Participant contributions...................................      2       3
Actuarial loss..............................................     --      27
                                                              -----   -----
Benefit obligation, end of year.............................  $ 131   $ 155
                                                              =====   =====
CHANGE IN PLAN ASSETS
Plan assets, beginning of year..............................  $  12   $  18
Benefits paid...............................................    (12)    (17)
Employer contributions......................................     17      16
Participant contributions...................................      2       3
Actual investment return....................................     (1)     (2)
                                                              -----   -----
Plan assets, end of year....................................  $  18   $  18
                                                              =====   =====
RECONCILIATION OF FUNDED STATUS
Funded status...............................................  $(113)  $(137)
Unrecognized prior service cost.............................     21      19
Unrecognized actuarial loss (gain)..........................    (10)     21
                                                              -----   -----
Net amount recognized at end of year........................  $(102)  $ (97)
                                                              =====   =====
ACTUARIAL ASSUMPTIONS
Discount rate...............................................   7.25%   6.75%
Expected long-term rate of return on assets.................    9.5%    9.0%
</Table>

     For the year ended December 31, 2001, the assumed health care cost trend
rates were 7.5% for participants under age 65 and 8.5% for participants age 65
and over. For the year ended December 31, 2002, the assumed health cost trend
rate was increased to 12% for all participants. The health care cost trend rates
decline by .75% annually to 5.5% by 2011.

     If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 2002 would
increase by approximately 3.9%. The annual effect of the 1% increase on the
total of the service and interest costs would be an increase of approximately
3.2%. If the health care cost trend rate assumptions were decreased by 1%, the
accumulated postretirement benefit obligation as of December 31, 2002 would
decrease by approximately 3.9%. The annual effect of the 1% decrease on the
total of the service and interest costs would be a decrease of 3.2%.

     CERC's postretirement obligation is presented as a liability in the
Consolidated Balance Sheets under the caption Benefit Obligations.

                                        48
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (e) OTHER NON-QUALIFIED PLANS

     CERC participates in CenterPoint Energy's deferred compensation plans which
permit eligible participants to elect each year to defer a percentage of that
year's salary and up to 100% of that year's annual bonus. Employees may elect to
receive an early distribution of their deferral plus interest after at least
four years or any year, up to and including, their age 65 retirement year. In
general, employees who attain the age of 60 during employment and participate in
CenterPoint Energy's deferred compensation plans may elect to have their
deferred compensation amounts repaid in (a) fifteen equal annual installments
commencing at the later of age 65 or termination of employment or (b) a lump-sum
distribution following termination of employment. Interest generally accrues on
deferrals at a rate equal to the average Moody's Long-Term Corporate Bond Index
plus 2%, determined annually until termination when the rate is fixed at the
rate in effect for the plan year immediately prior to which a participant
attains age 65. CERC recorded interest expense related to its deferred
compensation obligation of $1 million each year for the years ended December 31,
2000, 2001 and 2002. The discounted deferred compensation obligation recorded by
CERC was $14 million and $13 million as of December 31, 2001 and 2002,
respectively.

  (e) OTHER EMPLOYEE MATTERS

     As of December 31, 2002, CERC employed 5,428 people. Of these employees,
1,552 are covered by collective bargaining agreements.

9.  INCOME TAXES

     The components of income from continuing operations before taxes are as
follows:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                             ---------------------------
                                                             2000       2001        2002
                                                             ----   -------------   ----
                                                                    (IN MILLIONS)
<S>                                                          <C>    <C>             <C>
United States..............................................  $176       $125        $208
Foreign....................................................    15         --          --
                                                             ----       ----        ----
  Income from continuing operations before income taxes....  $191       $125        $208
                                                             ====       ====        ====
</Table>

     CERC's current and deferred components of income tax expense are as
follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Current
  Federal...................................................  $  52    $  31    $  56
  State.....................................................      9       (3)       9
  Foreign...................................................      3       --       --
                                                              -----    -----    -----
     Total current..........................................     64       28       65
                                                              -----    -----    -----
Deferred
  Federal...................................................     24       29       12
  State.....................................................      1        1       11
  Foreign...................................................      4       --       --
                                                              -----    -----    -----
     Total deferred.........................................     29       30       23
                                                              -----    -----    -----
Income tax expense..........................................  $  93    $  58    $  88
                                                              =====    =====    =====
</Table>

                                        49
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Income from continuing operations before income taxes.......  $ 191    $ 125    $ 208
  Federal statutory rate....................................     35%      35%      35%
                                                              -----    -----    -----
Income tax expense at statutory rate........................     67       44       73
                                                              -----    -----    -----
Increase (decrease) in tax resulting from:
  Capital loss benefit......................................     --       --      (72)
  State income taxes, net of valuation allowances and
     federal income tax benefit(1)..........................      6       (1)      13
  Goodwill amortization.....................................     18       16       --
  Valuation allowance, capital loss.........................     --       --       72
  Other, net................................................      2       (1)       2
                                                              -----    -----    -----
     Total..................................................     26       14       15
                                                              -----    -----    -----
Income tax expense..........................................  $  93    $  58    $  88
                                                              =====    =====    =====
Effective Rate..............................................   48.7%    46.4%    42.2%
</Table>

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

(1) Calculation of the accrual for state income taxes at the end of each year
    requires that CERC estimate the manner in which its income for that year
    will be allocated and/or apportioned among the various states in which it
    conducts business, where states have widely differing tax rules and rates.
    These allocation/apportionment factors change from year to year and the
    amount of taxes ultimately payable may differ from that estimated as a part
    of the accrual process. For these reasons, the amount of state income tax
    expense may vary significantly from year to year, even in the absence of
    significant changes to state income tax valuation allowances or changes in
    individual state income tax rates.

                                        50
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following are CERC's tax effects of temporary differences between the
carrying amounts of assets and liabilities in the financial statements and their
respective tax bases:

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              -------------
                                                              2001    2002
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Deferred tax assets:
  Current:
     Non-trading derivative liabilities, net................  $ 19    $ --
     Current portion of capital loss........................    --       8
     Allowance for doubtful accounts........................    15       9
                                                              ----    ----
       Total current deferred tax assets....................    34      17
  Non-current:
     Employee benefits......................................    70      79
     Operating and capital loss carryforwards...............    28      86
     Other..................................................    45      50
     Valuation allowance....................................   (15)    (83)
                                                              ----    ----
       Total non-current deferred tax assets................   128     132
                                                              ----    ----
       Total deferred tax assets............................   162     149
                                                              ----    ----
Deferred tax liabilities:
  Current:
     Non-trading derivative assets, net.....................    --       7
                                                              ----    ----
       Total current deferred tax liabilities...............    --       7
  Non-current:
     Depreciation...........................................   653     685
     Deferred gas costs.....................................    28       3
     Other..................................................    36      50
                                                              ----    ----
       Total non-current deferred tax liabilities...........   717     738
                                                              ----    ----
       Total deferred tax liabilities.......................   717     745
                                                              ----    ----
       Accumulated deferred income taxes, net...............  $555    $596
                                                              ====    ====
</Table>

     Tax Attribute Carryforwards.  At December 31, 2002, CERC had $7 million and
$386 million of federal and state tax net operating loss carryforwards,
respectively. The loss carryforwards are available to offset future respective
federal and state taxable income through the year 2022.

     In conjunction with the Reliant Resources restructuring and spin-off, CERC
realized a previously unrecorded capital loss attributable to the excess of the
tax basis over the book carrying value in former subsidiaries sold to Reliant
Resources. The tax benefit of this excess tax basis is recorded under SFAS No.
109 when realizable under the facts, such as a loss from a previously deferred
taxable disposition that is triggered by a spin-off. This loss is a capital loss
which may be used in the three taxable years preceding the year of the loss or
the five taxable years following the year of the loss. Federal tax law only
allows utilization of capital losses to offset capital gains. A valuation
allowance is provided against 100% of the expected benefit due to the
uncertainty in CERC's ability to generate capital gains during the utilization
period.

                                        51
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The valuation allowance reflects a net decrease of $33 million in 2001 and
a net increase of $68 million in 2002. These net changes resulted from a
reassessment of CERC's future ability to use federal capital loss carryforwards
and state tax net operating loss carryforwards.

     Tax Refund Case.  In December 2000, CERC received a refund from the IRS of
$32 million in taxes and interest following an audit of its tax returns and
refund claims for the 1979 through 1993 tax years. Interest of $26 million
related to the period prior to the acquisition of CERC by CenterPoint Energy was
recorded as a reduction of goodwill. The income statement effect of $4 million
(after-tax) was recorded in CERC's Statements of Consolidated Income in 2000.
All of CERC Corp.'s consolidated federal income tax returns for tax years ending
on or prior to the date of CenterPoint Energy's acquisition of RERC have been
audited and settled.

10.  COMMITMENTS AND CONTINGENCIES

  (a) ENVIRONMENTAL CAPITAL COMMITMENTS

     CERC has various commitments for capital and environmental expenditures.
CERC anticipates no significant capital and other special project expenditures
between 2003 and 2007 for environmental compliance.

  (b) Lease Commitments

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

<Table>
<S>                                                            <C>
2003........................................................   $ 15
2004........................................................     12
2005........................................................     10
2006........................................................      8
2007........................................................      7
2008 and beyond.............................................     74
                                                               ----
          Total.............................................   $126
                                                               ====
</Table>

     Total rental expense for all operating leases was $33 million, $31 million
and $27 million in 2000, 2001 and 2002, respectively.

  (c) Environmental Matters

     Hydrocarbon Contamination.  On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company (REGT), Reliant Energy Pipeline
Services, Inc., RERC Corp., RES, other Reliant Energy entities and third
parties, in the 1st Judicial District Court, Caddo Parish, Louisiana. The
petition has now been supplemented seven times. As of November 21, 2002, there
were 695 plaintiffs, a majority of whom are Louisiana residents. In addition to
the Reliant Energy entities, the plaintiffs have sued the State of Louisiana
through its Department of Environmental Quality, several individuals, some of
whom are present employees of the State of Louisiana, the Bayou South Gas
Gathering Company, L.L.C., Martin Timber Company, Inc., and several trusts.
Additionally on April 4, 2002, two plaintiffs filed a separate suit with
identical allegations against the same parties in the same court. More recently,
on January 6, 2003, two other plaintiffs filed a third suit of similar
allegations against CenterPoint Energy, as well as other defendants, in Bossier
Parish (26th Judicial District Court).

                                        52
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The suits allege that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer, which lies beneath property owned or leased by certain of the
defendants and which is the sole or primary drinking water aquifer in the area.
The primary source of the contamination is alleged by the plaintiffs to be a gas
processing facility in Haughton, Bossier Parish, Louisiana known as the "Sligo
Facility." This facility was purportedly used for gathering natural gas from
surrounding wells, separating gasoline and hydrocarbons from the natural gas for
marketing, and transmission of natural gas for distribution. This site was
originally leased and operated by predecessors of REGT in the late 1940s and was
operated until Arkansas Louisiana Gas Company ceased operations of the plant in
the late 1970s.

     Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of December
31, 2002, CERC is unable to estimate the monetary damages, if any, that the
plaintiffs may be awarded in these matters.

     Manufactured Gas Plant Sites.  CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in our Minnesota service territory, two of which CERC
believes were neither owned nor operated by CERC, and for which CERC believes it
has no liability.

     At December 31, 2001 and 2002, CERC had accrued $23 million and $19
million, respectively, for remediation of the Minnesota sites. At December 31,
2002, the estimated range of possible remediation costs was $8 million to $44
million based on remediation continuing for 30 to 50 years. The cost estimates
are based on studies of a site or industry average costs for remediation of
sites of similar size. The actual remediation costs will be dependent upon the
number of sites to be remediated, the participation of other potentially
responsible parties (PRP), if any, and the remediation methods used. CERC has an
environmental expense tracker mechanism in its rates in Minnesota. CERC has
collected $12 million at December 31, 2002 to be used for future environmental
remediation.

     CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for sites in other states. Based
on current information, CERC has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

     Mercury Contamination.  CERC's pipeline and distribution operations have in
the past employed elemental mercury in measuring and regulating equipment. It is
possible that small amounts of mercury may have been spilled in the course of
normal maintenance and replacement operations and that these spills may have
contaminated the immediate area with elemental mercury. This type of
contamination has been found by CERC at some sites in the past, and CERC has
conducted remediation at these sites. It is possible that other contaminated
sites may exist and that remediation costs may be incurred for these sites.
Although the total amount of these costs cannot be known at this time, based on
experience by CERC and that of others in the natural gas industry to date and on
the current regulations regarding remediation of these sites, CERC believes that
the costs of any remediation of these sites will not be material to CERC's
financial condition, results of operations or cash flows.

                                        53
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Other Environmental.  From time to time CERC has received notices from
regulatory authorities or others regarding its status as a PRP in connection
with sites found to require remediation due to the presence of environmental
contaminants. Considering the information currently known about such sites and
the involvement of CERC in activities at these sites, CERC does not believe that
these matters will have a material adverse effect on CERC's financial position,
results of operations or cash flows.

  Department of Transportation

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

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

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

  (d) OTHER LEGAL MATTERS

     Natural Gas Measurement Lawsuits.  In 1997, a suit was filed under the
Federal False Claims Act against RERC Corp. (now CERC Corp.) and certain of its
subsidiaries alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.

     In addition, CERC Corp., CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, Inc. and CenterPoint Energy-Mississippi River
Transmission Corporation are defendants in a class action filed in May 1999
against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants for more than 25 years. The plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. The action is currently pending in state court in Stevens
County, Kansas. Motions to dismiss and class certification issues have been
briefed and argued.

     City of Tyler, Texas, Gas Costs Review.  By letter to Entex dated July 31,
2002, the City of Tyler, Texas, forwarded various computations of what it
believes to be excessive costs ranging from $2.8 million to $39.2 million for
gas purchased by Entex for resale to residential and small commercial customers
in that city under supply agreements in effect since 1992. Entex's gas costs for
its Tyler system are recovered from customers pursuant to tariffs approved by
the city and filed with both the city and the Railroad Commission of Texas (the
Railroad Commission). Pursuant to an agreement, on January 29, 2003, Entex and
the city filed a Joint Petition for Review of Charges for Gas Sales (Joint
Petition) with the Railroad Commission. The Joint

                                        54
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Petition requests that the Railroad Commission determine whether Entex has
properly and lawfully charged and collected for gas service to its residential
and commercial customers in its Tyler distribution system for the period
beginning November 1, 1992, and ending October 31, 2002. The Company believes
that all costs for Entex's Tyler distribution system have been properly included
and recovered from customers pursuant to Entex's filed tariffs and that the city
has no legal or factual support for the statements made in its letter.

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

     Other Proceedings.  CERC is involved in other proceedings before various
courts, regulatory commissions and governmental agencies regarding matters
arising in the ordinary course of business. Management currently believes that
the disposition of these matters will not have a material adverse effect on
CERC's financial position, results of operations or cash flows.

11.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair values of cash and cash equivalents, investments in debt and
equity securities classified as "available-for-sale" and "trading" in accordance
with SFAS No. 115, and short-term borrowings are estimated to be equivalent to
carrying amounts and have been excluded from the table below. The fair values of
non-trading derivative assets and liabilities are recognized in the Consolidated
Balance Sheets at December 31, 2001 and 2002 (see Note 5). Therefore, these
financial instruments are stated at fair value and are excluded from the table
below:

<Table>
<Caption>
                                                              DECEMBER 31, 2001
                                                              -----------------
                                                              CARRYING    FAIR
                                                               AMOUNT    VALUE
                                                              --------   ------
                                                                (IN MILLIONS)
<S>                                                           <C>        <C>
Financial liabilities:
  Long-term debt (excluding capital leases).................   $1,968    $1,988
  Trust preferred securities................................        1         1
</Table>

<Table>
<Caption>
                                                              DECEMBER 31, 2002
                                                              -----------------
                                                              CARRYING    FAIR
                                                               AMOUNT    VALUE
                                                              --------   ------
                                                                (IN MILLIONS)
<S>                                                           <C>        <C>
Financial liabilities:
  Long-term debt (excluding capital leases).................   $1,959    $2,069
  Trust preferred securities................................        1        --
</Table>

                                        55
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  UNAUDITED QUARTERLY INFORMATION

     Summarized quarterly financial data is as follows:

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31, 2001
                                   ---------------------------------------------------------------
                                   FIRST QUARTER   SECOND QUARTER   THIRD QUARTER   FOURTH QUARTER
                                   -------------   --------------   -------------   --------------
                                                            (IN MILLIONS)
<S>                                <C>             <C>              <C>             <C>
Revenues.........................     $2,423            $960            $669            $  992
Operating income.................        174             (16)              5               103
Net income (loss)................         80             (34)            (27)               48
</Table>

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31, 2002
                                   ---------------------------------------------------------------
                                   FIRST QUARTER   SECOND QUARTER   THIRD QUARTER   FOURTH QUARTER
                                   -------------   --------------   -------------   --------------
                                                            (IN MILLIONS)
<S>                                <C>             <C>              <C>             <C>
Revenues.........................     $1,242            $868            $737            $1,361
Operating income.................        143              48              37               125
Net income (loss)................         69               8              (5)               48
</Table>

13.  REPORTABLE SEGMENTS

     Because CERC Corp. is a wholly owned subsidiary of CenterPoint Energy,
CERC's determination of reportable segments considers the strategic operating
units under which CenterPoint Energy manages sales, allocates resources and
assesses performance of various products and services to wholesale or retail
customers in differing regulatory environments. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies except that some executive benefit costs have not been
allocated to segments. Reportable business segments from previous years have
been restated to conform to the 2002 presentation. CERC accounts for
intersegment sales as if the sales were to third parties, that is, at current
market prices.

     Beginning in the first quarter of 2002, CERC began to evaluate performance
on an earnings (loss) before interest expense, distribution on trust preferred
securities and income taxes (EBIT) basis. Prior to 2002, CERC evaluated
performance on the basis of operating income. EBIT, as defined, is shown because
it is a measure CERC uses to evaluate the performance of its business segments
and CERC believes it is a measure of financial performance that may be used as a
means to analyze and compare companies on the basis of operating performance.
CERC expects that some analysts and investors will want to review EBIT when
evaluating CERC. EBIT is not defined under accounting principles generally
accepted in the United States (GAAP), should not be considered in isolation or
as a substitute for a measure of performance prepared in accordance with GAAP
and is not indicative of operating income from operations as determined under
GAAP. Additionally, CERC's computation of EBIT may not be comparable to other
similarly titled measures computed by other companies, because all companies do
not calculate it in the same fashion.

     CERC's reportable business segments include the following: Natural Gas
Distribution, Pipelines and Gathering, Wholesale Energy and Other Operations.
Natural Gas Distribution consists of intrastate natural gas sales to, and
natural gas transportation for, residential, commercial and industrial
customers, and some non-rate regulated retail gas marketing operations.
Pipelines and Gathering includes the interstate natural gas pipeline operations
and natural gas gathering and pipeline services. Reliant Energy Services was
previously reported within the Wholesale Energy segment. Other Operations
includes unallocated general corporate expenses and non-operating investments.
During 2000, Reliant Energy transferred RERC's non-rate regulated retail gas
marketing from Other Operations to Natural Gas Distribution and RERC's natural
gas gathering business from Wholesale Energy to Pipelines and Gathering. On
December 31, 2000, RERC Corp. transferred all of the outstanding stock of RESI,
Arkla Finance and RE Europe Trading, all wholly owned subsidiaries of

                                        56
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RERC Corp., to Reliant Resources. Also, on December 31, 2000, a wholly owned
subsidiary of Reliant Resources merged with and into Reliant Energy Services, a
wholly owned subsidiary of RERC Corp., with Reliant Energy Services as the
surviving corporation. As a result of the Merger, Reliant Energy Services became
a wholly owned subsidiary of Reliant Resources. Reportable segments from
previous years have been restated to conform to the 2002 presentation. All of
CERC's long-lived assets are in the United States.

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

<Table>
<Caption>
                                 NATURAL GAS    PIPELINES AND   WHOLESALE     OTHER      RECONCILING     SALES TO
                                 DISTRIBUTION     GATHERING      ENERGY     OPERATIONS   ELIMINATIONS   AFFILIATES   CONSOLIDATED
                                 ------------   -------------   ---------   ----------   ------------   ----------   ------------
                                                                          (IN MILLIONS)
<S>                              <C>            <C>             <C>         <C>          <C>            <C>          <C>
AS OF AND FOR THE YEAR ENDED
  DECEMBER 31, 2000:
Revenues from external
  customers(1).................     $4,445         $  182        $16,961       $  1         $  --          $--         $21,589
Intersegment revenues..........         34            202            579         --          (815)          --              --
Depreciation and
  amortization.................        145             55             11          3            --           --             214
EBIT...........................        125            137            106        (30)           (4)          --             334
Total assets...................      4,518          2,358             --        448          (748)          --           6,576
Expenditures for long-lived
  assets.......................        195             61             27          8            --           --             291
AS OF AND FOR THE YEAR ENDED
  DECEMBER 31, 2001:
Revenues from external
  customers(1).................      4,737            307             --         --            --           --           5,044
Intersegment revenues..........          5            108             --         --          (113)          --              --
Depreciation and
  amortization.................        147             58             --          2            --           --             207
EBIT...........................        149            138             --          3           (10)          --             280
Total assets...................      3,732          2,361             --        101          (202)          --           5,992
Expenditures for long-lived
  assets.......................        209             54             --         --            --           --             263
AS OF AND FOR THE YEAR ENDED
  DECEMBER 31, 2002:
Revenues from external
  customers(1).................      3,927            253             --         --            --           28           4,208
Intersegment revenues..........          7            119             --         --          (126)          --              --
Depreciation and
  amortization.................        126             41             --         --            --           --             167
EBIT...........................        210            158             --          6           (13)          --             361
Total assets...................      4,051          2,481             --        206          (752)          --           5,986
Expenditures for long-lived
  assets.......................        196             70             --         --            --           --             266
</Table>

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

(1) Included in revenues from external customers are revenues from sales to
    Reliant Resources, a former affiliate, of $816 million, $181 million and $42
    million for the years ended December 31, 2000, 2001 and 2002, respectively.

                                        57
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             2000      2001     2002
                                                            -------   ------   ------
                                                                  (IN MILLIONS)
<S>                                                         <C>       <C>      <C>
RECONCILIATION OF OPERATING INCOME TO EBIT AND EBIT TO NET
  INCOME:
Operating income..........................................  $   332   $  266   $  353
Other, net................................................        2       14        8
                                                            -------   ------   ------
  EBIT....................................................      334      280      361
Interest expense and other charges........................     (143)    (155)    (153)
Income taxes..............................................      (93)     (58)     (88)
Loss from discontinued operations.........................      (24)      --       --
                                                            -------   ------   ------
  Net income..............................................  $    74   $   67   $  120
                                                            =======   ======   ======
REVENUES BY PRODUCTS AND SERVICES:
Retail gas sales..........................................  $ 4,358   $4,645   $3,857
Wholesale energy and energy related sales.................   16,961       --       --
Gas transport.............................................      182      307      255
Energy products and services..............................       88       92       96
                                                            -------   ------   ------
  Total...................................................  $21,589   $5,044   $4,208
                                                            =======   ======   ======
REVENUES BY GEOGRAPHIC AREAS
U.S. .....................................................  $20,539   $5,044   $4,208
Canada....................................................    1,050       --       --
                                                            -------   ------   ------
  Total...................................................  $21,589   $5,044   $4,208
                                                            =======   ======   ======
</Table>

14.  DISCONTINUED OPERATIONS

     As discussed in Note 2, on December 31, 2000, CERC transferred all of the
outstanding stock of RE Europe Trading to Reliant Resources. As a result of the
transfer, CERC is reporting the results of RE Europe Trading as discontinued
operations for all periods presented in CERC's consolidated financial statements
in accordance with APB Opinion No. 30. Below is a table of the operating results
of RE Europe Trading for the year ended December 31, 2000.

<Table>
<Caption>
                                                                  YEAR ENDED
                                                               DECEMBER 31, 2000
                                                               -----------------
                                                                 (IN MILLIONS)
<S>                                                            <C>
Revenues....................................................         $ 37
Operating expenses..........................................           61
                                                                     ----
Operating loss..............................................          (24)
                                                                     ----
Net loss....................................................         $(24)
                                                                     ====
</Table>

     In addition to RE Europe Trading, in 2000 CERC transferred its interests in
Reliant Energy Services, RESI and Arkla Finance to Reliant Resources as
described in Note 2. The transfer of these operations did not result in the
disposal of a segment of business as defined under APB No. 30. Revenues for
these operations were $18 billion for 2000. Operations of Reliant Energy
Services, RESI and Arkla Finance had net income of $28 million in 2000.

                                        58
<PAGE>
              CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
       (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.  GUARANTOR DISCLOSURES

     CenterPoint Energy Gas Resources Corp., CenterPoint Energy Gas Marketing
Company and other wholly owned subsidiaries of CERC Corp. provide comprehensive
natural gas sales and services to industrial and commercial customers who are
primarily located within or near the territories served by the Company's
pipelines and distribution subsidiaries. In order to hedge their exposure to
natural gas prices, these CERC Corp. subsidiaries have entered standard purchase
and sale agreements with various counterparties. CenterPoint Energy and CERC
Corp. have guaranteed the payment obligations of these subsidiaries under
certain of these agreements, typically for one-year terms. As of December 31,
2002, CenterPoint Energy had delivered 14 such guarantees with an aggregate
maximum potential exposure of $133.5 million and an aggregate carrying amount of
$12.1 million. As of December 31, 2002, CERC Corp. had delivered 43 such
guarantees with an aggregate maximum potential exposure of $410 million and an
aggregate carrying amount of $53.7 million.

     CenterPoint Energy has delivered a guarantee in favor of the Tennessee
Board for Licensing Contractors to support the contracting activities of
CenterPoint Energy Pipeline Services, Inc. in Tennessee. The term of this
guarantee runs with the two-year license granted by the Tennessee Board and
provides for a maximum potential exposure of $15 million.

                                        59
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Stockholder of CenterPoint Energy Resources Corp.:

     We have audited the accompanying consolidated balance sheets of CenterPoint
Energy Resources Corp., formerly Reliant Energy Resources Corp., and its
subsidiaries (CERC) as of December 31, 2001 and 2002, and the related
consolidated statements of income, comprehensive income, stockholder's equity
and cash flows for each of the three years in the period ended December 31,
2002. Our audits also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and the financial statement
schedule are the responsibility of CERC's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CERC at December 31, 2001 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

     As discussed in Note 3(d) to the consolidated financial statements, on
January 1, 2002, CERC changed its method of accounting for goodwill and certain
intangible assets to conform to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."

DELOITTE & TOUCHE LLP

Houston, Texas
February 28, 2003

                                        60
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

     The information called for by Item 10 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).

ITEM 11. EXECUTIVE COMPENSATION.

     The information called for by Item 11 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDERS MATTERS.

     The information called for by Item 12 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information called for by Item 13 is omitted pursuant to Instruction
I(2) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).

                                    PART IV

ITEM 14. CONTROLS AND PROCEDURES.

     Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

                                        61
<PAGE>

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<Table>
<S>     <C>                                                            <C>
(a)(1)  Financial Statements

        Statements of Consolidated Income for the Three Years Ended
          December 31, 2002.........................................    27

        Statements of Consolidated Comprehensive Income for the
          Three Years Ended December 31, 2002.......................    28

        Consolidated Balance Sheets at December 31, 2002 and 2001...    29

        Statements of Consolidated Cash Flows for the Three Years
          Ended December 31, 2002...................................    30

        Statements of Consolidated Stockholder's Equity for the
          Three Years Ended December 31, 2002.......................    31

        Notes to Consolidated Financial Statements..................    32

        Independent Auditors' Report................................    60

        Financial Statement Schedules for the Three Years Ended
(a)(2)    December 31, 2002
        Schedule II -- Reserves.....................................    63
</Table>

The following schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements:

     I, III, IV and V.

(a)(3) Exhibits

     See Index of Exhibits on page 67.

(b) Reports on Form 8-K

     None.

                                        62
<PAGE>

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

                            SCHEDULE II -- RESERVES
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2002

<Table>
<Caption>
COLUMN A                                              COLUMN B    COLUMN C     COLUMN D      COLUMN E
--------                                             ----------   ---------   -----------   ----------
                                                                  ADDITIONS
                                                     BALANCE AT   ---------   DEDUCTIONS    BALANCE AT
                                                     BEGINNING     CHARGED       FROM         END OF
DESCRIPTION                                          OF PERIOD    TO INCOME   RESERVES(1)     PERIOD
-----------                                          ----------   ---------   -----------   ----------
                                                                  (THOUSANDS OF DOLLARS)
<S>                                                  <C>          <C>         <C>           <C>
Year Ended December 31, 2002:
  Accumulated provisions:
     Uncollectible accounts receivable.............   $33,047     $ 15,391      $28,870      $19,568
     Reserves for inventory........................       123           72          103           92
     Reserves for severance........................       455          881          455          881
     Deferred tax asset valuation allowance........    14,999       67,881           --       82,880
Year Ended December 31, 2001:
  Accumulated provisions:
     Uncollectible accounts receivable.............    32,375       45,745       45,073       33,047
     Reserves for inventory........................       399           72          348          123
     Reserves for severance........................     9,713          455        9,713          455
     Deferred tax asset valuation allowance........    47,677      (32,678)          --       14,999
Year Ended December 31, 2000:
  Accumulated provisions:
     Uncollectible accounts receivable.............    18,475       32,763       18,863       32,375
     Reserves for inventory........................        90          372           63          399
     Reserves for severance........................    11,700        2,507        4,494        9,713
     Deferred tax asset valuation allowance........    16,111       31,566           --       47,677
</Table>

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

(1) Deductions from reserves represent losses or expenses for which the
    respective reserves were created. In the case of the uncollectible accounts
    reserve, such deductions are net of recoveries of amounts previously written
    off.

                                        63
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, the State of Texas, on the 11th day of March, 2003.

                                            CENTERPOINT ENERGY RESOURCES CORP.
                                                       (Registrant)

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 11, 2003.

<Table>
<Caption>
                    SIGNATURE                                              TITLE
                    ---------                                              -----
<S>     <C>                                          <C>

             /s/ DAVID M. MCCLANAHAN                  President, Chief Executive Officer and Director
 ------------------------------------------------     (Principal Executive Officer and Sole Director)
              (David M. McClanahan)


               /s/ GARY L. WHITLOCK                     Executive Vice President and Chief Financial
 ------------------------------------------------                         Officer
                (Gary L. Whitlock)                             (Principal Financial Officer)


                /s/ JAMES S. BRIAN                   Senior Vice President and Chief Accounting Officer
 ------------------------------------------------              (Principal Accounting Officer)
                 (James S. Brian)
</Table>

                                        64
<PAGE>

                                 CERTIFICATIONS

I, David M. McClanahan, certify that:

     1. I have reviewed this annual report on Form 10-K of CenterPoint Energy
        Resources Corp.;

     2. Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which
        such statements were made, not misleading with respect to the period
        covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this annual report;

     4. The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
        we have:

        a) designed such disclosure controls and procedures to ensure that
           material information relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within those
           entities, particularly during the period in which this annual report
           is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls
           and procedures as of a date within 90 days prior to the filing date
           of this annual report (the "Evaluation Date"); and

        c) presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on our
           evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors (or persons
        performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal
           controls which could adversely affect the registrant's ability to
           record, process, summarize and report financial data and have
           identified for the registrant's auditors any material weaknesses in
           internal controls; and

        b) any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           controls; and

     6. The registrant's other certifying officers and I have indicated in this
        annual report whether or not there were significant changes in internal
        controls or in other factors that could significantly affect internal
        controls subsequent to the date of our most recent evaluation, including
        any corrective actions with regard to significant deficiencies and
        material weaknesses.

Date: March 11, 2003

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

                                        65
<PAGE>

                                 CERTIFICATIONS

I, Gary L. Whitlock, certify that:

     1. I have reviewed this annual report on Form 10-K of CenterPoint Energy
        Resources Corp.;

     2. Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which
        such statements were made, not misleading with respect to the period
        covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this annual report;

     4. The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
        we have:

        a) designed such disclosure controls and procedures to ensure that
           material information relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within those
           entities, particularly during the period in which this annual report
           is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls
           and procedures as of a date within 90 days prior to the filing date
           of this annual report (the "Evaluation Date"); and

        c) presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on our
           evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors (or persons
        performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal
           controls which could adversely affect the registrant's ability to
           record, process, summarize and report financial data and have
           identified for the registrant's auditors any material weaknesses in
           internal controls; and

        b) any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           controls; and

     6. The registrant's other certifying officers and I have indicated in this
        annual report whether or not there were significant changes in internal
        controls or in other factors that could significantly affect internal
        controls subsequent to the date of our most recent evaluation, including
        any corrective actions with regard to significant deficiencies and
        material weaknesses.

Date: March 11, 2003

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

                                        66
<PAGE>

                       CENTERPOINT ENERGY RESOURCES CORP.

                   EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
                    FOR FISCAL YEAR ENDED DECEMBER 31, 2002

                               INDEX OF EXHIBITS

     Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.

<Table>
<Caption>
                                                                                  SEC FILE OR
EXHIBIT                                                                           REGISTRATION    EXHIBIT
NUMBER                  DESCRIPTION            REPORT OR REGISTRATION STATEMENT      NUMBER      REFERENCE
-------         ----------------------------   --------------------------------   ------------   ---------
<S>        <C>  <C>                            <C>                                <C>            <C>
2(a)(1)    --   Agreement and Plan of Merger   HI's Form 8-K dated August 11,         1-7629        2
                among the Company, HL&P, HI    1996
                Merger, Inc. and NorAm dated
                August 11, 1996
2(a)(2)    --   Amendment to Agreement and     Registration Statement on Form      333-11329     2(c)
                Plan of Merger among the       S-4
                Company, HL&P, HI Merger,
                Inc. and NorAm dated August
                11, 1996
2(b)       --   Agreement and Plan of Merger   Registration Statement on Form      333-54526        2
                dated December 29, 2000        S-3
                merging Reliant Resources
                Merger Sub, Inc. with and
                into Reliant Energy
                Services, Inc.
3(a)(1)    --   Certificate of Incorporation   Form 10-K for the year ended           1-3187     3(a)(1)
                of RERC Corp.                  December 31, 1997
3(a)(2)    --   Certificate of Merger          Form 10-K for the year ended           1-3187     3(a)(2)
                merging former NorAm Energy    December 31, 1997
                Corp. with and into HI
                Merger, Inc. dated August 6,
                1997
3(a)(3)    --   Certificate of Amendment       Form 10-K for the year ended           1-3187     3(a)(3)
                changing the name to Reliant   December 31, 1998
                Energy Resources Corp.
3(b)       --   Bylaws of RERC Corp.           Form 10-K for the year ended           1-3187     3(b)
                                               December 31, 1997
4(a)(1)    --   Indenture, dated as of         NorAm's Form 10-K for the year        1-13265        4.14
                December 1, 1986, between      ended December 31, 1986
                NorAm and Citibank, N.A., as
                Trustee
4(a)(2)    --   First Supplemental Indenture   Form 10-K for the year ended           1-3187     4(a)(2)
                to Exhibit 4(a)(1) dated as    December 31, 1997
                of September 30, 1988
4(a)(3)    --   Second Supplemental            Form 10-K for the year ended           1-3187     4(a)(3)
                Indenture to Exhibit 4(a)(1)   December 31, 1997
                dated as of November 15,
                1989
4(a)(4)    --   Third Supplemental Indenture   Form 10-K for the year ended           1-3187     4(a)(4)
                to Exhibit 4(a)(1) dated as    December 31, 1997
                of August 6, 1997
</Table>

                                        67
<PAGE>

<Table>
<Caption>
                                                                                  SEC FILE OR
EXHIBIT                                                                           REGISTRATION    EXHIBIT
NUMBER                  DESCRIPTION            REPORT OR REGISTRATION STATEMENT      NUMBER      REFERENCE
-------         ----------------------------   --------------------------------   ------------   ---------
<S>        <C>  <C>                            <C>                                <C>            <C>
4(b)(1)    --   Indenture, dated as of March   NorAm's Registration Statement       33-14586        4.20
                31, 1987, between NorAm and    on Form S-3
                Chase Manhattan Bank, N.A.,
                as Trustee, authorizing 6%
                Convertible Subordinated
                Debentures due 2012
4(b)(2)    --   Supplemental Indenture to      Form 10-K for the year ended           1-3187     4(b)(2)
                Exhibit 4(b)(1) dated as of    December 31, 1997
                August 6, 1997
4(c)(1)    --   Indenture, dated as of April   NorAm's Registration Statement       33-23375        4.1
                15, 1990, between NorAm and    on Form S-3
                Citibank, N.A., as Trustee
4(c)(2)    --   Supplemental Indenture to      Form 10-K for the year ended           1-3187     4(c)(2)
                Exhibit 4(c)(1) dated as of    December 31, 1997
                August 6, 1997
4(d)(1)    --   Form of Indenture between      NorAm's Registration Statement       33-64001        4.8
                NorAm and The Bank of New      on Form S-3
                York as Trustee
4(d)(2)    --   Form of First Supplemental     NorAm's Form 8-K dated June 10,       1-13265        4.01
                Indenture to Exhibit 4(d)(1)   1996
4(d)(3)    --   Second Supplemental            Form 10-K for the year ended           1-3187     4(d)(3)
                Indenture to Exhibit 4(d)(1)   December 31, 1997
                dated as of August 6, 1997
4(e)       --   Indenture, dated as of         Registration Statement on Form      333-41017        4.1
                December 1, 1997, between      S-3
                RERC Corp. and Chase Bank of
                Texas, National Association
4(f)(1)    --   Indenture, dated as of         Form 8-K dated February 5, 1998       1-13265        4.1
                February 1, 1998, between
                RERC Corp. and Chase Bank of
                Texas, National Association,
                as Trustee
4(f)(2)    --   Supplemental Indenture No.     Form 8-K dated February 5, 1998       1-13265        4.2
                1, dated as of February 1,
                1998, providing for the
                issuance of RERC Corp.'s
                6 1/2% Debentures due
                February 1, 2008
4(f)(3)    --   Supplemental Indenture No.     Form 8-K dated November 9, 1998       1-13265        4.1
                2, dated as of November 1,
                1998, providing for the
                issuance of RERC Corp.'s
                6 3/8% Term Enhanced
                ReMarketable Securities
4(f)(4)    --   Supplemental Indenture No.     Registration Statement on Form      333-49162        4.2
                3, dated as of July 1, 2000,   S-4
                providing for the issuance
                of RERC Corp.'s 8.125% Notes
                due 2005
</Table>

                                        68
<PAGE>

<Table>
<Caption>
                                                                                  SEC FILE OR
EXHIBIT                                                                           REGISTRATION    EXHIBIT
NUMBER                  DESCRIPTION            REPORT OR REGISTRATION STATEMENT      NUMBER      REFERENCE
-------         ----------------------------   --------------------------------   ------------   ---------
<S>        <C>  <C>                            <C>                                <C>            <C>
4(f)(5)    --   Supplemental Indenture No.     Form 8-K dated February 21, 2001      1-13265        4.1
                4, dated as of February 15,
                2001, providing for the
                issuance of RERC Corp.'s
                7.75% Notes due 2011
4(g)(1)    --   Revolving Credit Agreement     Form 10-K for the year ended           1-3187     4(g)1
                among NorAm Energy Corp. and   December 31, 2001
                the Bank's party thereto and
                Citibank, N.A., as Agent
                dated as of March 31, 1998
4(g)(2)    --   Amendment Agreement dated as   Form 10-K for the year ended           1-3187     4(g)2
                of March 23, 1999 among RERC   December 31, 2001
                Corp., the lenders parties
                thereto, The Bank of Nova
                Scotia, as issuing Bank, and
                Citibank, N.A., as Agent
4(g)(3)    --   Second Amendment Agreement     Form 10-K for the year ended           1-3187     4(g)3
                and Consent dated as of        December 31, 2001
                August 22, 2000 among RERC
                Corp., the lenders party
                thereto, The Bank of Nova
                Scotia, as Issuing Bank, and
                Citibank, N.A., as Agent
4(g)(4)    --   Third Amendment Agreement      Form 10-K for the year ended           1-3187     4(g)4
                and Consent, dated as of       December 31, 2001
                July 13, 2001, among RERC
                Corp., the lenders party
                thereto, The Bank of Nova
                Scotia, as Issuing Bank, and
                Citibank, N.A., as Agent
</Table>

     There have not been filed as exhibits to this Form 10-K certain long-term
debt instruments, including indentures, under which the total amount of
securities do not exceed 10% of the total assets of CERC. CERC hereby agrees to
furnish a copy of any such instrument to the SEC upon request.

<Table>
<Caption>
                                                                                  SEC FILE OR
EXHIBIT                                                                           REGISTRATION    EXHIBIT
NUMBER                  DESCRIPTION            REPORT OR REGISTRATION STATEMENT      NUMBER      REFERENCE
-------                 -----------            --------------------------------   ------------   ---------
<C>       <S>  <C>                             <C>                                <C>            <C>
   10(a)  --   Service Agreement by and be-    NorAm's Form 10-K for the year        1-13265       10.20
               tween Mississippi River         ended December 31, 1989
               Transmission Corporation and
               Laclede Gas Company dated
               August 22, 1989
  +12     --   Computation of Ratios of
               Earnings to Fixed Charges
  +23     --   Consent of Deloitte & Touche
               LLP
</Table>

                                        69