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The following is an excerpt from a 10-K/A SEC Filing, filed by RELIANT ENERGY INC on 7/5/2002.
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CENTERPOINT ENERGY HOUSTON ELECTRIC LLC - 10-K/A - 20020705 - LIQUIDITY_CAPITAL

LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL CASH FLOWS

The net cash provided by/used in operating, investing and financing activities for 1999, 2000 and 2001 is as follows (in millions):

                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      2000      2001
                                                          -------   -------   -------
Cash provided by (used in):
  Operating activities..................................  $ 1,104   $ 1,344   $ 1,713
  Investing activities..................................   (2,870)   (3,286)   (2,085)
  Financing activities..................................    1,823     2,032       337

CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operations in 2001 increased $369 million compared to 2000. This increase primarily resulted from:

- an increase in recovered fuel costs by our Electric Operations business segment;

- a decrease in net margin deposits on energy trading activities as a result of reduced commodity volatility and relative price levels of natural gas and power compared to the fourth quarter of 2000; and

- an increase in operating margins from Wholesale Energy's power generation operations.

This increase is partially offset by:

- a prepayment of a lease obligation related to REMA sale/leaseback transactions (please read Note 14(b) to our consolidated financial statements);

- an increase in restricted cash related to our REMA operations;

- an increase in deposits in a collateral account related to an equipment financing structure (please read Note 14(l) to our consolidated financial statements);

- an increase in costs related to our Retail Energy business segments' increased staffing levels and preparation for competition in the retail electric market in Texas;

- reduced cash flows from our European Energy business segment primarily resulting from a decline in electric power generation gross margins as the Dutch electric market was completely opened to wholesale competition on January 1, 2001; and

- other changes in working capital.

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Net cash provided by operations in 2000 increased $240 million compared to 1999. This increase primarily resulted from:

- proceeds from the sale of an investment in marketable debt securities by REPGB;

- improved operating results of our Wholesale Energy business segment's California generating facilities;

- incremental cash flows provided by REPGB, acquired in the fourth quarter of 1999;

- cash flows from REMA, acquired in the second quarter of 2000; and

- increased sales from our Electric Operations business segment due to growth in usage and number of customers.

These increases were partially offset by increases in under-recovered fuel costs of our Electric Operations business segment and Wholesale Energy's net margin deposits on energy trading activities.

CASH USED IN INVESTING ACTIVITIES

Net cash used in investing activities decreased $1.2 billion during 2001 compared to 2000. This decrease was primarily due to no acquisitions being made in 2001 as compared to the $2.1 billion acquisition of REMA in 2000, and the funding of the remaining $982 million purchase obligation for REPGB in 2000.

These decreases were partially offset by additional capital expenditures in 2001 of $211 million primarily related to our Electric Operations business segment, proceeds of $1.0 billion received in 2000 from the REMA sale-leaseback and $642 million received in 2000 from the sale of our Latin America assets, net of investments and advances.

Net cash used in investing activities increased $416 million during 2000 compared to 1999. This increase was primarily due to:

- the funding of the remaining purchase obligation for REPGB of $982 million on March 1, 2000;

- the acquisition of REMA for $2.1 billion on May 12, 2000; and

- increased capital expenditures related to the construction of domestic power generation projects.

Proceeds of $1.0 billion from the REMA sale-leaseback in 2000, the sale of a substantial portion of our Latin America investments in 2000 and the purchase of $537 million of AOL Time Warner securities in 1999 partially offset these increases.

CASH PROVIDED BY FINANCING ACTIVITIES

Cash flows provided by financing activities decreased $1.7 billion in 2001 compared to 2000, primarily due to a decline in short term borrowings partially offset by $1.7 billion in net proceeds from the initial public offering of Reliant Resources.

Cash flows provided by financing activities increased $209 million in 2000 compared to 1999, primarily due to an increase in short-term borrowings partially offset by a decline in proceeds from long-term debt and the sale of trust preferred securities.

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FUTURE SOURCES AND USES OF CASH

The following table sets forth our consolidated capital requirements for 2001, and estimates of our consolidated capital requirements for 2002 through 2006 (in millions).

                                      2001     2002     2003     2004     2005    2006
                                     ------   ------   ------   ------   ------   ----
Electric Operations (with nuclear
  fuel)(1).........................  $  936   $   --   $   --   $   --   $   --   $ --
Electric Transmission and
  Distribution(1)..................      --      338      320      381      362    352
Electric Generation (with nuclear
  fuel)(1).........................      --      285      192       89       79     45
Natural Gas Distribution...........     209      219      231      231      234    231
Pipelines and Gathering............      54       76       45       45       43     38
Wholesale Energy(2)(3).............     658    3,579      322      147      215    146
European Energy....................      21       22       --       --       --     --
Retail Energy......................     117       40       19       18       14     16
Other Operations...................      58      111       80       46       73     38
Major maintenance cash outlays.....      88       94       87      106       86     85
                                     ------   ------   ------   ------   ------   ----
  Total............................  $2,141   $4,764   $1,296   $1,063   $1,106   $951
                                     ======   ======   ======   ======   ======   ====


(1) Beginning in 2002, the Electric Operations business segment will be replaced by the Electric Transmission and Distribution business segment and the Electric Generation business segment. In December 2001, we formed Texas Genco, LP, a Texas limited partnership, as an indirect, wholly owned subsidiary (Texas Genco). It is anticipated that the majority interest in Texas Genco held by CenterPoint Energy will be purchased by Reliant Resources in early 2004 pursuant to the terms of an option that Reliant Resources holds, or will otherwise be sold to one or more other parties. The Texas generation operations referred to as our "Texas generation business" throughout this Form 10-K will be reported as the "Electric Generation" business segment beginning in 2002. Capital requirements for current generation operations of Reliant Energy HL&P are included in the Electric Generation business segment. Capital requirements for the remainder of Reliant Energy HL&P's operations are included in the Electric Transmission and Distribution business segment.

(2) Capital requirements for 2002 include $2.9 billion for the acquisition of Orion Power by Reliant Resources.

(3) We currently estimate the capital expenditures by off-balance sheet special purpose entities to be $704 million, $343 million, $163 million and $48 million in 2002, 2003, 2004 and 2005, respectively. Capital expenditures for these projects have been excluded from the table above. Please read "Future Sources and Uses -- Reliant Resources (unregulated businesses)," "-- Off-Balance Sheet Transactions -- Construction Agency Agreements" and "-- Equipment Financing Structure" below for additional information.

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The following table sets forth estimates of our consolidated contractual obligations as of December 31, 2001 to make future payments for 2002 through 2006 and thereafter (in millions):

                                                                                          2007 AND
CONTRACTUAL OBLIGATIONS                TOTAL     2002     2003    2004    2005    2006   THEREAFTER
-----------------------               -------   ------   ------   ----   ------   ----   ----------
Long-term debt, including capital
  leases(1).........................  $ 6,403   $  538   $1,226   $ 90   $  390   $218     $3,941
Short-term borrowing, including
  credit facilities(1)..............    3,435    3,435       --     --       --     --         --
Trust preferred securities(2).......      706       --       --     --       --     --        706
REMA operating lease payments(3)....    1,560      136       77     84       75     64      1,124
Other operating lease payments(3)...      969       66       84     94       95     95        535
Trading and marketing
  liabilities(4)....................    1,840    1,478      216     85       33     13         15
Non-trading derivative
  liabilities(4)....................    1,121      472      198    115       62     35        239
Other commodity commitments(5)......    4,014      451      314    340      344    348      2,217
Other long-term obligations.........      300       10       10     10       10     10        250
                                      -------   ------   ------   ----   ------   ----     ------
  Total contractual cash
     obligations....................  $20,348   $6,586   $2,125   $818   $1,009   $783     $9,027
                                      =======   ======   ======   ====   ======   ====     ======


(1) For a discussion of short-term and long-term debt, please read Note 10 to our consolidated financial statements.

(2) For a discussion of trust preferred securities, please read Note 11 to our consolidated financial statements.

(3) For a discussion of REMA and other operating leases, please read Note 14(b) to our consolidated financial statements.

(4) For a discussion of trading and marketing liabilities and non-trading derivative liabilities, please read Note 5 to our consolidated financial statements.

(5) For a discussion of other commodity commitments, please read Note 14(a) to our consolidated financial statements. Excluded from the table above are amounts to be acquired by Reliant Resources from Texas Genco under purchase power and electric capacity commitments of $213 million and $57 million in 2002 and 2003, respectively.

The following discussion regarding future sources and uses of cash over the next twelve months is presented separately for our regulated businesses and unregulated businesses consistent with the separate liquidity plans that our management has developed for CenterPoint Energy and Reliant Resources. We believe that our borrowing capability combined with cash flows from operations will be sufficient to meet the operational needs of our businesses for the next twelve months.

RELIANT ENERGY (TO BECOME CENTERPOINT ENERGY SUBSEQUENT TO THE RESTRUCTURING)

Our liquidity and capital requirements will be affected by:

- capital expenditures;

- debt service requirements;

- the repayment of notes payable to Reliant Resources;

- the reduction in, and elimination of, programs under which we have sold customer accounts receivable;

- proceeds from the expected initial public offering of Texas Genco;

- various regulatory actions; and

- working capital requirements.

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We expect capital requirements to be met with cash flows from operations, as well as proceeds from debt offerings and other borrowings. The following table sets forth our capital requirements for 2001, and estimates of our capital requirements for 2002 through 2006 (in millions):

                                            2001    2002   2003   2004   2005   2006
                                           ------   ----   ----   ----   ----   ----
Electric Operations (with nuclear
  fuel)(1)...............................  $  936   $ --   $ --   $ --   $ --   $ --
Electric Transmission and
  Distribution(1)........................      --    338    320    381    362    352
Electric Generation (with nuclear
  fuel)(1)...............................      --    285    192     89     79     45
Natural Gas Distribution.................     209    219    231    231    234    231
Pipelines and Gathering..................      54     76     45     45     43     38
Other Operations.........................      14     36     34     15     41      5
                                           ------   ----   ----   ----   ----   ----
  Total..................................  $1,213   $954   $822   $761   $759   $671
                                           ======   ====   ====   ====   ====   ====


(1) Beginning in 2002, the Electric Operations business segment will be replaced by the Electric Transmission and Distribution business segment and the Electric Generation business segment. It is anticipated that the majority interest in Texas Genco held by CenterPoint Energy will be purchased by Reliant Resources in early 2004 pursuant to the terms of an option that Reliant Resources holds, or will otherwise be sold to one or more other parties. The Texas generation operations referred to as our "Texas generation business" throughout this Form 10-K will be reported as the "Electric Generation" business segment beginning in 2002. Capital requirements for current generation operations of Reliant Energy HL&P are included in the Electric Generation business segment. Capital requirements for the remainder of Reliant Energy HL&P's operations are included in the Electric Transmission and Distribution business segment.

The following table sets forth estimates of our contractual obligations to make future payments for 2002 through 2006 and thereafter (in millions):

                                                                                     2007 AND
CONTRACTUAL OBLIGATIONS               TOTAL     2002    2003   2004   2005   2006   THEREAFTER
-----------------------              -------   ------   ----   ----   ----   ----   ----------
Long-term debt, including capital
  leases...........................  $ 5,511   $  514   $687   $ 48   $378   $206     $3,678
Short-term borrowing, including
  credit facilities................    3,138    3,138     --     --     --     --         --
Trust preferred securities.........      706       --     --     --     --     --        706
Other operating lease
  payments(1)......................      110       14     12      7      6      5         66
Non-trading derivative
  liabilities......................       83       73      7      2      1     --         --
Other commodity commitments(2).....    1,150      199    129    133    137    141        411
                                     -------   ------   ----   ----   ----   ----     ------
  Total contractual cash
     obligations...................  $10,698   $3,938   $835   $190   $522   $352     $4,861
                                     =======   ======   ====   ====   ====   ====     ======


(1) For a discussion of other operating leases, please read Note 14(b) to our consolidated financial statements.

(2) For a discussion of other commodity commitments, please read Note 14(a) to our consolidated financial statements.

Credit Facilities. As of December 31, 2001, we had credit facilities, including facilities of Houston Industries FinanceCo LP (FinanceCo) and RERC Corp., that provided for an aggregate of $5.4 billion in committed credit. As of December 31, 2001, $3.1 billion was outstanding under these facilities including $2.5 billion of commercial paper supported by the facilities, borrowings of $636 million and letters of credit of $2.5 million.

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The following table summarizes amounts available under these credit facilities at December 31, 2001 and commitments expiring in 2002 (in millions):

                                                                                   AMOUNT OF
                                                            TOTAL      UNUSED     COMMITMENTS
                                                          COMMITTED   AMOUNT AT    EXPIRING
BORROWER                               TYPE OF FACILITY    CREDIT     12/31/01      IN 2002
--------                               ----------------   ---------   ---------   -----------
Reliant Energy.......................  Revolver            $  400      $  236       $  400
FinanceCo............................  Revolvers            4,300       1,671        4,300
RERC Corp. ..........................  Revolver               350         347           --
RERC Corp. ..........................  Receivables            350           4          350
                                                           ------      ------       ------
     Total...........................                      $5,400      $2,258       $5,050
                                                           ======      ======       ======

The RERC Corp. receivables facility was reduced from $350 million to $150 million in January 2002. Proceeds for the repayment of $196 million of advances under the facility were obtained from the liquidation of a temporary investment and the sale of commercial paper.

The revolving credit facilities contain various business and financial covenants requiring us to, among other things, maintain leverage (as defined in the credit facilities) below specified ratios. We are in compliance with the covenants under all of these credit agreements. We do not expect these covenants to materially limit our ability to borrow under these facilities. For additional discussion, please read Note 10(a) to our consolidated financial statements.

The revolving credit facilities support commercial paper programs. The maximum amount of outstanding commercial paper of an issuer is limited to the amount of the issuer's aggregate revolving credit facilities less any direct loans or letters of credit obtained under its revolvers. Due to an inability to consistently satisfy all short-term borrowing needs by issuing commercial paper, short-term borrowing needs have been met with a combination of commercial paper and bank loans. The extent to which commercial paper will be issued in lieu of bank loans will depend on market conditions and our credit ratings.

Pursuant to the terms of the existing agreements (but subject to certain conditions precedent which we anticipate will be met) the revolving credit agreements aggregating $4.3 billion of FinanceCo will terminate and CenterPoint Energy revolving credit facilities of the same amount and with the same termination dates will become effective on the date of Restructuring.

To the extent that we continue to need access to current amounts of committed credit prior to the Distribution, we expect to extend or replace the credit facilities on a timely basis. The terms of any new credit facilities are expected to be adversely affected by the leverage of Reliant Energy, the amount of bank capacity utilized by Reliant Energy, any delay in the date of Restructuring and Distribution and conditions in the bank market. These same factors are expected to make the syndication of new credit facilities more difficult in the future. Proceeds from any issuance of debt in the capital markets are expected to be used to retire a portion of our short-term debt and reduce our need for committed revolving credit facilities.

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Shelf Registrations. The following table lists shelf registration statements existing at December 31, 2001 for securities expected to be sold in public offerings.

                                                                                 TERMINATING ON
                                                                                    DATE OF
REGISTRANT                                 SECURITY                AMOUNT(1)     RESTRUCTURING
----------                                 --------               ------------   --------------
Reliant Energy..............           Preferred Stock            $230 million        Yes
Reliant Energy..............           Debt Securities             580 million        Yes
Reliant Energy..............             Common Stock              398 million         No
REI Trust II/Reliant          Trust Preferred and related Junior   125 million        Yes
  Energy....................       Subordinated Debentures
RERC Corp...................           Debt Securities              50 million         No


(1) The amount reflects the principal amount of debt securities, the aggregate liquidation value of trust preferred securities and the estimated market value of common stock based on the number of shares registered as of December 31, 2001 and the closing market price of Reliant Energy common stock on that date.

We expect to register $2.5 billion of debt securities some or all of which may be issued either by Reliant Energy prior to the Restructuring or by CenterPoint Energy after the Restructuring. Proceeds from the sale of these debt securities are expected to be used to repay short-term borrowings. The amount actually issued will depend on interest rates and other market conditions.

Debt Service Requirements. Excluding the repayments expected to be made on the transition bonds described in Note 4(a) to our consolidated financial statements, we have maturing long-term debt in 2002 aggregating $500 million. Maturing debt is expected to be refinanced with new debt. In addition, Reliant Energy has $175 million of 5.20% pollution control bonds that are expected to be remarketed in 2002 as multi-year fixed-rate debt.

Debt service requirements will be affected by the overall level of interest rates in 2002 and credit spreads applicable to the various issuers of debt in 2002. Up to $2.7 billion of long-term debt is expected to be issued or remarketed in 2002 and we expect to have large amounts of short-term floating-rate debt in 2002. At December 31, 2001, we had entered into five year forward starting interest rate swaps having an aggregate notional amount of $500 million to hedge the interest rate on an anticipated 2002 offering of five year notes. The weighted average rate on the swaps was 5.6%. At December 31, 2001, we also had entered into interest rate swaps to fix the rate on $1.8 billion of our floating rate debt. The weighted average rate on these swaps was 4.1% and the swaps expire in 2002 and 2003. While we have, in some instances, hedged our exposure to changes in interest rates by entering into interest rate swaps, the swaps leave us exposed to changes in our credit spread relative to the market indices reflected in the swaps.

Money Fund. We have a "money fund" through which Reliant Energy and participating subsidiaries 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 fund's net funding requirements are generally met with commercial paper and/or bank loans. At December 31, 2001, Reliant Resources had $390 million invested in the money fund. Reliant Resources is expected to withdraw its investment from the money fund on or before the Distribution. Funds for repayment of the notes payable to Reliant Resources will be obtained from bank loans or the issuance of commercial paper.

Environmental Issues. We anticipate investing up to $397 million in capital and other special project expenditures between 2002 and 2006 for environmental compliance. Of this amount, we anticipate expenditures to be approximately $234 million and $132 million in 2002 and 2003, respectively. These environmental compliance expenditures are included in the capital requirements table presented above. For additional information related to environmental issues, please read Note 14(f) to our consolidated financial statements.

Initial Public Offering of Texas Genco. In 2002, approximately 20% of Texas Genco is expected to be sold in an initial public offering or distributed to holders of CenterPoint Energy common stock. The decision

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whether to distribute the Texas Genco shares or to sell the shares in an initial public offering will depend on numerous factors, including market conditions. Proceeds, if any, are expected to be used to retire short-term debt.

Fuel Filing. As of December 31, 2000 and 2001, Reliant Energy HL&P was under-collected on fuel recovery by $558 million and $200 million, respectively. In two separate filings with the Texas Utility Commission in 2000, Reliant Energy HL&P received approval to implement fuel surcharges to collect the under-recovery of fuel expenses, as well as to adjust the fuel factor to compensate for significant increases in the price of natural gas. Under the Texas Electric Restructuring Law, a final settlement of these stranded costs will occur in 2004.

Reliant Energy HL&P Rate Matters. The October 3, 2001 Order established the transmission and distribution rates that became effective in January 2002. The Texas Utility Commission determined that Reliant Energy HL&P had overmitigated its stranded costs by redirecting transmission and distribution depreciation and by accelerating depreciation of generation assets as provided under the Transition Plan and Texas Electric Restructuring Law. In this final order, Reliant Energy HL&P is required to reverse the amount of redirected depreciation and accelerated depreciation taken for regulatory purposes as allowed under the Transition Plan and the Texas Electric Restructuring Law. Per the October 3, 2001 Order, our Electric Operations business segment recorded a regulatory liability to reflect the prospective refund of the accelerated depreciation. Our Electric Operations business segment began refunding excess mitigation credits with the January 2002 unbundled bills, to be refunded over a seven year period. The annual cash flow impact of the reversal of both redirected and accelerated depreciation is a decrease of approximately $225 million. Under the Texas Electric Restructuring Law, a final settlement of these stranded costs will occur in 2004. For further discussion, please read Note 4(a) to our consolidated financial statements.

In addition to the above factors, our liquidity and capital requirements could be affected by:

- a downgrade in credit ratings;

- the need to provide cash collateral in connection with trading activities;

- various regulatory actions; and

- funding of our pension plan.

Impact on Liquidity of a Downgrade in Credit Ratings. At December 31, 2001, Moody's Investors Service, Inc. (Moody's), Standard & Poor's, a division of The McGraw Hill Companies (S&P) and Fitch, Inc. (Fitch) had assigned the following credit ratings to senior debt of Reliant Energy and certain subsidiaries:

                                   MOODY'S              S&P
                              -----------------  -----------------
COMPANY/INSTRUMENT            RATING   OUTLOOK   RATING   OUTLOOK   RATING  FITCH WATCH   OUTLOOK
------------------            ------  ---------  ------  ---------  ------  -----------  ---------
Reliant Energy
  Senior Secured Debt.......  A3      Stable(1)  BBB+    Stable(2)  A-      Negative(3)  N/A
  Senior Unsecured Debt.....  Baa1    Stable(1)  BBB     Stable(2)  BBB+    Negative(3)  N/A
Reliant Energy FinanceCo II
  LP
  Senior Debt...............  Baa1    Stable(1)  BBB     Stable(2)  BBB     N/A          Stable(4)
RERC Corp.
  Senior Debt...............  Baa2    Stable(1)  BBB+    Stable(2)  BBB+    Negative(3)  N/A


(1) A "stable" outlook from Moody's indicates that Moody's does not expect to put the rating on review for an upgrade or downgrade within 18 months from when the outlook was assigned or last affirmed.

(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" watch from Fitch signals that the rating may be downgraded or affirmed in the near term. Fitch has indicated that the Reliant Energy senior secured debt ratings will change from A- to BBB+

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upon the distribution of Reliant Resources shares and that the RERC Corp. senior debt ratings will change from BBB+ to BBB upon the distribution of Reliant Resources shares.

(4) A "stable" outlook from Fitch signals that the medium term view of the credit trend of an issuer is stable rather than positive or negative.

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 access capital on acceptable terms.

A decline in credit ratings would increase commitment fees and borrowing costs under our existing bank credit facilities. A decline in credit ratings would also adversely affect our ability to issue commercial paper and the interest rates applicable to commercial paper. Increased direct borrowings under our bank credit facilities could also result in the payment of usage fees under the terms of these arrangements. A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets.

Our revolving credit agreements are broadly syndicated committed facilities which contain "material adverse change" clauses that could impact our ability to borrow under these facilities. The "material adverse change" clauses generally relate to our ability to perform our obligations under the agreements.

The $150 million receivables facility of RERC Corp. requires the maintenance of credit ratings of at least BB from S&P and Ba2 from Moody's. Advances under the facility would need to be repaid in the event a credit rating fell below the threshold.

As previously discussed, bank facilities of FinanceCo are expected to be converted into bank facilities of CenterPoint Energy on the date of Restructuring. There is a ratings-related condition precedent to the conversion from the existing FinanceCo bank credit facilities (totaling $4.3 billion) to facilities under which CenterPoint Energy will become the obligor. The condition precedent requires that CenterPoint Energy be rated at least BBB by S&P and Baa2 by Moody's at the time of Restructuring. We believe that we could obtain a waiver of this condition, if necessary. However, if we were unable to obtain such a waiver, the facilities would remain obligations of FinanceCo until the earlier of 90 days after the date of Restructuring or the expiration of the facilities in July 2002, subject to compliance with applicable covenants.

Similar ratings-related provisions govern the transfer to CenterPoint Energy of rights and obligations under certain interest rate swap agreements entered into by Reliant Energy and Houston Industries FinanceCo LP to effect interest rate hedging. Interest rate swaps having an aggregate notional amount of $1.5 billion as of December 31, 2001 contained such provisions. These agreements are generally assumable by CenterPoint Energy without the consent of the counterparties, provided that CenterPoint Energy's rating is at least BBB- from S&P or Baa3 from Moody's. We believe that we could obtain the consent of the counterparties if necessary, but if we were unable to do so, the swaps would remain obligations of the current counterparties until their expiration. All of the swaps terminate no later than 2004.

As discussed in Note 8 to our consolidated financial statements, each ZENS note is exchangeable at the holder's option at any time for an amount of cash equal to 95% of the market value of the reference shares of AOL TW common stock attributable to each ZENS note. If our credit worthiness were to drop such that ZENS note holders felt our liquidity was adversely affected or the market for the ZENS notes was to become illiquid, some ZENS holders might decide to exchange their ZENS for cash. Funds for the payment of cash upon exchange could be obtained from the sale of the AOL TW common stock that we own or from other sources. We own shares of AOL TW common stock equal to 100% of the "reference shares" used to calculate our obligation to the holders of the ZENS notes.

Certain of the contracts that we have entered into on behalf of Texas Genco for the sale of capacity from our Texas generation business contain requirements obligating us to put up additional security in the event that our rating or the rating of CenterPoint Energy falls below BBB- from S&P or Baa3 from Moody's. These

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requirements stem from reciprocal provisions under power purchase and sale agreements with purchasers of capacity to be delivered in various monthly, 12-month or 24-month periods or "strips" until December 2003. If a downgrade below either of these levels were to occur, the purchasers would be entitled to call upon us to provide collateral to secure our obligations in a "commercially reasonable" amount within three business days of notice. Failure to provide this collateral entitles the other party to terminate the agreement and unwind all pending transactions under the agreement. Our Texas generation business is always the seller under these agreements, and its performance obligation in all cases is one of delivery, rather than payment. Accordingly, it is difficult to quantify the amount of collateral we would be required to provide as assurance for these delivery obligations. We believe that any such quantification should be predicated on our Texas generation business' ultimate exposure under these agreements. Our Texas generation business has no exposure until (1) it cannot deliver power as called for in the agreements and (2) the market cost of replacement power has increased above the contract price. In the unlikely event that our Texas generation business could not deliver any of this power as agreed, we estimate that our Texas generation business' total exposure under these contracts at December 31, 2001 was approximately $73 million.

As part of its normal business operations, our Texas generation business has also entered power purchase and sale agreements with counterparties that contain similar provisions that require a party to provide additional collateral on three business days notice when that party's rating falls below BBB- from S&P or Baa3 from Moody's. Our Texas generation business both buys and sells under these agreements, and we use them whenever possible either to locate less expensive power than our Texas generation business' marginal cost of generation or to sell power to another party who is willing to pay more than our marginal cost of generation. Our Texas generation business' purchases for 2001 under agreements with ratings triggers were approximately $23 million and its sales under those agreements were approximately $8 million. This compares to total purchases of approximately $125 million and total sales of approximately $32 million under all buy/sell agreements in 2001. We believe that this risk is mitigated because most of the purchases and sales under these arrangements take place over relatively short time periods; typically, these transactions are for one-day deliveries and rarely exceed periods of one month.

Entex Gas Resources Corp., a wholly owned subsidiary of RERC Corp., provides comprehensive natural gas sales and services to industrial and commercial customers who are primarily located within or near the territories served by our pipelines and distribution subsidiaries. In order to hedge its exposure to natural gas prices, Entex Gas Resources Corp. will have agreements with provisions standard to 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 (RERC Corp. in this case), falls below those levels. The senior unsecured debt of RERC Corp. is currently rated BBB+ by S&P and Baa2 by Moody's. Based on these ratings, we estimate that unsecured credit limits extended to Entex Gas Resources Corp. by counterparties could aggregate $250 million; however, utilized credit capacity would typically be lower.

Regulatory Matters. Our liquidity can be impacted by regulatory actions affecting our Electric Operations and our Natural Gas Distribution business segments. For further discussion, please read Note 4 to our consolidated financial statements.

Treasury Stock Purchases. As of December 31, 2001, we were authorized under our common stock repurchase program to purchase an additional $271 million of our common stock. Our purchases under our repurchase program depend on market conditions, might not be announced in advance and may be made in open market or privately negotiated transactions. CenterPoint Energy has no current plans to engage in a significant stock buy-back program, but may seek to repurchase shares in the open market for use in various benefit and employee compensation plans, or to maintain a targeted balance of outstanding shares to the extent that original issue stock is used for such purposes.

Pension and Postretirement Benefits Funding. We make contributions to achieve adequate funding of Company sponsored pension and postretirement benefits in accordance with applicable regulations and rate orders. Based on current estimates, we expect to have funding requirements, excluding Reliant Resources, of

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approximately $330 million for the period 2002-2006. These anticipated funding requirements are not reflected in the table of contractual obligations presented above.

RELIANT RESOURCES -- UNREGULATED BUSINESSES

Liquidity and capital requirements for these businesses are affected primarily by the results of operations, capital expenditures, debt service requirements and working capital needs. Reliant Resources expects to grow these businesses through the construction of new generation facilities and the acquisition of generation facilities, the expansion of their energy trading and marketing activities and the expansion of their energy retail business. Reliant Resources expects any resulting capital requirements to be met with cash flows from operations, and proceeds from debt and equity offerings, project financings, securitization of assets, other borrowings and off-balance sheet financings. Additional capital expenditures, some of which may be substantial, depend to a large extent upon the nature and extent of future project commitments which are discretionary. In the discussion below, Reliant Resources has provided several tables outlining their expected future capital requirements by category of expenditure followed by more detailed descriptions of the most significant of their currently known future capital requirements and descriptions of known uncertainties that could impact these items.

The following table sets forth Reliant Resources' consolidated capital requirements for 2001, and estimates of their consolidated capital requirements for 2002 through 2006 (in millions).

                                           2001    2002    2003   2004   2005   2006
                                           ----   ------   ----   ----   ----   ----
Wholesale Energy(1)(2)(3)................  $658   $3,579   $322   $147   $215   $146
European Energy..........................    21       22     --     --     --     --
Retail Energy............................   117       40     19     18     14     16
Other Operations.........................    44       75     46     31     32     33
Major maintenance cash outlays...........    88       94     87    106     86     85
                                           ----   ------   ----   ----   ----   ----
  Total..................................  $928   $3,810   $474   $302   $347   $280
                                           ====   ======   ====   ====   ====   ====


(1) Capital requirements for 2002 includes $2.9 billion for the acquisition of Orion Power.

(2) In connection with Reliant Resources' separation from Reliant Energy, Reliant Energy has granted Reliant Resources an option, subject to completion of the Distribution, to purchase the majority interest in Texas Genco held by CenterPoint Energy in January 2004. This option may be exercised between January 10, 2004 and January 24, 2004. The purchase of Texas Genco has been excluded from the above table. For additional information regarding this option to purchase Texas Genco, please read Note 4(b) to our consolidated financial statements.

(3) Reliant Resources currently estimates the capital expenditures by off-balance sheet special purpose entities to be $704 million, $343 million, $163 million and $48 million in 2002, 2003, 2004 and 2005, respectively. Capital expenditures for these projects have been excluded from the table above. Please read "Future Sources and Uses -- Reliant Resources -- unregulated businesses," "-- Off-Balance Sheet Transactions -- Construction Agency Agreements" and "-- Equipment Financing Structure" below for additional information.

Acquisition of Orion Power. On February 19, 2002, Reliant Resources acquired all of the outstanding shares of common stock of Orion Power for $26.80 per share in cash for an aggregate purchase price of $2.9 billion. As of February 19, 2002, Orion Power's debt obligations were $2.4 billion ($2.1 billion net of cash acquired, some of which is restricted pursuant to debt covenants). Reliant Resources funded the purchase of Orion Power with a $2.9 billion credit facility (Orion Bridge Facility) and $41 million of cash on hand. Please read "-- Consolidated Sources of Cash -- Orion Bridge Facility" for further information.

Generating Projects. As of December 31, 2001, Reliant Resources had three generating facilities under construction. Total estimated costs of constructing these facilities are $1.1 billion, including $304 million in commitments for the purchase of combustion turbines. As of December 31, 2001, Reliant Resources had

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incurred $690 million of the total projected costs of these projects, which were funded primarily from equity and debt facilities. In addition, Reliant Resources has options to purchase additional combustion turbines for a total estimated cost of $42 million, but is actively attempting to market these turbines, having determined that they are in excess of their current needs. In addition to these facilities, Reliant Resources is constructing facilities as construction agents under the construction agency agreements under synthetic leasing arrangements, which permit them to lease or buy each of these facilities at the conclusion of their construction. For more information regarding the construction agency agreements, please read "-- Off Balance Sheet Transactions -- Construction Agency Agreements."

Environmental Expenditures. Reliant Resources anticipates investing up to $135 million in capital and other special project expenditures between 2002 and 2006 for environmental compliance, totaling approximately $53 million, $20 million, $9 million, $29 million and $24 million in 2002, 2003, 2004, 2005 and 2006, respectively, which is included in the above table. Additionally, environmental capital expenditures for the recently acquired Orion Power assets were estimated by Orion Power to be approximately $241 million over the same time period. Reliant Resources is currently reviewing Orion Power's estimates.

The following table sets forth estimates of Reliant Resources' consolidated contractual obligations as of December 31, 2001 to make future payments for 2002 through 2006 and thereafter (in millions):

                                                                                      2007 AND
CONTRACTUAL OBLIGATIONS              TOTAL     2002     2003    2004   2005   2006   THEREAFTER
-----------------------              ------   ------   ------   ----   ----   ----   ----------
Long-term debt.....................  $  892   $   24   $  539   $ 42   $ 12   $ 12     $  263
Short-term borrowing, including
  credit facilities................     297      297       --     --     --     --         --
Mid-Atlantic generating assets
  operating lease payments.........   1,560      136       77     84     75     64      1,124
Other operating lease payments.....     859       52       72     87     89     90        469
Trading and marketing
  liabilities......................   1,840    1,478      216     85     33     13         15
Non-trading derivative
  liabilities......................   1,038      399      191    113     61     35        239
Other commodity commitments........   3,134      465      242    207    207    207      1,806
Other long-term obligations........     300       10       10     10     10     10        250
                                     ------   ------   ------   ----   ----   ----     ------
  Total contractual cash
     obligations...................  $9,920   $2,861   $1,347   $628   $487   $431     $4,166
                                     ======   ======   ======   ====   ====   ====     ======

Long-term debt obligations as of December 31, 2001, include $829 million of borrowings under credit facilities that have been classified as long-term debt, based upon the availability of committed credit facilities and management's intention to maintain these borrowings in excess of one year.

As of December 31, 2001, Reliant Resources has issued $396 million of letters of credit, of which $345 million were issued under two credit facilities expiring in 2003 and $51 million were issued under a credit facility expiring in 2004.

Mid-Atlantic Assets Lease Obligation. In August 2000, Reliant Resources' subsidiaries entered into separate sale-leaseback transactions with each of the three owner-lessors for their respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively, which Reliant Resources acquired as part of the REMA acquisition. These lessees lease an interest in each facility from each owner-lessor under a facility lease agreement. The equity interests in all the subsidiaries of REMA are pledged as collateral for REMA's lease obligations. In addition, the subsidiaries have guaranteed the lease obligations. The lease documents contain restrictive covenants that restrict REMA's ability to, among other things, make dividend distributions unless REMA satisfies various conditions. The covenant restricting dividends would be suspended if the direct or indirect parent of REMA, meeting specified criteria, including having a credit rating on its long-term unsecured senior debt of at least BBB from Standard & Poor's and Baa2 from Moody's, guarantees the lease obligations. For additional discussion of these lease transactions, please read Notes 3(a) and 14(b) to our consolidated financial statements. Reliant Resources expects to make lease

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payments through 2029 under these leases, with total cash payments of $1.6 billion. The lease terms expire in 2034. During 2000 and 2001, cash lease payments totalled $1 million and $259 million, respectively.

Other Operating Lease Commitments. For a discussion of other operating leases, please read Note 14(b) to our consolidated financial statements.

Other Commodity Commitments. For a discussion of other commodity commitments, please read Note 14(a) to our consolidated financial statements.

Naming Rights to Houston Sports Complex. In October 2000, Reliant Resources acquired the naming rights for the new football stadium for the Houston Texans, the National Football League's thirty-second franchise. The agreement extends for 31 years. The aggregate undiscounted cost of the naming rights under this agreement is expected to be $300 million. Starting in 2002, when the new stadium is operational, Reliant Resources will pay $10 million each year through 2032 for annual advertising under this agreement. For additional information on the naming rights agreement, please read Note 14(d) to our consolidated financial statements.

Payment to Reliant Energy. To the extent that Reliant Resources' price for providing retail electric service to residential and small commercial customers in Reliant Energy HL&P's historical service territory during 2002 and 2003, which price is mandated by the Texas Electric Restructuring Law, exceeds the market price of electricity, Reliant Resources will be required to make a payment to Reliant Energy in early 2004. Due to the nature of this possible payment, Reliant Resources currently cannot reasonably estimate this payment, and accordingly, it is excluded from the above tables.

Treasury Stock Purchases. On December 6, 2001, the Reliant Resources' board of directors authorized the purchase of up to 10 million additional shares of common stock through June 2003. Purchases will be made on a discretionary basis in the open market or otherwise at times and in amounts as determined by management subject to market conditions, legal requirements and other factors. Since the date of such authorization through March 28, 2002, Reliant Resources has not purchased any of these shares of their common stock under this program.

In addition to the capital requirements discussed above, the following items, among others, could impact future capital requirements for Reliant Resources.

Downgrade in Credit Rating. In accordance with industry practice, Reliant Resources has entered into commercial contracts or issued guarantees related to their trading, marketing and risk management operations that require them to maintain an investment grade credit rating. If one or more of their credit ratings decline below investment grade, Reliant Resources may be obligated to provide additional or other credit support to the guaranteed parties in the form of a pledge of cash collateral, a letter of credit or other similar credit support.

Counterparty Credit Risk. Reliant Resources is exposed to the risk that counterparties who owe them money or physical commodities, such as energy or gas, as a result of market transactions fail to perform their obligations. Should the counterparties to these arrangements fail to perform, Reliant Resources might incur losses if they are forced to acquire alternative hedging arrangements or replace the underlying commitment at then-current market prices. In addition, Reliant Resources might incur additional losses to the extent of amounts, if any, already paid to the defaulting counterparties.

CONSOLIDATED SOURCES OF CASH

Reliant Resources believes that their current level of cash and borrowing capability, along with their future anticipated cash flows from operations and assuming successful refinancings of credit facilities as they mature, will be sufficient to meet the existing operational needs of their business for the next 12 months. If cash generated from operations is insufficient to satisfy their liquidity requirements, Reliant Resources may seek to sell either equity or debt securities or obtain additional credit facilities or long-term financings from financial institutions. In the discussion below, Reliant Resources has provided a description of the significant

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factors that could impact their cash flows from operations, their currently available liquidity sources, currently contemplated future liquidity sources and known uncertainties that could impact these sources.

The following items will affect Reliant Resources' future cash flows from operations:

Reliant Resources Restricted Cash. Covenants under the Mid-Atlantic assets lease, discussed above, restrict REMA's ability to make dividend distributions. The restricted cash is available for REMA's working capital needs and for it to make future lease payments. As of December 31, 2001, REMA had $167 million of restricted cash. Reliant Resources currently anticipates that REMA will be able to satisfy the conditions necessary to distribute these restricted funds in 2002. In addition, the terms of two of their subsidiaries' indebtedness restrict the subsidiaries' ability to pay dividends or make restricted payments to Reliant Resources in some circumstances. Specifically, their subsidiary which holds an electric power generation facility in Channelview, Texas (Channelview) and their subsidiary which holds an equity investment in the entity owning and operating an electric power generation facility in Nevada (El Dorado) are each party to credit agreements used to finance construction of these generating plants. Both the Channelview credit agreement and the El Dorado credit agreement allow the respective subsidiary to pay dividends or make restricted payments only if specified conditions are satisfied, including maintaining specified debt service coverage ratios and debt service reserve account balances. In both cases, the amount of the dividends or restricted payments that may be paid if the conditions are met is limited to a specified level and may be paid only from a particular account.

Orion Power Restricted Cash. Substantially all of Orion Power's operations are conducted by its subsidiaries. The terms of some of its subsidiaries' indebtedness restrict the subsidiaries' ability to pay dividends to Orion Power or Reliant Resources. Restricted funds are available for such subsidiaries to make debt service payments and to meet their working capital needs. In addition, covenants under some indebtedness of Orion Power restrict its ability to pay dividends to Reliant Resources unless Orion Power meets certain conditions, including the ability to incur additional indebtedness without violating the required fixed charge coverage ratio of 2.0 to 1.0. A credit facility of Orion Power also restricts its ability to pay dividends to Reliant Resources unless the restrictions contained in certain of its subsidiaries' credit agreements have terminated and no restrictions remain under its credit agreements.

California Trade Receivables. As of December 31, 2001, Reliant Resources was owed $302 million by Cal ISO, the California Power Exchange (Cal PX) and the California Department of Water Resources (CDWR) and California Energy Resource Scheduling for energy sales in the California wholesale market, during the fourth quarter of 2000 through December 31, 2001 and has recorded an allowance against such receivables of $68 million. From January 1, 2002 through March 26, 2002, Reliant Resources has collected $45 million of these receivable balances. For additional information regarding uncertainties in the California wholesale market, please read Notes 14(f) and 14(g) to our consolidated financial statements.

Other Items. For other items that may affect our future cash flows from operations, please read "-- Certain Factors Affecting Our Future Earnings" related to the Reliant Resources business segments.

The following discussion summarizes Reliant Resources' currently available liquidity sources and material factors that could impact that availability.

Credit Facilities. The following table provides a summary of the amounts owed and amounts available under Reliant Resources' various credit facilities (in millions).

                                            TOTAL                                   EXPIRING BY
                                          COMMITTED   DRAWN     LETTERS    UNUSED   DECEMBER 31,
                                           CREDIT     AMOUNT   OF CREDIT   AMOUNT     2002(1)
                                          ---------   ------   ---------   ------   ------------
Reliant Resources, as of December 31,
  2001..................................   $5,563     $1,078     $396      $4,089      $1,114
Orion Power, as of February 19, 2002....    2,028      1,827       95         106       1,736
                                                                                       ------
  Total.................................                                               $2,850
                                                                                       ======

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(1) Excludes $383 million of facilities expiring in November 2002 as borrowings under such facilities are convertible into a long-term loan.

As of February 19, 2002, Reliant Resources has $2.9 billion of credit facilities which will expire in 2002. To the extent that they continue to need access to this amount of committed credit, Reliant Resources expects to extend or replace these facilities. The current credit environment currently impacting their industry may require their future facilities to include terms that are more restrictive or burdensome or at higher borrowing rates than those of their current facilities.

Reliant Resources Credit Facilities Covenants. As of December 31, 2001, Reliant Resources, including certain of their subsidiaries, had committed credit facilities of $5.6 billion. Of these facilities, $5.0 billion contain various business and financial covenants requiring them to, among other things, maintain a ratio of net balance sheet debt to the sum of net balance sheet debt, subordinated affiliate balance sheet debt and stockholders' equity not to exceed 0.60 to 1.00. These covenants are not anticipated to materially restrict Reliant Resources from borrowing funds or obtaining letters of credit under these facilities. The remaining credit facilities of $0.6 billion, which were held by certain of their domestic power generation subsidiaries, contain various business and financial covenants that are typical for limited or non-recourse project financings. Such covenants include restrictions on dividends and capital expenditures, as well as requirements regarding insurance, approval of operating budgets and commercial contracts. These covenants are not anticipated to materially restrict Reliant Resources from borrowing funds or obtaining letters of credit under their credit facilities. None of the above committed bank credit facilities have any defaults or prepayments triggered by changes in credit ratings, or are in any way linked to the price of Reliant Resources' common stock or any other traded instrument.

For additional information regarding the terms and related interest rates of these credit facilities, please read Note 10 of our consolidated financial statements.

Orion Power Credit Facilities. The credit facilities of Orion Power and its subsidiaries contain various business and financial covenants that are typical for limited or non-recourse project financings. Such covenants include restrictions on dividends and capital expenditures, as well as requirements regarding insurance, approval of operating budgets and commercial contracts. These include covenants that require two of Orion Power's significant subsidiaries which have credit facilities with outstanding borrowings of $1.6 billion as of December 31, 2001, to, among other things, maintain a debt service coverage ratio of at least 1.5 to 1.0, and for Orion Power, which has a $75 million credit facility, to, among other things, maintain a debt service coverage ratio of at least 1.4 to 1.0. One of the subsidiaries may not be able to meet this debt service coverage ratio for the quarter ended June 30, 2002, and Orion Power did not meet the debt service coverage ratio for the quarter ended March 31, 2002. In the event that Orion Power is unable to meet this financial covenant for a second consecutive fiscal quarter, it would constitute a default under its credit facility. Reliant Resources currently intends to arrange for the repayment, refinancing or amendment of these facilities prior to June 30, 2002. If these facilities are not repaid, refinanced or amended prior to that date, and if a waiver is required under either or both of these credit facilities, Reliant Resources believes that they will be able to obtain such a waiver on or prior to June 30, 2002. Reliant Resources currently has no assurance that they will be able to obtain such a waiver or amendment from the respective lender groups if required under either or both of these credit facilities.

Orion Bridge Facility. In November 2001, Reliant Resources entered into a $2.2 billion term loan facility to be utilized for the acquisition of Orion Power. In January 2002, the facility was increased to $2.9 billion. On February 19, 2002, in connection with the Orion Power acquisition Reliant Resources borrowed $2.9 billion under the Orion Bridge Facility, which is required to be repaid on or before February 19, 2003.

Potential Future Liquidity Sources. Reliant Resources is currently considering pursuing the following sources of cash to meet their future capital requirements.

Commercial Paper Program. Reliant Resources plans to commence a commercial paper program in 2002, which will be supported by their existing credit facilities. Although they have not yet determined the size

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of such program, Reliant Resources does not expect that it would exceed $300 million initially, due to market conditions and their current credit ratings. To the extent that they are not successful in placing commercial paper consistently, Reliant Resources will borrow directly under their existing credit facilities.

Debt Securities in the Capital Markets. As part of refinancing the Orion Bridge Facility, Reliant Resources currently expects that they will issue various fixed and floating rate debt securities in 2002 having maturities up to ten years or greater depending upon market conditions. Reliant Resources expects to offer debt securities in the amount of $2.5 to $3.0 billion, depending on market conditions. Their ability to complete such debt offerings in the capital markets will depend on their future performance and prevailing market conditions. This Form 10-K does not constitute an offer to sell or the solicitation of an offer to buy debt securities of Reliant Resources or their subsidiaries.

Settlement of Indemnification of REPGB Stranded Costs. In December 2001, REPGB and its former shareholders entered into a settlement agreement resolving the former shareholders' stranded cost indemnity obligations under the purchase agreement of REPGB. Under the settlement agreement, the former shareholders paid to REPGB NLG 500 million ($202 million based on an exchange rate of 2.48 NLG per U.S. dollar as of December 31, 2001) in January and February 2002. In addition, under the settlement agreement, the former shareholders waived all rights under the original indemnification agreement to claim distributions from NEA, a 22.5% owned equity investment. Reliant Resources estimates that there will be future distributions from 2002 through 2005 from NEA to REPGB totaling approximately $299 million. For additional information regarding the settlement agreement, Reliant Resources' investment in NEA and indemnification of district heat contract obligations, please read Note 14(h) to our consolidated financial statements.

Factors Affecting Our Sources of Cash and Liquidity. As a result of several recent events, including the United States economic recession, the price decline of the common stock of participants in Reliant Resources' industry sector and the downgrading of the credit ratings of several of Reliant Resources' significant competitors, the availability and cost of capital for their business and the businesses of their competitors have been adversely affected. Any future acquisition or development projects will likely require Reliant Resources to access substantial amounts of capital from outside sources on acceptable terms. Reliant Resources may also need external financing to fund capital expenditures, including capital expenditures necessary to comply with air emission regulations or other regulatory requirements. If Reliant Resources is are unable to obtain outside financing to meet their future capital requirements on terms that are acceptable to them, their financial condition and future results of operations could be materially adversely affected. In order to meet their future capital requirements, Reliant Resources may increase the proportion of debt in their overall capital structure. Increases in their debt levels may adversely affect their credit ratings thereby increasing the cost of their debt. In addition, the capital constraints currently impacting their industry may require Reliant Resources' future indebtedness to include terms and/or pricing that are more restrictive or burdensome than those of their current indebtedness. This may negatively impact their ability to operate their business, or severely restrict or prohibit distributions from their subsidiaries.

Reliant Resources' ability to arrange financing, including refinancing, and their cost of capital are dependent on the following factors:

- general economic and capital market conditions;

- maintenance of acceptable credit ratings;

- credit availability from banks and other financial institutions;

- investor confidence in Reliant Resources, their competitors and peer companies and their wholesale power markets;

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

- market perceptions of Reliant Resources' ability to access capital markets on reasonable terms;

- the success of current power generation projects;

- the perceived quality of new power generation projects; and

- provisions of relevant tax and securities laws.

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Credit Ratings. Credit ratings for Reliant Resources' senior unsecured debt are as follows:

DATE ASSIGNED                                       RATING AGENCY     RATING   OUTLOOK
-------------                                       -------------     ------   --------
March 22, 2002..................................       Moody's        Baa3      Stable
February 14, 2002...............................      Fitch(1)         BBB     Negative
March 21, 2002..................................  Standard & Poor's    BBB      Stable


(1) Fitch assigned a negative rating outlook to reflect its analysis of Reliant Resources' plan for financing and integrating the acquisition of Orion Power.

Reliant Resources 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. Reliant Resources notes that these credit ratings are not recommendations to buy, sell or hold Reliant Resources' securities and may be revised or withdrawn at any time by a rating agency. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of their credit ratings could have a material adverse impact on Reliant Resources' ability to access capital on acceptable terms. Reliant Resources has commercial contracts and/or guarantees related to their trading, marketing and risk management and hedging operations that require them to maintain an investment grade credit rating. If their credit rating declines below investment grade, Reliant Resources estimates that they could be obligated to provide significant credit support to the counterparties in the form of a pledge of cash collateral, a letter of credit or other similar credit support.

Furthermore, if their credit ratings decline below an investment grade credit rating, Reliant Resources' trading partners may refuse to trade with them or trade only on terms less favorable to them. As of December 31, 2001, Reliant Resources had $214 million of margin deposits on energy trading and hedging activities posted as collateral with counterparties. As of December 31, 2001, Reliant Resources had $1.5 billion available under their credit facilities to satisfy future commodity obligations.

OFF-BALANCE SHEET TRANSACTIONS

Construction Agency Agreements. In 2001, Reliant Resources, through several of their subsidiaries, entered into operative documents with special purpose entities to facilitate the development, construction, financing and leasing of several power generation projects. The special purpose entities are not consolidated by Reliant Resources. The special purpose entities have an aggregate financing commitment from equity and debt participants (Investors) of $2.5 billion of which the last $1.1 billion is currently available only if the cash is collateralized. The availability of the commitment is subject to satisfaction of various conditions, including the obligation to provide cash collateral for the loans and letters of credit outstanding on November 27, 2004. Reliant Resources, through several of their subsidiaries, acts as construction agent for the special purpose entities and is responsible for completing construction of these projects by December 31, 2004, but Reliant Resources has generally limited their risk during construction to an amount not in excess of 89.9% of costs incurred to date, except in certain events. Upon completion of an individual project and exercise of the lease option, their subsidiaries will be required to make lease payments in an amount sufficient to provide a return to the Investors. If Reliant Resources does not exercise their option to lease any project upon its completion, they must purchase the project or remarket the project on behalf of the special purpose entities. Reliant Resources' ability to exercise the lease option is subject to certain conditions. Reliant Resources must guarantee that the Investors will receive an amount at least equal to 89.9% of their investment in the case of a remarketing sale at the end of construction. At the end of an individual project's initial operating lease term (approximately five years from construction completion), Reliant Resources' subsidiary lessees have the option to extend the lease with the approval of Investors, purchase the project at a fixed amount equal to the original construction cost, or act as a remarketing agent and sell the project to an independent third party. If the lessees elect the remarketing option, they may be required to make a payment of an amount not to exceed 85% of the project cost, if the proceeds from remarketing are not sufficient to repay the Investors. Reliant Resources has guaranteed the performance and payment of their subsidiaries' obligations during the construction periods and, if the lease option is exercised, each lessee's obligations during the lease period. At anytime during the

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construction period or during the lease, Reliant Resources may purchase a facility by paying an amount approximately equal to the outstanding balance plus costs. As of December 31, 2001, the special purpose entities had property, plant and equipment of $428 million and net other assets of $52 million, which were primarily restricted cash and debt obligations of $465 million. As of December 31, 2001, the special purpose entities had equity from unaffiliated third parties of $15 million. Reliant Resources currently estimates the aggregate cost of the three generating facilities that are currently under construction by the special purpose entities to be approximately $1.8 billion.

Equipment Financing Structure. Reliant Resources, through their subsidiary, REPG, has entered into an agreement with a bank whereby the bank, as owner, entered or will enter into contracts for the purchase and construction of power generation equipment and REPG, or its subagent, acts as the bank's agent in connection with administering the contracts for such equipment. Under the agreement, the bank has agreed to provide up to a maximum aggregate amount of $650 million. REPG and its subagents must cash collateralize their obligation to administer the contracts. This cash collateral is approximately equivalent to the total payments by the bank for the equipment, interest and other fees. As of December 31, 2001, the bank had assumed contracts for the purchase of eleven turbines, two heat recovery steam generators and one air-cooled condenser with an aggregate cost of $398 million. REPG, or its designee, has the option at any time to purchase or, at equipment completion, subject to certain conditions, including the agreement of the bank to extend financing, to lease equipment, or to assist in the remarketing of the equipment under terms specified in the agreement. All costs, including the purchase commitment on the turbines, are the responsibility of the bank. The cash collateral is deposited by REPG or an affiliate into a collateral account with the bank and earns interest at the London inter-bank offered rate (LIBOR) less 0.15%. Under certain circumstances, the collateral deposit or a portion of it will be returned to REPG or its designee. Otherwise it will be retained by the bank. At December 31, 2001, REPG and its subsidiary had deposited $230 million into the collateral account. The bank's payments for equipment under the contracts totaled $227 million as of December 31, 2001. In January 2002, the bank sold to the parties to the construction agency agreements discussed above, equipment contracts with a total contractual obligation of $258 million under which payments and interest during construction totaled $142 million. Accordingly, $142 million of our collateral deposits were returned to Reliant Resources. As of December 31, 2001, there were equipment contracts with a total contractual obligation of $140 million under which payments during construction totaled $83 million. Currently this equipment is not designated for current planned power generation construction projects. Therefore, Reliant Resources anticipates that it will either purchase the equipment, assist in the remarketing of the equipment or negotiate to cancel the related contracts.

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operations and requires management to make difficult, subjective or complex judgments. 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 perceived with certainty. We base our estimates on historical experience and on various other assumptions that are believed 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 are the most significant estimates used in the preparation of our consolidated financial statements.

ACCOUNTING FOR RATE REGULATION

SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated entities account for and report assets and liabilities consistent with the recovery of those costs in rates if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. Our rate-

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regulated businesses follow the accounting and reporting requirements of SFAS No. 71. Certain expenses and revenues subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. The total amounts of regulatory assets and liabilities reflected in the Consolidated Balance Sheets are $1.9 billion and $237 million at December 31, 2000, and $3.3 billion and $1.4 billion at December 31, 2001, respectively.

Application of SFAS No. 71 to the generation portion of our business was discontinued as of June 30, 1999. Only the electric transmission and distribution business, the natural gas distribution companies and one of our interstate pipelines are subject to SFAS No. 71 after January 1, 2002. We have recorded regulatory assets and liabilities related to stranded costs associated with our electric generation operations. Under the Texas Electric Restructuring Law, a final settlement of these stranded costs will occur in 2004. In the event that regulation significantly changes the probability for us to recover our costs in the future, a write-down of all or a portion of our existing regulatory assets and liabilities could result.

IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE

Long-lived assets, which include property, plant and equipment, goodwill and other intangibles and equity investments comprise a significant amount of our total assets. 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. Additionally, the carrying values of these assets are periodically reviewed for impairment or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires us to make long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and services, future market conditions and regulatory developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period.

During December 2001, we evaluated our European Energy business segment's long-lived assets and goodwill for impairment. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. As of December 31, 2001, pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," (SFAS No. 121) no impairment had been indicated.

During the fourth quarter of 2001, the Distribution of Reliant Resources common stock to our shareholders was deemed to be a probable event. As Reliant Resources has an option to purchase our majority interest in Texas Genco in 2004, we were required to evaluate these assets for potential impairment in accordance with SFAS No. 121, due to an expected decrease in the number of years we expect to hold and operate these assets. As of December 31, 2001, no impairment had been indicated. We anticipate that future events, such as the expected public offering of Texas Genco shares (please read Note 4(b)), or change in the estimated holding period of the Texas generation assets, will require us to re-evaluate our Texas generation assets for impairment between now and 2004. If an impairment is indicated, it could be material and will not be fully recoverable through the 2004 true-up proceeding calculations (please read Notes 2(e) and 4(a) to our consolidated financial statements).

Assets held for sale are evaluated based on estimated net realizable value in accordance with Emerging Issues Task Force Issue No. 90-6. During December 2001, we concluded that there was an impairment related to our remaining Latin America assets held for sale. This evaluation resulted in an after-tax impairment charge in 2001 of $43 million, representing the excess of book value over estimated net realizable value. As of December 31, 2001, we had $8 million of Latin America net assets held for sale recorded in the Consolidated Balance Sheets. The charge was included as a component of operating income with respect to consolidated subsidiaries and other income with respect to equity investments in unconsolidated subsidiaries. The impairment was primarily related to the recent adverse economic developments in Argentina. We do not intend to invest additional resources in these operations. For additional information about our Latin America assets, please read Note 19 to our consolidated financial statements.

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UNBILLED ENERGY REVENUES

Revenues related to the sale of energy are generally recorded when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters which are read on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated. This unbilled electric revenue is estimated each month based on daily generation volumes, line losses and applicable customer rates based on analyses reflecting significant historical trends and experience. 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, 2000 were $39 million related to our Electric Operations business segment, $3 million related to our Retail Energy business segment and $551 million related to our Natural Gas Distribution business segment. Accrued unbilled revenues recorded in the Consolidated Balance Sheet as of December 31, 2001 were $33 million related to our Electric Operations business segment, $5 million related to our Retail Energy business segment and $188 million related to our Natural Gas Distribution business segment.

ACCOUNTING FOR DERIVATIVES AND HEDGING INSTRUMENTS

SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize the fair value of derivative instruments held as assets or liabilities on the balance sheet. In accordance with SFAS No. 133, the effective portion of the change in the fair value of a derivative instrument designated as a cash flow hedge is reported in other comprehensive income, net of tax. Amounts in accumulated other comprehensive income are ultimately recognized in earnings when the related hedged forecasted transaction occurs. The change in the fair value of the ineffective portion of the derivative instrument designated as a cash flow hedge is recorded in earnings. Derivative instruments that have not been designated as hedges are adjusted to fair value through earnings.

We utilize derivative instruments such as futures, physical forward contracts, swaps and options to mitigate the impact of changes in electricity, natural gas and fuel prices on our operating results and cash flows. We utilize cross-currency swaps, forward contracts and options to hedge our net investments in and cash flows of our foreign subsidiaries, interest rate swaps to mitigate the impact of changes in interest rates and other financial instruments to manage various other market risks.

The determination of fair values of trading and marketing assets and liabilities for our energy trading, marketing and price risk management operations and non-trading derivative assets and liabilities, including stranded cost obligations related to our European Energy operations, are based on estimates. For further discussion, please read " -- Trading and Marketing Operations", "Quantitative and Qualitative Disclosure About Market Risk" in Item 7A of this Form 10-K and Note 5 to our consolidated financial statements.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142. 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. SFAS No. 142 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. We adopted the provisions of each 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 a material impact on our historical results of operations or financial position.

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On January 1, 2002, we discontinued amortizing goodwill into the results of operations pursuant to SFAS No. 142. We recognized $81 million of goodwill amortization expense in our Statements of Consolidated Income during 2001, excluding a $19 million write-off of a Communications business goodwill balance which was recorded as goodwill amortization expense (please read Note 20 to our consolidated financial statements). We are in the process of determining further effects of adoption of SFAS No. 142 on our consolidated financial statements, including the review of goodwill and certain intangible assets for impairment. We have not completed our review pursuant to SFAS No. 142. However, based on our preliminary review, we believe an impairment of our European Energy business segment goodwill is reasonably possible. As of December 31, 2001, net goodwill associated with our European Energy business segment is $632 million. We have not completed our preliminary review of our other business segments with net goodwill totaling $2.0 billion. We anticipate finalizing our review of goodwill and certain intangible assets during 2002.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for an asset retirement legal obligation to be recognized in the period in which it is incurred. When the liability is initially recorded, associated costs are capitalized by increasing the carrying amount of the related long-lived asset. 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. 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 plan to adopt SFAS No. 143 on January 1, 2003 and are in the process of determining the effect of adoption on our consolidated financial statements. For certain operations subject to cost of service rate regulation, we are permitted to include annual charges for cost of removal and nuclear decommissioning costs in the revenues we charge customers.

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 is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. SFAS No. 144 is not expected to 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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 risks include exposures to commodity prices through trading and marketing and non-trading activities, interest rates, foreign currency exchange rates and equity prices. A description of each market risk category is set forth below:

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

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

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- Currency rate risk results from exposures to changes in the value of foreign currencies relative to our reporting currency, the U.S. dollar, and exposures to changes in currency rates in transactions executed in currencies other than a business segment's reporting currency.

- 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 our exposures through the use of derivative financial instruments and derivative commodity instruments. 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 or 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.

Our trading operations enter into derivative instrument transactions as a means of risk management, optimization of our current power generation asset position, and to take a market position. Derivative instrument transactions are entered into in our non-trading operations to manage and hedge certain exposures, such as exposure to changes in electricity and fuel prices, exposure to purchase and sale commitments of natural gas, exposure to interest rate risk on our floating-rate borrowings and foreign currency exposures related to our foreign investments. We believe that the associated market risk of these instruments can best be understood relative to the underlying assets or risk being hedged and our trading strategy.

TRADING MARKET RISK

Trading and marketing operations often involve market risk associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis, through derivative instruments (Trading Energy Derivatives). Our trading and marketing businesses depend on price movements and volatility levels to create business opportunities, but these businesses must control risk within authorized limits.

We assess the risk of Trading Energy Derivatives using a value-at-risk (VAR) method, in order to maintain our total exposure within authorized limits. VAR is the potential loss in value of trading positions due to adverse market movements over a defined time period within a specified confidence level. We utilize the variance/covariance model of VAR, which relies on statistical relationships to describe how changes in different markets can affect a portfolio of instruments with different characteristics and market exposures.

For the VAR numbers reported below, a one-day holding period and a 95% confidence level were used, except for our European trading operations which uses a two-day to five-day holding period. This means that if VAR is calculated at $10 million, we may state that there is a one in 20 chance that if prices move against our consolidated diversified positions, our pre-tax loss in liquidating or offsetting with hedges our portfolio in a one-day period would exceed $10 million.

The VAR methodology employs a seasonally adjusted volatility-based approach with the following critical parameters: forward prices and volatility estimates, appropriate market-oriented holding periods and seasonally adjusted correlation estimates. We use the delta approximation method for reporting option positions. The instruments being evaluated could have features that may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used. An inherent limitation of VAR is that past changes in market risk may not produce accurate predictions of future market risk. Moreover, VAR calculated for a one-day holding period does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day. We cannot assure you that market volatility, failure of counterparties to meet their contractual obligations, future transactions or a failure of risk controls will not lead to significant losses from our trading, marketing and risk management activities.

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While we believe that our assumptions and approximations are reasonable for calculating VAR, there is no uniform industry methodology for estimating VAR, and different assumptions and/or approximations could produce materially different VAR estimates.

Our VAR limits are set by our board of directors, as further discussed below. Violations in overall VAR limits are required to be reported to the Audit Committee of our board of directors pursuant to our corporate-wide risk limit parameters. For further discussion on our risk management framework, please read "-- Risk Management Structure" below.

The following presents the daily VAR for substantially all of our Trading Energy Derivative positions (in millions).

                                                              2000   2001
                                                              ----   ----
As of December 31,..........................................  $15    $27
Year Ended December 31:
  Average...................................................    6      9
  High......................................................   36     27
  Low.......................................................    1      3

The following chart presents the daily VAR for substantially all of our Trading Energy Derivatives during 2001 (in millions).

COMBINED DOMESTIC AND EUROPEAN VAR
FOR THE YEAR ENDED DECEMBER 31, 2001

(PERFORMANCE GRAPH)

                                                                    YEAR ENDED
                                                                DECEMBER 31, 2001
                                                   --------------------------------------------
                                                   WHOLESALE    EUROPE     RETAIL       TOTAL
                                                   ---------   --------   ---------   ---------
First Quarter....................................  5.040953    0.976000                6.016953
Second Quarter...................................  7.938367    0.838000                8.776367
Third Quarter....................................  4.785587    0.832000                5.617587
Fourth Quarter...................................  8.714555    0.551000   17.785732   27.051287

During the beginning of 2001, the high VAR levels were due to high natural gas and power prices and volatility levels, which continued from late 2000. VAR exposure was lower in the second and third quarters of 2001 due to the significant decline in natural gas and power prices and volatility levels. During the fourth quarter of 2001, VAR levels increased due to increased power marketing activities in ERCOT related to our Retail Energy business segment.

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NON-TRADING MARKET RISK

Commodity Price Risk

Commodity price risk is an inherent component of our electric power generation businesses because the profitability of our generation assets depends significantly on commodity prices sufficient to create gross margin. During 2001, the majority of our non-trading commodity price risk was related to our electric power generation businesses. Prior to the energy delivery period, we attempt, in part to hedge the economics of our electric power facilities by selling power and purchasing equivalent fuel. Some power capacity is held in reserve and sold in the spot market. Non-trading derivative instruments (Non-trading Energy Derivatives) are used to mitigate exposure to variability in future cash flows from probable, anticipated future transactions attributable to a commodity risk. In this way, more certainty is provided as to the financial contribution associated with the operation of these assets. Beginning in 2002, our commodity price risk exposures related to our Retail Energy operations increased as we began to provide retail electric services to all customers of the T&D Utility who did not select another retail electric provider. For a discussion of risk factors affecting our Retail Energy operations, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Our Future Earnings -- Factors Affecting the Results of Our Retail Energy Operations" in Item 7 of this Form 10-K.

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 futures transactions, forward contracts, swaps and options 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.

Derivative instruments, which we use as economic hedges, create exposure to commodity prices, which we use 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 $38 million, excluding non-trading derivatives liabilities associated with our European Energy business segment's stranded cost import contracts.

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 and electric power to which the hedges relate. Furthermore, the Non-trading Energy Derivative portfolio, excluding the stranded cost import contracts, is managed to complement the physical transaction portfolio, thereby 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 cease 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 maturity date, whichever comes first. Non-trading Energy Derivatives intended as hedges, and which are effective as hedges, may still have some percentage which is not effective. The change in value of the Non-

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trading Energy Derivatives which represents the ineffective component of the hedges, is recorded in our results of operations. During 2001, we recognized revenues of $8 million in our Statements of Consolidated Income due to hedge ineffectiveness.

Our European Energy business segment's stranded cost import contracts have exposure to commodity prices. For information regarding these contracts, please read Notes 5(b) and 14(h) to our consolidated financial statements. A decrease of 10% in market prices of energy commodities from their December 31, 2001 levels would result in a loss of earnings of $98 million.

Interest Rate Risk

We have issued long-term debt and have obligations under bank facilities that subject us to the risk of loss associated with movements in market interest rates. We utilize interest-rate swaps in order to hedge a portion of our floating-rate obligations.

We have outstanding long-term debt and commercial paper obligations under bank facilities, mandatory redeemable preferred securities of subsidiary trusts holding solely our junior subordinated debentures (Trust Preferred Securities), securities held in our nuclear decommissioning trust, some lease obligations and our obligations under the ZENS that subject us to the risk of loss associated with movements in market interest rates. We utilize interest-rate swaps in order to hedge portions of our floating-rate debt and to hedge a portion of the interest rate applicable to a future offering of long-term debt.

Our floating-rate obligations aggregated $5.8 billion and $4.2 billion at December 31, 2000 and 2001, respectively. If the floating interest rates were to increase by 10% from December 31, 2001 rates, our combined interest expense would increase by a total of $1.2 million each month in which such increase continued.

At December 31, 2000 and 2001, we had outstanding fixed-rate debt (excluding indexed debt securities) and Trust Preferred Securities aggregating $5.5 billion and $6.2 billion, respectively, in principal amount and having a fair value of $6.2 billion each year. 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 10 and 11 to our consolidated financial statements). However, the fair value of these instruments would increase by approximately $682 million if interest rates were to decline by 10% from their levels at December 31, 2001. 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 14(k) to our consolidated financial statements, we contributed $14.8 million in 1999, 2000 and 2001 to a trust established to fund our share of the decommissioning costs for the South Texas Project. In 2002, we will begin contributing $2.9 million per year to this trust. The securities held by the trust for decommissioning costs had an estimated fair value of $169 million as of December 31, 2001, of which approximately 46% were fixed-rate debt securities that subject us to risk of loss of fair value with movements in market interest rates. If interest rates were to increase by 10% from their levels at December 31, 2001, the decrease in fair value of the fixed-rate debt securities would not be material to us. In addition, the risk of an economic loss is mitigated. Any unrealized gains or losses are accounted for in accordance with SFAS No. 71 as a regulatory asset/liability because we believe that our future contributions, which are currently recovered through the ratemaking process, will be adjusted for these gains and losses. For further discussion regarding the recovery of decommissioning costs pursuant to the Texas Electric Restructuring Law, please read Note 4(a) to our consolidated financial statements.

As discussed in Note 10(b) to our consolidated financial statements, RERC Corp.'s $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, 2001, we could terminate the option at a cost of $21 million. A decrease of 10% in the December 31, 2001 level of interest rates would increase the cost of termination of the option by approximately $16 million.

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As discussed in Note 8 to our consolidated financial statements, upon adoption of SFAS No. 133 effective January 1, 2001, the ZENS obligation was bifurcated into a debt component of $122 million and a derivative component of $788 million. The debt component of $122 million is a fixed-rate obligation and, therefore, does not expose us to the risk of loss in earnings due to changes in market interest rates. However, the fair value of the debt component would increase by approximately $18 million if interest rates were to decline by 10% from levels at December 31, 2001. Changes in the fair value of the derivative component will be recorded in our Statements of Consolidated Income and, therefore, we are exposed to changes in the fair value of the derivative component as a result of changes in the underlying risk-free interest rate. If the risk-free interest rate were to increase by 10% from December 31, 2001 levels, the fair value of the derivative component would increase by approximately $10 million, which would be recorded as a loss in our Statements of Consolidated Income.

During 2001, we entered into interest rate swaps having an aggregate notional amount of $1.8 billion to fix the interest rate applicable to floating rate short-term debt and interest rate swaps of $425 million to fix the interest rate applicable to floating rate long-term debt. At December 31, 2001, the swaps relating to short-term debt could be terminated at a cost of $12 million and the swaps related to long-term debt, of which $225 million had expired as of December 31, 2001, could be terminated at a cost of $4 million. The swaps relating to short-term debt do not qualify as cash flow hedges under SFAS No. 133, and are marked to market in our Consolidated Balance Sheets with changes reflected in interest expense in the Statements of Consolidated Income. The swaps relating to long-term debt qualify for hedge accounting under SFAS No. 133 and the periodic settlements are recognized as an adjustment to interest expense in the Statements of Consolidated Income over the term of the swap agreement. A decrease of 10% in the December 31, 2001 level of interest rates would increase the cost of terminating the swaps related to short-term debt and long-term debt outstanding at December 31, 2001 by $4 million each.

During 2001, we entered into forward-starting interest rate swaps having an aggregate notional amount of $500 million to hedge the interest rate on a future offering of five-year notes. At December 31, 2001, these swaps could be terminated at a cost of $2 million. These swaps qualify as cash flow hedges under SFAS No. 133. Should the expected issuance of the debt no longer be probable, any deferred amount will be recognized immediately into income. A decrease of 10% in the December 31, 2001 level of interest rates would increase the cost of terminating these swaps by $12 million.

For information regarding the accounting for these interest rate swaps, please read Note 5 to our consolidated financial statements.

Foreign Currency Exchange Rate Risk

Our European operations expose us to risk of loss in the fair value of our foreign investments due to the fluctuation in foreign currencies relative to our reporting currency, the U.S. dollar. Additionally, our European Energy business segment transacts in several European currencies, although the majority of its business is conducted in the Euro and prior to January 2001, the Dutch Guilder. As of December 31, 2001, we had entered into foreign currency swaps and foreign currency forward contracts and had issued Euro-denominated borrowings to hedge our foreign currency exposure of our net European investment. Changes in the value of the foreign currency hedging instruments and Euro -- denominated borrowings are recorded as foreign currency translation adjustments as a component of accumulated other comprehensive income (loss) in stockholders' equity. As of December 31, 2000 and 2001, we had recorded a loss of $2 million and $96 million, respectively, in cumulative net translation adjustments. The cumulative translation adjustments will be realized in earnings and cash flows only upon the disposition of the related investments. During the normal course of business, we review our currency hedging strategies and determine the hedging approach we deem appropriate based upon the circumstances of each situation.

As of December 31, 2001, our European Energy business segment had entered into transactions to purchase $271 million at fixed exchange rates in order to hedge future fuel purchases payable in U.S. dollars. As of December 31, 2001, the fair value of these financial instruments was a $3 million asset. An increase in

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the value of the Euro of 10% compared to the U.S. dollar from its December 31, 2001 level would result in loss in the fair value of these foreign currency financial instruments of $27 million.

Our European Energy business segment's stranded cost import contracts have foreign currency exposure. An increase of 10% in the U.S. dollar relative to the Euro from their December 31, 2001 levels would result in a loss of earnings of $6 million.

Beginning in January 2002, our remaining Latin America operations will use the Argentine peso as their functional currency (please read Note 2(o) to our consolidated financial statements). These foreign operations will expose us to risk of loss in earnings and cash flows due to the fluctuation in foreign currencies relative to our consolidated reporting currency, the U.S. dollar. We account for adjustments resulting from translation of our investments with functional currencies other than the U.S. dollar as a charge or credit directly to a separate component of stockholders' equity.

Equity Market Value Risk

We are exposed to equity market value risk through our ownership of approximately 26 million shares of AOL TW Common, which are held by us to facilitate our ability to meet our obligations under the ZENS. Please read Note 8 to our consolidated financial statements for a discussion of the effect of adoption of SFAS No. 133 on our ZENS obligation and our historical accounting treatment of our ZENS obligation. Subsequent to adoption of SFAS No. 133, a decrease of 10% from the December 31, 2001 market value of AOL TW Common would result in a net loss of approximately $3 million, which would be recorded as a loss in our Statements of Consolidated Income.

As discussed above under "-- Interest Rate Risk," we contribute to a trust established to fund our share of the decommissioning costs for the South Texas Project, which held debt and equity securities as of December 31, 2001. The equity securities expose us to losses in fair value. If the market prices of the individual equity securities were to decrease by 10% from their levels at December 31, 2001, the resulting loss in fair value of these securities would not be material to us. Currently, the risk of an economic loss is mitigated as discussed above under "-- Interest Rate Risk."

We have equity investments, which are classified as "available-for-sale" under SFAS No. 115. As of December 31, 2001, the value of these securities was $12 million. A 10% decline in the market value per share of these securities from December 31, 2001 would result in a loss in fair value of $1 million.

RISK MANAGEMENT STRUCTURE

We have a risk control framework to limit, monitor, measure and manage the risk in our existing portfolio of assets and contracts and to risk-measure and authorize new transactions. These risks include market, credit, liquidity and operational exposures. We believe that we have effective procedures for evaluating and managing these risks to which we are exposed. Key risk control activities include limits on trading and marketing exposures and products, credit review and approval, credit and performance risk measurement and monitoring, validation of transactions, portfolio valuation and daily portfolio reporting including mark-to-market valuation, VAR and other risk measurement metrics.

We seek to monitor and control our risk exposures through a variety of separate but complementary processes and committees which involve business unit management, senior management and our board of directors, as detailed below.

Board of Directors. Our board of directors affirms the overall strategy and approves overall risk limits for commodity trading and marketing.

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Audit Committee. The Audit Committee of our board of directors assesses the adequacy of the risk control organization and policies. The Audit Committee of our board of directors meets at least four times a year to:

- approve the risk control organization structure;

- approve the corporate-wide risk control policy;

- monitor compliance with trading limits;

- review significant risk control issues; and

- recommend to our board of directors corporate-wide commodity risk limit parameters for trading and marketing activities.

Executive Management. Our executive management appoints the Risk Oversight Committee members, reviews and approves recommendations of the Risk Oversight Committee prior to presentations to the Audit Committee of our board of directors, and approves and monitors broad risk limit allocations to the business segments and product types. Our executive management receives daily position reports of our trading and marketing activities.

Risk Oversight Committee. The Risk Oversight Committee, which is comprised of corporate and business segment officers, oversees all of our trading, marketing and hedging activities and other activities involving market risks. These activities expose us to commodity price, credit, foreign currency and interest rate risks. The Risk Oversight Committee meets at least monthly. For trading, marketing and hedging activities, the Risk Oversight Committee:

- monitors compliance of our trading units;

- reviews daily position reports for trading and marketing activities;

- recommends adjustments to trading limits, products and policies to the Audit Committee of our board of directors;

- approves business segment's detailed policies and procedures;

- allocates board of director-approved trading and marketing risk capital limits, including VAR limits;

- approves new trading, marketing and hedging products and commodities;

- approves entrance into new trading markets;

- monitors processes and information systems related to the management of our risk to market exposures; and

- places guidelines and limits around hedging activities.

Commitment Review Committee. The Commitment Review Committee, which is comprised of corporate officers, establishes corporate-wide standards for the evaluation of capital projects and other significant commitments, evaluates proposed capital projects and other significant commitments, and makes recommendations to the chief executive officer. The Commitment Review Committee is scheduled to meet on an as needed basis.

Corporate Risk Control Organization. Our Corporate Risk Control Organization is headed by a chief risk control officer who has corporate-wide oversight for maintaining consistent application of corporate risk policies within individual business segments. The Corporate Risk Control Organization:

- recommends the corporate-wide risk management policies and procedures which are approved by the Audit Committee of our board of directors;

- provides updates of trading and marketing activities to the Audit Committee of our board of directors on a regular basis;

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- provides oversight of our ongoing development and implementation of operational risk policies, framework and methodologies;

- monitors effectiveness of the corporate-wide risk management policies, procedures and risk limits;

- evaluates the business segment risk control organizations, including information systems and reporting;

- evaluates all significant valuation methodologies, assumptions and models;

- evaluates allocation of risk limits within our business segments;

- reviews daily position reports of trading and marketing activities; and

- reviews inherent risks in proposed transactions.

Business Segment Risk Control Organizations. The Corporate Risk Control Organization also serves as the risk control organization for the business segments that will comprise CenterPoint Energy. Each of Reliant Resources' business segments has a Business Segment Risk Control Organization, which is headed by a risk control officer who reports to the Corporate Risk Control Organization and the business segment's executive management outside of the commercial trading organization. The Business Segment Risk Control Organization:

- develops and maintains the risk control infrastructure, including policies, processes, personnel and information and valuation systems, to analyze and report the daily risk positions to Executive Management, the Risk Oversight Committee, the Corporate Risk Control Organization, the Internal Audit Department and the Controllers Organization;

- reviews credit exposures for customers and counterparties;

- reviews all significant valuation methodologies, assumptions and models used for risk measurement, mark-to-market valuations and structured transaction evaluations;

- ensures that risk systems can adequately measure positions and related risk exposures for new products and transactions;

- evaluates new transactions for compliance with risk policies and limits; and

- evaluates effectiveness of hedges.

The management of each of the business segments is responsible for the management of its risks and for maintaining an environment conducive to effective risk control activities as part of its overall responsibility for the business unit. Commercial management has in-depth knowledge of the primary sources of risk in their individual markets and the instruments available to hedge our exposures. Commercial management assigns risk limits that have been allocated to specific markets and to individual traders, within the limits imposed by the Risk Oversight Committee. Risk limits are monitored on a daily basis. Risk limit violations, including VAR, are reported to the appropriate level of management in the business segment, the Corporate Risk Control Organization, the Risk Oversight Committee, the board of directors and the Audit Committee of the board of directors.

Segregation of duties and management oversight are fundamental elements of our risk management process. There are segregation of duties among the trading and marketing functions; transaction validation and documentation; risk measurement and reporting; settlements function; accounting and financial reporting functions; and treasury function. These risk management processes and related controls are reviewed by our corporate Internal Audit Department on a regular basis. When appropriate, external advisors or consultants with relevant experience will assist the Internal Audit Department with their reviews.

The effectiveness of our policies and procedures for managing risk exposure can never be completely measured or fully assured. For example, we could experience losses which could have a material adverse effect on our financial condition, results of operations or cash flows, from unexpectedly large or rapid movements or disruptions in the energy markets, from regulatory-driven market rules changes, and bankruptcy of customers or counterparties.

130

CREDIT RISK

Credit risk is inherent in our commercial activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. Broad credit policies and parameters are set by the Risk Oversight Committee. The Business Segment Risk Control Organizations prepare daily analyses of credit exposures. We enter into derivative instruments primarily with counterparties having a minimum investment grade credit rating (i.e., a minimum credit rating for such entity's senior unsecured debt of BBB- for Standard & Poor's and Fitch or Baa3 for Moody's). In addition, we seek to enter into netting agreements that permit us to offset receivables and payables with a given counterparty. We also attempt to enter into agreements that enable us to either obtain collateral from a counterparty or to terminate upon the occurrence of adverse credit-related events. We are re-evaluating our current credit risk practices in light of changes in the marketplace, recent corporate failures and changing credit practices by the rating agencies.

It is our policy that all transactions must be within approved counterparty or customer credit limits. For each business segment, counterparty credit limits are established by the applicable business segment's credit risk control group. We employ tiered levels of approval authority for counterparty credit limits, with authority increasing from the operating business segment's credit analysts through the business segment's risk control officer, the Risk Oversight Committee and our executive management. The Business Segment Risk Control Organization monitors credit exposure daily. The mark-to-market values and cash settlement values for all transactions are compared to the authorized credit threshold for each counterparty. For long-term arrangements, we periodically review the financial condition of these counterparties in addition to monitoring the effectiveness of these contracts in achieving our objectives.

For information regarding our provision related to our energy sales in the California market, please read Note 14(g) to our consolidated financial statements. For information regarding our net provision related to energy sales to Enron which filed a voluntary petition for bankruptcy, please read Note 21 to our consolidated financial statements.

The following table presents the distribution by credit ratings of our total trading and marketing assets and total non-trading derivative assets as of December 31, 2001, after taking into consideration netting and set-off agreements with counterparties within each balance sheet caption (in millions).

                                                                                  PERCENTAGE OF
                                                  COLLATERAL   EXPOSURE NET OF   EXPOSURE NET OF
CREDIT RATING EQUIVALENT               EXPOSURE    HELD(3)       COLLATERAL        COLLATERAL
------------------------               --------   ----------   ---------------   ---------------
AAA/Aaa..............................   $  136      $  --          $  136                5%
AA/Aa2...............................      191         --             191                7%
A/A2.................................    1,049         (4)          1,045               39%
BBB/Baa2.............................    1,152       (137)          1,015               38%
BB/Ba2 or lower......................      251        (26)            225                9%
Unrated(1)(2)........................       49         --              49                2%
                                        ------      -----          ------              ---
                                         2,828       (167)          2,661              100%
                                                                                       ===
Less: Credit and other reserves......      114         --             114
                                        ------      -----          ------
                                        $2,714      $(167)         $2,547
                                        ======      =====          ======

131

The following table presents credit exposure by maturity for total trading and marketing assets and non-trading derivative assets, net of collateral, as of December 31, 2001 (in millions).

                                                                               EXPOSURE NET OF
CREDIT RATING EQUIVALENT                     0-12 MONTHS   1 YEAR OR GREATER     COLLATERAL
------------------------                     -----------   -----------------   ---------------
AAA/Aaa....................................    $   95            $ 41              $  136
AA/Aa2.....................................       142              49                 191
A/A2.......................................       860             185               1,045
BBB/Baa2...................................       660             355               1,015
BB/Ba2 or lower............................       125             100                 225
Unrated(1)(2)..............................        31              18                  49
                                               ------            ----              ------
                                                1,913             748               2,661
Less: Credit and other reserves............        69              45                 114
                                               ------            ----              ------
                                               $1,844            $703              $2,547
                                               ======            ====              ======


(1) For unrated counterparties, we perform financial statement analysis, considering contractual rights and restrictions, and collateral, to create a synthetic credit rating.

(2) In lieu of making an individual assessment of the credit of unrated counterparties, we may make a determination that the collateral held in respect of such obligations is sufficient to cover a substantial portion of our exposure. In making this determination, we take into account various factors, including market volatility.

(3) Collateral consists of cash and standby letters of credit.

132

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF THE COMPANY

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(AS RESTATED, SEE NOTE 1)

                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 1999          2000          2001
                                                              -----------   -----------   -----------
                                                                      (THOUSANDS OF DOLLARS,
                                                                     EXCEPT PER SHARE AMOUNTS)
REVENUES....................................................  $13,794,548   $28,269,159   $40,809,455
EXPENSES:
  Fuel and cost of gas sold.................................    6,330,893    15,049,322    19,505,052
  Purchased power...........................................    3,095,110     7,580,108    15,126,826
  Operation and maintenance.................................    1,763,695     2,356,213     2,654,490
  Taxes other than income taxes.............................      441,242       498,061       542,847
  Depreciation and amortization.............................      905,305       906,318       911,450
  Latin America operating results...........................         (528)        1,113            --
  Impairment of Latin America assets........................           --        40,711        75,342
                                                              -----------   -----------   -----------
      Total.................................................   12,535,717    26,431,846    38,816,007
                                                              -----------   -----------   -----------
OPERATING INCOME............................................    1,258,831     1,837,313     1,993,448
                                                              -----------   -----------   -----------
OTHER INCOME (EXPENSE):
  Unrealized gain (loss) on AOL Time Warner investment......    2,452,406      (204,969)      (70,215)
  Unrealized (loss) gain on indexed debt securities.........     (629,523)      101,851        58,033
  (Loss) income from equity investments in unconsolidated
    subsidiaries............................................         (793)       42,860        57,440
  Operating results from equity investments in
    unconsolidated Latin America assets.....................      (26,176)      (40,583)           --
  Impairment of Latin America unconsolidated equity
    investments.............................................           --      (130,842)       (4,330)
  Loss on disposal of Latin America assets..................           --      (176,400)           --
  Interest expense..........................................     (500,151)     (713,674)     (602,090)
  Distribution on trust preferred securities................      (51,220)      (54,358)      (55,598)
  Minority interest.........................................          638           988       (81,399)
  Other, net................................................       60,836        96,366       123,496
                                                              -----------   -----------   -----------
      Total.................................................    1,306,017    (1,078,761)     (574,663)
                                                              -----------   -----------   -----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEMS, CUMULATIVE
  EFFECT OF ACCOUNTING CHANGE AND PREFERRED DIVIDENDS.......    2,564,848       758,552     1,418,785
    Income Tax Expense......................................      899,117       318,497       499,845
                                                              -----------   -----------   -----------
INCOME BEFORE EXTRAORDINARY ITEMS, CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE AND PREFERRED DIVIDENDS.................    1,665,731       440,055       918,940
  Extraordinary (Loss) Gain, net of tax of $98,679 and $0 in
    1999 and 2000, respectively.............................     (183,261)        7,445            --
                                                              -----------   -----------   -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND
  PREFERRED DIVIDENDS.......................................    1,482,470       447,500       918,940
  Cumulative Effect of Accounting Change, net of tax of
    $33,205 in 2001.........................................           --            --        61,619
                                                              -----------   -----------   -----------
INCOME BEFORE PREFERRED DIVIDENDS...........................    1,482,470       447,500       980,559
  Preferred Dividends.......................................          389           389           858
                                                              -----------   -----------   -----------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS..............  $ 1,482,081   $   447,111   $   979,701
                                                              ===========   ===========   ===========
BASIC EARNINGS PER SHARE:
  Income Before Extraordinary Items and Cumulative Effect of
    Accounting Change.......................................  $      5.84   $      1.54   $      3.17
  Extraordinary Items, net of tax...........................        (0.64)         0.03            --
  Cumulative Effect of Accounting Change, net of tax........           --            --          0.21
                                                              -----------   -----------   -----------
  Net Income Attributable to Common Stockholders............  $      5.20   $      1.57   $      3.38
                                                              ===========   ===========   ===========
DILUTED EARNINGS PER SHARE:
  Income Before Extraordinary Items and Cumulative Effect of
    Accounting Change.......................................  $      5.82   $      1.53   $      3.14
  Extraordinary Items, net of tax...........................        (0.64)         0.03            --
  Cumulative Effect of Accounting Change, net of tax........           --            --          0.21
                                                              -----------   -----------   -----------
  Net Income Attributable to Common Stockholders............  $      5.18   $      1.56   $      3.35
                                                              ===========   ===========   ===========

See Notes to the Company's Consolidated Financial Statements

133

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(AS RESTATED, SEE NOTE 1)

                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                                1999        2000       2001
                                                             ----------   --------   ---------
                                                                  (THOUSANDS OF DOLLARS)
Net income attributable to common stockholders.............  $1,482,081   $447,111   $ 979,701
Other comprehensive (loss) income, net of tax:
  Foreign currency translation adjustments from continuing
     operations (net of tax of $317, $594 and $98,088).....        (587)    (1,104)    (94,066)
  Foreign currency translation adjustments from assets held
     for sale (net of tax of $22,826, $40,862 and $13).....     (42,392)    75,887         (24)
  Unrealized (loss) gain on available-for-sale securities
     (net of tax of $373, $1,492 and $9,241)...............      (1,224)    (2,264)     16,984
  Reclassification adjustments for gains on sales of
     available-for-sale securities realized in income (net
     of tax of $4,668).....................................          --         --      (8,670)
  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 $11,127 and $3,601).........          --    (19,135)      5,965
  Cumulative effect of adoption of SFAS No. 133 (net of tax
     of $215,897)..........................................          --         --    (421,852)
  Net deferred gain from cash flow hedges (net of tax of
     $203,913).............................................          --         --     412,445
  Reclassification of deferred gain from cash flow hedges
     realized in net income (net of tax of $96,876)........          --         --     (91,599)
                                                             ----------   --------   ---------
Other comprehensive (loss) income..........................     (44,203)    70,612    (180,817)
                                                             ----------   --------   ---------
Comprehensive Income.......................................  $1,437,878   $517,723   $ 798,884
                                                             ==========   ========   =========

See Notes to the Company's Consolidated Financial Statements

134

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AS RESTATED, SEE NOTE 1)

                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 2000          2001
                                                              -----------   -----------
                                                               (THOUSANDS OF DOLLARS)
                                        ASSETS

CURRENT ASSETS:
  Cash and cash equivalents.................................  $   175,972   $   135,674
  Restricted cash...........................................       50,000       167,421
  Investment in AOL Time Warner common stock................      896,824       826,609
  Accounts receivable, net..................................    2,623,492     1,922,708
  Accrued unbilled revenues.................................      592,618       226,428
  Inventory.................................................      483,213       579,673
  Trading and marketing assets..............................    4,290,803     1,611,393
  Non-trading derivative assets.............................           --       399,896
  Margin deposits on energy trading and hedging
    activities..............................................      521,004       213,727
  Other.....................................................      279,335       165,206
                                                              -----------   -----------
      Total current assets..................................    9,913,261     6,248,735
                                                              -----------   -----------
PROPERTY, PLANT AND EQUIPMENT, NET..........................   15,260,176    15,814,170
                                                              -----------   -----------
OTHER ASSETS:
  Goodwill and other intangibles, net.......................    3,080,686     2,946,859
  Regulatory assets.........................................    1,926,103     3,276,800
  Trading and marketing assets..............................      544,909       446,610
  Non-trading derivative assets.............................           --       256,402
  Equity investments in unconsolidated subsidiaries.........      108,727       386,841
  Stranded costs indemnification receivable.................           --       203,693
  Net assets held for sale..................................      194,858         8,000
  Restricted cash...........................................           --         6,775
  Other.....................................................      931,709     1,085,659
                                                              -----------   -----------
      Total other assets....................................    6,786,992     8,617,639
                                                              -----------   -----------
      TOTAL ASSETS..........................................  $31,960,429   $30,680,544
                                                              ===========   ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Short-term borrowings.....................................  $ 5,004,494   $ 3,435,347
  Current portion of long-term debt.........................    1,623,202       660,757
  Indexed debt securities derivative........................           --       730,225
  Accounts payable..........................................    3,057,948     1,439,840
  Taxes accrued.............................................      172,449       307,827
  Interest accrued..........................................      103,489       114,578
  Dividends declared........................................      110,893             9
  Trading and marketing liabilities.........................    4,272,771     1,478,335
  Non-trading derivative liabilities........................           --       472,021
  Margin deposits from customers on energy trading and
    hedging activities......................................      284,603       144,700
  Accumulated deferred income taxes, net....................      309,008       359,220
  Other.....................................................      706,357       563,323
                                                              -----------   -----------
      Total current liabilities.............................   15,645,214     9,706,182
                                                              -----------   -----------
OTHER LIABILITIES:
  Accumulated deferred income taxes, net....................    2,548,891     2,307,737
  Unamortized investment tax credit.........................      265,737       247,407
  Trading and marketing liabilities.........................      530,263       361,786
  Non-trading derivative liabilities........................           --       649,036
  Benefit obligations.......................................      491,964       547,369
  Regulatory liabilities....................................      237,487     1,359,883
  Non-derivative stranded costs liability...................           --       203,693
  Other.....................................................    1,048,018     1,064,474
                                                              -----------   -----------
      Total other liabilities...............................    5,122,360     6,741,385
                                                              -----------   -----------
LONG-TERM DEBT..............................................    4,996,095     5,741,944
                                                              -----------   -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES..............        9,345     1,047,366
                                                              -----------   -----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
  SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR
  SUBORDINATED DEBENTURES OF THE COMPANY....................      705,355       705,744
                                                              -----------   -----------
STOCKHOLDERS' EQUITY........................................    5,482,060     6,737,923
                                                              -----------   -----------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..............  $31,960,429   $30,680,544
                                                              ===========   ===========

See Notes to the Company's Consolidated Financial Statements

135

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 1999          2000          2001
                                                              -----------   -----------   -----------
                                                                      (THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income attributable to common stockholders............  $ 1,482,081   $   447,111   $   979,701
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation and amortization...........................      905,305       906,318       911,450
    Deferred income taxes...................................      632,588       (41,892)     (110,279)
    Investment tax credit...................................      (58,706)      (18,330)      (18,330)
    Cumulative effect of accounting change, net.............           --            --       (61,619)
    Unrealized (gain) loss on AOL Time Warner investment....   (2,452,406)      204,969        70,215
    Unrealized loss (gain) on indexed debt securities.......      629,523      (101,851)      (58,033)
    Undistributed losses (earnings) of unconsolidated
      subsidiaries..........................................          793       (24,931)      (30,280)
    Curtailment and related enhancement of benefits.........           --            --       100,609
    REPGB stranded cost indemnification settlement gain.....           --            --       (36,881)
    Impairment of marketable equity securities..............           --        26,504            --
    Extraordinary items.....................................      183,261        (7,445)           --
    Net cash (used in) provided by assets held for sale.....      (24,547)      437,620       199,031
    Minority interest.......................................         (638)         (988)       81,399
    Changes in other assets and liabilities:
      Restricted cash.......................................           --       (50,000)     (117,421)
      Accounts receivable, net..............................     (325,777)   (1,933,033)    1,189,214
      Inventory.............................................       51,480       (74,603)      (74,703)
      Proceeds from sale of debt securities.................           --       123,428            --
      Accounts payable......................................      197,549     2,022,004    (1,635,274)
      Federal tax refund....................................           --        86,155            --
      Fuel cost over (under) recovery/surcharge.............       73,567      (515,278)      422,672
      Net trading and marketing assets and liabilities......      (11,703)       (3,984)     (185,136)
      Margin deposits on energy trading and hedging
        activities, net.....................................      (29,921)     (206,480)      167,374
      Non-trading derivative................................           --            --       (51,415)
      Prepaid lease obligations.............................           --            --      (180,531)
      Interest and taxes accrued............................      (29,858)      (48,841)      155,117
      Other current assets..................................      (21,337)      (93,731)      159,057
      Other current liabilities.............................       (4,143)      229,628       (70,841)
      Other assets..........................................      (72,551)     (158,184)     (158,227)
      Other liabilities.....................................      (55,939)       69,738        (1,441)
    Other, net..............................................       34,931        70,100        67,639
                                                              -----------   -----------   -----------
        Net cash provided by operating activities...........    1,103,552     1,344,004     1,713,067
                                                              -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (1,165,639)   (1,842,385)   (2,053,383)
  Business acquisitions, net of cash acquired...............   (1,060,000)   (2,121,481)           --
  Proceeds from sale-leaseback transactions.................           --     1,000,000            --
  Payment of business purchase obligation...................           --      (981,789)           --
  Investment in AOL Time Warner securities..................     (537,055)           --            --
  Investments in unconsolidated subsidiaries................      (36,582)       (5,755)           --
  Net cash (used in) provided by assets held for sale.......      (55,100)      641,768       (13,397)
  Other, net................................................      (15,557)       23,444       (18,181)
                                                              -----------   -----------   -----------
        Net cash used in investing activities...............   (2,869,933)   (3,286,198)   (2,084,961)
                                                              -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt, net.........................    2,060,680     1,092,373     1,293,204
  Increase (decrease) in short-term borrowings, net.........      822,468     2,170,314    (1,477,646)
  Payments of long-term debt................................     (935,908)     (678,709)     (636,206)
  Payment of common stock dividends.........................     (427,255)     (426,859)     (433,918)
  Proceeds from issuance of stock, net......................       30,452        53,809       100,430
  Proceeds from subsidiary issuance of stock................           --            --     1,696,074
  Proceeds from sale of trust preferred securities, net.....      362,994            --            --
  Purchase of treasury stock by subsidiary..................           --            --      (189,460)
  Purchase of treasury stock................................      (90,708)      (27,306)           --
  Redemption of preferred stock.............................           --            --       (10,227)
  Increase in restricted cash related to securitization
    financing...............................................           --            --        (6,775)
  Net cash provided by (used in) assets held for sale.......          400      (120,173)        1,200
  Other, net................................................         (204)      (31,138)          672
                                                              -----------   -----------   -----------
        Net cash provided by financing activities...........    1,822,919     2,032,311       337,348
                                                              -----------   -----------   -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.....................           --         5,088        (5,752)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........       56,538        95,205       (40,298)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..............       24,229        80,767       175,972
                                                              -----------   -----------   -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $    80,767   $   175,972   $   135,674
                                                              ===========   ===========   ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash Payments:
    Interest (net of amounts capitalized)...................  $   504,821   $   786,660   $   598,009
    Income taxes............................................      401,703       526,603       563,011

See Notes to the Company's Consolidated Financial Statements

136

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

(AS RESTATED, SEE NOTE 1)

                                                                      1999                   2000                   2001
                                                              --------------------   --------------------   --------------------
                                                              SHARES      AMOUNT     SHARES      AMOUNT     SHARES      AMOUNT
                                                              -------   ----------   -------   ----------   -------   ----------
                                                                              (THOUSANDS OF DOLLARS AND SHARES)
PREFERENCE STOCK, NONE OUTSTANDING..........................       --   $       --        --   $       --        --   $       --
CUMULATIVE PREFERRED STOCK
  Balance, beginning of year................................       97        9,740        97        9,740        97        9,740
  Redemption of preferred stock.............................       --           --        --           --       (97)      (9,740)
                                                              -------   ----------   -------   ----------   -------   ----------
  Balance, end of year......................................       97        9,740        97        9,740        --           --
                                                              -------   ----------   -------   ----------   -------   ----------
COMMON STOCK, NO PAR; AUTHORIZED 700,000,000 SHARES
  Balance, beginning of year................................  296,271    3,136,826   297,612    3,182,751   299,914    3,257,190
  Issuances related to benefit and investment plans.........    1,341       46,062     2,302       74,447     3,030      130,660
  Unrealized gain on sale of subsidiaries' stock............       --           --        --           --        --      509,499
  Other.....................................................       --         (137)       --           (8)       --          (48)
                                                              -------   ----------   -------   ----------   -------   ----------
  Balance, end of year......................................  297,612    3,182,751   299,914    3,257,190   302,944    3,897,301
                                                              -------   ----------   -------   ----------   -------   ----------
TREASURY STOCK
  Balance, beginning of year................................     (103)      (2,384)   (3,625)     (93,296)   (4,811)    (120,856)
  Shares acquired...........................................   (3,524)     (90,708)   (1,184)     (27,306)       --           --
  Contribution to pension plan..............................       --           --        --           --     4,512      113,336
  Other.....................................................        2         (204)       (2)        (254)      299        7,520
                                                              -------   ----------   -------   ----------   -------   ----------
  Balance, end of year......................................   (3,625)     (93,296)   (4,811)    (120,856)       --           --
                                                              -------   ----------   -------   ----------   -------   ----------
UNEARNED ESOP STOCK
  Balance, beginning of year................................  (11,674)    (217,780)  (10,679)    (199,226)   (8,639)    (161,158)
  Issuances related to benefit plan.........................      995       18,554     2,040       38,068     1,569       29,270
                                                              -------   ----------   -------   ----------   -------   ----------
  Balance, end of year......................................  (10,679)    (199,226)   (8,639)    (161,158)   (7,070)    (131,888)
                                                              -------   ----------   -------   ----------   -------   ----------
RETAINED EARNINGS
  Balance, beginning of year................................             1,445,081              2,500,181              2,520,350
  Net income................................................             1,482,081                447,111                979,701
  Common stock dividends -- $1.50 per share in 1999 and 2000
    and $1.125 in 2001......................................              (426,981)              (426,942)              (323,518)
                                                                        ----------             ----------             ----------
  Balance, end of year......................................             2,500,181              2,520,350              3,176,533
                                                                        ----------             ----------             ----------
ACCUMULATED OTHER COMPREHENSIVE LOSS
  Balance, beginning of year................................               (49,615)               (93,818)               (23,206)
  Other comprehensive (loss) income, net of tax:
    Foreign currency translation adjustments from continuing
      operations............................................                  (587)                (1,104)               (94,066)
    Foreign currency translation adjustments from assets
      held for sale.........................................               (42,392)                75,887                    (24)
    Unrealized (loss) gain on available-for-sale
      securities............................................                (1,224)                (2,264)                16,984
    Reclassification adjustment for gains on sales of
      available-for-sale securities realized in income......                    --                     --                 (8,670)
    Reclassification adjustment for impairment loss on
      available-for-sale securities realized in net
      income................................................                    --                 17,228                     --
    Additional minimum non-qualified pension liability
      adjustment............................................                    --                (19,135)                 5,965
    Cumulative effect of adoption of SFAS No. 133...........                    --                     --               (421,852)
    Net deferred gain from cash flow hedges.................                    --                     --                412,445
    Reclassification of deferred gain from cash flow hedges
      realized in net income................................                    --                     --                (91,599)
                                                                        ----------             ----------             ----------
  Other comprehensive (loss) income.........................               (44,203)                70,612               (180,817)
                                                                        ----------             ----------             ----------
  Balance, end of year......................................               (93,818)               (23,206)              (204,023)
                                                                        ----------             ----------             ----------
      Total Stockholders' Equity............................            $5,306,332             $5,482,060             $6,737,923
                                                                        ==========             ==========             ==========

See Notes to the Company's Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BACKGROUND AND BASIS OF PRESENTATION

Reliant Energy, Incorporated (Reliant Energy), together with its subsidiaries (collectively, the Company), is a diversified international energy services company that provides energy and energy services primarily in North America and Western Europe. Reliant Energy is both an electric utility company and a utility holding company through its wholly owned subsidiary Reliant Energy Resources Corp. (RERC).

The Company's financial reporting business segments include the following:
Electric Operations, Natural Gas Distribution, Pipelines and Gathering, Wholesale Energy, European Energy, Retail Energy, Latin America and Other Operations. Electric Operations includes the operations of Reliant Energy HL&P, an electric utility. Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers and some non-rate regulated retail gas marketing operations to commercial and industrial customers. Pipelines and Gathering includes the interstate natural gas pipeline operations and the natural gas gathering and pipelines services businesses. Wholesale Energy is engaged in the acquisition, development and operation of non-rate regulated power generation facilities as well as the wholesale energy trading, marketing, power origination and risk management services in North America. European Energy is engaged in the operation of power generation facilities in the Netherlands as well as wholesale energy trading and power origination activities in Europe. Retail Energy consists of the Company's unregulated retail electric operations, and has historically been reported in the Other Operations business segment. Other Operations includes unallocated general corporate expenses, a communications business and non-operating investments. Latin America primarily consists of an electric utility and an electric cogeneration plant located in Argentina. Wholesale Energy, European Energy, Retail Energy and certain operations included within Other Operations are currently owned by Reliant Resources.

Reliant Energy is in the process of separating its regulated and unregulated businesses into two publicly traded companies. In December 2000, Reliant Energy transferred a significant portion of its unregulated businesses to Reliant Resources, Inc. (Reliant Resources) which, at the time, was a wholly owned subsidiary. In May 2001, Reliant Resources conducted an initial public offering (Offering) of approximately 20% of its common stock (59.8 million shares of its common stock) at a price of $30 per share, and received net proceeds from the Offering of $1.7 billion. After the Offering, Reliant Energy owned approximately 80% of Reliant Resources. As of December 31, 2001, Reliant Energy owns approximately 83% of Reliant Resources due to treasury stock repurchases of $189 million during 2001 by Reliant Resources. As a result of the Offering, the Company recorded directly into stockholders' equity as a component of common stock a $509 million unrealized gain on the sale of subsidiaries' stock. Pursuant to a master separation agreement between Reliant Energy and Reliant Resources, Reliant Resources used $147 million of the net proceeds to repay certain indebtedness owed to Reliant Energy. In connection with the Offering, Reliant Energy converted $1.7 billion of intercompany indebtedness owed by Reliant Resources and its subsidiaries prior to the closing of the Offering to equity as a capital contribution to Reliant Resources. In December 2001, Reliant Energy's shareholders approved an agreement and plan of merger by which the following will occur (which we refer to as the Restructuring):

- CenterPoint Energy will become the holding company for Reliant Energy and its subsidiaries;

- Reliant Energy and its subsidiaries will become subsidiaries of CenterPoint Energy; and

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

After the Restructuring, Reliant Energy plans, subject to further corporate approvals, market and other conditions, to complete the separation of its regulated and unregulated businesses by distributing the shares of common stock of Reliant Resources that the Company owns to its shareholders (Distribution). The Company's goal is to complete the Restructuring and subsequent Distribution as quickly as possible after all

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the necessary conditions are fulfilled, including receipt of an order from the Securities and Exchange Commission (SEC) granting the required approvals under the Public Utility Holding Company Act of 1935 (1935 Act) and an extension from the IRS of its private letter ruling that the Company has obtained regarding the tax-free treatment of the Distribution. Although receipt or timing of regulatory approvals cannot be assured, the Company believes it meets the standards for such approvals. Reliant Energy currently expects to complete the Restructuring and Distribution in the summer of 2002.

Effective December 1, 2000, Reliant Energy's board of directors approved a plan to dispose of the Company's Latin America business segment through sales of its assets. Accordingly, in its 2000 consolidated financial statements, the Company reported the results of its Latin America business segment as discontinued operations 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) for each of the three years in the period ended December 31, 2000. On December 20, 2001, negotiations for the sale of the remaining Latin America investments were terminated as a result of the recent economic developments in Argentina. The Company will continue to evaluate options related to the future disposition of these assets.

Accordingly, the Latin America business segment is no longer reported as discontinued operations. The related operating results and loss on disposal have been reclassified within the Consolidated Statements of Income for all periods into operating income with respect to consolidated subsidiaries and other income with respect to equity investments in unconsolidated subsidiaries as required for assets held for sale by Emerging Issues Task Force (EITF) Issue No. 90-6 (EITF 90-6). For additional information regarding the disposal of the Latin America business segment, see Note 19.

RESTATEMENT

On May 9, 2002, Reliant Resources determined that it had engaged in same-day commodity trading transactions involving purchases and sales with the same counterparty for the same volume at substantially the same price, which the personnel who effected these transactions apparently did so with the sole objective of increasing volumes. Reliant Resources commenced a review to quantify the amount and assess the impact of these trades (round trip trades). The Audit Committees of each of the Board of Directors of Reliant Energy and Reliant Resources (Audit Committees) also directed an internal investigation by outside legal counsel, with assistance by outside accountants, of the facts and circumstances relating to the round trip trades and related matters.

The Company currently reports all trading, marketing and risk management services transactions on a gross basis with such transactions being reported in revenues and expenses except primarily for financial gas transactions such as swaps. Therefore, the round trip trades were reflected in both the Company's revenues and expenses. The round trip trades should not have been recognized in revenues or expenses (i.e. they should have been reflected on a net basis). However, since the round trip trades were done at the same volume and substantially the same price, they had no impact on the Company's reported cash flows, operating income or net income.

Based on Reliant Resources' review, Reliant Resources determined that it engaged in such round trip trades in 1999, 2000 and 2001. The results of the Audit Committees' investigation were consistent with the results of Reliant Resources' review. The round trip trades were for 30 million megawatt hours (MWh) of power and 182 billion cubic feet (Bcf) in 1999, 30 million MWh of power in 2000, and 74 million MWh of power and 46 Bcf of natural gas in 2001. On May 13, 2002, Reliant Resources previously announced its preliminary findings of round trip trades which had identified 30 million MWh of power in 1999, 30 million MWh of power in 2000, and 78 million MWh of power and 45 Bcf of natural gas in 2001. In addition to the round trip trades reported on May 13, 2002, Reliant Resources' review also identified an additional transaction in 1999 involving 182 Bcf of natural gas totaling $364 million, which based on available information, Reliant

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Resources believes was also recorded with the sole objective of increasing volumes but also resulted in increased revenues and fuel and cost of gas sold expense.

In the course of Reliant Resources' review, Reliant Resources also identified and determined to record on a net basis several transactions for energy related services (not involving round trip trades) that totaled $85 million over the three year period ended December 31, 2001. These transactions were originally recorded on a gross basis.

During 1999, 2000 and 2001, these transactions, referred to above, collectively, had the effect of increasing revenues, fuel and cost of gas sold expense and purchased power expense as follows:

                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              1999     2000     2001
                                                             ------   ------   ------
                                                                  (IN MILLIONS)
Revenues...................................................  $1,417   $1,070   $3,902
Fuel and cost of gas sold expense..........................     376       27      208
Purchase power expense.....................................   1,041    1,043    3,694

In addition, during the May 2001 through September 2001 time frame, Reliant Resources entered into four structured transactions involving a series of forward or swap contracts to buy and sell an energy commodity in 2001 and to buy and sell an energy commodity in 2002 or 2003 (four structured transactions). The four structured transactions were intended to increase future cash flow and earnings and to increase certainty associated with future cash flow and earnings, albeit at the expense of 2001 cash flow and earnings. Each series of contracts in a structure were executed contemporaneously with the same counterparty and were for the same commodities, quantities and locations. The contracts in each structure were offsetting in terms of physical attributes. The transactions that settled in 2001 were previously recorded on a gross basis with such transactions being reported in revenues and expenses which resulted in $1.5 billion of revenues, $364 million in fuel and cost of gas sold and $1.2 billion of purchased power expense being recognized during the period from May 2001 through December 31, 2001. Having further reviewed the transactions, Reliant Resources now believes these transactions should have been accounted for on a net basis.

During the fourth quarter of 2000, two power generation swap contracts with a fair value of $261 million were terminated and replaced with a substantially similar contract providing for physical delivery and designated to hedge electric generation. The termination of the original contracts and execution of the replacement contract represented a substantive modification to the original contract. As a result, upon termination of the original contracts, a contractual liability representing the fair value of the original contracts and a deferred asset of equal amount should have been recorded. As of January 1, 2001, in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133), the deferred asset should have been recorded as a transition adjustment to other comprehensive loss. The liability and transition adjustment should have been amortized on a straight-line basis over the term of the power generation contract replacing the terminated power generation contracts (through May 2004). The Company previously did not give accounting recognition to these transactions. As a result, the Company has restated its Consolidated Balance Sheets as of December 31, 2000 and 2001 and the Statements of Consolidated Stockholders' Equity and Comprehensive Income for the year ended December 31, 2001, to appropriately account for these transactions as described above. The restatement had no impact on the Company's reported consolidated cash flows, operating income or net income.

The consolidated financial statements for 1999, 2000 and 2001 have been restated from amounts previously reported to reflect all of the transactions described herein. In addition, the unaudited quarterly financial data for the interim periods ended March 31, 2001, June 30, 2000 and 2001, and September 30, 2000 and 2001 have been restated from amounts previously reported to reflect all of the transactions described

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

herein. The unaudited restated condensed quarterly financial statement information for the quarters ended March 31, 2001, June 30, 2000 and 2001, September 30, 2000 and 2001, and December 31, 2000 and 2001 have been included in Note 17. The restatement had no impact on previously reported consolidated cash flows, operating income or net income. A summary of the principal effects of the restatement are as follows for 1999, 2000 and 2001: (Note -- Those line items for which no change in amounts is shown were not affected by the restatement.)

                                                                      YEAR ENDED
                                                                   DECEMBER 31, 1999
                                                              ---------------------------
                                                                            AS PREVIOUSLY
                                                              AS RESTATED     REPORTED
                                                              -----------   -------------
                                                                     (IN MILLIONS)
Revenues....................................................    $13,794        $15,211
Expenses:
  Fuel and Cost of Gas Sold.................................      6,331          6,707
  Purchased Power...........................................      3,095          4,136
  Other Expenses............................................      3,109          3,109
                                                                -------        -------
     Total..................................................     12,535         13,952
                                                                -------        -------
Operating Income............................................      1,259          1,259
Other Income, net...........................................      1,305          1,305
Income Tax Expense..........................................       (899)          (899)
                                                                -------        -------
Income Before Extraordinary Loss............................      1,665          1,665
Extraordinary Loss..........................................       (183)          (183)
                                                                -------        -------
Net Income Attributable to Common Stockholders..............    $ 1,482        $ 1,482
                                                                =======        =======

                                                                      YEAR ENDED
                                                                   DECEMBER 31, 2000
                                                              ---------------------------
                                                                            AS PREVIOUSLY
                                                              AS RESTATED     REPORTED
                                                              -----------   -------------
                                                                     (IN MILLIONS)
Revenues....................................................    $28,269        $29,339
Expenses:
  Fuel and Cost of Gas Sold.................................     15,050         15,077
  Purchased Power...........................................      7,580          8,623
  Other Expenses............................................      3,802          3,802
                                                                -------        -------
     Total..................................................     26,432         27,502
                                                                -------        -------
Operating Income............................................      1,837          1,837
Other Expense, net..........................................     (1,079)        (1,079)
Income Tax Expense..........................................       (318)          (318)
                                                                -------        -------
Income Before Extraordinary Gain............................        440            440
Extraordinary Gain..........................................          7              7
                                                                -------        -------
Net Income Attributable to Common Stockholders..............    $   447        $   447
                                                                =======        =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                                      YEAR ENDED
                                                                   DECEMBER 31, 2001
                                                              ---------------------------
                                                                            AS PREVIOUSLY
                                                              AS RESTATED     REPORTED
                                                              -----------   -------------
                                                                     (IN MILLIONS)
Revenues....................................................    $40,810        $46,226
Expenses:
  Fuel and Cost of Gas Sold.................................     19,504         20,075
  Purchased Power...........................................     15,127         19,972
  Other Expenses............................................      4,186          4,186
                                                                -------        -------
     Total..................................................     38,817         44,233
                                                                -------        -------
Operating Income............................................      1,993          1,993
Other Expense, net..........................................       (574)          (574)
Income Tax Expense..........................................       (500)          (500)
                                                                -------        -------
Income Before Cumulative Effect of Accounting Change........        919            919
Cumulative Effect of Accounting Change, net of tax..........         61             61
                                                                -------        -------
Net Income Attributable to Common Stockholders..............    $   980        $   980
                                                                =======        =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                                   DECEMBER 31, 2000
                                                              ---------------------------
                                                                            AS PREVIOUSLY
                                                              AS RESTATED     REPORTED
                                                              -----------   -------------
                                                                     (IN MILLIONS)
                           ASSETS
CURRENT ASSETS:
  Other current assets......................................    $   279        $   203
  Other.....................................................      9,634          9,634
                                                                -------        -------
          Total current assets..............................      9,913          9,837
                                                                -------        -------
OTHER ASSETS:
  Other noncurrent assets...................................        932            747
  Property, plant and equipment and other assets............     21,115         21,115
                                                                -------        -------
          Total other assets................................     22,047         21,862
                                                                -------        -------
          TOTAL ASSETS......................................    $31,960        $31,699
                                                                =======        =======

            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Other current liabilities.................................    $   706        $   630
  Other.....................................................     14,939         14,939
                                                                -------        -------
          Total current liabilities.........................     15,645         15,569
OTHER LIABILITIES:
  Other liabilities.........................................      1,048            863
  Other.....................................................      4,074          4,074
                                                                -------        -------
          Total other liabilities...........................      5,122          4,937
                                                                -------        -------
LONG-TERM DEBT..............................................      4,996          4,996
                                                                -------        -------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES..............          9              9
                                                                -------        -------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
  SECURITIES OF SUBSIDIARY TRUSTS...........................        706            706
                                                                -------        -------
STOCKHOLDERS' EQUITY:
  Cumulative Preferred Stock................................         10             10
  Common Stock..............................................      3,257          3,257
  Treasury Stock............................................       (121)          (121)
  Unearned ESOP.............................................       (161)          (161)
  Retained earnings.........................................      2,520          2,520
  Accumulated other comprehensive loss......................        (23)           (23)
                                                                -------        -------
       Stockholders' equity.................................      5,482          5,482
                                                                -------        -------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........    $31,960        $31,699
                                                                =======        =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                                   DECEMBER 31, 2001
                                                                            AS PREVIOUSLY
                                                              AS RESTATED     REPORTED
                                                              -----------   -------------
                                                                     (IN MILLIONS)
                           ASSETS
CURRENT ASSETS..............................................    $ 6,249        $ 6,249
PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS..............     24,432         24,432
                                                                -------        -------
          TOTAL ASSETS......................................    $30,681        $30,681
                                                                =======        =======
            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Non-trading derivative liabilities........................    $   472        $   396
  Accumulated deferred income taxes, net....................        359            386
  Other.....................................................      8,875          8,875
                                                                -------        -------
          Total current liabilities.........................      9,706          9,657
                                                                -------        -------
OTHER LIABILITIES:
  Accumulated deferred income taxes, net....................      2,308          2,346
  Non-trading derivative liabilities........................        649            540
  Other.....................................................      3,785          3,785
                                                                -------        -------
          Total other liabilities...........................      6,742          6,671
                                                                -------        -------
LONG-TERM DEBT..............................................      5,742          5,742
                                                                -------        -------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES..............      1,047          1,047
                                                                -------        -------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS.............................        706            706
                                                                -------        -------
STOCKHOLDERS' EQUITY:
  Common Stock..............................................      3,897          3,897
  Unearned ESOP.............................................       (132)          (132)
  Retained earnings.........................................      3,177          3,177
  Accumulated other comprehensive loss......................       (204)           (84)
                                                                -------        -------
       Stockholders' equity.................................      6,738          6,858
                                                                -------        -------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........    $30,681        $30,681
                                                                =======        =======

The restatement did not impact earnings per share for 1999, 2000 and 2001, the Statements of Consolidated Cash Flows for 1999, 2000 and 2001, the Statements of Consolidated Comprehensive Income for 1999 and 2000 or the Statements of Consolidated Stockholders' Equity as of December 31, 1999 and 2000.

In addition to the round trip trades described above, Reliant Resources' review and the Audit Committees' investigation also considered other transactions executed on the same day at the same volume, price and delivery terms and with the same counterparty. These transactions were executed in the normal course of Reliant Resources' trading and marketing activities, and were historically reported on a gross basis, and were not material.

Beginning with the quarter ended September 30, 2002, the Company will report all energy trading and marketing activities on a net basis in the Statements of Consolidated Income pursuant to Emerging Issues

144

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Task Force Issue No. 02-3, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities".

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) RECLASSIFICATIONS AND USE OF ESTIMATES

Some amounts from the previous years have been reclassified to conform to the 2001 presentation of financial statements. These reclassifications do not affect earnings.

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.

(b) MARKET RISK AND UNCERTAINTIES

The Company is subject to the risk associated with price movements of energy commodities and the credit risk associated with the Company's risk management activities. For additional information regarding these risks, see Notes 5, 14(g) and 21. The Company is also subject to risks relating to the supply and prices of fuel and electricity, seasonal weather patterns, technological obsolescence and the regulatory environment in the United States, and Western Europe and Latin America.

(c) PRINCIPLES OF CONSOLIDATION

The accounts of Reliant Energy and its wholly owned and majority owned subsidiaries are included in the consolidated financial statements. All significant intercompany transactions and balances are eliminated in consolidation. The Company uses the equity method of accounting for investments in entities in which the Company has an ownership interest between 20% and 50% and exercises significant influence. For additional information regarding these investments, see Note 7. Other investments, excluding marketable securities, are generally carried at cost. The results of the Company's European Energy business segment are consolidated on a one-month lag basis due to the availability of financial information. The Company has made adjustments to the European Energy business segment's accounts to include the effect of the settlement of our indemnity for certain energy obligations in December 2001 (see Note 14(h)). The Company owns approximately 83% of Reliant Resources and has reflected the third-party interest in Reliant Resources as minority interest in the Consolidated Balance Sheets and Statements of Consolidated Income.

(d) REVENUES

The Company records revenue for electricity and natural gas sales and services to retail customers, except for certain contracted sales to large commercial, industrial and institutional customers, under the accrual method and these revenues are generally recognized upon delivery. Pipelines and Gathering record revenues as transportation services are provided. Energy sales and services not billed by month-end are accrued based upon estimated energy and services delivered. Domestic non-rate regulated electric power and other non-rate regulated energy services are sold at market-based prices through existing power exchanges or through third-party contracts. Prior to January 1, 2001, energy revenues related to the Company's power generation facilities in Europe were generated under a regulated pricing structure, which included compensation for the cost of fuel, capital and operation and maintenance expenses. The wholesale electric market in the Netherlands opened to competition on January 1, 2001. Accordingly, beginning in 2001, electric power and other energy services in Europe are sold at market-based prices or through third-party contracts.

The Company's energy trading, marketing, power origination and risk management services activities and contracted sales of electricity to large commercial, industrial and institutional customers are accounted for under mark-to-market accounting. Under the mark-to-market method of accounting, financial instruments and contractual commitments are recorded at fair value in revenues upon contract execution. The net changes

145

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in their fair values are recognized in the Statements of Consolidated Income as revenues in the period of change. Trading and marketing revenues related to the physical sale of natural gas, electric power and other energy related commodities are recorded on a gross basis in the delivery period. For additional discussion regarding trading and marketing revenue recognition and the related estimates and assumptions that can affect reported amounts of such revenues, see Note 5.

The gains and losses related to financial instruments and contractual commitments qualifying and designated as hedges related to the sale of electric power and sales and purchases of natural gas are recognized in the same period as the settlement of the underlying physical transaction. These realized gains and losses are included in operating revenues and operating expenses in the Statements of Consolidated Income. For additional discussion, see Note 5.

(e) LONG-LIVED ASSETS AND INTANGIBLES

The Company records property, plant and equipment at historical cost. The Company recognizes repair and maintenance costs incurred in connection with planned major maintenance, such as turbine and generator overhauls, control system upgrades and air conditioner replacements, under the "accrual in advance" method for its non-rate regulated power generation operations acquired or developed prior to December 31, 1999. Planned major maintenance cycles primarily range from two to ten years. Under the accrual in advance method, the Company estimates the costs of planned major maintenance and accrues the related expense over the maintenance cycle. As of December 31, 2000 and 2001, the Company's maintenance reserve was $27 million and $19 million, respectively, of which $20 million and $17 million, respectively, were included in other long-term liabilities and the remainder in other current liabilities. The Company expenses all other repair and maintenance costs as incurred. Property, plant and equipment includes the following:

                                                                          DECEMBER 31,
                                                     ESTIMATED USEFUL   -----------------
                                                      LIVES (YEARS)      2000      2001
                                                     ----------------   -------   -------
                                                                          (IN MILLIONS)
Electric...........................................        5-75         $18,754   $20,092
Natural gas distribution...........................        5-50           1,809     2,002
Pipelines and gathering............................        5-75           1,582     1,627
Other property.....................................        3-40             247       450
                                                                        -------   -------
  Total............................................                      22,392    24,171
Accumulated depreciation and amortization..........                      (7,132)   (8,357)
                                                                        -------   -------
     Property, plant and equipment, net............                     $15,260   $15,814
                                                                        =======   =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company records goodwill for the excess of the purchase price over the fair value assigned to the net assets of an acquisition. Goodwill has been amortized on a straight-line basis over 5 to 40 years. See Note 3 and the following table for additional information regarding goodwill and the related amortization periods.

                                                                           DECEMBER 31,
                                                       ESTIMATED USEFUL   ---------------
                                                        LIVES (YEARS)      2000     2001
                                                       ----------------   ------   ------
                                                                           (IN MILLIONS)
Reliant Energy Resources Corp. (RERC Corp.)..........          40         $1,955   $1,955
Reliant Energy Mid-Atlantic Power Holdings, LLC......          35              7        5
Reliant Energy Power Generation Benelux N.V. ........          30            897      877
Florida Generation Plant.............................          35              2        2
California Generation Plants.........................          30             70       70
Reliant Energy Services, Inc. .......................          40            131      131
Other................................................        5-35             64       45
                                                                          ------   ------
  Total..............................................                      3,126    3,085
Accumulated amortization.............................                       (222)    (303)
Foreign currency exchange impact.....................                       (107)    (150)
                                                                          ------   ------
  Total goodwill, net................................                     $2,797   $2,632
                                                                          ======   ======

The Company recognizes specifically identifiable intangibles, including air emissions regulatory allowances and water rights and permits, when specific rights and contracts are acquired. As of December 31, 2000 and 2001, specific intangibles were $284 million and $315 million, respectively. The Company amortizes air emissions regulatory allowances primarily on a units-of-production basis as utilized. The Company amortizes other acquired intangibles on a straight-line basis over the lesser of their contractual or estimated useful lives that range between 5 and 35 years.

The Company periodically evaluates long-lived assets, including property, plant and equipment, goodwill and specifically identifiable intangibles, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. An impairment analysis of generating facilities requires estimates of possible future market prices, load growth, competition and many other factors over the lives of the facilities. A resulting impairment loss is highly dependent on these underlying assumptions. During 2001, the Company determined equipment and goodwill associated with its Communications business was impaired and accordingly recognized $22 million of fixed asset impairments and $19 million of goodwill impairments (see Note 20). For discussion of goodwill impairment analysis in 2002, see Note 2(q).

During December 2001, the Company evaluated its European Energy business segment's long-lived assets and goodwill for impairment. As of December 31, 2001, pursuant to Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), no impairment had been indicated. For discussion of goodwill impairment analysis in 2002, see Note 2(q).

During the fourth quarter of 2001, the Distribution of Reliant Resources was deemed to be a probable event. As Reliant Resources has an option, subject to the completion of the Distribution, to purchase the Company's Texas generation assets in 2004 (see Note 4(b)), the Company was required to evaluate these assets for potential impairment in accordance with SFAS No. 121, due to an expected decrease in the number of years the Company expects to hold and operate these assets. As of December 31, 2001, no impairment had been indicated. The Company anticipates that future events, such as the expected public offering of the Company's Texas generation operations (see Note 4(b)), or change in the estimated holding period of the Texas generation assets, will require the Company to re-evaluate these assets for impairment between now and 2004. If an impairment is indicated, it could be material and will not be fully recoverable through the 2004 true-up proceeding calculations (see Note 4(a)).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Texas Electric Restructuring Law provides the Company recovery of the regulatory book value of its Texas generating assets for the amount the regulatory book value exceeds the estimated market value. If the Texas generating assets are sold to Reliant Resources, or to a third party in the future, a loss on sale of these assets, or an impairment of the recorded recoverable electric generation plant mitigation regulatory asset (see Note
2(f)), will occur to the extent the recorded book value of the Texas generating assets exceeds the regulatory book value. As of December 31, 2001, the recorded book value was $638 million in excess of the regulatory book value. This amount declines each year as the recorded book value is depreciated and increases by the amount of non-environmental capital expenditures. For further discussion of the difference between the regulatory book value and the recorded book value, see Note 4.

(f) REGULATORY ASSETS AND LIABILITIES

The Company 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 transmission and distribution operations of Reliant Energy HL&P and the utility operations of Natural Gas Distribution and to some of the accounts of Pipelines and Gathering. For information regarding Reliant Energy HL&P's electric generation operations' discontinuance of the application of SFAS No. 71 in 1999 and the effect on its regulatory assets and the Texas Electric Choice Plan (Texas Electric Restructuring Law), see Note 4(a).

The following is a list of regulatory assets/liabilities reflected on the Company's Consolidated Balance Sheets as of December 31, 2000 and 2001:

                                                                DECEMBER 31,
                                                              ----------------
                                                               2000     2001
                                                              ------   -------
                                                               (IN MILLIONS)
Recoverable impaired plant costs, net.......................  $  281   $    --
Recoverable electric generation related regulatory assets,
  net.......................................................   1,150       160
Securitized regulatory asset................................      --       740
Regulatory tax asset, net...................................     186       111
Unamortized loss on reacquired debt.........................      66        62
Recoverable electric generation plant mitigation............      --     1,967
Excess mitigation liability.................................      --    (1,126)
Other long-term assets/liabilities..........................       6         3
                                                              ------   -------
  Total.....................................................  $1,689   $ 1,917
                                                              ======   =======

If, as a result of changes in regulation or competition, the Company's ability to recover these assets and liabilities would not be assured, then pursuant to SFAS No. 101, "Regulated Enterprises Accounting for the Discontinuation of Application of SFAS No. 71" (SFAS No. 101) and SFAS No. 121, the Company would be required to write off or write down these regulatory assets and liabilities. In addition, the Company would be required to determine any impairment to the carrying costs of plant and inventory assets. See Note 4(a) for a discussion of the discontinuation of SFAS No. 71 related to Reliant Energy HL&P's electric generation operations.

Through December 31, 2001, the Texas Utility Commission provided for the recovery of most of Reliant Energy HL&P's fuel and purchased power costs from customers through a fixed fuel factor included in electric rates. Included in the above table in recoverable electric generation related regulatory assets, net are $558 million and $200 million of regulatory assets related to the recovery of fuel costs as of December 31, 2000 and 2001.

In December 2001, the Company recorded a regulatory asset for recoverable electric generation plant mitigation for $2.0 billion and recorded a regulatory liability of $1.1 billion for excess mitigation, resulting in net regulatory assets of $841 million on which the Company will not earn a return and which are not included in the Company's rate base. Recoverable electric plant generation regulatory assets are anticipated to be recovered in the 2004 true-up proceedings as further discussed in Note 4(a). The Company is entitled to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recover its full amount of stranded costs in the 2004 true-up proceeding. That recovery would include any amounts whose earlier mitigation was prevented by excess mitigation credits and the reversal of redirected depreciation ordered by the Texas Utility Commission.

In 2001, the Company monetized $738 million of regulatory assets in a securitization financing authorized by the Texas Utility Commission pursuant to the Texas Electric Restructuring Law. For additional information regarding the securitization financing, see Note 4(a).

For additional information regarding recoverable impaired plant costs and recoverable electric generation related assets and the related amortization during 1999, 2000 and 2001, see Notes 2(g) and 4(a).

(g) DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation is computed using the straight-line method based on economic lives or a regulatory mandated method. Other amortization expense includes amortization of regulatory assets and air emissions regulatory allowances and other intangibles. See Notes 2(f) and 4(a) for additional discussion of these items.

The following table presents depreciation, goodwill amortization and other amortization expense for 1999, 2000 and 2001.

                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     2000     2001
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
Depreciation expense........................................   $547     $391     $436
Goodwill amortization expense...............................     62       86       81
Write off of Communications goodwill........................     --       --       19
Other amortization expense..................................    296      429      375
                                                               ----     ----     ----
  Total depreciation and amortization expense...............   $905     $906     $911
                                                               ====     ====     ====

In June 1998, the Texas Utility Commission issued an order approving a transition to competition plan (Transition Plan) filed by Reliant Energy HL&P in December 1997. In order to reduce Reliant Energy HL&P's exposure to potential stranded costs related to generation assets, the Transition Plan permitted the redirection of depreciation expense to generation assets that Reliant Energy HL&P otherwise would apply to transmission, distribution and general plant assets (Redirected Depreciation). In addition, the Transition Plan provided that all earnings above a stated overall annual rate of return on invested capital be used to recover Reliant Energy HL&P's investment in generation assets (Accelerated Depreciation). Reliant Energy HL&P implemented the Transition Plan effective January 1, 1998 and pursuant to its terms, recorded $194 million in Accelerated Depreciation and $195 million in Redirected Depreciation in 1998 and $104 million in Accelerated Depreciation and $99 million in Redirected Depreciation in the first six months in 1999. Due to the discontinuance of SFAS No. 71 to Reliant Energy HL&P's generation operations, the provisions for Accelerated and Redirected Depreciation of the Transition Plan were no longer applied effective July 1, 1999. For additional information regarding the discontinuance of SFAS No. 71 to the Electric Operations business segments' generation operations and the related Texas Electric Restructuring Law, as well as an October 3, 2001 order finding that the Company had overmitigated its stranded costs, see Note 4(a).

(h) CAPITALIZATION OF INTEREST AND ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION

Allowance for funds used during construction (AFUDC) represents the approximate net composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction. Although AFUDC increases both utility plant and earnings, it is realized in cash through depreciation provisions included in rates for subsidiaries that apply SFAS No. 71. Interest and AFUDC 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 1999, 2000 and 2001, the Company capitalized interest and AFUDC related to debt of $19 million, $45 million and $68 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) INCOME TAXES

The Company files a consolidated federal income tax return. The Company follows a policy of comprehensive interperiod income tax allocation. The Company 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. Unremitted earnings from the Company's foreign operations are deemed to be permanently reinvested in foreign operations. For additional information regarding income taxes, see Note 13.

(j) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable, principally from customers, are net of an allowance for doubtful accounts of $89 million and $136 million at December 31, 2000 and 2001, respectively. The provision for doubtful accounts in the Company's Statements of Consolidated Income for 1999, 2000 and 2001 was $16 million, $80 million and $90 million, respectively. In addition, during the year ended December 31, 2001, the Company wrote off $15 million of receivables for refunds related to energy sales in California and $88 million related to energy sales to Enron Corp. and its affiliates (Enron) which filed a voluntary petition for bankruptcy during the fourth quarter of 2001. For information regarding the provision against receivable balances related to energy sales in the California market and to Enron, see Notes 14(g) and 21, respectively.

During 1999, 2000 and 2001, the Company had an agreement under which it sold substantially all of the customer accounts receivable of Reliant Energy HL&P. Receivables aggregating $4.4 billion, $4.9 billion and $5.8 billion were sold in 1999, 2000 and 2001, respectively. In December 2001, Reliant Energy HL&P terminated the agreement under which it sold its customer accounts receivable and recorded an early termination charge of $20 million in the Statements of Consolidated Income. Proceeds for the repurchase of receivables, which occurred in January 2002, were obtained from a combination of bank loans and the sale of commercial paper. Net proceeds from the sale of customer accounts receivable were $523 million at December 31, 2001. Such proceeds were not reflected as debt in the Consolidated Balance Sheets.

(k) INVENTORY

Inventory consists principally of materials and supplies, coal and lignite, natural gas and heating oil. Inventories used in the production of electricity and in the retail natural gas distribution operations are valued at the lower of average cost or market except for coal and lignite, which are valued under the last-in, first-out method. Heating oil and natural gas used in the trading and marketing operations are accounted for under mark-to-market accounting as discussed in Note 5.

                                                              DECEMBER 31,
                                                              -------------
                                                              2000    2001
                                                              -----   -----
                                                              (IN MILLIONS)
Materials and supplies......................................  $270    $273
Coal and lignite............................................    59      92
Natural gas.................................................   107     173
Heating oil.................................................    47      42
                                                              ----    ----
     Total inventory........................................  $483    $580
                                                              ====    ====

(l) 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), the Company reports "available-for-sale" securities at estimated fair value within other long-term assets in the Company's Consolidated Balance Sheets and any unrealized gain or loss, net of tax, as a separate component of stockholders' equity and accumulated other comprehensive (loss) income. In accordance with SFAS No. 115, the Company reports "trading" securities at estimated fair value in the Company's Consolidated Balance Sheets, and any unrealized holding gains and losses are recorded as other income (expense) in the Company's Statements of Consolidated Income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2000 and 2001, the Company held "available-for-sale" debt and equity securities in its nuclear decommissioning trust, which is reported at its fair value of $159 million and $169 million, respectively, in the Company's Consolidated Balance Sheets in other long-term assets. Any unrealized losses or gains are accounted for in accordance with SFAS No. 71 as a regulatory asset/liability.

In addition, as of December 31, 2000 and 2001, the Company held marketable equity securities of $5 million and $12 million, respectively, classified as "available-for-sale." At December 31, 2000, the accumulated unrealized loss, net of tax, relating to these equity securities was $2 million. At December 31, 2001, the accumulated unrealized gain, net of tax, relating to these equity securities was $6 million.

During 2000, pursuant to SFAS No. 115, the Company incurred a pre-tax impairment loss equal to the $27 million of cumulative unrealized losses that had been charged to accumulated other comprehensive loss through December 31, 1999. Management's determination to recognize this impairment resulted from a combination of events occurring in 2000 related to this investment. These events affecting the investment included changes occurring in the investment's senior management, announcement of significant restructuring charges and related downsizing for the entity, reduced earnings estimates for this entity by brokerage analysts and the bankruptcy of a competitor of the investment in the first quarter of 2000. These events, coupled with the stock market value of the Company's investment in these securities continuing to be below the Company's cost basis, caused management to believe the decline in fair value of these "available-for-sale" securities to be other than temporary.

As of December 31, 2000 and 2001, the Company held an investment in AOL Time Warner common stock, which was classified as a "trading" security. For information regarding the Company's investment in AOL Time Warner, Inc. common stock, see Note 8.

As of December 31, 2000, the Company did not hold debt or equity securities that are classified as "trading", other than its investment in AOL Time Warner. As of December 31, 2001, the Company held equity securities classified as "trading" totaling $1 million, other than its investment in AOL Time Warner. The Company recorded unrealized holding gains on "trading" securities, excluding unrealized gains and losses related to the Company's investment in AOL Time Warner, included in gains from investments in the Statements of Consolidated Income of $16 million, $4 million and $5 million during 1999, 2000 and 2001, respectively.

(m) PROJECT DEVELOPMENT COSTS

Project development costs include costs for professional services, permits and other items that are incurred incidental to a particular project. The Company expenses these costs as incurred until the project is considered probable. After a project is considered probable, capitalizable costs incurred are capitalized to the project. When project operations begin, the Company begins to amortize these costs on a straight-line basis over the life of the facility. As of December 31, 2000 and 2001, the Company had recorded in the Consolidated Balance Sheets project development costs of $7 million and $9 million, respectively.

(n) ENVIRONMENTAL COSTS

The Company expenses or capitalizes environmental expenditures, as appropriate, depending on their future economic benefit. The Company expenses amounts that relate to an existing condition caused by past operations, and that do not have future economic benefit. The Company 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 in some circumstances.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(o) FOREIGN CURRENCY ADJUSTMENTS

Local currencies are the functional currency of the Company's foreign operations. Foreign subsidiaries' assets and liabilities have been translated into U.S. dollars using the exchange rate at the balance sheet date. Revenues, expenses, gains and losses have been translated using the weighted average exchange rate for each month prevailing during the periods reported. Cumulative adjustments resulting from translation have been recorded as a component of accumulated other comprehensive loss in stockholders' equity. Through December 31, 2001, the U.S. dollar had been the functional currency for the Company's operations in Argentina since the revenues and costs of these operations were based primarily on U.S. dollar-indexed contracts. Since the inception of the Company's operations in Argentina, the Argentine peso has been pegged to the U.S. dollar at a rate of one Argentine peso to one U.S. dollar. As a result, no foreign currency adjustments have resulted from these operations through 2001. The Company has determined that the functional currency for its Argentina operations in 2002 will be the Argentine peso as a result of Argentine legislation enacted in January 2002 requiring that all U.S. dollar-indexed contracts be restructured to Argentine pesos.

(p) STATEMENTS OF CONSOLIDATED CASH FLOWS

For purposes of reporting cash flows, the Company considers cash equivalents to be short-term, highly liquid investments with maturities of three months or less from the date of purchase. As of December 31, 2001, the Company has recorded $167 million of restricted cash that is available for Reliant Energy Mid-Atlantic Power Holdings LLC and its subsidiaries' (collectively, REMA) working capital needs and future lease payments. For additional discussion regarding REMA's lease transactions, see Note 14(b). In connection with a financing completed in October 2001, the Company was required to establish restricted cash accounts to collateralize the bonds that were issued in this financing transaction. These restricted cash accounts are reflected as Restricted Cash in the Consolidated Balance Sheets and are classified as long-term as they are not available for withdrawal until the maturity of the bonds. Cash and Cash Equivalents does not include Restricted Cash. For additional information regarding the securitization financing, see Note 4(a).

(q) NEW ACCOUNTING PRONOUNCEMENTS

Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), was issued by the SEC on December 3, 1999. SAB No. 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The consolidated financial statements reflect the accounting guidance provided in SAB No. 101.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). 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. SFAS No. 142 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. The Company adopted the provisions of each 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 a material impact on the Company's historical results of operations or financial position. On January 1, 2002, the Company discontinued amortizing goodwill into the results of operations pursuant to SFAS No. 142. The Company recognized $81 million of goodwill amortization expense in the Statements of Consolidated Income during 2001, excluding a $19 million write-off of its Communications business goodwill

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

balance which was recorded as goodwill amortization expense (see Note 20). The Company is in the process of determining further effects of adoption of SFAS No. 142 on its consolidated financial statements, including the review of goodwill and certain intangible assets for impairment. The Company has not completed its review pursuant to SFAS No. 142. However, based on the Company's preliminary review, the Company believes an impairment of its European Energy business segment goodwill is reasonably possible. As of December 31, 2001, net goodwill associated with the European Energy business segment is $632 million. The Company has not completed its preliminary review of its other business segments with net goodwill totaling $2.0 billion. The Company anticipates finalizing its review of goodwill and certain intangible assets during 2002.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of a liability for an asset retirement legal obligation to be recognized in the period in which it is incurred. When the liability is initially recorded, associated costs are capitalized by increasing the carrying amount of the related long-lived asset. 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. 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. The Company plans to adopt SFAS No. 143 on January 1, 2003 and is in the process of determining the effect of adoption on its consolidated financial statements. For certain operations subject to cost of service rate regulation, the Company is permitted to include annual charges for cost of removal and nuclear decommissioning costs in the revenues charged to customers.

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 is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. SFAS No. 144 is not expected to materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in additional future dispositions being reported as discontinued operations than was previously permitted. The Company adopted SFAS No. 144 on January 1, 2002.

See Note 5 for the Company's adoption of SFAS No. 133 on January 1, 2001 and adoption of subsequent cleared guidance.

(3) BUSINESS ACQUISITIONS

(a) RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC

On May 12, 2000, a subsidiary of the Company purchased entities owning electric power generating assets and development sites located in Pennsylvania, New Jersey and Maryland having an aggregate net generating capacity of approximately 4,262 MW. With the exception of development entities that were sold to another subsidiary of Reliant Resources in July 2000, the assets of the entities acquired are held by REMA. The purchase price for the May 2000 transaction was $2.1 billion. In 2002, the Company made an $8 million payment to the prior owner for post-closing adjustments which resulted in an adjustment to purchase price. The Company accounted for the acquisition as a purchase with assets and liabilities of REMA reflected at their estimated fair values. The Company's fair value adjustments related to the acquisition primarily included adjustments in property, plant and equipment, air emissions regulatory allowances, specific intangibles,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

materials and supplies inventory, environmental reserves and related deferred taxes. The air emissions regulatory allowances of $153 million are being amortized on a units-of-production basis as utilized. The specific intangibles which relate to water rights and permits of $43 million will be amortized over the estimated life of the related facility of 35 years. The excess of the purchase price over the fair value of the net assets acquired of $5 million was recorded as goodwill and historically was amortized over 35 years. The Company finalized these fair value adjustments in May 2001. There were no additional material modifications to the preliminary adjustments from December 31, 2000. Funds for the acquisition of REMA were made available through commercial paper borrowings by a finance subsidiary, which borrowings were supported by credit facilities.

The net purchase price of REMA was allocated and the fair value adjustments to the seller's book value are as follows:

                                                              PURCHASE PRICE   FAIR VALUE
                                                                ALLOCATION     ADJUSTMENTS
                                                              --------------   -----------
                                                                     (IN MILLIONS)
Current assets..............................................      $   85          $ (27)
Property, plant and equipment...............................       1,898            627
Goodwill....................................................           5           (146)
Other intangibles...........................................         196             33
Other assets................................................           3             (5)
Current liabilities.........................................         (50)           (13)
Other liabilities...........................................         (39)           (15)
                                                                  ------          -----
     Total..................................................      $2,098          $ 454
                                                                  ======          =====

Adjustments to property, plant and equipment, other intangibles which includes air emissions regulatory allowances and other specific intangibles, and environmental reserves included in other liabilities are based primarily on valuation reports prepared by independent appraisers and consultants.

In August 2000, the Company, through subsidiaries, entered into separate sale-leaseback transactions with each of three owner-lessors covering the subsidiaries' respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively, acquired as part of the REMA acquisition. As lessee, Reliant Resources leases an interest in each facility from each owner-lessor under a facility lease agreement. As consideration for the sale of the Company's interest in the facilities, the Company received $1.0 billion in cash. The Company used the $1.0 billion of sale proceeds to repay certain commercial paper borrowings as described above.

The Company's results of operations include the results of REMA only for the period beginning May 12, 2000. The following table presents selected actual financial information and unaudited pro forma information for 1999 and 2000, as if the acquisition had occurred on November 24, 1999 and January 1, 2000, as applicable. Pro forma information for operations prior to November 24, 1999 would not be meaningful since historical financial results of the business and the revenue generating activities underlying that period are substantially different from the wholesale generation activities that REMA has been engaged in after November 24, 1999. Pro forma amounts also give effect to the sale and leaseback of interests in three of the REMA generating plants, which were consummated in August 2000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                        YEAR ENDED DECEMBER 31,
                                               -----------------------------------------
                                                      1999                  2000
                                               -------------------   -------------------
                                                         UNAUDITED             UNAUDITED
                                               ACTUAL    PRO FORMA   ACTUAL    PRO FORMA
                                               -------   ---------   -------   ---------
                                                             (IN MILLIONS)
Revenues.....................................  $13,794    $13,824    $28,269    $28,436
Income after tax and before extraordinary
  items......................................    1,666      1,656        440        431
Net income attributable to common
  stockholders...............................    1,482      1,472        447        438

These unaudited pro forma results, based on assumptions deemed appropriate by the Company's management, have been prepared for informational purposes only and are not necessarily indicative of the amounts that would have resulted if the acquisition of the REMA entities had occurred on November 24, 1999 and January 1, 2000, as applicable. Purchase-related adjustments to the results of operations include the effects on depreciation and amortization, interest expense and income taxes.

(b) RELIANT ENERGY POWER GENERATION BENELUX N.V.

Effective October 7, 1999, a subsidiary of the Company acquired REPGB, a Dutch electric generation company, for a total net purchase price, payable in Dutch Guilders (NLG), of $1.9 billion based on an exchange rate on October 7, 1999 of 2.06 NLG per U.S. dollar. The aggregate purchase price paid in 1999 by the Company consisted of $833 million in cash. On March 1, 2000, under the terms of the acquisition agreement, the Company funded the remaining purchase obligation for $982 million. A portion ($596 million) of this obligation was financed with a three-year term loan facility obtained in the first quarter of 2000.

The Company recorded the REPGB acquisition under the purchase method of accounting, with assets and liabilities of REPGB reflected at their estimated fair values. As outlined in the table below, the Company's fair value adjustments related to the acquisition of REPGB primarily included increases in property, plant and equipment, long-term debt, severance liabilities, post-employment benefit liabilities and deferred foreign taxes. Additionally, a $19 million receivable was recorded in connection with the acquisition as the selling shareholders agreed to reimburse REPGB for some obligations incurred prior to the purchase of REPGB. Adjustments to property, plant and equipment are based on valuation reports prepared by independent appraisers and consultants. The excess of the purchase price over the fair value of net assets acquired of $877 million was recorded as goodwill and was historically amortized on a straight-line basis over 30 years. The Company finalized these fair value adjustments in September 2000. The Company finalized a severance plan (REPGB Plan) in connection with the REPGB acquisition in September 2000 (commitment date) and in accordance with EITF Issue No. 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination," recorded this liability of $19 million in the third quarter of 2000. During 2001, the Company utilized $8 million of the reserve for the REPGB Plan. As of December 31, 2001, the remaining severance liability is $11 million. The majority of the $11 million of remaining severance liability will be disbursed in accordance with the terms and conditions outlined by a collective labor bargaining agreement regarding employees near retirement age (Social Plan) in accordance with applicable Dutch labor law. The Social Plan, which by formula defines termination benefits, prescribes a payout period for up to five years for an employee subsequent to termination date. In the fourth quarter of 2001, the Dutch taxing authority finalized REPGB's tax basis of property, plant and equipment as of October 1999. As a result, the Company recorded an adjustment to decrease goodwill and accumulated deferred tax liability by $5 million in the fourth quarter of 2001. As of December 31, 2001, the tax basis of other certain assets and liabilities has not been finalized.

In connection with the acquisition of REPGB, the Company developed a comprehensive business process reengineering and employee severance plan intended to make REPGB competitive in the deregulated Dutch electricity market that began January 1, 2001. The REPGB Plan's initial conceptual formulation was initiated prior to the acquisition of REPGB in October 1999. The finalization of the REPGB Plan was approved and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

completed in September 2000. The Company identified 195 employees who were involuntarily terminated in REPGB's following functional areas: plant operations and maintenance, procurement, inventory, general and administrative, legal, finance and support. The Company has notified all employees identified under the severance component of the REPGB Plan that they are subject to involuntary termination and the majority of terminations occurred during 2001. The termination benefits under the REPGB Plan are governed by REPGB's Social Plan, a collective bargaining agreement between REPGB and its various representative labor unions signed in 1998. The Social Plan provides defined benefits for involuntarily severed employees depending upon age, tenure and other factors, and was agreed to by the management of REPGB as a result of the anticipated deregulation of the Dutch electricity market. The Social Plan is still in force and binding on the current management of the Company and REPGB. The Company is still executing the REPGB Plan as of the date of these consolidated financial statements.

The net purchase price of REPGB was allocated and the fair value adjustments to the seller's book value are as follows:

                                                              PURCHASE PRICE   FAIR VALUE
                                                                ALLOCATION     ADJUSTMENTS
                                                              --------------   -----------
                                                                     (IN MILLIONS)
Current assets..............................................      $  244         $   34
Property, plant and equipment...............................       1,899            719
Goodwill....................................................         877            877
Current liabilities.........................................        (336)            --
Deferred taxes..............................................         (76)           (76)
Long-term debt..............................................        (422)           (87)
Other long-term liabilities.................................        (244)           (35)
                                                                  ------         ------
  Total.....................................................      $1,942         $1,432
                                                                  ======         ======

The following table presents selected actual financial information for 1999 and unaudited pro forma information for 1999, as if the acquisition of REPGB had occurred on January 1, 1999. The pro forma results are based on assumptions deemed appropriate by the Company's management, have been prepared for informational purposes only and are not necessarily indicative of the consolidated results that would have resulted if the acquisition of REPGB had occurred on January 1, 1999. Purchase related adjustments to results of operations include amortization of goodwill, interest expense and the effects on depreciation and amortization of the assessed fair value of some of REPGB's net assets and liabilities.

                                                                     1999
                                                              -------------------
                                                              ACTUAL    PRO FORMA
                                                              -------   ---------
                                                                 (IN MILLIONS)
Revenues....................................................  $13,794    $14,371
Net income attributable to common stockholders..............    1,482      1,455

(c) FLORIDA GENERATION PLANT PURCHASE

On October 6, 1999, the Company purchased a steam turbine generation plant (Indian River) with a net generating capacity of 619 MW from a Florida municipality (Municipality) for a net purchase price of $188 million. Indian River, located near Titusville, Florida, consists of three conventional steam generation units fueled by both oil and natural gas. Under the Company's ownership, the units will sell up to 578 MW of power generation from Indian River to the Municipality through a power purchase agreement that was originally scheduled to expire in September 2003, but has been extended through September 2007. During the option period, the Municipality has the right to purchase up to 500 MW for the first two years of the option period and 300 MW for the final two years. Any excess power generated by the plant may be sold to other utilities and rural electric cooperatives within the state and other entities within the Florida wholesale market.

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The Company recorded the acquisition under the purchase method of accounting. The purchase price has been allocated to assets acquired and liabilities assumed based on their estimated fair market values at the date of acquisition. The Company's fair value adjustments related to the acquisition of Indian River primarily included increases in property, plant and equipment, specific intangibles related to water rights and permits, major maintenance reserves and related deferred taxes. The specific intangibles of $112 million are being amortized over their contractual lives of 35 years. The Company finalized these fair value adjustments during September 2000. There were no material adjustments made to the purchase allocation subsequent to December 31, 1999.

Net purchase price of Indian River was allocated as follows (in millions):

Current assets..............................................   $ 15
Property, plant and equipment...............................     93
Goodwill....................................................      2
Other intangibles...........................................    112
Major maintenance reserve...................................     (3)
Other long-term liabilities.................................    (31)
                                                               ----
  Total.....................................................   $188
                                                               ====

The Company's results of operations include Indian River's results of operations only for the period beginning with the October 6, 1999 acquisition date. Pro forma information has not been presented for Indian River for 1999. Pro forma information would not be meaningful since historical financial results of the business and the revenue generating activities underlying that period as described below are substantially different from the wholesale generation activities that Indian River has been engaged in after October 6, 1999. Prior to the Company's acquisition, the acquired Indian River generation operations were fully integrated with, and its results of operations were consolidated into, the Municipality's vertically-integrated utility operations. In addition, prior to the Company's acquisition, the electric output of these facilities was sold based on rates set by regulatory authorities and are not indicative of these assets' future operating results as a wholesale electricity provider.

(4) REGULATORY MATTERS

(a) TEXAS ELECTRIC CHOICE PLAN AND DISCONTINUANCE OF SFAS NO. 71 FOR ELECTRIC GENERATION OPERATIONS

In June 1999, the Texas legislature adopted the Texas Electric Restructuring Law, which substantially amended the regulatory structure governing electric utilities in Texas in order to allow retail electric competition. Retail pilot projects allowing competition for up to 5% of each utility's load in all customer classes began in the third quarter of 2001, and retail electric competition for all other customers began in January 2002. In preparation for competition, the Company made significant changes in the electric utility operations it conducts through its electric utility division, Reliant Energy HL&P. In addition, the Texas Utility Commission issued a number of new rules and determinations in implementing the Texas Electric Restructuring Law.

The Texas Electric Restructuring Law defined the process for competition and created a transition period during which most utility rates were frozen at rates not in excess of their then-current levels. The Texas Electric Restructuring Law provided for utilities to recover their generation related stranded costs and regulatory assets (as defined in the Texas Electric Restructuring Law).

Retail Choice. Under the Texas Electric Restructuring Law, beginning January 1, 2002, retail customers of most investor owned electric utilities in Texas became eligible to purchase their electricity from any of a number of "retail electric providers," which are certified by the Texas Utility Commission. Retail electric providers may not own or operate generation assets and their sales prices are not subject to traditional

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cost-of-service rate regulation. Retail electric providers that are affiliates of electric utilities may compete substantially statewide for these sales, but prices they charge within the affiliated electric utility's traditional service territory are subject to some limitations at the outset of retail choice, as described below. The Texas Utility Commission has prescribed regulations governing quality, reliability and other aspects of service from retail electric providers. Reliant Resources intends to compete in the Texas retail market and, as a result, has certified three of its subsidiaries as retail electric providers.

Unbundling. As of January 1, 2002, electric utilities in Texas such as Reliant Energy HL&P unbundled their businesses in order to separate power generation, transmission and distribution, and retail activities into different units. Pursuant to the Texas Electric Restructuring Law, the Company submitted a plan in January 2000 that was later amended and updated to accomplish the required separation (the Business Separation Plan). For additional information regarding the Business Separation Plan, see Note 4(b). The transmission and distribution business will continue to be subject to cost-of-service rate regulation and will be responsible for the delivery of electricity to retail customers. The Company plans to transfer the Texas generation facilities that were formerly part of the Reliant Energy HL&P integrated utility (Texas generation business) to an indirect wholly owned partnership (Texas Genco) in connection with the Restructuring. As a result of these changes, the Company's Texas generation operations will no longer be conducted as part of an integrated utility and will comprise a new business segment in 2002, Electric Generation. Additionally, these operations will not be part of the Company's business if they are acquired in 2004 by Reliant Resources pursuant to an option agreement as described below. At that time, Reliant Resources will be an unaffiliated company as a result of the planned Distribution.

Generation. Power generators began selling electric energy to wholesale purchasers, including retail electric providers, at unregulated prices on January 1, 2002. To facilitate a competitive market, each power generation company affiliated with a transmission and distribution utility is required to sell at auction 15% of the output of its installed generating capacity. The first auction was held in September 2001 for power delivered beginning January 1, 2002. This obligation continues until January 1, 2007 unless before that date the Texas Utility Commission determines that at least 40% of the quantity of electric power consumed in 2000 by residential and small commercial load in the electric utility's service area is being served by retail electric providers other than the affiliated retail electric provider. See Note 4(b) for information regarding the capacity auctions and the effect of the Business Separation Plan on the Company. Texas Genco plans to auction all of its remaining capacity (less approximately 10% withheld to provide for unforeseen outages) during the time period prior to Reliant Resources' exercise of the Texas Genco option discussed below. Pursuant to the Business Separation Plan, Reliant Resources is entitled to purchase, at prices established in these auctions, 50% (but no less than 50%) of the remaining capacity, energy and ancillary services auctioned by Texas Genco.

Rates. Base rates charged by Reliant Energy HL&P on September 1, 1999 were frozen until January 1, 2002. Pursuant to Texas Utility Commission regulations, effective January 1, 2002, after the cycle meter read in January 2002, retail rates charged to residential and small commercial customers by an affiliated retail electric provider were reduced by 6% from the average rates (on a bundled basis) in effect on January 1, 1999. Following adjustments for changes in fuel prices, this actually resulted in a 17% rate reduction for Reliant Resources, through its subsidiaries, as an affiliated retail provider. That reduced rate, known as the "price to beat", is being charged by the affiliated retail electric provider to residential and small commercial customers in the utility's service area who have not elected service from another retail electric provider. The affiliated retail electric provider may not offer different rates to residential or small commercial customer classes in the utility's service area until the earlier of the date the Texas Utility Commission determines that 40% of power consumed by that class in the affiliated transmission and distribution utility's service area is being served by non-affiliated retail electric providers or January 1, 2005. In addition, the affiliated retail electric provider must make the price to beat rate available to eligible consumers until January 1, 2007.

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Stranded Costs. Reliant Energy HL&P will be entitled to recover its stranded costs (i.e., the excess of net book value of generation assets (as defined by the Texas Electric Restructuring Law) over the market value of those assets) and its regulatory assets related to generation. The Texas Electric Restructuring Law prescribes specific methods for determining the amount of stranded costs and the details for their recovery. During the transition period to deregulation (the Transition Period) which included 1998 and the first six months of 1999, and extending through the base rate freeze period from July 1999 through 2001, the Texas Electric Restructuring Law provided that earnings above a stated overall annual rate of return on invested capital be used to recover the Electric Operations business segments' investment in generation assets (Accelerated Depreciation). In addition, during the Transition Period, the redirection of depreciation expense to generation assets that the Electric Operation business segment would otherwise apply to transmission, distribution and general plant assets was permitted for regulatory purposes (Redirected Depreciation). See discussion of the accounting treatment of Accelerated Depreciation and Redirected Depreciation for financial reporting purposes below under "Accounting." We cannot predict the amount, if any, of these costs that may not be recovered.

In accordance with the Texas Electric Restructuring Law, beginning on January 1, 2002, and ending when the true-up proceeding is completed in January 2004, any difference between market power prices received in the generation capacity auction and the Texas Utility Commission's earlier estimates of those market prices will be included in the 2004 stranded cost true-up, as further discussed below. This component of the true-up is intended to ensure that neither the customers nor the Company are disadvantaged economically as a result of the two-year transition period by providing this pricing structure.

On October 24, 2001, Reliant Energy Transition Bond Company LLC (Bond Company), a Delaware limited liability company and direct wholly owned subsidiary of Reliant Energy, issued $749 million aggregate principal amount of its Series 2001-1 Transition Bonds pursuant to a financing order of the Texas Utility Commission. Classes of the bonds have final maturity dates of September 15, 2007, September 15, 2009, September 15, 2011 and September 15, 2015, and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively. Scheduled payments on the bonds are from 2002 through 2013. Net proceeds to the Bond Company from the issuance were $738 million. The Bond Company paid Reliant Energy $738 million for the transition property. Reliant Energy used the net proceeds for general corporate purposes, including the repayment of indebtedness.

The Transition Bonds are secured primarily by the "transition property," which includes the irrevocable right to recover, through non-bypassable transition charges payable by certain retail electric customers, the qualified costs of Reliant Energy HL&P authorized by the financing order. The holders of the Bond Company's bonds have no recourse to any assets or revenues of Reliant Energy, and the creditors of Reliant Energy have no recourse to any assets or revenues (including, without limitation, the transition charges) of the Bond Company. Reliant Energy has no payment obligations with respect to the Transition Bonds except to remit collections of transition charges as set forth in a servicing agreement between Reliant Energy and the Bond Company and in an intercreditor agreement among Reliant Energy, the Bond Company and other parties.

Costs associated with nuclear decommissioning will continue to be subject to cost-of-service rate regulation and are included in a charge to transmission and distribution customers. For further discussion of the effect of the Business Separation Plan on funding of the nuclear decommissioning trust fund, see Note 4(b).

True-Up Proceeding. The Texas Electric Restructuring Law and current Texas Utility Commission implementation guidance provide for a True-up Proceeding to be initiated in January 2004. The purpose of the True-up Proceeding is to quantify and reconcile the amount of stranded costs, the capacity auction true-up, unreconciled fuel costs (see Note 2(f)), and other regulatory assets associated with Reliant Energy HL&P's

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electric generating operations that were not previously securitized through the Transition Bonds. The True-up Proceeding will result in either additional charges or credits being assessed on certain retail electric customers.

Accounting. Historically, Reliant Energy HL&P has applied the accounting policies established in SFAS No. 71. Effective June 30, 1999, the Company applied SFAS No. 101 to Reliant Energy HL&P's electric generation operations. Reliant Energy HL&P's transmission and distribution operations continue to meet the criteria of SFAS No. 71.

In 1999, the Company evaluated the effects that the Texas Electric Restructuring Law would have on the recovery of its generation related regulatory assets and liabilities. The Company determined that a pre-tax accounting loss of $282 million existed because it believes only the economic value of its generation related regulatory assets (as defined by the Texas Electric Restructuring Law) will be recovered. Therefore, the Company recorded a $183 million after-tax extraordinary loss in the fourth quarter of 1999. Pursuant to EITF Issue No. 97-4, the remaining recoverable regulatory assets will not be written off and will become associated with the transmission and distribution portion of the Company's electric utility business. For details regarding Reliant Energy HL&P's regulatory assets, see Note 2(f).

At June 30, 1999, the Company performed an impairment test of its previously regulated electric generation assets pursuant to SFAS No. 121 on a plant specific basis. Under SFAS No. 121, an asset is considered impaired, and should be written down to fair value, if the future undiscounted net cash flows expected to be generated by the use of the asset are insufficient to recover the carrying amount of the asset. For assets that are impaired pursuant to SFAS No. 121, the Company determined the fair value for each generating plant by estimating the net present value of future cash inflows and outflows over the estimated life of each plant. The difference between fair value and net book value was recorded as a reduction in the current book value. The Company determined that $808 million of electric generation assets were impaired in 1999. Of this amount, $756 million related to the South Texas Project Electric Generating Station (South Texas Project) and $52 million related to two gas-fired generation plants. The Texas Electric Restructuring Law provides for recovery of this impairment through regulated cash flows during the transition period and through charges to transmission and distribution customers. As such, a regulatory asset was recorded for an amount equal to the impairment loss and was included on the Company's Consolidated Balance Sheets as a regulatory asset. The Company recorded amortization expense related to the recoverable impaired plant costs and other assets created from discontinuing SFAS No. 71 of $221 million in the third and fourth quarters of 1999, $329 million in 2000 and $258 million in 2001.

The impairment analysis requires estimates of possible future market prices, load growth, competition and many other factors over the lives of the plants. The resulting impairment loss is highly dependent on these underlying assumptions. In addition, after January 10, 2004, Reliant Energy HL&P must finalize and reconcile stranded costs (as defined by the Texas Electric Restructuring Law) in a filing with the Texas Utility Commission. Any positive difference between the regulatory net book value and the fair market value of the generation assets (as defined by the Texas Electric Restructuring Law) will be collected through future charges. Any overmitigation of stranded costs may be refunded by a reduction in future charges. This final reconciliation allows alternative methods of third party valuation of the fair market value of these assets, including outright sale, stock valuations and asset exchanges.

In order to reduce potential exposure to stranded costs related to generation assets, Reliant Energy HL&P redirected $195 million and $99 million of depreciation in 1998 and for the six months ended June 30, 1999, respectively, from transmission and distribution related plant assets to generation assets for regulatory and financial reporting purposes (Redirected Depreciation). This redirection was in accordance with the Company's Transition Plan. Subsequent to June 30, 1999, Redirected Depreciation expense could no longer be recorded by the electric generation operations portion of Reliant Energy HL&P for financial reporting purposes as this portion of electric operations is no longer accounted for under SFAS No. 71. During the six months ended December 31, 1999 and during 2000 and 2001, $99 million, $218 million and $230 million in

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depreciation expense, respectively, was redirected from transmission and distribution for regulatory and financial reporting purposes and was established as an embedded regulatory asset included in transmission and distribution related plant and equipment balances. As of December 31, 2000 and 2001, the cumulative amount of Redirected Depreciation for regulatory purposes was $611 million and $841 million, respectively, prior to the effects of the October 3, 2001 order discussed below.

Additionally, as allowed by the Texas Utility Commission, in an effort to further reduce potential exposure to stranded costs related to generation assets, Reliant Energy recorded Accelerated Depreciation of $194 million and $104 million in 1998 and for the six months ended June 30, 1999, respectively, for regulatory and financial reporting purposes. Accelerated Depreciation expense was recorded in accordance with the Company's Transition Plan during this period. Subsequent to June 30, 1999, Accelerated Depreciation expense could no longer be recorded by the electric generation operations portion of Reliant Energy HL&P for financial reporting purposes, as this portion of electric operations is no longer accounted for under SFAS No. 71. During the six months ended December 31, 1999 and during 2000 and 2001, $179 million, $385 million and $264 million of Accelerated Depreciation was recorded for regulatory reporting purposes, reducing the regulatory book value of Reliant Energy HL&P's electric generation assets.

The Texas Utility Commission issued a final order on October 3, 2001 (October 3, 2001 Order) that established the transmission and distribution utility rates that became effective January 2002. In this Order, the Texas Utility Commission found that Reliant Energy HL&P had overmitigated its stranded costs by redirecting transmission and distribution depreciation and by accelerating depreciation of generation assets as provided under the Transition Plan and Texas Electric Restructuring Law. As a result of the October 3, 2001 Order, Reliant Energy HL&P was required to reverse the $841 million embedded regulatory asset related to Redirected Depreciation, thereby reducing the net book value of transmission and distribution assets. Reliant Energy HL&P was required to record a regulatory liability of $1.1 billion related to Accelerated Depreciation. The October 3, 2001 Order requires this amount to be refunded through excess mitigation credits to certain retail electric customers during a seven year period beginning in January 2002. On appeal, a Texas District court upheld the Texas Utility Commission's order. An appeal may be taken to a Texas Court of Appeal, but no further appeal has yet been filed.

As of December 31, 2001, in contemplation of the True-up Proceeding, Reliant Energy HL&P has recorded a regulatory asset of $2.0 billion representing the estimated recovery of previously incurred stranded costs, which includes a regulatory liability of $1.1 billion plus the reversal of previously recorded Redirected Depreciation. This estimated recovery is based upon current projections of the market value of the Reliant Energy HL&P electric generation assets to be covered by the True-up Proceeding calculations. Because generally accepted accounting principles require the Company to estimate fair market values in advance of the final reconciliation, the financial impacts of the Texas Electric Restructuring Law with respect to the final determination of stranded costs in 2004 are subject to material changes. Factors affecting such changes may include estimation risk, uncertainty of future energy and commodity prices and the economic lives of the plants. If events were to occur that made the recovery of some of the remaining generation related regulatory assets no longer probable, the Company would write off the remaining balance of such assets as a charge against earnings. For additional discussion of potential future impairment of the assets of the Company's Texas generation business, see Note 2(e).

Other Accounting Policy Changes. As a result of discontinuing SFAS No. 71, effective July 1, 1999, allowance for funds used during construction is no longer accrued on generation related construction projects. Instead, interest is being capitalized on these projects in accordance with SFAS No. 34, "Capitalization of Interest Cost."

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Previously, in accordance with SFAS No. 71, Reliant Energy HL&P deferred the premiums and expenses that arose when long-term debt was redeemed and amortized these costs over the life of the new debt. If no new debt was issued, these costs would be amortized over the remaining original life of the retired debt. Effective July 1, 1999, costs resulting from the retirement of debt attributable to the generation operations of Reliant Energy HL&P will be recorded in accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," unless these costs will be recovered through regulated cash flows. In that case, these costs will be deferred and recorded as a regulatory asset by the entity through which the source of the regulated cash flows will be derived.

(b) BUSINESS SEPARATION PLAN

Restructuring of Regulated Entities and Distribution of Reliant Resources Stock. Pursuant to the Business Separation Plan, subject to receipt of an order from the Securities and Exchange Commission (SEC) described below, Reliant Energy will become a subsidiary of a new holding company, CenterPoint Energy, which initially will own the Company's (a) electric transmission and distribution operations, (b) natural gas distribution businesses, (c) electric generating assets in Texas that were formerly operated by Reliant Energy HL&P,
(d) interstate pipelines, gas gathering and pipeline services operations, (e) interests in energy companies in Latin America (see Note 19) and (f) interests in Reliant Resources. In these Notes, references to Reliant Energy in connection with events occurring or the performance of agreements after the Restructuring generally refer to CenterPoint Energy.

Upon becoming a subsidiary of CenterPoint Energy, Reliant Energy will transfer the stock of its principal operating subsidiaries to a subsidiary of CenterPoint Energy and will transfer its electric generating assets in Texas that were formerly operated by Reliant Energy HL&P to Texas Genco. In January 2004, Reliant Resources will have the right to exercise an option to acquire Texas Genco, as further discussed below. As a result of the stock and asset transfers described above, Reliant Energy will become solely a transmission and distribution utility, with its other businesses becoming indirect subsidiaries of CenterPoint Energy, which will assume all of Reliant Energy's debt other than its first mortgage bonds. The indebtedness of certain wholly owned financing subsidiaries of Reliant Energy is expected to be refinanced by the regulated holding company by the end of 2002.

The Company anticipates that, upon completion of the Restructuring and subject to approval by the Company's board of directors, market and other conditions, CenterPoint Energy will distribute all of the stock it owns in Reliant Resources to CenterPoint Energy's shareholders, affecting the separation of its operations into two publicly traded corporations. The Company has obtained a private letter ruling from the IRS providing for the tax-free treatment of the Distribution that is predicated on the completion of the Distribution by April 30, 2002. The Company has requested an extension of this deadline. While there can be no assurance that the Company will receive the extension, the Company anticipates that it will receive an extension that allows it to proceed with the Distribution after April 30, 2002.

Reliant Energy has made and will continue to make internal asset and stock transfers intended to allocate the assets and liabilities of Reliant Energy in accordance with regulatory requirements and as contemplated by the Business Separation Plan. Forms of each of the intercompany agreements described below were prepared and entered into by Reliant Energy and Reliant Resources prior to the Offering.

The Restructuring as currently planned cannot be completed unless and until the SEC issues an order granting the required approvals under the Public Utility Holding Company Act of 1935 (1935 Act). While the Company believes such an order will be received, and that both the Restructuring and Distribution will be completed during the summer of 2002, there can be no assurances that such will be the case. The Restructuring has been designed to enable the Company to meet all of the requirements of the Texas Electric Restructuring Law. The Company has not formulated an alternative restructuring plan that could be implemented were the SEC to refuse to grant the requested approvals for CenterPoint Energy.

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Agreements Related to Texas Generating Assets. Pursuant to the Business Separation Plan, Reliant Energy expects to cause Texas Genco to conduct an initial public offering of approximately 20% of its capital stock by the end of 2002. If the initial public offering is not conducted, Reliant Energy may distribute approximately 20% of Texas Genco's capital stock to its stockholders in a transaction taxable both to it and its stockholders as part of the valuation of stranded costs. In connection with the separation of its unregulated businesses from its regulated businesses, Reliant Energy granted Reliant Resources an option, subject to the completion of the Distribution, to purchase all of the shares of capital stock of Texas Genco that will be owned by Reliant Energy after the initial public offering or distribution (Texas Genco Option). The Texas Genco Option may be exercised between January 10, 2004 and January 24, 2004. The per share exercise price under the option will be the average daily closing price on the national exchange for publicly held shares of common stock of Texas Genco for the 30 consecutive trading days with the highest average closing price during the 120 trading days immediately preceding January 10, 2004, plus a control premium, up to a maximum of 10%, to the extent a control premium is included in the valuation determination made by the Texas Utility Commission relating to the market value of Texas Genco's common stock equity. The exercise price is also subject to adjustment based on the difference between the cash dividends paid during the period there is a public ownership interest in Texas Genco and Texas Genco's earnings during that period. Reliant Resources has agreed that if it exercises the Texas Genco Option and purchases the shares of Texas Genco common stock, Reliant Resources will also purchase all notes and other receivables from Texas Genco then held by Reliant Energy, at their principal amount plus accrued interest. Similarly, if Texas Genco holds notes or receivables from the Company, Reliant Resources will assume those obligations in exchange for a payment to Reliant Resources by the Company of an amount equal to the principal plus accrued interest.

Exercise of the Texas Genco Option by Reliant Resources will be subject to various regulatory approvals, including Hart-Scott-Rodino antitrust clearance and United States Nuclear Regulatory Commission (NRC) license transfer approval. The option will be exercisable only if Reliant Energy or CenterPoint Energy distributes all of the shares of Reliant Resources common stock it owns to its shareholders.

At the time of the Restructuring, Texas Genco will become the beneficiary of the decommissioning trust that has been established to provide funding for decontamination and decommissioning of a nuclear electric generation station in which Reliant Energy owns a 30.8% interest (see Note 6). The master separation agreement provides that Reliant Energy will collect through rates or other authorized charges to its electric utility customers amounts designated for funding the decommissioning trust, and will pay the amounts to Texas Genco. Texas Genco will in turn be required to deposit these amounts received from Reliant Energy into the decommissioning trust. Upon decommissioning of the facility, in the event funds from the trust are inadequate, Reliant Energy or its successor will be required to collect through rates or other authorized charges to customers as contemplated by the Texas Utilities Code all additional amounts required to fund Texas Genco's obligations relating to the decommissioning of the facility. Following the completion of the decommissioning, if surplus funds remain in the decommissioning trust, the excess will be refunded to Reliant Energy's or its successor's ratepayers.

(c) RELIANT ENERGY HL&P REGULATORY FILINGS

As of December 31, 2000 and 2001, Reliant Energy HL&P was under-collected on fuel recovery by $558 million and $200 million, respectively. In two separate filings with the Texas Utility Commission in 2000, Reliant Energy HL&P received approval to implement fuel surcharges to collect the under-recovery of fuel expenses, as well as to adjust the fuel factor to compensate for significant increases in the price of natural gas. For additional information regarding this matter, see Note 2(f).

On March 15, 2001, Reliant Energy HL&P filed an application with the Texas Utility Commission to revise its fuel factor and address its undercollected fuel costs of $389 million, which was the accumulated amount from September 2000 through February 2001, plus estimates for March and April 2001. Reliant

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Energy HL&P requested to revise its fixed fuel factor to be implemented with the May 2001 billing cycle and proposed to defer the collection of the $389 million until the 2004 stranded costs True-up Proceeding. On April 16, 2001, the Texas Utility Commission issued an order approving interim rates effective with the May 2001 billing cycle.

On June 21, 2001, Reliant Energy HL&P filed an application with the Texas Utility Commission to terminate the interim factor and return to the prior fuel factor due to the forecasted decline in natural gas prices. On July 20, 2001, the Texas Utility Commission issued an order of dismissal approving Reliant Energy HL&P's request that the interim rates approved on April 16, 2001, effective with Reliant Energy HL&P's May 2001 billing month, be terminated and Reliant Energy HL&P prospectively bill its customers using the prior fuel factor established in a previous order beginning with Reliant Energy HL&P's August billing month. The Texas Utility Commission also granted Reliant Energy HL&P a good cause exception in that Reliant Energy HL&P will not be required to refund amounts collected through the interim rates. Reliant Energy HL&P did not waive its right to collect any final fuel balance. The final fuel balance is subject to review, and the amount to be included in the 2004 stranded cost true-up will be determined during the final fuel reconciliation. The Texas Utility Commission currently has scheduled Reliant Energy HL&P to file its final fuel reconciliation in July 2002.

(d) ARKLA RATE CASE

On November 21, 2001, Arkla filed a rate case (Docket 01-243-U) with the Arkansas Public Service Commission seeking an increase in rates for its Arkansas customers of approximately $47 million on an annual basis. Arkla's last rate increase was authorized in 1995. In the rate filing, Arkla maintains that its rate base has grown by $183 million, and its operating expenses have increased from $93 million to $106 million on an annual basis and, therefore, Arkla's current rates for service to Arkansas customers do not provide a reasonable opportunity for Arkla to cover its operating costs and earn a fair return on its investment. A decision in the case is expected by the fourth quarter of 2002.

(5) DERIVATIVE FINANCIAL INSTRUMENTS

Effective January 1, 2001, the Company 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 (loss), depending on the intended use of the derivative, its resulting designation and its effectiveness. If certain conditions are met, an entity may designate a 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 an after-tax increase in net income of $61 million and a cumulative after-tax increase in accumulated other comprehensive loss of $422 million. The adoption also increased current assets, long-term assets, current liabilities and long-term liabilities by approximately $627 million, $67 million, $778 million, and $277 million, respectively, in the Company's Consolidated Balance Sheets. During the year ended December 31, 2001, $165 million of the initial after-tax transition adjustment recognized in other comprehensive income was recognized in net income.

The application of SFAS No. 133 is still evolving as the FASB clears issues previously submitted to the Derivatives Implementation Group for consideration. During the second quarter of 2001, an issue that applies exclusively to the electric industry and allows the normal purchases and normal sales exception for option-type contracts if certain criteria are met was approved by the FASB with an effective date of July 1, 2001. The

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adoption of this cleared guidance had no impact on the Company's results of operations. Certain criteria of this previously approved guidance were revised in October and December 2001 and became effective on April 1, 2002. The Company is currently in the process of determining the effect of adoption of the revised guidance.

During the third quarter of 2001, the FASB cleared an issue related to application of the normal purchases and normal sales exception to contracts that combine forward and purchased option contracts. The effective date of this guidance is April 1, 2002, and the Company is currently assessing the impact of this cleared issue and does not believe it will have a material impact on the Company's consolidated financial statements.

The Company is exposed to various market risks. These risks arise from transactions entered into in the normal course of business and are inherent in the Company's consolidated financial statements. The Company utilizes derivative instruments such as futures, physical forward contracts, swaps and options (Energy Derivatives) to mitigate the impact of changes in electricity, natural gas and fuel prices on its operating results and cash flows. The Company utilizes cross-currency swaps, forward contracts and options to hedge its net investments in and cash flows of its foreign subsidiaries, interest rate swaps to mitigate the impact of changes in interest rates and other financial instruments to manage various other market risks.

Trading and marketing operations often involve risk associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. These risks fall into three different categories: price and volume volatility, credit risk of trading counterparties and adequacy of the control environment for trading. The Company routinely enters into Energy Derivatives to hedge purchase and sale commitments, fuel requirements and inventories of natural gas, coal, electricity, crude oil and products, emission allowances and other commodities and to minimize the risk of market fluctuations in its trading, marketing, power origination and risk management services operations.

Energy Derivatives primarily used by the Company are described below:

- Future contracts are exchange-traded standardized commitments to purchase or sell an energy commodity or financial instrument, or to make a cash settlement, at a specific price and future date.

- Physical forward contracts are commitments to purchase or sell energy commodities in the future.

- Swap agreements require payments to or from counterparties based upon the differential between a fixed price and variable index price (fixed price swap) or two variable index prices (variable price swap) for a predetermined contractual notional amount. The respective index may be an exchange quotation or an industry pricing publication.

- Option contracts convey the right to buy or sell an energy commodity, financial instrument at a predetermined price or settlement of the differential between a fixed price and a variable index price or two variable index prices.

(a) ENERGY TRADING, MARKETING, POWER ORIGINATION AND PRICE RISK MANAGEMENT ACTIVITIES

The Company offers energy price risk management services primarily related to natural gas, electric power and other energy related commodities. These activities also include the establishing of open positions in the energy markets, primarily on a short-term basis, and transactions intended to optimize the Company's power generation portfolio, but which do not qualify for hedge accounting. The Company provides these services by utilizing a variety of derivative instruments (Trading Energy Derivatives).

The Company applies mark-to-market accounting for all of its energy trading, marketing, power origination and price risk management services operations in North America and Europe, as well as to retail contracted sales to large commercial, industrial and institutional customers. Accordingly, these Trading Energy Derivatives are recorded at fair value with net realized and unrealized gains (losses) recorded as a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

component of revenues. The recognized, unrealized balances are recorded as trading and marketing assets/liabilities.

                                                                    FAIR VALUE
                                                               --------------------
                                                               ASSETS   LIABILITIES
                                                               ------   -----------
                                                                  (IN MILLIONS)
December 31, 2000
  Natural gas...............................................   $3,823     $3,818
  Electricity...............................................      974        946
  Oil and other.............................................       39         39
                                                               ------     ------
                                                               $4,836     $4,803
                                                               ======     ======
December 31, 2001
  Natural gas...............................................   $1,389     $1,303
  Electricity...............................................      648        517
  Oil and other.............................................       21         20
                                                               ------     ------
                                                               $2,058     $1,840
                                                               ======     ======

All of the fair values shown in the table above at December 31, 2000 and 2001 have been recognized in income. The fair values as of December 31, 2000 and 2001, are estimated using quoted prices where available, other valuation techniques when market data is not available, for example in illiquid markets, and other factors such as time value and volatility factor for the underlying commitment. The Company's alternative pricing methodologies include, but are not limited to, extrapolation of forward pricing curves using historically reported data from illiquid pricing points. These same pricing techniques are used to evaluate a contract prior to taking the position.

The fair values in the above table are subject to significant changes based on fluctuating market prices and conditions. Changes in the assets and liabilities from trading, power origination, marketing and price risk management services result primarily from changes in the valuation of the portfolio of contracts, newly originated transactions and the timing of settlements. The most significant estimates include natural gas and power forward market prices, volatility and credit risk. For the contracted retail electric sales to large commercial, industrial and institutional customers, significant variables affecting contract values also include the variability in electricity consumption patterns due to weather and operational uncertainties (within contract parameters). Market prices assume a normal functioning market with an adequate number of buyers and sellers providing market liquidity. Insufficient market liquidity could significantly affect the values that could be obtained for these contracts, as well as the costs at which these contracts could be hedged.

The weighted-average term of the trading portfolio, based on volumes, is less than one year. The maximum term of the trading portfolio is 17 years. These maximum and average terms are not indicative of likely future cash flows, as these positions may be changed by new transactions in the trading portfolio at any time in response to changing market conditions, market liquidity and the Company's risk management portfolio needs and strategies. Terms regarding cash settlements of these contracts vary with respect to the actual timing of cash receipts and payments.

(b) NON-TRADING ACTIVITIES

Cash Flow Hedges. To reduce the risk from market fluctuations in revenues and the resulting cash flows derived from the sale of electric power, natural gas and other commodities, the Company may enter into Energy Derivatives in order to hedge exposure to variability in cash flows (Non-trading Energy Derivatives).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Non-trading Energy Derivative portfolios are managed to complement the physical transaction portfolio, reducing overall risks within authorized limits.

The Company 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. This correlation, a measure of hedge effectiveness, is measured both at the inception of the hedge and on an ongoing basis, with an acceptable level of correlation of at least 80% to 120% for hedge designation. If and when correlation ceases to exist at an acceptable level, hedge accounting ceases and mark-to-market accounting is applied. During 2001, the amount of hedge ineffectiveness recognized in earnings from derivatives that are designated and qualify as Cash Flow Hedges was a gain of $8 million. 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, the Company realizes in net income the deferred gains and losses recognized in accumulated other comprehensive income (loss). During the year ended December 31, 2001, there was a $3.6 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 due to credit problems of a customer. Once the anticipated transaction occurs, the accumulated deferred gain or loss recognized in accumulated other comprehensive income (loss) is reclassified and included in the Company's Statements of Consolidated Income under the captions
(a) fuel expenses, in the case of natural gas purchase transactions, (b) purchased power, in the case of electric power purchase transactions and (c) revenues, in the case of electric power and natural gas sales transactions and financial electric power or natural gas derivatives. 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, 2001, the Company's current non-trading derivative assets and liabilities and corresponding amounts in accumulated other comprehensive loss were expected to be reclassified into net income during the next twelve months.

The maximum length of time the Company is hedging its exposure to the variability in future cash flows for forecasted transactions excluding the payment of variable interest on existing financial instruments is eleven years.

In addition, as of December 31, 2001, the European Energy business segment had entered into transactions to purchase $271 million at fixed exchange rates in order to hedge future fuel purchases payable in U.S. dollars.

Interest Rate Swaps. During 2001, the Company entered into interest rate swaps with an aggregate notional amount of $1.8 billion to fix the interest rate applicable to floating rate short-term debt and interest rate swaps with a notional amount of $425 million to fix the interest rate applicable to floating rate long-term debt. At December 31, 2001, $225 million of the swaps relating to long-term debt had expired. The swaps relating to short-term debt do not qualify as cash flow hedges under SFAS No. 133, and are marked to market on the Consolidated Balance Sheets with changes reflected in interest expense in the Statements of Consolidated Income. The swaps relating to long-term debt qualify for hedge accounting under SFAS No. 133 and the periodic settlements are recognized as an adjustment to interest expense in the Statements of Consolidated Income over the term of the swap agreement. During 2001, the Company entered into forward-starting interest rate swaps having an aggregate notional amount of $500 million to hedge the interest rate on a portion of a future offering of five-year notes. These swaps qualify as cash flow hedges under SFAS No. 133. Should the expected issuance of the debt no longer be probable, any deferred amount will be recognized immediately into income. The maximum length of time the Company is hedging its exposure to the payment of variable interest rates is four years.

Hedge of the Foreign Currency Exposure of Net Investment in Foreign Subsidiaries. The Company has substantially hedged the foreign currency exposure of its net investment in its European subsidiaries through a combination of Euro-denominated borrowings, foreign currency swaps and foreign currency forward contracts

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to reduce the Company's exposure to changes in foreign currency rates. During the normal course of business, the Company reviews its currency hedging strategies and determines the hedging approach deemed appropriate based upon the circumstances of each situation.

The Company records the changes in the value of the foreign currency hedging instruments and Euro-denominated borrowings as foreign currency translation adjustments included as a component of accumulated other comprehensive loss. The effectiveness of the hedging instruments can be measured by the net change in foreign currency translation adjustments attributed to the Company's net investment in its European subsidiaries. These amounts generally offset amounts recorded in stockholders' equity as adjustments resulting from translation of the hedged investment into U.S. dollars. During 2001, the derivative and non-derivative instruments designated as hedging the net investment in the Company's European subsidiaries resulted in a gain of $31 million, which is included in the balance of the cumulative translation adjustment.

Other Derivatives. In December 2000, the Dutch parliament adopted legislation allocating to the Dutch generation sector, including REPGB, financial responsibility for various stranded costs contracts and other liabilities. The legislation became effective in all material respects on January 1, 2001. In particular, the legislation allocated to the Dutch generation sectors, including REPGB, financial responsibility to purchase electricity and gas under gas supply and electricity contracts. These contracts are derivatives pursuant to SFAS No. 133. As of December 31, 2001, the Company had recognized $369 million in short-term and long-term non-trading derivative liabilities for REPGB's portion of these stranded costs contracts. Future changes in the valuation of these stranded cost import contracts which remain an obligation of REPGB will be recorded as adjustments to the Company's Statements of Consolidated Income. The valuation of the contracts could be affected by, among other things, changes in the price of electric power, coal, low sulfur fuel oil and the value of the United States dollar and British pound relative to the Euro. For additional information regarding REPGB's stranded costs and the related indemnification by former shareholders of these stranded costs during 2001, see Note 14(h).

During 2001, Reliant Resources entered into two structured transactions which were recorded on the Consolidated Balance Sheets in non-trading derivative assets and liabilities involving a series of forward contracts to buy and sell an energy commodity in 2001 and to buy and sell an energy commodity in 2002 or 2003. The change in fair value of these derivative assets and liabilities must be recorded in the Statements of Consolidated Income for each reporting period. During 2001, $117 million of net non-trading derivative liabilities were settled related to these transactions, and a $1 million pre-tax unrealized gain was recognized. As of December 31, 2001, Reliant Resources has recognized $221 million of non-trading derivative assets and $103 million of non-trading derivative liabilities related to these transactions.

(c) CREDIT RISKS

In addition to the risk associated with price movements, credit risk is inherent in the Company's risk management activities and hedging activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. The Company has off-balance sheet risk to the extent that the counterparties to these transactions may fail to perform as required by the terms of each contract. The Company enters into derivative instruments primarily with counterparties having at least a minimum investment grade credit rating (i.e. a minimum credit rating for such entity's senior unsecured debt of BBB- for Standard & Poor's and Fitch or Baa3 for Moody's). In addition, the Company seeks to enter into netting agreements that permit it to offset receivables and payables with a given counterparty. The Company also attempts to enter into agreements that enable the Company to obtain collateral from a counterparty or to terminate upon the occurrence of credit-related events. For long-term arrangements, the Company periodically reviews the financial condition of these counterparties in addition to monitoring the effectiveness of these financial contracts in achieving the Company's objectives. If the counterparties to these arrangements fail to perform, the Company would seek to compel performance at law or otherwise obtain compensatory damages.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company might be forced to acquire alternative hedging arrangements or be required to replace the underlying commitment at then-current market prices. In this event, the Company might incur additional losses to the extent of amounts, if any, already paid to the counterparties. For information regarding the provision related to energy sales in California, see Note 14(g). For information regarding the net provision recorded in 2001 related to energy sales to Enron, see Note 21.

The following tables show the composition of the trading and marketing assets of the Company as of December 31, 2000 and 2001 and the non-trading derivative assets as of December 31, 2001.

                                                  DECEMBER 31, 2000     DECEMBER 31, 2001
                                                 -------------------   -------------------
                                                 INVESTMENT            INVESTMENT
TRADING AND MARKETING ASSETS                      GRADE(2)    TOTAL     GRADE(2)    TOTAL
----------------------------                     ----------   ------   ----------   ------
                                                               (IN MILLIONS)
Energy marketers...............................    $2,291     $2,481     $  683     $  757
Financial institutions.........................     1,099      1,228        495        495
Gas and electric utilities.....................       472        542        538        544
Oil and gas producers..........................       474        566        135        176
Commercial, industrial and institutional
  customers....................................        73         85        119        184
                                                   ------     ------     ------     ------
  Total........................................    $4,409      4,902     $1,970      2,156
                                                   ======                ======
Credit and other reserves......................                  (66)                  (98)
                                                              ------                ------
Trading and marketing assets...................               $4,836                $2,058
                                                              ======                ======

                                                               DECEMBER 31, 2001
                                                              -------------------
                                                              INVESTMENT
NON-TRADING DERIVATIVE ASSETS                                 GRADE(1)(2)   TOTAL
-----------------------------                                 -----------   -----
                                                                 (IN MILLIONS)
Energy marketers............................................     $371       $408
Financial institutions......................................       76         76
Gas and electric utilities..................................       89         90
Oil and gas producers.......................................        8         76
Commercial, industrial and institutional customers..........        7          8
Others......................................................        5         14
                                                                 ----       ----
  Total.....................................................     $556        672
                                                                 ====       ----
Credit and other reserves...................................                 (16)
                                                                            ----
Non-trading derivative assets...............................                $656
                                                                            ====


(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 encompass 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.

(d) TRADING AND NON-TRADING -- GENERAL POLICY

The Company has established a Risk Oversight Committee comprised of corporate and business segment officers that oversees all commodity price, foreign currency and credit risk activities, including the Company's trading, marketing, power origination, risk management services and hedging activities. The committee's

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

duties are to approve the Company's commodity risk policies, allocate risk capital within limits established by the Company's board of directors, approve trading of new products and commodities, monitor risk positions and monitor compliance with the Company's risk management policies and procedures and trading limits established by the Company's board of directors.

The Company'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.

(6) JOINTLY OWNED ELECTRIC UTILITY PLANT

The Company has a 30.8% interest in the South Texas Project, which consists of two 1,250 MW nuclear generating units and bears a corresponding 30.8% share of capital and operating costs associated with the project. The South Texas Project is owned as a tenancy in common among its four co-owners, with each owner retaining its undivided ownership interest in the two nuclear-fueled generating units and the electrical output from those units. The four co-owners have delegated management and operating responsibility for the South Texas Project to the South Texas Project Nuclear Operating Company (STPNOC). STPNOC is managed by a board of directors comprised of one director from each of the four owners, along with the chief executive officer of STPNOC. As of December 31, 2001, the total utility plant in service and construction work in progress for the total South Texas Project was $5.8 billion and $120 million, respectively. The Company's investment in the South Texas Project was $316 million (net of $2.2 billion accumulated depreciation which includes an impairment loss recorded in 1999 of $756 million). For additional information regarding the impairment loss, see Note 4(a). The Company's investment in nuclear fuel was $35 million (net of $286 million amortization) as of December 31, 2001.

(7) EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The Company has a 50% interest in a 490 MW electric generation plant in Boulder City, Nevada. The plant became operational in May 2000. Reliant Resources has a 50% partnership interest in a 100 MW cogeneration plant in Orange, Texas which began commercial operations in December 1999. In addition, Reliant Resources, through REPGB, acquired a 22.5% interest in BV Nederlands Elektriciteit Administratiekantoor (NEA), which was formerly the coordinating body for the Dutch electricity generating sector. For information regarding Reliant Resources' investment in NEA and financial impacts, see Note 14(h). See Note 3(b) for a description of 1999 equity accounting related to REPGB during 1999.

Reliant Resources' equity investments in unconsolidated subsidiaries are as follows:

                                                                  AS OF
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     2001
                                                              -----    -----
                                                              (IN MILLIONS)
Nevada generation plant.....................................  $ 77     $ 57
Texas cogeneration plant....................................    32       31
NEA.........................................................    --      299
                                                              ----     ----
  Equity investments in unconsolidated subsidiaries.........  $109     $387
                                                              ====     ====

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reliant Resources' income (loss) from equity investments of unconsolidated subsidiaries is as follow:

                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                              1999    2000    2001
                                                              ----    ----    ----
                                                                 (IN MILLIONS)
Nevada generation plant.....................................  $(1)    $42     $ 5
Texas cogeneration plant....................................   --       1       1
NEA.........................................................   --      --      51
                                                              ---     ---     ---
  Income from equity investments in unconsolidated
     subsidiaries...........................................  $(1)    $43     $57
                                                              ===     ===     ===

During 1999, there were no distributions from these investments. During 2000 and 2001, $18 million and $27 million, respectively, were the net distributions from these investments.

(8) INDEXED DEBT SECURITIES (ACES AND ZENS) AND AOL TIME WARNER SECURITIES

(a) ORIGINAL INVESTMENT IN TIME WARNER SECURITIES

On July 6, 1999, the Company converted its 11 million shares of Time Warner Inc. (TW) convertible preferred stock (TW Preferred) into 45.8 million shares of Time Warner common stock (TW Common). Prior to the conversion, the Company's investment in the TW Preferred was accounted for under the cost method at a value of $990 million in the Company's Consolidated Balance Sheets. The TW Preferred which was redeemable after July 6, 2000, had an aggregate liquidation preference of $100 per share (plus accrued and unpaid dividends), was entitled to annual dividends of $3.75 per share until July 6, 1999 and was convertible by the Company. The Company recorded pre-tax dividend income with respect to the TW Preferred of $21 million in 1999 prior to the conversion. Effective on the conversion date, the shares of TW Common were classified as trading securities under SFAS No. 115 and an unrealized gain was recorded in the amount of $2.4 billion ($1.5 billion after-tax) to reflect the cumulative appreciation in the fair value of the Company's investment in Time Warner securities. Unrealized gains and losses resulting from changes in the market value of the TW Common (now AOL TW Common) are recorded in the Company's Statements of Consolidated Income.

(b) ACES

In July 1997, in order to monetize a portion of the cash value of its investment in TW Preferred, the Company issued 22.9 million of its unsecured 7% Automatic Common Exchange Securities (ACES) having an original principal amount of $1.052 billion and maturing July 1, 2000. The market value of ACES was indexed to the market value of TW Common. On the July 1, 2000 maturity date, the Company tendered 37.9 million shares of TW Common to fully settle its obligations in connection with its unsecured 7% ACES having a value of $2.9 billion.

(c) ZENS

On September 21, 1999, the Company issued approximately 17.2 million of its 2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) having an original principal amount of $1.0 billion. The original principal amount per ZENS will increase each quarter to the extent that the sum of the quarterly cash dividends and the interest paid during a quarter on the reference shares attributable to one ZENS is less than $.045, so that the annual yield to investors from the date the Company issued the ZENS to the date of computation of the contingent principal amount is not less than 2.309%. At December 31, 2001, the principal amount of the ZENS had increased $3 million as the reference shares no longer pay dividends. At maturity the holders of the ZENS will receive in cash the higher of the original principal amount of the ZENS (subject to adjustment as discussed above) or an amount based on the then-current market value of AOL TW

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common, or other securities distributed with respect to AOL TW Common (1.5 shares of AOL TW Common and such other securities, if any, are referred to as reference shares). Each ZENS has an original principal amount of $58.25, and is exchangeable at any time at the option of the holder for cash equal to 95% (100% in some cases) of the market value of the reference shares attributable to one ZENS. The Company pays interest on each ZENS at an annual rate of 2% plus the amount of any quarterly cash dividends paid in respect of the quarterly interest period on the reference shares attributable to each ZENS. Subject to some conditions, the Company has the right to defer interest payments from time to time on the ZENS for up to 20 consecutive quarterly periods. As of December 31, 2001, no interest payments on the ZENS had been deferred.

The Company used $537 million of the net proceeds from the offering of the ZENS to purchase 9.2 million shares of TW Common (now 13.8 million shares of AOL TW Common), which are classified as trading securities under SFAS No. 115. Prior to the purchase of additional shares of TW Common on September 21, 1999, the Company owned approximately 8 million shares of TW Common (now 12 million shares of AOL TW Common). The Company now holds 25.8 million shares of AOL TW Common that are expected to be held to facilitate the Company's ability to meet its obligation under the ZENS.

Prior to January 1, 2001, an increase above $58.25 (subject to some adjustments) in the market value per share of TW Common resulted in an increase in the Company's liability for the ZENS. However, as the market value per share of TW Common declined below $58.25 (subject to some adjustments), the liability for the ZENS did not decline below the original principal amount. The market value per share of TW Common was $52.24 as of December 31, 2000 and the market value per share of AOL TW Common was $32.10 as of December 31, 2001. Upon adoption of SFAS No. 133 effective January 1, 2001, the ZENS obligation was bifurcated into a debt component and a derivative component (the holder's option to receive the appreciated value of AOL TW Common at maturity). The derivative component was valued at fair value and determined the initial carrying value assigned to the debt component ($121 million) as the difference between the original principal amount of the ZENS ($1.0 billion) and the fair value of the derivative component at issuance ($879 million). Effective January 1, 2001 the debt component was recorded at its accreted amount of $122 million and the derivative component is recorded at its current fair value of $788 million, as a current liability, resulting in a transition adjustment pre-tax gain of $90 million ($58 million net of tax). The transition adjustment gain was reported in the first quarter of 2001 as the effect of a change in accounting principle. Subsequently, the debt component will accrete through interest charges at 17.5% up to the minimum amount payable upon maturity of the ZENS in 2029, approximately $1.1 billion, and changes in the fair value of the derivative component will be recorded in the Company's Statements of Consolidated Income. During 2001, the Company recorded a $70 million loss on the Company's investment in AOL TW Common. During 2001, the Company recorded a $58 million gain associated with the fair value of the derivative component of the ZENS obligation. Changes in the fair value of the AOL TW Common held by the Company are expected to substantially offset changes in the fair value of the derivative component of the ZENS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth summarized financial information regarding the Company's investment in AOL TW securities and the Company's ACES and ZENS obligations (in millions).

                                                                      DEBT       DERIVATIVE
                                             AOL TW               COMPONENT OF   COMPONENT
                                           INVESTMENT    ACES         ZENS        OF ZENS
                                           ----------   -------   ------------   ----------
Balance at December 31, 1998.............   $   990     $ 2,350      $   --         $ --
Issuance of indexed debt securities......        --          --       1,000           --
Purchase of TW Common....................       537          --          --           --
Loss on indexed debt securities..........        --         388         241           --
Gain on TW Common........................     2,452          --          --           --
                                            -------     -------      ------         ----
Balance at December 31, 1999.............     3,979       2,738       1,241           --
Loss (gain) on indexed debt securities...        --         139        (241)          --
Loss on TW Common........................      (205)         --          --           --
Settlement of ACES.......................    (2,877)     (2,877)         --           --
                                            -------     -------      ------         ----
Balance at December 31, 2000.............       897          --       1,000           --
Transition adjustment from adoption of
  SFAS No. 133...........................        --          --         (90)          --
Bifurcation of ZENS obligation...........        --          --        (788)         788
Accretion of debt component of ZENS......        --          --           1           --
Gain on indexed debt securities..........        --          --          --          (58)
Loss on AOL TW Common....................       (70)         --          --           --
                                            -------     -------      ------         ----
Balance at December 31, 2001.............   $   827     $    --      $  123         $730
                                            =======     =======      ======         ====

(9) PREFERRED STOCK AND PREFERENCE STOCK

(a) PREFERRED STOCK

At December 31, 2000, Reliant Energy had 10,000,000 authorized shares of cumulative preferred stock, of which 97,397 shares were outstanding. As of that date, Reliant Energy's only outstanding series of preferred stock was its $4.00 Preferred Stock. The $4.00 Preferred Stock paid an annual dividend of $4.00 per share, was redeemable at $105 per share and had a liquidation price of $100 per share to third parties.

On December 14, 2001, Reliant Energy redeemed all outstanding shares of its $4.00 Preferred Stock at $105 per share plus accrued dividends of $0.478 per share for a total redemption payment of $10.3 million. At December 31, 2001, Reliant Energy had 10,000,000 authorized shares of cumulative preferred stock, none of which were outstanding.

(b) PREFERENCE STOCK

At December 31, 2000 and 2001, Reliant Energy had 10,000,000 authorized shares of preference stock, none of which were outstanding for financial reporting purposes. At December 31, 2001, Reliant Energy had issued and outstanding shares of preference stock that were held by various financing subsidiaries of the Company to support debt obligations of the subsidiaries to third party lenders. The aggregate amount of debt outstanding at these subsidiaries at December 31, 2001 was $2.9 billion.

Reliant Energy has a Shareholder Rights Plan, which states that each share of Reliant Energy's common stock includes one associated preference stock purchase right (Right) which entitles the registered holder to purchase from Reliant Energy a unit consisting of one-thousandth of a share of Series A Preference Stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Rights, which expire on July 11, 2010, are exercisable upon some events involving the acquisition of 20% or more of Reliant Energy's outstanding common stock. Upon the occurrence of such an event, each Right entitles the holder to receive common stock with a current market price equal to two times the exercise price of the Right. At anytime prior to becoming exercisable, Reliant Energy may repurchase the Rights at a price of $0.005 per Right. There are 700,000 shares of Series A Preference Stock reserved for issuance upon exercise of the Rights.

(10) LONG-TERM DEBT AND SHORT-TERM BORROWINGS

                                                                DECEMBER 31, 2000        DECEMBER 31, 2001
                                                              ----------------------   ----------------------
                                                                LONG-                    LONG-
                                                                TERM      CURRENT(1)     TERM      CURRENT(1)
                                                              ---------   ----------   ---------   ----------
                                                                               (IN MILLIONS)
Short-term borrowings:
  Commercial paper..........................................                $3,675                   $2,502
  Lines of credit...........................................                   853                      290
  Receivables facility......................................                   350                      346
  Other(2)..................................................                   126                      297
                                                                            ------                   ------
Total short-term borrowings.................................                $5,004                   $3,435
                                                                            ------                   ------
Long-term debt:
Reliant Energy
  ZENS(3)...................................................   $   --       $1,000      $   --       $  123
  Debentures 7.88% to 9.38% due 2002........................      100          250          --          100
  First mortgage bonds 4.90% to 9.15% due 2002 to 2027......    1,261           --       1,161          100
  Pollution control bonds 4.70% to 5.95% due 2011 to 2030...    1,046           --       1,046           --
  Series 2001-1 Transition Bonds 3.84% to 5.63% due 2002 to
    2013....................................................       --           --         736           13
  Other.....................................................       12            1          11            1
Financing Subsidiaries (directly or indirectly owned by
  Reliant Energy)
  Debentures 7.40% due 2002.................................      300          225          --          300
Reliant Energy Power Generation, Inc.
  Notes payable various market rates due 2002 to 2024.......      260           --         295            2
REPGB(2)
  Debentures 6.00% to 8.94% due 2002 to 2006................       66            1          38           22
Reliant Energy Capital Europe(2)
  Notes payable various market rates due 2003...............      565           --         534           --
RERC Corp.(4)
  Convertible debentures 6.00% due 2012.....................       93           --          82           --
  Debentures 6.38% to 8.90% due 2003 to 2011................    1,285           --       1,833           --
  Notes payable 8.77% to 9.23% paid 2001....................       --          146          --           --
Unamortized discount and premium............................        8           --           6           --
                                                               ------       ------      ------       ------
    Total long-term debt....................................    4,996        1,623       5,742          661
                                                               ------       ------      ------       ------
    Total borrowings........................................   $4,996       $6,627      $5,742       $4,096
                                                               ======       ======      ======       ======


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

(2) Includes borrowings at December 31, 2000 and 2001 which are denominated in Euros. As of December 31, 2000 and 2001, the assumed exchange rate was 1.06 Euros and 1.12 Euros per U.S. dollar, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) Upon adoption of SFAS No. 133 effective January 1, 2001, the Company's ZENS obligation was bifurcated into a debt component and an embedded derivative component. For additional information regarding ZENS, see Note 8(b). As ZENS are exchangeable for cash at any time at the option of the holders, these notes are classified as a current portion of long-term debt.

(4) Debt acquired in business acquisitions is adjusted to fair market value as of the acquisition date. Included in long term debt is additional unamortized premium related to fair value adjustments of long-term debt of $12 million and $9 million at December 31, 2000 and 2001, respectively, which is being amortized over the respective remaining term of the related long-term debt.

(a) SHORT-TERM BORROWINGS

As of December 31, 2001, the Company had credit facilities, which included the facilities of various financing subsidiaries, Reliant Resources, REPGB and RERC Corp., with financial institutions which provide for an aggregate of $11.0 billion in committed credit. The facilities expire as follows: $6.6 billion in 2002, $3.6 billion in 2003 and $0.8 billion in 2004. As of December 31, 2001, borrowings of $4.6 billion were outstanding or supported under these credit facilities of which $0.8 billion were classified as long-term debt, based on availability of committed credit with expiration dates exceeding one year and management's intention to maintain these borrowings in excess of one year. The remaining unused credit facilities totaled $6.4 billion. Various credit facilities aggregating $2.4 billion may be used for letters of credit of which $0.4 billion were outstanding as of December 31, 2001. Interest rates on borrowings are based on the London Interbank Offered Rate (LIBOR) plus a margin, Euro interbank deposits plus a margin, a base rate or a rate determined through a bidding process. Credit facilities aggregating $5.4 billion are unsecured. The credit facilities contain covenants and requirements that must be met to borrow funds and obtain letters of credit, as applicable. Such covenants are not anticipated to materially restrict the borrowers from borrowing funds or obtaining letters of credit, as applicable, under such facilities. As of December 31, 2001, the borrowers are in compliance with the covenants under all of these credit agreements.

The Company sells commercial paper to provide financing for general corporate purposes. As of December 31, 2001, $2.5 billion of commercial paper was outstanding. The commercial paper borrowings are supported by various credit facilities discussed above, including $4.7 billion in credit facilities expiring in 2002 and a $350 million revolving credit facility expiring in 2003.

RERC Corp. has a receivables facility under which it sells its customer accounts receivable. Advances under this facility are reflected in the Consolidated Balance Sheets as short-term debt. At December 31, 2000 and 2001, the amount of the receivables facility was $350 million and RERC Corp. had received advances of $350 million and $346 million, respectively. Fees and interest expense related to this facility for 1999, 2000 and 2001 aggregated $19 million, $24 million and $15 million, respectively. The size of the receivables facility was increased from $300 million to $350 million in August 1999. For information on the reduction in the size of the facility in 2002, see Note 22(b).

The weighted average interest rate on short-term borrowings as of December 31, 1999, 2000 and 2001 was 5.84%, 7.43% and 3.29%, respectively.

The Company's revolving credit agreements are broadly-syndicated committed facilities which contain "material adverse change" clauses that could impact its ability to borrow under these facilities. The "material adverse change" clauses generally relate to the Company's ability to perform its obligations under the agreements.

(b) LONG-TERM DEBT

Maturities. The Company's maturities of long-term debt and sinking fund requirements, excluding the ZENS obligation, are $538 million in 2002, $1.2 billion in 2003, $90 million in 2004, $390 million in 2005 and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$218 million in 2006. The 2002 and 2003 amounts are net of sinking fund payments that can be satisfied with bonds that had been acquired and retired as of December 31, 2001.

Liens. At December 31, 2001, substantially all physical assets used in the conduct of the business and operations of the Electric Operations business segment are subject to liens securing the First Mortgage Bonds. After the Restructuring, only the assets of the transmission and distribution utility are expected to be subject to liens securing the First Mortgage Bonds. Sinking fund requirements on the First Mortgage Bonds may be satisfied by certification of property additions at 100% of the requirements as defined by the Mortgage and Deed of Trust. Sinking or improvement/replacement fund requirements for 1999, 2000 and 2001 have been satisfied by certification of property additions. The replacement fund requirement to be satisfied in 2002 is $334 million.

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

Securitization. For a discussion of the securitization financing completed in October 2001, see Note 4(a).

Purchase of Convertible Debentures. At December 31, 2000 and 2001, RERC Corp. had issued and outstanding $98 million and $86 million, respectively, aggregate principal amount ($93 million and $82 million, respectively, carrying amount) of its 6% Convertible Subordinated Debentures due 2012 (Subordinated Debentures). The holders of the Subordinated Debentures receive interest quarterly and have the right at any time on or before the maturity date thereof to convert each Subordinated Debenture into 0.65 shares of Reliant Energy common stock and $14.24 in cash. After the Restructuring, each Subordinated Debenture will be convertible into 0.65 shares of CenterPoint Energy common stock and $14.24 in cash. After the Distribution, each Subordinated Debenture will be convertible into an increased number of CenterPoint Energy shares based on a formula as provided in the relevant indenture and $14.24 in cash. During 2001, RERC Corp. purchased $11 million aggregate principal amount of its Subordinated Debentures.

TERM Notes. RERC 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, which gives it the right to have the TERM Notes redeemed from the investors on November 1, 2003 and then remarketed if it chooses to exercise the option. The TERM Notes are unsecured obligations of RERC Corp. which 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, RERC 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 RERC Corp., within the 52-week period beginning November 1, 2003. During this period and prior to remarketing, the TERM Notes will bear interest at rates, adjusted weekly, based on an index selected by RERC Corp. 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 RERC Corp.'s applicable credit spread at the time of such remarketing.

Extinguishments of Debt. During the second quarter of 2000, REPGB negotiated the repurchase of $272 million aggregate principal amount of its long-term debt for a total cost of $286 million, including $14 million in expenses. The book value of the debt repurchased was $293 million, resulting in an extraordinary gain on the early extinguishment of long-term debt of $7 million. Borrowings under a short-term

176

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

banking facility and proceeds from the sale of trading securities by REPGB were used to finance the debt repurchase.

During 1999, the Company's regulated operations recorded losses from the extinguishment of debt of $22 million. There were no losses recorded from the early extinguishment of debt in 2000 and 2001. As these costs will be recovered through regulated cash flows, these costs have been deferred and a regulatory asset has been recorded. For further discussion regarding the accounting, see Note 4(a).

(c) OFF-BALANCE SHEET FINANCINGS

For information regarding off-balance sheet financings and REMA sale-leaseback transactions related to Reliant Resources, see Notes 14(b) and 14(l).

(11) TRUST PREFERRED SECURITIES

In February 1997, two Delaware statutory business trusts created by Reliant Energy (HL&P Capital Trust I and HL&P Capital Trust II) issued to the public (a) $250 million aggregate amount of preferred securities and (b) $100 million aggregate amount of capital securities, respectively. In February 1999, a Delaware statutory business trust created by Reliant Energy (REI Trust I) issued $375 million aggregate amount of preferred securities to the public. Reliant Energy accounts for REI Trust I, HL&P Capital Trust I and HL&P Capital Trust II as wholly owned consolidated subsidiaries. Each of the trusts used the proceeds of the offerings to purchase junior subordinated debentures issued by Reliant Energy having interest rates and maturity dates that correspond to the distribution rates and the mandatory redemption dates for each series of preferred securities or capital securities.

The junior subordinated debentures are the trusts' sole assets and their entire operations. Reliant Energy considers its obligations under the Amended and Restated Declaration of Trust, Indenture, Guaranty Agreement and, where applicable, Agreement as to Expenses and Liabilities, relating to each series of preferred securities or capital securities, taken together, to constitute a full and unconditional guarantee by Reliant Energy of each trust's obligations with respect to the respective series of preferred securities or capital securities.

The preferred securities and capital securities are mandatorily redeemable upon the repayment of the related series of junior subordinated debentures at their stated maturity or earlier redemption. Subject to some limitations, Reliant Energy has the option of deferring payments of interest on the junior subordinated debentures. During any deferral or event of default, Reliant Energy may not pay dividends on its capital stock. As of December 31, 2001, no interest payments on the junior subordinated debentures had been deferred.

In June 1996, a Delaware statutory business trust created by RERC Corp. (RERC Trust) issued $173 million aggregate amount of convertible preferred securities to the public. RERC Corp. accounts for RERC Trust as a wholly owned consolidated subsidiary. RERC Trust used the proceeds of the offering to purchase convertible junior subordinated debentures issued by RERC 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 RERC Trust's sole assets and its entire operations. RERC 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 RERC Corp. of RERC 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. Each convertible preferred security is convertible at the option of the holder into $33.62 of cash and 1.55 shares of Reliant Energy common stock. During 2000 and 2001, convertible preferred securities of $0.3 million and $0.04 million,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively, were converted. As of December 31, 2000 and 2001, $0.4 million liquidation amount of convertible preferred securities were outstanding. Subject to some limitations, RERC Corp. has the option of deferring payments of interest on the convertible junior subordinated debentures. During any deferral or event of default, RERC Corp. may not pay dividends on its common stock to Reliant Energy. As of December 31, 2001, no interest payments on the convertible junior subordinated debentures had been deferred.

The outstanding aggregate liquidation amount, distribution rate and mandatory redemption date of each series of the preferred securities, convertible preferred securities or capital securities of the trusts and the identity and similar terms of each related series of junior subordinated debentures are as follows:

                           AGGREGATE
                          LIQUIDATION
                         AMOUNTS AS OF                            MANDATORY
                         DECEMBER 31,       DISTRIBUTION          REDEMPTION
TRUST                    2000 AND 2001   RATE/INTEREST RATE   DATE/MATURITY DATE   JUNIOR SUBORDINATED DEBENTURES
-----                    -------------   ------------------   ------------------   ------------------------------
                         (IN MILLIONS)
REI Trust I............      $375               7.20%           March 2048         7.20% Junior Subordinated
                                                                                   Debentures due 2048
HL&P Capital Trust I...      $250              8.125%           March 2046         8.125% Junior Subordinated
                                                                                   Deferrable Interest Debentures
                                                                                   Series A
HL&P Capital Trust           $100              8.257%          February 2037       8.257% Junior Subordinated
  II...................                                                            Deferrable Interest Debentures
                                                                                   Series B
RERC Trust.............      $  1               6.25%            June 2026         6.25% Convertible Junior
                                                                                   Subordinated Debentures due
                                                                                   2026

(12) STOCK-BASED INCENTIVE COMPENSATION PLANS AND RETIREMENT PLANS

(a) INCENTIVE COMPENSATION PLANS

The Company has long-term incentive compensation plans (LICP) that provide for the issuance of stock-based incentives, including performance-based shares, performance-based units, restricted shares, stock options and stock appreciation rights, to key employees of the Company, including officers. As of December 31, 2001, 716 current and 54 former employees of the Company participate in the plans. A maximum of approximately 39 million shares of Reliant Energy common stock may be issued under these plans.

Awards in Reliant Resources common stock have been made from the Reliant Resources, Inc. Long-Term Incentive Plan (Resources LICP). Under the Resources LICP, participant awards may be in the form of stock options, performance-based shares or units, stock appreciation rights, restricted or unrestricted grants of common stock. As of December 31, 2001, 735 current employees and 4 former employees of Reliant Resources participate in the Resources LICP.

Performance-based shares, performance-based units and restricted shares are granted to employees without cost to the participants. The performance shares and units vest three years after the grant date based upon the performance of the Company over a three-year cycle, except as discussed below. The restricted shares vest to the participants at various times ranging from immediate vesting to vesting at the end of a six-year period. Upon vesting, the shares are issued to the plans' participants.

In 2001, awards of Reliant Resources performance-based shares and restricted shares have been made to Reliant Resources participants. For all other participants, awards have been made in performance-based units and restricted shares of Reliant Energy. During 1999, 2000 and 2001, the Company, including Reliant Resources, recorded compensation expense of $8 million, $22 million and $9 million, respectively, related to performance-based shares, performance-based units and restricted share grants.

178

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes Reliant Energy's performance-based units, performance-based shares and restricted share grant activity for the years 1999 through 2001:

                                               NUMBER OF           NUMBER OF
                                           PERFORMANCE-BASED   PERFORMANCE-BASED       NUMBER OF
                                                 UNITS              SHARES         RESTRICTED SHARES
                                           -----------------   -----------------   -----------------
Outstanding at December 31, 1998.........            --              904,997             161,385
  Granted................................            --              431,643             113,837
  Canceled...............................            --             (228,215)               (646)
  Released to participants...............            --             (179,958)             (3,953)
                                                -------           ----------           ---------
Outstanding at December 31, 1999.........            --              928,467             270,623
  Granted................................            --              394,942             206,395
  Canceled...............................            --              (81,541)            (13,060)
  Released to participants...............            --             (174,001)             (5,346)
                                                -------           ----------           ---------
Outstanding at December 31, 2000.........            --            1,067,867             458,612
  Granted................................        83,670                   --               2,623
  Canceled...............................            --              (17,154)             (2,778)
  Released to participants...............            --             (424,623)           (249,895)
                                                -------           ----------           ---------
Outstanding at December 31, 2001.........        83,670              626,090             208,562
                                                =======           ==========           =========
Weighted average fair value granted for
  1999...................................       $    --           $    29.23           $   26.88
                                                =======           ==========           =========
Weighted average fair value granted for
  2000...................................       $    --           $    25.19           $   28.03
                                                =======           ==========           =========
Weighted average fair value granted for
  2001...................................       $    --           $       --           $   38.13
                                                =======           ==========           =========

The maximum value associated with the performance-based units granted in 2001 was $150.

The following table summarizes Reliant Resources' performance-based shares and restricted share grant activity during 2001:

                                                           NUMBER OF
                                                       PERFORMANCE-BASED       NUMBER OF
                                                            SHARES         RESTRICTED SHARES
                                                       -----------------   -----------------
Outstanding at December 31, 2000.....................            --                  --
  Granted............................................       693,135             156,674
  Canceled...........................................            --                  --
  Released to participants...........................            --                  --
                                                           --------            --------
Outstanding at December 31, 2001.....................       693,135             156,674
                                                           ========            ========
Weighted average fair value granted for 2001.........      $  22.50            $  33.11
                                                           ========            ========

Assuming the Distribution occurs during calendar year 2002, the Company's compensation committee will authorize the conversion of outstanding Reliant Energy performance-based shares for the performance cycle ending December 31, 2002 to a number of time-based restricted shares of Reliant Energy's common stock equal to the number of performance-based shares that would have vested if the performance objectives for the performance cycle were achieved at the maximum level. These time-based restricted shares will vest if the participant holding the shares remains employed with the Company or with Reliant Resources and its subsidiaries through December 31, 2002. On the date of the Distribution, holders of these time-based restricted shares will receive shares of Reliant Resources common stock in the same manner as other holders

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Reliant Energy common stock, but these shares of common stock will be subject to the same time-based vesting schedule, as well as to the terms and conditions of the plan under which the original performance shares were granted. Thus, following the Distribution, employees who held performance-based shares under the LICP for the performance cycle ending December 31, 2002 will hold time-based restricted shares of Reliant Energy common stock and time-based restricted shares of Reliant Resources common stock, which will vest following continuous employment through December 31, 2002.

Under both the Resources LICP and the Company's plans, stock options generally become exercisable in one-third increments on each of the first through third anniversaries of the grant date. The exercise price is the average of the high and low sales price of the common stock on the New York Stock Exchange on the grant date. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for these fixed stock options. The following table summarizes stock option activity related to the Company and Reliant Resources for the years 1999 through 2001:

                                           RELIANT ENERGY                RELIANT RESOURCES
                                    -----------------------------   ----------------------------
                                    NUMBER OF    WEIGHTED AVERAGE   NUMBER OF   WEIGHTED AVERAGE
                                      SHARES      EXERCISE PRICE     SHARES      EXERCISE PRICE
                                    ----------   ----------------   ---------   ----------------
Outstanding at December 31,
  1998............................   2,945,654        $24.87
  Options granted.................   3,806,051         26.74
  Options exercised...............     (83,610)        19.38
  Options canceled................    (205,124)        25.96
                                    ----------
Outstanding at December 31,
  1999............................   6,462,971         25.99
                                    ==========
  Options granted.................   5,936,510         22.14
  Options exercised...............  (1,061,169)        25.01
  Options canceled................  (1,295,877)        23.96
                                    ----------
Outstanding at December 31,
  2000............................  10,042,435         24.13
                                    ==========
  Options granted.................   1,887,668         46.23        8,826,432        $29.82
  Options exercised...............  (1,812,022)        24.11               --            --
  Options canceled................    (289,610)        27.38         (245,830)        28.28
                                    ----------                      ---------
Outstanding at December 31,
  2001............................   9,828,471         28.34        8,580,602         29.86
                                    ==========                      =========
Options exercisable at December
  31, 1999........................   1,350,374        $23.87
                                    ==========        ======
Options exercisable at December
  31, 2000........................   2,258,397        $25.76
                                    ==========        ======
Options exercisable at December
  31, 2001........................   3,646,228        $25.38            6,500        $30.00
                                    ==========        ======        =========        ======

Exercise prices for Reliant Energy stock options outstanding held by Company employees ranged from $7.00 to $50.00. Exercise prices for Reliant Resources stock options outstanding held by Company employees

180

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ranged from $15.65 to $34.03. The following tables provide information with respect to outstanding Reliant Energy and Reliant Resources stock options held by the Company's employees on December 31, 2001:

                                                               RELIANT ENERGY
                                              ------------------------------------------------
                                                                             REMAINING AVERAGE
                                                OPTIONS        AVERAGE       CONTRACTUAL LIFE
                                              OUTSTANDING   EXERCISE PRICE        (YEARS)
                                              -----------   --------------   -----------------
Ranges of Exercise Prices:
  $7.00-$21.00..............................   3,974,064        $20.46              8.1
  $21.01-$26.00.............................   1,107,368         25.20              6.0
  $26.01-$30.00.............................   2,450,119         27.16              7.3
  $30.01-$50.00.............................   2,296,920         44.73              9.2
                                               ---------
          Total.............................   9,828,471         28.34              7.9
                                               =========

                                                             RELIANT RESOURCES
                                              ------------------------------------------------
                                                                             REMAINING AVERAGE
                                                OPTIONS        AVERAGE       CONTRACTUAL LIFE
                                              OUTSTANDING   EXERCISE PRICE        (YEARS)
                                              -----------   --------------   -----------------
Ranges of Exercise Prices:
  $15.65-$23.50.............................      95,436        $20.62              9.7
  $23.51-$34.03.............................   8,485,166         29.97              9.2
                                               ---------
          Total.............................   8,580,602         29.86              9.2
                                               =========

The following table provides information with respect to Reliant Energy stock options exercisable at December 31, 2001:

                                                                OPTIONS        AVERAGE
                                                              EXERCISABLE   EXERCISE PRICE
                                                              -----------   --------------
Ranges of Exercise Prices:
  $7.00-$21.00..............................................     991,464        $20.36
  $21.01-$26.00.............................................   1,015,723         25.24
  $26.01-$30.00.............................................   1,439,165         27.23
  $30.01-$47.22.............................................     199,876         37.70
                                                               ---------
          Total.............................................   3,646,228         25.38
                                                               =========

As of December 31, 2001, Reliant Resources had 6,500 options exercisable at an exercise price of $30.00.

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company applies the guidance contained in APB Opinion No. 25 and discloses the required pro forma effect on net income of the fair value based method of accounting for stock compensation. The weighted average fair values at date of grant for Reliant Energy options granted during 1999, 2000 and 2001 were $3.13, $5.07 and $9.25, respectively. The weighted average fair value at date of grant for Reliant Resources options granted

181

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during 2001 was $13.35. The fair values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

                                                                 RELIANT ENERGY
                                                           --------------------------
                                                            1999      2000      2001
                                                           ------    ------    ------
Expected life in years...................................       5         5         5
Interest rate............................................    5.10%     6.57%     4.87%
Volatility...............................................   21.23%    24.00%    31.91%
Expected common stock dividend...........................  $ 1.50    $ 1.50    $ 1.50

                                                               RELIANT RESOURCES
                                                                     2001
                                                               -----------------
Expected life in years......................................             5
Interest rate...............................................          4.94%
Volatility..................................................         42.65%

Pro forma information for 1999, 2000 and 2001 is provided to take into account the amortization of stock-based compensation to expense on a straight-line basis over the vesting period. Had compensation costs been determined as prescribed by SFAS No. 123, the Company's, including Reliant Resources', net income would have been reduced by $5 million, $10 million, and $26 million in 1999, 2000 and 2001, respectively. Earnings per share would have been reduced by $0.02 per share, $0.03 per share and $0.09 per share in 1999, 2000 and 2001, respectively.

Subject to the Distribution, the Company expects to convert all outstanding Reliant Energy stock options granted prior to the Offering to a combination of adjusted Reliant Energy stock options and Reliant Resources stock options. For the converted stock options, the sum of the intrinsic value of the Reliant Energy stock options immediately prior to the record date of the Distribution will equal the sum of the intrinsic values of the adjusted Reliant Energy stock options and the Reliant Resources stock options granted immediately after the record date of the Distribution. As such, Reliant Resources employees who do not work for the Company will hold stock options of the Company. Both the number and the exercise price of all outstanding Reliant Energy stock options that were granted on or after the Offering will be adjusted to maintain the total intrinsic value of the grants.

(b) PENSION

The Company sponsors multiple pension plans. The principal retiree benefit plans are discussed below. Other such plans are not significant individually or in the aggregate.

The Company maintains a pension plan which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. The benefit accrual is in the form of a cash balance of 4% of annual pay. 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 for transition benefits through 2008.

The Company's funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. The assets of the pension plans consist principally of common stocks and interest bearing obligations. Included in such assets are approximately 4.5 million shares of Reliant Energy common stock contributed from treasury stock during 2001. As of December 31, 2001, the fair value of Reliant Energy common stock was $120 million or 8.7% of the pension plan assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REPGB is a foreign subsidiary of the Company and participates along with other companies in the Netherlands in making payments to pension funds which are not administered by the Company. The Company treats these payments as a defined contribution pension plan which provides retirement benefits for most of its employees. The contributions are principally based on a percentage of the employee's base compensation and charged against income as incurred. This expense was $2 million, $6 million and $6 million for the three months ended December 31, 1999 and during 2000 and 2001, respectively.

Net pension cost for the Company (excluding REPGB) includes the following components:

                                                             YEAR ENDED DECEMBER 31,
                                                             -----------------------
                                                             1999     2000     2001
                                                             -----    -----    -----
                                                                  (IN MILLIONS)
Service cost -- benefits earned during the period..........  $  34    $  33    $  37
Interest cost on projected benefit obligation..............     88       88       99
Expected return on plan assets.............................   (141)    (146)    (138)
Net amortization...........................................     (5)     (12)      (3)
Curtailment................................................     --       --      (23)
Benefit enhancement........................................     --       --       69
                                                             -----    -----    -----
  Net pension (benefit) cost...............................  $ (24)   $ (37)   $  41
                                                             =====    =====    =====

Following are reconciliations of the Company's beginning and ending balances of its retirement plan benefit obligation, plan assets and funded status for 2000 and 2001 (excluding REPGB):

                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       2001
                                                              -------    -------
                                                                (IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year.......................  $ 1,232    $ 1,319
Service cost................................................       33         37
Interest cost...............................................       88         99
Benefits paid...............................................      (85)       (92)
Plan amendments.............................................        3         --
Acquisitions................................................        1         --
Transfer of obligation to non-qualified pension plan........      (11)        --
Curtailment and benefit enhancement.........................       --         57
Actuarial loss..............................................       58         71
                                                              -------    -------
Benefit obligation, end of year.............................  $ 1,319    $ 1,491
                                                              =======    =======
CHANGE IN PLAN ASSETS
Plan assets, beginning of year..............................  $ 1,513    $ 1,418
Employer contributions......................................       --        107
Benefits paid...............................................      (85)       (92)
Actual investment return....................................      (11)       (56)
Acquisitions................................................        1         --
                                                              -------    -------
Plan assets, end of year....................................  $ 1,418    $ 1,377
                                                              =======    =======

183

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       2001
                                                              -------    -------
                                                                (IN MILLIONS)
RECONCILIATION OF FUNDED STATUS
Funded status...............................................  $    99    $  (114)
Unrecognized transition asset...............................       (4)        (2)
Unrecognized prior service cost.............................     (125)       (92)
Unrecognized actuarial loss.................................      227        471
                                                              -------    -------
Net amount recognized at end of year........................  $   197    $   263
                                                              =======    =======
ACTUARIAL ASSUMPTIONS
Discount rate...............................................      7.5%      7.25%
Rate of increase in compensation levels.....................  3.5-5.5%   3.5-5.5%
Expected long-term rate of return on assets.................     10.0%       9.5%

The transitional asset at January 1, 1986, is being recognized over 17 years, and the prior service cost is being recognized over 15 years.

Effective March 1, 2001, the Company no longer accrues benefits under a noncontributory pension plan for its domestic non-union employees of Reliant Resources and its participating subsidiaries' employees (Resources Participants). Effective March 1, 2001, each Resources Participant's unvested accrued benefit was fully vested and a one-time benefit enhancement was provided to some qualifying participants. After the Distribution, each Resources Participant may elect to have his accrued benefit (a) left in the Company's pension plan, (b) rolled over to a new Reliant Resources savings plan or an individual IRA account, or (c) paid in a lump sum or annuity distribution. During the first quarter of 2001, the Company incurred a charge to earnings of $84 million (pre-tax) for a one-time benefit enhancement and a gain of $23 million (pre-tax) related to the curtailment of the Company's pension plan.

In addition to the noncontributory pension plans discussed above, the Company maintains non-qualified pension plans which allow participants to retain the benefits to which they would have been entitled under the Company's noncontributory pension plan except for the federally mandated limits on these benefits or on the level of salary on which these benefits may be calculated. The expense associated with these non-qualified plans was $5 million, $25 million and $25 million in 1999, 2000 and 2001, respectively. Expense for 2001 includes a one-time benefit enhancement of $15 million, which is included in the $84 million discussed above. The accrued benefit liability for the nonqualified pension plan was $92 million and $99 million at December 31, 2000 and 2001, respectively. In addition, these accrued benefit liabilities include the recognition of minimum liability adjustments of $30 million as of December 31, 2000 and $20 million as of December 31, 2001, which are reported as a component of comprehensive income, net of income tax effects.

The Company's prepaid pension asset is presented in the Consolidated Balance Sheets under the caption "Other Assets -- Other."

(c) SAVINGS PLAN

The Company has employee savings plans that qualify as cash or deferred arrangements under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Under the plans, participating employees may contribute a portion of their compensation, pre-tax or after-tax, generally up to a maximum of 16% of compensation. The Company matches 75% to 125% (based on certain performance goals achieved) of the first 6% of each employee's compensation contributed, with most matching contributions subject to a vesting schedule. A substantial portion of the Company's match is invested in Reliant Energy common stock.

184

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective March 1, 2001, the Company amended its savings plan for Reliant Resources participants and REMA's non-union employee savings plan to generally provide for (a) employer matching contributions equal to 100% of the first 6% of each employee's contributions to the plan, (b) a 2% employer contribution on a payroll basis for 2002, limited to the first $85,000 of compensation, and (c) discretionary employer contributions up to 3% at the end of the plan year based on each employee's eligible compensation. Effective March 1, 2001, all prior and future employer contributions on behalf of such employees are fully vested.

The Company's savings plan has a leveraged Employee Stock Ownership Plan (ESOP) component. The Company may use ESOP shares to satisfy its obligation to make matching contributions under the Company's savings plan. Debt service on the ESOP loan is paid using all dividends on shares in the ESOP, interest earnings on funds held in the ESOP and cash contributions by the Company. Shares of Reliant Energy common stock are released from the encumbrance of the ESOP loan based on the proportion of debt service paid during the period.

The Company recognizes benefit expense for the ESOP equal to the fair value of the ESOP shares committed to be released. The Company credits to unearned ESOP shares the original purchase price of ESOP shares committed to be released to plan participants with the difference between the fair value of the shares and the original purchase price recorded to common stock. Dividends on allocated ESOP shares are recorded as a reduction to retained earnings. Dividends on unallocated ESOP shares are recorded as a reduction of principal or accrued interest on the ESOP loan.

The ESOP share balances at December 31, 2000 and 2001 were as follows:

                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2000           2001
                                                           ------------   ------------
Allocated shares transferred/distributed from the savings
  plan...................................................     2,397,523      2,740,328
Allocated shares.........................................     7,725,772      8,951,967
Unearned shares..........................................     8,638,889      7,069,889
                                                           ------------   ------------
  Total original ESOP shares.............................    18,762,184     18,762,184
                                                           ============   ============
Fair value of unearned ESOP shares.......................  $374,171,880   $187,493,456
                                                           ============   ============

As a result of the ESOP and the Company stock fund, the savings plan has significant holdings of Reliant Energy common stock. As of December 31, 2000 and 2001, an aggregate of 33,437,216 shares and 33,505,474 shares of Reliant Energy's common stock were held by the savings plan, which represented 66.0% and 56.1% of its investments, respectively. Given the concentration of the investments in Reliant Energy's common stock, the savings plan and its participants have market risk related to this investment.

The Company's savings plan benefit expense was $35 million, $53 million and $55 million in 1999, 2000 and 2001, respectively.

(d) POSTRETIREMENT BENEFITS

The Company sponsors multiple postretirement plans. The principal retiree benefit plans are discussed below. Other such plans are not significant individually or in the aggregate.

The Company provides certain healthcare 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.

185

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Such benefit costs are accrued over the active service period of employees. The net unrecognized transition obligation, resulting from the implementation of accrual accounting, is being amortized over approximately 20 years.

The Company 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.

Net postretirement benefit cost for the Company includes the following components:

                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              1999   2000   2001
                                                              ----   ----   ----
                                                                (IN MILLIONS)
Service cost -- benefits earned during the period...........  $ 5    $  6   $  7
Interest cost on projected benefit obligation...............   26      29     32
Expected return on plan assets..............................   (9)    (11)   (13)
Net amortization............................................   15      12     14
Curtailment.................................................   --      --     40
                                                              ---    ----   ----
  Net postretirement benefit cost...........................  $37    $ 36   $ 80
                                                              ===    ====   ====

Following are reconciliations of the Company's beginning and ending balances of its postretirement benefit plans benefit obligation, plan assets and funded status for 2000 and 2001:

                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                2000          2001
                                                              ---------    ----------
                                                                   (IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year.......................  $    395     $     455
Service cost................................................         6             7
Interest cost...............................................        29            32
Benefits paid...............................................       (27)          (18)
Participant contributions...................................         3             5
Acquisitions................................................        12            --
Plan amendments.............................................         3            --
Foreign exchange impact.....................................        (1)           (2)
Actuarial loss..............................................        35             6
                                                              --------     ---------
Benefit obligation, end of year.............................  $    455     $     485
                                                              ========     =========
CHANGE IN PLAN ASSETS
Plan assets, beginning of year..............................  $    105     $     122
Benefits paid...............................................       (27)          (18)
Employer contributions......................................        37            41
Participant contributions...................................         3             5
Actual investment return....................................         4           (11)
                                                              --------     ---------
Plan assets, end of year....................................  $    122     $     139
                                                              ========     =========

186

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                2000          2001
                                                              ---------    ----------
                                                                   (IN MILLIONS)
RECONCILIATION OF FUNDED STATUS
Funded status...............................................  $   (333)    $    (346)
Unrecognized transition obligation..........................       126            94
Unrecognized prior service cost.............................        88            66
Unrecognized actuarial gain.................................       (52)          (23)
                                                              --------     ---------
Net amount recognized at end of year........................  $   (171)    $    (209)
                                                              ========     =========
ACTUARIAL ASSUMPTIONS
Discount rate...............................................   6.6-7.5%     6.6-7.25%
Expected long-term rate of return on assets.................      10.0%          9.5%
Health care cost trend rates -- Under 65....................       8.0%          7.5%
Health care cost trend rates -- 65 and over.................       9.0%          8.5%

The assumed health care rates gradually decline to 5.5% for both medical categories by 2010. The actuarial gains and losses are due to changes in actuarial assumptions.

If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would increase by approximately 3.6%. The annual effect of the 1% increase on the total of the service and interest costs would be an increase of approximately 3%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would decrease by approximately 3.5%. The annual effect of the 1% decrease on the total of the service and interest costs would be a decrease of 2.9%.

Effective March 1, 2001, the Company discontinued providing subsidized postretirement benefits to its Resources Participants. The Company incurred a pre-tax loss of $40 million during the first quarter of 2001 related to the curtailment of the Company's postretirement obligation.

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

(e) POSTEMPLOYMENT BENEFITS

Net postemployment benefit costs for former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily health care and life insurance benefits for participants in the long-term disability plan) were $11 million, $2 million and $6 million in 1999, 2000 and 2001, respectively.

The Company's postemployment obligation is presented as a liability in the Consolidated Balance Sheets under the caption "Benefit Obligations."

(f) OTHER NON-QUALIFIED PLANS

Since 1985, the Company has had in effect deferred compensation plans which permit eligible participants to elect each year to defer a percentage of that year's salary (prior to December 1993, up to 25% or 40%, depending on age, and beginning in December 1993, up to 100%) and up to 100% of that year's annual bonus. In general, employees who attain the age of 60 during employment and participate in the Company'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 made in 1989 and

187

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsequent years 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 greater of the rate in effect at age 64 or at age 65. Fixed rates of 19% to 24% were established for deferrals made in 1985 through 1988. During 1999, 2000 and 2001, the Company, including Reliant Resources, recorded interest expense related to its deferred compensation obligation of $22 million, $14 million and $17 million, respectively. The discounted deferred compensation obligation recorded by the Company, including Reliant Resources, was $159 million and $161 million as of December 31, 2000 and 2001, respectively.

Each Reliant Resources participant has elected to have his non-qualified deferred compensation plan account balance, after the Distribution: (a) placed in a new Reliant Resources deferred compensation plan, which generally mirrors the former Reliant Energy deferred compensation plans; or, (b) rolled over to the new non-qualified deferred compensation plan discussed below.

Effective January 1, 2002, select key and highly compensated employees were eligible to participate in a new non-qualified deferred compensation plan. The plan allows eligible employees to elect to defer up to 80% of their annual base salary and/or up to 100% of their eligible annual bonus. The Company funds these deferred compensation liabilities by making contributions to a rabbi trust. Plan participants direct the allocation of their deferrals between one or more of the Company's designated investment funds within the rabbi trust. Participants may withdraw their deferrals and accumulated earnings, if any, at any time before their normal distributions would have commenced with a ten percent penalty.

The Company's obligations under other non-qualified plans are presented as a liability in the Consolidated Balance Sheets under the caption "Benefit Obligations."

(g) OTHER EMPLOYEE MATTERS

As of December 31, 2001, approximately 36% of the Company's employees are subject to collective bargaining arrangements, of which contracts covering 8% of the Company's employees will expire prior to December 31, 2002.

(13) INCOME TAXES

The components of income before taxes are as follows:

                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               1999     2000     2001
                                                              -------   -----   -------
                                                                    (IN MILLIONS)
United States...............................................  $2,535    $578    $1,302
Foreign.....................................................      29     180       117
                                                              ------    ----    ------
  Income before income taxes................................  $2,564    $758    $1,419
                                                              ======    ====    ======

188

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's current and deferred components of income tax (benefit) expense were as follows:

                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               1999     2000     2001
                                                              ------   ------   -------
                                                                    (IN MILLIONS)
Current:
  Federal...................................................   $300     $297     $ 625
  State.....................................................      4       25         2
  Foreign...................................................      7       48         1
                                                               ----     ----     -----
     Total current..........................................    311      370       628
                                                               ----     ----     -----
Deferred:
  Federal...................................................    554      (53)     (140)
  State.....................................................     34        1        16
  Foreign...................................................     --       --        (4)
                                                               ----     ----     -----
     Total deferred.........................................    588      (52)     (128)
                                                               ----     ----     -----
Income tax expense..........................................   $899     $318     $ 500
                                                               ====     ====     =====

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

                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               1999     2000     2001
                                                              -------   -----   -------
                                                                    (IN MILLIONS)
Income before income taxes..................................  $2,564    $758    $1,419
Federal statutory rate......................................      35%     35%       35%
                                                              ------    ----    ------
Income taxes at statutory rate..............................     898     265       497
                                                              ------    ----    ------
Net addition (reduction) in taxes resulting from:
  State income taxes, net of valuation allowances and
     federal income tax benefit.............................      25      17        12
  Amortization of investment tax credit.....................     (21)    (18)      (18)
  Excess deferred taxes.....................................      (5)     (4)       (5)
  REPGB tax holiday.........................................      (5)    (44)      (50)
  Federal and foreign valuation allowance...................       1      13         3
  Goodwill amortization.....................................      18      19        25
  Latin America operations..................................      --      69        (5)
  Minority interest.........................................      --      --        29
  Other, net................................................     (12)      1        12
                                                              ------    ----    ------
     Total..................................................       1      53         3
                                                              ------    ----    ------
Income tax expense..........................................  $  899    $318    $  500
                                                              ======    ====    ======
Effective rate..............................................    35.1%   42.0%     35.2%

189

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     2001
                                                              ------   ------
                                                               (IN MILLIONS)
Deferred tax assets:
  Current:
     Unrealized loss on indexed debt securities.............  $  555   $  472
     Allowance for doubtful accounts........................      --       74
     Non-trading derivative assets, net.....................      --       19
     Other..................................................      --        5
                                                              ------   ------
       Total current deferred tax assets....................     555      570
                                                              ------   ------
  Non-current:
     Alternative minimum tax and other credit
      carryforwards.........................................      25       --
     Employee benefits......................................     143      172
     Disallowed plant cost, net.............................      56       53
     Operating loss carryforwards...........................      84       47
     Contingent liabilities associated with discontinuance
      of SFAS No. 71........................................      74       74
     Environmental reserves.................................      25       16
     Allowance for doubtful accounts........................      34       --
     Foreign exchange gains.................................      26       27
     Non-trading derivative liabilities, net................      --      136
     Non-derivative stranded costs liability................      --       73
     Impairment of foreign asset............................      --       52
     Other..................................................      88       94
     Valuation allowance....................................     (68)     (31)
                                                              ------   ------
       Total non-current deferred tax assets................     487      713
                                                              ------   ------
       Total deferred tax assets............................  $1,042   $1,283
                                                              ------   ------
Deferred tax liabilities:
  Current:
     Unrealized gain on AOL Time Warner investment..........  $  864   $  829
     Trading and marketing assets, net......................      --       48
     Hedges of net investment in foreign subsidiaries.......      --       52
                                                              ------   ------
       Total current deferred tax liabilities...............     864      929
                                                              ------   ------

190

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                             DECEMBER 31,
                                                            ---------------
                                                             2000     2001
                                                            ------   ------
                                                             (IN MILLIONS)
Non-current:
   Depreciation...........................................   2,290    2,252
   Regulatory assets, net.................................     380      438
   Deferred state income taxes............................      69       69
   Deferred gas costs.....................................     201       43
   Trading and marketing assets, net......................      --       27
   Stranded costs indemnification receivable..............      --       73
   Other..................................................      96      119
                                                            ------   ------
     Total non-current deferred tax liabilities...........   3,036    3,021
                                                            ------   ------
     Total deferred tax liabilities.......................   3,900    3,950
                                                            ------   ------
        Accumulated deferred income taxes, net............  $2,858   $2,667
                                                            ======   ======

Tax Attribute Carryforwards. At December 31, 2001, the Company had $13 million, $530 million and $45 million of federal, state and foreign net operating loss carryforwards, respectively. The losses are available to offset future respective federal and state taxable income through the year 2021. The foreign losses available to offset future foreign taxable income will not expire under current foreign jurisdiction tax law.

The valuation allowance reflects a net increase of $49 million in 2000 and a net decrease of $37 million in 2001. These net changes resulted from a reassessment of the Company's future ability to use federal, state and foreign tax net operating loss carryforwards.

REPGB Tax Holiday. Under 1998 Dutch tax law relating to the Dutch electricity industry, REPGB qualifies for a zero percent tax rate through December 31, 2001. The tax holiday applies only to the Dutch income earned by REPGB. Beginning January 1, 2002, REPGB is subject to Dutch corporate income tax at standard statutory rates, which is currently 34.5%, and was enacted in 2001. Prior to 2001, the enacted rate was 35%. The effect of the change in the enacted tax rate was not material to the Company's results of operations.

As discussed in Note 14(h), the Dutch parliament has adopted legislation allocating to the Dutch generation sector, including REPGB, financial responsibility for certain stranded costs and other liabilities incurred by NEA prior to the deregulation of the Dutch wholesale market. These obligations include NEA's obligations under an out-of-market gas supply contract and three out-of-market electricity contracts. As a result of the above, the Company recorded a net stranded cost liability of $369 million and a related deferred tax asset of $127 million at December 31, 2001 for the Company's statutorily allocated share of these gas supply and electricity contracts. The Company believes that the costs incurred by REPGB subsequent to the tax holiday ending in 2001 related to these contracts will be deductible for Dutch tax purposes. However, due to uncertainties related to the deductibility of these costs, the Company has recorded an offsetting liability in other liabilities of $127 million as of December 31, 2001.

Undistributed Earnings of Foreign Subsidiaries. The undistributed earnings of foreign subsidiaries aggregated $298 million as of December 31, 2001, which, under existing tax law, will not be subject to U.S. income tax until distributed. Provisions for U.S. taxes have not been accrued on these undistributed earnings, as these earnings have been, or are intended to be, permanently reinvested. In the event of a distribution of these earnings in the form of dividends, the Company will be subject to U.S. income taxes net of allowable foreign tax credits.

191

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Tax Refunds. In 2000, the Company received refunds from the IRS totaling $126 million in taxes and interest following audits of tax returns and refund claims for Reliant Energy's 1985, 1986 and 1990 through 1995 tax years, and RERC Corp.'s 1979 through 1993 tax years. The pre-tax income statement effect of $40 million ($26 million after-tax) was recorded in 2000 in other income in the Company's Statements of Consolidated Income. Of the refunds, $26 million was recorded as a reduction in goodwill. Reliant Energy's consolidated federal income tax returns have been audited and settled through the 1996 tax year. All of RERC Corp.'s consolidated federal income tax returns for tax years ending on or prior to Reliant Energy's acquisition of RERC Corp. have been audited and settled.

(14) COMMITMENTS AND CONTINGENCIES

(a) COMMITMENTS AND GUARANTEES

The following information is presented separately for the Company's regulated and unregulated businesses:

RELIANT ENERGY (TO BECOME CENTERPOINT ENERGY SUBSEQUENT TO THE RESTRUCTURING)

Capital and Environmental Commitments. Reliant Energy anticipates investing up to $397 million in capital and other special project expenditures between 2002 and 2006 for environmental compliance. Reliant Energy anticipates expenditures to be as follows (in millions):

2002........................................................  $234
2003........................................................   132
2004........................................................    28
2005........................................................     3
2006........................................................    --
                                                              ----
  Total.....................................................  $397
                                                              ====

Fuel and Purchased Power. Fuel commitments include several long-term coal, lignite and natural gas contracts related to Texas power generation operations, which have various quantity requirements and durations that are not classified as non-trading derivatives assets and liabilities or trading and marketing assets and liabilities in the Company's Consolidated Balance Sheets as of December 31, 2001 as these contracts meet the SFAS No. 133 exception to be classified as "normal purchases contracts" (see Note 5) or do not meet the definition of a derivative. Minimum payment obligations for coal and transportation agreements that extend through 2009 are approximately $199 million in 2002, $129 million in 2003, $133 million in 2004, $137 million in 2005 and $141 million in 2006. Purchase commitments related to lignite mining and lease agreements, natural gas purchases and storage contracts, and purchased power are not material to Reliant Energy's operations. Prior to January 1, 2002, the Electric Operations business segment was allowed recovery of these costs through rates for electric service. As of December 31, 2001, some of these contracts are above market. Reliant Energy anticipates that stranded costs associated with these obligations will be recoverable through the stranded cost recovery mechanisms contained in the Texas Electric Restructuring Law. For information regarding the Texas Electric Restructuring Law, see Note 4(a).

Reliant Energy's other long-term fuel supply commitments which have various quantity requirements and durations are not considered material either individually or in the aggregate to its results of operations or cash flows.

192

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RELIANT RESOURCES -- UNREGULATED BUSINESSES

As of December 31, 2001, the Wholesale Energy business segment had entered into commitments associated with various non-rate regulated electric generating projects, including commitments for the purchase of combustion turbines, aggregating $440 million. In addition, the Wholesale Energy business segment has options to purchase additional generating equipment for a total estimated cost of $42 million for future generation projects. Reliant Resources is actively attempting to remarket this equipment.

Reliant Resources is a party to several fuel supply contracts, commodity transportation contracts, and purchase power and electric capacity contracts, that have various quantity requirements and durations that are not classified as non-trading derivatives assets and liabilities or trading and marketing assets and liabilities in the Consolidated Balance Sheets as of December 31, 2001 as these contracts meet the SFAS No. 133 exception to be classified as "normal purchases contracts" (see Note 5) or do not meet the definition of a derivative. The maximum duration of any of these commitments is 21 years. Minimum purchase commitment obligations under these agreements are as follows for the next five years, as of December 31, 2001 (in millions):

                                                                              PURCHASED POWER
                                                                              AND ELECTRIC AND
                                                             TRANSPORTATION     GAS CAPACITY
                                          FUEL COMMITMENTS    COMMITMENTS       COMMITMENTS
                                          ----------------   --------------   ----------------
2002....................................        $105              $ 45              $315
2003....................................          39                84               119
2004....................................          45               101                61
2005....................................          45               101                61
2006....................................          45               101                61
                                                ----              ----              ----
  Total.................................        $279              $432              $617
                                                ====              ====              ====

The maximum duration under any individual fuel supply contract and transportation contract is 18 years and 21 years, respectively.

Reliant Resources' aggregate electric capacity commitments, including capacity auction products, are for 7,496 MW, 1,800 MW, 1,000 MW, 1,000 MW and 1,000 MW for 2002, 2003, 2004, 2005 and 2006, respectively. The maximum duration under any individual commitment is five years. Included in the above purchase power and electric capacity commitments are amounts to be acquired from Texas Genco in 2002 and 2003 of $213 million and $57 million, respectively.

As of December 31, 2001, Reliant Resources has commitments, including electric energy and capacity sale contracts and district heating contracts (see Note 14(h)) which are not classified as non-trading derivative assets and liabilities or trading and marketing assets and liabilities in the Consolidated Balance Sheets as these contracts meet the SFAS No. 133 exception to be classified as "normal sales contracts" or do not meet the definition of a derivative. The estimated minimum sale commitments under these contracts are $450 million, $211 million, $194 million, $174 million and $159 million in 2002, 2003, 2004, 2005 and 2006, respectively.

In addition, in January 2002, Reliant Resources began providing retail electric services to approximately 1.5 million residential and small commercial customers previously served by Reliant Energy's electric utility division. Within Reliant Energy's electric utility division's territory, prices that may be charged to residential and small commercial customers by this retail electric service provider are subject to a fixed, specified price (price to beat) at the outset of retail competition. The Texas Utility Commission's regulations allow this retail electric provider to adjust its price to beat fuel factor based on a percentage change in the price of natural gas. In addition, the retail electric provider may also request an adjustment as a result of changes in its price of purchased energy. The retail electric provider may request that its price to beat be adjusted twice a year.

193

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reliant Resources will not be permitted to sell electricity to residential and small commercial customers in the incumbent's traditional service territory at a price other than the price to beat until January 1, 2005, unless before that date the Texas Utility Commission determines that 40% or more of the amount of electric power that was consumed in 2000 by the relevant class of customers is committed to be served by other retail electric providers.

Reliant Resources guarantees the performance of certain of its subsidiaries' trading and hedging obligations. As of December 31, 2001, the fixed maximum amount of such guarantees was $4.7 billion. In addition, Reliant Resources has issued letters of credit totaling $51 million in connection with its trading activities. Reliant Resources does not consider it likely that it would be required to perform or otherwise incur any losses associated with these guarantees.

In addition to the above discussions, Reliant Resources' other commitments have various quantity requirements and durations and are not considered material either individually or in the aggregate to its results of operations or cash flows.

(b) LEASE COMMITMENTS

In August 2000, the Company, entered into separate sale-leaseback transactions with each of three owner-lessors covering the subsidiaries' respective 16.45%, 16.67% and 100% interests in the Conemaugh, Keystone and Shawville generating stations, respectively, acquired in the REMA acquisition. As lessee, the Company leases an interest in each facility from each owner-lessor under a facility lease agreement. The equity interests in all the subsidiaries of REMA are pledged as collateral for REMA's lease obligations. In addition, the subsidiaries have guaranteed the lease obligations. The lease documents contain restrictive covenants that restrict REMA's ability to, among other things, make dividend distributions unless REMA satisfies various conditions. The covenant restricting dividends would be suspended if the direct or indirect parent of REMA, meeting specified criteria, including having a rating on REMA's long-term unsecured senior debt of at least BBB from Standard and Poor's and Baa2 from Moody's, guarantees the lease obligations. The Company will make lease payments through 2029. The lease term expires in 2034. As of December 31, 2001, REMA had $167 million of restricted funds that are available for REMA's working capital needs and to make future lease payments, including a lease payment of $55 million which was made in January 2002.

In the first quarter of 2001, Reliant Resources entered into tolling arrangements with a third party to purchase the rights to utilize and dispatch electric generating capacity of approximately 1,100 MW extending through 2012. This electricity will be generated by two gas-fired, simple-cycle peaking plants, with fuel oil backup which are being constructed by a tolling partner. Reliant Resources anticipates construction to be completed by the summer of 2002, at which time Reliant Resources will commence tolling payments. The tolling arrangements qualify as operating leases.

In February 2001, the Company entered into a lease for office space for Reliant Resources in a building under construction. The lease agreement was assigned by the Company to Reliant Resources by an assignment and assumption agreement in June 2001. The lease term, which commences in the second quarter 2003, is 15 years with two five-year renewal options. Reliant Resources has the right to name the building.

The following table sets forth information concerning the Company's obligations under non-cancelable long-term operating leases at December 31, 2001, which primarily relate to the REMA leases mentioned above. Other non-cancelable, long-term operating leases for Reliant Energy and Reliant Resources principally

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consist of tolling arrangements, as discussed above, rental agreements for building space, data processing equipment and vehicles, including major work equipment.

                                  REMA SALE-LEASE   RELIANT RESOURCES   RELIANT ENERGY
                                    OBLIGATION            OTHER             OTHER        TOTAL
                                  ---------------   -----------------   --------------   ------
                                                          (IN MILLIONS)
2002............................      $  136              $ 52               $ 14        $  202
2003............................          77                72                 12           161
2004............................          84                87                  7           178
2005............................          75                89                  6           170
2006............................          64                90                  5           159
2007 and beyond.................       1,124               469                 66         1,659
                                      ------              ----               ----        ------
  Total.........................      $1,560              $859               $110        $2,529
                                      ======              ====               ====        ======

Total lease expense for all operating leases was $39 million, $62 million and $112 million during 1999, 2000 and 2001, respectively. During 2001, the Company made lease payments related to the REMA lease of $259 million. As of December 31, 2001, the Company had recorded a prepaid lease obligation related to the REMA sale-leaseback of $59 million and $122 million in other current assets and other long-term assets, respectively.

(c) CROSS BORDER LEASES

During the period from 1994 through 1997, under cross border lease transactions, REPGB leased several of its power plants and related equipment and turbines to non-Netherlands based investors (the head leases) and concurrently leased the facilities back under sublease arrangements with remaining terms as of December 31, 2001 of 1 to 23 years. REPGB utilized proceeds from the head lease transactions to prepay its sublease obligations and to provide a source for payment of end of term purchase options and other financial undertakings. The initial sublease obligations totaled $2.4 billion of which $1.6 billion remained outstanding as of December 31, 2001. These transactions involve REPGB providing to a foreign investor an ownership right in (but not necessarily title to) an asset, with a leaseback of that asset. The net proceeds to REPGB of the transactions were recorded as a deferred gain and are currently being amortized to income over the lease terms. At December 31, 2000 and 2001, the unamortized deferred gain on these transactions totaled $77 million and $68 million, respectively. The power plants, related equipment and turbines remain on the financial statements of REPGB and continue to be depreciated.

REPGB is required to maintain minimum insurance coverages, perform minimum annual maintenance and, in specified situations, post letters of credit. REPGB's shareholder is subject to some restrictions with respect to the liquidation of REPGB's shares. In the case of early termination of these contracts, REPGB would be contingently liable for some payments to the sublessors, which at December 31, 2001, are estimated to be $272 million. Starting in March 2000, REPGB was required by some of the lease agreements to obtain standby letters of credit in favor of the sublessors in the event of early termination. The amount of the required letters of credit was $272 million as of December 31, 2001. Commitments for these letters of credit have been obtained as of December 31, 2001.

(d) NAMING RIGHTS TO HOUSTON SPORTS COMPLEX

In October 2000, Reliant Resources acquired the naming rights for the new football stadium for the Houston Texans, the National Football League's newest franchise. In addition, the naming rights cover the entertainment and convention facilities included in the stadium complex. The agreement extends for 32 years. In addition to naming rights, the agreement provides Reliant Resources with significant sponsorship rights.

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The aggregate cost of the naming rights will be approximately $300 million. During the fourth quarter of 2000, Reliant Resources incurred an obligation to pay $12 million in order to secure the long-term commitment and for the initial advertising of which $10 million was expensed in the Statement of Consolidated Income in 2000. Starting in 2002, when the new stadium is operational, Reliant Resources will pay $10 million each year through 2032 for annual advertising under this agreement.

(e) TRANSPORTATION AGREEMENT

A subsidiary of RERC 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 RERC Corp.'s pipeline and related assets. As of December 31, 2000 and 2001, the Company had recorded $41 million in other long-term liabilities in the Company's Consolidated Balance Sheets to reflect the Company's obligation to ANR for the use of 130 million cubic feet (Mmcf)/day of capacity in some of the Company's transportation facilities. The level of transportation will decline to 100 Mmcf/day in the year 2003 with a refund of $5 million to ANR. The ANR Agreement will terminate in 2005 with a refund of $36 million.

(f) LEGAL, ENVIRONMENTAL AND OTHER REGULATORY MATTERS

Legal Matters

Reliant Energy HL&P Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton, Galveston and Pasadena filed suit, for themselves and a proposed class of all similarly situated cities in Reliant Energy HL&P's service area, against Reliant Energy and Houston Industries Finance, Inc. (formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of municipal franchise fees. Plaintiffs claim that they are entitled to 4% of all receipts of any kind for business conducted within these cities over the previous four decades. Because the franchise ordinances at issue affecting Reliant Energy HL&P expressly impose fees only on its own receipts and only from sales of electricity for consumption within a city, the Company regards all of plaintiffs' allegations as spurious and is vigorously contesting the case. The plaintiffs' pleadings asserted that their damages exceeded $250 million. The 269th Judicial District Court for Harris County granted partial summary judgment in favor of Reliant Energy dismissing all claims for franchise fees based on sales tax collections. Other motions for partial summary judgment were denied. A six-week jury trial of the original claimant cities (but not the class of cities) ended on April 4, 2000 (Three Cities case). Although the jury found for Reliant Energy on many issues, they found in favor of the original claimant cities on three issues, and assessed a total of $4 million in actual and $30 million in punitive damages. However, the jury also found in favor of Reliant Energy on the affirmative defense of laches, a defense similar to a statute of limitations defense, due to the original claimant cities having unreasonably delayed bringing their claims during the 43 years since the alleged wrongs began.

The trial court in the Three Cities case granted most of Reliant Energy's motions to disregard the jury's findings. The trial court's rulings reduced the judgment to $1.7 million, including interest, plus an award of $13.7 million in legal fees. In addition, the trial court granted Reliant Energy's motion to decertify the class and vacated its prior orders certifying a class. Following this ruling, 45 cities filed individual suits against Reliant Energy in the District Court of Harris County.

The Three Cities case has been appealed. The Company believes that the $1.7 million damage award resulted from serious errors of law and that it will be set aside by the Texas appellate courts. In addition, the Company believes that because of an agreement between the parties limiting fees to a percentage of the damages, reversal of the award of $13.7 million in attorneys' fees in the Three Cities case is probable.

The extent to which issues in the Three Cities case may affect the claims of the other cities served by Reliant Energy HL&P cannot be assessed until judgments are final and no longer subject to appeal. However, the trial court's rulings disregarding most of the jury's findings are consistent with Texas Supreme Court

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opinions over the past decade. The Company estimates the range of possible outcomes for the plaintiffs to be between zero and $18 million inclusive of interest and attorneys' fees.

California Wholesale Market. Reliant Energy, Reliant Energy Services, REPG and several other subsidiaries of Reliant Resources, as well as three officers of some of these companies, have been named as defendants in class action lawsuits and other lawsuits filed against a number of companies that own generation plants in California and other sellers of electricity in California markets. Pursuant to the terms of the master separation agreement between Reliant Energy and Reliant Resources (see Note 4(c)), Reliant Resources has agreed to indemnify Reliant Energy for any damages arising under these lawsuits and may elect to defend these lawsuits at its own expense. Three of these lawsuits were filed in the Superior Court of the State of California, San Diego County; two were filed in the Superior Court in San Francisco County; and one was filed in the Superior Court of Los Angeles County. While the plaintiffs allege various violations by the defendants of state antitrust laws and state laws against unfair and unlawful business practices, each of the lawsuits is grounded on the central allegation that defendants conspired to drive up the wholesale price of electricity. In addition to injunctive relief, the plaintiffs in these lawsuits seek treble the amount of damages alleged, restitution of alleged overpayments, disgorgement of alleged unlawful profits for sales of electricity, costs of suit and attorneys' fees. The cases were initially removed to federal court and were then assigned to Judge Robert H. Whaley, United States District Judge, pursuant to the federal procedures for multi-district litigation. On July 30, 2000, Judge Whaley remanded the cases to state court. Upon remand to state court, the cases were assigned to Superior Court Judge Janis L. Sammartino pursuant to the California state coordination procedures. On March 4, 2002, Judge Sammartino adopted a schedule proposed by the parties that would result in a trial beginning on March 1, 2004. On March 8, 2002, the plaintiffs filed a single, consolidated complaint naming numerous defendants, including Reliant Energy Services and other Reliant Resources' subsidiaries, that restated the allegations described above and alleged that damages against all defendants could be as much as $1 billion.

Plaintiffs have voluntarily dismissed Reliant Energy from two of the three class actions in which it was named as a defendant. The ultimate outcome of the lawsuits cannot be predicted with any degree of certainty at this time. However, the Company believes, based on its analysis to date of the claims asserted in these lawsuits and the underlying facts, that resolution of these lawsuits will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.

On March 11, 2002, the California Attorney General filed a civil lawsuit in San Francisco Superior Court naming Reliant Energy, Reliant Resources, Reliant Energy Services, REPG, and several other subsidiaries of Reliant Resources as defendants. Pursuant to the terms of the master separation agreement between Reliant Energy and Reliant Resources (see Note 4(c)), Reliant Resources has agreed to indemnify Reliant Energy for any damages arising under these lawsuits and may elect to defend these lawsuits at its own expense. The Attorney General alleges various violations by the defendants of state laws against unfair and unlawful business practices arising out of transactions in the markets for ancillary services run by the California Independent System Operator (Cal ISO). In addition to injunctive relief, the Attorney General seeks restitution and disgorgement of alleged unlawful profits for sales of electricity, and civil penalties. The ultimate outcome of this lawsuit cannot be predicted with any degree of certainty at this time.

On March 19, 2002, the California Attorney General filed a complaint with the FERC naming Reliant Energy Services and "all other public utility sellers" in California as defendants. The complaint alleges that sellers with market-based rates have violated their tariffs by not filing with the FERC transaction-specific information about all of their sales and purchases at market-based rates. The California Attorney General argues that, as a result, all past sales should be subject to refund if found to be above just and reasonable levels. The ultimate outcome of this complaint proceeding cannot be predicted with any degree of certainty at this time. However, the Company believes, based on its analysis to date of the claims asserted in the complaint, the underlying facts, and the relevant statutory and regulatory provisions, that resolution of this

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lawsuit will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the Federal False Claim Act against RERC 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 U.S. 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 was consolidated, together with the other similar False Claim Act cases filed and transferred to the District of Wyoming. Motions to dismiss were denied. The defendants intend to vigorously contest this case.

In addition, RERC, REGT, REFS and MRT have been named as 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, including certain Reliant Energy entities, 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. Plaintiffs initially sued Reliant Energy Services, but that company was dismissed without prejudice on June 8, 2001. Other Reliant Energy entities that were misnamed or duplicative have also been dismissed. MRT and REFS have filed motions to dismiss for lack of personal jurisdiction and are currently responding to discovery on personal jurisdiction. All four Reliant Energy defendants have joined in a motion to dismiss.

The defendants plan to raise significant affirmative defenses based on the terms of the applicable contracts, as well as on the broad waivers and releases in take or pay settlements that were granted by the producer-sellers of natural gas who are putative class members.

Environmental Matters

Clean Air Standards. The Company has participated in a lawsuit against the Texas Natural Resource Conservation Commission (TNRCC) regarding the limitation of the emission of oxides of nitrogen (NOx) in the Houston area. A settlement of the lawsuit was reached with the TNRCC in the second quarter of 2001 and revised emissions limitations were adopted by the TNRCC in the third quarter of 2001. The revised limitations provide for an increase in allowable NOx emissions, compared to the original TNRCC requirements, through 2004. Further emission reduction requirements may or may not be required through 2007, depending upon the outcome of further investigations of regional air quality issues. To achieve the TNRCC NOx reduction requirements, the Company anticipates investing up to $721 million in capital and other special project expenditures by 2004, including costs incurred through December 31, 2001, and potentially up to an additional $88 million between 2004 and 2007. The Texas Electric Restructuring Law provides for stranded cost recovery for expenditures incurred before May 1, 2003 to achieve the NOx reduction requirements.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit against Reliant Energy Gas Transmission Company, Inc., Reliant Energy Pipeline Services, Inc., RERC, Reliant Energy Services, Inc., other Reliant Energy entities and third parties (Docket No. 460, 916-Div. "B"), in the 1st Judicial District Court, Caddo Parish, Louisiana. The petition has now been supplemented five times. As of March 11, 2002, there were 628 plaintiffs, a majority of whom are Louisiana residents who live near the Wilcox Aquifer. 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.

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The suit alleges 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 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 Reliant Energy Gas Transmission Company 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 dimunition 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, 2001, the Company is unable to estimate the monetary damages, if any, that the plaintiffs may be awarded in this matter.

Manufactured Gas Plant Sites. RERC and its predecessors operated a manufactured gas plant (MGP) until 1960 adjacent to the Mississippi River in Minnesota, formerly known as Minneapolis Gas Works (MGW). RERC has substantially completed remediation of the main site other than ongoing water monitoring and treatment. The manufactured gas was stored in separate holders. RERC is negotiating clean-up of one such holder. There are six other former MGP sites in the Minnesota service territory. Remediation has been completed on one site. Of the remaining five sites, RERC believes that two were neither owned nor operated by RERC. RERC believes it has no liability with respect to the sites it neither owned nor operated.

At December 31, 2000 and 2001, RERC had accrued $18 million and $23 million, respectively, for remediation of the Minnesota sites. At December 31, 2001, the estimated range of possible remediation costs was $11 million to $49 million. The cost estimates of the MGW site are based on studies of that site. The remediation costs for the other sites are based on industry average costs for remediation of sites of similar size. The actual remediation costs will be dependent upon the number of sites remediated, the participation of other potentially responsible parties (PRP), if any, and the remediation methods used.

Issues relating to the identification and remediation of MGPs are common in the natural gas distribution industry. The Company has received notices from the United States Environmental Protection Agency and others regarding its status as a PRP for other sites. Based on current information, the Company has not been able to quantify a range of environmental expenditures for potential remediation expenditures with respect to other MGP sites.

Other Minnesota Matters. At December 31, 2000 and 2001, RERC had recorded accruals of $4 million and $5 million, respectively for other environmental matters in Minnesota for which remediation may be required. At December 31, 2001 the estimated range of possible remediation costs was $4 million to $8 million.

Mercury Contamination. The Company'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 the Company at some sites in the past, and the Company has conducted remediation at sites found to be contaminated. Although the Company is 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

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amount of these costs cannot be known at this time, based on experience by the Company and that of others in the natural gas industry to date and on the current regulations regarding remediation of these sites, the Company believes that the costs of any remediation of these sites will not be material to the Company's financial position, results of operations or cash flows.

REMA Ash Disposal Site Closures and Site Contaminations. Under the agreement to acquire REMA (see Note 3(a)), the Company became responsible for liabilities associated with ash disposal site closures and site contamination at the acquired facilities in Pennsylvania and New Jersey prior to a plant closing, except for the first $6 million of remediation costs at the Seward Generating Station. A prior owner retained liabilities associated with the disposal of hazardous substances to off-site locations prior to November 24, 1999. As of December 31, 2000 and 2001, REMA has liabilities associated with six future ash disposal site closures and six current site investigations and environmental remediations. The Company has recorded its estimate of these environmental liabilities in the amount of $36 million as of December 31, 2000 and 2001. The Company expects approximately $16 million will be paid over the next five years.

REPGB Asbestos Abatement and Soil Remediation. Prior to the Company's acquisition of REPGB (see Note 3(b)), REPGB had a $25 million obligation primarily related to asbestos abatement, as required by Dutch law, and soil remediation at six sites. During 2000, the Company initiated a review of potential environmental matters associated with REPGB's properties. REPGB began remediation in 2000 of the properties identified to have exposed asbestos and soil contamination, as required by Dutch law and the terms of some leasehold agreements with municipalities in which the contaminated properties are located. All remediation efforts are to be fully completed by 2005. As of December 31, 2000 and 2001, the recorded estimated undiscounted liability for this asbestos abatement and soil remediation was $24 million and $18 million, respectively.

Other. From time to time the Company 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. The Company has from time to time received notices from regulatory authorities regarding alleged noncompliance with environmental regulatory requirements. In addition, the Company has been named as a defendant in litigation related to allegedly contaminated sites and in recent years has been named, along with numerous others, as a defendant in several lawsuits filed by a large number of individuals who claim injury due to exposure to asbestos while working at sites along the Texas Gulf Coast. Most of these claimants have been workers who participated in construction of various industrial facilities, including power plants, and some of the claimants have worked at locations owned by the Company. The Company anticipates that additional claims like those received may be asserted in the future and intends to continue vigorously contesting claims which it does not consider to have merit. Although their ultimate outcome cannot be predicted at this time, the Company does not believe, based on its experience to date, that these matters, either individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows.

Other Matters

The Company is involved in other legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. Some of these proceedings involve substantial amounts. The Company's management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. The Company's management believes that the disposition of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.

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(g) CALIFORNIA WHOLESALE MARKET UNCERTAINTY.

Receivables. During portions of 2000 and 2001, prices for wholesale electricity in California increased dramatically as a result of a combination of factors, including higher natural gas prices and emission allowance costs, reduction in available hydroelectric generation resources, increased demand, decreased net electric imports and limitations on supply as a result of maintenance and other outages. The resulting supply and demand imbalance disproportionately impacted California utilities that relied too heavily on short-term power markets to meet their load requirements. Although wholesale prices increased, California's deregulation legislation kept retail rates frozen at 10% below 1996 levels for two of California's public utilities, Pacific Gas and Electric (PG&E) and Southern California Edison Company (SCE), until rates were raised by the California Public Utilities Commission (CPUC) early in 2001.

Due to the disparity between wholesale and retail rates, the credit ratings of PG&E and SCE fell below investment grade. Additionally, PG&E filed for protection under the bankruptcy laws on April 6, 2001. As a result, PG&E and SCE are no longer considered creditworthy and since January 17, 2001 have not directly purchased power from third-party suppliers through the Cal ISO to serve their net short load. Pursuant to emergency legislation enacted by the California Legislature, the California Department of Water Resources (CDWR) has negotiated and purchased power through short and long-term contracts on behalf of PG&E and SCE to meet their net short loads. In December 2001, the CDWR began making payments to the Cal ISO for real-time transactions. The CDWR has now made payment through the Cal ISO for most real-time energy deliveries subsequent to January 17, 2001.

In addition, certain contracts intended to serve as collateral for sales to the California Power Exchange (Cal PX) were seized by California Governor Gray Davis in February 2001. The Ninth Circuit Court of Appeals subsequently ruled that Governor Davis' seizure of these contracts was wrongful. The Company has filed a lawsuit, currently pending in California, to require the state of California to compensate it for the seizure of these contracts. Although SCE made a payment on March 1, 2002 to the Cal PX that included amounts it owed to the Company under these contracts, the Company is still seeking to recover the market value of the contracts at the time they were seized by Governor Davis, which was significantly higher than the contract value, and to collect amounts owed as a result of payment defaults by PG&E under the contracts. The timing and ultimate resolution of these claims is uncertain at this time.

On September 20, 2001, PG&E filed a Plan of Reorganization and an accompanying disclosure statement with the bankruptcy court. Under this plan, PG&E would pay all allowed creditor claims in full, through a combination of cash and long-term notes. Components of the plan will require the approval of the FERC, the SEC and the Nuclear Energy Regulatory Commission, in addition to the bankruptcy court. PG&E has stated it seeks to have this plan confirmed by December 31, 2002. A number of parties are contesting PG&E's reorganization plan, including a number of California parties and agencies. The bankruptcy judge in the PG&E case has ordered that the CPUC may file a competing plan. The details of the CPUC's proposal are unknown at this time. The ability of PG&E to have its reorganization plan confirmed, including the provision providing for the payment in full of unsecured creditors, is uncertain at this time.

On October 5, 2001, a federal district court in California entered a stipulated judgment approving a settlement between SCE and the CPUC in an action brought by SCE regarding the recovery of its wholesale power costs under the filed rate doctrine. Under the stipulated judgment, a rate increase approved earlier in 2001 will remain in place until the earlier of SCE recovering $3.3 billion or December 31, 2002. After that date, the CPUC will review the sufficiency of retail rates through December 31, 2005. A consumer organization has appealed the judgment to the Ninth Circuit Court of Appeals, and no hearing has been held to date. Under the stipulated judgment, any settlement with SCE's creditors that is entered into after March 1, 2002 must be approved by the CPUC. The Company has appealed this provision of the judgment. On March 1, 2002, SCE made a payment to the Cal PX that included amounts it owed the Company. The Company has made a filing with FERC seeking an order providing for the disbursement of the funds owed to

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the suppliers. The FERC and the bankruptcy court governing the Cal PX bankruptcy proceedings are considering how to dispense this money and it remains uncertain when those funds will be paid over to the Company.

As of December 31, 2000, the Company was owed a total of $282 million by the Cal PX and the Cal ISO. As of December 31, 2001, the Company was owed a total of $302 million by the Cal ISO, the Cal PX, the CDWR, and California Energy Resources Scheduling for energy sales in the California wholesale market during the fourth quarter of 2000 through December 31, 2001. From January 1, 2002 through March 26, 2002, the Company has collected $45 million of these receivable balances. As of December 31, 2001, the Company had a pre-tax provision of $68 million against receivable balances related to energy sales in the California market, including $39 million recorded in 2000 and $29 million recorded in 2001. Management will continue to assess the collectability of these receivables based on further developments affecting the California electricity market and the market participants described herein.

FERC Market Mitigation. In response to the filing of a number of complaints challenging the level of wholesale prices, the FERC initiated a staff investigation and issued a number of orders implementing a series of wholesale market reforms. Under these orders, and subject to review and adjustment based on the pending refund proceeding described below, the Company may face an as yet undetermined amount of refund liability. See "-- FERC Refunds" below. Under these orders, for the period January 1, 2001 through June 19, 2001, approximately $20 million of the $149 million charged by the Company for sales in California to the Cal ISO and the Cal PX were identified as being subject to possible refunds. During the second quarter of 2001, the Company accrued refunds of $15 million, $3 million of which had been previously expensed during the first quarter of 2001.

On April 26, 2001, the FERC issued an order replacing the previous price review procedures and establishing a market monitoring and mitigation plan, effective May 29, 2001, for the California markets. The plan establishes a cap on prices during periods when power reserves fall below 7% in the Cal ISO (reserve deficiency periods). The Cal ISO is instructed to use data submitted confidentially by gas-fired generators in California and daily indices of natural gas and emissions allowance costs to establish the market-clearing price in real-time based on the marginal cost of the highest-cost generator called to run. The plan also requires generators in California to offer all their available capacity for sale in the real-time market, and conditions sellers' market-based rate authority such that sellers engaging in certain bidding practices will be subject to increased scrutiny by the FERC, potential refunds and even revocation of their market-based rate authority.

On June 19, 2001, the FERC issued an order modifying the market monitoring and mitigation plan adopted in its April 26 order, to apply price controls to all hours, instead of just hours of low operating reserve, and to extend the mitigation measures to other Western states in addition to California, including Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming. The FERC set July 2, 2001 as the refund effective date for sales subject to the price mitigation plan throughout the West region. This means that transactions after that date may be subject to refund if found to be unjust or unreasonable. The proxy market clearing price calculated by the Cal ISO will apply during periods of reserve deficiency to all sales in the Cal ISO and Western spot markets. In non-reserve deficiency hours in California, the maximum price in California and the other Western states will be capped at 85% of the highest Cal ISO hourly market clearing price established during the most recent reserve deficiency period. Sellers other than marketers will be allowed to bid higher than the maximum prices, but such bids are subject to justification and potential refund. Justification of higher prices is limited to establishing higher actual gas costs than the proxy calculation averages and making a showing that conditions in natural gas markets changed significantly. The modified monitoring and mitigation plan went into effect June 20, 2001, and will terminate on September 30, 2002, covering two summer peak seasons, or approximately 16 months.

On December 19, 2001, the FERC issued a series of orders on price mitigation in California and the West region. These orders largely maintained existing mitigation mechanisms, but did make a temporary modifica-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tion to the way that mitigated market clearing prices will be set during the winter months, allowing the maximum prices to rise if gas prices rise. The FERC removed the requirement that non-reserve deficiency prices be limited to 85% of the most recent reserve deficiency prices, allowing prices to rise to a mitigated clearing price of $108/MWh (above which price transactions must be justified as described above). In addition, the FERC determined that if gas prices in California rise by 10%, the mitigated price may be revised to take that change into account. The formula will then track subsequent cumulative changes of at least 10%, but may not fall below a maximum price of $108/MWh. This modification is effective December 20, 2001 through April 30, 2002, at which point the previous mitigation formula is reinstated.

Also, the December 19 orders affirm the June 19 order's requirement that generators must offer all available capacity for sale in the real-time market. As a result of this requirement, the Company's opportunity to sell ancillary services in the West region in the future may be reduced. During 2001, the Company recorded $42 million in revenues related to ancillary services in the West region.

In addition to the impact on ancillary services sales, certain aspects of the December 19, 2001 orders may have retroactive application that may affect prices charged in the West region since June 21, 2001. Because the precise application of the December 19, 2001 order is not known at this time, the Company cannot anticipate the resulting impact on earnings.

The Company believes that while the mitigation plan will reduce volatility in the market, the Company will nevertheless be able to profitably operate its facilities in the West. Additionally, as noted above, the mitigation plan allows sellers, such as the Company, to justify prices above the proxy price. However, previous efforts by the Company to justify prices above the proxy price have been rejected by the FERC and there is no certainty that the FERC will allow for the recovery of costs above the proxy price. Finally, any adverse impacts of the mitigation plan on the Company's operations would be mitigated, in part, by the Company's forward hedging activities.

FERC Refunds. The FERC issued an order on July 25, 2001 adopting a refund methodology and initiating a hearing schedule to determine (1) revised mitigated prices for each hour from October 2, 2000 through June 20, 2001; (2) the amount owed in refunds by each supplier according to the methodology (these amounts may be in addition to or in place of the refund amounts previously determined by the FERC); and (3) the amount currently owed to each supplier. The amounts of any refunds will be determined by the FERC after the conclusion of the hearing process. On December 19, 2001, the FERC issued an order modifying the methodology to be used to determine refund amounts. The schedule currently anticipates that the Administrative Law Judge will make his refund amount recommendations to the FERC in October 2002. However, the Company does not know when the FERC will issue its final decision. The Company has not reserved any amounts for potential future refund liability resulting from the FERC refund hearing, nor can it currently predict the amount of these potential refunds, if any, because the methodology used to calculate these refunds is not final and will depend on information that is still subject to review and challenge in the hearing process. Any refunds that are determined in the FERC proceeding will likely be offset against unpaid amounts owed, if any, to the Company for its prior sales.

On November 20, 2001, the FERC instituted an investigation under Section 206 of the Federal Power Act regarding the tariffs of all sellers with market-based rates authority, including the Company. In this proceeding, the FERC conditions the market-based rate authority of all sellers on their not engaging in anti-competitive behavior. Such condition will apply upon a further order from FERC establishing a refund effective date. This condition allows the FERC, if it determines that a seller has engaged in anti-competitive behavior subsequent to the start of the refund effective period, to order refunds back to the date of such behavior. The FERC invited comments regarding this proposal, and the Company has filed comments in opposition to the proposal. On March 11, 2002, the FERC's Staff held a conference with market participants to discuss the comments FERC has received, and possible modification of the proposed conditions to address concerns raised in the comments while protecting consumers against anticompetitive behavior. The timing of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

further action by FERC is uncertain. If the FERC does not modify or reject its proposed approach for dealing with anti-competitive behavior, the Company's future earnings may be affected by the open-ended refund obligation.

On February 13, 2002, the FERC issued an order initiating a staff investigation into potential manipulation of electric and natural gas prices in the Western region for the period January 1, 2000 forward. While this order does not propose any action against the Company, if the investigation results in findings that markets were dysfunctional during this period, those findings may be used in support of existing or future claims by the FERC or others that prices in the Company's long-term contracts entered into after January 1, 2000 for sales in the West region should be altered.

Other Investigations. In addition to the FERC investigation discussed above, several state and other federal regulatory investigations and complaints have commenced in connection with the wholesale electricity prices in California and other neighboring Western states to determine the causes of the high prices and potentially to recommend remedial action. In California, the California State Senate and the California Office of the Attorney General have separate ongoing investigations into the high prices and their causes. Although these investigations have not been completed and no findings have been made in connection with either of them, the California Attorney General has filed a civil lawsuit in San Francisco Superior Court alleging that the Company has violated state laws against unfair and unlawful business practices and a complaint with the FERC alleging the Company violated the terms of its tariff with the FERC (see Note 14(f)). Adverse findings or rulings could result in punitive legislation, sanctions, fines or even criminal charges against the Company or its employees. The Company is cooperating with both investigations and has produced a substantial amount of information requested in subpoenas issued by each body. The Washington and Oregon attorneys general have also begun similar investigations.

Legislative Efforts. Since the inception of the California energy crisis, various pieces of legislation, including tax proposals, have been introduced in the U.S. Congress and the California Legislature addressing several issues related to the increase in wholesale power prices in 2000 and 2001. For example, a bill was introduced in the California legislature that would have created a "windfall profits" tax on wholesale electricity sales and would subject exempt wholesale generators, such as the Company's subsidiaries that own generation facilities in California, to regulation by the CPUC as "public utilities." To date, only a few energy-related bills have passed and the Company does not believe that the legislation that has been enacted to date on these issues will have a material adverse effect on the Company. However, it is possible that legislation could be enacted on either the state or federal level that could have a material adverse effect on the Company's financial condition, results of operations and cash flows.

(h) INDEMNIFICATION OF STRANDED COSTS

Background. In January 2001, the Dutch Electricity Production Sector Transitional Arrangements Act (Transition Act) became effective and, among other things, allocated to REPGB and the three other large-scale Dutch generation companies, a share of the assets, liabilities and stranded cost commitments of NEA. Prior to the enactment of the Transition Act, NEA acted as the national electricity pooling and coordinating body for the generation output of REPGB and the three other large-scale national Dutch generation companies. REPGB and the three other large-scale Dutch generation companies are shareholders of NEA.

The Transition Act and related agreements specify that REPGB has a 22.5% share of NEA's assets, liabilities and stranded cost commitments. NEA's stranded cost commitments consisted primarily of various uneconomical or stranded cost investments and commitments, including a gas supply and three power contracts entered into prior to the liberalization of the Dutch wholesale electricity market. REPGB's stranded cost obligations also include uneconomical district heating contracts which were previously administrated by NEA prior to deregulation of the Dutch power market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The gas supply contract expires in 2016 and provides for gas imports aggregating 2.283 billion cubic meters per year. Prior to December 31, 2001, one of the stranded cost power contracts was settled. The two remaining stranded cost power contracts have the following capacities and terms: (a) 300 MW through 2005, and (b) 600 MW through March 2002 and 750 MW through 2009. Under the Transition Act, REPGB can either assume its 22.5% allocated interest in the contracts or, subject to the terms of the contracts, sell its interests to third parties. The district heating obligations relate to three heating water supply contacts entered into with various municipalities and expire from 2013 through 2015. Under the district heating contracts, the municipal districts are required to take annually a combined minimum of 5,549 terajoules (TJ) increasing annually to 7,955 TJ over the life of the contracts.

The Transition Act also authorized the government to purchase from NEA at least a majority of the shares in the Dutch national transmission grid company which was sold to the Dutch government on October 25, 2001 for approximately NLG 2.6 billion (approximately $1.05 billion based on an exchange rate of 2.48 NLG per U.S. dollar as of December 31, 2001).

Prior to December 31, 2001, the former shareholders agreed pursuant to a share purchase agreement to indemnify REPGB for up to NLG 1.9 billion in stranded cost liabilities (approximately $766 million). The indemnity obligation of the former shareholders and various provincial and municipal entities (including the city of Amsterdam), was secured by a NLG 900 million escrow account (approximately $363 million).

The Transition Act provided that, subject to the approval of the European Commission, the Dutch government will provide financial compensation to the Dutch generation companies, including REPGB, for liabilities associated with (a) long-term district heating contracts and (b) an experimental coal facility. In July 2001, the European Commission ruled that under certain conditions the Dutch government can provide financial compensation to the generation companies for the district heating contracts. To the extent that this compensation is not ultimately provided to the generation companies by the Dutch government, REPGB was to collect its compensation directly from the former shareholders as further discussed below.

In January 2001, the Company recognized an out-of-market, net stranded cost liability for its gas and electric contracts and district heating commitments. At such time, the Company recorded a corresponding asset of equal amount for the indemnification of this obligation from REPGB's former shareholders and the Dutch government, as applicable. Pursuant to SFAS No. 133, the gas and electric contracts are marked-to-market (see Note 5). As of December 31, 2001, the Company has recorded a liability of $369 million for its stranded cost gas and electric commitments in non-trading derivative liabilities and a liability of $206 million for its district heating commitments in current and non-current other liabilities. As of December 31, 2001, the Company has recorded an indemnification receivable from the Dutch government for the district heating stranded cost liability of $206 million. The settlement of the indemnification related to gas and electric contract commitments in December 2001 is discussed below.

Settlement of Stranded Cost Indemnification. In December 2001, REPGB and its former shareholders entered into a settlement agreement immediately resolving the former shareholders of their stranded cost indemnity obligations related to the gas supply and power contracts under the original share purchase agreement, and provides conditional terms for the possible settlement of their stranded cost indemnity obligation related to district heating obligations under certain conditions. The settlement agreement was approved in December 2001 by the Ministry of Economic Affairs of the Netherlands.

Under the settlement agreement, the former shareholders paid to REPGB NLG 500 million ($202 million) in January and February 2002. The payment represents a settlement of the obligations of the former shareholders to indemnify REPGB for all stranded cost liabilities other than those relating to the district heating contracts. The full amount of this payment was placed into an escrow account in the name of REPGB to fund its stranded cost obligations related to the gas and electric import contracts. Any remaining escrow funds as of January 1, 2004 will be distributed to REPGB.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the settlement agreement, the former shareholders will continue to indemnify REPGB for the stranded cost liabilities relating to district heating contracts. The terms of the indemnity are as follows:

- The settlement agreement acknowledges that the Netherlands is finalizing regulations for compensation of stranded cost associated with district heating projects. Within 21 days after the date these compensation rules take effect, REPGB can elect to receive one of two forms of indemnification under the settlement agreement.

- If the compensation to be paid by the Netherlands under these rules is at least as much as the compensation to be paid under the original indemnification agreement, REPGB can elect to receive a one-time payment of NLG 60 million ($24 million). In addition, unless the decree implementing the new compensation rules provides for compensation for the lifetime of the district heating projects, REPGB can receive an additional cash payment of NLG 15 million ($6 million).

- If the compensation rules do not provide for compensation at least equal to that provided under the original indemnification agreement, REPGB can claim indemnification for stranded cost losses up to a maximum of NLG 700 million ($282 million) less the amount of compensation provided by the new compensation rules and certain proceeds received from arbitrations.

- If no new compensation rules have taken effect on or prior to December 31, 2003, REPGB is entitled, but not obligated, to elect to receive indemnification under the formula described above.

Under the terms of the original indemnification agreement, the former shareholders were entitled to receive any and all distributions and dividends above NLG 125 million ($51 million) paid by NEA. Under the settlement agreement, the former shareholders waived all rights under the original indemnification agreement to claim distributions of NEA.

Reliant Resources recognized a net gain of $37 million for the difference between the sum of (a) the cash settlement payment of $202 million and the additional rights to claim distributions of Reliant Resources' NEA investment recognized of $248 million and (b) the amount recorded as stranded cost indemnity receivable related to the stranded cost gas and electric commitments of $369 million and claims receivable related to stranded cost incurred in 2001 of $44 million both previously recorded in the Consolidated Balance Sheets.

Investment in NEA. During the second quarter of 2001, Reliant Resources recorded a $51 million pre-tax gain (NLG 125 million) recorded as equity income for the preacquisition gain contingency related to the acquisition of REPGB for the value of its equity investment in NEA. This gain was based on Reliant Resources' evaluation of NEA's financial position and fair value. The fair value of Reliant Resources' investment in NEA is dependent upon the ultimate resolution of its existing contingencies and proceeds received from liquidating its remaining net assets. Prior to the settlement agreement discussed above, pursuant to the purchase agreement of REPGB, as amended, REPGB was entitled to a NLG 125 million dividend from NEA with any remainder owing to the former shareholders. As mentioned above, REPGB entered into an agreement with its former shareholders to settle the original indemnification agreement and the former shareholders waived all rights to distributions of NEA. Accordingly, as a component of the net gain recognized from the settlement of the stranded cost indemnity, Reliant Resources recorded a $248 million increase in its investment in NEA. As of December 31, 2001, Reliant Resources has recorded $299 million in equity investments of unconsolidated subsidiaries for its investment in NEA.

(i) OPERATIONS AGREEMENT WITH CITY OF SAN ANTONIO

As part of the 1996 settlement of certain litigation claims asserted by the City of San Antonio with respect to the South Texas Project, the Company entered into a 10-year joint operations agreement under which the Company and the City of San Antonio, acting through the City Public Service Board of San Antonio (CPS), share savings resulting from the joint dispatching of their respective generating assets in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

order to take advantage of each system's lower cost resources. In January 2000, the contract term was extended for three years and is expected to terminate in 2009. Under the terms of the joint operations agreement entered into between CPS and Electric Operations, the Company has guaranteed CPS minimum annual savings of $10 million up to a total cumulative savings of $150 million over the term of the agreement. The cumulative obligation was met in the first quarter of 2001. In 1999, 2000 and 2001, savings generated for CPS' account were $14 million, $60 million and $65 million, respectively. Through December 31, 2001, cumulative savings generated for CPS' account were $189 million.

(j) NUCLEAR INSURANCE

The Company and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $2.75 billion in property damage insurance coverage, which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses.

Pursuant to the Price Anderson Act, the maximum liability to the public of owners of nuclear power plants was $9.3 billion as of December 31, 2001. Owners are required under the Price Anderson Act to insure their liability for nuclear incidents and protective evacuations. The Company and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan.

There can be no assurance that all potential losses or liabilities will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material effect on the Company's financial condition, results of operations and cash flows.

(k) NUCLEAR DECOMMISSIONING

The Company contributed $14.8 million per year in 1999, 2000 and 2001 to a trust established to fund its share of the decommissioning costs for the South Texas Project. Pursuant to the October 3, 2001 Order, beginning in 2002, the Company will contribute $2.9 million per year to this trust. There are various investment restrictions imposed upon the Company by the Texas Utility Commission and the NRC relating to the Company's nuclear decommissioning trust. Additionally, the Company's board of directors has appointed the Nuclear Decommissioning Trust Investment Committee to establish the investment policy of the trust and oversee the investment of the trusts' assets. The securities held by the trust for decommissioning costs had an estimated fair value of $169 million as of December 31, 2001, of which approximately 46% were fixed-rate debt securities and the remaining 54% were equity securities. For a discussion of the accounting treatment for the securities held in the Company's nuclear decommissioning trust, see Note 2(l). In July 1999, an outside consultant estimated the Company's portion of decommissioning costs to be approximately $363 million. While the current funding levels currently exceed minimum NRC requirements, no assurance can be given that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. Such costs may vary because of changes in the assumed date of decommissioning and changes in regulatory requirements, technology and costs of labor, materials and equipment. Pursuant to the Texas Electric Restructuring Law, costs associated with nuclear decommissioning that have not been recovered as of January 1, 2002, will continue to be subject to cost-of-service rate regulation and will be included in a charge to transmission and distribution customers. For information regarding the effect of the Business Separation Plan on funding of the nuclear decommissioning trust fund, see Note 4(b).

(l) CONSTRUCTION AGENCY AGREEMENT AND EQUIPMENT FINANCING STRUCTURE

In 2001, Reliant Resources, through several of its subsidiaries, entered into operative documents with special purpose entities to facilitate the development, construction, financing and leasing of several power

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generation projects. The special purpose entities are not consolidated by the Company. The special purpose entities have an aggregate financing commitment from equity and debt participants (Investors) of $2.5 billion of which the last $1.1 billion is currently available only if the cash is collateralized. The availability of the commitment is subject to satisfaction of various conditions, including the obligation to provide cash collateral for the loans and letters of credit outstanding on November 27, 2004. Reliant Resources, through several of its subsidiaries, acts as construction agent for the special purpose entities and is responsible for completing construction of these projects by December 31, 2004, but Reliant Resources has generally limited its risk during construction to an amount not in excess of 89.9% of costs incurred to date, except in certain events. Upon completion of an individual project and exercise of the lease option, Reliant Resources' subsidiaries will be required to make lease payments in an amount sufficient to provide a return to the Investors. If Reliant Resources does not exercise its option to lease any project upon its completion, Reliant Resources must purchase the project or remarket the project on behalf of the special purpose entities. Reliant Resources' ability to exercise the lease option is subject to certain conditions. Reliant Resources must guarantee that the Investors will receive an amount at least equal to 89.9% of their investment in the case of a remarketing sale at the end of construction. At the end of an individual project's initial operating lease term (approximately five years from construction completion), Reliant Resources' subsidiary lessees have the option to extend the lease with the approval of Investors, purchase the project at a fixed amount equal to the original construction cost, or act as a remarketing agent and sell the project to an independent third party. If the lessees elect the remarketing option, they may be required to make a payment of an amount not to exceed 85% of the project cost, if the proceeds from remarketing are not sufficient to repay the Investors. Reliant Resources has guaranteed the performance and payment of its subsidiaries' obligations during the construction periods and, if the lease option is exercised, each lessee's obligations during the lease period. At any time during the construction period or during the lease, Reliant Resources may purchase a facility by paying an amount approximately equal to the outstanding balance plus costs.

Reliant Resources, through its subsidiary, REPG, has entered into an agreement with a bank whereby the bank, as owner, entered or will enter into contracts for the purchase and construction of power generation equipment and REPG, or its subagent, acts as the bank's agent in connection with administering the contracts for such equipment. Under the agreement, the bank has agreed to provide up to a maximum aggregate amount of $650 million. REPG and its subagents must cash collateralize their obligation to administer the contracts. This cash collateral is approximately equivalent to the total payments by the bank for the equipment, interest and other fees. As of December 31, 2001, the bank had assumed contracts for the purchase of eleven turbines, two heat recovery steam generators and one air-cooled condenser with an aggregate cost of $398 million. REPG, or its designee, has the option at any time to purchase, or, at equipment completion, subject to certain conditions, including the agreement of the bank to extend financing, to lease the equipment, or to assist in the remarketing of the equipment under terms specified in the agreement. All costs, including the purchase commitment on the turbines, are the responsibility of the bank. The cash collateral is deposited by REPG or an affiliate into a collateral account with the bank and earns interest at LIBOR less 0.15%. Under certain circumstances, the collateral deposit or a portion of it, will be returned to REPG or its designee. Otherwise, it will be retained by the bank. At December 31, 2001, REPG and its subsidiary had deposited $230 million into the collateral account. The bank's payments for equipment under the contracts totaled $227 million as of December 31, 2001. In January 2002, the bank sold to the parties to the construction agency agreements discussed above, equipment contracts with a total contractual obligation of $258 million, under which payments and interest during construction totaled $142 million. Accordingly, $142 million of Reliant Resources' collateral deposits were returned to Reliant Resources. As of December 31, 2001, there were equipment contracts with a total contractual obligation of $140 million under which payments during construction totaled $83 million. Currently this equipment is not designated for current planned power generation construction projects. Therefore, the Company anticipates that it will either purchase the equipment, assist in the remarketing of the equipment or negotiate to cancel the related contracts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) 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 approximately equivalent to carrying amounts and have been excluded from the table below. The fair value of financial instruments included in the trading operations are marked-to-market at December 31, 2000 and 2001 (see Note 5). The fair values of non-trading derivative assets and liabilities are recognized in the Consolidated Balance Sheets at December 31, 2001 (see Note 5). Therefore, these financial instruments are stated at fair value and are excluded from the table below. The fair values of non-trading derivative assets and liabilities as of December 31, 2000 have been determined using quoted market prices for the same or similar instruments when available or other estimation techniques.

                                                              DECEMBER 31, 2000
                                                              -----------------
                                                              CARRYING    FAIR
                                                               AMOUNT    VALUE
                                                              --------   ------
                                                                (IN MILLIONS)
Financial assets:
  Energy derivatives -- non-trading.........................   $   --    $  520
Financial liabilities:
  Long-term debt (excluding capital leases).................    6,607     6,512
  Trust preferred securities................................      705       665
  Energy derivatives -- non-trading.........................       --        69
  Foreign currency swaps....................................       62        68

                                                              DECEMBER 31, 2001
                                                              -----------------
                                                              CARRYING    FAIR
                                                               AMOUNT    VALUE
                                                              --------   ------
                                                                (IN MILLIONS)
Financial liabilities:
  Long-term debt (excluding capital leases).................   $6,391    $6,406
  Trust preferred securities................................      706       664

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) EARNINGS PER SHARE

The following table reconciles numerators and denominators of the Company's basic and diluted earnings per share (EPS) calculations:

                                                            FOR THE YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------
                                                           1999           2000           2001
                                                       ------------   ------------   ------------
                                                             (IN MILLIONS, EXCEPT PER SHARE
                                                                   AND SHARE AMOUNTS)
Basic EPS calculation:
  Income before extraordinary items and cumulative
     effect of accounting change.....................  $      1,665   $        440   $        919
  Extraordinary items................................          (183)             7             --
  Cumulative effect of accounting change, net of
     tax.............................................            --             --             61
                                                       ------------   ------------   ------------
  Net income attributable to common stockholders.....  $      1,482   $        447   $        980
                                                       ============   ============   ============
Weighted average shares outstanding..................   285,040,000    284,652,000    289,776,000
Basic EPS:
  Income before extraordinary items and cumulative
     effect of accounting change.....................  $       5.84   $       1.54   $       3.17
  Extraordinary items................................         (0.64)          0.03             --
  Cumulative effect of accounting change, net of
     tax.............................................            --             --           0.21
                                                       ------------   ------------   ------------
  Net income attributable to common stockholders.....  $       5.20   $       1.57   $       3.38
                                                       ============   ============   ============
Diluted EPS calculation:
  Net income attributable to common stockholders.....  $      1,482   $        447   $        980
  Plus: Income impact of assumed conversions:
     Interest on 6 1/4% convertible trust preferred
       securities....................................            --             --             --
                                                       ------------   ------------   ------------
  Total earnings effect assuming dilution............  $      1,482   $        447   $        980
                                                       ============   ============   ============
Weighted average shares outstanding..................   285,040,000    284,652,000    289,776,000
  Plus: Incremental shares from assumed
     conversions(1) Stock options....................       260,000      1,652,000      1,650,000
     Restricted stock................................       698,000        955,000        754,000
     6 1/4% convertible trust preferred securities...        23,000         14,000         13,000
                                                       ------------   ------------   ------------
  Weighted average shares assuming dilution..........   286,021,000    287,273,000    292,193,000
                                                       ============   ============   ============
Diluted EPS:
  Income before extraordinary items and cumulative
     effect of accounting change.....................  $       5.82   $       1.53   $       3.14
  Extraordinary items................................         (0.64)          0.03             --
  Cumulative effect of accounting change, net of
     tax.............................................            --             --           0.21
                                                       ------------   ------------   ------------
  Net income attributable to common stockholders.....  $       5.18   $       1.56   $       3.35
                                                       ============   ============   ============


(1) Options to purchase 433,915, 442,385 and 2,074,437 shares were outstanding for the years ended December 31, 1999, 2000 and 2001, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares for the respective years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) RESTATED UNAUDITED QUARTERLY INFORMATION

As discussed in Note 1, the unaudited quarterly financial data for the interim periods ended March 31, 2001, June 30, 2000 and 2001, September 30, 2000 and 2001 and December 31, 2000 and 2001 have been restated from amounts previously reported to reflect certain transactions on a net basis. The restatement had no impact on previously reported consolidated cash flows, operating income or net income. A summary of the principal effects of the restatement are as follows for unaudited quarterly information for the quarters ended March 31, 2000 and 2001, June 30, 2000 and 2001, September 30, 2000 and 2001, and December 31, 2000 and 2001: (Note -- Those line items for which no change in amounts are shown were not affected by the restatement.)

                                                          YEAR ENDED DECEMBER 31, 2000
                                                   -------------------------------------------
                                                   FIRST QUARTER         SECOND QUARTER
                                                   -------------   ---------------------------
                                                   AS PREVIOUSLY                 AS PREVIOUSLY
                                                     REPORTED      AS RESTATED     REPORTED
                                                   -------------   -----------   -------------
                                                                  (IN MILLIONS)
Revenues........................................      $4,213         $5,719         $5,755
Fuel and cost of gas sold.......................       2,333          2,915          2,922
Purchased power.................................         785          1,377          1,406
Operating income................................         346            508            508
Income before extraordinary item................         133            217            217
Extraordinary item, net of tax..................          --              7              7
Net income attributable to common
  stockholders..................................         133            224            224
BASIC EARNINGS PER SHARE:(1)
  Income before extraordinary item..............      $ 0.47         $ 0.76         $ 0.76
  Extraordinary item, net of tax................          --           0.03           0.03
                                                      ------         ------         ------
     Net income attributable to common
       stockholders.............................      $ 0.47         $ 0.79         $ 0.79
                                                      ======         ======         ======
DILUTED EARNINGS PER SHARE:(1)
  Income before extraordinary item..............      $ 0.47         $ 0.75         $ 0.75
  Extraordinary item, net of tax................          --           0.03           0.03
                                                      ------         ------         ------
     Net income attributable to common
       stockholders.............................      $ 0.47         $ 0.78         $ 0.78
                                                      ======         ======         ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                         YEAR ENDED DECEMBER 31, 2000
                                           ---------------------------------------------------------
                                                  THIRD QUARTER                FOURTH QUARTER
                                           ---------------------------   ---------------------------
                                                         AS PREVIOUSLY                 AS PREVIOUSLY
                                           AS RESTATED     REPORTED      AS RESTATED     REPORTED
                                           -----------   -------------   -----------   -------------
                                                                 (IN MILLIONS)
Revenues.................................    $9,109         $9,502         $9,228         $9,869
Fuel and cost of gas sold................     3,882          3,895          5,920          5,927
Purchased power..........................     3,428          3,808          1,990          2,624
Operating income.........................       778            778            205            205
Income before extraordinary item.........       389            389           (299)          (299)
Extraordinary item, net of tax...........        --             --             --             --
Net income attributable to common
  stockholders...........................       389            389           (299)          (299)
BASIC EARNINGS PER SHARE:(1)
  Income before extraordinary item.......    $ 1.36         $ 1.36         $(1.04)        $(1.04)
  Extraordinary item, net of tax.........        --             --             --             --
                                             ------         ------         ------         ------
    Net income attributable to common
       stockholders......................    $ 1.36         $ 1.36         $(1.04)        $(1.04)
                                             ======         ======         ======         ======
DILUTED EARNINGS PER SHARE:(1)
  Income before extraordinary item.......    $ 1.34         $ 1.34         $(1.04)        $(1.04)
  Extraordinary item, net of tax.........        --             --             --             --
                                             ------         ------         ------         ------
    Net income attributable to common
       stockholders......................    $ 1.34         $ 1.34         $(1.04)        $(1.04)
                                             ======         ======         ======         ======

                                                         YEAR ENDED DECEMBER 31, 2001
                                           ---------------------------------------------------------
                                                  FIRST QUARTER                SECOND QUARTER
                                           ---------------------------   ---------------------------
                                                         AS PREVIOUSLY                 AS PREVIOUSLY
                                           AS RESTATED     REPORTED      AS RESTATED     REPORTED
                                           -----------   -------------   -----------   -------------
                                                                 (IN MILLIONS)
Revenues.................................    $12,052        $13,284        $10,269        $11,991
Fuel and cost of gas sold................      7,666          7,667          5,008          5,313
Purchased power..........................      2,877          4,108          3,660          5,077
Operating income.........................        454            454            614            614
Income before cumulative effect of
  accounting change......................        201            201            316            316
Cumulative effect of accounting change,
  net of tax.............................         61             61             --             --
Net income attributable to common
  stockholders...........................        262            262            316            316
BASIC EARNINGS PER SHARE:(1)
  Income before cumulative effect of
    accounting change....................    $  0.69        $  0.69        $  1.09        $  1.09
  Cumulative effect of accounting change,
    net of tax...........................       0.22           0.22             --             --
                                             -------        -------        -------        -------
    Net income attributable to common
       stockholders......................    $  0.91        $  0.91        $  1.09        $  1.09
                                             =======        =======        =======        =======
DILUTED EARNINGS PER SHARE:(1)
  Income before cumulative effect of
    accounting change....................    $  0.69        $  0.69        $  1.08        $  1.08
  Cumulative effect of accounting change,
    net of tax...........................       0.21           0.21             --             --
                                             -------        -------        -------        -------
    Net income attributable to common
       stockholders......................    $  0.90        $  0.90        $  1.08        $  1.08
                                             =======        =======        =======        =======

212

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                         YEAR ENDED DECEMBER 31, 2001
                                           ---------------------------------------------------------
                                                  THIRD QUARTER                FOURTH QUARTER
                                           ---------------------------   ---------------------------
                                                         AS PREVIOUSLY                 AS PREVIOUSLY
                                           AS RESTATED     REPORTED      AS RESTATED     REPORTED
                                           -----------   -------------   -----------   -------------
                                                                 (IN MILLIONS)
Revenues.................................    $10,903        $12,511        $7,586         $8,440
Fuel and cost of gas sold................      3,667          3,928         3,163          3,167
Purchased power..........................      5,348          6,695         3,242          4,092
Operating income.........................        779            779           146            146
Income before cumulative effect of
  accounting change......................        355            355            47             47
Cumulative effect of accounting change,
  net of tax.............................         --             --            --             --
Net income attributable to common
  stockholders...........................        355            355            47             47
BASIC EARNINGS PER SHARE:(1)
  Income before cumulative effect of
    accounting change....................    $  1.22        $  1.22        $ 0.16         $ 0.16
  Cumulative effect of accounting change,
    net of tax...........................         --             --            --             --
                                             -------        -------        ------         ------
    Net income attributable to common
       stockholders......................    $  1.22        $  1.22        $ 0.16         $ 0.16
                                             =======        =======        ======         ======
DILUTED EARNINGS PER SHARE:(1)
  Income before cumulative effect of
    accounting change....................    $  1.21        $  1.21        $ 0.16         $ 0.16
  Cumulative effect of accounting change,
    net of tax...........................         --             --            --             --
                                             -------        -------        ------         ------
    Net income attributable to common
       stockholders......................    $  1.21        $  1.21        $ 0.16         $ 0.16
                                             =======        =======        ======         ======


(1) Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings per common share.

The quarterly operating results incorporate the results of operations of REMA from its respective acquisition date as discussed in Note 3(a). The variances in revenues, operating income and net income (loss) from quarter to quarter were primarily due to this acquisition, the seasonal fluctuations in demand for energy and energy services and changes in energy commodity prices and the timing of maintenance expenses on electric generation plants.

Effective December 1, 2000, Reliant Energy's board of directors approved a plan to dispose of the Company's Latin America business segment through sales of its assets. Accordingly, in its 2000 consolidated financial statements, the Company reported the results of its Latin America business segment as discontinued operations in accordance with APB Opinion No. 30 for each of the three years in the period ended December 31, 2000.

On December 20, 2001, negotiations for the sale of the Company's remaining Latin America investments were terminated as a result of the recent adverse economic developments in Argentina.

Accordingly, the Latin America business segment is no longer reported as discontinued operations. The related operating results and loss on disposal have been reclassified within the Statements of Consolidated Income for all periods into operating income with respect to consolidated subsidiaries and other income with respect to equity investments in unconsolidated subsidiaries as required for assets held for sale by EITF 90-6. For additional discussion of our Latin America business segment, see Note 19.

213

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(18) REPORTABLE BUSINESS SEGMENTS

The Company's determination of reportable business segments considers the strategic operating units under which the Company manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. Financial information for REMA and REPGB are included in the business segment disclosures only for periods beginning on their respective acquisition dates. The accounting policies of the business 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 business segments. The Company evaluates performance based on operating income excluding some corporate costs not allocated to the business segments. Long-lived assets include net property, plant and equipment, net goodwill, net air emissions regulatory allowances and other intangibles and equity investments in unconsolidated subsidiaries. The Company accounts for intersegment sales as if the sales were to third parties, that is, at current market prices. In the fourth quarter of 2000, the Company transferred its non-rate regulated retail gas marketing operations from Retail Energy to Natural Gas Distribution and its natural gas gathering business from Wholesale Energy to Pipelines and Gathering. In the third quarter of 2001, the Company began reporting the results of its unregulated retail electric business as a separate business segment entitled "Retail Energy". Historically, Retail Energy's operations had been reported as part of the Other Operations business segment. Reportable business segments from previous years have been restated to conform to the 2001 presentation.

Effective December 1, 2000, Reliant Energy's board of directors approved a plan to dispose of the Company's Latin America business segment through sales of its assets. Accordingly, in its 2000 consolidated financial statements, the Company reported the results of its Latin America business segment as discontinued operations in accordance with APB Opinion No. 30 for each of the three years in the period ended December 31, 2000.

On December 20, 2001, negotiations for the sale of the Company's remaining assets in Argentina were terminated as a result of the recent adverse economic developments in Argentina. The Company will continue to evaluate options related to the future disposition of these assets. Accordingly, the Latin America business segment is no longer reported as discontinued operations.

214

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has identified the following reportable business segments:
Electric Operations, Natural Gas Distribution, Pipelines and Gathering, Wholesale Energy, European Energy, Retail Energy, Latin America and Other Operations. For a description of the financial reporting business segments, see Note 1. Financial data for business segments, products and services and geographic areas are as follows:

                                                                                                        LATIN
                                            NATURAL      PIPELINES                                    AMERICA/
                              ELECTRIC        GAS           AND      WHOLESALE   EUROPEAN   RETAIL   ASSETS HELD     OTHER
                             OPERATIONS   DISTRIBUTION   GATHERING    ENERGY      ENERGY    ENERGY    FOR SALE     OPERATIONS
                             ----------   ------------   ---------   ---------   --------   ------   -----------   ----------
                                                                      (IN MILLIONS)
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 1999:
Revenues from external
  customers................   $ 4,483        $2,742       $  151      $ 6,231     $  153     $ 23      $   --        $   11
Intersegment revenues......        --            46          180          264         --       --          --             1
Depreciation and
  amortization.............       667           137           53           21         21       --          --             6
Operating income (loss)....       981           158          131           27         32      (14)         (4)          (52)
Total assets...............     9,941         3,683        2,486        2,821      3,247       51       1,078         4,257
Equity investments in
  unconsolidated
  subsidiaries.............        --            --           --           78         --       --          --            --
Expenditures for long-lived
  assets...................       573           206           79          481        834       45          --            44
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 2000:
Revenues from external
  customers................     5,494         4,470          177       17,494        580       41          --            13
Intersegment revenues......        --            34          207          578         --       23          --             1
Depreciation and
  amortization.............       507           145           56          108         76        4          --            10
Operating income (loss)....     1,230           118          137          479         89      (70)        (44)         (102)
Total assets...............    10,691         4,518        2,358       11,148      2,521      151         195         1,486
Equity investments in
  unconsolidated
  subsidiaries.............        --            --           --          109         --       --          --            --
Expenditures for long-lived
  assets...................       643           195           61        1,966        995       28          --            63
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 2001:
Revenues from external
  customers................     5,503         4,638          225       29,075      1,192      154          --            23
Intersegment revenues......         2           104          190          667         --       57          --             2
Depreciation and
  amortization.............       453           147           58          118         76       11          --            48
Operating income (loss)....     1,091           130          137          899         56      (13)        (75)         (232)
Total assets...............    12,012         3,732        2,361        8,290      3,380      391           8         1,438
Equity investments in
  unconsolidated
  subsidiaries.............        --            --           --           88        299       --          --            --
Expenditures for long-lived
  assets...................       936           209           54          658         21      117          --            58


                             RECONCILING
                             ELIMINATIONS   CONSOLIDATED
                             ------------   ------------
                                    (IN MILLIONS)
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 1999:
Revenues from external
  customers................    $    --        $13,794
Intersegment revenues......       (491)            --
Depreciation and
  amortization.............         --            905
Operating income (loss)....         --          1,259
Total assets...............     (1,107)        26,457
Equity investments in
  unconsolidated
  subsidiaries.............         --             78
Expenditures for long-lived
  assets...................         --          2,262
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 2000:
Revenues from external
  customers................         --         28,269
Intersegment revenues......       (843)            --
Depreciation and
  amortization.............         --            906
Operating income (loss)....         --          1,837
Total assets...............     (1,108)        31,960
Equity investments in
  unconsolidated
  subsidiaries.............         --            109
Expenditures for long-lived
  assets...................         --          3,951
AS OF AND FOR THE YEAR
  ENDED DECEMBER 31, 2001:
Revenues from external
  customers................         --         40,810
Intersegment revenues......     (1,022)            --
Depreciation and
  amortization.............         --            911
Operating income (loss)....         --          1,993
Total assets...............       (931)        30,681
Equity investments in
  unconsolidated
  subsidiaries.............         --            387
Expenditures for long-lived
  assets...................         --          2,053

215

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      2000      2001
                                                              -------   -------   -------
                                                                     (IN MILLIONS)
RECONCILIATION OF OPERATING INCOME TO NET INCOME
  ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Operating income............................................  $ 1,259   $ 1,837   $ 1,993
(Loss) income from equity investments in unconsolidated
  subsidiaries..............................................       (1)       43        57
Gain (loss) on AOL Time Warner investment...................    2,452      (205)      (70)
(Loss) gain on indexed debt securities......................     (630)      102        58
Operating results from equity investments in unconsolidated
  Latin America assets......................................      (26)      (41)       --
Impairment of Latin America unconsolidated equity
  investments...............................................       --      (131)       (4)
Loss on disposal of Latin America assets....................       --      (176)       --
Interest expense and other charges..........................     (551)     (768)     (658)
Minority interest...........................................        1         1       (81)
Other income, net...........................................       60        96       124
Income tax expense..........................................     (899)     (318)     (500)
Extraordinary (loss) gain, net of tax.......................     (183)        7        --
Cumulative effect of accounting change, net of tax..........       --        --        61
                                                              -------   -------   -------
     Net income attributable to common stockholders.........  $ 1,482   $   447   $   980
                                                              =======   =======   =======
REVENUES BY PRODUCTS AND SERVICES:
Retail power sales..........................................  $ 4,483   $ 5,494   $ 5,503
Retail gas sales............................................    2,742     4,383     4,546
Wholesale energy and energy related sales...................    6,383    18,073    30,267
Gas transport...............................................      151       177       225
Energy products and services................................       35       142       269
                                                              -------   -------   -------
     Total..................................................  $13,794   $28,269   $40,810
                                                              =======   =======   =======
REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC AREAS:
Revenues:
  US........................................................  $13,524   $26,640   $37,295
  Netherlands...............................................      153       580     1,192
  Other.....................................................      117     1,049     2,323
                                                              -------   -------   -------
     Total..................................................  $13,794   $28,269   $40,810
                                                              =======   =======   =======
Long-lived assets:
  US........................................................  $13,605   $16,079   $16,724
  Netherlands...............................................    2,648     2,371     2,424
                                                              -------   -------   -------
     Total..................................................  $16,253   $18,450   $19,148
                                                              =======   =======   =======

216

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

After the Distribution, CenterPoint Energy's business will consist principally of regulated operations. As a result, CenterPoint Energy's business segments will consist of the following:

- Electric Transmission and Distribution;

- Electric Generation;

- Natural Gas Distribution;

- Pipelines and Gathering; and

- Other Operations.

The Wholesale Energy, European Energy, Retail Energy and unregulated portions of our Other Operations business segments will be conducted by Reliant Resources as a separate publicly traded company. The operations conducted by the Electric Generation business segment may also be acquired by Reliant Resources in January 2004 pursuant to the Texas Genco Option. For additional information, see Note 4(b).

(19) DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Effective December 1, 2000, Reliant Energy's board of directors approved a plan to dispose of the Company's Latin America business segment through sales of its assets. Accordingly, in its 2000 consolidated financial statements, the Company reported the results of its Latin America business segment as discontinued operations in accordance with APB Opinion No. 30 for each of the three years in the period ended December 31, 2000.

In the fourth quarter of 2000, the Latin America business segment sold its investments in El Salvador, Colombia and Brazil for an aggregate $790 million in after-tax proceeds. The Company recorded a $242 million after-tax ($294 million pre-tax) loss in connection with the sale of these investments. The Company, through its subsidiaries, continues to operate investments in Argentina which include a 100% interest in a 160 MW cogeneration project, Argener, and a 90% interest in a utility, EDESE (collectively, the Argentine Investments).

In the fourth quarter of 2000 and in the first quarter of 2001, the Company recorded additional after-tax impairments related to the Argentine Investments of $89 million and $7 million ($95 million and $6 million pre-tax), respectively, based on the expected net realizable value of the businesses upon their disposition.

On December 20, 2001, negotiations for the sale of the Argentine Investments were terminated as a result of the recent adverse economic developments in Argentina. The Company will continue to evaluate options related to the future disposition of these assets.

Accordingly, the Latin America business segment is no longer reported as discontinued operations. The related operating results and loss on disposal have been reclassified within the Statements of Consolidated Income for all periods into operating income with respect to consolidated subsidiaries and other income with respect to equity investments in unconsolidated subsidiaries as required for assets held for sale by EITF 90-6.

During December 2001, the Company concluded there were indicators of impairment related to the remaining assets in this business segment, and accordingly, an impairment evaluation was conducted at the end of the fourth quarter under the guidelines of SFAS No. 121. This evaluation resulted in an after-tax impairment charge of $43 million ($80 million pre-tax), representing the excess of book value over estimated net realizable value. As of December 31, 2001, the Company had $8 million of Latin America net assets held for sale recorded in its Consolidated Balance Sheets. The fair value of the remaining net assets was determined using a net discounted cash flows approach. The charge was included as a component of operating income with respect to consolidated subsidiaries and other income with respect to equity investments in

217

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unconsolidated subsidiaries. The impairment was primarily related to the recent economic deterioration in Argentina.

(20) RELIANT ENERGY COMMUNICATIONS

During the third quarter of 2001, management decided to exit the Company's Communications business which served as a facility-based competitive local exchange carrier and Internet services provider and owned network operations centers and managed data centers in Houston and Austin. Consequently, the Company determined the goodwill associated with the Communications business was impaired. The Company recorded a total of $54 million of pre-tax disposal charges in the third and fourth quarters of 2001. These charges included the write-off of goodwill of $19 million, fixed asset impairments of $22 million, and severance accruals and other incremental costs associated with exiting the Communications business, totaling $13 million.

(21) BANKRUPTCY OF ENRON CORP. AND ITS AFFILIATES

During the fourth quarter of 2001, Enron filed a voluntary petition for bankruptcy. Accordingly, the Company recorded an $85 million provision, comprised of provisions against 100% of receivables of $88 million and net non-trading derivative balances of $52 million, offset by the Company's net trading and marketing liabilities to Enron of $55 million.

The non-trading derivatives with Enron were designated as Cash Flow Hedges (see Note 5). The net gain on these derivative instruments previously reported in other comprehensive income will remain in accumulated other comprehensive loss and will be reclassified into earnings during the period in which the originally designated hedged transactions occur.

(22) SUBSEQUENT EVENTS

(a) ORION POWER HOLDINGS, INC.

In February 2002, Reliant Resources acquired all of the outstanding shares of Orion Power for $26.80 per share in cash for an aggregate purchase price of $2.9 billion. Reliant Resources funded the Orion Power acquisition with a term loan supported by a $2.9 billion credit facility and $41 million of cash on hand. Interest rates on the term loan are based on LIBOR plus a margin or a base rate. The term loan must be repaid within one year from the date on which it was funded. As a result of the acquisition, Reliant Resources' consolidated net debt obligations also increased by the amount of Orion Power's net debt obligations. As of February 19, 2002, Orion Power's debt obligations were $2.4 billion ($2.1 billion net of cash acquired some of which is restricted pursuant to debt covenants). Orion Power is an independent electric power generating company formed in March 1998 to acquire, develop, own and operate power-generating facilities in certain deregulated wholesale markets throughout North America. As of February 28, 2002, Orion Power had 81 power plants in operation with a total generating capacity of 5,644 MW and an additional 804 MW in construction or in various stages of development.

(b) FACTORING AGREEMENT

In the first quarter of 2002, RERC reduced its trade receivables facility from $350 million to $150 million. Borrowings under the receivables facility aggregating $196 million were repaid in January 2002 with proceeds from the issuance of commercial paper under RERC's $350 million revolving credit facility and from the liquidation of short-term investments.

218

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) INTEREST RATE SWAPS

In the first quarter of 2002, the Company entered into interest rate swaps with an aggregate notional amount of $1.25 billion. Swaps with a notional amount of $250 million were entered into for the purpose of fixing rates on short-term debt subject to interest rate fluctuations and do not qualify as cash flow hedges under SFAS No. 133. The swaps with a notional amount of $1 billion were entered into to hedge the interest rate on a future offering of five-year fixed rate notes. These swaps qualify as cash flow hedges under SFAS No. 133.

219

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Reliant Energy, Incorporated and Subsidiaries:

Houston, Texas

We have audited the accompanying consolidated balance sheets of Reliant Energy, Incorporated and its subsidiaries (the Company) as of December 31, 2000 and 2001, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company'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 the Company at December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 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 5 to the consolidated financial statements, the Company changed its method of accounting for derivatives and hedging activities in 2001.

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements have been restated.

DELOITTE & TOUCHE LLP

March 28, 2002

(July 3, 2002 as to the effects of the restatement discussed in Note 1)

220

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, to the extent not set forth in "Executive Officers of Reliant Energy" in Item 1, is or will be set forth in the definitive proxy statement relating to Reliant Energy's 2002 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 10 are incorporated herein by reference pursuant to Instruction G to Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is or will be set forth in the definitive proxy statement relating to Reliant Energy's 2002 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 11 are incorporated herein by reference pursuant to Instruction G to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 12 is or will be set forth in the definitive proxy statement relating to Reliant Energy's 2002 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 12 are incorporated herein by reference pursuant to Instruction G to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 is or will be set forth in the definitive proxy statement relating to Reliant Energy's 2002 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 13 are incorporated herein by reference pursuant to Instruction G to Form 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements.
          Statements of Consolidated Income for the Three Years Ended December
           31, 2001...........................................................   133
          Statements of Consolidated Comprehensive Income for the Three Years
           Ended December 31, 2001............................................   134
          Consolidated Balance Sheets at December 31, 2001 and 2000...........   135
          Statements of Consolidated Cash Flows for the Three Years Ended
           December 31, 2001..................................................   136
          Statements of Consolidated Stockholders' Equity for the Three Years
           Ended December 31, 2001............................................   137

          Notes to Consolidated Financial Statements..........................   138
          Independent Auditors' Report........................................   220
(a)(2)  Financial Statement Schedules for the Three Years Ended December 31, 2001.
          II -- Reserves......................................................   223

221

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 225, which index also includes the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K.

On December 18, 2001, we filed a Current Report on Form 8-K dated December 17, 2001 announcing shareholder approval of our corporate restructuring.

On January 11, 2002, we filed a Current Report on Form 8-K dated December 18, 2001 relating to the execution of a settlement agreement regarding European stranded cost indemnification.

On February 5, 2002, we filed a Current Report on Form 8-K dated February 5, 2002 regarding a delay in the release of earnings and restatement of 2001 results.

On March 6, 2002, we filed a Current Report on Form 8-K dated February 19, 2002 regarding Reliant Resources' acquisition of Orion Power Holdings, Inc.

On March 15, 2002, we filed a Current Report on Form 8-K dated March 15, 2002 regarding our 2001 earnings and the effects of our restatement.

On April 5, 2002, we filed a Current Report on Form 8-K regarding an SEC informal inquiry.

222

RELIANT ENERGY, INCORPORATED AND SUBSIDIARIES

SCHEDULE II -- RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

               COLUMN A                   COLUMN B           COLUMN C            COLUMN D      COLUMN E
---------------------------------------  ----------   -----------------------   -----------   ----------
                                                             ADDITIONS
                                                      -----------------------
                                         BALANCE AT    CHARGED    CHARGED TO    DEDUCTIONS    BALANCE AT
                                         BEGINNING       TO          OTHER         FROM         END OF
              DESCRIPTION                OF PERIOD    INCOME(2)   ACCOUNTS(1)   RESERVES(2)     PERIOD
              -----------                ----------   ---------   -----------   -----------   ----------
                                                             (THOUSANDS OF DOLLARS)
Year Ended December 31, 2001:
  Accumulated provisions:
     Uncollectible accounts
       receivable......................   $89,132     $ 89,551      $ 1,455       $44,383      $135,755
     Reserves deducted from trading and
       marketing assets................    66,132       31,717           --            --        97,849
     Reserves for accrue-in-advance
       major maintenance...............    27,075        2,383         (663)        9,419        19,376
     Reserves for inventory............     7,227          123       (6,424)          348           578
     Reserves for severance............    45,162        6,439       (1,802)       28,553        21,246
     Deferred tax asset valuation
       allowance.......................    67,937      (36,866)          --            --        31,071
Year Ended December 31, 2000:
  Accumulated provisions:
     Uncollectible accounts
       receivable......................    33,519       79,619         (597)       23,409        89,132
     Reserves deducted from trading and
       marketing assets................    11,511       54,621           --            --        66,132
     Reserves for accrue-in-advance
       major maintenance...............    47,809       41,306         (787)       61,253        27,075
     Reserves for inventory............     5,806          372       17,053        16,004         7,227
     Reserves for severance............    29,506        5,467       20,065         9,876        45,162
     Deferred tax asset valuation
       allowance.......................    19,139       48,798           --            --        67,937
Year Ended December 31, 1999:
  Accumulated provisions:
     Uncollectible accounts
       receivable......................    26,106       16,296        7,490        16,373        33,519
     Reserves deducted from trading and
       marketing assets................     6,464        5,047           --            --        11,511
     Reserves for accrue-in-advance
       major maintenance...............    35,249        5,826       17,411        10,677        47,809
     Reserves for inventory............     6,574           72           --           840         5,806
     Reserves for severance............    33,954          232       18,080        22,760        29,506
     Deferred tax asset valuation
       allowance.......................     8,591       10,548           --            --        19,139


(1) Charged to Other Accounts represents obligations acquired through business acquisitions.

(2) 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.

223

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas, on the 3rd day of July, 2002.

RELIANT ENERGY, INCORPORATED
(Registrant)

By:    /s/ R. STEVE LETBETTER
  ------------------------------------
          R. Steve Letbetter,
     Chairman, President and Chief
            Executive Officer

224

RELIANT ENERGY, INCORPORATED

EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2001

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. Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------   --------------
   2(a)(1)   --   Agreement and Plan of Merger among     HI's Form 8-K dated August 11, 1996     1-7629             2
                  former Houston Industries
                  Incorporated ("HI"), Houston
                  Lighting & Power ("HL&P" or "Reliant
                  Energy"), HI Merger, Inc. and NorAm
                  dated August 11, 1996
   2(a)(2)   --   Amendment to Agreement and Plan of     Registration Statement on Form S-4    333-11329           2(c)
                  Merger among HI, HL&P, HI Merger,
                  Inc. and NorAm dated August 11, 1996
   2(b)(1)   --   Share Subscription Agreement dated     Form 10-Q for the quarter ended         1-3187            10.2
                  March 29, 1999 among Reliant Energy    March 31, 1999
                  Wholesale Holdings (Europe) Inc.,
                  Provincie Noord Holland, Gemeente
                  Amsterdam, N.V. Provinciaal En
                  Gemeenelijk Utrechts
                  Stroomleveringsdedrijf, Reliant
                  Energy Power Generation, Inc. and
                  UNA
   2(b)(2)   --   Share Purchase Agreement dated March   Form 10-Q for the quarter ended         1-3187            10.3
                  29, 1999 among Reliant Energy          March 31, 1999
                  Wholesale Holdings (Europe) Inc.,
                  Provincie Noord Holland, Gemeente
                  Amsterdam, N.V. Provinciaal En
                  Gemeenelijk Utrechts
                  Stroomleveringsdedrijf, Reliant
                  Energy Power Generation, Inc. and
                  UNA
   2(b)(3)   --   Deed of Amendment dated September 2,   Form 10-K for the year ended            1-3187          2(b)(3)
                  1999 among Reliant Energy Wholesale    December 31, 1999
                  Holdings (Europe) Inc., Provincie
                  Noord Holland, Gemeente Amsterdam,
                  N.V. Provinciaal En Gemeenelijk
                  Utrechts Stroomleveringsdedrijf,
                  Reliant Energy Power Generation,
                  Inc. and UNA
   2(c)      --   Purchase Agreement dated as of         Form 10-K for the year ended            1-3187            2(c)
                  February 19, 2000 among Reliant        December 31, 1999
                  Energy Power Generation, Inc.,
                  Reliant Energy, Sithe Energies, Inc.
                  and Sithe Northeast Generating
                  Company, Inc.
   2(d)      --   Agreement and Plan of Merger dated     Form 10-Q for the quarter ended         1-3187            2(a)
                  as of September 26, 2001 by and        September 30, 2001
                  among Reliant Resources, Inc.,
                  Reliant Energy Power Generation
                  Merger Sub, Inc. and Orion Power
                  Holdings, Inc. (incorporated by
                  reference from Reliant Energy's
                  Current Report on Form 8-K dated
                  September 27, 2001), Exhibit 2.1,
                  SEC File No. 1-3187

225

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------   --------------
   3(a)      --   Restated Articles of Incorporation     Form 10-K for the year ended            1-3187            3(a)
                  of Reliant Energy, restated as of      December 31, 1997
                  September 1997
   3(b)      --   Amendment to Restated Articles of      Form 10-Q for the quarter ended         1-3187            3(b)
                  Incorporation of Reliant Energy, as    March 31, 1999
                  of May 5, 1999
   3(c)      --   Amended and Restated Bylaws of         Form 10-Q for the quarter ended         1-3187             3
                  Reliant Energy adopted May 3, 2000     March 31, 2000
   3(d)      --   Statement of Resolution Establishing   Form 10-Q for the quarter ended         1-3187            3(c)
                  Series of Shares designated Series C   March 31, 1998
                  Preference Stock
   3(e)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(e)
                  Series of Shares designated Series D   December 31, 1999
                  Preference Stock
   3(f)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(f)
                  Series of Shares designated Series E   December 31, 1999
                  Preference Stock
   3(g)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(g)
                  Series of Shares designated Series F   December 31, 1999
                  Preference Stock
   3(h)      --   Articles/Certificate of Correction     Form 10-K for the year ended            1-3187            3(h)
                  relating to the Statement of           December 31, 1999
                  Resolution Establishing Series of
                  Shares designated Series F
                  Preference Stock
   3(i)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(i)
                  Series of Shares designated Series G   December 31, 1999
                  Preference Stock
   3(j)      --   Statement of Resolution Establishing   Form 10-Q for quarter ended June 30,    1-3187            3(a)
                  Series of Shares designated Series H   2000
                  Preference Stock
   3(k)      --   Statement of Resolution Establishing   Form 10-Q for quarter ended June 30,    1-3187            3(b)
                  Series of Shares designated Series I   2000
                  Preference Stock
   3(l)      --   Statement of Resolution Establishing   Form 10-Q for quarter ended June 30,    1-3187            3(c)
                  Series of Shares designated Series J   2000
                  Preference Stock
   3(m)      --   Statement of Resolution Establishing   Form 10-Q for quarter ended             1-3187             3
                  Series of Shares designated Series K   September 30, 2000
                  Preference Stock
   3(n)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(n)
                  Series of Shares designated Series L   December 31, 2000
                  Preference Stock
   3(o)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(o)
                  Series of Shares designated Series M   December 31, 2000
                  Preference Stock
   3(p)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(p)
                  Series of Shares designated Series N   December 31, 2000
                  Preference Stock
   3(q)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(q)
                  Series of Shares designated Series O   December 31, 2000
                  Preference Stock
   3(r)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(r)
                  Series of Shares designated Series P   December 31, 2000
                  Preference Stock

226

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------   --------------
   3(s)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(s)
                  Series of Shares designated Series Q   December 31, 2000
                  Preference Stock
   3(t)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(t)
                  Series of Shares designated Series R   December 31, 2000
                  Preference Stock
   3(u)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(u)
                  Series of Shares designated Series S   December 31, 2000
                  Preference Stock
   3(v)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(v)
                  Series of Shares designated Series T   December 31, 2000
                  Preference Stock
   3(w)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(w)
                  Series of Shares designated Series U   December 31, 2000
                  Preference Stock
   3(x)      --   Statement of Resolution Establishing   Form 10-K for the year ended            1-3187            3(x)
                  Series of Shares designated Series V   December 31, 2000
                  Preference Stock
   3(y)      --   Statement of Resolution Establishing   Form 10-Q for the quarter ended June    1-3187            3(a)
                  Series of Shares designated Series W   30, 2001
                  Preference Stock
   3(z)      --   Statement of Resolution Establishing   Form 10-Q for the quarter ended June    1-3187            3(b)
                  Series of Shares designated Series X   30, 2001
                  Preference Stock
   4(a)(1)   --   Mortgage and Deed of Trust, dated      Form S-7 of HL&P filed on August 25,   2-59748            2(b)
                  November 1, 1944 between HL&P and      1977
                  Chase Bank of Texas, National
                  Association (formerly, South Texas
                  Commercial National Bank of
                  Houston), as Trustee, as amended and
                  supplemented by 20 Supplemental
                  Indentures thereto
   4(a)(2)   --   Twenty-First through Fiftieth          HL&P's Form 10-K for the year ended     1-3187          4(a)(2)
                  Supplemental Indentures to Exhibit     December 31, 1989
                  4(a)(1)
   4(a)(3)   --   Fifty-First Supplemental Indenture     HL&P's Form 10-Q for the quarter        1-3187            4(a)
                  to Exhibit 4(a)(1) dated as of March   ended June 30, 1991
                  25, 1991
   4(a)(4)   --   Fifty-Second through Fifty-Fifth       HL&P's Form 10-Q for the quarter        1-3187             4
                  Supplemental Indentures to Exhibit     ended March 31, 1992
                  4(a)(1) each dated as of March 1,
                  1992
   4(a)(5)   --   Fifty-Sixth and Fifty-Seventh          HL&P's Form 10-Q for the quarter        1-3187             4
                  Supplemental Indentures to Exhibit     ended September 30, 1992
                  4(a)(1) each dated as of October 1,
                  1992
   4(a)(6)   --   Fifty-Eighth and Fifty-Ninth           HL&P's Form 10-Q for the quarter        1-3187             4
                  Supplemental Indentures to Exhibit     ended March 31, 1993
                  4(a)(1) each dated as of March 1,
                  1993
   4(a)(7)   --   Sixtieth Supplemental Indenture to     HL&P's Form 10-Q for the quarter        1-3187             4
                  Exhibit 4(a)(1) dated as of July 1,    ended June 30, 1993
                  1993

227

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------   --------------
   4(a)(8)   --   Sixty-First through Sixty-Third        HL&P's Form 10-K for the year ended     1-3187          4(a)(8)
                  Supplemental Indentures to Exhibit     December 31, 1993
                  4(a)(1) each dated as of December 1,
                  1993
   4(a)(9)   --   Sixty-Fourth and Sixty-Fifth           HL&P's Form 10-K for the year ended     1-3187          4(a)(9)
                  Supplemental Indentures to Exhibit     December 31, 1995
                  4(a)(1) each dated as of July 1,
                  1995
   4(b)(1)   --   Rights Agreement, dated July 11,       HI's Form 8-K dated July 11, 1990       1-7629          4(a)(1)
                  1990, between the Company and Texas
                  Commerce Bank, National Association,
                  as Rights Agent (Rights Agent),
                  which includes form of Statement of
                  Resolution Establishing Series of
                  Shares designated Series A
                  Preference Stock and form of Rights
                  Certificate
   4(b)(2)   --   Agreement and Appointment of Agent,    HI's Form 8-K dated July 11, 1990       1-7629          4(a)(2)
                  dated as of July 11, 1990, between
                  the Company and the Rights Agent
   4(b)(3)   --   Form of Amended and Restated Rights    Registration Statement on Form S-4    333-11329         4(b)(1)
                  Agreement executed on August 6,
                  1997, including form of Statement of
                  Resolution Establishing Series of
                  Shares Designated Series A
                  Preference Stock and form of Rights
                  Agreement
   4(b)(4)   --   Amendment No. 1 to Rights Agreement,   Form 10-Q for the quarter ended         1-3187             4
                  dated as of May 8, 2000, between       March 31, 2000
                  Reliant Energy and Chase Bank of
                  Texas, National Association as
                  Rights Agent
   4(c)      --   Indenture, dated as of April 1,        HI's Form 10-Q for the quarter ended    1-7629            4(b)
                  1991, between the Company and          June 30, 1991
                  NationsBank of Texas, National
                  Association, as Trustee

Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, Reliant Energy has not filed as exhibits to this Form 10-K certain long-term debt instruments, including indentures, under which the total amount of securities authorized do not exceed 10% of the total assets of Reliant Energy and its subsidiaries on a consolidated basis. Reliant Energy hereby agrees to furnish a copy of any such instrument to the SEC upon request.

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
 *10(a)(1)   --   Executive Benefit Plan of the          HI's Form 10-Q for the quarter ended    1-7629         10(a)(1),
                  Company and First and Second           March 31, 1987                                       10(a)(2), and
                  Amendments thereto effective as of                                                             10(a)(3)
                  June 1, 1982, July 1, 1984, and May
                  7, 1986, respectively
 *10(a)(2)   --   Third Amendment dated September 17,    Form 10-K for the year ended            1-3187          10(a)(2)
                  1999 to the Executive Benefit Plan     December 31, 2000
                  of the Company
 *10(b)(1)   --   Executive Incentive Compensation       HI's Form 10-K for the year ended       1-7629           10(b)
                  Plan of the Company effective as of    December 31, 1991
                  January 1, 1982

228

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
 *10(b)(2)   --   First Amendment to Exhibit 10(b)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(a)
                  effective as of March 30, 1992         March 31, 1992
 *10(b)(3)   --   Second Amendment to Exhibit 10(b)(1)   HI's Form 10-K for the year ended       1-7629           10(b)
                  effective as of November 4, 1992       December 31, 1992
 *10(b)(4)   --   Third Amendment to Exhibit 10(b)(1)    HI's Form 10-K for the year ended       1-7629          10(b)(4)
                  effective as of September 7, 1994      December 31, 1994
 *10(b)(5)   --   Fourth Amendment to Exhibit 10(b)(1)   Form 10-K for the year ended            1-3187          10(b)(5)
                  effective as of August 6, 1997         December 31, 1997
 *10(c)(1)   --   Executive Incentive Compensation       HI's Form 10-Q for the quarter ended    1-7629          10(b)(1)
                  Plan of the Company effective as of    March 31, 1987
                  January 1, 1985
 *10(c)(2)   --   First Amendment to Exhibit 10(c)(1)    HI's Form 10-K for the year ended       1-7629          10(b)(3)
                  effective as of January 1, 1985        December 31, 1988
 *10(c)(3)   --   Second Amendment to Exhibit 10(c)(1)   HI's Form 10-K for the year ended       1-7629          10(c)(3)
                  effective as of January 1, 1985        December 31, 1991
 *10(c)(4)   --   Third Amendment to Exhibit 10(c)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(b)
                  effective as of March 30, 1992         March 31, 1992
 *10(c)(5)   --   Fourth Amendment to Exhibit 10(c)(1)   HI's Form 10-K for the year ended       1-7629          10(c)(5)
                  effective as of November 4, 1992       December 31, 1992
 *10(c)(6)   --   Fifth Amendment to Exhibit 10(c)(1)    HI's Form 10-K for the year ended       1-7629          10(c)(6)
                  effective as of September 7, 1994      December 31, 1994
 *10(c)(7)   --   Sixth Amendment to Exhibit 10(c)(1)    Form 10-K for the year ended            1-3187          10(c)(7)
                  effective as of August 6, 1997         December 31, 1997
 *10(d)      --   Executive Incentive Compensation       HI's Form 10-Q for the quarter ended    1-7629          10(b)(2)
                  Plan of Houston Lighting & Power       March 31, 1987
                  Company effective as of January 1,
                  1985
 *10(e)(1)   --   Executive Incentive Compensation       HI's Form 10-Q for the quarter ended    1-7629           10(b)
                  Plan of the Company effective as of    June 30, 1989
                  January 1, 1989
 *10(e)(2)   --   First Amendment to Exhibit 10(e)(1)    HI's Form 10-K for the year ended       1-7629          10(e)(2)
                  effective as of January 1, 1989        December 31, 1991
 *10(e)(3)   --   Second Amendment to Exhibit 10(e)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  effective as of March 30, 1992         March 31, 1992
 *10(e)(4)   --   Third Amendment to Exhibit 10(e)(1)    HI's Form 10-K for the year ended       1-7629          10(c)(4)
                  effective as of November 4, 1992       December 31, 1992
 *10(e)(5)   --   Fourth Amendment to Exhibit 10(e)(1)   HI's Form 10-K for the year ended       1-7629          10(e)(5)
                  effective as of September 7, 1994      December 31, 1994
 *10(f)(1)   --   Executive Incentive Compensation       HI's Form 10-K for the year ended       1-7629           10(b)
                  Plan of the Company effective as of    December 31, 1990
                  January 1, 1991
 *10(f)(2)   --   First Amendment to Exhibit 10(f)(1)    HI's Form 10-K for the year ended       1-7629          10(f)(2)
                  effective as of January 1, 1991        December 31, 1991
 *10(f)(3)   --   Second Amendment to Exhibit 10(f)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(d)
                  effective as of March 30, 1992         March 31, 1992
 *10(f)(4)   --   Third Amendment to Exhibit 10(f)(1)    HI's Form 10-K for the year ended       1-7629          10(f)(4)
                  effective as of November 4, 1992       December 31, 1992
 *10(f)(5)   --   Fourth Amendment to Exhibit 10(f)(1)   HI's Form 10-K for the year ended       1-7629          10(f)(5)
                  effective as of January 1, 1993        December 31, 1992
 *10(f)(6)   --   Fifth Amendment to Exhibit 10(f)(1)    HI's Form 10-K for the year ended       1-7629          10(f)(6)
                  effective in part, January 1, 1995,    December 31, 1994
                  and in part, September 7, 1994

229

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
 *10(f)(7)   --   Sixth Amendment to Exhibit 10(f)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(a)
                  effective as of August 1, 1995         June 30, 1995
 *10(f)(8)   --   Seventh Amendment to Exhibit           HI's Form 10-Q for the quarter ended    1-7629           10(a)
                  10(f)(1) effective as of January 1,    June 30, 1996
                  1996
 *10(f)(9)   --   Eighth Amendment to Exhibit 10(f)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(a)
                  effective as of January 1, 1997        June 30, 1997
 *10(f)(10)  --   Ninth Amendment to Exhibit 10(f)(1)    Form 10-K for the year ended            1-3187         10(f)(10)
                  effective in part, January 1, 1997,    December 31, 1997
                  and in part, January 1, 1998
 *10(g)      --   Benefit Restoration Plan of the        HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  Company, effective as of June 1,       March 31, 1987
                  1985
 *10(h)      --   Benefit Restoration Plan of the        HI's Form 10-K for the year ended       1-7629          10(g)(2)
                  Company as amended and restated        December 31, 1991
                  effective as of January 1, 1988
 *10(i)(1)   --   Benefit Restoration Plan of the        HI's Form 10-K for the year ended       1-7629          10(g)(3)
                  Company, as amended and restated       December 31, 1991
                  effective as of July 1, 1991
 *10(i)(2)   --   First Amendment to Exhibit 10(i)(1)    Form 10-K for the year ended            1-3187          10(i)(2)
                  effective in part, August 6, 1997,     December 31, 1997
                  in part, September 3, 1997, and in
                  part, October 1, 1997
 *10(j)(1)   --   Deferred Compensation Plan of the      HI's Form 10-Q for the quarter ended    1-7629           10(d)
                  Company effective as of September 1,   March 31, 1987
                  1985
 *10(j)(2)   --   First Amendment to Exhibit 10(j)(1)    HI's Form 10-K for the year ended       1-7629          10(d)(2)
                  effective as of September 1, 1985      December 31, 1990
 *10(j)(3)   --   Second Amendment to Exhibit 10(j)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(e)
                  effective as of March 30, 1992         March 31, 1992
 *10(j)(4)   --   Third Amendment to Exhibit 10(j)(1)    HI's Form 10-K for the year ended       1-7629          10(h)(4)
                  effective as of June 2, 1993           December 31, 1993
 *10(j)(5)   --   Fourth Amendment to Exhibit 10(j)(1)   HI's Form 10-K for the year ended       1-7629          10(h)(5)
                  effective as of September 7, 1994      December 31, 1994
 *10(j)(6)   --   Fifth Amendment to Exhibit 10(j)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(d)
                  effective as of August 1, 1995         June 30, 1995
 *10(j)(7)   --   Sixth Amendment to Exhibit 10(j)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(b)
                  effective as of December 1, 1995       June 30, 1995
 *10(j)(8)   --   Seventh Amendment to Exhibit           HI's Form 10-Q for the quarter ended    1-7629           10(b)
                  10(j)(1) effective as of January 1,    June 30, 1997
                  1997
 *10(j)(9)   --   Eighth Amendment to Exhibit 10(j)(1)   Form 10-K for the year ended            1-3187          10(j)(9)
                  effective as of September 1, 1997      December 31, 1997
 *10(j)(10)  --   Ninth Amendment to Exhibit 10(j)(1)    Form 10-K for the year ended            1-3187         10(j)(10)
                  effective as of September 3, 1997      December 31, 1997
 *10(k)(1)   --   Deferred Compensation Plan of the      HI's Form 10-Q for the quarter ended    1-7629           10(a)
                  Company effective as of January 1,     June 30, 1989
                  1989
 *10(k)(2)   --   First Amendment to Exhibit 10(k)(1)    HI's Form 10-K for the year ended       1-7629          10(e)(3)
                  effective as of January 1, 1989        December 31, 1989
 *10(k)(3)   --   Second Amendment to Exhibit 10(k)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(f)
                  effective as of March 30, 1992         March 31, 1992
 *10(k)(4)   --   Third Amendment to Exhibit 10(k)(1)    HI's Form 10-K for the year ended       1-7629          10(i)(4)
                  effective as of June 2, 1993           December 31, 1993
 *10(k)(5)   --   Fourth Amendment to Exhibit 10(k)(1)   HI's Form 10-K for the year ended       1-7629          10(i)(5)
                  effective as of September 7, 1994      December 31, 1994

230

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
 *10(k)(6)   --   Fifth Amendment to Exhibit 10(k)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  effective as of August 1, 1995         June 30, 1995
 *10(k)(7)   --   Sixth Amendment to Exhibit 10(k)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  effective December 1, 1995             June 30, 1995
 *10(k)(8)   --   Seventh Amendment to Exhibit           HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  10(k)(1) effective as of January 1,    June 30, 1997
                  1997
 *10(k)(9)   --   Eighth Amendment to Exhibit 10(k)(1)   Form 10-K for the year ended            1-3187          10(k)(9)
                  effective in part October 1, 1997      December 31, 1997
                  and in part January 1, 1998
 *10(k)(10)  --   Ninth Amendment to Exhibit 10(k)(1)    Form 10-K for the year ended            1-3187         10(k)(10)
                  effective as of September 3, 1997      December 31, 1997
 *10(l)(1)   --   Deferred Compensation Plan of the      HI's Form 10-K for the year ended       1-7629          10(d)(3)
                  Company effective as of January 1,     December 31, 1990
                  1991
 *10(l)(2)   --   First Amendment to Exhibit 10(l)(1)    HI's Form 10-K for the year ended       1-7629          10(j)(2)
                  effective as of January 1, 1991        December 31, 1991
 *10(l)(3)   --   Second Amendment to Exhibit 10(l)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(g)
                  effective as of March 30, 1992         March 31, 1992
 *10(l)(4)   --   Third Amendment to Exhibit 10(l)(1)    HI's Form 10-K for the year ended       1-7629          10(j)(4)
                  effective as of June 2, 1993           December 31, 1993
 *10(l)(5)   --   Fourth Amendment to Exhibit 10(l)(1)   HI's Form 10-K for the year ended       1-7629          10(j)(5)
                  effective as of December 1, 1993       December 31, 1993
 *10(l)(6)   --   Fifth Amendment to Exhibit 10(l)(1)    HI's Form 10-K for the year ended       1-7629          10(j)(6)
                  effective as of September 7, 1994      December 31, 1994
 *10(l)(7)   --   Sixth Amendment to Exhibit 10(l)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(b)
                  effective as of August 1, 1995         June 30, 1995
 *10(l)(8)   --   Seventh Amendment to Exhibit           HI's Form 10-Q for the quarter ended    1-7629           10(d)
                  10(l)(1) effective as of December 1,   June 30, 1996
                  1995
 *10(l)(9)   --   Eighth Amendment to Exhibit 10(l)(1)   HI's Form 10-Q for the quarter ended    1-7629           10(d)
                  effective as of January 1, 1997        June 30, 1997
 *10(l)(10)  --   Ninth Amendment to Exhibit 10(l)(1)    Form 10-K for the year ended            1-3187         10(l)(10)
                  effective in part August 6, 1997, in   December 31, 1997
                  part October 1, 1997, and in part
                  January 1, 1998
 *10(l)(11)  --   Tenth Amendment to Exhibit 10(l)(1)    Form 10-K for the year ended            1-3187         10(i)(11)
                  effective as of September 3, 1997      December 31, 1997
 *10(m)(1)   --   Long-Term Incentive Compensation       HI's Form 10-Q for the quarter ended    1-7629           10(c)
                  Plan of the Company effective as of    June 30, 1989
                  January 1, 1989
 *10(m)(2)   --   First Amendment to Exhibit 10(m)(1)    HI's Form 10-K for the year ended       1-7629          10(f)(2)
                  effective as of January 1, 1990        December 31, 1989
 *10(m)(3)   --   Second Amendment to Exhibit 10(m)(1)   HI's Form 10-K for the year ended       1-7629          10(k)(3)
                  effective as of December 22, 1992      December 31, 1992
 *10(m)(4)   --   Third Amendment to Exhibit 10(m)(1)    HI's Form 10-K for the year ended       1-3187          10(m)(4)
                  effective as of August 6, 1997         December 31, 1997
 *10(n)      --   Form of stock option agreement for     HI's Form 10-Q for the quarter ended    1-7629           10(h)
                  non-qualified stock options granted    March 31, 1992
                  under the Company's 1989 Long-Term
                  Incentive Compensation Plan

231

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
 *10(o)      --   Forms of restricted stock agreement    HI's Form 10-Q for the quarter ended    1-7629           10(i)
                  for restricted stock granted under     March 31, 1992
                  the Company's 1989 Long-Term
                  Incentive Compensation Plan
 *10(p)(1)   --   1994 Long-Term Incentive               HI's Form 10-K for the year ended       1-7629          10(n)(1)
                  Compensation Plan of the Company       December 31, 1993
                  effective as of January 1, 1994
 *10(p)(2)   --   Form of stock option agreement for     HI's Form 10-K for the year ended       1-7629          10(n)(2)
                  non-qualified stock options granted    December 31, 1993
                  under the Company's 1994 Long-Term
                  Incentive Compensation Plan
 *10(p)(3)   --   First Amendment to Exhibit 10(p)(1)    HI's Form 10-Q for the quarter ended    1-7629           10(e)
                  effective as of May 9, 1997            June 30, 1997
 *10(p)(4)   --   Second Amendment to Exhibit 10(p)(1)   Form 10-K for the year ended            1-3187          10(p)(4)
                  effective as of August 6, 1997         December 31, 1997
 *10(p)(5)   --   Third Amendment to Exhibit 10(p)(1)    Form 10-K for the year ended            1-3187          10(p)(5)
                  effective as of January 1, 1998        December 31, 1998
 *10(q)(1)   --   Savings Restoration Plan of the        HI's Form 10-K for the year ended       1-7629           10(f)
                  Company Effective as of January 1,     December 31, 1990
                  1991
 *10(q)(2)   --   First Amendment to Exhibit 10(q)(1)    HI's Form 10-K for the year ended       1-7629          10(l)(2)
                  effective as of January 1, 1992        December 31, 1991
 *10(q)(3)   --   Second Amendment to Exhibit 10(q)(1)   Form 10-K for the year ended            1-3187          10(q)(3)
                  effective in part, August 6, 1997,     December 31, 1997
                  and in part, October 1, 1997
 *10(r)(1)   --   Director Benefits Plan, effective as   HI's Form 10-K for the year ended       1-7629           10(m)
                  of January 1, 1992                     December 31, 1991
 *10(r)(2)   --   First Amendment to Exhibit 10(r)(1)    Form 10-K for the year ended            1-7629          10(m)(1)
                  effective as of August 6, 1997         December 31, 1998
 *10(s)(1)   --   Executive Life Insurance Plan of the   HI's Form 10-K for the year ended       1-7629           10(q)
                  Company effective as of January 1,     December 31, 1993
                  1994
 *10(s)(2)   --   First Amendment to Exhibit 10(s)(1)    HI's Form 10-Q for the quarter ended    1-7629             10
                  effective as of January 1, 1994        June 30, 1995
 *10(s)(3)   --   Second Amendment to Exhibit 10(s)(1)   Form 10-K for the year ended            1-3187          10(s)(3)
                  effective as of August 6, 1997         December 31, 1997
 *10(t)      --   Employment and Supplemental Benefits   HI's Form 10-Q for the quarter ended    1-7629           10(f)
                  Agreement between HL&P and Hugh Rice   March 31, 1987
                  Kelly
 *10(u)(1)   --   Houston Industries Incorporated        Company's Form 10-K for the year        1-7629          10(s)(4)
                  Savings Trust between the Company      ended December 31, 1995
                  and The Northern Trust Company, as
                  Trustee (as amended and restated
                  effective April 1, 1999)
  10(u)(2)   --   Note Purchase Agreement between the    HI's Form 10-K for the year ended       1-7629          10(j)(3)
                  Company and the ESOP Trustee, dated    December 31, 1990
                  as of October 5, 1990
  10(u)(3)   --   Reliant Energy, Incorporated Master    Form 10-K for the year ended            1-3187          10(u)(3)
                  Retirement Trust (as amended and       December 31, 1999
                  restated effective January 1, 1999
                  and renamed effective May 5, 1999)

232

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
  10(u)(4)   --   Contribution and Registration          Form 10-K for the year ended            1-3187          10(u)(4)
                  Agreement dated December 18, 2001      December 31, 2001
                  among the Company, CenterPoint
                  Energy, Inc. and the Northern Trust
                  Company, trustee under the Reliant
                  Energy, Incorporated Master
                  Retirement Trust
  10(v)(1)   --   Stockholder's Agreement dated as of    Schedule 13-D dated July 6, 1995       5-19351             2
                  July 6, 1995 between the Company and
                  Time Warner Inc.
  10(v)(2)   --   Amendment to Exhibit 10(v)(1) dated    HI's Form 10-K for the year ended       1-7629          10(x)(4)
                  November 18, 1996                      December 31, 1996
 *10(w)(1)   --   Houston Industries Incorporated        Form 10-K for the year ended            1-7629           10(7)
                  Executive Deferred Compensation        December 31, 1995
                  Trust, effective as of December 19,
                  1995
 *10(w)(2)   --   First Amendment to Exhibit 10(w)(1)    Form 10-Q for the quarter ended June    1-3187             10
                  effective as of August 6, 1997         30, 1998
 *10(x)      --   Consulting Agreement, dated January    HI's Form 10-K for the year ended       1-7629           10(bb)
                  14, 1997, between the Company and      December 31, 1996
                  Milton Carroll
 *10(y)      --   Reliant Energy, Incorporated Common    Form 10-K for the year ended            1-3187           10(y)
                  Stock Participation Plan for           December 31, 2000
                  Designated New Employees and
                  Non-Officer Employees effective as
                  of March 4, 1998
 *10(z)      --   Reliant Energy, Incorporated Annual    Definitive Proxy Statement for 2000     1-3187         Appendix I
                  Incentive Compensation Plan, as        Annual Meeting of Shareholders
                  established effective January 1,
                  1999
 *10(aa)(1)  --   Long Term Incentive Plan of Reliant    Registration Statement on Form S-8    333-60260           4.6
                  Energy, Incorporated, effective as     dated May 4, 2001
                  of January 1, 2001
 *10(aa)(2)  --   First Amendment to Long Term           Registration Statement on Form S-8    333-60260           4.7
                  Incentive Plan of Reliant Energy,      dated May 4, 2001
                  Incorporated, effective as of
                  January 1, 2001
  10(bb)(1)  --   Master Separation Agreement entered    Form 10-Q for the quarter ended         1-3187            10.1
                  into as of December 31, 2000 between   March 31, 2001
                  Reliant Energy, Incorporated and
                  Reliant Resources, Inc.
  10(bb)(2)  --   Transition Services Agreement, dated   Form 10-Q for the quarter ended         1-3187            10.2
                  as of December 31, 2000, between       March 31, 2001
                  Reliant Energy, Incorporated and
                  Reliant Resources, Inc.
  10(bb)(3)  --   Technical Services Agreement, dated    Form 10-Q for the quarter ended         1-3187            10.3
                  as of December 31, 2000, between       March 31, 2001
                  Reliant Energy, Incorporated and
                  Reliant Resources, Inc.
  10(bb)(4)  --   Texas Genco Option Agreement, dated    Form 10-Q for the quarter ended         1-3187            10.4
                  as of December 31, 2000, between       March 31, 2001
                  Reliant Energy, Incorporated and
                  Reliant Resources, Inc.
  10(bb)(5)  --   Employee Matters Agreement, entered    Form 10-Q for the quarter ended         1-3187            10.5
                  into as of December 31, 2000,          March 31, 2001
                  between Reliant Energy, Incorporated
                  and Reliant Resources, Inc.

233

                                                                                                 SEC FILE
                                                                                                    OR
EXHIBIT                                                                                        REGISTRATION      EXHIBIT
NUMBER                        DESCRIPTION                  REPORT OR REGISTRATION STATEMENT       NUMBER        REFERENCE
-------                       -----------                  --------------------------------    ------------     ---------
  10(bb)(6)  --   Retail Agreement, entered into as of   Form 10-Q for the quarter ended         1-3187            10.6
                  December 31, 2000, between Reliant     March 31, 2001
                  Energy, Incorporated and Reliant
                  Resources, Inc.
  10(bb)(7)  --   Registration Rights Agreement, dated   Form 10-Q for the quarter ended         1-3187            10.7
                  as of December 31, 2000, between       March 31, 2001
                  Reliant Energy, Incorporated and
                  Reliant Resources, Inc.
  10(bb)(8)  --   Tax Allocation Agreement, entered      Form 10-Q for the quarter ended         1-3187            10.8
                  into as of December 31, 2000,          March 31, 2001
                  between Reliant Energy, Incorporated
                  and Reliant Resources, Inc.
  10(cc)     --   $2,500,000,000 Senior A Credit         Form 10-K for the year ended            1-3187           10(cc)
                  Agreement dated as of July 13, 2001    December 31, 2001
                  among Houston Industries FinanceCo
                  LP, Reliant Energy, Incorporated and
                  the lender thereto.
  10(dd)     --   $1,800,000,000 Senior B Credit         Form 10-K for the year ended            1-3187           10(dd)
                  Agreement dated as of July 13, 2001    December 31, 2001
                  among Houston Industries FinanceCo
                  LP, Reliant Energy, Incorporated and
                  the lender parties thereto.
  10(ee)     --   $400,000,000 Amended and Restated      Form 10-K for the year ended            1-3187           10(ee)
                  Revolving Credit and Competitive       December 31, 2001
                  Advance Facilities Agreement dated
                  as of July 13, 2001 among Reliant
                  Energy, Incorporated and the banks
                  named therein.
+*10(ff)     --   Retention Agreement effective May 4,
                  2001 between Reliant Resources, Inc.
                  and R. Steve Letbetter
+*10(gg)     --   Retention Agreement effective May 4,
                  2001 between Reliant Resources, Inc.
                  and Robert W. Harvey
+*10(hh)     --   Retention Agreement effective May 4,
                  2001 between Reliant Resources, Inc.
                  and Stephen W. Naeve
+*10(ii)     --   Retention Agreement effective May 4,
                  2001 between Reliant Resources, Inc.
                  and Joe Bob Perkins
+*10(jj)     --   Retention Agreement effective
                  October 15, 2001 between Reliant
                  Energy, Incorporated and David G.
                  Tees
+*10(kk)     --   Retention Agreement effective
                  October 15, 2001 between Reliant
                  Energy, Incorporated and Michael A.
                  Reed
 +12         --   Computation of Ratios of Earnings to
                  Fixed Charges
 +21         --   Subsidiaries of Reliant Energy
 +23         --   Consent of Deloitte & Touche LLP
 +99         --   Investor's Choice Plan Notice of
                  Temporary Suspension of Stock
                  Purchases

234

Exhibit 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Reliant Energy, Incorporated's
(i) Registration No. 333-11329 on Form S-4; (ii) Registration Statement Nos. 33-46368, 33-54228, 333-323353, 333-33301, 333-33303, 333-58433, 333-70665, 333-81119 and 333-68290 on Form S-3; (iii) Post-Effective Amendment No. 1 to Registration Statement No. 33-51417 on Form S-3; (iv) Registration Statement Nos. 333-32413, 333-32585, 333-49333, 333-38188 and 333-60260 on Form S-8; (v) Post-Effective Amendments Nos. 1, 2 and 3 to Registration Statement No. 333-11329-99 on Form S-8 and in CenterPoint Energy, Inc.'s Registration Statement No. 333-69502 on Form S-4 of our report dated March 28, 2002, July 3, 2002, as to the effects of the restatement discussed in Note 1 (which expresses an unqualified opinion and includes explanatory paragraphs relating to the restatement described in Note 1 and the change in method of accounting for derivatives and hedging activities), appearing in this Amendment No. 1 to the Annual Report on Form 10-K/A of Reliant Energy, Incorporated for the year ended December 31, 2001.

Houston, Texas
July 3, 2002


EXHIBIT 99

[RELIANT ENERGY LETTERHEAD]

NOTICE OF TEMPORARY SUSPENSION OF STOCK PURCHASES
THROUGH THE INVESTOR'S CHOICE PLAN

Dear Investor's Choice Plan Participant:

As required under federal securities law, purchases of stock for participants through the Reliant Energy, Incorporated Investor's Choice Plan are suspended until such time as an amendment to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 is filed with the Securities and Exchange Commission (SEC). It is currently anticipated that the amendment will be filed with the SEC around June 10, 2002. The Company expects to resume normal Plan purchases following that filing.

Sales of Reliant Energy common stock through the Investor's Choice Plan are not affected by this suspension and will continue in the usual manner.

We apologize for any inconvenience this may cause you. Upon your request, we will be happy to return any optional cash contributions received by us but not yet used for purchase. If you do not request the return of your cash contribution, we will hold your funds for purchase on the next investment date, which will be the third trading day after the Form 10-K amendment is filed with the SEC. Once purchases resume, cash which was not invested prior to May 29 will be used to purchase shares at the lower of the price on (i) the trading day immediately preceding the next investment date (the second trading day after the Form 10-K amendment is filed with the SEC) or (ii) the trading day immediately preceding the investment date purchases would have been made in absence of this suspension (such purchases normally being made every 5 trading days using cash received prior to that investment date). Shares purchased through the reinvestment of the dividend payable on June 10th will be allocated to participants at the lower of the price on (i) June 7th (the trading day immediately preceding the June 10th dividend payment date) or (ii) the trading day immediately preceding the next investment date. Under the Plan, the price of purchases is the average of the high and low sales prices of the Company's common stock reported on the New York Stock Exchange Composite Tape for the trading day immediately preceding the relevant investment date.

If you wish to have your optional cash contribution returned or to change your current dividend reinvestment election, please call Investor Services no later than the close of business on the second trading day after the Form 10-K amendment is filed with the SEC. If you change your dividend reinvestment election for the June 10th dividend payment it will take approximately 3 business days to process the change and prepare your dividend check.

We appreciate your continuing support of Reliant Energy, Incorporated. Please call or write Investor Services if you have any questions.

Very truly yours, Reliant Energy, Incorporated

THIS NOTICE SUPPLEMENTS THE INVESTOR'S CHOICE PLAN PROSPECTUS DATED SEPTEMBER 10, 2001 AND CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.

BROKERAGE PARTNERS