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Rating Action: Moody's assigns Aa2 to San Antonio (City of), TX Combined Utility Enterprise's (CPS Energy) Electric and Gas Systems Revenue Refunding Bonds, New Series 2022 and Taxable New Series 2022Global Credit Research - 17 Mar 2022New York, March 17, 2022 -- Moody's Investors Service has assigned a Aa2 senior lien rating to the City of San Antonio, TX Combined Utility Enterprise's (CPS Energy) $108.57 million in Electric and Gas Systems Revenue Refunding Bonds, New Series 2022 and $421.375 million of Electric and Gas Systems Revenue Refunding Bonds, Taxable New Series 2022. We also maintain a Aa2 rating on senior lien obligations totaling approximately $4.2 billion post-refunding, an Aa3 rating on $2.1 billion of junior lien obligations, and a P-1 rating on the outstanding Commercial Paper Notes Series A, B, and C. The rating outlook is stable.RATINGS RATIONALEThe Aa2 senior lien rating considers rising leverage as CPS Energy issues long-term debt related to Winter Storm Uri costs. We also expect financial metrics including debt service coverage ratios and liquidity will remain in line with similarly rated peers based on the recent rate increase adopted by the Board and City Council in January 2022. The total potential Uri-related liability is about $1 billion, $587 million of which is currently in dispute. The rating reflects our expectation that CPS Energy's adjusted debt ratio, including Moody's adjusted net pension liability (ANPL), will move closer to and eventually exceed 80% over the next three years especially if CPS Energy ends up paying a portion or all of the disputed charges.Winter Storm Uri's extreme nature and enduring cost impact to CPS Energy, and the fact that meaningful reliability improvements have yet to be implemented at scale in the ERCOT market and the state's energy supply chain, are considered in our assessment of environmental risk. Strained customer relations in the wake of the storm and the need to rebuild management credibility after a wave of executive departures also raise the risk profile as it relates to social and governance considerations.CPS Energy successfully obtained approval for a 3.85% base rate increase in January 2022 from the Board and City Council, a credit positive achievement considering the heightened political pushback owing to an erosion of customer trust after Winter Storm Uri, inflation concerns, and a protracted recovery from the coronavirus. While the utility still faces headwinds as it works through the impact of Winter Storm Uri and other related issues, we expect additional anticipated rate increases over the five-year planning horizon will be implemented to maintain financial metrics at or above internal targets of 1.5x debt service coverage and 150 days cash on hand.CPS Energy's ratings continue to reflect various strengths including the utility's broad and growing service area economy; diverse generation resource mix; credit-supportive self-regulation on electric and gas rates and sound environmental policies; competitive residential retail rates that are lower than Texas peers; and consistent record of maintaining solid DSCRs and liquidity.The one notch differential of the Aa3 junior lien rating to the Aa2 senior lien rating considers the subordinate pledge relative to the security on the senior lien obligations and lack of a debt service reserve fund.RATING OUTLOOKThe stable outlook reflects our expectation that CPS Energy will maintain solid liquidity and DSCRs averaging 1.7x over the next two years after the successful adoption of the most recent base rate increase and creation of the regulatory asset. The stable outlook recognizes the efforts taken to strengthen resiliency across the system and to expand its financial and physical hedging program providing greater natural gas price protection.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Reduction in leverage, without sacrificing needed capital investment in the system, with an adjusted (debt plus Moody's adjusted net pension liability) debt ratio projected to remain at or below 70%- Consistent trend of adjusting base rates as needed with limited political intervention to maintain strong liquidity and generate post-transfer debt service coverage ratios of over 2.0xFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Adjusted debt service coverage that is expected to fall below 1.50 times over a multi-year period- Unadjusted days cash on hand below management's target of 150 days or below 200 adjusted days cash on hand when including short term borrowing capacity- Customer intolerance for any rate increase that would adversely impact financial metrics- Weakening in competitive position or change in business model that impacts fixed cost recovery.LEGAL SECURITYThe senior lien bonds are payable from a first lien net revenue pledge of CPS Energy's electric and natural gas systems; there is a sum-sufficient rate covenant required which includes a deposit of 6% of gross revenues into the repair and replacement account, that effectively provides greater than the stated sum-sufficient debt service coverage.The junior lien obligations consisting of the long-term fixed and variable rate bonds are payable from a pledge of net revenues that is junior to the senior lien. The commercial paper notes are issued on a third lien, subordinate to the junior lien obligations. Lastly, notes issued under the flex rate note program are inferior (fourth) lien obligations and are subordinate to the commercial paper notes.There is an additional bonds test of 1.50 times maximum annual debt service on senior lien bonds and 1.00 times on all senior and junior-lien debt obligations and a debt service reserve on senior lien bonds funded at average annual debt service and provided by a surety policy from Assured Guaranty Municipal Corp. (A2 stable). There is no debt service reserve for the junior lien bonds.USE OF PROCEEDSThe proceeds from the tax-exempt bonds will be used to refund certain outstanding senior lien obligations to achieve a debt service savings. The taxable bonds are being issued to refund outstanding Commercial Paper Program and Series A Flex Notes originally issued to fund Winter Storm Uri costs. The bonds will restore total available capacity of $670 million under the Commercial Paper Program and $100 million of the Series A Flex Notes. Proceeds will also be used to pay bond issuance costs.PROFILESan Antonio Electric and Gas Systems, Texas is a combined utility owned by the City of San Antonio (Aaa negative). CPS Energy provides monopoly locally-owned electric service to a strong economic area that includes all of Bexar County (rated Aaa) and parts of seven adjacent counties. There is no service area boundary for the CPS Energy gas system. The San Antonio metropolitan statistical area has a population of 2.6 million, which is more than double the population of 1980. Otherwise, customer base stability includes: the retail service area is not open to competition, the utility serves several Federal military installations and there is no major customer dominance. Approximately 90% of customers are residential.METHODOLOGYThe principal methodology used in these ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170209. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Julie Meyer Lead Analyst Project Finance Moody's Investors Service, Inc. 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