The following discussion and analysis should be read in combination with our consolidated financial statements included in Item 8 herein.

Background

We are a public utility holding company whose indirect wholly owned subsidiaries include:

• CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston; and

• CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in six states. Subsidiaries of CERC Corp. own interstate natural gas pipelines and gas gathering systems and provide various ancillary services. A wholly owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities.

Business Segments

In this Management's Discussion, we discuss our results from continuing operations on a consolidated basis and individually for each of our business segments. We also discuss our liquidity, capital resources and certain critical accounting policies. We are first and foremost an energy delivery company and it is our intention to remain focused on this segment of the energy business. The results of our business operations are significantly impacted by weather, customer growth, economic conditions, cost management, rate proceedings before regulatory agencies and other actions of the various regulatory agencies to which we are subject. Our electric transmission and distribution services are subject to rate regulation and are reported in the Electric Transmission & Distribution business segment, as are impacts of generation-related stranded costs and other true-up balances recoverable by the regulated electric utility. Our natural gas distribution services are also subject to rate regulation and are reported in the Natural Gas Distribution business segment. A summary of our reportable business segments as of December 31, 2008 is set forth below:

Electric Transmission & Distribution

Our electric transmission and distribution operations provide electric transmission and distribution services to retail electric providers (REPs) serving over 2 million metered customers in a 5,000-square-mile area of the Texas Gulf Coast that has a population of approximately 5.6 million people and includes Houston.

On behalf of REPs, CenterPoint Houston delivers electricity from power plants to substations, from one substation to another and to retail electric customers in locations throughout CenterPoint Houston's certificated service territory. The Electric Reliability Council of Texas, Inc. (ERCOT) serves as the regional reliability coordinating council for member electric power systems in Texas. ERCOT membership is open to consumer groups, investor and municipally-owned electric utilities, rural electric cooperatives, independent generators, power marketers and REPs. The ERCOT market represents approximately 85% of the demand for power in Texas and is one of the nation's largest power markets. Transmission and distribution services are provided under tariffs approved by the Texas Utility Commission.

Natural Gas Distribution

CERC owns and operates our regulated natural gas distribution business (Gas Operations), which engages in intrastate natural gas sales to, and natural gas transportation for, approximately 3.2 million residential, commercial and industrial customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.

Competitive Natural Gas Sales and Services

CERC's operations also include non-rate regulated retail and wholesale natural gas sales to, and transportation services for, commercial and industrial customers in the six states listed above as well as several other Midwestern and Eastern states.

Interstate Pipelines

CERC's interstate pipelines business owns and operates approximately 8,000 miles of natural gas transmission lines primarily located in Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. It also owns and operates six natural gas storage fields with a combined daily deliverability of approximately 1.2 billion cubic feet (Bcf) and a combined working gas capacity of approximately 59 Bcf. It also owns a 10% interest in the Bistineau storage facility located in Bienville Parish, Louisiana, with the remaining interest owned and operated by Gulf South Pipeline Company, LP. Its storage capacity in the Bistineau facility is 8 Bcf of working gas with 100 million cubic feet per day of deliverability. Most storage operations are in north Louisiana and Oklahoma.

Field Services

CERC's field services business owns and operates approximately 3,600 miles of gathering pipelines and processing plants that collect, treat and process natural gas from approximately 150 separate systems located in major producing fields in Arkansas, Louisiana, Oklahoma and Texas.

Other Operations

Our other operations business segment includes office buildings and other real estate used in our business operations and other corporate operations which support all of our business operations.

Significant Events in 2008 and 2009

Hurricane Ike

CenterPoint Houston's electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast early Saturday, September 13, 2008.

The strong Category 2 storm initially left more than 90% of CenterPoint Houston's more than 2 million metered customers without power, the largest outage in CenterPoint Houston's 130-year history. Most of the widespread power outages were due to power lines damaged by downed trees and debris blown by Hurricane Ike's winds. In addition, on Galveston Island and along the coastal areas of the Gulf of Mexico and Galveston Bay, the storm surge and flooding from rains accompanying the storm caused significant damage or destruction of houses and businesses served by CenterPoint Houston.

CenterPoint Houston estimates that total costs to restore the electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $600 million to $650 million. As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston's transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $17 million.

In addition to storm restoration costs, CenterPoint Houston lost approximately $17 million in revenue through December 31, 2008. Within the first 18 days after the storm, CenterPoint Houston had restored power to all customers capable of receiving it.

CenterPoint Houston has deferred the uninsured storm restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, storm restoration costs did not affect our or CenterPoint Houston's reported net income for 2008. As of December 31, 2008, CenterPoint Houston recorded an increase of $145 million in construction work in progress and $435 million in regulatory assets for restoration costs incurred through December 31, 2008. Approximately $73 million of these costs are based on estimates and are included in accounts payable as of December 31, 2008. Additional restoration costs will continue to be incurred in 2009.

Assuming necessary enabling legislation is enacted by the Texas Legislature in the session that began in January 2009, CenterPoint Houston expects to seek a financing order from the Texas Utility Commission to obtain recovery of its storm restoration costs through the issuance of non-recourse securitization bonds similar to the storm recovery bonds issued by another Texas utility following the hurricanes that affected that utility's service territories in 2005. Assuming those bonds are issued, CenterPoint Houston will recover the amount of storm restoration costs determined by the Texas Utility Commission to have been prudently incurred out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers. Alternatively, if securitization is not available, recovery of those costs would be sought through traditional regulatory mechanisms. Under its 2006 rate case settlement, CenterPoint Houston is entitled to seek an adjustment to rates in this situation, even though in most instances its rates are frozen until 2010.

Gas Operations also suffered some damage to its system in Houston, Texas and in other portions of its service territory across Texas and Louisiana. As of December 31, 2008, Gas Operations has deferred approximately $4 million of costs related to Hurricane Ike for recovery as part of future natural gas distribution rate proceedings.

Debt Financing Transactions

Pursuant to a financing order issued by the Texas Utility Commission in September 2007, in February 2008 a subsidiary of CenterPoint Houston issued approximately $488 million in transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates in February 2020 and February 2023, respectively. Scheduled final payment dates are February 2017 and February 2020. Through issuance of the transition bonds, CenterPoint Houston securitized transition property of approximately $483 million representing the remaining balance of the competition transition charge (CTC) adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the fuel reconciliation settlement.

In April 2008, we purchased $175 million principal amount of pollution control bonds issued on our behalf at 102% of their principal amount. Prior to the purchase, $100 million principal amount of such bonds had a fixed rate of interest of 7.75% and $75 million principal amount of such bonds had a fixed rate of interest of 8%. Depending on market conditions, we may remarket both series of bonds, at 100% of their principal amounts, in 2009.

In April 2008, we called our 3.75% convertible senior notes for redemption on May 30, 2008. At the time of the announcement, the notes were convertible at the option of the holders, and substantially all of the notes were submitted for conversion on or prior to the May 30, 2008 redemption date. During the year ended December 31, 2008, we issued 16.9 million shares of our common stock and paid cash of approximately $532 million to settle conversions of approximately $535 million principal amount of our 3.75% convertible senior notes.

In May 2008, we issued $300 million aggregate principal amount of senior notes due in May 2018 with an interest rate of 6.50%. The proceeds from the sale of the senior notes were used for general corporate purposes, including the satisfaction of cash payment obligations in connection with conversions of our 3.75% convertible senior notes as discussed above.

In May 2008, CERC Corp. issued $300 million aggregate principal amount of senior notes due in May 2018 with an interest rate of 6.00%. The proceeds from the sale of the senior notes were used for general corporate purposes, including capital expenditures, working capital and loans to or investments in affiliates.

In November 2008, CERC replaced a receivables facility that had expired in October 2008 with a new receivables facility that expires in November 2009. Availability under the new facility ranges from $128 million to $375 million, reflecting seasonal changes in receivables balances.

In December 2008, CERC entered into an asset management agreement whereby it sold $110 million of its natural gas in storage and agreed to repurchase an equivalent amount of natural gas during the 2008-2009 winter heating season for payments totaling $114 million. This transaction was accounted for as a financing and, as of December 31, 2008, the consolidated financial statements reflect natural gas inventory of $75 million and a financing obligation of $75 million related to this transaction.

In January 2009, CenterPoint Houston issued $500 million aggregate principal amount of general mortgage bonds due in March 2014 with an interest rate of 7.00%. The proceeds from the sale of the bonds were used for general corporate purposes, including the repayment of outstanding borrowings under its revolving credit facility and the money pool, capital expenditures and storm restoration costs associated with Hurricane Ike.

Equity Financing Transactions

In 2008, we received proceeds of approximately $65 million from the sale of approximately 4.9 million common shares to our defined contribution plan and proceeds of approximately $13 million from the sale of approximately 0.9 million common shares to participants in our enhanced dividend reinvestment plan.

Interstate Pipeline Expansion

The Southeast Supply Header (SESH) pipeline project, a joint venture between CenterPoint Energy Gas Transmission, a wholly owned subsidiary of CERC Corp., and Spectra Energy Corp., was placed into commercial service on September 6, 2008. This new 270-mile pipeline, which extends from the Perryville Hub, near Perryville, Louisiana, to an interconnection with the Gulf Stream Natural Gas System near Mobile, Alabama, has a maximum design capacity of approximately one Bcf per day. The pipeline represents a new source of natural gas supply for the Southeast United States and offers greater supply diversity to this region. Our share of SESH's net construction costs is approximately $625 million.

Outlook

During 2008, economic conditions in the United States declined significantly, with several large bank failures and consolidations, large declines in the values of securities, disruptions in the capital markets, which made it difficult to raise debt and equity, and increased costs for capital when it was available. Many of the factors that led to the economic decline are continuing into 2009, but it is impossible to predict the impacts such events may have in the future. Although our businesses and the areas in which we serve have, to date, not been as significantly affected as some others, in 2008, we experienced substantial declines in the value of our pension plan assets as a result of the stock market declines. Disruptions in the bank and capital markets during the last two quarters of 2008 have led to higher borrowing costs and greater uncertainty regarding the ability to execute transactions in these markets.

Although we cannot predict future performance, the decline in the value of our pension plan assets that occurred during 2008 will result in increased non-cash charges to pension plan expense in 2009, which will adversely impact earnings, and may also result in the need for us to make significant cash contributions to our pension plan subsequent to 2009. We also expect to experience higher borrowing costs and greater uncertainty in executing capital markets transactions if conditions in financial markets do not improve from their current state.

To the extent the adverse economic conditions affect our suppliers and customers, results from our energy delivery businesses may suffer. The current low commodity prices for natural gas and other energy products may cause energy producers to scale back projects such as drilling new gas wells or constructing new facilities. Reduced demand and lower energy prices could lead to financial pressure on some of our customers who operate within the energy industry. Also, adverse economic conditions, coupled with concerns for protecting the environment, may cause consumers to use less energy or avoid expansions of their facilities, resulting in less demand for our services.

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

• the resolution of the true-up components, including, in particular, the results of appeals to the courts regarding rulings obtained to date;

• state and federal legislative and regulatory actions or developments, including deregulation, re-regulation, environmental regulations, including regulations related to global climate change, and changes in or application of laws or regulations applicable to the various aspects of our business;

• timely and appropriate legislative and regulatory actions allowing securitization or other recovery of costs associated with Hurricane Ike;

• timely and appropriate rate actions and increases, allowing recovery of costs and a reasonable return on investment;

• cost overruns on major capital projects that cannot be recouped in prices;

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

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

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

• the timing and extent of changes in natural gas basis differentials;

• weather variations and other natural phenomena;

• changes in interest rates or rates of inflation;

• commercial bank and financial market conditions, our access to capital, the cost 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;

• effectiveness of our risk management activities;

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

• non-payment for our services due to financial distress of our customers, including Reliant Energy, Inc. (RRI);

• the ability of RRI and its subsidiaries to satisfy their other obligations to us, including indemnity obligations, or in connection with the contractual arrangements pursuant to which we are their guarantor;

• the outcome of litigation brought by or against us;

• our ability to control costs;

• the investment performance of our employee benefit plans;

• our potential business strategies, including acquisitions or dispositions of assets or businesses, which we cannot assure will be completed or will have the anticipated benefits to us;

• acquisition and merger activities involving us or our competitors; and

• other factors we discuss under "Risk Factors" in Item 1A of this report and in other reports we file from time to time with the Securities and Exchange Commission.

All dollar amounts in the tables that follow are in millions, except for per share amounts.

                                                                 Year Ended December 31,
                                                            2006          2007          2008

Revenues                                                  $   9,319     $   9,623     $  11,322
Expenses                                                      8,274         8,438        10,049
Operating Income                                              1,045         1,185         1,273
Gain (Loss) on Time Warner Investment                            94          (114 )        (139 )
Gain (Loss) on Indexed Debt Securities                          (80 )         111           128
Interest and Other Finance Charges                             (470 )        (503 )        (466 )
Interest on Transition Bonds                                   (130 )        (123 )        (136 )
Distribution from AOL Time Warner Litigation Settlement           -            32             -
Additional Distribution to ZENS Holders                           -           (27 )           -
Equity in Earnings of Unconsolidated Affiliates                   6            16            51
Other Income, net                                                29            17            14
Income Before Income Taxes                                      494           594           725
Income Tax Expense                                              (62 )        (195 )        (278 )
Net Income                                                $     432     $     399     $     447

Basic Earnings Per Share                                  $    1.39     $    1.25     $    1.33

Diluted Earnings Per Share                                $    1.33     $    1.17     $    1.30

2008 Compared to 2007

Net Income. We reported net income of $447 million ($1.30 per diluted share) for 2008 compared to $399 million ($1.17 per diluted share) for the same period in 2007. The increase in net income of $48 million was primarily due to an $88 million increase in operating income, a $37 million decrease in interest expense, excluding transition bond-related interest expense, a $35 million increase in equity in earnings of unconsolidated affiliates related primarily to SESH and a $17 million increase in the gain on our indexed debt securities. These increases in net income were partially offset by an $83 million increase in income tax expense, a $25 million increase in the loss on our Time Warner investment and a $13 million increase in interest expense on transition bonds.

Income Tax Expense. Our 2008 effective tax rate of 38.4% differed from the 2007 effective tax rate of 32.8% primarily as a result of revisions to the Texas State Franchise Tax Law (Texas margin tax) which was reported as an operating expense prior to 2008 and is now being reported as an income tax for CenterPoint Houston and a Texas state tax examination in 2007.

2007 Compared to 2006

Net Income. We reported net income of $399 million ($1.17 per diluted share) for 2007 compared to $432 million ($1.33 per diluted share) for the same period in 2006. The decrease in net income of $33 million was primarily due to a $208 million increase in the loss on our Time Warner investment, a $133 million increase in income tax expense primarily as a result of the favorable tax settlement reached with the Internal Revenue Service (IRS) in 2006 related to our 2.0% Zero Premium Exchangeable Subordinated Notes due 2029 (ZENS) and Automatic Common Exchange Securities (ACES) and a $33 million increase in interest expense, excluding transition bond-related interest expense, due to higher borrowing levels. These decreases in net income were partially offset by a $191 million increase in the gain on our indexed debt securities, a $140 million increase in operating income and a $10 million increase in equity in earnings of unconsolidated affiliates.

The following table presents operating income (in millions) for each of our business segments for 2006, 2007 and 2008. Included in revenues are intersegment sales. We account for intersegment sales as if the sales were to third parties, that is, at current market prices.

                  Operating Income (Loss) by Business Segment

                                                       Year Ended December 31,
                                                     2006        2007        2008
      Electric Transmission & Distribution         $    576     $   561     $   545
      Natural Gas Distribution                          124         218         215
      Competitive Natural Gas Sales and Services         77          75          62
      Interstate Pipelines                              181         237         293
      Field Services                                     89          99         147
      Other Operations                                   (2 )        (5 )        11
      Total Consolidated Operating Income          $  1,045     $ 1,185     $ 1,273

Electric Transmission & Distribution

The following tables provide summary data of our Electric Transmission &
Distribution business segment, CenterPoint Houston, for 2006, 2007 and 2008 (in
millions, except throughput and customer data):

                                                               Year Ended December 31,
                                                        2006            2007            2008
Revenues:
Electric transmission and distribution utility       $     1,516     $     1,560     $     1,593
Transition bond companies                                    265             277             323
Total revenues                                             1,781           1,837           1,916
Expenses:
Operation and maintenance, excluding transition
bond companies                                               611             652             703
Depreciation and amortization, excluding
transition bond companies                                    243             243             277
Taxes other than income taxes                                212             223             201
Transition bond companies                                    139             158             190
Total expenses                                             1,205           1,276           1,371
Operating Income                                     $       576     $       561     $       545

Operating Income:
Electric transmission and distribution operations    $       395     $       400     $       407
Competition transition charge                                 55              42               5
Transition bond companies (1)                                126             119             133
Total segment operating income                       $       576     $       561     $       545
Throughput (in gigawatt-hours (GWh)):
Residential                                               23,955          23,999          24,258
Total                                                     75,877          76,291          74,840
Number of metered customers at period end:
Residential                                            1,743,963       1,793,600       1,821,267
. . .