We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.

The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.

These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.

When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?

Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.

Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.

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Wednesday, July 09, 2008

Fitch Affirms CenterPoint Energy & Subsidiaries; Outlook Stable

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NEW YORK, Jul 09, 2008 (BUSINESS WIRE) ----Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and outstanding debt ratings of CenterPoint Energy, Inc. (CNP) following completion of a periodic review. Fitch has also affirmed the 'BBB' IDR for Centerpoint's subsidiaries. The Rating Outlook is Stable. Approximately $7 billion of debt is affected by today's rating actions. A detailed ratings list follows the end of the press release.

CNP's ratings are supported by dividend payments from mostly regulated operations that are favorably located in relatively high growth areas as well as a strong liquidity position. Approximately 85% of consolidated operating income is generated by regulated utilities and pipeline operations. CenterPoint Energy Houston Electric LLC (CEHE) is able to annually recover transmission investments in tariffs for the remaining two years of the base rate freeze and CenterPoint Energy Resources Corp.'s (CERC) cash flows are expected to increase as a result of interstate pipeline and gas gathering investments.

Fitch's primary credit concern for CNP is high consolidated balance sheet leverage. In addition, capital spending is expected to require external funding to supplement cash generation in 2008 as CEHE invests in the TX electric transmission system and CERC completes the Southeast Supply Header interstate pipeline expansion and invests in gas gathering and processing capacity to serve growing gas production.

Ratings of CEHE are supported by credit ratios consistent with a 'BBB' lower risk utility as a transmission and distribution utility that has no commodity price risk or provider of last resort obligations. Rating concerns include rising operating costs during a base rate freeze that extends to mid-2010 and regulatory and political risk.

While year to date only four small retail electric providers (REPs) have ceased operations as a result of price spikes in the energy balancing markets that made their power purchases unaffordable, the spikes increase risk that additional REPs will go out of business and lead to growing receivables for CEHE. The high power costs also raise the likelihood that Texas law or regulations may be changed to help consumers manage power bills. Fitch notes that CEHE's largest REP counter-parties, formed when vertically integrated utilities were separated in TX, have mostly hedged expected generation supply needs and are not significantly exposed to recent volatility in the Texas spot energy markets.

CERC's ratings are supported by contractual cash flows from interstate pipelines and improving cash flows from regulated gas local distribution utilities (LDCs). Fitch's rating concerns include the potential for cost over-runs of capital projects and/or disproportionate growth of CERC's higher risk non-regulated operations.

The Stable Rating Outlook assumes that the electric and gas utilities and the pipelines will perform well and that operating and maintenance costs will be effectively controlled during the base rate freeze. The Stable Outlook also assumes risk regulated operations will continue to contribute more than 80% of consolidated operating income. Fitch's Outlook incorporates the expectation that capital spending needs will reduce to a level that is funded with internal cash flow beyond 2008. Improvement in leverage and coverage ratios through cash flow growth or other means is the key to any improvement in CNP's current ratings or Outlook.

CNP, through its subsidiaries, operates as a public utility company. CEHE provides regulated electric transmission and distribution services to REPs, municipalities, electric cooperatives, and other distribution companies that provide service to approximately two million customers in and around Houston, Texas. CERC owns and operates LDCs that serve 3.2 million customers in six states, 8,200 miles of interstate natural gas pipelines, gas gathering lines, processing and storage facilities, and engages in gas marketing to commercial and industrial customers.

Fitch has affirmed the following ratings with a Stable Outlook:

CenterPoint Energy, Inc. (CNP)

--IDR 'BBB-';

--Senior unsecured 'BBB-';

--Trust preferred/Zens 'BB+';

--Short-term IDR 'F3';

--Commercial paper 'F3'.

CenterPoint Energy Resources Corp. (CERC)

--IDR 'BBB';

--Senior unsecured 'BBB';

--Convertible subordinated notes 'BBB-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

CenterPoint Energy Houston Electric LLC (CEHE)

--IDR 'BBB';

--First mortgage bonds 'A-';

--General mortgage bonds 'BBB+';

--Unsecured credit Facility 'BBB';

--Short-term IDR 'F2'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings Sharon Bonelli, +1-212-908-0581 (New York) Justin Bowersock,
   CFA, +1-312-368-3151 (Chicago) Media Relations Brian Bertsch, +1-212-908-0549 (New York)

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