Fitch Rates San Antonio, Texas' $394MM Electric & Gas Bonds 'AA+'; Stable Outlook.

SAN FRANCISCO -- Fitch assigns an 'AA+' rating to the City of San Antonio, Texas's $394 million of electric and gas systems revenue bonds, series 2006A (issued on behalf of CPS Energy). Fitch also affirms the 'AA+' long-term rating on CPS Energy's outstanding senior and subordinate bonds. The Rating Outlook is Stable. Proceeds of the series 2006A bonds will fund ongoing capital needs of CPS, primarily related to construction of a new 750MW coal unit - the J.K. Spruce Unit II (for more information see below). The bonds are expected to sell on Aug. 9 via a negotiated transaction with Lehman Brothers as the senior underwriter.

The 'AA+' rating reflects CPS Energy's strong management practices, stable financial performance, low-cost and diverse generating portfolio, and very competitive retail rates. Additional credit strengths include a favorable service area economy and a diverse customer base. Fitch anticipates that CPS Energy's construction of a new 750MW base-load coal unit and the acquisition of 300MW of additional nuclear capacity in 2005 should continue to keep the cost of power competitive. CPS continues to exhibit stable financial performance with debt service coverage levels consistently above 2.2 times (x) over the last five years. Liquidity is exceptionally strong due to approximately $800 million in unrestricted reserves, or 272 days cash. However, CPS Energy expects to spend down approximately $400 million of its reserves to fund a portion of its sizable capital plan. Fitch notes that the remaining reserves of $400 million continue to reflect a liquidity level (138 days cash) that supports the 'AA+' rating based on the utility's risk profile.

Credit concerns are limited and focused on CPS Energy's $2.9 billion capital improvement plan over the next five years and the city of San Antonio's historical general fund reliance on the utility transfer, which is equal to 14% of gross revenues ($235 million in fiscal 2006). However, these concerns are somewhat mitigated by the utility's demonstrated ability to support the general fund transfer without significant impact to its rate flexibility, debt service coverage levels, or ability to maintain its pay-as-you-go funding of capital improvements. The rating reflects Fitch's expectation that CPS Energy will be able to execute its capital plan while maintaining an approximately 50% debt-to-capital ratio over time, its historically high debt service coverage levels, and its robust liquidity levels.

New Coal Unit: CPS began construction on the J.K. Spruce II unit, a 750MW coal plant, in April 2006. In addition to project construction, CPS Energy will incur additional environmental upgrade costs at its existing coal plants as part of the approved permit for the J.K. Spruce II unit. The upgrades will result in a net decrease in emissions after the new 750MW plant is operational as compared to current levels from the three existing plants. Calvaveras Power Partners is constructing the unit under a design-build contract. The plant is expected to become commercially operational in May 2010 and should help CPS Energy continue to offer its ratepayers highly competitive and stable rates in the ERCOT market, with 70% of capacity provided by gas-fired generation.

System Profile: CPS Energy provides exclusive retail electric service to 650,000 customers in virtually all of Bexar County and portions of seven adjacent counties. Additionally, the utility provides retail gas service to 313,000 customers within the city of San Antonio and surrounding areas. The customer base is diverse with a peak demand of 4,320. CPS Energy owns three coal plants (1,425MW) and 40% of the South Texas Project Nuclear Plant (1,025MW) that combined, provided 80% of its kWh sales in fiscal 2006.

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