Fitch Rates San Antonio, Texas' $127.9MM Electric & Gas Bonds 'AA+'; Outlook Stable.

SAN FRANCISCO -- Fitch assigns an 'AA+' rating to the City of San Antonio, Texas' $127.9 million of electric and gas systems revenue and refunding bonds, new series 2006B (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 new series 2006B bonds will refund certain series 1998B and 2000B taxable bonds. The bonds are expected to price on Jan. 9, 2007 via a negotiated transaction with Morgan Stanley as the senior underwriter.

Key credit strengths include:

--Strong management practices;

--Stable financial performance;

--Low-cost and diverse generating portfolio; and

--Competitive retail rates.

Additional credit strengths include a favorable service area economy and a diverse customer base. Fitch anticipates that CPS Energy's acquisition of 300MW of additional nuclear capacity in 2005 and ongoing construction of a new 750MW base-load coal unit expected to enter commercial operation in 2010 should continue to keep its average cost of power competitive in the ERCOT market. CPS continues to exhibit strong financial performance with debt service coverage levels consistently above 2.2 times (x) over the last five years. Strong coverage levels are driven by a large transfer to the city's general fund and a strong pay-as-you-go component of the capital plan. Liquidity was exceptionally strong at the end of FY06 (Jan. 31, 2006) 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 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 FY06). 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 or its 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.

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 4,407. 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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