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 the city of 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 and Analysis, 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, competition, rate proceedings before regulatory agencies and other actions of the various regulatory agencies to whose jurisdiction 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, 2012 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 two million metered customers in a 5,000-square-mile area of the Texas Gulf Coast that has a population of approximately six million people and includes the city of 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, river authorities 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 Public Utility Commission of Texas (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 3.3 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 natural gas sales to, and transportation services for, commercial and industrial customers in 21 states in the central and eastern regions of the United 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 1.3 billion cubic feet (Bcf) and a combined working gas capacity of approximately 59 Bcf. It owns a 50% interest in Southeast Supply Header, LLC (SESH). SESH owns a 1.0 Bcf per day, 274-mile interstate pipeline that runs from the Perryville Hub in Louisiana to Coden, Alabama. Most storage operations are in north Louisiana and Oklahoma.

Field Services

CERC's field services business owns and operates approximately 4,600 miles of gathering pipelines and processing plants that collect, treat and process natural gas primarily from three regions 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.

Factors Influencing Our Business

We are an energy delivery company. The majority of our revenues are generated from the gathering, processing, transportation and sale of natural gas and the transmission and delivery of electricity by our subsidiaries. We do not own or operate electric generating facilities or make retail sales to end-use electric customers. To assess our financial performance, our management primarily monitors operating income and cash flows from our business segments. Within these broader financial measures, we monitor margins, operation and maintenance expense, interest expense, capital spending and working capital requirements. In addition to these financial measures we also monitor a number of variables that management considers important to the operation of our business segments, including the number of customers, throughput, use per customer, commodity prices and heating and cooling degree days. We also monitor system reliability, safety factors and customer satisfaction to gauge our performance.

To the extent adverse economic conditions affect our suppliers and customers, results from our energy delivery businesses may suffer. 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.

Performance of our Electric Transmission & Distribution and Natural Gas Distribution business segments is significantly influenced by the number of customers and energy usage per customer. Weather conditions can have a significant impact on energy usage, and we compare our results on a weather adjusted basis. The Houston area experienced extremely hot and dry weather during 2011, and each month from April through September was one of the ten warmest months on record. In 2012, we experienced a return to more normal weather in the summer months. However, every state in which we distribute natural gas had the warmest winter on record. In recent years, customers have typically reduced their energy consumption, and reduced consumption can adversely affect our results. However, due to more affordable energy prices and continued economic recovery in the areas we serve, the trend toward lower usage has slowed in some of the areas we serve. In addition, in many of our service areas, particularly in the Houston area and in Minnesota, we have benefited from growth in the number of customers that also tends to mitigate the effects of reduced consumption. We anticipate that this growth will continue as the regions experience a continued economic recovery. The profitability of our businesses is influenced significantly by the regulatory treatment we receive from the various state and local regulators who set our electric and gas distribution rates. In recent rate filings, we have sought rate mechanisms that help to decouple our results from the impacts of weather and variations in usage from levels reflected in rates, but such rate mechanisms have not yet been approved in all jurisdictions. We plan to continue to pursue such decoupling mechanisms in our future rate filings.

Our Field Services and Interstate Pipelines business segments are currently benefiting from their proximity to significant natural gas producing regions in Texas, Arkansas, Oklahoma and Louisiana. In our Field Services business segment, the development of shale formations has helped offset declines in production from more traditional basins. The recent decline in natural gas prices has contributed to reductions in drilling activity in dry gas shale formations as well, including those served by our Field Services business segment. Many producers have shifted their focus to liquids-rich natural gas or crude oil basins. A

reduction in drilling activity may result in lower throughput volumes on our systems as the wells decline over time. However, a significant amount of the volumes gathered by systems we recently developed in shale basins such as the Haynesville and Fayetteville shales are supported by contracts with annual volume commitments, or price adjustment mechanisms that provide for minimum returns on capital deployed. In monitoring performance of the segments, we focus on throughput of the pipelines and gathering systems, and in the case of Field Services, on the number of well-connects.

Our Competitive Natural Gas Sales and Services business segment contracts with customers for transportation, storage and sales of natural gas on an unregulated basis. Its operations serve customers in the central and eastern regions of the United States. The segment benefits from favorable price differentials, either on a geographic basis or on a seasonal basis. While this business utilizes financial derivatives to hedge its exposure to price movements, it does not engage in speculative or proprietary trading and maintains a low value at risk level, or VaR, to avoid significant financial exposures. Lower geographic and seasonal price differentials during 2010, 2011 and 2012 adversely affected results for this business segment.

The nature of our businesses requires significant amounts of capital investment, and we rely on internally generated cash, borrowings under our credit facilities, proceeds from commercial paper and issuances of debt and equity in the capital markets to satisfy these capital needs. We strive to maintain investment grade ratings for our securities in order to access the capital markets on terms we consider reasonable. Our goal is to continue to improve our credit ratings over time. A reduction in our ratings generally would increase our borrowing costs for new issuances of debt, as well as borrowing costs under our existing revolving credit facilities, and may prevent us from accessing the commercial paper markets. Disruptions in the financial markets can also affect the availability of new capital on terms we consider attractive. In those circumstances, companies like us may not be able to obtain certain types of external financing or may be required to accept terms less favorable than they would otherwise accept. For that reason, we seek to maintain adequate liquidity for our businesses through existing credit facilities and prudent refinancing of existing debt.

We expect to make contributions to our pension plan aggregating approximately $83 million in 2013 and may need to make larger contributions in subsequent years. Consistent with the regulatory treatment of such costs, we can defer the amount of pension expense that differs from the level of pension expense included in our base rates for our Electric Transmission & Distribution business segment and our Gas Operations in Texas.

Significant Events

Acquisition

On July 31, 2012, we purchased the 50% interest that we did not already own in Waskom Gas Processing Company (Waskom), a Texas general partnership, which owns and operates a natural gas processing plant and natural gas gathering assets, as well as other gathering and related assets from a third-party for approximately $273 million. The amount of the purchase price allocated to the acquisition of the 50% interest in Waskom was approximately $201 million, with the remaining purchase price allocated to the other gathering assets, based on a discounted cash flow methodology. The purchase of the 50% interest in Waskom was determined to be a business combination achieved in stages, and as such we recorded a pre-tax gain of approximately $136 million on July 31, 2012, which is the result of remeasuring our original 50% interest in Waskom to fair value. As a result of the purchase, we recorded goodwill of $24 million, which includes $17 million related to Waskom (including the re-measurement of our existing 50% interest) and $7 million related to the other gathering and related assets.

Goodwill Impairment

We performed our annual impairment test in the third quarter of 2012 and determined that a non-cash goodwill impairment charge in the amount of $252 million was required for the Competitive Natural Gas Sales and Services reportable segment. We also determined that no impairment charge was required for any other reportable segment. The adverse wholesale market conditions facing our energy services business, specifically the prospects for continued low geographic and seasonal price differentials for natural gas, led to a reduction in the estimate of the fair value of goodwill associated with this reporting unit.

Debt Financing Transactions

In January 2012, CenterPoint Energy Transition Bond Company IV, LLC (Bond Company IV) issued $1.695 billion of transition bonds in three tranches with interest rates ranging from 0.9012% to 3.0282% and final maturity dates ranging from April 15, 2018 to October 15, 2025. Through the issuance of these transition bonds, CenterPoint Houston recovered the additional true-up balance of $1.695 billion, less approximately $10.4 million of offering expenses. The transition bonds will be repaid through a charge imposed on customers in CenterPoint Houston's service territory.

In February 2012, we purchased $275 million aggregate principal amount of pollution control bonds issued on our behalf at 100% of their principal amount plus accrued interest pursuant to the mandatory tender provisions of the bonds. The purchased pollution control bonds will remain outstanding and may be remarketed. Prior to the purchase, the pollution control bonds had fixed interest rates ranging from 5.15% to 5.95%. Additionally, in March 2012, we redeemed $100 million aggregate principal amount of pollution control bonds issued on our behalf at 100% of their principal amount plus accrued interest pursuant to the optional redemption provisions of the bonds. The redeemed pollution control bonds had a fixed interest rate of 5.25%.

In August 2012, CenterPoint Houston issued $300 million of 2.25% general mortgage bonds due 2022 and $500 million of 3.55% general mortgage bonds due 2042. The net proceeds from the sale of the bonds were used to fund a portion of the redemption of the general mortgage bonds discussed below.

In August 2012, CenterPoint Houston redeemed $300 million principal amount of its 5.75% general mortgage bonds due 2014 at a price of 107.332% of their principal amount and $500 million principal amount of its 7.00% general mortgage bonds due 2014 at a price of 109.397% of their principal amount. Redemption premiums for the two series aggregated approximately $69 million.

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

• state and federal legislative and regulatory actions or developments affecting various aspects of our businesses, including, among others, energy deregulation or re-regulation, pipeline integrity and safety, health care reform, financial reform, tax legislation and actions regarding the rates charged by our regulated businesses;

• state and federal legislative and regulatory actions or developments relating to the environment, including those related to global climate change;

• timely and appropriate rate actions that allow recovery of costs and a reasonable return on investment;

• the timing and outcome of any audits, disputes and other proceedings related to taxes;

• problems with construction, implementation of necessary technology or other issues with respect to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;

• industrial, commercial and residential growth in our service territory and changes in market demand, including the effects of energy efficiency measures and demographic patterns;

• the timing and extent of changes in commodity prices, particularly natural gas and natural gas liquids, the competitive effects of excess pipeline capacity in the regions we serve, and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances on re-contracting available capacity on our interstate pipelines;

• the timing and extent of changes in the supply of natural gas, particularly supplies available for gathering by our field services business and transporting by our interstate pipelines, including the impact of natural gas and natural gas liquids prices on the level of drilling and production activities in the regions we serve;

• competition in our mid-continent region footprint for access to natural gas supplies and markets;

• weather variations and other natural phenomena, including the impact on operations and capital of severe weather events;

• any direct or indirect effects on our facilities, operations and financial condition resulting from terrorism, cyber-attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events;

• the impact of unplanned facility outages;

• timely and appropriate regulatory actions allowing securitization or other recovery of costs associated with any future hurricanes or natural disasters;

• 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 credit 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;

• the ability of GenOn Energy, Inc. (GenOn) (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc. (RRI)), a wholly owned subsidiary of NRG Energy, Inc. (NRG), and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or obligations in connection with the contractual arrangements pursuant to which we are their guarantor;

• the ability of REPs, including REP affiliates of NRG and Energy Future Holdings Corp. (Energy Future Holdings), which are CenterPoint Houston's two largest customers, to satisfy their obligations to us and our subsidiaries;

• the outcome of litigation brought by or against us;

• our ability to control costs;

• the investment performance of our pension and postretirement benefit plans;

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

• acquisition and merger activities involving us or our competitors;

• future economic conditions in regional and national markets and their effect on sales, prices and costs; 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 SEC.

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

                                                         Year Ended December 31,
                                                      2010        2011        2012
Revenues                                            $ 8,785     $ 8,450     $ 7,452
Expenses                                              7,536       7,152       6,414
Operating Income                                      1,249       1,298       1,038
Gain on Marketable Securities                            67          19         154
Gain (Loss) on Indexed Debt Securities                  (31 )        35         (71 )
Interest and Other Finance Charges                     (481 )      (456 )      (422 )
Interest on Transition and System Restoration Bonds    (140 )      (127 )      (147 )
Equity in Earnings of Unconsolidated Affiliates          29          30          31
Return on True-Up Balance                                 -         352           -
Step acquisition gain                                     -           -         136
Other Income, net                                        12          23          38
Income Before Income Taxes and Extraordinary Item       705       1,174         757
Income Tax Expense                                      263         404         340
Income Before Extraordinary Item                        442         770         417
Extraordinary Item, net of tax                            -         587           -
Net Income                                          $   442     $ 1,357     $   417

Basic Earnings Per Share:
Income Before Extraordinary Item                    $  1.08     $  1.81     $  0.98
Extraordinary Item, net of tax                            -        1.38           -
Net Income                                          $  1.08     $  3.19     $  0.98

Diluted Earnings Per Share:
Income Before Extraordinary Item                    $  1.07     $  1.80     $  0.97
Extraordinary Item, net of tax                            -        1.37           -
Net Income                                          $  1.07     $  3.17     $  0.97

2012 Compared to 2011

Net Income. We reported net income of $417 million ($0.97 per diluted share) for 2012 compared to $1.357 billion ($3.17 per diluted share) for the same period in 2011. The decrease in net income of $940 million was primarily due to the resolution in 2011 of the true-up appeal resulting in an after-tax extraordinary gain of $587 million and a $352 million return on the true-up balance, a $260 million decrease in operating income (discussed by segment below), including a $252 million non-cash goodwill impairment charge, and a $106 million increase in the loss on our indexed debt securities, which were partially offset by a $136 million step acquisition gain related to the acquisition of an additional 50% interest in Waskom, a $135 million increase in the gain on our marketable securities, a $64 million decrease in income tax expense and a $14 million decrease in interest expense due to lower levels of debt.

Income Tax Expense. We reported an effective tax rate of 44.9% for 2012 compared to 34.4% for the same period in 2011. The increase in the effective tax rate of 10.5% is due to goodwill impairment of $252 million which is non-deductible for tax purposes. It is partially offset by favorable tax adjustments, including the re-measurement of certain unrecognized tax benefits of $28 million related to the Internal Revenue Service (IRS) settlement of tax years 2006 through 2009.

2011 Compared to 2010

Net Income. We reported net income of $1.357 billion ($3.17 per diluted share) for 2011 compared to $442 million ($1.07 per diluted share) for the same period in 2010. The increase in net income of $915 million was primarily due to the resolution of the true-up appeal resulting in an after-tax extraordinary gain of $587 million and a $352 million return on the true-up balance, a $66 million increase in the gain on our indexed debt securities, a $49 million increase in operating income and a $38 million decrease in interest expense due to lower levels of debt, which were partially offset by a $141 million increase in income tax expense and a $48 million decrease in the gain on our marketable securities.

Income Tax Expense. We reported an effective tax rate of 34.4% for 2011 compared to 37.3% for the same period in 2010. The decrease in the effective tax rate of 2.9% is due to an $18 million reduction to the uncertain tax liability primarily related to the resolution of the tax normalization issue, a $21 million reduction to the deferred tax asset due to the enactment of the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act recognized in 2010, a $24 million decrease to state tax expense due to the restructuring of certain subsidiaries in December 2010, and a $17 million state tax benefit primarily attributable to lower blended state tax rates and a reduction to the state deferred tax liability recorded in December 2011.

The following table presents operating income (loss) (in millions) for each of our business segments for 2010, 2011 and 2012. 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,
                                              2010        2011       2012
Electric Transmission & Distribution       $     567    $   623    $   639
Natural Gas Distribution                         231        226        226
Competitive Natural Gas Sales and Services        16          6       (250 )
Interstate Pipelines                             270        248        207
Field Services                                   151        189        214
Other Operations                                  14          6          2
Total Consolidated Operating Income        $   1,249    $ 1,298    $ 1,038