PRELIMINARY REMARKETING MEMORANDUM Dated: August 18, 2017

NOT A NEW ISSUE – Book-Entry-Only RATINGS: See "RATINGS" herein

Fulbright & Jaworski LLP and Escamilla & Poneck, LLP, as original co-bond counsel to the City (hereinafter defined) and in connection with the initial delivery of the Bonds (hereinafter defined), rendered an opinion, assuming continuing compliance by the City after the date of initial delivery of the Bonds with certain covenants contained in the Ordinance (hereinafter defined) and subject to the matters set forth under “TAX MATTERS” herein, that interest on the Bonds for federal income tax purposes under existing statutes, regulations, published rulings, and court decisions (1) would be excludable from the gross income of the owners thereof pursuant to section 103 of the Internal Revenue Code of 1986, as amended to the date of initial delivery of the Bonds, and (2) would not be included in computing the alternative minimum taxable income of individuals or, except as described herein, corporations. Co-Bond Counsel (hereinafter defined) will (in accordance with the Ordinance), render an opinion to the Paying Agent / Registrar (defined below) that the remarketing of the Bonds that is the subject of this Remarketing Memorandum will not adversely affect the excludability of interest on the Bonds for federal income tax purposes. The Remarketing Agent (identified below) will be allowed to rely on such opinion. See “TAX MATTERS” herein. Additionally, see "THE BONDS – Interest During the Current Term Mode Interest Period" identifying circumstances when an opinion of nationally recognized bond counsel is required as a condition for an interest rate mode conversion. Co-Bond Counsel expresses no opinion as to the effect on the excludability from gross income for federal income tax purposes of any action requiring such an opinion.

$124,170,000* CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS VARIABLE RATE JUNIOR LIEN REVENUE REFUNDING BONDS, SERIES 2015B

CONVERSION TO TERM RATE PERIOD OF 4* YEARS AT A PER ANNUM TERM RATE OF ___% (PRICED TO YIELD ___% TO MANDATORY TENDER DATE)

Originally Dated: January 1, 2015 Mandatory Tender Date: December 1, 2021* (Interest accrues from the hereinafter defined Date of Delivery) Maturity Date: February 1, 2033

The Bonds. The City of San Antonio, Texas (the "City"), on January 7, 2015, issued its Electric and Gas Systems Variable Rate Junior Lien Revenue Refunding Bonds, Series 2015B (the "Bonds"), pursuant to an ordinance, adopted by the City Council of the City on October 30, 2014 (the "Ordinance"), for the purposes of refinancing existing variable rate debt of the City and paying the costs of issuance of the Bonds. The Bonds are currently outstanding in the aggregate principal amount of $125,000,000. On September 14, 2017, $125,000,000 in Bonds will be tendered for purchase, and $124,170,000* in Bonds will be remarketed in a Term Mode (defined herein) to provide proceeds to pay the purchase price of the aforementioned mandatorily tendered Bonds (see "THE BONDS – Bond Provisions – Authority for the Bonds"). The Bonds are issued in fully-registered form only, without coupons, in denominations of $5,000 (or any integral multiple thereof) while in a Term Mode (see "THE BONDS – Description of the Bonds" herein). No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds is payable by U.S. Bank National Association, Dallas, Texas, as paying agent / registrar (the "Paying Agent / Registrar"), to Cede & Co., which makes distribution of the amounts so paid to the beneficial owners of the Bonds (see "THE BONDS – Bond Provisions – Book-Entry-Only System" herein).

Interest. The Bonds are multi-modal variable rate bonds that were initially issued in a SIFMA Index Mode, effective January 7, 2015 and expiring on September 13, 2017 by election of the City. The Bonds are being remarketed in a Term Mode having a duration of 4* years (accruing interest through November 30, 2021*; such interest period applicable to the Bonds, as remarketed, the "Current Term Mode Interest Period") and, upon the conclusion thereof, will again be remarketed into a successive Interest o circumstances shall this Preliminary Remarketing Memorandum constitute an offer to sell sell to offer an constitute Memorandum Remarketing Preliminary this shall o circumstances Mode (defined herein) of a to-be-determined duration. During the Current Term Mode Interest Period, the Bonds will bear interest at a Term Rate (defined herein) equal to

ation or sale would be unlawful prior to registration or qualification under the securities laws of ___%. See the table appearing on page ii of this Remarketing Memorandum for a description of the Bonds’ Term Rate during the Current Term Mode Interest Period, as well as the Current Term Mode Interest Period’s effective date, ending date, mandatory tender date, yield, Stepped Rate (defined herein), and CUSIP Number applicable to the Bonds, as remarketed. As the Bonds will be remarketed into a Term Mode, interest on the Bonds during the Current Term Mode Interest Period will be calculated on the basis of a 360-day year of twelve 30-day months and will be payable on each February 1 and August 1, commencing February 1, 2018, along with an irregular final interest payment on the Bonds on December 1, 2021* (being the day immediately following the last day of the Current Term Mode Interest Period).

Tenders; Redemption. At the conclusion of the Current Term Mode Interest Period, the Bonds are, on December 1, 2021*, subject to mandatory tender, without right of retention by the Holders (defined herein) thereof (subject to the description below under "No Liquidity Support"). During the Current Term Mode Interest Period, the Bonds are not subject to optional or mandatory tender. The Bonds are subject to redemption at the times, in the amounts and upon conditions described herein. See "THE BONDS – Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds" and "THE BONDS - Redemption of Bonds".

No Liquidity Support. During the Current Term Mode Interest Period, the Bonds are not subject to the benefit of a liquidity facility provided by a third party. Accordingly, a failure by the Remarketing Agent (defined herein) to remarket the Bonds subject to mandatory tender at the end of the Current Term Mode Interest Period will result in the rescission of the notice of mandatory tender with respect thereto and the City not having any obligation to purchase such mandatorily-tendered Bonds at that time. The occurrence of the foregoing will not result in an event of default under the Ordinance or the Bonds. Until such time as the City redeems or remarkets such Bonds that have not been successfully remarketed as described above, those Bonds shall bear interest at the "Stepped Rate", which is identified on page ii of this Remarketing Memorandum, calculated on the basis of a 365 or 366-day year and the number of days actually elapsed. See "THE BONDS - Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds – Mandatory Tender" herein.

Tender; Remarketing. All tenders of Bonds must be made to U.S. Bank National Association, Dallas, Texas, as tender agent for the Bonds (the "Tender Agent"). In the Ordinance, the City has reserved the right to appoint a substitute remarketing agent for the Bonds (which is not required to be the Remarketing Agent identified below) prior to the commencement of the requisite remarketing period applicable to the Bonds and to occur before the expiration of the Current Term Mode Interest Period. Bonds tendered for purchase at the conclusion of the Current Term Mode Interest Period will be bought from the proceeds derived from the remarketing of such Bonds, if any; provided, however, that should the date for tender of the Bonds occur on an Interest Payment Date (defined herein), the accrued interest portion of the Purchase Price (defined herein) is to be paid by the City.

Security. The Bonds are special obligations of the City payable solely from and equally and ratably secured, together with the currently outstanding Junior Lien Obligations (defined herein) and any Additional Junior Lien Obligations (defined herein) hereafter issued by the City, by a junior lien on and pledge of the Net Revenues (defined herein) of the City's Electric and Gas Systems (as further described herein, the "Systems"), subject and subordinate to liens and pledges securing the outstanding Senior Lien Obligations and any Additional Senior Lien Obligations (defined herein) hereafter issued, and superior to the pledge and lien securing the currently outstanding Commercial Paper Obligations (defined herein) and Inferior Lien Obligations (defined herein), all as fully set forth in the Ordinance. The City has reserved the right to grant equal and ratable liens on and pledges of Net Revenues to secure payment of Additional Junior Lien Obligations hereafter issued in accordance with the Ordinance (see "THE BONDS – Bond Provisions - Authority and Security for the Bonds").

Conversion. The Ordinance provides that the Bonds are, at the conclusion of the then-effective interest rate mode (other than the Fixed Mode (defined herein), but including the Current Term Mode Interest Period), subject to conversion to another interest rate mode. If the Bonds are converted, in whole or in part, to an interest rate mode other than another Term Mode, a SIFMA Index Mode (defined herein), or a Fixed Mode, the City anticipates entering into an agreement providing liquidity support for those Bonds at such time. No such agreement, however, has been entered into at this time, nor is one expected to be entered into in the future.

The Bonds were originally delivered to the initial purchasers together with the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by Fulbright & Jaworski LLP and Escamilla & Poneck, LLP, as original co-bond counsel to the City. Norton Rose Fulbright US LLP (formerly Fulbright & Jaworski LLP) and Kassahn & Ortiz, P.C., both of San Antonio, Texas, serve as Co-Bond Counsel ("Co-Bond Counsel") to the City in connection with the remarketing of the Bonds that is the subject of this Remarketing Memorandum. The remarketing of the Bonds will, through the services of DTC, be available for delivery on or about September 14, 2017 (the "Date of Delivery"). In connection with the remarketing of the Bonds, certain legal matters will be passed upon for the Remarketing Agent by its counsel, McCall, Parkhurst & Horton L.L.P., San Antonio, Texas. This Preliminary Remarketing Memorandum and the information contained herein are subject to completion or amendment. Under n Under amendment. or completion to subject are herein contained information the and Memorandum Remarketing Preliminary This solicit offer, such which in jurisdiction any in securities these of sale any be there shall nor buy, to offer an of solicitation the or such jurisdiction. such MORGAN STANLEY ______*Preliminary, subject to change.

CURRENT TERM MODE INTEREST PERIOD INFORMATION

CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS

$124,170,000*

Variable Rate Junior Lien Revenue Refunding Bonds, Series 2015B Current Term Mode Interest Period commences on September 14, 2017

Term Mode Mandatory Term Mode Stepped Expiration* Tender Date* Interest Rate (%) Yield(1) (%) Rate (%) CUSIP No.(2)

Nov. 30, 2021 Dec. 1, 2021 796253___

The Bonds have a stated maturity date of February 1, 2033. The Bonds are subject to mandatory sinking fund redemption in the amounts and at the times provided in the Ordinance and as described herein under the subcaption "THE BONDS – Redemption of Bonds", but none of which occur during the Current Term Mode Interest Period. In addition, all or part of the Bonds of a particular series may be subject to redemption prior to stated maturity, and prior to the expiration of a then-current and applicable interest rate mode, if such redemption provisions are preserved at the time of conversion of such Bonds to the then-applicable interest rate mode. The Bonds are subject to redemption at the times, in the amounts, and upon the conditions described herein. See "THE BONDS – Redemption of Bonds".

(1) The yield shown for the Bonds is calculated to December 1, 2021*.

(2) CUSIP numbers have been assigned to the Bonds by CUSIP Global Services, managed by S&P Global Market Intelligence on behalf of The American Bankers Association, and are included solely for the convenience of the owners and potential owners of the Bonds. No assurance can be given that the CUSIP number for the Bonds will remain the same after the date of delivery of such series of Bonds. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the City, the Board, the Co-Financial Advisors, nor the Remarketing Agent shall be responsible for the selection, changes to, errors, or correctness of the CUSIP numbers set forth herein.

______*Preliminary, subject to change.

ii

CONTACT INFORMATION

City Public Service Board: Tender Agent and Paying Agent / Registrar:

CPS Energy U.S. Bank National Association Ms. Shannon R. Albert Mr. Israel Lugo Senior Director, Capital Markets & Cash Management 13737 Noel Road, Suite 800 Mail Drop 100602 Dallas, TX 75240 P.O. Box 1771 (972) 581-1623 San Antonio, TX 78296-1771 [email protected] (210) 353-3818 [email protected]

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iii

CITY OF SAN ANTONIO, TEXAS

CITY COUNCIL

Ron Nirenberg, Mayor(1)

Roberto Treviño(1) Rey Saldaña(2) Manny Pelaez(1) William "Cruz" Shaw(1) Shirley Gonzales(2) John Courage(1) Rebecca Viagran(2) Greg Brockhouse(1) Clayton Perry(1) Ana Sandoval(3)

Sheryl Sculley – City Manager Ben Gorzell, Jr. – Chief Financial Officer Leticia M. Vacek – City Clerk Andrew Segovia – City Attorney(4)

CITY PUBLIC SERVICE BOARD OF SAN ANTONIO

Edward B. Kelley, Chairman Derrick Howard, Vice Chairman Homer Guevara, Jr., Trustee John T. Steen, Jr., Trustee Ron Nirenberg, Mayor

Paula Y. Gold-Williams – President & CEO Edward L. Fleming Jr. – Chief Financial Officer & Treasurer(5) Carolyn E. Shellman, Esq. – Secretary, Chief Legal & Administrative Officer

CONSULTANTS

Norton Rose Fulbright US LLP PFM Financial Advisors LLC Kassahn & Ortiz, P.C. FirstSouthwest, a Division of Hilltop Securities Inc. Co-Bond Counsel Estrada Hinojosa & Company, Inc. Co-Financial Advisors

(1) Elected pursuant to a run-off election held within the City on June 10, 2017, the results of which were canvassed on June 21, 2017. These City officials were sworn in on the same day.

(2) Re-elected in the City's general election held May 6, 2017, the results of which were canvassed on May 17, 2017. These councilmembers were sworn into office on May 31, 2017.

(3) Elected in the City's general election held May 6, 2017, the results of which were canvassed on May 17, 2017. Councilwoman Sandoval was sworn into office on May 31, 2017.

(4) Named City Attorney on August 4, 2016 and began on August 29, 2016.

(5) Assumed the role of Chief Financial Officer on January 9, 2017 and Treasurer on January 30, 2017. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – History and Management – Administration and Operating Personnel".

iv

USE OF INFORMATION

For purposes of compliance with Rule 15c2-12, as amended, of the United States Securities and Exchange Commission ("Rule 15c2-12"), and in effect on the date of this Preliminary Remarketing Memorandum, this document constitutes an "official statement" of the City with respect to the Bonds that has been "deemed final" by the City as of its date except for the omission of no more than the information permitted by Rule 15c2-12.

No dealer, broker, salesman, or other person has been authorized by the City to give any information or to make any representation with respect to the Bonds, other than as contained in this Remarketing Memorandum, and if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Remarketing Memorandum does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation, or sale. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Remarketing Memorandum nor any sale made shall under any circumstances create any implication that there has been no change in the information or opinions set forth herein after the date of this Remarketing Memorandum. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the undertaking of the City and the Board to provide certain information on a continuing basis.

THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE BONDS HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION FOR THE PURCHASE THEREOF.

IN CONNECTION WITH THIS OFFERING, THE REMARKETING AGENT MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The Remarketing Agent has provided the following sentence for inclusion in this Remarketing Memorandum. The Remarketing Agent has reviewed the information in this Remarketing Memorandum in accordance with and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agent does not guarantee the accuracy or completeness of such information.

The Co-Financial Advisors have provided the following sentence for inclusion in this Remarketing Memorandum. The Co-Financial Advisors have reviewed the information in this Remarketing Memorandum in accordance with and as part of their responsibilities to the Board and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Co-Financial Advisors do not guarantee the accuracy or completeness of such information.

None of the City, the Board, the Co-Financial Advisors, or the Remarketing Agent makes any representation or warranty with respect to the information contained in this Remarketing Memorandum regarding The Depository Trust Company or its Book-Entry-Only System.

The agreements of the City, the Board and others related to the Bonds are contained solely in the contracts described herein. Neither this Remarketing Memorandum nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds.

THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND IS NOT INTENDED AS A SUMMARY OF THIS OFFERING. INVESTORS SHOULD READ THE ENTIRE REMARKETING MEMORANDUM, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE BONDS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

v

TABLE OF CONTENTS

INTRODUCTORY STATEMENT ...... 1 Transmission System ...... 45 THE BONDS ...... 2 Distribution System ...... 45 Description of the Bonds ...... 2 Interconnected System ...... 45 Interest During the Current Term Mode Interest Period ...... 3 External Events Impacting Nuclear Power Generation Industry and STP1 Record Date During the Current Term Mode Interest Period ...... 3 and STP2, and CPS Energy's Response ...... 46 Conversion of Interest Modes (Including Current Conversion); Mandatory Used Nuclear Fuel Management ...... 48 Tender; Purchase of Tendered Bonds ...... 3 Additional Generation Opportunities ...... 50 Redemption of Bonds ...... 5 Nuclear ...... 50 Bond Provisions ...... 6 Generating Station Events ...... 51 DEBT SERVICE REQUIREMENTS ...... 12 Braunig ...... 51 Outstanding Senior Lien Obligations and Junior Lien Obligations ...... 12 Deely...... 52 Historical Net Revenues and Coverage ...... 13 Rio Nogales ...... 52 JUNIOR LIEN OBLIGATIONS ...... 14 Milton B. Lee (MBLCT6) ...... 52 COMMERCIAL PAPER PROGRAM ...... 15 Sommers ...... 52 FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT Spruce2 ...... 52 PROGRAM ...... 15 STP1 ...... 53 SAN ANTONIO ELECTRIC AND GAS SYSTEMS ...... 16 STP2 ...... 54 HISTORY AND MANAGEMENT ...... 16 Fuel Supply ...... 55 Administration and Operating Personnel ...... 16 Gas System ...... 56 RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES 18 Transmission System ...... 56 Retail Service Area ...... 18 Heath Consultants – Falsification Performance of Cathodic Protection Electric ...... 18 Reads ...... 57 Gas...... 18 RRCT Annual Audit Results for 2016 ...... 57 Customer Base as of January 31, 2017 ...... 19 Distribution System ...... 57 Wholesale Power ...... 19 Rule Relating to Replacement of Gas Distribution Facilities ...... 57 CUSTOMERS AND RATES ...... 20 General Properties ...... 58 Customer Rates ...... 20 Operation Control System ...... 58 Retail Service Rates ...... 20 Support Facilities ...... 58 Fuel and Gas Cost Adjustment ...... 21 General Offices and Customer Service Centers ...... 58 Governmentally Imposed Fees, Taxes or Payments ...... 21 Construction Centers and Service Centers ...... 59 Transmission Access and Rate Regulation ...... 22 Villita Assembly Building ...... 59 FINANCIAL MANAGEMENT OF THE SYSTEMS ...... 25 Vehicles and Work Equipment ...... 59 Management Discussion...... 25 Real Estate Holdings ...... 59 Accounting Policies ...... 25 IBM Audit Notice ...... 60 Debt and Asset Management Program ...... 25 COMPLIANCE AND REGULATION ...... 60 Financial Responsibility and Debt Disclosure / Offering Document General Regulatory Climate ...... 60 Preparation Process ...... 26 Environmental Matters ...... 60 Capital Program ...... 26 Federal Clean Air Act ...... 60 Insurance Program ...... 27 Federal Clean Water Act ...... 69 Enterprise Risk Management And Solutions ...... 27 Proper Venue for Clean Water Act Challenges ...... 70 Investments ...... 28 Water Resources Planning ...... 71 Operating Funds ...... 28 Water Conservation ...... 71 Investment Policies ...... 29 Other Environmental Issues ...... 72 Additional Provisions ...... 29 Energy Conservation And Public Safety Programs ...... 73 Trust Funds ...... 30 Energy Conservation ...... 73 STP Decommissioning Funds ...... 30 Public Safety Programs ...... 75 STP Decommissioning Trust ...... 30 Litigation and Regulatory Compliance ...... 75 Master Trust (TCC Funded) ...... 31 The City of San Antonio ...... 75 EMPLOYEE BENEFITS...... 32 Systems Litigation and Claims ...... 77 PENSION AND OTHER POSTEMPLOYMENT BENEFITS...... 32 No Litigation Certificate ...... 79 Use of Assumptions and Estimates ...... 32 Regulatory Compliance ...... 79 Pension Plan ...... 32 CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY OPEB Plans ...... 33 INDUSTRY ...... 79 New OPEB Accounting Guidance ...... 34 THE ELECTRIC UTILITY INDUSTRY GENERALLY ...... 79 STRATEGIC INITIATIVES ...... 36 Federal Energy Policy ...... 80 Business and Economic Development ...... 37 FERC Authority ...... 82 DESCRIPTION OF FACILITIES ...... 38 The Public Utility Commission of Texas (PUCT) ...... 83 Electric System ...... 38 Texas Reliability Entity, Inc. (Texas RE) ...... 83 Power Generation Sources ...... 38 ERCOT ...... 83 Generating Capability ...... 39 ELECTRIC UTILITY RESTRUCTURING IN TEXAS ...... 84 Nuclear ...... 40 Entities that have Opted-in to Competition ...... 84 Coal Plants ...... 41 Additional Impacts of Senate Bill 7 Deregulation ...... 85 Gas / Fuel Oil Plants ...... 42 Environmental Restrictions of Senate Bill 7 and Other Related Renewable Resources ...... 43 Regulations ...... 87 Peak Demand and Native Load ...... 43 Wholesale Market Design Developments ...... 88 Replacement Power for Events ...... 44 CONTINUING DISCLOSURE OF INFORMATION ...... 89 Lease Transaction ...... 44 Annual Reports ...... 89 Assets Supporting Generation ...... 44 Notice of Certain Events ...... 90 Google Fiber Optic Infrastructure Program ...... 45 Availability of Information ...... 90 Smart Grid Modernization Program...... 45 Limitations and Amendments ...... 91 Qualified Scheduling Entity ...... 45 Compliance with Prior Undertakings ...... 91

vi LEGAL MATTERS ...... 91 CO-FINANCIAL ADVISORS...... 94 TAX MATTERS ...... 92 SETTLEMENT OF REMARKETING ...... 94 General ...... 92 INDEPENDENT AUDITORS ...... 94 Tax Changes ...... 93 USE OF INFORMATION IN REMARKETING MEMORANDUM ...... 95 Tax Accounting Treatment of Premium Bonds ...... 93 FORWARD-LOOKING STATEMENTS ...... 95 LEGAL INVESTMENTS IN TEXAS ...... 93 MISCELLANEOUS ...... 95 SECURITIES LAWS ...... 93 RATINGS ...... 94

Appendix A – City of San Antonio, Texas-General Demographic and Economic Information ...... A-1 Appendix B – City Public Service - Basic Financial Statements for the Fiscal Years Ended January 31, 2017 and 2016 and Independent Auditors' Report ...... B-1 Appendix C – Certain Provisions of the Ordinance ...... C-1 Appendix D – Original Opinion of Original Co-Bond Counsel ...... D-1

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vii [THIS PAGE INTENTIONALLY LEFT BLANK] REMARKETING MEMORANDUM

Relating To

$124,170,000* CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS VARIABLE RATE JUNIOR LIEN REVENUE REFUNDING BONDS, SERIES 2015B

INTRODUCTORY STATEMENT

This Remarketing Memorandum, including the cover page and the Appendices hereto, of the City of San Antonio, Texas ("City"), is provided to furnish information with respect to the remarketing of its $124,170,000* Electric and Gas Systems Variable Rate Junior Lien Revenue Refunding Bonds, Series 2015B (the "Bonds"), currently in a three-year SIFMA Index Mode expiring on February 1, 2018, but made subject to mandatory tender on September 13, 2017 by election of the City (the "Initial SIFMA Mode Interest Period"). This Remarketing Memorandum relates only to the remarketing of the Bonds in a Term Mode (defined herein), commencing on September 14, 2017 and concluding on November 30, 2021* (the "Current Term Mode Interest Period"), upon the conclusion of the Initial SIFMA Mode Interest Period, all in accordance with the provisions of the ordinance authorizing the issuance of the Bonds (the "Ordinance") adopted by the City Council (the "City Council") of the City on October 30, 2014 and a resolution (the "Remarketing Resolution") adopted by the hereinafter-defined Board on July 31, 2017. Certain terms used but not defined herein have the meanings ascribed thereto in the Ordinance. See "APPENDIX C – CERTAIN PROVISIONS OF THE ORDINANCE".

In close proximity to its remarketing and settlement of the Bonds, the City is issuing its $194,980,000 Electric and Gas Systems Revenue Refunding Bonds, New Series 2017 (the "2017 Revenue Refunding Bonds"), refunding certain outstanding commercial paper notes to lock in current long term tax-exempt interest rates. The City anticipates this issuance will close on or about August 30, 2017. Investors interested in purchasing the 2017 Revenue Refunding Bonds should refer to the offering document relating thereto and made available by the City in connection therewith.

The Bonds were initially issued to (i) refinance existing variable rate debt (hereinafter defined and referred to as the "Refunded Bonds") to permit the City to maintain variable interest rate exposure without the requirement to also maintain third party bank liquidity, and (ii) pay costs and expenses relating to the issuance of the Bonds.

The Bonds were issued pursuant to the Ordinance and as Additional Junior Lien Obligations (as hereinafter defined) under the provisions of the City ordinances (collectively, the "Bond Ordinances") authorizing the "Junior Lien Obligations", herein defined to mean, in addition to the Bonds, the City's Electric and Gas Systems Junior Lien Revenue Bonds, Taxable Series 2010A (Direct Subsidy – Build America Bonds), Electric and Gas Systems Junior Lien Revenue Refunding Bonds, Taxable Series 2010B (Direct Subsidy – Build America Bonds), Electric and Gas Systems Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012A, Electric and Gas Systems Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012B, Electric and Gas Systems Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012C, Electric and Gas Systems Junior Lien Revenue Bonds, Series 2013, Electric and Gas Systems Junior Lien Revenue Bonds, Series 2014, Electric and Gas Systems Junior Lien Revenue Refunding Bonds, Series 2014, Electric and Gas Systems Junior Lien Revenue Refunding Bonds, Series 2015A, and Electric and Gas Systems Variable Rate Junior Lien Revenue Bonds, Series 2015C and Electric and Gas Systems Variable Rate Junior Lien Revenue Bonds, Series 2015D. Inclusive of the Bonds, as remarketed, the City has outstanding Junior Lien Obligations with an aggregate principal amount of $1,873,000,000*.

The Junior Lien Obligations are secured by a lien on and pledge of the Net Revenues of the City's electric and gas systems (the "Systems") junior and inferior to the lien thereon and pledge thereof securing the payment of the Senior Lien Obligations (defined in the Bond Ordinances to mean, generally, those City obligations payable from a first lien on and pledge of the Net Revenues of the Systems), and upon issuance of the 2017 Revenue Refunding Bonds will be outstanding in an aggregate principal amount of $3,762,050,000. In addition to Additional Senior Lien Obligations (as defined in the Bond Ordinances), the Bond Ordinances permit the issuance of additional obligations of the City payable from a lien on and pledge of the Net Revenues on parity with the lien thereon and pledge thereof securing the then-outstanding Junior Lien Obligations (such additional obligations, the "Additional Junior Lien Obligations"), if certain historical earnings tests and other conditions are satisfied. See "THE BONDS – Bond Provisions" and "JUNIOR LIEN OBLIGATIONS" herein.

______*Preliminary, subject to change.

1 The Bond Ordinances also permit the City to issue obligations payable from a lien on and pledge of the Net Revenues that is subordinate and inferior to the lien thereon and pledge thereof securing the payment of the Junior Lien Obligations (such subordinate lien obligations are identified in the Ordinance as the "Commercial Paper Obligations" and the "Inferior Lien Obligations", as such terms are hereinafter defined), but the Bond Ordinances provide that, other than the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued, no obligations of the City shall be issued that are payable from a lien on and pledge of the Net Revenues of the Systems that is senior and superior to the lien thereon and pledge thereof securing the payment of the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued.

The City has also established a revolving finance program for the purpose of providing an interim financing mechanism for operating, maintaining, and improving the Systems. Under this program, the City is authorized to issue taxable or tax-exempt notes, bearing interest at fixed or variable rates, in an aggregate principal amount at any one time outstanding not to exceed $100,000,000. The City at this time has entered into a purchase agreement with a third party financial institution obligating that third party to purchase up to $26,000,000 of taxable notes under this program. These notes are Inferior Lien Obligations under the ordinance establishing the program, as well as the Bond Ordinances. As of the date of this Remarketing Memorandum, $25,200,000 of taxable notes under this program are currently outstanding. See "FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM" herein.

There follows in this Remarketing Memorandum a description of the City, the City Public Service Board of San Antonio, Texas ("Board", "CPS", or "CPS Energy"), and the Systems; certain information relating to the City and the State of Texas ("State" or "Texas"); certain information relating to the sources of payment for the Bonds, together with summaries of certain provisions of the Ordinance and the Bonds; and a discussion of factors affecting the electric and gas industries generally. All references herein to agreements and documents are qualified in their entirety by reference to the definitive forms thereof, and all references to the Bonds are further qualified by reference to the information with respect thereto contained in the Ordinance. Copies of such documents may be obtained from the City or the Co-Financial Advisors (defined herein) upon request by electronic mail or upon payment of reasonable copying, handling and delivery charges.

This Remarketing Memorandum speaks only as to its date and the information contained herein is subject to change. A copy of the Final Remarketing Memorandum relating to the Bonds will be available from the Municipal Securities Rulemaking Board ("MSRB"), through its Electronic Municipal Market Access ("EMMA") system. See "CONTINUING DISCLOSURE OF INFORMATION" herein for a description of the City's and the Board's undertaking to provide certain information on a continuing basis.

THE BONDS

DESCRIPTION OF THE BONDS

The Bonds are dated January 1, 2015 and mature on February 1, 2033 in the amount shown on the cover page hereof. The Bonds are multi-modal, variable rate bonds, initially issued in a SIFMA Index Mode that commenced on January 7, 2015 and is set to expire on February 1, 2018, but by election of the City has been set to earlier conclude on September 13, 2017 (heretofore defined and herein referred to as the Initial SIFMA Mode Interest Period). The Bonds are currently outstanding in the aggregate principal amount of $125,000,000. On September 14, 2017, $125,000,000 in Bonds will be mandatorily tendered for purchase (without right of retention by the holders thereof), and $124,170,000* in Bonds will be remarketed in a Term Mode to provide proceeds to pay the purchase price of the aforementioned mandatorily-tendered Bonds. The subsequent Term Mode into which the Bonds are now remarketed commences on September 14, 2017 and concludes on November 30, 2021* (heretofore defined and herein referred to as the Current Term Mode Interest Period). Upon expiration of the Current Term Mode Interest Period, the Bonds will be remarketed into a successive Interest Mode and Interest Period of a to-be-determined duration.

THE BONDS ARE SUBJECT TO CONVERSION TO OTHER INTEREST MODES AT THE TIMES AND UPON THE CONDITIONS DESCRIBED IN THE ORDINANCE FOLLOWING A MANDATORY TENDER FOR PURCHASE OF SUCH BONDS. THIS REMARKETING MEMORANDUM IS NOT INTENDED TO PROVIDE INFORMATION WITH RESPECT TO THE BONDS AFTER CONVERSION TO ANY NEW INTEREST MODE OR INTEREST PERIOD (INCLUDING ANY SUBSEQUENT TERM MODE INTEREST PERIOD). PURCHASERS OF THE BONDS SHOULD NOT RELY ON THIS REMARKETING MEMORANDUM FOR INFORMATION CONCERNING ANY OTHER INTEREST MODE OR INTEREST PERIOD FOR THE BONDS OTHER THAN THE BONDS IN THE CURRENT TERM MODE INTEREST PERIOD.

The Bonds are issuable in fully registered form only, without coupons, in denominations of $5,000 and integral multiples of $5,000 while in a Term Mode. The Bonds are initially issuable only to Cede & Co., the nominee of The Depository Trust Company, New York, New York ("DTC"), pursuant to the Book-Entry-Only System described herein. For such time as the Book-Entry-Only System is utilized, no physical delivery of the Bonds will be made to the purchasers thereof and the principal of and interest on the

2 Bonds will be payable by the Paying Agent / Registrar to Cede & Co., which will make distribution of the amounts so paid to the Beneficial Owners (defined herein) of the Bonds. For such time as the Bonds are issuable in Book-Entry-Only form, references herein and in the Bonds and the Ordinances to "registered owners" will include only Cede & Co., as the nominee of DTC, the sole registered owner of the Bonds. See "THE BONDS – Bond Provisions – Book-Entry-Only System" herein. The City reserves the right to discontinue the Book-Entry-Only System, whereupon interest on the Bonds will be payable (i) by check mailed by the Paying Agent / Registrar, currently U.S. Bank National Association, Dallas, Texas, on the interest payment date to the registered owners thereof as shown on the records of the Paying Agent / Registrar, at the close of business on the Record Date (defined herein), or (ii) by such other method, acceptable to the Paying Agent / Registrar, at the written request of and at the risk and expense of the registered owner.

INTEREST DURING THE CURRENT TERM MODE INTEREST PERIOD

During the Current Term Mode Interest Period, the Bonds will bear interest at a per annum rate identified in the table appearing on page ii hereof; thereafter, the Bonds will bear interest at the rate or rates and in the manner specified in the Ordinance and as described herein.

The interest rate mode for the Bonds or any portion thereof may be converted to a different mode, or to a Term Mode with an interest rate period of different duration, at the direction of the City as described below under "Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds". Following such a conversion, such Bonds or portion thereof will bear interest at the applicable rate determined in accordance with the Ordinance. Any such conversion (1) will be subject to receipt of an opinion of nationally recognized bond counsel to the effect that such conversion will not adversely affect any exclusion of interest on any Bond from gross income for federal income tax purposes and is authorized by applicable Texas law and (2) will result in the mandatory tender of affected Bonds or portions thereof for purchase as described below under "Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds - Mandatory Tender".

When the Bonds bear interest at a Term Rate, interest on such Bonds will be computed on the basis of a 360-day year comprised of twelve 30-day months. Interest accruing on the Bonds during the Current Term Mode Interest Period will be payable semi- annually on the dates February 1 and August 1 of each year, commencing February 1, 2018, along with an irregular final interest payment on the Bonds on December 1, 2021*. Interest due on each interest payment date will include interest accrued through the preceding day.

The Bonds, during the Current Term Mode Interest Period, are not benefitted by a liquidity facility provided by a third party. Accordingly, a failure by the Remarketing Agent to remarket Bonds subject to mandatory tender on the conversion date at the end of the Current Term Mode Interest Period will result in the rescission of the notice of mandatory tender with respect thereto and the City will not have any obligation to purchase such Bonds at that time. The occurrence of the foregoing will not result in an event of default under the Ordinance or the Bonds. Until such time as the City redeems or remarkets such Bonds that have been unsuccessfully remarketed as described above, such Bonds shall bear interest at the "Stepped Rate", being the per annum rate of interest then applicable to such unremarketed Bonds identified in the table appearing on page ii hereof, calculated on the basis of a 365 or 366-day year and the number of days actually elapsed (see "THE BONDS - Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds – Mandatory Tender" herein).

The City has not acquired a liquidity facility to provide liquidity support for the Bonds nor is one currently contemplated to be acquired into in the future.

RECORD DATE DURING THE CURRENT TERM MODE INTEREST PERIOD

During the Current Term Rate Interest Period and while the Bonds are in a Term Mode, the record date for determining the party to whom interest on the Bonds is payable on any interest payment date (the "Record Date") is the close of business on the fifteenth day of the preceding calendar month.

CONVERSION OF INTEREST MODES (INCLUDING CURRENT CONVERSION); MANDATORY TENDER; PURCHASE OF TENDERED BONDS

Conversion of Interest Modes. Upon conclusion of the Current Term Mode Interest Period, the City is permitted to change the mode for all or any portion of the Bonds to a different mode or to a Term Mode of different duration (and, if the new interest rate mode is a Term Mode or SIFMA Index Mode, to designate the duration of such interest rate period). The Bonds, at the conclusion of the Current Term Mode Interest Period, are subject to mandatory tender without right of retention.

______*Preliminary, subject to change. 3 Remarketing Agent and Remarketing Agreement. Morgan Stanley & Co. LLC ("Morgan Stanley") has been appointed to serve as the "Remarketing Agent" for the Bonds. The office of Morgan Stanley for purposes of its duties as Remarketing Agent is 1585 Broadway, 2nd floor, New York, New York 10036 (Attention: Jenna Russotto). Pursuant to, and subject to the terms and conditions of the Remarketing Agreement dated as of July 31, 2017 (but effective as of September 14, 2017), between the City and Morgan Stanley in its capacity as Remarketing Agent for the Bonds in connection with the remarketing of the Bonds into the Current Term Mode Interest Period, the Remarketing Agent has agreed to provide firm financial arrangements for such remarketing of Bonds. For this service, Morgan Stanley will be compensated as described herein under the subcaption "SETTLEMENT OF REMARKETING OF THE BONDS".

Under the Ordinance, the City is permitted to appoint a qualified financial institution to serve as a substitute Remarketing Agent; accordingly, there is no guaranty that Morgan Stanley will serve as Remarketing Agent when the Bonds, in the Current Term Mode Interest Period, will be subject to mandatory tender.

Tender Provisions Generally. The Bonds are not subject to optional or mandatory tender during the Current Term Mode Interest Period. The Bonds are, however, subject to mandatory tender (without right of retention) at the conclusion of the Current Term Mode Interest Period; provided that when there exists no Liquidity Facility relating to the Bonds, which includes the Bonds in the Current Term Mode Interest Period, a failure to remarket such Bonds subject to mandatory tender will not constitute an event of default under either the Ordinance or the affected Bonds themselves and, in such instance, the mandatory tender is deemed rescinded until the Remarketing Agent is able to remarket or the City redeems the affected Bonds, all in accordance with the Ordinance.

As stated above, the Bonds, during the Current Term Mode Interest Period, are not benefitted by a Liquidity Facility provided by a third party. Accordingly, a failure by the Remarketing Agent to remarket Bonds subject to mandatory tender on the Rate Adjustment Date (defined herein) at the end of the Current Term Mode Interest Period will result in the rescission of the notice of mandatory tender with respect thereto and the City will not have any obligation to purchase such Bonds at that time. The occurrence of the foregoing will not result in an event of default under the Ordinance or the Bonds. Until such time as the City redeems or remarkets such Bonds that have not been successfully remarketed as described above, such Bonds shall bear interest at the "Stepped Rate", being the per annum rate of interest then applicable to such unremarketed Bonds specified on page ii hereof, calculated on the basis of a 365 or 366-day year and the number of days actually elapsed.

Mandatory Tender. Dependent upon the Bonds' then-current interest mode and applicable terms of sale, the Bonds are subject to tender, whether optional or mandatory (and if mandatory, with or without right of retention by the Holders thereof, as specified by the City), on the day immediately succeeding the day of conclusion of the concluding interest mode (which is the day that the new interest rate or rates is applicable to tendered and remarketed Bonds; such date, the "Rate Adjustment Date"), unless such Rate Adjustment Date is not a Business Day (in which case, the Bonds are subject to mandatory tender on the first Business Day thereafter). The Bonds in the Current Term Mode Interest Period are subject to mandatory tender, without right of retention, on December 1, 2021*. Each owner of Bonds will be required to tender, and in any event will be deemed to have tendered, such Bonds (or the applicable portion thereof described below) to the Tender Agent for purchase at a purchase price equal to 100% of the principal amount plus accrued interest, if any (payable from the limited sources of funds described below).

The Tender Agent is required to give notice of mandatory tender to each registered owner of the Bonds affected thereby by mail, first-class postage prepaid, not more than 60 nor less than 30 days, while Bonds are in a Term Mode (which includes the Current Term Mode Interest Period). While the Bonds are registered in the name of Cede & Co., only Cede & Co. will receive such notice from the Tender Agent. See "THE BONDS – Bond Provisions – Book-Entry-Only System" herein. However, beneficial owners may register to receive such information directly by contacting the Tender Agent. See "CONTINUING DISCLOSURE OF INFORMATION" herein.

In the event that the Bonds are not converted and remarketed to new purchasers on the Rate Adjustment Date occurring immediately after conclusion of the Current Term Mode Interest Period (or the first Business Day thereafter), the City shall have no obligation to purchase the Bonds tendered on such date, the failed conversion and remarketing shall not constitute an event of default under the Ordinance or the Bonds, the mandatory tender will be deemed to have been rescinded for that date with respect to the Bonds subject to such failed remarketing only, and such Bonds (i) will continue to be Outstanding, (ii) will be purchased upon the availability of funds to be received from the subsequent remarketing of such Bonds, (iii) will be subject to redemption and mandatory tender for purchase on any date during the Term Mode period during which interest accrues at the Stepped Rate (and which shall occur, at the City's discretion and upon delivery of at least one day's notice of such redemption or requirement of mandatory tender to the holders of Bonds then bearing interest at the Stepped Rate), and (iv) will be deemed to continue in the Current Term Mode Interest Period for all other purposes of the Ordinance, though bearing interest during such time at the Stepped ______*Preliminary, subject to change.

4 Rate until remarketed or redeemed in accordance with the terms of the Ordinance. In the event of a failed conversion and remarketing as described above, the City has covenanted in the Ordinance to cause the Bonds to be converted and remarketed on the earliest reasonably practicable date on which they can be sold at par, in such Interest Mode or Modes as the City directs, at a rate not exceeding the Maximum Rate.

Tender Agent. U.S. Bank National Association, Dallas, Texas, serves as the tender agent (the "Tender Agent"), for the Bonds, pursuant to a Tender Agent Agreement, dated as of October 30, 2014, between the City and the Tender Agent. Tender Procedures. While the Bonds are all registered in the name of Cede & Co., as nominee for DTC, bondholders may tender Bonds for purchase by giving DTC sufficient instructions to transfer beneficial ownership of such Bonds to the account of the Tender Agent against payment. In the event that the Book-Entry-Only System herein is discontinued and registered bonds are issued, all notices and Bonds are required to be delivered to the Tender Agent. Limitations on Payment of Purchase Price; Untendered Bonds. The Tender Agent will be required to effect purchases of tendered Bonds solely from and to the extent of (1) proceeds of the remarketing of such Bonds pursuant to the Remarking Agreement, or, to the extent such proceeds are insufficient and (2) payments, if any, elected to be made by the City in its sole discretion. The City will have no obligation and has no intent to purchase tendered Bonds. No purchase right will pertain to Bonds registered in the name or held for the benefit or account of the City or certain affiliates. See discussion above under "Mandatory Tender" for the effects of a failed remarketing of Bonds when there exists no Liquidity Facility providing liquidity support therefor. ANY BOND (OR PORTION THEREOF) WHICH IS REQUIRED TO BE TENDERED OR FOLLOWING NOTICE OF TENDER AND FOR WHICH PAYMENT OF THE PURCHASE PRICE IS DULY PROVIDED FOR ON THE RELEVANT PURCHASE DATE WILL BE DEEMED TO HAVE BEEN TENDERED AND SOLD ON SUCH PURCHASE DATE, AND THE HOLDER OF SUCH BOND WILL NOT THEREAFTER BE ENTITLED TO ANY PAYMENT (INCLUDING ANY INTEREST ACCRUED SUBSEQUENT TO SUCH PURCHASE DATE) IN RESPECT THEREOF OTHER THAN THE PURCHASE PRICE FOR SUCH BOND OR PORTION OR OTHERWISE BE SECURED BY OR ENTITLED TO ANY BENEFIT UNDER THE ORDINANCE. REDEMPTION OF BONDS

Mandatory Sinking Fund Redemption. The Bonds are subject to mandatory sinking fund redemption by the City prior to their scheduled maturity (but not during the Current Term Mode Interest Period) at a redemption price equal to 100% of the principal amount thereof, without premium, on the first interest payment date for such Bonds on or after February 1 of the years and in the principal amounts indicated below:

Year Principal Amount* 2029 $24,170,000 2030 25,000,000 2031 25,000,000 2032 25,000,000 2033 (final maturity) 25,000,000 $124,170,000

The principal amount of a Bond required to be redeemed pursuant to the operation of such mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of any Bonds of such series and of such stated maturity which, at least 50 days prior to the mandatory redemption date (1) shall have been defeased or acquired by the City and delivered to the Paying Agent / Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent / Registrar at the request of the City with money in the applicable Bond Fund, or (3) shall have been redeemed pursuant to the optional redemption provisions set forth herein and not theretofore credited against a mandatory redemption requirement.

Though these mandatory sinking fund redemption payments are not scheduled to occur in the Current Term Mode Interest Period, they are nevertheless included herein to demonstrate that the Bonds are not structured as a "bullet" maturity and to evidence the Bonds as a part of the table appearing under "DEBT SERVICE REQUIREMENTS" herein.

Optional Redemption. The Bonds are subject to redemption prior to their stated maturity at the option of the City in whole or in part, at a redemption price equal to 100% of principal amount plus accrued interest, if any, on the first interest payment date occurring after the conclusion of the Current Term Mode Interest Period, and on any date for Bonds bearing interest at a Stepped Rate. Future Bond redemption provisions will be determined at the time of their remarketing in accordance with the terms of the Ordinance.

______*Preliminary, subject to change.

5 Redemption provisions applicable to the Bonds prior to the expiration of the Current Term Mode Interest Period, if any, will be determined at the time of the pricing of the remarketing of the Bonds and will be disclosed in the Final Official Statement.

Redemption Procedures. Except with respect to Bonds bearing interest at a Stepped Rate (which may be redeemed on one day's notice to the holders thereof), notice of each redemption of Bonds is required to be mailed not less than 30 days, and not more than 60 days prior to the redemption date to each registered owner of the Bonds to be redeemed at the address of such owner recorded in the bond register. If notice of redemption of any Bond is so given, such Bond (or the principal amount thereof to be redeemed) will be due and payable on the redemption date and, if funds sufficient to pay the redemption price are deposited with the Paying Agent / Registrar on the redemption date, will cease to bear interest after such date. While the Bonds are registered in the name of DTC or its nominee, as nominee for the Beneficial Owners, the foregoing notice will be given to DTC or such nominee only, which shall alone be responsible for providing such notice to the Beneficial Owners. See "THE BONDS – Bond Provisions - Book-Entry- Only System" herein. However, beneficial owners may register to receive such notices directly by contacting the Paying Agent / Registrar. See "CONTINUING DISCLOSURE OF INFORMATION".

With respect to redemptions of Bonds effected on a Rate Adjustment Date, the notice of mandatory tender provided pursuant to the Ordinance shall also serve as notice of any such redemption.

Except when held by DTC, its nominee, or any substitute securities depository, if less than all the Bonds are to be redeemed, the Paying Agent / Registrar must select at random and by lot the Bonds to be redeemed as provided in the Ordinance.

BOND PROVISIONS

Authority for the Bonds. The Bonds were originally issued and are from time to time remarketed under the provisions of applicable laws of the State, including Texas Government Code, Chapters 1207, 1371, and 1502, as amended (collectively, the "Act"), the City's Home Rule Charter, and the Ordinance. On July 31, 2017, the Board adopted the Remarketing Resolution authorizing the conversion and remarketing of the Bonds from the Initial SIFMA Mode Interest Period to the Current Term Mode Interest Period pursuant to the terms of the Ordinance. In the Remarketing Resolution, the Board delegated to certain authorized officials (being the Designated Financial Officers under the Ordinance) the ability to execute a conversion certificate (the "Conversion Certificate") evidencing final terms relating to the remarketing of the Bonds.

Security for the Bonds. The Bonds are special obligations of the City payable solely from and equally and ratably secured, together with the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, by a junior lien on and pledge of the Net Revenues of the Systems, subject and subordinate to lien thereon and pledge thereof securing the outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued, and superior to lien thereon and the pledge thereof securing the currently outstanding Commercial Paper Obligations and Inferior Lien Obligations, all as fully set forth in the Bond Ordinances. The City has reserved the right to grant equal and ratable liens on and pledges of Net Revenues to secure payment of Additional Junior Lien Obligations hereafter issued in accordance with the Bond Ordinances. See "DEBT SERVICE REQUIREMENTS" and "THE BONDS – Bond Provisions - Additional Bonds" herein, and "APPENDIX C – CERTAIN PROVISIONS OF THE ORDINANCE".

The Ordinance does not create a mortgage or other security interest on the property of the Systems. The taxing power of neither the City nor the State is pledged for the payment thereof.

For a description of the sources of payment of the purchase price of Bonds tendered for purchase, see "THE BONDS – Conversion of Interest Modes (Including Current Conversion); Mandatory Tender; Purchase of Tendered Bonds" herein.

Perfection of Security for the Bonds. Chapter 1208, as amended, Texas Government Code, applies to the issuance of the Bonds and the pledge of the Net Revenues as security therefor, and such pledge is therefore, valid, effective, and perfected. Should State law be amended while the Bonds are outstanding and unpaid, the result of such amendment being that the pledge of the Net Revenues is to be subject to the filing requirements of Chapter 9, Texas Business and Commerce Code, in order to preserve to the registered owners of the Bonds a security interest in such pledges, the City has agreed in the Ordinance to take such measures as it determines are reasonable and necessary to enable a filing of a security interest in any such pledge to occur.

Flow of Funds. The Ordinance provides that the gross revenues of the Systems are to be deposited in CPS Energy's General Account, and further provide that such revenues are pledged and appropriated, in the following priority: (i) to the payment of reasonable and proper Maintenance and Operating Expenses of the Systems; (ii) to the payment of Senior Lien Obligations or Additional Senior Lien Obligations, including the establishment and maintenance of the reserve therefor; (iii) to the payment of the Bonds, the Previously Issued Junior Lien Obligations, and any Additional Junior Lien Obligations, including the establishment and maintenance of a reserve therefor, if any; (iv) to the payment and security of the Notes and the Agreement (as defined in the Commercial Paper Ordinance); (v) to the payment and security of obligations hereinafter issued which are inferior in lien to the

6 Senior Lien Obligations, Additional Senior Lien Obligations, the Junior Lien Obligations (including the Bonds), and the Notes, which obligations referred to in the Bond Ordinances as Inferior Lien Obligations and which includes the Flex Rate Notes (defined herein); (vi) to the payment of an annual amount equal to six percent (6%) of the gross revenues of the Systems to be deposited in the Repair and Replacement Account provided for in the Bond Ordinances; (vii) to the payment of the annual amount due the General Fund of the City, as provided in the Bond Ordinances; and (viii) to the extent of any remaining Net Revenues of the Systems in the General Account, to the Repair and Replacement Account to the extent provided in the Bond Ordinances. Any remaining Net Revenues after making or providing for the foregoing payments and deposits may be used for any other purpose of the Board.

Rate Covenant. The City has covenanted in the Ordinance that it will at all times maintain rates and charges for the sale of electric energy, gas, or other services furnished, provided and supplied by the Systems to the City and all other consumers which will be reasonable and nondiscriminatory and which will be reasonably expected to produce gross revenues sufficient to pay all expenses of maintenance and operation of the Systems, and to produce Net Revenues sufficient, together with other lawfully available funds, to pay debt service requirements on all revenue debt of the Systems, including the Senior Lien Obligations, any Additional Senior Lien Obligations, the Junior Lien Obligations (including the Bonds), the Commercial Paper Obligations, and any Inferior Lien Obligations outstanding from time to time. The CPS Energy rate covenant is consistent with and supported by the relevant State statute concerning rate setting for municipally owned utilities ("Municipal Utilities") such as CPS Energy. Section 1502.057, as amended, Texas Government Code, provides that the charges for services provided by encumbered municipal systems, such as CPS Energy, must be "at least sufficient to pay: all operating, maintenance, depreciation, replacement, improvement and interest charges in connection with the utility system; for an interest and sinking fund sufficient to pay any public securities issued or obligations incurred for any purpose…relating to the utility system; and any outstanding debt against the system". This State statute could be amended or repealed by the Texas Legislature. See "APPENDIX C – CERTAIN PROVISIONS OF THE ORDINANCE". Also, see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Retail Service Rates" and "– Transmission Access and Rate Regulation" regarding rate regulation herein.

Additional Bonds. The City may issue Additional Senior Lien Obligations on a parity with the currently outstanding Senior Lien Obligations if, among other things, it has obtained a certificate from an independent certified public accountant to the effect that the Net Revenues of the Systems during the previous fiscal year, or any 12 consecutive months out of the 15 months immediately preceding the month in which the ordinance authorizing the Additional Senior Lien Obligations is passed, were (i) at least 1.50 times the maximum annual debt service requirements in any future fiscal year on all outstanding Senior Lien Obligations and the proposed Additional Senior Lien Obligations and (ii) at least 1.00 times the maximum annual debt service requirements for any future fiscal year for Senior Lien Obligations, Additional Senior Lien Obligations, and Junior Lien Obligations (including the then outstanding Junior Lien Obligations, the Bonds, and any Additional Junior Lien Obligations) to be outstanding, assuming that variable rate interest accrues at The Bond Buyer's Revenue Bond Index with respect to the Junior Lien Obligations and adding or subtracting net payments due on or receivable under interest rate hedge agreements, if any.

The City may issue Additional Junior Lien Obligations if a Designated Financial Officer certifies that the Net Revenues of the Systems during the previous fiscal year, or any 12 consecutive months out of the 18 months immediately preceding the month in which the ordinance authorizing such obligations is passed, were at least 1.00 times the average annual debt service requirements for any future fiscal year for Senior Lien Obligations, Additional Senior Lien Obligations, the Bonds, the other Junior Lien Obligations, and Additional Junior Lien Obligations to be outstanding, assuming that variable rate interest accrues at The Bond Buyer's Revenue Bond Index and adding or subtracting net payments due on or receivable under interest rate hedge agreements, if any.

Refundable Tax Credit Bonds. The refundable tax credits to be received by the City in connection with any obligations secured by Net Revenues of the Systems that are designated as obligations entitling the City to the receipt of refundable tax credits from the United States Department of the Treasury under the Internal Revenue Code of 1986, as amended (the "Code"), (including, but not limited to, obligations designated as "build America bonds" and "qualified bonds" under the Code) will be considered as an offset to debt service for the purpose of satisfying any debt service coverage requirements under any ordinance, including satisfaction of any rate covenant, reserve fund requirement, or prerequisite to the issuance of additional indebtedness at any lien level.

The City has determined that the reduced amount of refundable tax credit payments to be received from the United States Department of the Treasury in relation to its outstanding obligations designated as "build America bonds" and "qualified bonds" under the Code as a result of the automatic reductions in federal spending effective March 1, 2013, pursuant to the Budget Control Act of 2011 (commonly referred to as "Sequestration"), and extensions thereof pursuant to the Bipartisan Budget Act of 2013, will not have a material impact on the financial condition of the City or its ability to pay regularly scheduled debt service on its outstanding obligations when and in the amounts due and owing. See "DEBT SERVICE REQUIREMENTS" herein.

Under current law, Sequestration is scheduled to continue through 2025. Congressional bills filed call for the repeal of Sequestration, but this is only a proposal and has not been acted upon by Congress. Assuming Congress does not repeal the

7 sequester, the percentage reduction that will be applied to payments of issuers of direct-pay bonds for federal fiscal year ending September 30, 2017 will be 6.9%. The Sequestration rate applicable for federal fiscal year 2017-2018 is 6.6%

Amendments. The City may, without the consent of or notice to any Holders, from time to time and at any time, amend any Ordinance in any manner not detrimental to the interest of the Holders, including the curing of any ambiguity, inconsistency, or formal defect or omission therein. In addition, the City may, with the written consent of Holders holding a majority in aggregate principal amount of the Bonds of a particular series then Outstanding affected thereby, amend, add to, or rescind any of the provisions of the applicable Ordinance; provided that, without the consent of all Holders of Outstanding Bonds of such series, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof, the rate of interest thereon, or the redemption price therefor, or in any other way modify the mandatory tender provisions applicable to such Bonds or the terms of payment of the principal of or interest on the applicable series of Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission.

Defeasance. The Ordinance provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise) is provided by irrevocably depositing with an authorized escrow agent in trust (i) money in an amount sufficient to make such payment and / or (ii) Government Securities (defined below) certified, in the case of a net defeasance, by an independent accounting firm or other legally permitted person to mature as to principal and interest in such amounts and at such times to ensure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Bonds; provided, however, that no certification by an independent accounting firm of the sufficiency of deposits shall be required in connection with a gross defeasance of Bonds. The City has additionally reserved the right in the Ordinance, subject to satisfying the requirements of above, to substitute other Government Securities for the Government Securities originally deposited, to reinvest the uninvested money on deposit for such defeasance and to withdraw for the benefit of the City money in excess of the amount required for such defeasance. The Ordinance provides that "Government Securities" means (i) direct, non-callable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (ii) non-callable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, (iii) non-callable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, or (iv) any additional securities and obligations hereafter authorized by Texas law as eligible for use to accomplish the discharge of obligations such as the Bonds. There is no assurance that the ratings for United States Treasury securities acquired to defease any Bonds, or those for any other Government Securities, will be maintained at any particular rating category. Further, there is no assurance that current State law will not be amended in a manner that expands or contracts the list of permissible defeasance securities (such list consisting of those securities identified in clauses (i) through (iii) above), or any rating requirement thereon, that may be purchased with defeasance proceeds relating to the Bonds ("Defeasance Proceeds"), though the City has reserved the right to utilize any additional securities for such purpose in the event the aforementioned list is expanded. Because the Ordinance does not contractually limit such permissible defeasance securities and expressly recognize the ability of the City to use lawfully available Defeasance Proceeds to defease all or any portion of the Bonds, registered owners of Bonds of such series are deemed to have consented to the use of Defeasance Proceeds to purchase such other defeasance securities, notwithstanding the fact that such defeasance securities may not be of the same investment quality as those currently identified under State law as permissible defeasance securities.

Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking arrangements have been made, the City shall have no further rights to amend the Ordinance or call Bonds for redemption; provided however, the City has reserved the option, to be exercised at the time of the defeasance of the Bonds, to call for redemption at an earlier date those Bonds which have been defeased to their maturity date, if the City (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements, and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes.

Paying Agent / Registrar. The principal of the Bonds will be paid to the registered owners at stated maturity upon presentation of the Bonds to the Paying Agent / Registrar, which currently is U.S. Bank National Association, at its offices located in Dallas, Texas (the "Paying Agent / Registrar"). Interest on the Bonds will be paid to registered owners shown on the records of the Paying Agent / Registrar on the close of business on the Record Date, and such interest will be paid by check and sent by mail to the address of such registered owner appearing on the registration books of the Paying Agent / Registrar or by such other customary banking arrangements acceptable to the Paying Agent / Registrar requested by, and at the risk and expense of, the registered owner. See "THE BONDS – Record Date During the Current Term Mode Interest Period" herein.

8 Successor Paying Agent / Registrar. The City reserves the right to replace the Paying Agent / Registrar. If the City replaces the Paying Agent / Registrar, the new Paying Agent / Registrar shall accept the previous Paying Agent / Registrar's records and act in the same capacity as the previous Paying Agent / Registrar. Any successor Paying Agent / Registrar selected by the City shall be a bank, a trust company, financial institution, or other entity duly qualified and legally authorized to serve and perform the duties of Paying Agent / Registrar for the Bonds. Upon a change in the Paying Agent / Registrar for the Bonds, the City shall promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first-class postage prepaid, which notice shall give the address of the new Paying Agent / Registrar.

Registered Owners' Remedies. If the City defaults in the payment of principal of and interest on the Bonds when due, or if it fails to make payments into any fund or funds created in the Ordinance, or defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Ordinance, the registered owners may seek a writ of mandamus to compel City officials to carry out their legally imposed duties with respect to the Bonds, if there is no other available remedy at law to compel performance of the Bonds or the Ordinance and the City's obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinance does not provide for the appointment of a trustee to represent the interest of the registered owners upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) ("Tooke") that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Because CPS Energy was created to act on behalf of the City to manage the Systems and the City is the issuer of the Bonds, an analysis of relevant sovereign immunity municipal case law is described below.

Tooke, and subsequent jurisprudence, held that a municipality is not immune from suit for torts committed in the performance of its proprietary functions, as it is for torts committed in the performance of its governmental functions (the "Proprietary- Governmental Dichotomy"). Governmental functions are those that are enjoined on a municipality by law and are given by the State as a part of the State's sovereignty, to be exercised by the municipality in the interest of the general public, while proprietary functions are those that a municipality may, in its discretion, perform in the interest of the inhabitants of the municipality.

In Wasson Interests, Ltd. v. City of Jacksonville, 489 S.W.3d 427 (Tex. 2016) ("Wasson"), the Texas Supreme Court (the "Wasson Court") addressed whether the distinction between governmental and proprietary acts (as found in tort-based causes of action) applies to breach of contract claims against municipalities. The Wasson Court analyzed the rationale behind the Proprietary- Governmental Dichotomy to determine that "a city's proprietary functions are not done pursuant to the 'will of the people'" and protecting such municipalities "via the State's immunity is not an efficient way to ensure efficient allocation of State resources". While the Wasson Court recognized that the distinction between government and proprietary functions is not clear, Wasson held that the Proprietary-Governmental Dichotomy applies in contract-claims context. Therefore, in regard to municipal contract cases (as in tort claims), it is incumbent on the courts to determine whether a function is proprietary or governmental based upon the statutory guidance and definitions found in the Texas Civil Practice and Remedies Code.

Notwithstanding the foregoing new case law issued by the Wasson Court, such sovereign immunity issues have not been adjudicated in relation to bond matters (specifically, in regard to the issuance of municipal debt). Each situation will be prospectively evaluated based on the facts and circumstances surrounding the contract in question to determine if a suit, and subsequently, a judgment, is justiciable against a municipality. Chapter 1371, as amended, Texas Government Code ("Chapter 1371"), which pertains to the issuance of public securities by issuers such as the City, permits the City to waive sovereign immunity in the proceedings authorizing the issuance of the Bonds. Notwithstanding its reliance upon the provisions of Chapter 1371 in connection with the issuance of the Bonds (as further described under the caption "THE BONDS – Bond Provisions – Authority for the Bonds"), the City has not waived the defense of sovereign immunity with respect thereto. Because it is unclear whether the Texas Legislature has effectively waived the City's sovereign immunity from a suit for money damages outside of Chapter 1371, registered owners may not be able to bring such a suit against the City for breach of the Bonds or the Ordinance covenants. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City's property. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the United States Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues (such as the Net Revenues), such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without bankruptcy court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the bankruptcy court (which could require that the action be heard in bankruptcy court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a bankruptcy court in administering any proceeding brought before it. The original opinion of Fulbright & Jaworski LLP and Escamilla & Poneck, LLP, as co-bond counsel to the City at the time of initial delivery of the Bonds ("Original Co-Bond Counsel"), the form of which is attached hereto as APPENDIX D (and later defined and referred to herein as the "Original Opinion"), notes that all opinions relative

9 to the enforceability of the Ordinance and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors and general principles of equity that permit the exercise of judicial discretion.

Book-Entry-Only System. This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Remarketing Memorandum. The City, the Co-Financial Advisors and the Remarketing Agent believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof.

The City cannot and does not give any assurance that (i) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC participants, (ii) DTC participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (iii) DTC will serve and act in the manner described in this Remarketing Memorandum. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC participants are on file with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for the Bonds in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC provides custody and asset servicing for about 3.5 million issues of United States and non-United States equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both Unites States and non-United States securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both United States and non-United States securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a S&P Global Ratings rating of "AA+". The DTC Rules applicable to its participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, who will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of the Bonds ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interest in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners, will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as: redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In

10 the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent / Registrar and request that copies of notices are provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detailed information from the City or the Paying Agent / Registrar on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor its nominee), the Paying Agent / Registrar or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City; disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants.

A Beneficial Owner shall give notice to elect to have its Bonds purchased or tendered, through its Direct Participant, to the Tender Agent, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds, on DTC's records, to the Tender Agent. The requirement for physical delivery of Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Bonds to the Tender Agent's DTC account.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City. Under such circumstances, in the event that a successor depository is not obtained, physical Bonds are required to be printed and delivered.

The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, physical Bonds will be printed and delivered.

So long as Cede & Co. is the registered owner of the Bonds, the City will have no obligation or responsibility to the DTC participants or Indirect Participants, or to the persons for which they act as nominees, with respect to payment to or providing of notice to such Participants, or the persons for which they act as nominees.

Use of Certain Terms in Other Sections of this Remarketing Memorandum. In reading this Remarketing Memorandum, it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Remarketing Memorandum to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC.

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11 DEBT SERVICE REQUIREMENTS

OUTSTANDING SENIOR LIEN OBLIGATIONS AND JUNIOR LIEN OBLIGATIONS*

The following schedule calculated on an accrual (rather than cash) basis, reflects annual debt service requirements on all outstanding Senior Lien Obligations and Junior Lien Obligations (including the Bonds and excluding the current Fiscal Year debt service payments made through (and including) August 1, 2017). Because of the inclusion of the Bonds, certain of the amounts in the table below are preliminary and subject to change. Debt service on the Commercial Paper Obligations incurred under the Commercial Paper Program, as well as any Flex Rate Notes issued under the Flexible Rate Revolving Note ("FRRN") Private Placement Program, is excluded. See "COMMERCIAL PAPER PROGRAM" and "FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM" herein. Junior Lien Obligations Total Senior and Year Ending Total Senior Lien Variable Rate Fixed Rate Junior Lien January 31, Obligations(1) Obligations(2),(3) Obligations(4) Obligations(5)

2018 134,803,072 7,161,658 53,804,062 195,768,792 2019 257,963,093 15,396,815 134,237,174 407,597,082 2020 259,703,168 24,440,046 134,235,174 418,378,388 2021 336,214,168 35,505,078 48,969,924 420,689,170 2022 345,782,868 41,006,471 48,969,924 435,759,263 2023 345,787,368 47,183,220 48,969,924 441,940,512 2024 339,759,768 53,159,805 48,969,924 441,889,497 2025 309,962,480 82,704,152 48,969,924 441,636,556 2026 209,179,369 80,963,615 55,172,962 345,315,946 2027 208,660,915 77,292,657 54,823,500 340,777,072 2028 208,661,099 65,355,510 54,824,750 328,841,359 2029 208,652,539 84,874,852 54,823,750 348,351,141 2030 208,664,031 82,222,222 54,824,750 345,711,003 2031 208,662,571 78,222,222 54,826,750 341,711,543 2032 207,590,022 74,237,037 54,823,750 336,650,809 2033 217,267,331 70,251,852 54,825,000 342,344,183 2034 215,436,930 16,222,222 113,919,250 345,578,402 2035 224,141,623 16,222,222 110,571,055 350,934,900 2036 224,900,435 16,237,037 109,809,207 350,946,679 2037 225,718,390 16,251,852 108,992,472 350,962,714 2038 226,568,708 19,287,222 108,148,600 354,004,530 2039 209,547,856 35,249,298 107,244,564 352,041,718 2040 131,902,047 38,241,942 178,952,944 349,096,933 2041 132,917,069 37,039,166 177,946,144 347,902,379 2042 78,511,436 35,759,769 75,944,250 190,215,455 2043 34,363,250 34,468,385 75,944,250 144,775,885 2044 34,367,000 33,140,457 45,418,000 112,925,457 2045 34,365,850 31,774,332 28,874,000 95,014,182 2046 34,367,150 25,497,252 28,871,250 88,735,652 2047 34,367,850 - 28,874,250 63,242,100 2048 - - 28,869,750 28,869,750 Totals $ 5,848,789,456 $ 1,275,368,368 $ 2,334,451,228 $ 9,458,609,052

*Preliminary, subject to change. Interest rate on the Bonds is calculated using assumed principal amortization and interest rates for purposes of illustration only.

(1) Excludes regularly scheduled interest due on the Taxable New Series 2009C Bonds and the Taxable New Series 2010A Bonds anticipated to be off-set by the refundable taxcredit to be received from the U.S. Department of the Treasury (the "Treasury") as a result of such obligations being designated as "build America bonds" and "qualified bonds" under the Code. See footnote 4 to table appearing under "DEBT SERVICE REQUIREMENTS - Historical Net Revenues and Coverage" herein. Also, takes into account the effects of Sequestration assuming a 6.6% reduction in taxcredits received through August 2025. See "THE BONDS - Refundable TaxCredit Bonds" herein.

(2) Assumes periodic redemptions in accordance with mandatory sinking fund requirements. Interest on Variable Rate Junior Lien Revenue Refunding Bonds Series 2012A, Series 2012B and 2012C, respectively, is calculated utilizing interest rates of 2%, 1.75% and 2% through their respective termrate period’s expiration of November 30, 2018, and assumes a Stepped Rate of 7%, 8% and 8%, respectively, for each such series thereafter through applicable final maturity. Similarly, interest on Variable Rate Junior Lien Revenue Refunding Bonds, Series 2015A (the "Series 2015A Bonds"), Series 2015C, and Series 2015D, respectively, utilizes interest rates of 2.25%, 3% and 3% through their respective termrate periods of November 30, 2019, November 30, 2019, and November 30, 2020, respectively, and at a Stepped Rate of 8% thereafter through applicable final maturity. Interest calculated for the Bonds, was an assumed rate of 3% for its initial Interest Period expiring on September 13, 2017 (even though the Bonds, during this applicable period, bear interest at the applicable SIFMA IndexRate that resets weekly). Thereafter, the Bonds are depicted based on an assumed amortization schedule with a coupon of 2% through the anticipated November 30, 2021 conclusion of the new interest rate period and a Stepped Rate of 8% thereafter, through Stated Maturity of the Bonds. None of the foregoing variable rate obligations are benefited by third party liquidity and, as a result of a failure to remarket the same at the conclusion of their respective term rate periods, then the applicable notice of mandatory tender will be deemed to have been rescinded with respect to such series of bonds whose remarketing has failed, and such bonds will bear interest at the Stepped Rate until remarketed or redeemed.

(3) Assumes periodic redemptions in accordance with mandatory sinking fund requirements. For purposes of illustration, interest calculated for the Bonds at an assumed rate for the assumed Current Term Mode Interest Period and at an assumed Stepped Rate of 8% thereafter through stated maturity. Interest on the Series 2015B Bonds utilizes interest rate of 2.00% through its respective term rate period expiration of November 30, 2021, and at a Stepped Rate of 8% thereafter through applicable final maturity. See "THE BONDS - Redemption of Bonds - Mandatory Sinking Fund Redemption").

(4) Excludes regularly scheduled interest due on the Taxable Junior Lien Series 2010A and the Taxable Junior Lien Series 2010Banticipated to be off-set by the refundable tax credit to be received from the Treasury as a result of such obligations being designated as "build America bonds" and "qualified bonds" under the Code. See footnote 5 to table appearing under "DEBT SERVICE REQUIREMENTS - Historical Net Revenues and Coverage" herein. Also, takes into account the effects of Sequestration assuming a 6.6% reduction in tax credits received through August 2025. See "THE BONDS - Refundable Tax Credit Bonds" herein.

(5) Senior Lien Obligations outstanding and Junior Lien Obligations outstanding represent the debt service requirements for the total outstanding debt payable fromand secured by the Net Revenues of the Systems, excluding debt service payable with respect to the Commercial Paper Program and the Flexible Rate RevolvingNote Placement Program. See "COMMERCIAL PAPER PROGRAM" and "FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM" herein.

12 HISTORICAL NET REVENUES AND COVERAGE

Fiscal Years Ended January 31, (Dollars in thousands) (1)

2013 2014 2015 2016 2017 Gross Revenues(2) ………………………… $ 2,207,863 $ 2,434,969 $ 2,666,411 $ 2,514,685 $ 2,494,120 Maintenance & Operating Expenses ……… 1,375,027 1,528,300 1,608,949 1,484,744 1,489,688

Available For Debt Service …………………$ 832,836 $ 906,669 $ 1,057,462 $ 1,029,941 $ 1,004,432 Actual Principal and Interest Requirements: Senior Lien Obligations(3),(4),(9)…………… $ 366,474 $ 333,698 $ 335,440 $ 280,520 $ 290,264 Junior Lien Obligations(5)………………… $ 23,256 $ 34,275 $ 52,026 $ 94,722 $ 98,996

ACTUAL COVERAGE - Senior Lien(6) …… 2.27x 2.72x 3.15x 3.67x 3.46x ACTUAL COVERAGE - Senior and Junior Liens ………………… 2.14x 2.46x 2.73x 2.74x 2.58x

PRO FORMA MADS COVERAGE Senior Lien(7) …………………………… 2.41x 2.62x 3.06x 2.98x 2.90x Senior and Junior Liens(8) ……..………… 1.88x 2.05x 2.39x 2.33x 2.27x

(1) Some numbers may have been adjusted due to rounding. (2) Calculated in accordance with the Bond Ordinances. (3) Net of accrued interest where applicable. (4) Includes a reduction of $15.6 million, $14.4 million, $14.5 million, $14.5 million, and $14.5 million for fiscal years 2013, 2014, 2015, 2016 and 2017, respectively, related to the direct subsidy for the Build America Bonds. See "THE BONDS - Refundable Tax Credit Bonds" herein. (5) Includes a reduction of $10.5 million, $9.7 million, $9.8 million, $9.8 million, and $9.8 million for fiscal years 2013, 2014, 2015, 2016 and 2017, respectively, related to the direct subsidy for the Build America Bonds. See "THE BONDS - Refundable Tax Credit Bonds" herein. (6) Calculation differs from"FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE" herein, by the inclusion of nonoperating expenses in the above schedule. (7) Maximum annual debt service on Senior Lien Obligations and the Bonds. (8) Maximum annual debt service on Senior Lien Obligations and Junior Lien Obligations is based upon the footnoted assumptions under "Outstanding Senior Lien Obligations and Junior Lien Obligations," on the previous page. (9) Amount shown is gross debt service and does not include any cash contributions made.

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13

JUNIOR LIEN OBLIGATIONS

On November 4, 2010, the City issued its $300,000,000 Electric and Gas Systems Junior Lien Revenue Bonds, Taxable Series 2010A (Direct Subsidy – Build America Bonds) and its $200,000,000 Electric and Gas Systems Junior Lien Revenue Refunding Bonds, Taxable Series 2010B (Direct Subsidy – Build America Bonds) as Additional Junior Lien Obligations secured by and payable from a junior lien on and pledge of the Net Revenues of the Systems on parity with the outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued. These Junior Lien Obligations were issued as fixed rate, taxable bonds that were irrevocably designated as "build America bonds" and "qualified bonds" under the Code, entitling the City to the periodic receipt of a refundable tax credit thereon from the United States Department of the Treasury, which the City uses as an offset to debt service on such designated Junior Lien Obligations. See "THE BONDS – Bond Provisions – Refundable Tax Credit Bonds" herein.

On November 29, 2012, the City issued its Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012A (now outstanding in the amount of $47,135,000), its Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012B (now outstanding in the amount of $47,650,000), and its Variable Rate Junior Lien Revenue Refunding Bonds, Series 2012C (now outstanding in the amount of $47,500,000) (the "Series 2012C Bonds"), each series as Additional Junior Lien Obligations. Each series of these bonds was issued in a term rate mode and without third party liquidity support. See footnote 2 to the table appearing under "DEBT SERVICE REQUIREMENTS – Outstanding Senior Lien Obligations and Junior Lien Obligations". The proceeds from these three series of bonds were collectively used to refund, in their entirety, a series of traditional variable rate demand obligations supported with third party liquidity. On December 1, 2016, the Series 2012C Bonds were remarketed into a new Term Interest Period which will expire on November 30, 2018 (and, accordingly, the Series 2012C Bonds will be subject to mandatory tender on December 1, 2018, but such tender shall actually occur on December 3, 2018 (which is the first Business Day occurring after December 1, 2018, because December 1, 2018 is not a Business Day)).

On July 25, 2013, the City issued $375,000,000 of Junior Lien Revenue Bonds as fixed rate obligations. The proceeds from these bonds were used to fund capital expenditures to the Systems.

On July 3, 2014, the City issued $200,000,000 of Junior Lien Revenue Bonds as fixed rate obligations. The proceeds from these bonds were used to fund capital expenditures to the Systems.

On November 5, 2014, the City issued $262,530,000 of Junior Lien Revenue Refunding Bonds as fixed rate obligations. The proceeds from these bonds were used to refund $294,625,000 of Senior Lien Obligations designated as Revenue Refunding Bonds, New Series 2005.

On January 7, 2015, the City issued the Bonds (now outstanding in the principal amount of $125,000,000), and the Series 2015A Bonds (now outstanding in the principal amount of $124,555,000). The Bonds and the Series 2015A Bonds are multimodal variable rate bonds, with the Series 2015A Bonds now in a Term Mode, the Bonds converting to a Term Mode, and neither series benefitted by third party liquidity. The proceeds from these two series of bonds were collectively used to refund, in their entirety, a series of traditional variable rate demand obligations supported with third party liquidity that were issued and were outstanding as Junior Lien Obligations. The remarketing of the Bonds, which are subject to mandatory tender (without right of retention) on September 14, 2017, is the subject of this Remarketing Memorandum.

On December 3, 2015, the City issued its Variable Rate Junior Lien Revenue Bonds, Series 2015C (now outstanding in the principal amount of $100,000,000) and Series 2015D (now outstanding in the principal amount of $100,000,000), each of such series issued as "Additional Junior Lien Obligations". These series of bonds are not benefited by third party liquidity. These Junior Lien Obligations were multi-modal variable rate bonds, each initially issued in a Term Mode. The proceeds for these Junior Lien Obligations were used to fund capital expenditures to the Systems.

As of the date hereof, the aggregate principal amount of all Junior Lien Obligations outstanding is $1,873,000,000*, inclusive of the Bonds, as remarketed.

The Junior Lien Obligations are equally and ratably secured by and are payable from the Net Revenues of the Systems, such pledge being junior and inferior to the lien on and pledge of Net Revenues securing the payment of the Senior Lien Obligations, but prior and superior to the lien on and pledge of the Net Revenues securing the payment of the Commercial Paper Obligations or any Flex Rate Notes to be issued pursuant to the Flexible Rate Revolving Note Private Placement Program.

______*Preliminary, subject to change.

14 COMMERCIAL PAPER PROGRAM

Pursuant to authorization from the City, CPS Energy maintains a Commercial Paper Program to provide taxable and tax-exempt interim financing for various purposes. The Commercial Paper Program, which has been amended numerous times since its inception, and which was most recently amended and restated on October 11, 2012, currently is authorized to issue Commercial Paper Notes (the "Notes") in multiple series (identified as "Series A", "Series B", and "Series C") and in an aggregate principal amount not to exceed $600,000,000 at any one time outstanding. Individual revolving credit agreements relating to each series of Notes, entered into with separate banks (together the "Credit Agreement"), provide liquidity support for the Notes in an aggregate amount of $600,000,000 (comprised of $150,000,000 in liquidity support for the Series A Notes and $225,000,000 in liquidity support for each of the Series B Notes and the Series C Notes). The Series A Credit Agreement is effective through February 6, 2019 (unless earlier terminated in accordance with its terms), with JPMorgan Chase Bank, National Association serving as liquidity provider thereunder. The Series B Credit Agreement was effective through June 21, 2019 (unless earlier terminated in accordance with its terms), with State Street Bank and Trust Company / Wells Fargo Bank, National Association serving as liquidity providers thereunder. The Series C Credit Agreement is effective through June 21, 2019 (unless earlier terminated in accordance with its terms), with The Bank of Tokyo-Mitsubishi UFJ, Ltd, acting through its New York Branch, serving as liquidity provider thereunder.

CPS Energy is currently issuing the 2017 Revenue Refunding Bonds which will refund a portion of the currently outstanding Notes under the Commercial Paper Program. After issuance of the 2017 Revenue Refunding Bonds (anticipated to occur on or about August 30, 2017) an aggregate principal amount of $130,000,000 of Notes will remain outstanding under the Commercial Paper Program.

The purpose of the Commercial Paper Program is to: (i) assist in the financing of capital improvements to the Systems; (ii) provide working capital and funds for fuel acquisition; (iii) pay interest on resold Notes; (iv) refund outstanding Notes on maturity; and (v) redeem other obligations of the Systems which are secured by and payable from a lien on and / or a pledge of Net Revenues of the Systems. Scheduled maturities of the Notes may not extend past November 1, 2042 (the maturity date specified in the current Commercial Paper Ordinance). See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Debt and Asset Management Program" and "– Capital Program" herein.

The borrowings under the Commercial Paper Program, represented by the Notes, are equally and ratably secured by and are payable from (i) the Net Revenues of the Systems, such pledge being subordinate and inferior to the pledge of Net Revenues securing the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued and the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued; (ii) the proceeds from the sale of additional bonds issued for that purpose or borrowings under the Commercial Paper Program; and (iii) borrowings under and pursuant to the Credit Agreement. The obligations of the City under the Credit Agreement are secured on a parity basis with the pledge of the Net Revenues that secures the Notes and along with the Notes, comprise the Commercial Paper Obligations.

FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM

The City has established a flexible rate revolving note program ("Flexible Rate Revolving Note Private Placement Program") for the benefit of the Systems, under which the City may issue taxable or tax exempt notes, bearing interest at fixed or variable rates and having individual maturities of one year or less, in an aggregate principal amount at any one time outstanding not to exceed $100,000,000 (the "Flex Rate Notes"). This program became effective on April 28, 2009, and now provides additional liquidity in support of the Systems. This program authorizes the issuance of such notes through November 1, 2028. These notes are secured by an inferior lien on and pledge of the Net Revenues (and are classified as Inferior Lien Obligations pursuant to the Bond Ordinances), funds, deposits, or investments of the Board legally available for such purpose, or any combination of the foregoing, and will be sold, by private placement, to provider banks (anticipated to be the Board's depository bank) under note purchase agreements entered into by the City from time to time. JPMorgan Chase Bank, N.A. currently serves as the note purchaser under this program by contractual arrangement in effect through December 31, 2017, under which it is obligated to purchase $26,000,000 in Flex Rate Notes. Currently, only the taxable facility is being utilized through a note purchase agreement with the note purchaser named above. CPS Energy anticipates again extending this note purchase agreement with the current note purchaser prior to its stated termination date.

On May 10, 2010, CPS Energy issued $25,200,000 of Flex Rate Notes, the interest on which is not excluded for purposes of federal income taxation, under this program and used the proceeds on May 11, 2010, along with other lawfully-available funds, to effectuate the legal defeasance of $25,745,000 of outstanding Senior Lien Obligations and Junior Lien Obligations, the interest on which was excluded for purposes of federal income taxation. There are $25,200,000 in aggregate principal amount of outstanding taxable Flex Rate Notes under the Flexible Rate Revolving Note Private Placement Program as of the date of this Remarketing Memorandum.

15 SAN ANTONIO ELECTRIC AND GAS SYSTEMS

HISTORY AND MANAGEMENT

The City acquired its electric and gas utilities in 1942 from the American Light and Traction Company, which had been ordered by the federal government to sell properties under provisions of the Holding Company Act of 1935. The Bond Ordinances establish management requirements and provide that the complete management and control of the Systems is vested in the Board. The Mayor of the City is a voting member of the Board, represents the City Council, and is charged with the duty and responsibility of keeping the City Council fully advised and informed at all times of any actions, deliberations, and decisions of the Board and its conduct of the management of the Systems. The present members of the Board are:

Originally Name & Position Profession Appointed to the Board Present Term Expires*

Edward B. Kelley, President & CEO, May 19, 2011 January 31, 2022 Chairman USAA Real Estate, Retired

Derrick Howard, Executive Director, February 1, 2008 January 31, 2018 Vice Chairman Freeman Coliseum

Homer Guevara, Jr., Professor, Business & Government March 19, 2009 January 31, 2019 Trustee Northwest Vista College

John T. Steen, Jr., Attorney, February 29, 2016 January 31, 2021 Trustee Law Office of John T. Steen, Jr.

Ron Nirenberg, Mayor, June 21, 2017 May 31, 2019 Ex-Officio Member City of San Antonio

______*Derrick Howard, Edward Kelley and Homer Guevara, Jr., are serving their second terms. John Steen, Jr., is serving his first term. Ron Nirenberg was elected as Mayor to a first term and was sworn in on June 21, 2017.

Vacancies in membership on the Board are filled by majority vote of the remaining members. New Board appointees must be approved by a majority vote of the City Council. A vacancy in certain cases may be filled by authorization from the City Council. At the expiration of their first five-year term of office, the members of the Board are eligible for re-appointment by other Board members to one additional term. Reappointments require approval by the City Council. In 1997, the City Council ordained that Board membership should be representative of the geographic quadrants established by the City Council. New Board members considered for approval by the City Council will be those whose residence is in a quadrant that provides such geographic representation.

The Board is vested with all of the powers of the City with respect to the management and operation of the Systems and the expenditure and application of the revenues therefrom, including all powers necessary or appropriate for the performance of all covenants, undertakings, and agreements of the City contained in the Bond Ordinances, except regarding rates, condemnation proceedings, issuance of bonds, notes, or commercial paper. The Board has full power and authority to make rules and regulations governing the furnishing of electric and gas service and full authority with reference to making extensions, improvements and additions to the Systems, and to adopt rules for the orderly handling of CPS Energy's affairs. The Board is further empowered to appoint and employ all officers and employees and must obtain and keep in force a "blanket" type employees' fidelity and indemnity bond (also known as commercial crime bond) covering losses in the amount of not less than $100,000.

The management provisions of the Bond Ordinances also grant the City Council authority to review Board action with respect to policies adopted relating to research, development, and planning.

ADMINISTRATION AND OPERATING PERSONNEL

CPS Energy had 3,174 employees as of January 31, 2017, which included approximately 1,404 wage scale (hourly / field) employees. The average tenure of a CPS Energy employee is over 15 years. The majority of all executive and supervisory personnel have experience in the utility industry, or other related experience required for their career field. CPS Energy provides employees a broad range of employee benefit programs, including a defined benefit pension plan, group life insurance, group health (medical, dental and vision), and other benefits. Company culture, employee benefits and career growth opportunities all contribute towards the maintenance of a stable, well-qualified work force which, between February 1, 2016 and January 31, 2017, recorded a turnover rate of 6.48%.

16 CPS Energy salaried and executive employees participate in an Employee Incentive Plan ("EIP"), that rewards performance in controlling expenses, promoting safety, maintaining low utility bills, and enhancing customer satisfaction. The EIP provides links between CPS Energy's competitiveness, performance and compensation. In addition to broad performance by CPS Energy, employees' individual performance is linked to their individual incentive payout.

CPS Energy continues to enhance its performance management process, which measures performance against targeted performance goals and an established set of behaviors (i.e. behavioral principles and / or critical measures). Employees are engaged in working toward key performance goals that align to organizational and business unit / area strategies and objectives. The process is designed to provide for continual monitoring and a high level of coaching and feedback to reach performance expectations, to provide meaningful developmental opportunities, to emphasize how results are achieved, and to reward and recognize contributions toward business goals. In addition, CPS Energy is actively engaged in comprehensive workforce development and succession planning processes to promote wider development opportunities for employees to learn and grow. These processes are based on the foundational ideas that all employees are expected to develop to their maximum capabilities and that succession planning must focus on ensuring that key positions will be staffed by employees who have the capacity to keep CPS Energy operating at its highest level of productivity.

CPS Energy's principal executives and members of the Executive Leadership Team include: Paula Gold-Williams, President & CEO; Dr. Cris C. Eugster, Chief Operating Officer; Carolyn E. Shellman, Board Secretary, Chief Legal & Administrative Officer; Fred Bonewell, Chief Safety & Security Officer; Felecia Etheridge, Chief Customer Engagement Officer; and Edward L. Fleming Jr., Chief Financial Officer & Treasurer. In addition to the Executive Leadership Team, biographies of the members of the Senior Leadership Team, which encompasses other key members of CPS Energy's senior staff, are available at www.cpsenergy.com.

Ms. Paula Gold-Williams is the President & CEO. Ms. Gold-Williams joined CPS Energy in October 2004, after serving in several senior financial management positions at other companies. Ms. Gold-Williams is a Certified Public Accountant. She received a Bachelor's degree in Accounting from St. Mary's University and holds a Master of Business Administration degree with a concentration in finance and accounting from Regis University. Ms. Gold-Williams served as CPS Energy's Group Executive Vice President – Financial & Administrative Services, CFO & Treasurer prior to the Board's appointment to serve as interim CEO, effective November 1, 2015. Ms. Gold-Williams was selected as the President & CEO on July 25, 2016.

Dr. Cris Eugster is the Chief Operating Officer. Dr. Eugster joined CPS Energy in May 2009 and was formerly a partner with McKinsey & Company. He is responsible for the overall performance, dispatch, and evolution of CPS Energy's generation capabilities, energy supply and market operations, overall corporate strategy, integrated resource planning, new product and services, research and development, and environmental oversight. Dr. Eugster has a Bachelor of Science degree in Electrical Engineering from Texas A&M University, and he received a Master's degree and Ph.D. in Electrical Engineering from the Massachusetts Institute of Technology.

Ms. Carolyn Shellman is the Chief Legal & Administrative Officer and Board Secretary. Ms. Shellman joined CPS Energy in July 2006, after serving as Vice President, General Counsel and Board Secretary for the Electric Reliability Council of Texas ("ERCOT"), and as a partner in the utility sections of two separate Texas law firms. Ms. Shellman has also served as the Director for the Hearings Division of the Public Utility Commission of Texas ("PUCT") and as a hearing officer with the PUCT. She provides oversight for legal services, external relations, ethics, audit, facilities, human resources, compliance functions, and serves as Secretary to the Board. Ms. Shellman has a Bachelor's degree from Vassar College and a Juris Doctor from the University of Oklahoma. She is a current member of the State Bar of Texas and the State Bar of Oklahoma.

Mr. Fred Bonewell is the Chief Safety & Security Officer. Mr. Bonewell oversees all of CPS Energy's internal and external safety programs, labor relations, cyber security, as well as the fleet operations. Mr. Bonewell has more than 30 years of progressive leadership experience in employee health and safety, risk, workers' compensation, and labor relations. He has worked for Louisville Gas & Electric, Florida Power & Light, and others. Mr. Bonewell is a graduate of Indiana State University.

Ms. Felecia Etheridge is the Chief Customer Engagement Officer and oversees customer experience and engagement initiatives at CPS Energy. She is also responsible for ensuring consistent and exceptional customer experiences across major customer channels and touchpoints. Prior to joining CPS Energy in August 2016, Ms. Etheridge had approximately 35 years of industry experience through her own consulting company, and her work at Pacific Gas & Electric Company, TXU, Assurance Energy and Global Customer Solutions. Ms. Etheridge has a Bachelor's of Business Administration degree in International Marketing from Texas A&M University.

Mr. Edward L. Fleming Jr., is the Chief Financial Officer ("CFO") & Treasurer with oversight of all financial and information technology ("IT") functions as well as supply chain and business planning. Mr. Fleming has over 30 years of diverse financial experience in the energy industry, both domestic and international. Mr. Fleming received a Bachelor of Science degree in Electrical

17 Engineering from Syracuse University and a Master of Business Administration degree from the Columbia University Graduate School of Business. He is also a Certified Public Accountant.

RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES

RETAIL SERVICE AREA

Electric

The CPS Energy electric system serves a territory consisting of substantially all of Bexar County and small portions of the adjacent counties of Comal, Guadalupe, Atascosa, Medina, Bandera, Wilson and Kendall. Certification of this service area was granted by the PUCT.

CPS Energy is currently the exclusive provider of retail electric service within this service area, including the provision of electric service to some federal military installations located within the service area that own their own distribution facilities. In 1999, the Texas Legislature enacted Senate Bill 7 ("SB 7"), which allows for retail electric competition within designated service areas upon a decision of the governing body having jurisdiction within such areas affirmatively acting to "opt-in" to such a competitive scenario. CPS Energy and the City have not elected to "opt-in." Until and unless the City Council and the Board exercise the option to opt-in to retail electric competition (called "Texas Electric Choice" by the PUCT), CPS Energy has the sole right to provide retail electric services in its service area.

On April 26, 2001, after a thorough feasibility study was conducted and reviewed, the City Council passed a resolution stating that the City did not intend to opt-in to the deregulated electric market beginning January 1, 2002, the date Texas Electric Choice became effective. As stated above, SB 7 provides that electric "opt-in" decisions are to be made by the governing body or the body vested with the power to manage and operate a municipal utility such as CPS Energy. Given the relationship of the Board and the City Council, any decision to opt-in to electric competition would be based upon the adoption of resolutions by both the Board and the City Council. If CPS Energy and the City choose to opt-in, other retail electric energy suppliers would be authorized to offer retail electric energy in the CPS Energy service area and CPS Energy would be authorized to offer retail electric energy in any other service areas open to retail competition in ERCOT. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – THE ELECTRIC UTILITY INDUSTRY IN GENERAL – ERCOT" herein. ERCOT is the independent entity that monitors and administers the flow of electricity within the interconnected grid that operates wholly within Texas; the term "ERCOT" also refers to the area within Texas served by this interconnected grid. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System - Interconnected System" and "CUSTOMERS AND RATES – Customer Rates – Governmentally Imposed Fees, Taxes or Payments" herein. CPS Energy has the option of acting in the role of the "Provider of Last Resort" (hereinafter defined) for its service area in the event it and the City choose to opt-in. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – THE ELECTRIC UTILITY INDUSTRY GENERALLY – ELECTRIC UTILITY RESTRUCTURING IN TEXAS" herein.

Gas

The CPS Energy gas system serves Bexar County and portions of the surrounding counties of Comal, Guadalupe and Medina. In the counties of Karnes, Wilson and Atascosa, CPS Energy has gas facilities but currently is not serving any customers. In Texas, no legislative provision or regulatory procedure exists for certification of natural gas service areas. As a result, CPS Energy competes against other gas supplying entities on the periphery of its electric service area.

Pursuant to the authority provided by Section 181.026, Texas Utilities Code, among other applicable laws, the City has executed a license agreement (the "License Agreement") with the City of Grey Forest, Texas (the "Licensee"), dated July 28, 2003, for a term through May 31, 2028. Pursuant to this License Agreement, the City permits the Licensee to provide, construct, operate and maintain certain natural gas lines within the boundaries of the City which it originally established in 1967 to provide extensions and other improvements thereto upon compliance with the provisions of the License Agreement and upon the payment to the City of a quarterly license fee of 3% of the gross revenues received by the Licensee from the sale of natural gas within the Licensed Area (as defined in the License Agreement). Thus, in the Licensed Area (which comprises less than 6.2% of the CPS Energy natural gas service area), CPS Energy is in direct competition with Grey Forest Utilities as a supplier of natural gas.

CPS Energy and the City of Castroville, a current wholesale power customer (See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES - Wholesale Power" herein), reached an agreement for CPS Energy to operate and maintain the Castroville gas system through July 31, 2017. A similar agreement was made with the City of Lytle to operate and maintain the Lytle gas system through July 31, 2017. A multi-year contract for both the Cities of Lytle and Castroville was completed in July 2017.

18 CPS Energy maintains "Franchise Agreements" with 31 incorporated communities in the San Antonio area. These Franchise Agreements permit CPS Energy to operate its facilities in these cities' streets and public ways in exchange for a franchise fee of 4.5% on electric and natural gas revenues earned within their respective municipal boundaries. Two of the 31 cities have elected to increase franchise fees to 5.5% that went into effect February 1, 2015. The additional 1% only applies to customers within those two jurisdictional city boundaries.

Customer Base as of January 31, 2017

Electric(1) Gas(1)

Number Percent Number Percent

Residential 711,133 88% Residential 323,356 94% Commercial & Industrial 71,274 9% Commercial 17,631 5% All Night Security Lighting 12,631 2% Industrial & Public Street Lighting, Public Authorities Authorities 2,767 1% & Other Utilities(2) 9,637 1% Total 804,675 100% Total 343,754 100%

(1) See "FIVE-YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY" and "FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE" herein for information regarding consumption of energy and contribution of revenues to the Systems by the average customers for these categories as of January 31, 2017. (2) Also includes off-system sales customers.

WHOLESALE POWER

CPS Energy has an active program to optimize its excess power generation capacity in the wholesale power market, which includes both power purchases and power sales when such can be reasonably expected to reduce cost or generate revenue for the electric system. As a part of managing the power generation portfolio, CPS Energy may also purchase power if there is an unanticipated deficit in capacity, to maintain reserve margins, to enhance reliability for the electric system, or when economically prudent to reduce overall costs of its obligations in the ERCOT market.

Trained, experienced staff in CPS Energy's Energy Market Operations, who report to the CPS Energy Vice President for Energy Supply and Market Operations, conduct wholesale power transactions in accordance with established procedures. CPS Energy is a Qualified Scheduling Entity ("QSE") within ERCOT which allows CPS Energy to manage both load and generation in the ERCOT real-time and day-ahead markets. The QSE function is also managed by the Energy Market Operations. The governance for ERCOT market activity is established by the Energy Markets and Risk Management Policy. Under this policy, the Energy Portfolio Strategy Committee, comprised of select executive leadership, provides comprehensive review and oversight of proposed wholesale transactions to ensure alignment with CPS Energy strategies, including evaluation of the associated risks. CPS Energy conducts wholesale power transactions only with approved counterparties with which CPS Energy has established master enabling agreements for such transactions. The enabling agreements outline payment and delivery terms and conditions of such sales and purchases, and provide for written confirmation of each transaction between CPS Energy and its counterparts.

CPS Energy sells wholesale electricity to the Floresville Electric Light & Power System, the City of Hondo, and the City of Castroville. These three wholesale supply agreements have been recently renewed and have terms expiring in 2025, 2018, and 2018, respectively. CPS Energy also has an agreement in place with the City of Bandera that provides 10% of their metered load through June 30, 2018.

Long-term supply agreements have been entered with Central Texas Electric Cooperative, the City of Boerne, the City of Seguin, and the Kerrville Public Utility Board to provide supply for terms that began in June 2013 and extend through 2021 for Central Texas Electric Cooperative and through 2023 for the other three entities. The requirements under the existing wholesale agreements are firm energy obligations of CPS Energy. In addition, from time to time, CPS Energy provides a variety of supply arrangements on a short-term basis for terms ranging from one month up to one year with a variety of approved counterparts.

19 CUSTOMERS AND RATES

CUSTOMER RATES

CPS Energy's electric and gas monthly rate schedules list the currently effective monthly charges payable by CPS Energy customers. Each rate schedule briefly describes the types of service CPS Energy renders to customers billed in accordance with that rate schedule, plus customer eligibility criteria. Customers with similar load and usage characteristics are grouped into rate classes and are billed in accordance with the same rate schedule. The different electric rate classes include rate schedules for residential, commercial, and industrial customers. There are also rate schedules for street lighting, all night security lights, and wholesale power to other electric utilities. The gas rate schedules are categorized into general, commercial and industrial.

Retail Service Rates

Under the Texas Public Utility Regulatory Act ("PURA"), significant original jurisdiction over the rates, services, and operations of "electric utilities" is vested in the PUCT. In this context, "electric utility" means an electric investor-owned utility ("IOU"). Since the electric deregulation aspects of SB 7 became effective on January 1, 2002, the PUCT's jurisdiction over electric IOUs primarily encompass only the transmission and distribution functions. PURA generally excludes municipally-owned utilities ("Municipal Utilities" or "MOUs"), such as CPS Energy, from PUCT jurisdiction, although the PUCT has jurisdiction over electric wholesale transmission rates. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Transmission Access and Rate Regulation" herein. Under the PURA, a municipal governing body or the body vested with the power to manage and operate a Municipal Utility such as CPS Energy has exclusive jurisdiction to set rates applicable to all services provided by the Municipal Utility with the exception of electric wholesale transmission activities and rates. Unless and until the City Council and Board choose to opt-in to electric retail competition, CPS Energy retail service electric rates are subject to appellate, but not original rate regulatory jurisdiction by the PUCT in areas that CPS Energy serves outside the City limits. To date, no such appeal to the PUCT of CPS Energy retail electric rates has ever been filed. CPS Energy is not subject to the annual PUCT gross receipts fee payable by IOU electric utilities. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – ELECTRIC UTILITY RESTRUCTURING IN TEXAS" herein.

The Railroad Commission of Texas ("RRCT") has significant original jurisdiction over the rates, services and operations of natural gas utilities in the State. Municipal Utilities such as CPS Energy are generally excluded from regulation by the RRCT, except in matters related to natural gas safety. CPS Energy retail gas service rates applicable to ratepayers outside the City are subject to appellate, but not original rate regulatory jurisdiction by the RRCT in areas that CPS Energy serves outside the City limits. To date, no such appeal to the RRCT of CPS Energy retail gas rates has ever been filed. In the absence of a contract for service, the RRCT also has jurisdiction to establish gas transportation rates for service to Texas State agencies by a Municipal Utility. A Municipal Utility is also required to sell gas to and transport State-owned gas for "public retail customers," including State agencies, State institutions of higher education, public school districts, United States military installations, and United States Veterans Affairs facilities, at rates provided by written contract between the Municipal Utility and the buyer entity. If agreement to such a contract cannot be reached, a rate would be set by the legal and relevant regulatory body.

The City has covenanted and is obligated under the Bond Ordinances, as provided under the rate covenant, to establish and maintain rates and collect charges in an amount sufficient to pay all maintenance and operating expenses of the Systems and to pay the debt service requirements on all revenue debt of the Systems, including the outstanding Senior Lien Obligations, the Bonds, any Additional Senior Lien Obligations, the outstanding Junior Lien Obligations, obligations arising under liquidity facilities relating to such Junior Lien Obligations, any Additional Junior Lien Obligations, the Commercial Paper Obligations (and related Liquidity Facilities) and Inferior Lien Obligations, and to make all other payments prescribed in the Bond Ordinances. See "THE BONDS – Bond Provisions – Rate Covenant".

CPS Energy has periodic rate increases, with the most recent electric and gas base rate increase of 4.25% implemented on February 1, 2014 (the first such rate increase since a 7.5% electric base rate increase and a 8.5% gas base rate increase became effective on March 1, 2010). CPS Energy announced in October 2014 that it will not need to request a rate adjustment through Fiscal Year 2017. Several factors contributed to this decision, including: lower debt costs due to the refinancing of debt; better than expected wholesale sales; a successful voluntary retirement incentive program; strong investment returns on the employee benefit plans, which reduces the requirement for company funding; continued successful focus on additional cost control measures; a successful interim Transmission Cost of Service filing; and maintaining very strong cash and liquidity levels.

CPS Energy expects to continue to periodically seek electric and gas base rate increases that are intended to maintain debt coverage, debt to equity and liquidity ratios.

In addition to standard service rates, CPS Energy also provides several rates and riders for a variety of programs and products. Since May 2000, under Rider E15, CPS Energy has offered a monthly contract for renewable energy service (currently wind- generated electricity). The High Load Factor ("HLF") rate, first offered in February 2014, is available to customers with new or 20 added load of 10 megawatts ("MW") or greater. The HLF rate requires eligible customers to maintain a load factor of 90 percent or more and also meet the requirements of Rider E16. Rider E16 offers discounts off the Super Large Power ("SLP") and HLF demand charge for a period up to four years for new or added load of at least 10 MW. Under certain conditions, the discount may be extended for up to an additional six years. Eligible customers that qualify for Rider E16 discounts must also meet City employment targets or other related performance metrics and targets for purchases of goods or services from local businesses. Since July 2012, under Rider E19, CPS Energy provides an optional service offering of electricity generated by wind-powered turbines, solar-powered systems, or other renewable resources. Additionally, Rider E20, which became effective February 1, 2015, waives late fees for individuals 60 years or older with income at or below 125% of the federal poverty level. CPS Energy recently revised its "Rules and Regulations Applying to Retail Utility Service", effective February 1, 2017, which contains provisions for alternative payment plans, payment assistance, and extensions.

CPS Energy also has rates that permit recovery of certain miscellaneous customer charges and for extending lines to provide gas and electric service to its customers. The Policy for Miscellaneous Customer Charges is approved periodically by the Board and is subject to a corresponding City ordinance.

In May 2009, the City Council established a mechanism to fund CPS Energy's Save for Tomorrow Energy Plan ("STEP"), an energy efficiency and conservation program to be funded largely through the electric fuel adjustment fee. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Fuel and Gas Cost Adjustment" herein. The total cost of the STEP program during the 2009 to 2020 time period is estimated at $849 million with annual costs ranging from $12.3 million to over $111 million. While approximately $8 to $9 million a year is currently recovered through existing base rates, the additional costs for the STEP program will be recovered through a STEP surcharge applied to the electric fuel adjustment as stated above. Through Fiscal Year 2017, the accumulated cost was $472.6 million. Since inception, CPS Energy quantified a cumulative reduction of 463 MW. If energy use is reduced to levels predicted, the benefits of this program should exceed the implementation costs. CPS Energy will reassess the STEP program in calendar year 2019 to determine if continuing the program beyond 2020 is a viable option based on projected annual reductions in energy consumption and demand going forward and the costs that would be incurred to achieve such reductions. For additional information on CPS Energy's STEP energy efficiency and conservation program, see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Energy Conservation And Public Safety Programs" herein.

Fuel and Gas Cost Adjustment

The Systems' tariffs feature a fuel cost adjustment provision in the electric rates and a gas cost adjustment provision in the gas rates, which allow CPS Energy to reconcile fuel and gas cost variances above or below levels included in base rates. CPS Energy's electric rates are subject to a positive or negative monthly adjustment equal to the variance in the price of fuel above or below a base cost of $0.01416 per kilowatt-hour ("kWh"). Similarly, CPS Energy's base gas rates are subject to an adjustment equal to the variance in the price of natural gas above or below a base cost of $0.220 per 100 cubic feet ("CCF"), approximately equivalent to $2.115 per 1 million British Thermal Unit ("MMBtu"). A British Thermal Unit ("Btu") is a measure of energy content in fuel, and is used in the power steam generation, and heating and air conditioning, industries. Natural Gas is usually measured in Btu.

Governmentally Imposed Fees, Taxes or Payments

The rates, as previously approved by various rate ordinances adopted by the City Council, may be adjusted without further action by the City Council to reflect the increase or decrease in fees, taxes or other required payments to governmental entities or for governmental or municipal purposes which may be hereafter assessed, imposed, or otherwise required and which are payable out of or are based upon net revenues of the Systems.

In March 2000, two new governmental assessments resulting from regulatory changes in the Texas electric utility industry, including the open access wholesale transmission charges, were added to CPS Energy's electric billings as regulatory adjustments and are updated annually or as needed. The first assessment recovers additional ERCOT-related transmission expenditures not recovered through CPS Energy's current base rates. For CPS Energy residential customer rates, this adjustment (effective February 2017) adds $0.00979 per kWh sold. The second assessment relates to CPS Energy's share of the cost to fund the staffing and operation of ERCOT, the Independent System Operator ("ISO"), and the quarterly Electric Reliability Organization ("ERO") fee. The PUCT retains oversight authority over ERCOT. For all CPS Energy retail customers, this charge increases bills by $0.00074 per kWh sold.

In March 2005, the RRCT began imposing a regulatory fee to cover the cost of regulation by the RRCT. The fee is based upon the number of active gas customers and is recovered from CPS Energy gas customers through the payment of an annual fee assessed one time during the year.

21 Transmission Access and Rate Regulation

Pursuant to amendments made by the Texas Legislature in 1995 to the PURA ("PURA95"), Municipal Utilities, including CPS Energy, became subject to the regulatory jurisdiction of the PUCT for transmission of wholesale energy. PURA95 requires the PUCT to establish open access transmission on the interconnected Texas grid for all utilities, co-generators, power marketers, independent power producers and other transmission customers.

The 1999 Texas Legislature amended the PURA95 to expressly authorize rate authority over Municipal Utilities for wholesale transmission and to require that the postage stamp method be used exclusively for pricing wholesale transmission transactions. The PUCT in late 1999 amended its transmission rule to incorporate fully the postage stamp pricing method, which sets the price for transmission at the system average for ERCOT. CPS Energy's wholesale open access transmission charges are set out in tariffs filed with the PUCT, and are based on its transmission cost of service approved by the PUCT, representing CPS Energy's input to the statewide postage stamp pricing model. The PUCT's rule, consistent with provisions in PURA § 35.005(b), also provides that the PUCT may require construction or enlargement of transmission facilities in order to facilitate wholesale transmission service. Additional information on recovery of ERCOT transmission fees is discussed in "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Governmentally Imposed Fees, Taxes or Payments" and with respect to the transition to the nodal market is discussed in "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – ELECTRIC UTILITY RESTRUCTURING IN TEXAS – Wholesale Market Design Developments" herein.

TEN-YEAR ELECTRIC CUSTOMER STATISTICS(1) Fiscal Years Ended January 31, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 RESIDENTIAL Average Monthly kWh/ Customer 1,164 1,187 1,233 1,177 1,281 1,187 1,170 1,182 1,149 1,119 Average Monthly Bill/ Customer $91.98 $107.60 $107.00 $107.01 $118.48 $109.74 $115.20 $120.17 $122.81 $120.25 Average Monthly Revenue/kWh $0.0790 $0.0906 $0.0868 $0.0909 $0.0925 $0.0924 $0.0985 $0.1017 $0.1069 $0.1075

COMMERCIAL AND INDUSTRIAL Average Monthly kWh/ Customer 10,887 10,856 10,685 10,880 11,230 11,059 10,967 10,848 10,888 11,049 Average Monthly Bill/ Customer $722.94 $828.72 $801.81 $835.16 $877.37 $853.02 $905.84 $922.86 $961.12 $978.60 Average Monthly Revenue/kWh $0.0664 $0.0763 $0.0750 $0.0768 $0.0781 $0.0771 $0.0826 $0.0851 $0.0883 $0.0886

ALL CUSTOMERS Average Monthly kWh/ Customer 2,392 2,419 2,427 2,400 2,536 2,421 2,389 2,381 2,342 2,326 Average Monthly Bill/ Customer $170.01 $197.33 $192.98 $196.30 $211.41 $200.22 $211.25 $217.35 $223.24 $221.98 Average Monthly Revenue/kWh $0.0711 $0.0816 $0.0795 $0.0818 $0.0834 $0.0827 $0.0884 $0.0913 $0.0953 $0.0954

(1) Excludes unbilled revenues and off-system sales.

HISTORICAL RECORD OF CITY OF SAN ANTONIO GENERAL FUND BENEFITS FROM CITY'S ELECTRIC AND GAS UTILITY SYSTEMS (Dollars in thousands)

Fiscal Years Ended January 31, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Payments To City(1),(2) $ 247,854 $ 282,140 $ 260,636 $ 276,863 $ 286,943 $ 271,589 $ 296,672 320,933$ $ 320,454 $ 324,469

(1) Payments to the City, by ordinance, are not to exceed 14% of CPS Energy's gross revenue (includes wholesale revenues), and includes cash payments and refund of charges for furnishing the City electricity and gas services, and for a street light replacement program. See Appendix B. (2) Excludes additional payments to the City. See "CAPITAL PROGRAM" herein.

22 FIVE-YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY

Fiscal Years Ended January 31, 2013 2014 2015 2016 2017 ELECTRIC SYSTEM

SALES IN kWh(1) Residential 9,215,167,313 9,261,180,503 9,543,648,227 9,469,946,381 9,442,880,084 Commercial & industrial 8,912,486,465 8,957,746,237 8,992,773,827 9,126,055,853 9,389,924,617 Street lighting 91,749,898 86,810,650 75,504,815 74,213,309 74,236,222 Public authorities 2,695,444,584 2,700,155,856 2,709,140,253 2,710,033,507 2,832,860,627 Other utilities(2) 7,722,484,054 8,142,897,020 10,636,100,491 6,443,248,042 5,404,120,814 ANSL(3) 20,694,930 21,209,710 21,539,020 21,713,403 21,569,842 Total sales in kWH 28,658,027,244 29,169,999,976 31,978,706,633 27,845,210,495 27,165,592,206

AVERAGE NUMBER OF CUSTOMERS Residential 646,756 659,869 672,931 686,672 703,397 Commercial & industrial 67,161 68,069 69,081 69,850 70,821 Street lighting 2,296 2,309 2,336 2,381 2,472 Public authorities 7,706 7,083 7,057 6,824 7,027 Other utilities(2) 712191816 ANSL(3) 11,875 12,112 12,244 12,350 12,545 Total customers 735,801 749,454 763,668 778,095 796,278 kWh SALES PER CUSTOMER Residential 14,248 14,035 14,182 13,791 13,425 Commercial & industrial 132,703 131,598 130,177 130,652 132,587

GAS SYSTEM

SALES IN MCF(1) Residential 8,584,375 10,797,706 11,673,061 10,307,616 8,532,993 Commercial 9,495,948 10,433,104 10,687,180 10,335,964 10,403,729 Industrial 748,030 731,682 846,841 688,496 714,741 Public authorities 2,243,957 2,635,182 2,754,976 2,553,464 2,390,299 Total sales in MCF 21,072,310 24,597,674 25,962,058 23,885,540 22,041,762

AVERAGE NUMBER OF CUSTOMERS Residential 308,387 311,725 314,278 317,001 321,023 Commercial 17,794 17,706 17,689 17,632 17,612 Industrial 46 44 45 45 44 Public authorities 3,485 2,982 2,871 2,722 2,718 Total customers 329,712 332,457 334,883 337,400 341,397

MCF SALES PER CUSTOMER Residential 28 35 37 33 27 Commercial 534 589 604 586 591 Industrial 16,262 16,629 18,819 15,300 16,244

(1) Excludes unbilled revenues. (2) Includes Off-Systems Sales. (3) All Night Security Lighting.

23 FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE(1)

Fiscal Years Ended January 31, 2013 2014 2015 2016 2017 ELECTRIC SYSTEM

BILLED REVENUES Residential $851,722,009 $912,202,679 $970,412,539 $1,012,380,845 $1,015,038,320 Commercial & industrial 684,753,068 739,914,358 765,026,514 805,608,732 831,661,495 Street lighting 14,926,992 15,237,859 15,160,028 15,510,427 15,740,447 Public authorities 183,339,567 197,604,156 204,232,938 213,045,600 220,861,372 Other utilities(2) 265,040,445 325,978,599 441,844,051 256,036,895 199,261,371 ANSL(3) 4,630,279 4,242,058 5,110,608 5,251,978 5,359,993 Other 9,507,501 14,760,863 11,668,304 13,616,484 17,750,895 Total revenues 2,013,919,861 2,209,940,572 2,413,454,982 2,321,450,961 2,305,673,893

OPERATION & MAINTENANCE EXPENSE Production(4) 874,987,412 986,221,454 1,024,665,992 962,516,339 906,097,678 Transmission(4) 19,495,518 19,245,352 19,535,805 17,733,327 19,376,671 Distribution 83,123,256 82,014,635 82,638,727 94,473,807 100,054,517 Regulatory assessments 57,431,705 72,479,734 79,333,909 66,964,644 74,965,322 Energy efficiency(4) 25,611,435 43,415,776 53,543,493 56,374,842 62,392,909 Customer accounts & information 21,940,949 21,619,103 23,148,791 25,627,083 27,601,956 Administrative & general(4) 162,334,403 148,672,320 158,779,893 137,185,660 169,906,729 Payroll taxes(5) 5,836,063 6,256,552 6,581,293 6,078,062 6,516,970 STP decommissioning expense 2,219,000 - 3,119,000 1,800,000 900,000 Total expenses 1,252,979,741 1,379,924,926 1,451,346,903 1,368,753,764 1,367,812,752 Operating income - electric 760,940,120 830,015,646 962,108,079 952,697,197 937,861,141

GAS SYSTEM

BILLED REVENUES Residential 90,783,100 109,144,034 125,797,998 95,957,894 87,877,114 Commercial & industrial 66,064,373 76,379,160 87,311,242 63,530,526 65,788,279 Public authorities 14,044,492 16,951,595 19,836,095 13,273,493 13,009,567 Other 1,337,646 1,510,611 1,600,951 1,678,390 1,840,830 Total revenues 172,229,611 203,985,400 234,546,286 174,440,303 168,515,790

OPERATION & MAINTENANCE EXPENSE Gas purchased 86,143,442 113,152,416 118,872,367 75,542,105 72,749,732 Distribution 15,548,863 15,138,843 16,961,944 17,688,066 21,449,708 Customer accounts & information 10,722,928 10,534,311 11,249,817 12,315,617 13,265,003 Administrative & general(4) 9,929,948 9,280,808 11,441,138 10,360,657 13,048,835 Payroll taxes(5) 294,368 346,421 337,073 310,246 326,119 Total expenses 122,639,549 148,452,799 158,862,339 116,216,691 120,839,397 Operating income - gas 49,590,062 55,532,601 75,683,947 58,223,612 47,676,393

Combined operating income - Electric and gas 810,530,182 885,548,247 1,037,792,026 1,010,920,809 985,537,534 Nonoperating income(6) 21,714,687 21,042,334 18,409,237 18,793,828 19,930,413 Net revenues, per ordinances $832,244,869 $906,590,581 $1,056,201,263 $1,029,714,637 $1,005,467,947

DEBT SERVICE Senior lien obligations(7) - Principal and interest $366,473,642 $333,698,240 $335,440,064 $280,520,356 $290,264,115 Junior lien obligations - interest 23,255,686 34,274,760 52,026,229 94,723,593 98,996,034 Other interest & debt-related costs 2,880,782 4,466,436 4,518,504 4,145,376 5,443,039 Total debt service $392,610,110 $372,439,436 $391,984,797 $379,389,325 $394,703,188

DEBT SERVICE COVERAGE Senior & junior lien obligations, commercial paper, FRRN 2.12x 2.43x 2.69x 2.71x 2.55x Senior lien obligations 2.27x 2.72x 3.15x 3.67x 3.46x

(1) Excludes unbilled revenue and component units (STP Decommissioning).

(2) The lower wholesale sales revenues and related sales volume for FY 2016 and FY 2017 are a result of plant outages during a portion of the year and reduced ma rket opportunities and margins as a result of lower natural gas prices. (3) All Night Security Lighting.

(4) In October 2016, CPS Energy reclassified a portion of the FY 2013-2015 Electric System Production expense and FY 2013-2015 Electric System Transmission expense to Electric and Gas System Administrative & general expense. Costs associated with the Save for Tomorrow Energy Plan (STEP) for FY 2013-2016 were reclassified from Electric SystemAdministrative & general expense and are now reported as Energy efficiency expense. And finally, certain other components of FY 2013-2016 Admin istrative & general expense were reclassified from Gas to Electric. Combined operating income, Net Revenues and Debt Service Coverage were not impacted by these expense reclassifications. In March, 2013, CPS Energy reclassified certain Electric System Operation & Maintenance Expenses previously presented separately to Electric System Production, Electric System Administrative & general and Electric System Payroll taxes. A "Notice of Updated Financial Information and Operating Data" was filed by the City with the MSRB through EMMA reflecting thesereclassifications and updated tables on November 4, 2016. (5) Payroll taxes are allocated separately to Production, Transmission and Distribution. (6) Excludes fair value adjustments and gain/loss from ineffective hedging transactions. (7) Amount shown is gross debt service and does not include any cash contributions made.

24 FINANCIAL MANAGEMENT OF THE SYSTEMS

MANAGEMENT DISCUSSION

CPS Energy's Basic Financial Statements for the fiscal years ended January 31, 2017 and 2016, and the Independent Auditors' Report thereon are included in APPENDIX B. CPS Energy follows Governmental Accounting Standards Board ("GASB") Statement No. 34, which requires the preparation of Basic Financial Statements to include an unaudited Management's Discussion and Analysis ("MD&A") in connection with audited Basic Financial Statements and Related Notes as well as unaudited Required Supplementary Information ("RSI") of CPS Energy. Reference is hereby made to APPENDIX B for the MD&A, Financial Statements & Related Notes and RSI pertaining to the CPS Energy fiscal year ended January 31, 2017. The Basic Financial Statements for each of the three most recently completed fiscal years and certain interim audited and unaudited financial reports are made available by CPS Energy to the general public and are accessible at www.cpsenergy.com. The terms "audited financial reports", "audited financial statements", "financial reports" and "financial reporting" herein are in reference to the audited and unaudited components of the financial package prepared to GASB Statement No. 34 standards and provided in whole or in part within APPENDIX B.

Certain historical financial information presented in this Remarketing Memorandum in table format was derived from CPS Energy's annual audited financial reports, though the presentation format itself was not separately audited.

The operating results of the Systems reflect the results of past operations and are not necessarily indicative of results of operations for any future period. Future operations will be affected by factors relating to changes in rates, fuel and other operating costs, utility industry regulation and deregulation, environmental regulation, economic growth of the community, population, weather, and other matters; the nature and effect of which cannot at present be determined. See "FORWARD-LOOKING STATEMENTS" herein.

ACCOUNTING POLICIES

CPS Energy is subject to and complies with the provisions of GASB pronouncements and guidance made from time to time, upon assessment of applicability to and implementation by CPS Energy. GASB pronouncements and guidance to which CPS Energy adheres and implements are described in its audited financial statements. For a description of recent GASB pronouncements and guidance, as well as CPS Energy's response thereto in connection with its fiscal year 2017 financial reporting, see CPS Energy's fiscal year 2017 Basic Financial Statements and Independent Auditors' Report included in APPENDIX B.

Other than the changes resulting from GASB pronouncements and guidance that are described in CPS Energy's fiscal year 2017 Basic Financial Statements and Independent Auditors' Report, there were no additional significant accounting principles or reporting changes implemented in the fiscal year ended January 31, 2017. Other accounting and reporting changes that occurred during the prior reporting year continued into the fiscal year ending January 31, 2017. These accounting changes and the effects on the financial statements are described in greater detail in the MD&A and in the Notes to CPS Energy's fiscal year 2017 Basic Financial Statements and Independent Auditors' Report included in APPENDIX B hereto.

DEBT AND ASSET MANAGEMENT PROGRAM

CPS Energy has developed a debt and asset management program ("Debt Management Program") for the purposes of lowering the debt component of energy costs, maximizing the effective use of cash and cash equivalent assets and enhancing financial flexibility. An important part of the Debt Management Program is debt restructuring through the prudent employment of variable rate debt. CPS Energy does not currently use interest rate swaps, but continues to assess them as potential debt management tools that could be incorporated into the CPS Energy debt portfolio in the future. The program also focuses on the use of unencumbered cash and available cash flow, when available, to redeem debt ahead of scheduled maturities as a means of reducing outstanding debt. The Debt Management Program is designed to lower interest costs, fund strategic initiatives and increase net cash flow. CPS Energy has a Debt Management Policy, providing guidelines under which financing and debt transactions are managed. These guidelines focus on financial options intended to lower debt service costs on outstanding debt, facilitate alternative financing methods to capitalize on the present market conditions and optimize capital structure, and maintain favorable financial ratios. Under these guidelines, CPS Energy's gross variable rate exposure cannot exceed 25% of total outstanding debt. Gross variable rate debt as of the date of pricing on August 29, 2017, is estimated to comprise approximately 13.3% of CPS Energy's debt portfolio, assuming certain refunded Commercial Paper Obligations pertaining to the 2017 Revenue Refunding Bonds have been defeased.

CPS Energy management continually evaluates the inventory of all non-core business assets and determines if these assets should be divested for more efficient use. As part of this process, in January 2014, CPS Energy sold its communication towers to Crown Castle in a transaction valued at $41 million (net cash benefit to CPS Energy). Communication tower management is not in line with CPS Energy's core business and, as a result, CPS Energy determined that this asset was better utilized to pay down existing CPS Energy debt. Adequate communication capacity on the towers was reserved to cover CPS Energy's existing and future communication needs. 25 FINANCIAL RESPONSIBILITY AND DEBT DISCLOSURE / OFFERING DOCUMENT PREPARATION PROCESS

At least annually, and at other times as needed to support CPS Energy's financial and external reporting activities (including annual audits and applicable official statements), CPS Energy publishes financial information that is distributed to external stakeholders, including current and potential investors. As part of the requirements for financial reporting and participation in the financial markets, the President & CEO and CFO & Treasurer formally affirm, on behalf of the entire management staff, the integrity of the information presented. To support this requirement, CPS Energy has established a Management Financial Responsibility & Disclosure Certification Process.

Under this process, all members of CPS Energy Management (from Senior Manager level to the Chiefs) except for the Vice President of Audit Services, the CFO and the CEO are required to submit a Management Financial Responsibility & Disclosure Certification Form ("Disclosure Certification") in which they describe any conditions of which they are aware that could affect the presentation of financial information or results of operations, including the status of key systems, internal controls or regulatory compliance, and the potential future effects of currently known risks, uncertainties, events, conditions or trends. The Disclosure Certifications submitted are reviewed by a Disclosure Committee, which includes the CFO & Treasurer (who serves as Committee Chair), Chief Legal & Administrative Officer, VP - Financial Services, Controller, Senior Director of Capital Markets & Cash Management and Interim Director of Enterprise Risk Management & Solutions. The outcomes of this process are used to validate the public disclosures to be included in CPS Energy's financial information and offering documentation used in connection with CPS Energy's public offering of its debt (including the Bonds).

CAPITAL PROGRAM

Comprehensive programs for planning and construction to meet current and future electric and gas systems needs are continually being reviewed and updated, and are aligned with the strategic plan. CPS Energy utilizes computer-based mathematical models for its forecasting processes. CPS Energy bases its near-term construction and operating needs on a five-year forecast. This short- term annual forecast is supported by a 35-year electric resource plan and is integrated into the long-term financial plan. These assumptions are subject to substantial change and are revised as necessary to maintain CPS Energy's competitive position.

While short-term energy demand projections have been impacted by recent economic developments and while energy efficiency and conservation are expected to reduce usage through STEP, positive customer growth is still expected. CPS Energy expects to see continued growth of its customer base for the Systems due to projected population growth in the San Antonio area. The current energy sales and peak demand forecast predicts annual increases in sales over the next 25 years between 1-2% and 0.5-1.5% in electric and gas sales, respectively, and an average peak demand growth rate over the next 25 years between 1-2% per year. CPS Energy has continued to expand its electric customer extensions, with ongoing construction growth in this area. The capital projects in fiscal year 2017-18 are planned to be funded with transfers from internally generated funds, debt proceeds, and other sources.

A capital improvement plan is made for planning purposes and may identify projects that may be deferred or omitted entirely in future years. In addition, the proposed funding sources for the plan may be modified to meet changing conditions. Likewise, as conditions change, new projects may be added that are not currently identified. CPS Energy continually monitors and updates the capital plan with estimates of expenditures necessary to meet proposed and probable new environmental regulations and regulatory standards. CPS Energy's current $3.319 billion, five-year capital improvement plan is forecasted from February 1, 2017 to January 31, 2022, and does not include expenditure for further development of CPS Energy's existing 7.625% interest in STP3 and STP4. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Additional Generation Opportunities – Nuclear" herein.

Construction projects include electric transmission, electric generation, electric distribution, general properties, and gas facilities. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System" herein. The capital program is primarily driven by the electrical and transmission functions and includes expenditures for various infrastructure and modernization projects as well as customer growth projects. The remainder of the capital budget is for power generation, gas distribution, and shared services including the deployment of a grid optimization program and various other demand side management technology initiatives.

Over the five-year period covered by the current capital plan, construction funding from debt proceeds averages approximately $287.1 million per year, with other significant sources of funding for the plan consisting of internally generated funds.

The Community Infrastructure and Economic Development Fund ("CIED") was established by Board policy on January 19, 2005, as a successor to the Overhead Conversion Fund ("OCF"). The OCF was originally instituted in 1993 by the Board in response to interest by the citizens and governing bodies of the City and the suburban cities within the CPS Energy service area to enhance the aesthetic appeal of the public areas by minimizing the visual impact of overhead electric facilities. The CIED amount, set annually,

26 equaled 1% of the electric base rate revenue (less uncollectibles) of the CPS Energy electric system billed during the previous fiscal year to retail electric customers of CPS Energy residing within the City and each of the suburban cities.

Effective February 1, 2012, the Board found that the objectives underlying the establishment of the CIED Fund had been successfully accomplished and authorized the termination of the policy. Suburban cities with unused or unencumbered funds were distributed remaining balances, which were completed in 2013.

INSURANCE PROGRAM

CPS Energy maintains property and liability insurance programs that combine self-insurance with commercial insurance policies to cover major financial risks. The property insurance program provides $3.5 billion of replacement value for property and boiler, machinery loss coverage including comprehensive automobile coverage, fire damage coverage for construction equipment, and valuable papers coverage. The deductible levels for the property insurance policy are $5.0 million per occurrence for power plants, $2.5 million per occurrence for substations and $1.0 million per occurrence for all other property locations. The liability insurance program includes (1) excess liability coverage with a $100.0 million policy limit at a $3.0 million self-insured retention, and (2) excess workers compensation coverage with a $35.0 million policy limit at a $3.0 million self-insured retention. Other property and liability insurance coverages include directors and officers liability, employment practices liability, fiduciary liability, employee travel, event insurance and commercial crime. CPS Energy also maintains insurance reserves, which as of January 31, 2017, totaled $22.1 million to cover losses under the self-insurance portion of the insurance program.

CPS Energy and the other participants in STP1 and STP2, as further defined herein, maintain the Nuclear Regulatory Commission ("NRC") required nuclear liability, worker liability, and property insurance, each of which includes provisions for retrospective assessments depending on occurrences at STP1 and STP2 and other commercial nuclear plants. CPS Energy is liable for 40% of the premiums and any retrospective assessments with respect to STP1 and STP2 insurance, and for costs of decontamination and repairs or replacement of damaged property in excess of policy limits.

ENTERPRISE RISK MANAGEMENT AND SOLUTIONS

The Enterprise Risk Management & Solutions ("ERMS") Division is under the direction of the Vice President of Financial Services and is responsible for enterprise risk assessments, insurance service and commodity related middle office activities. As part of these responsibilities, ERMS continuously monitors all counterparties and credit related exposure on a daily basis.

In 2002, as part of its risk management and fuel and electricity purchasing policies, CPS Energy obtained the ability to hedge or mitigate price volatility associated with fuel and energy sales and purchases through the utilization of energy-based futures, options and swap contracts. The hedge program is operated in accordance with a written policy approved annually by the Board. The program oversight committee, composed of CPS Energy corporate officers and senior executives, approves operating procedures and corporate hedging strategies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010. Title VII of the Dodd-Frank Act, known as the "Wall Street Transparency and Accountability Act of 2010," substantially modified portions of the Commodity Exchange Act with respect to swaps and swap transactions. The law was designed to reduce systemic risk, establish new business conduct rules, increase transparency, and promote market integrity within the financial system. The Dodd-Frank Act gave both the Commodity Futures Trading Commission ("CFTC") and the United States Securities and Exchange Commission (the "SEC") statutory authority to directly regulate the "Over the Counter" ("OTC") derivatives market, which include commodities currently being utilized by CPS Energy to hedge price risk in accordance with its own policies and procedures. CPS Energy operations are principally affected by the regulations promulgated under the Dodd-Frank Act by the CFTC. Development of regulations implementing the legislation has progressed, but the overall impact on CPS Energy remains uncertain pending completion of certain CFTC rulemakings. Exemptions intended to minimize the regulatory burden on commercial end- users and governmental entities have pared back obligations initially bearing upon CPS Energy. Certain CFTC rules and policy statements made necessary the modification of CPS Energy's contract arrangements with hedging counterparties, bringing in various representations, elections and commitments as to reporting obligations and other matters, and must be covered in new relationships. Similarly, filings with government authorities, relationships with third party services providers, and additional internal controls and responsibilities have been made necessary. President Trump promised to "dismantle the Dodd-Frank Act", and issued an executive order in February 2017 aiming to restore "public accountability" thereto, implying future deregulation when compared to the Dodd-Frank Act's current requirements. On June 8, 2017, the House of Representatives passed the Financial Choice Act of 2017, which proposes widespread amendments to the Dodd-Frank Act and subsequently included in the "Building a Better America" budget unveiled July 18, 2017. CPS Energy continues to monitor the status of the Dodd-Frank Act, and any possible revisions, in order to remain compliant with current law.

As an "end user", CPS Energy would be exempt under currently proposed CFTC rules mandating clearing and margining of certain market participants' OTC commodity positions. The CFTC proposed rules as to "capital requirements" and financial condition 27 reporting do not impose direct burdens on "end-user" market participants such as CPS Energy. If CPS Energy were made subject to onerous capital requirements, the organization's ability to hedge its portfolio could be impacted. Implementation of the Volcker rule, which restricts United States banks from making certain kinds of speculative investments that do not benefit customers, could affect liquidity in markets in which CPS Energy currently operates. CPS Energy takes part in efforts of its trade organizations within CFTC rule-making processes to shape rules which will allow commercial end-users and municipal utilities to avoid undue burdens when hedging their commercial risks. Out of those efforts, CPS Energy currently benefits from an exemption applying to certain non-financial energy transactions between government- and / or cooperative-owned electric utilities.

INVESTMENTS

Operating Funds

CPS Energy invests its operating funds as authorized by the Bond Ordinances and by federal and State law including, but not limited to, the Public Funds Investment Act, as amended, Texas Government Code Chapter 2256 ("Investment Act"), Texas Local Government Code Chapter 272, as amended, and in accordance with written investment policies approved by the Board. These Bond Ordinances, laws and CPS Energy's investment policies are subject to change.

On July 23, 2014, the SEC adopted changes to its Rule 2a-7 that governs money market funds. This new rule became effective October 14, 2014 and a compliance deadline of October 14, 2016 requires a floating net asset value ("NAV") for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of the fund's assets. The Investment Act requires money market funds to have a stable $1 NAV. Therefore, due to the changes to Rule 2a-7, CPS Energy is no longer be able to invest in institutional prime money market funds, which it has historically used many years for its short-term liquidity needs. CPS Energy Cash and Liquidity Management staff have developed an investment plan to invest in other permissible similar investments, such as government money market funds and investment pools (both of which are exempt from the Rule 2a-7 requirements), for its short-term liquidity needs. As of October 1, 2016, all monies that were previously invested in institutional prime money market funds had been transferred to other allowable investments.

Under current State law and the investment policies approved by the Board, CPS Energy may invest its funds in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State or its agencies and instrumentalities; (3) collateralized mortgage obligations, having a stated final maturity of 10 years or less, directly issued and guaranteed by a Federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by Texas or the United States or their agencies and instrumentalities including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation ("FDIC") or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated not less than "A" category or its equivalent; (6) a certificate of deposit or share certificate issued by a depository institution or a broker that has its main office or branch in the State of Texas, which is fully secured and / or federally insured; (7) securities lending programs that are 100-102% collateralized; (8) fully collateralized repurchase agreements; (9) certain bankers' acceptances; (10) commercial paper rated not less than "A-1" or "P-1" or equivalent by at least two nationally recognized credit rating agencies and that have a stated maturity of 270 days or fewer from the date of issuance; (11) no-load money market mutual funds that comply with Rule 2a-7; (12) no-load mutual funds registered with the SEC that: have an average weighted maturity of less than two years; and have a duration of one year or more and are invested exclusively in obligations described in this paragraph or have a duration of less than one year and the investment portfolio is limited to investment grade securities, excluding asset-backed securities; (13) certain guaranteed investment contracts that are funded by bond proceeds if authorized in the order, ordinance, or resolution authorizing the issuance of the bonds; (14) investment pools that stabilize at a $1 NAV to the extent reasonably possible and are rated no lower than "AAA" or "AAA- m" or equivalent and meet all other requirements as stipulated in Section 2256.016 of the Investment Act; (15) in connection with a transaction authorized by Section 272.004 of the Texas Local Government Code, one or more of the investments, securities, guarantees, and / or insurance contracts or other contracts and agreements described in Section 452.108(d) of the Texas Transportation Code, including, but not limited to the following: payment agreements, financial guarantees or insurance contracts with counterparties having either a corporate credit or debt rating in any form, a claims-paying ability, or a rating for financial strength of "AA" or better and (16) for the General Account only, hedging instruments authorized by Section 2256.0201 of the Investment Act and in accordance with CPS Energy's Energy Price Risk Management Policy for the purpose of managing risks of financial uncertainty or loss associated with adverse volatility in the pricing of CPS Energy's energy and fuel assets, to include energy based futures contracts, option contracts, swap contracts, insurance contracts, and structured contracts composed of combinations of hedging instruments.

CPS Energy is specifically prohibited from investing its funds in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity date of greater than 10 years; and (4) collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the change in the market index. 28 The weighted term to maturity of investments at January 31, 2017, was 2.57 years for CPS Energy's funds. CPS Energy's funds, as of January 31, 2017, were invested entirely in Government Agency Obligations, collateralized mortgage obligations directly issued by and guaranteed by a Federal agency, U.S. Treasury securities, money market mutual funds, investment pools, commercial paper, high quality municipal bonds, certificate of deposit pools and PFIA-compliant money market deposit funds. The market value of the investments held as of January 31, 2017 totaled approximately $918 million. Based on market value, 40% of the portfolio was invested in United States Government Agency obligations, 26% in money market mutual funds / investment pools, 11% in collateralized mortgage obligations and other pass through securities whose principal and interest are backed by Federal Agencies, 1% in U.S. Treasury securities, 16% in high-quality municipal bonds and 6% in high quality commercial paper. CPS Energy determines the market value of non-cash investments primarily through Interactive Data Corporation, a reputable third party data provider, as well as by reference to Bloomberg's financial terminal, published quotations and other comparable information. No CPS Energy funds are invested currently in reverse repurchase agreements or derivative securities, securities whose rate of return is determined by reference to some other instrument, index, or commodity, except for certain natural gas options held under the Energy Price Risk Management Policy. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES – Wholesale Power", "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Enterprise Risk Management And Solutions" and "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Fuel Supply" herein.

Investment Policies

Under the Investment Act, CPS Energy is required to invest its funds in accordance with written investment policies that (1) primarily emphasize safety of principal and liquidity; (2) address investment diversification, yield, maturity, and the quality and capability of investment management; (3) include a list of authorized investments for CPS Energy funds and the maximum allowable stated maturity of any individual investment; (4) state the maximum dollar-weighted average maturity allowed for pool fund groups; (5) contain the methods to monitor the market price of investments acquired with public funds; (6) require the settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis; and (7) monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the provisions of Section 2256.021 of the Investment Act. All CPS Energy funds must be invested consistent with formally adopted written investment strategies that specifically address each fund's investment. Each strategy describes its objectives concerning (1) suitability of investment type; (2) preservation and safety of principal; (3) liquidity; (4) marketability of each investment; (5) diversification of the portfolio; and (6) yield.

Under the Investment Act, CPS Energy investments under all investment policies must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived."

Consistent with the requirements of the NRC, Texas Property Code, the Investment Act, and as applicable, the PUCT, the STP Decommissioning Trust, and the Master Trust (TCC Funded) will be invested consistent with the following goals: (1) the funds will be invested with a goal of earning a reasonable return commensurate with the need to preserve the value of the assets; (2) the portfolio of securities will be diversified to the extent reasonably feasible given the size of the trust; (3) asset allocation and the acceptable risk level of the portfolio will take into account market conditions, the time horizon remaining before the commencement and completion of decommissioning, and the funding status of the trust; (4) while maintaining an acceptable risk level, the investment emphasis when the remaining life of the liability exceeds five years will be to maximize net long-term earnings and the investment emphasis in the remaining investment period of the trust will be on current income and asset preservation; and (5) in selecting investments, the impact of the investment on the portfolio's volatility and expected return net of fees will be considered.

Additional Provisions

Under the Investment Act for the Operating Funds, STP Decommissioning Trust and the Master Trust (TCC Funded), CPS Energy must: (1) review annually and, if desired, change its adopted written investment policies and strategies; (2) designate investment officers to be responsible for investment of its funds consistent with the investment policies of CPS Energy; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board; (4) require the qualified representative of firms seeking to sell securities to CPS Energy to (a) receive and review the CPS Energy investment policies; (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions not authorized by the CPS Energy investment policies; and (c) deliver a written statement attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the CPS Energy investment policies; (6) provide specific investment training for CPS Energy's investment officers; and (7) review, revise, and adopt on an annual basis a list of qualified brokers that are authorized to engage in investment transactions with CPS Energy. See "Trust Funds" below.

29 For the STP Decommissioning Trust and the Master Trust (TCC Funded), CPS Energy is prohibited from being engaged as investment manager for the funds or from giving day-to-day management direction of the funds' investments. Therefore, the use of one or more professional investment managers is necessary to assure that the trusts are managed in a manner so that the funds are secure and earn a reasonable return. CPS Energy has the following duties concerning the use of one or more investment managers: (1) a duty to determine whether the investment manager's fee schedule for investment management services is reasonable, when compared to other such managers; (2) a duty to investigate and determine whether the past performance of the investment manager in managing investments has been reasonable; (3) a duty to investigate and determine whether the financial stability and strength of the investment manager is adequate for purposes of liability; (4) a duty to investigate and determine whether the investment manager has complied with the investment management agreement; and (5) a duty to investigate any other factors which may bear on whether the investment manager is suitable.

Trust Funds

STP Decommissioning Funds

CPS Energy invests in two specific decommissioning trusts, the STP Decommissioning Trust and the Master Trust (TCC Funded), in accordance with its decommissioning investment policy and as authorized by Texas law, the NRC and, where applicable, the PUCT. The STP Decommissioning Trust is the sinking fund created by CPS Energy for the sole purpose of financing the decommissioning expenses for its original 28% interest in STP. CPS Energy obtained the Master Trust (TCC Funded) after it purchased from AEP Texas Central Company ("TCC") its additional 12% interest in STP. As part of the acquisition of the additional interest in STP, CPS Energy obtained a proportionate amount of the nuclear decommissioning trust fund originally created by TCC. Responsibility for continuous funding of the Master Trust (TCC Funded) will remain the responsibility of TCC customers through final decommissioning of STP. At acquisition by CPS Energy of the additional interest in STP from TCC, the funds were transferred to CPS Energy by TCC and placed into the Master Trust (TCC Funded), which is entirely separate from the existing decommissioning trust fund held in the STP Decommissioning Trust created and maintained by CPS Energy for its original interest in STP. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – External Events Impacting Nuclear Power Generation Industry and STP1 and STP2, and CPS Energy's Response" herein for further discussion of CPS Energy's acquisition of a 12% interest in STP from TCC. CPS Energy's investments in the STP Decommissioning Trust and in the Master Trust (TCC Funded) are held by an independent trustee and are invested pursuant to a separate investment policy adopted by the Board and to the provisions of the trust agreements of each trust.

Effective September 1, 2005, the Investment Act was amended to allow a Texas municipality which owns a municipal electric utility to invest its decommissioning trust funds in any investment authorized by Subtitle B, Title 9 of the Texas Property Code. The broad investment authority found in the Texas Property Code includes, but is not limited to, the power to invest in equities.

STP Decommissioning Trust

Under the Texas Property Code, other applicable law and the South Texas Project Decommissioning Trust Investment Policy ("STP Investment Policy") approved by the Board, the STP Decommissioning Trust may be invested as follows: (1) funds may be invested in investments permissible by law under the guidance and regulations issued by the NRC and under the Texas Property Code; (2) the STP Decommissioning Trust's investments should be diversified such that (a) no more than 5% of the securities held may be issued by one entity, with the exception of the federal government, its agencies and instrumentalities, and (b) the portfolio shall contain at least 20 different issues of securities with municipal securities and real estate investment trusts diversified as to geographic region; (3) derivative securities are limited to those whose purpose is to enhance returns of the STP Decommissioning Trust without a corresponding increase in risk of the portfolio; (4) securities lending transactions must be collateralized at 100- 102%; (5) fixed income securities may not be rated below "BBB-" and "BBB-" by S&P Global Ratings ("S&P") and Fitch Ratings, Inc. ("Fitch"), respectively, or "Baa3" by Moody's Investors Service, Inc. ("Moody's"), at the time of purchase, and the overall fixed income portfolio must be rated no less than "A" by S&P and Fitch and "A2" by Moody's; (6) equity securities are permissible investments (a) limited to a cap of (i) 60% when the weighted average remaining life of the decommissioning liability exceeds 5 years, (ii) 30% when the weighted average remaining life of decommissioning liability ranges between 5 years and 2.5 years and during all years in which expenditures for decommissioning the nuclear units occur, and (iii) 0% when the weighted average remaining life of the decommissioning liability is less than 2.5 years, and (b) when the equities are of a type not considered to be speculative; (7) no load commingled funds of the United States, including investments in commingled real estate limited partnerships or funds; and (8) commingled funds that include United States equity-indexed funds, actively managed United States equity funds, balanced funds, bond funds, real estate investment trusts, and international funds are permissible investments, if the commingled funds are consistent with the goals stated in the STP Investment Policy. Commingled funds (a) may be focused on specific market sectors or concentrated in a few holdings only as necessary to balance the trust's overall investment portfolio mix, and (b) may contain some below investment grade bonds; but the overall portfolio of debt instruments shall have a quality level, measured quarterly, not below an "A" rating by S&P and Fitch, respectively, and "A2" by Moody's.

30 The STP Decommissioning Trust is specifically prohibited (1) from investing in derivatives if being used to increase the value of the portfolio by any amount greater than the value of the underlying securities; (2) from the use of leverage (borrowing) to purchase securities or the purchase of securities on margin; (3) from investing in corporate or municipal debt securities that have a bond rating below investment grade (below "BBB-" by S&P and Fitch or "Baa3" by Moody's) at the time that the securities are purchased and the appropriateness of continuing to hold a particular debt security must be reexamined if the debt rating of the company in question falls below investment grade after the debt security has been purchased; and (4) from investing in equity securities that are considered speculative (e.g., stocks of companies with limited operating history or that have low "safety" rankings from ratings agencies).

Investments in the STP Decommissioning Trust as of December 31, 2016, consisted of fixed income securities, equity securities, Real Estate Investment Trusts of the United States ("US REITs") and cash equivalents. The market value of cash, cash equivalents and investments held as of December 31, 2016, totaled approximately $393 million and was comprised of fixed income securities totaling approximately $241 million, equity securities (domestic and international) having a market value of approximately $98 million, US REITs in the amount of approximately $38 million, and the remaining $16 million being invested in cash and cash equivalents. Based upon market values, 57% of fixed income securities were invested in United States Government and Government Agency obligations, 38% were invested in corporate bonds and municipal bonds, 4% were invested in foreign bonds, and 1% was invested in cash and cash equivalents, such as money market funds.

Master Trust (TCC Funded)

Under applicable law, including NRC and PUCT regulations, and the STP Investment Policy, the Master Trust (TCC Funded), may be invested in (1) a way that, once the portfolio of securities (including commingled funds) held in the Trust contains securities with an aggregate value in excess of $20 million, the funds are diversified so that (a) no more than 5% of the Investment Manager's portfolio of securities held are issued by one entity, with the exception of the federal government, its agencies and instrumentalities, and (b) the portfolio shall contain at least 20 different issues of securities with municipal securities and real estate investments diversified as to geographic region; (2) derivative securities limited to those whose purpose is to enhance returns of the trust without a corresponding increase in risk of the portfolio; (3) securities lending transactions when collateralized at 100-102%; (4) fixed income securities not rated below "BBB-" or "BBB-" by S&P and Fitch, respectively, or "Baa3" by Moody's, at the time of purchase; (5) equity securities, (a) limited to a cap of (i) 60% when the weighted average remaining life of the decommissioning liability exceeds 5 years, (ii) 30% when the weighted average remaining life ranges between 5 years and 2.5 years and during all years in which expenditures for decommissioning the nuclear units occur, and (iii) 0% when the weighted average remaining life of the decommissioning liability is less than 2.5 years, and (b) with at least 70% of the aggregate market value of the equity portfolio, including the individual securities in commingled funds, having a quality ranking from a major rating service and the overall portfolio of ranked equities with a weighted average quality rating equivalent to the composite rating of the S&P 500 index assuming equal weighting of each ranked security in the index; and (6) commingled funds that include United States equity-indexed funds, actively managed United States equity funds, balanced funds, bond funds, real estate investment trusts, and international funds that (a) are consistent with the goals stated in the investment policy, (b) are focused on specific market sectors or concentrated in a few holdings only if used as necessary to balance the trust's overall investment portfolio mix, and (c) may contain some below investment grade bonds; however, the overall portfolio of debt instruments shall have a quality level, measured quarterly, not below a "AA" rating by S&P and Fitch, respectively, or "Aa2" by Moody's.

The Master Trust (TCC Funded) is specifically prohibited (1) from investing in derivatives if being used to increase the value of the portfolio by any amount greater than the value of the underlying securities; (2) from the use of leverage (borrowing) to purchase securities or the purchase of securities on margin; (3) from investing in corporate or municipal debt securities that have a bond rating below investment grade (below "BBB-" or "BBB-" by S&P and Fitch, respectively, or "Baa3" by Moody's) at the time that the securities are purchased and the appropriateness of continuing to hold a particular debt security must be reexamined if the debt rating of the company in question falls below investment grade at some time after the debt security has been purchased; (4) from investing in equity securities where the issuer has a capitalization of less than $100 million; and (5) from investing in securities issued by the electric utility collecting the funds or any of its affiliates; however, investments may include commingled funds that contain securities issued by the electric utility if the securities of the utility constitute no more than 5% of the fair market value of the assets of such commingled funds at the time of the investment.

As of December 31, 2016, investments in the Master Trust (TCC Funded) consisted of fixed income securities, equity securities (domestic and international), US REITs and cash equivalents. The market value of cash, cash equivalents and investments held as of December 31, 2016, totaled approximately $143 million and was comprised of fixed income securities totaling approximately $83 million, equity securities having a market value of approximately $39 million, US REITs in the amount of approximately $14 million and the remaining $7 million being invested in cash and cash equivalents. Based upon market values, 57% of fixed income securities were invested in United States Government and Government Agency obligations and 39% were invested in corporate and municipal bonds, 3% were invested in foreign bonds and the remaining 1% was invested in cash and cash equivalents.

31 EMPLOYEE BENEFITS

CPS Energy provides health, dental and vision benefits for employees, their spouses, and covered dependents, as well as Pension and Other Postemployment Benefits ("OPEB") as discussed in the following section. The health, dental and vision benefits provided during active employment are funded on a pay-as-you-go basis, with premiums from the participants and CPS Energy designed to cover current year claims.

PENSION AND OTHER POSTEMPLOYMENT BENEFITS

CPS Energy provides Pension and OPEB for its employees. There are four plans which include: the CPS Energy Pension Plan (the "Pension Plan"), the CPS Energy Group Health Plan, the CPS Energy Group Life Insurance Plan, and the CPS Energy Long- Term Disability Income Plan (the Group Health Plan, the Group Life Insurance Plan, and the Long-Term Disability Income Plan, collectively referred to herein as the "OPEB Plans"). All plans are reported on a calendar-year basis. While all plans are separately and independently audited, CPS Energy discloses relevant information about them in its financial statements, related Notes and RSI. See "Basic Financial Statements – Note 9 – Employee Pension Plan and Note 10 – Other Postemployment Benefits" in CPS Energy's Basic Financial Statements attached hereto as APPENDIX B ("Notes 9, 10 and RSI").

All plans are operated based on a Statement of Governance ("SoG") approved by the Board. The SoG provides for an Employee Benefits Oversight Committee ("EBOC"), which is composed of the President and CEO, the Chief Financial Officer and the Audit Committee members of the Board. Among other functions, the EBOC approves all changes to the plans, engages external auditors, appoints members of an Administrative Committee (which manages daily operations and makes investment decisions), and approves all changes to the investment policy. All plan investments are made and managed in accordance with the investment policy, which requires diversification of assets and maintaining appropriate liquidity according to the needs of each plan.

CPS Energy retains an actuary to perform annual actuarial valuations for the Pension Plan and each of the OPEB Plans. Conducted in accordance with generally accepted actuarial principles and practices, the actuarial reports summarize the funding status of each plan for the current and prior year, as well as provide projected funding contribution recommendations for CPS Energy's next fiscal year. Additionally, information included in the actuarial reports provides the basis for CPS Energy's financial reporting of costs and liabilities related to the Pension and OPEB Plans.

Use of Assumptions and Estimates

As set forth herein and in Notes 9 and 10 and RSI of APPENDIX B, the disclosures relating to the Pension Plan and the OPEB Plans are based upon certain assumptions and estimates that may vary based upon the risk factors. To the extent that these assumptions and estimates do not materialize or are inaccurate, the financial information disclosed herein and in Notes 9 and 10 and RSI of APPENDIX B, including the estimates as compared to the actual values of the assets and liabilities, could change substantially and in a materially adverse manner. The actuarial values determined for the measurement of benefit plan assets and liabilities were based on reasonable assumptions, which are estimates based on information available at the time the actuarial reports were prepared.

An experience study, covering Pension and OPEB Plans' experience during calendar years 2012 to 2016, was completed by CPS Energy's actuary, and the results communicated to the Administrative Committee in June 2017. CPS Energy engaged a third party to evaluate the experience study, the results of which are expected to be communicated to CPS Energy by late August 2017. Changes to both demographic and economic assumptions were recommended for consideration based on the study results. The most impactful were 1) a reduction to the expected rate of return on assets from 7.50% to 7.25% and 2) the use of the RP-2016 combined health, with no collar adjustment, male and female mortality tables with the MP-2016 mortality improvement scale. Both changes are expected to increase liability, recommended contributions and expense. The Administrative Committee authorized the actuary to use the recommended assumptions to prepare the January 1, 2017, actuarial reports that will be used to determine liability, contributions, and expense for CPS Energy's fiscal year 2019 financial statements. The changed assumptions did not impact the information provided in CPS Energy's Basic Financial Statements attached hereto as APPENDIX B ("Notes 9, 10 and RSI").

PENSION PLAN

The Pension Plan is a self-administered, single-employer, defined-benefit contributory pension plan and provides retirement and ancillary benefits for substantially all CPS Energy employees who attain age 21 and complete a minimum period of service and / or otherwise become eligible. The benefits provided by the Pension Plan are paid from a Pension Trust Fund established by CPS Energy that is kept separate from and in addition to the benefits employees are entitled to receive under any other CPS Energy program and under the federal Social Security Act. This Pension Plan and the Pension Trust Fund were established by the Board in accordance with applicable law and are maintained for the exclusive benefit of the eligible employees and their beneficiaries.

32 CPS Energy offered a voluntary retirement incentive program to employees who were eligible to retire, as of August 1, 2014, based on their age and / or years of participation in its pension plan. Over 25% of CPS Energy's workforce was eligible to retire; 30.8% of those eligible accepted the offer and retired during fiscal year 2015.

In 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions, which replaced Statements No. 27 and No. 50, and which addressed accounting and financial reporting for all government-sponsored pension plans administered as trusts. CPS Energy adopted GASB Statement No. 68 in fiscal year 2015 and concurrently restated its prior fiscal year financial statements to reflect the effects of the guidance for all periods presented. The net effect of prior period restatements made to comply with the new guidance was accounted for as a regulatory asset that is being amortized over a 50-year period. Regulatory accounting, in accordance with guidance provided by GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, permits certain costs to be capitalized as regulatory assets until they are recovered through future rates.

In March 2016, GASB issued Statement No. 82, Pension Issues—an amendment of GASB Statements No. 67, No. 68, and No. 73, the requirements of which were effective for CPS Energy beginning in fiscal year 2017. Specifically, Statement No. 82 addresses issues regarding (1) the presentation of payroll-related measures in RSI, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. CPS Energy expects that minor modifications may be required for payroll-related information included in RSI disclosures.

Refer to complete disclosures at Note 9 and RSI at APPENDIX B regarding CPS Energy's Net Pension Liability ("NPL") and Pension Expense and related details of plan features, plan funding, the measurement of NPL, underlying actuarial assumptions, discount rate assumptions and sensitivity, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pension.

The following schedule presents selected multiyear trend information regarding NPL and related statistics. Amounts presented are determined as of the measurement date of the NPL for the following fiscal years:

Pension Plan

(Dollars in thousands) Plan Fiduciary Net Position as Ending Ending Plan Ending Net a Percentage of Total Pension Fiduciary Net Pension Total Pension Liability Position Liability Liability Fiscal Year Ended (a) (b) (a-b) (b / a)

January 31, 2017 $ 1,734,177 $ 1,299,766 $ 434,411 74.9% January 31, 2016 $ 1,652,796 $ 1,386,440 $ 266,355 83.9% January 31, 2015 $ 1,584,060 $ 1,317,300 $ 266,760 83.2% January 31, 2014 $ 1,533,250 $ 1,188,800 $ 344,450 77.5% January 31, 2013 $ 1,432,943 $ 1,097,600 $ 335,343 76.6%

OPEB PLANS

The OPEB Plans are single-employer defined benefit contributory plans that are funded by employee contributions and annual contributions from CPS Energy as determined by the Board in accordance with applicable law. The assets of the OPEB Plans are stated at fair market value.

Most CPS Energy employees are eligible for Group Health and Life Insurance benefits upon retirement. CPS Energy's Long-Term Disability Income Plan provides income to eligible employees of CPS Energy who become disabled. CPS Energy established each plan as a "risk pool" as that term is defined in the Texas Political Subdivision Employees Uniform Group Benefits Act ("Benefits Act"), Chapter 172, Texas Local Government Code, as amended. These plans are each operated at all times and in all respects as a risk pool under the Benefits Act.

Refer to complete disclosures at Note 10 and RSI at APPENDIX B regarding CPS Energy's Net OPEB Obligation and Annual OPEB Cost and related details of plan features, plan funding, measurements related to OPEB and underlying actuarial assumptions.

33 The actuarial value of the assets of each of the plans represents an adjusted value determined by the actuary, in accordance with industry standards, and therefore will not equal the amounts shown in the plans' statements of net position.

The Actuarial Accrued Liability ("AAL") is calculated on a present value basis. Significant actuarial assumptions used in the calculations include, but are not limited to, rates of mortality, rates of retirement, the estimated number of participants expected to withdraw from the program(s), expected base salary increases, overtime rates, disability rates, medical cost increases, and investment returns. The AAL includes liabilities for current retirees and active employees for benefits at retirement.

The following schedules in "New OPEB Accounting Guidance" below outline CPS Energy's OPEB funding status based on actuarial valuations dated January 1, 2015, January 1, 2014 and January 1, 2013, as included in RSI and reviewed by CPS Energy's external auditors. Although CPS Energy is not required to make contributions to fund the future liabilities of the OPEB Plans, it has been voluntarily doing so since 1992.

In June 2015, in connection with preparation of the health plan trust portion of a preliminary OPEB actuarial report reflecting actuarial valuation assumptions as of January 1, 2015, the actuary notified CPS Energy of an increase in the projected health plan trust liability. Beginning immediately thereafter, CPS Energy management engaged independent consultants to examine the actuarial processes and models used and review the appropriateness of the assumptions underlying CPS Energy's increased projected health plan trust liability. In October 2015, the review process was completed and the actuarial models and assumptions were validated. Consequently, beginning in fiscal year 2016, CPS Energy's health plan trust OPEB accounting reflects January 1, 2014 valuation assumption revisions that increased the unfunded AAL by $27.8 million compared to the prior year. In response, management authorized the use of cash reserves to make a $25 million supplemental contribution to the Health Plan trust in December 2015, which will also help mitigate the impact of GASB Statement No. 75 discussed below.

NEW OPEB ACCOUNTING GUIDANCE

In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. CPS Energy expects to implement Statement No. 74 in the OPEB benefit trust's fiscal year ended December 31, 2017, and to implement Statement No. 75 in CPS Energy's fiscal year ended January 31, 2018.

Similar to recently implemented pension guidance, GASB Statement No. 74 enhances note disclosures and RSI for all defined benefit OPEB plans that are administered through trusts that meet the specified criteria. It requires the presentation of new information about annual money-weighted rates of return in the notes to the financial statements and in ten-year RSI schedules. Statement No. 74 also requires that notes to financial statements include descriptive information, such as the types of OPEB provided, the classes of plan members covered, and the composition of the OPEB plan's board. Such OPEB plans also are required to disclose information about OPEB plan investments, including the OPEB plan's investment policies, concentrations of investments with individual organizations equaling or exceeding 5% of the OPEB plan's fiduciary net position.

Also similar to recently implemented pension guidance, GASB Statement No. 75 establishes new accounting and financial reporting requirements for governments whose employees are provided with OPEB, including the recognition and measurement of liabilities, deferred outflows of resources, deferred inflows of resources and expense. For each qualifying plan providing postemployment benefits other than pensions, employers are required to report the difference between the actuarial OPEB liability and the related plan's fiduciary net position as the net OPEB liability on the statement of net position. Previously, a liability was recognized only to the extent that contributions made to each plan were exceeded by the actuarially calculated contributions for those plans. Additionally, Statement No. 75 sets forth note disclosure and required supplementary disclosure requirements for defined contribution OPEB. CPS Energy has initiated an evaluation of the impact that adoption of Statement No. 75 will have on its financial statements. As previously mentioned, CPS Energy's management contributed an additional $25 million to the CPS Energy Group Health Plan trust in December 2015. This was in response to an increase in the projected health plan liability and to help mitigate the anticipated impact to CPS Energy's financial statements from the implementation of this new accounting guidance.

In March 2017, GASB issued Statement No. 85, Omnibus 2017, which addressed practice issues that have been identified during implementation and application of certain GASB Statements. Statement No. 85 addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits), which is effective for periods after June 15, 2017.

34 Health Plan (Dollars in thousands) Actuarial Actuari al Accrued Val ue of Pl an Liability Unfunded AAL Actuari al Assets (AAL) (1) (2) (UAAL) Funded Ratio Valuation Date (a) (b) (b - a) (a / b) January 1, 2015 $ 249,151 $ 320,067 $ 70,916 77.8% January 1, 2014 $ 242,994 $ 280,655 $ 37,661 86.6% January 1, 2013 $ 233,187 $ 243,022 $ 9,835 96.0%

(1) The AAL consisted of the liability for both retired employees and active employees. The AAL for health benefits paid to retired employees was $188.0 million for January 1, 2015, $116.4 million for January 1, 2014, and $106.0 million for January 1, 2013.

(2) In accordance with a Technical Bulletin issued by GASB in 2006, the AAL is presented exclusive of Medicare Part D Subsidy payments received from the federal government. With the Subsidy considered, AAL at each valuation date would be reduced by $47.5 million, $41.4 million, and $40.9 million for 2015, 2014 and 2013, respectively.

Life Plan (Dollars in thousands) Actuarial Actuari al Accrued Val ue of Pl an Liability Unfunded AAL Actuari al Assets (AAL) (UAAL) (1) Funded Ratio Valuation Date (a) (b) (b - a) (a / b)

January 1, 2015 $ 46,709 $ 42,596 $ (4,113) 109.7% January 1, 2014 $ 45,928 $ 43,544 $ (2,384) 105.5% January 1, 2013 $ 46,995 $ 41,923 $ (5,072) 112.1%

(1) CPS Energy has selected the aggregate cost method for determining Life Plan funding amounts. Since this method does not identify or separately amortize unfunded actuarial liabilities, information about the funded status and funding progress has been prepared using the entry-age normal actuarial cost method, which approximates the funding progress of the plan.

Disability Plan

(Dollars in thousands) Actuarial Actuari al Accrued Val ue of Pl an Liability Unfunded AAL Actuari al Assets (AAL) (UAAL) (1) Funded Ratio Valuation Date (a) (b) (b - a) (a / b)

January 1, 2015 $ 4,601 $ 5,833 $ 1,232 78.9% January 1, 2014 $ 4,516 $ 4,960 $ 444 91.0% January 1, 2013 $ 4,610 $ 5,113 $ 503 90.2%

(1) CPS Energy has selected the aggregate cost method for determining Disability Plan funding amounts. Since this method does not identify or separately amortize unfunded actuarial liabilities, information about the funded status and funding progress has been prepared using the entry-age normal actuarial cost method, which approximates the funding progress of the plan.

35 Total OPEB Plans (Dollars in thousands) Actuarial Actuari al Accrued Val ue of Pl an Liability Unfunded AAL Actuari al Assets (AAL) (2) (UAAL) (1) Funded Ratio Valuation Date (a) (b) (b - a) (a / b) January 1, 2015 $ 300,461 $ 368,496 $ 68,035 81.5% January 1, 2014 $ 293,438 $ 329,159 $ 35,721 89.1% January 1, 2013 $ 284,792 $ 290,058 $ 5,266 98.2% (1) CPS Energy has selected the aggregate cost method for determining Total Life and Disability Plan funding amounts. Since this method does not identify or separately amortize unfunded actuarial liabilities, information about the funded status and funding progress has been prepared using the entry-age normal actuarial cost method, which approximates the funding progress of the plan. (2) In accordance with a Technical Bulletin issued by GASB in 2006, the AAL is presented exclusive of Medicare Part D Subsidy payments received by the Health Plan from the federal government. With the Subsidy considered, AAL at each valuation date would be reduced by $47.5 million, $41.4 million, and $40.9 million for 2015, 2014 and 2013, respectively.

As of future actuarial valuation dates, CPS Energy expects variances in the Health Plan liability resulting from various factors. The first is the impact of adopting a new actuarial cost method, as required by GASB Statement No. 75, to be implemented by CPS Energy in Fiscal Year 2018. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – PENSION AND OTHER POSTEMPLOYMENT BENEFITS - New OPEB Accounting Guidance" above for further detail. Additionally, an Actuarial Standard of Practice ("ASOP 6") relating to the measurement of OPEB liabilities requires actuaries to select the best estimate assumptions with neither a conservative nor an aggressive bias, which will require liability to now reflect the benefit of certain pharmaceutical manufacturer rebates not previously considered. ASOP 6 became effective with the January 1, 2016, actuarial valuation, which will impact CPS Energy in Fiscal Year 2018.

STRATEGIC INITIATIVES

In 2008, CPS Energy implemented Vision 2020, outlining CPS Energy's long-term view and focusing on four key objectives: increasing its energy efficiency and conservation efforts; expanding renewable-energy resources; providing cost-competitive electricity; and maintaining its strong commitment to the environment. To ensure achievement of Vision 2020, the following key strategic business drivers were established, along with targets for each: customer relationships, employee relationships, external relationships, operational excellence, renewable / carbon constraints / environment, technology and innovation, and financial integrity. As part of the Vision 2020 Generation Strategy, CPS Energy projects, by 2020, its generation mix to be approximately 33.1% of coal, 30.6% of nuclear, 17.3% of natural gas, 12.2% of wind power, 4.5% of solar power, 1.9% of purchased power and 0.4% of landfill gas. CPS Energy also plans to include 4.0% as part of its generation projection to be met through the STEP program. As strategies and / or market conditions change these projections may be modified in the future.

In support of CPS Energy's commitment to provide world-class energy solutions to meet the diverse and unique needs of its customers, while acting as an economic engine to drive value and growth in the community, CPS Energy designed an integrated two-year integrated planning process ("CPS Energy Integrated Planning Process") to serve as its roadmap forward.

Through thoughtful leadership, partnerships and CPS Energy's passionate employees, management continues to strategically and successfully evolve its value portfolio to achieve top-tier safety, customer service, electric and gas delivery, generation availability and financial performance.

The CPS Energy Integrated Planning Process is derived through a deliberately orchestrated cross-functional effort, and aligned with current strategic drivers, risk management and financial planning. Complementary to the CPS Energy Business Plan are business unit plans designed to reinforce CPS Energy's objectives by way of major initiatives, milestones, metrics, targets and goal alignment. Supporting lowered-tiered metrics, targets and goals are appropriately cascaded throughout the organization, ensuring a traceable path from enterprise level objectives, to business unit goals and down to individual performance accountabilities.

CPS Energy's success is measured through operational excellence processes, including reporting, monitoring and assessing metric trends throughout the year -- ultimately managing and leading towards goal attainment.

36 To enhance its relationship with the community and to provide community input directly to the Board and CPS Energy staff, CPS Energy established a 15-member Citizens Advisory Committee ("CAC"). The CAC meets monthly with the primary goal of providing recommendations on utility-related projects and programs to offer a customer perspective on community issues, assist in identifying strengths and offer suggestions for improvement to the organization. Representing the various sectors of CPS Energy's service area, the CAC encompasses a broad range of representation in order to identify concerns and understand community issues. The City Council members nominate ten of the 15 members, one representing each City Council district. The other five members are at-large candidates who can reside anywhere within the service territory. The CPS Energy Board approves all members of the CAC and each member can serve up to three two-year terms.

With respect to State and national legislative action regarding competition, CPS Energy continues to participate actively in the legislative process to voice the interests of Municipal Utilities and play an integral part in shaping the environment in which it will operate. CPS Energy continues to evaluate the price components of the energy services it provides, recognizing that the price for electricity will be a paramount factor for succeeding in a deregulated environment. Cost containment initiatives coupled with additional phases of debt management strategies will continue in the years ahead.

BUSINESS AND ECONOMIC DEVELOPMENT

CPS Energy works independently as well as with the San Antonio Economic Development Foundation ("SAEDF") and other local economic development agencies to recruit, retain and encourage the expansion of targeted businesses throughout CPS Energy's service territory. Strategic initiatives include the pro-active recruitment of the following industries which have the most potential advantage to CPS Energy: clean energy technology, manufacturing, aviation, aerospace, automotive, life sciences / bio-medical, cyber-security / information technology, logistics / distribution, corporate business services and large-scale retail developments.

Since January 2016, CPS Energy, through its partnership with SAEDF, has recruited new company locations / expansions into the CPS Energy service territory. These companies represent diverse industries including business service operations, manufacturing, distribution, new energy, healthcare and bioscience, finance, and information technology. Some of the new and expanding companies include: Accenture Federal Services, SocialPath Solutions, Toyotetsu Texas, Becton Dickinson, Wells Fargo, CaptureRx, Hulu LLC, and TJX Companies. In aggregate, these companies are expected to add 5,489 new jobs to the San Antonio community. These companies also represent new megawatt growth for CPS Energy.

CPS Energy is also at the forefront within the community by leading the way into the New Energy Economy ("NEE"). CPS Energy's NEE is based on its Vision 2020 strategies which are designed to achieve:

 20% of CPS Energy's generation capacity, or 1,500 MW, from renewables like solar and wind.  A reduction of 771 MW of the community's demand for electricity to avoid the need to build additional generation.  A lower carbon-intensive fleet – 65% of CPS Energy's generation to be produced with low or no-carbon emitting resources.

CPS Energy's NEE is built on partnerships with companies who share its belief in clean energy, innovation, and energy efficiency. Since 2011, CPS Energy has worked with a number of partners to turn those principles into economic development while protecting the environment and helping its customers use energy more efficiently. Furthermore, these partner companies have relocated their headquarters/offices to the San Antonio area. As of January 2017, CPS Energy's NEE partners (listed below) have contributed to economic development as follows:

 More than 600 new jobs have been created in San Antonio.  Capital expenditures stand at over $200 million, exceeding a commitment of $124 million by 2020.  Over $6 million contributed towards education with commitments of over $23 million.  The total annual economic impact to San Antonio from these efforts has reached $1 billion.

OCI Solar Power: Developer, owner, and operator of solar power plants. OCI is currently engaged in the development of 500 megawatts of solar power through the combined use of multiple solar farms in San Antonio and throughout Texas. Of the 500 MW of solar power being developed, approximately 400 MW are operational. OCI has exercised its option to sell five of its solar farms to third parties approved by CPS Energy. All of OCI's obligations are assumed by the buyer. OCI has complied with all contract requirements resulting from its failure to attain the requisite number of qualifying jobs; and both OCI and CPS Energy continue to monitor the actual number of qualifying jobs for purposes of potential future OCI obligations related to maintaining the requisite number of qualifying jobs.

Mission Solar Energy: Producer of solar panels at its state-of-the-art solar module manufacturing facility located in San Antonio. This facility, which produces up to 200 megawatts of manufactured solar modules, is currently the only one of its kind in Texas.

37 Sun Action Trackers: A full line manufacturer of solar tracking and racking systems. These components/trackers allow solar panels to collect the maximum amount of light for conversion to solar energy.

KACO New Energy: Manufacturer of solar inverters which transform the output of solar panels into an electrical current that can be fed into a standard electrical grid.

Mortenson: Engineering, procurement and construction firm for solar farms. Mortenson provides a complete range of construction services including planning, general contracting, construction management and design-build.

Silver Spring Networks: Developer of networking systems for Smart Grid and Smart City technologies. Silver Spring provides communication infrastructure for CPS Energy's current Smart Grid Initiative.

GreenStar Products, Inc.: Manufacturer of a highly developed, eco-friendly, and cost-saving LED lighting system for commercial interests. GreenStar builds and assembles their lighting systems at their facility in San Antonio.

Landis + Gyr: Manufacturer of the smart meters that are part of CPS Energy's upgrades and grid modernization project. Landis + Gyr's smart meters help customers improve energy efficiency, reduce energy costs, and contribute to a sustainable use of resources. It also manages the home energy management system that allows customers to monitor energy consumption using a computer or smart device.

PowerFin: A renewable energy investment advisor and manager of solar project assets. PowerFin has set up a citywide solar rooftop program allowing residents and businesses to install solar panels on rooftops at no cost and, in return, receive credits on their respective energy bills.

All of the New Energy Economy partners are fully committed to reaching their respective economic milestones. Nevertheless, some partners have experienced economic setbacks related to international price competition. As a result, these partners are restructuring their business models which is temporarily preventing them from attaining some of their economic commitments.

On June 2, 2016, the City Council passed an ordinance authorizing a competitive matter memorandum of understanding between the City and CPS Energy regarding the provision of electric and gas distribution systems at Lackland Air Force Base, Lackland Training Annex and Randolph Air Force Base.

DESCRIPTION OF FACILITIES

ELECTRIC SYSTEM

Power Generation Sources

CPS Energy currently operates 19 non-nuclear electric generating units, four of which are coal-fired and 15 of which are gas-fired. Some of the gas-fired generating units may also burn fuel oil (diesel), which provides fuel flexibility and greater reliability. CPS Energy also owns a 40% interest in the STP's two existing nuclear generating Units 1 and 2. These nuclear units supplied 37.3% of the electric system's native load for the twelve months ending January 31, 2017. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Nuclear" herein. The generating plants are normally referred to by the plant name and number (i.e. Deely1 for Deely unit 1, Braunig3 for Braunig unit 3). See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Capability" herein.

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38 Generating Capability(1)

Summer Net Max Plant Unit Fuel Year Installed Capability MW(2) Total Capability MW

STP (40% interest)(3) Unit 1 Nuclear 1988 531.0 Unit 2 Nuclear 1989 533.0 1,064.0 Nuclear Spruce Plant Unit 1 Coal 1992 560.0 Unit 2 Coal 2010 785.0(4) Deely Plant(5) Unit 1 Coal 1977 420.0 Unit 2 Coal 1978 420.0 2,185.0 Coal Arthur Von Rosenberg (NGCC 2x1) Unit 1 Gas 2000 466.0 Sommers Plant Unit 1 Gas / Oil 1972 420.0 Unit 2 Gas / Oil 1974 410.0 Braunig Plant Unit 1 Gas / Oil 1966 217.0 Unit 2 Gas / Oil 1968 230.0 Unit 3 Gas / Oil 1970 412.0 Milton B. Lee West Plant(6) MBLCT 1(6) Gas 2004 46.0 MBLCT 2(6) Gas 2004 46.0 MBLCT 3(6) Gas 2004 44.0 MBLCT 4(6) Gas 2004 46.0 Milton B. Lee East Plant(6) MBLCT 5(6) Gas / Oil 2010 48.0 MBLCT 6(6) Gas / Oil 2010 48.0 MBLCT 7(6) Gas / Oil 2010 48.0 MBLCT 8(6) Gas / Oil 2010 47.0 Rio Nogales Plant(7) (NGCC 3x1) Unit 1 Gas 2012 785.0 3,313.0 Gas / Oil

Total Capability Owned by CPS Energy 6,562.0

Renewable Purchased Power Nameplate Capability: Desert Sky Wind Farm Wind 2002 160.5 Cottonwood Creek Wind Farm Wind 2005 100.5 Sweetwater 4 Wind 2007 240.8 Penascal Wind 2009 76.8 Papalote Creek Wind 2009 130.4 Cedro Hill Wind 2010 150.0 Los Vientos Wind 2012 200.1 1,059.1 Wind Covel Gardens Landfill Gas 2005 9.6 Nelson Gardens Landfill Gas 2014 4.2 13.8 Landfill Gas Blue Wing Solar PV(8) 2010 13.9 Sinkin 1 Solar PV(8) 2012 9.9 Sinkin 2 Solar PV(8) 2012 9.9 Somerset Solar PV(8) 2012 10.6 Alamo 1 Solar PV(8) 2013 40.7 St. Hedwig (Alamo 2) Solar PV(8) 2014 4.4 Eclipse (Alamo 4) Solar PV(8) 2014 39.6 Walzem (Alamo 3) Solar PV(8) 2015 5.5 Helios (Alamo 5) Solar PV(8) 2015 95.0 Solara (Alamo 7) Solar PV(8) 2016 106.4 Sirius 1 (Alamo 6) Solar PV(8) 2017 110.2 446.1 Solar PV Total Renewable Purchased Power Nameplate Capability 1,519.0

Total Capability including Renewable Purchased Power 8,081.0

(1) Data as of January 31, 2017. (2) Summer net max capability reflects net summer rating for CPS Energy owned plants. (3) Current nominal electric rating (MWe) for CPS Energy's share of STP1 & 2. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Power Generation Sources - Nuclear" herein. (4) Spruce2 returned to full capacity rating on June 23, 2016, after a temporary derating due to a generator limit. It still has a reactive power limitation and it is allowed to operate only in the lagging reactive power range. The generator is scheduled for replacement in late 2018 to remedy this situation. (5) Deely Plant is scheduled to be deactivated at the end of calendar year 2018. (6) "CT" stands for "Combustion Turbine". Plants renamed MBL (Milton B. Lee) CT as of March 6, 2014. (7) The Rio Nogales Plant was purchased on April 9, 2012. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Power Generation Sources - Gas / Fuel Oil Plants" herein. (8) Solar PV capacity is reported on an alternating current (AC) basis.

39 Nuclear

Nuclear is CPS Energy's other base energy option, providing about 30.8% of CPS Energy's total net annual generation for the twelve months ending January 31, 2017. The South Texas Project ("STP") is a two-unit nuclear power plant with Unit 1 and Unit 2 (or "STP1" and "STP2") having a nominal output of approximately 1,330 MW each. STP is located on a 12,220 acre site in Matagorda County, Texas, near the Texas Gulf Coast, approximately 200 miles from San Antonio. CPS Energy currently owns 40% of these units. Participant Ownership ("Participants") in STP1 and STP2 and their shares therein are as follows:

Ownership Effective February 2, 2006(1)

Participants % MW (approximate) NRG Energy, Inc. ("NRG") 44.0 1,170 CPS Energy 40.0 1,064 City of Austin-Austin Energy 16.0 426 100.0 2,660

(1) In 2006, Texas Genco, holder of a 44% interest in STP, was acquired by NRG. NRG holds its interest in STP1 and STP2 in NRG South Texas LP, a wholly-owned subsidiary of NRG.

STP is maintained and operated by a non-profit Texas corporation ("STP Nuclear Operating Company" or "STPNOC") financed and controlled by the owners pursuant to an operating agreement among the owners and STPNOC. Currently, a four-member board of directors governs the STPNOC, with each owner appointing one member to serve with the STPNOC's chief executive officer ("CEO"). On January 9, 2017, CEO Dennis Koehl informed his staff and the owners that he plans to retire in late 2017. The STP owners and STPNOC Board of Directors have engaged an external consultant to assist in assessing internal and external CEO candidates. The search and selection process remains ongoing. All costs and output continue to be shared in proportion to ownership interests.

On February 9, 2017, STPNOC received a final significance determination notice from the NRC concerning a previously identified security-related finding. The NRC concluded the finding was Greater than Green and of low to moderate security significance. The finding was identified during an NRC inspection conducted from October 19 through December 1, 2016. STP took prompt actions to address the finding. Because the finding was characterized as Greater than Green, the NRC determined that STP will be in the Regulatory Response Column of the Reactor Oversight Process Action Matrix. Exit criteria from the Regulatory Response Column includes successful completion of a follow up NRC inspection to be conducted later this year.

NRC, which retains jurisdiction to conduct cybersecurity-related inspections at nuclear facilities, is currently on-site at STP conducting such an inspection, to be completed by the fall of 2017. STP is the first nuclear facility in the country receiving such an inspection.

STP1 and STP2 each has a 40-year NRC license that expires in 2027 and 2028, respectively. In October 2010, STPNOC filed an application to the NRC to extend the operating licenses of STP1 and STP2 to 2047 and 2048, respectively. The NRC issued a revision to STPNOC's license renewal application schedule due to a scheduling request from the Advisory Committee on Reactor Safeguards ("ACRS") and due to continued work on one of the open items. This schedule change previously listed milestones associated with issuance of the Safety Evaluation Report ("SER") as "to be determined". On September 9, 2016, the NRC issued a letter that provided an Updated Safety Review Schedule for the STP Units 1 and 2 license renewal application. On February 10, 2017, the NRC issued a letter that provided an Updated Safety Review Schedule for STP Units 1 and 2 license renewal application. The NRC issued the SER on June 8, 2017, followed by a full ACRS meeting on the SER which occurred July 12, 2017, and the Office of Nuclear Reactor Regulator ("NRR") decision is expected in September 2017, as reflected on the NRC webpage for license renewal.

During the twelve-months ended January 31, 2017, STP1 and STP2 operated at approximately 103.8% and 95.2% of net capacities, respectively.

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40 Five-Year South Texas Project Capacity Factor(1)

Calendar Years Ended December 31,

2012 2013 2014 (2) 2015 2016 (2) Unit 1 95.8% 99.2% 82.8% 85.2% 102.8% Unit 2 73.9% 64.3% 106.2% 92.7% 95.2% Total 84.9% 81.8% 94.5% 89.0% 99.0%

(1) Capacity Factor bases on nameplate rating of 1,250.6 MW per unit.

(2) Greater than 100% due to plant upgrades.

In February 2016, NRC commissioners issued an order approving the expansion of the South Texas Project in Bay City, Texas, with the issuance of licenses to build and operate reactors to follow. Environmental interest groups filed lawsuits with the U.S. Court of Appeals in the District of Columbia Circuit seeking to have the court review the NRC's decision to issue licenses for STP Units 3 and 4. The groups contend that the NRC's action in issuing the licenses: (1) violated the prohibition against foreign control or domination of a nuclear power plant project in violation of the Atomic Energy Act ("AEA"), as a foreign minority owner, Toshiba America Nuclear Energy Corporation has effectively taken control of the project through financing arrangements with the license applicant; and (2) violated the National Environmental Policy Act ("NEPA") by relying on the Continued Storage Rule and the supporting Generic Environmental Impact Statement ("GEIS") for its NEPA analysis of the STP Units 3 and 4 licensing decision. The environmental groups agreed that the matter related to the Continued Storage Rule be held in abeyance pending the outcome of the appeal of the State of New York versus NRC. On June 3, 2016, the U.S. Court of Appeals for the D.C. Circuit upheld the NRC's justification for allowing spent nuclear fuel to be stored on-site at active facilities and on August 8, 2016, denied an en banc motion to reconsider its findings. In light of this court action, the environmental groups agreed not to raise any challenges regarding the Continued Storage Rule in the STP Units 3 and 4. On April 18, 2017, this case was voluntarily dismissed in light of the New York v. NRC finding that NRC did not act arbitrarily or capriciously in promulgating the Continued Storage Rule under NEPA.

Recent operational highlights for STP include the following: In September 2016, STPNOC was recognized by EHS Today's, a national publication for environment, health and safety leaders, as one of 10 companies selected to the 2016 list of America's Safest Companies. This is the second time STP has received this national honor, also receiving the award in 2010. In 2014 total generation, STP2 ranked #1 of 100 reactors in the United States and #2 of 424 reactors worldwide; STP1 ranked #33 in the United States and #55 in the world. In 2014, STP's annual Total Generation Cost ($ / MWh) and three-year Total Generation Cost ($ / MWh) both ranked in the top decile nationally compared to the other United States nuclear generation stations. STP produced more energy than any other two-unit nuclear plant in the country for the period 2004 through 2011 and 2014. In October 2012, STP1 was shut down for a scheduled refueling outage, establishing a record for an STP unit by running for 530 consecutive days.

Coal Plants

Coal, with its relatively stable low cost, provided 28.7% of CPS Energy's total net annual generation in Fiscal Year 2017 and 2,185 MW of reliable capacity in the ERCOT market. Coal units also provided 32.1% of the Fiscal Year 2017 electric system native load.

The Deely and Spruce Plants are located at the Calaveras Power Station southeast of the City and share Calaveras Lake's cooling capacity. The Deely Plant and the Spruce Plant each are equipped with substantial environmental controls. CPS Energy obtains its low sulfur content coal from the Powder River Basin area of Wyoming.

The Deely Plant consists of two large well maintained units. Deely1 and Deely2 were installed in 1977 and 1978, respectively and are both rated to provide 420 net MW of capacity to the Bulk Electric System ("BES") operated by ERCOT. Currently both Deely units burn Ultra Low Sulfur Coal to minimize SO2 emissions. Both Deely units are scheduled for deactivation at the end of calendar year 2018, as described in "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric Systems – Additional Generation Opportunities".

The Spruce Plant also consists of two large well maintained units. Spruce1 and Spruce2 were installed in 1992 and 2010, respectively. Spruce1 is capable of providing 560 net MW of capacity to the BES. Spruce2 is capable of providing 785 net MW of capacity to the BES. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Station Events" and "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES –

41 Electric System – Generating Capability" herein. The units are usually base loaded and remain online 24 / 7 for dispatch to the electric system by ERCOT. To support ozone reduction, CPS Energy is evaluating the installation of selective catalytic reduction ("SCR") technology on the Spruce1 unit.

Gas / Fuel Oil Plants

The Sommers Plant, located at the Calaveras Power Station, comprises two large steam units capable of operating on either natural gas or fuel oil, providing flexibility in a fuel constrained situation. Sommers1 and Sommers2 were installed in 1972 and 1974 respectively. Sommers1 is capable of providing 420 net MW of intermediate / peaking capacity to the BES. Sommers2 is capable of providing 410 net MW of intermediate / peaking capacity to the BES. Both units are offered to the ERCOT Energy Market and are selected to operate as the market economics and load demand dictates. The units are typically cycled daily during peak load months in the summer and winter based on the load demand and market pricing for the day. During the shoulder months of fall and spring, the units typically operate in a standby mode available to cover CPS Energy native load obligations as well as to take advantage of ERCOT market opportunities.

The Braunig Plant and Arthur Von Rosenberg Plant ("AVR") are located at the Braunig Power Station southwest of the City and share Braunig Lake's cooling capacity. The Braunig Plant has three steam units that can operate on either natural gas or fuel oil. Braunig1, Braunig2 and Braunig3 were installed in 1966, 1968, and 1970 respectively. Braunig1, Braunig2, and Braunig3 are capable of providing 217, 230 and 412 net MW, respectively, of capacity to the BES. All three units are typically cycled daily during peak load months in the summer and winter. During the shoulder months of fall and spring the units typically do not run as often and are in standby mode available to take advantage of ERCOT market opportunities.

The Braunig Plant also has four simple cycle combustion turbines (renamed Milton B. Lee East Plant) which provide quick-start peaking energy for CPS Energy's generation portfolio, as well as Black Start capability to ensure CPS Energy's generation assets can expeditiously come on line in an outage situation. The Milton B. Lee East Plant was installed in 2010. Three of the four units are capable of providing 48 MWs, and one of the units provides 47 MWs net capacity to the BES. Each unit consists of a generator driven by a General Electric (GE) LM6000 Combustion Turbine aero derivative. These combustion turbine units may be fueled with either gas or diesel making them very flexible and able to take advantage of constrained energy situations in the ERCOT market. The units are operated as cycling peaking units and are utilized to provide reliable and valuable energy in high demand periods as well as to meet CPS Energy's ancillary service obligations.

The AVR Plant, located adjacent to the Braunig Plant, uses combined cycle technology that is 25% to 30% more fuel efficient than other gas generation technologies and provides a competitive low heat rate asset for CPS Energy. Three generators combine to provide 466 net MW of reliable competitive capacity to the BES. The plant consists of two GE 7FA Frame Combustion Turbines driving one generator each and a GE D11 Steam Turbine driving another generator. The exhaust heat from both turbines is used to generate steam to drive the steam turbine generator. The plant can operate in a 1x1 configuration with one combustion turbine and the steam turbine, or a 2x1 configuration with both combustion turbines in service along with the steam turbine giving it the flexibility to maximize its value.

The Milton B. Lee West Power Station located in southwest Bexar County has four additional quick-start natural gas simple cycle combustion turbines that include Black Start capability to ensure CPS Energy's generation assets can expeditiously come on line in an outage situation and providing 182 net MW of flexible capacity for CPS Energy. The Milton B. Lee West Plant was installed in 2004. Three of the four units are capable of providing approximately 46 net MW of capacity to the BES. MBLCT3 can only provide 44 MW. Each unit consists of a generator driven by a GE LM6000 Combustion Turbine aero derivative. These combustion turbine units operate on natural gas. The units are operated as cycling units and are utilized to cover energy in periods of high demand and ancillary service obligations of CPS Energy. Two older gas steam units at this location, Leon Creek Plant Gas Steam Units 3 and 4, had been in a "mothballed" status since March 1, 2011. They were retired on June 4, 2013, and are not included in the "Generating Capability" table. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Capability" herein.

On April 9, 2012, CPS Energy closed on the acquisition of the Rio Nogales natural gas combined cycle power plant (the "Rio Nogales Plant"), located in Seguin, Texas. The low heat rate 785 MW (net summer rating with duct firing) plant was purchased from Tenaska Capital Management, LLC and provides CPS Energy with reliable, efficient generation capacity. Natural gas is supplied to the plant through a pipeline lateral that accesses the Oasis pipeline, a DCP Midstream pipeline, and a Kinder Morgan / Houston Pipe Line joint venture pipeline. Water sources for the plant consist of treated sewage effluent from the City of Seguin's wastewater treatment plant, surface water from the Guadalupe River, and ground water from the Schertz / Seguin Local Government Corporation well field in Gonzales County. All of the Rio Nogales Plant's water is supplied through an agreement with the City of Seguin. The agreement was entered into in 2001 and has a primary term of 25 years, terminating in 2027 with options to extend the agreement for up to three additional five-year terms. CPS Energy initially sold the plant capacity into the ERCOT wholesale market (including bilateral sales) during the first few years of ownership. The plant capacity is now dedicated to CPS Energy native load demand (corresponding approximately with the expected reduction in generating capacity attributable to the planned

42 deactivation of Deely1 and Deely2). See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Power Generation Sources – Coal Plants" herein.

Renewable Resources

As of January 31, 2017, CPS Energy's renewable energy capacity totals 1,519.0 MW in service with another 100.0 MW under contract. CPS Energy has one of the strongest renewable energy programs in Texas with a renewable capacity under contract totaling 1,619.0 MW. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – ELECTRIC UTILITY RESTRUCTURING IN TEXAS - Environmental Restrictions of Senate Bill 7 and Other Related Regulations" herein.

As a step in diversifying its energy resource plan, CPS Energy is proactively pursuing renewable energy supplies. CPS Energy is currently receiving renewable energy under several long-term contracts. CPS Energy has two contracts for wind-generated energy from the Desert Sky Wind Project: a 20-year contract for 135 MW and a 15-year contract for 25.5 MW; a 20-year contract for 100.5 MW from the Cottonwood Creek Wind Farm; a 20-year contract for 240.8 MW from the Sweetwater Wind Farm; a 15-year contract for 76.8 MW from the Penascal Wind Farm; a 15-year contract for 130.4 MW from the Papalote Creek Wind Farm; a 20- year contract for 150 MW from the Cedro Hill Wind Farm, and a 25-year contract for 200.1 MW from the Los Vientos Wind Farm.

CPS Energy also has a 15-year contract for a landfill gas-generated energy project totaling 9.6 MW which came on-line in December 2005. Under an additional contract, the Nelson Gardens 4.2 MW landfill gas generation project achieved commercial operation in April 2014.

CPS Energy is growing its solar energy portfolio with a 30-year contract for the 13.9 MW Blue Wing solar energy project which entered into commercial operation in November 2010; two 25-year contracts for Sinkin 1 and 2, each 9.9 MW which became operational in May 2012 and a 25-year contract for 10.6 MW from the Somerset Solar project, which became operational in August 2012. Sinkin 1 and 2 and Somerset Solar projects comprise what was formally referred to as the SunEdison Project. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – STRATEGIC INITIATIVES – Business and Economic Development" herein.

CPS Energy executed a Master Agreement with OCI Solar Power for approximately 400 MW from seven facilities. All seven facilities have been or became operational in early 2017. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – STRATEGIC INITIATIVES – Business and Economic Development" herein. Each individual facility comprising OCI Solar's 401.8 MW has an existing Purchase Power Agreement ("PPA"). OCI's Alamo 1 project facility of 40.7 MW achieved commercial operation in December 2013; St. Hedwig (Alamo 2) for 4.4 MW achieved commercial operation in March 2014; Eclipse (Alamo 4) facility at 39.6 MW, achieved commercial operation in August 2014; Walzem (Alamo 3) project at 5.5 MW achieved commercial operation in January 2015. The Uvalde (Helios – Alamo 5) facility at 95 MW became operational at the end of December 2015. The Haskell (Solara – Alamo 7) facility at 106.4 MW became operational in September 2016. The Sirius 1 (Alamo 6), at 110.2 MW in Pecos County, Texas, began producing test energy in late 2016 and became operational in March 2017. At this time, Alamo 6 is one of the largest solar PV plants in Texas. In addition to the PPAs executed under the Master Agreement with OCI, CPS Energy has also executed two separate 25-year PPAs for Project Pearl (50 MW located adjacent to Alamo 6) and for Project Ivory (50 MW located in Upton County). Project Pearl is expected to be operational in the fourth quarter of 2017 and Project Ivory is expected to be operational in mid-2018. In March 2017, CPS Energy and OCI executed an Amended and Restated Master Power Purchase and Economic Development Agreement. The original Master Agreement was replaced in order to simplify the agreement and reflect pertinent terms going forward.

CPS Energy receives energy from 1,059.1 MW of wind, 446.1 MW of solar and 13.8 MW of landfill gas generated energy for a total renewable energy capacity in operation of 1,519.0 MW, thereby exceeding CPS Energy's goal of 1,500 MW of renewable capacity by 2020. The addition of the 100.0 MW of solar generated energy still under contract with OCI Solar will bring CPS Energy's total renewable capacity under contract to 1,619.0 MW.

An estimate of 1.0 MW of solar electricity will be produced by the utility's Solartricity Producer Program. The Solartricity Producer Program is a limited pilot project that is currently closed to any new subscribers and is not included in the "Generating Capability" table. Each Solartricity participant has a 20-year contract with CPS Energy. In addition, the pilot "Simply Solar" programs discussed in section "ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS" currently constitute approximately 4 MW of solar capacity. These new programs are not currently included in the "Generating Capability" table.

Peak Demand and Native Load

In the growing CPS Energy service territory, a record system peak demand of 5,017 MW was set on August 12, 2016, on hour ending 6 p.m. At the time of the 2016 peak, CPS Energy was receiving 548 MW of renewable capacity helping to meet the peak demand. Along with the 6,562 MW of fossil fuel and nuclear capacity, a total of 7,113 MW was available to meet CPS Energy's native load summer peaking needs. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Capability" herein.

43 Replacement Power for Events

Depending upon the time of the year and actual customer demand, unplanned outages may or may not result in a need to purchase power from other providers on the ERCOT wholesale market. While replacement power can be more expensive to CPS Energy's customers than generation from its own facilities, CPS Energy's existing rate structure allows the cost of replacement power to be funded through its monthly electric fuel adjustment fee. As a result, there was no material adverse effect on the finances of CPS Energy from replacement power purchases.

Lease Transaction

The City was a party to a transaction, entered into in June 2000, involving Spruce1, pursuant to which such facility was subject to a variety of contractual arrangements, including a series of lease transactions (collectively, the "Lease" or the "Transactions"), with CPS Energy as lessee. This Lease was complex, involved voluminous documentation and numerous parties, and the discussion herein is provided primarily for the purpose of providing information concerning the financial impact on CPS Energy from the termination of this Lease as disclosed in the following paragraph. See also "APPENDIX B – City Public Service – Basic Financial Statements" herein for certain financial disclosure about the Lease. As security for its obligations under the Lease, CPS Energy obtained (a) a payment undertaking agreement guaranteed by American International Group, Inc., which was additionally secured by a pool of United States government securities ("AIG Collateral") and (b) a financial guaranty insurance policy issued by Financial Security Assurance Inc., now known as AGM. The Lease documents required that, in the event the senior unsecured credit rating of AGM fell below "AA-" from S&P or "Aa3" from Moody's, CPS Energy was required to replace the financial guaranty with a similar collateral instrument issued by a provider having such minimum (or in the case of certain providers, higher) ratings.

On January 17, 2013, Moody's downgraded the Insurance Financial Strength rating of AGM to "A2" from "Aa3." As a result of this rating downgrade, CPS Energy had until February 28, 2013 by which to replace the financial guaranty insurance policy. CPS Energy entered into five letter agreements with the other parties to the applicable lease / leaseback documents to extend the period of time allowed for CPS Energy to meet its obligations under those agreements with respect to the financial guaranty insurance policy. In January 2014, the parties agreed in principle on the necessary terms to terminate the Lease in its entirety. Although approvals by all parties were obtained in January 2014, the Lease was officially terminated and executed on February 26, 2014. Accordingly, Spruce1 was conveyed back to the City, acting by and through CPS Energy. As a result of this termination, CPS Energy is released from all scheduled payment and security obligations under the Lease, including any obligation to replace the AGM financial guarantee. Further, CPS Energy does not anticipate incurring any material financial consequences as a result of the Lease termination.

Assets Supporting Generation

Braunig and Calaveras Lakes are CPS Energy-owned man-made lakes that provide cooling for the majority of CPS Energy's generating units. These lakes utilize treated sewage effluent and runoff waters to maintain operating levels. CPS Energy was a pioneer in the use of non-potable, recycled water from treated sewage effluent for cooling purposes, thereby saving higher quality, potable ground water for other uses. Braunig Lake has additional cooling capability for future generating units.

CPS Energy has contracted with the San Antonio Water System ("SAWS"), the City's municipally-owned water and sewer system, to provide a maximum of 50,000 acre-feet of treated sewage effluent per year to CPS Energy. CPS Energy projects that these contract volumes, along with water available under existing water rights, will provide sufficient cooling capacity for existing and planned generation units at Braunig and Calaveras Lakes. However, low flow in the San Antonio River could create challenges in pumping make-up water from the river to keep the lakes in optimal operating conditions.

CPS Energy owns an additional 3,064 acre-feet of Edwards Aquifer ground water rights to supply process water and some cooling water to other power plants in its service territory. CPS Energy has leased 1,000 acre-feet of this water to the Edwards Aquifer Authority on a short term basis as described in "COMPLIANCE AND REGULATION – Environmental Matters – Water Resources Planning". A lease of 1,000 acre-feet additional Edwards Aquifer water rights to SAWS was executed in May 2014. This water had gone unused in the past and CPS Energy projects that the retained 1,000 acre-feet of water is sufficient to maintain power plant operations even in drought conditions. CPS Energy also purchases potable water from SAWS and East Central Special Utility District through standard water delivery rates for power plant process water and miscellaneous plant needs.

CPS Energy continues to manage water-related legal, supply, and conservation issues through participation with local and regional water stakeholder groups. CPS Energy has conserved water by using technologies such as once-through cooling ponds (instead of cooling towers), increased power plant efficiency projects, the installation of water-efficient gas turbines (versus gas steam turbines), and new water treatment technologies. CPS Energy is continuing to study other water conservation technologies, such as dry cooling. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Environmental Matters" herein.

44 For description of other assets of the Systems that support generation, please see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Fuel Supply".

Google Fiber Optic Infrastructure Program

Google has announced plans to develop fiber optic communication infrastructure to include gigabyte speed internet and video services in the CPS Energy service territory. The original scope of this work was estimated to last 6-8 years over which time, an estimated 230,000 pole attachments were to be connected to CPS Energy's poles. Earlier this year, Google representatives informed CPS Energy representatives that they have decided to abandon their pole attachment strategy and will instead install their infrastructure underground as much as possible, with pole attachments only being installed on an exception basis. This change in strategy will significantly reduce CPS Energy's involvement in Google's fiber optic network installation as there is no CPS Energy infrastructure or participation required when the installation is underground.

Smart Grid Modernization Program

Starting in 2013, CPS Energy began building a converged Advanced Metering Infrastructure ("AMI") and distribution automation ("DA") network. The rollout of new electric meters and gas interface management units ("IMUs") using this network began in 2014 and will continue for 48 months. CPS Energy believes this new program will reduce operational costs and improve reliability. A new energy portal was implemented to give customers the opportunity to better track and manage their energy usage. The combined cost of the network, electric and gas upgrades is estimated at $290 million. Operational savings, accurate reads, and distribution automation are all factored in the program. Savings are expected to cover the cost in approximately 12 years. As of May 31, 2017, approximately 818,000 smart grid devices have been installed pursuant to this program, which is to be completed by 2018.

Qualified Scheduling Entity

CPS Energy operates as an ERCOT Level 4 Qualified Scheduling Entity ("QSE") representing all of CPS Energy's assets and load. The communication with ERCOT and the CPS Energy power plants is monitored and dispatched 24 hours per day / 365 days a year. Functions are provided from the Energy Market Center housed within the main office of CPS Energy. Backup facilities have also been created. QSE functions include load forecasting, day ahead and real time scheduling of load, generation and bilateral transactions, generator unit commitment and dispatch, communications, invoicing and settlement. The QSE operates in all aspects of the ERCOT Market, including submitting bids and offers in the Day Ahead Market ("DAM"), operating generation and load in the Real Time Market, participating in Congestion Revenue Rights auctions, and offering Ancillary Services into the grid.

Transmission System

CPS Energy maintains a transmission network for the movement of large amounts of electric power from generating stations to various parts of the service area, to or from neighboring utilities, and for wholesale energy transactions as required. This network is composed of 138 and 345 kilovolt ("kV") lines with autotransformers to provide the necessary flexibility in the movement of bulk power.

Distribution System

The distribution system is supplied by 89 substations strategically located on the high voltage 138 kV transmission system stepping down to distribution system voltages of 34.5 kV and 13.2 kV. The City's central business district is served by nine underground networks, each consisting of four primary feeders operated at 13.2 kV, transformers equipped with network protectors, and both a 4-wire 120 / 208 volt secondary grid system and a 4-wire 277 / 480 volt secondary spot system. This system is designed for the highest level of distribution reliability.

Approximately 7,866 circuit miles (three-phase equivalent) of overhead distribution lines are included in the distribution system. These overhead lines also carry secondary circuits and street lighting circuits. The underground distribution system consists of 577 miles of three-phase equivalent distribution lines, 86 miles of three-phase downtown network distribution lines, and 4,899 miles of single-phase underground residential distribution lines. Many of the residential subdivisions added in recent years are served by underground residential distribution systems. CPS Energy is currently evaluating the implementation of additional underground distribution systems.

Interconnected System

The electric system is integrated with more than 100 other utilities, municipalities, independent power producers, power marketers, and co-operatives in Texas to form ERCOT, which covers a large portion of Texas. The ERCOT system is operated entirely within the State and is connected to other reliability councils and Mexico through asynchronous connections, providing only limited import / export capability. CPS Energy and the twelve utilities below are the major transmission entities in ERCOT: 45 American Electric Power Service Corporation Austin Energy Brazos Electric Power Co-op CenterPoint Energy Electric Transmission Texas LCRA Transmission Services Corp. South Texas Electric Co-op / Medina Electric Co-op Sharyland Utilities ONCOR Electric Delivery Cross Texas Transmission Lone Star Transmission Wind Energy Transmission Texas

The transmission facilities of CPS Energy, the twelve above entities, and those of other transmission facility owners have been integrated into a single control area, which is operated by ERCOT acting as the ISO. ERCOT operates the transmission grid through each of the transmission-owning entities that maintain direct control and maintenance of their respective portions of the transmission infrastructure.

Pursuant to the PUCT's open access transmission rule, discussed under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Transmission Access and Rate Regulation" herein, ERCOT members and other wholesale market participants jointly established, by a filing with the PUCT in 1996, the ERCOT organization as an ISO and an integrated electronic transmission information network. ERCOT's responsibilities were augmented in 1999 under SB 7 for the retail competitive market and include alternate dispute resolution procedures, coordination of the scheduling of ERCOT generation and transmission, directing the redispatch of ERCOT generation and transmission transactions for economic purposes, preserving system reliability, and administering the electronic transmission information network. Beginning July 31, 2001, ERCOT began operating the interconnected system as a single control area, in contrast to the multiple control areas historically in place, as part of the transition to the retail competitive market, which was fully implemented on January 1, 2002.

In December 2010, ERCOT transitioned from its existing "Zonal" market structure to a "Nodal" market structure. Instead of simply facilitating the scheduling of generation resources and loads, in the Nodal market ERCOT optimizes the dispatch of all generating units in the Real Time Market ("RTM") using Security Constrained Economic Dispatch ("SCED"). Resource operators submit offer curves to ERCOT and load serving entities submit bid curves to ERCOT. The SCED engine optimizes deployment of generation assets (constrained by the limits of the transmission system) to meet demand through an electronic auction run every five minutes. In order to provide predictability in the RTM, ERCOT also operates a financial DAM. This voluntary market allows market participants to sell resources and buy load one day prior to the operating day, securing positions and adding predictability to their revenues and costs. The DAM is conducted by ERCOT itself, and each participant must show adequate creditworthiness to participate. CPS Energy participates in both the DAM and the RTM on a daily basis. ERCOT's costs of converting to a single control area and of administering system operations for the competitive retail market are recovered through an administrative fee assessed to system participants, including CPS Energy, allocated on an energy basis. CPS Energy recovers the fee through the billing adjustment discussed above under "CUSTOMER RATES – Governmentally Imposed Fees, Taxes or Payments".

ERCOT also manages commercial operations of the wholesale power market, as well as acts as a single clearinghouse for retail customer switches and metering information.

CPS Energy is a qualified scheduling entity, load serving entity, distribution service provider, resource entity, and transmission service provider in the ERCOT wholesale market, and is thereby obligated to comply with all rules established by ERCOT as reflected in its protocols, planning guides, and operating guides, which are subject to change from time to time and subject to oversight and review by the PUCT.

CPS Energy is also complying with the reliability standards of the North American Electric Reliability Corporation ("NERC"), including the Critical Infrastructure Protection standards. CPS Energy must comply with these standards as a Transmission Planner, Transmission Owner, Transmission Operator, Distribution Provider, Generation Owner and Generation Operator. CPS Energy is continually monitoring proposed new reliability standards, new versions of existing standards, and the potential of violations related to the standards. CPS Energy does not anticipate any violations that would have a material financial impact.

External Events Impacting Nuclear Power Generation Industry and STP1 and STP2, and CPS Energy's Response

On March 11, 2011, a magnitude-9.0 earthquake struck off of the north-eastern coast of Japan. This earthquake triggered a tsunami that devastated portions of Japan. The Fukushima Daiichi nuclear power plant site was one of the areas struck by the earthquake and tsunami. This event resulted in core damage to Units 1, 2, and 3 at that plant. The nuclear industry response to the events at Fukushima continues to evolve. The NRC formulated a Near-Term Task Force to conduct a review of the NRC's processes and regulations in light of the events at Fukushima. The Near-Term Task Force's 90-day report confirmed the safety of United States nuclear power plants and included twelve recommendations to the NRC commissioners. In October 2011, the NRC commissioners directed NRC staff to implement seven of the recommendations that were identified as those that should be implemented without unnecessary delay. In addition, the NRC commissioners directed the staff to identify the schedule and resource needs associated with those Near-Term Task Force recommendations that were identified as long-term actions and / or that require additional staff

46 study to inform potential regulatory changes. On March 12, 2012, the NRC issued three orders (the "NRC Orders") and one Request for Information letter. These actions represented the first regulatory activity initiated as a result of the lessons learned from the events at Fukushima. The NRC Orders outline actions that must be taken and also provide a compliance deadline. License holders must have completed the actions within two refueling outages or by December 31, 2016 (whichever came first). The Request for Information letter requires specific responses from license holders. Additionally, NRC developed the diverse and flexible mitigation capability ("FLEX"), an additional layer of backup power after an extreme event at nuclear energy sites, which will maintain cooling water at the reactors in the event backup systems fail. Most recently, NRC staff reviewed the International Atomic Energy Agency's report, "The Fukushima Daiichi Accident" and determined the observations concluded therein do not introduce issues not previously considered by NRC, the U.S. Government, or the U.S. nuclear industry, either as a part of a pre-existing program or Fukushima enhancements. As of July 21, 2016, STPNOC has submitted the requested information and complied with the NRC Orders in a timely manner to comply with all deadlines that have come due. NRC released its site evaluation report on June 8, 2017, with a final decision related to STP 1 and 2's license renewal application to be rendered in September 2017. The CPS Energy budget for STP includes both operating and maintenance and capital for costs associated to comply with regulatory changes that are being implemented from the Fukushima task force recommendations. As part of CPS Energy's on-going oversight of STP, CPS Energy continues to work with STPNOC to identify cost estimates for any additional exposures related to the industry response to Fukushima that may result from future actions taken by the NRC.

The NRC evaluates plant performance by analyzing two distinct inputs: inspection findings from the NRC's inspection program and performance indicators that are reported by the licensee. Inspection findings and performance indicators are given a color designation based on their safety significance. The current plant assessment for STP can be found at a summary level at http://www.nrc.gov/NRR/OVERSIGHT/ASSESS/pim_summary.html, or by writing to United States Nuclear Regulatory Commission, Public Document Room, O-1F-13, Washington, D.C. 20555.

The NRC regulations require that each holder of a nuclear plant operating license submit to the NRC a decommissioning plan, which contains, among other things, a cost estimate for decommissioning such plant and either a funding plan or a guaranty method for covering decommissioning costs for such plant. Participants in STP have filed a decommissioning plan for the STP in compliance with these regulations, which includes representations by each Participant that it has established a trust into which it annually pays, throughout the life of the STP, amounts which, when accumulated with investment income, are projected to provide the funds required by the rules to pay its respective portion of such costs.

CPS Energy maintains decommissioning funds for its 28% interest in STP separate from decommissioning funds associated with its 12% STP interest ("former AEP TCC interest") to meet its decommissioning obligations for its entire 40% interest in STP. See Note 14 to CPS Energy's Basic Financial Statements in APPENDIX B. Total funds in each Trust are allocated to decommissioning costs, spent fuel management and site restoration. The allocation to decommissioning is based on cost estimates most recently provided in a cost study finalized in May 2013. As of December 31, 2016, and December 31, 2015, CPS Energy had accumulated approximately $399.4 million and $386.0 million, respectively, in the 28% Trust. Based on the most recent annual calculation of financial assurance required by the NRC as of December 31, 2016, the 28% Trust funds allocated to decommissioning costs totaled $249.0 million, which exceeded the calculated financial assistance amount of $152.5 million. With respect to decommissioning funds for the former AEP TCC interest, the acquisition by CPS Energy and Texas Genco of AEP TCC's interest in STP includes, proportionately, the responsibility for decontamination and decommissioning, but also resulted in the transfer of decommissioning funds held in trust by AEP TCC. Under PUCT's Substantive Rules Applicable to Electric Service Providers – Nuclear Decommissioning – Rule 25.303, AEP TCC will continue to collect decommissioning fees from its historical retail customers, which are paid into new trust accounts applicable to the new shares of STP acquired by CPS Energy and Texas Genco. These fees are subject to review and adjustment by the PUCT at its initiative or at the request of an interested person including CPS Energy or Texas Genco. As of December 31, 2016, and December 31, 2015, the CPS Energy balance in the Decommissioning Master Trust Related to the South Texas Project Interest Acquired from AEP Texas Central Company, "Master Trust (TCC Funded)", was $144.9 million and $140.6 million, respectively. Based on the most recent annual calculation of financial assurance required by the NRC as of December 31, 2016, the balance in the Master Trust allocated to decommissioning costs for CPS Energy's 12% interest in STP totaled $97.2 million, which exceeded the estimated NRC requirement of $65.3 million. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS - Investments – Trust Funds – STP Decommissioning Funds" and "Master Trust (TCC Funded)" herein for information concerning the value of investments in the decommissioning trusts. Actual decommissioning costs could vary substantially from the estimate of such costs depending on future regulatory requirements, the method used for decommissioning, and other factors, and the amounts in the decommissioning trusts may or may not be adequate to pay these costs. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS - Investments – Trust Funds – STP Decommissioning Trust" herein.

47 Used Nuclear Fuel Management

Under the Nuclear Waste Policy Act, 42 U.S.C. 10101, et seq. ("NWPA"), the Department of Energy ("DOE") has an obligation to provide for the permanent disposal of high level radioactive waste, which includes used nuclear fuel at United States commercial nuclear power plants such as STP. To fund that obligation, all owners or operators of commercial nuclear power plants have entered into a standard contract under which the owner(s) pay a fee to the DOE of 1.0 mill per kilowatt hour (1M / kWh) electricity generated and sold from the power plant along with additional assessments. In exchange for collecting this fee and the assessments, DOE undertook the obligation to develop a high-level waste repository for safe long-term storage of the fuel and, no later than January 31, 1998, to transport, and dispose of the used fuel. To date, no high-level waste repository has been licensed to accept used fuel. The National Association of Regulatory Utility Commissioners ("NARUC") has challenged further collection of this fee. On November 19, 2013, the U.S. Court of Appeals for the District of Columbia ruled in favor of NARUC and ordered DOE to submit to Congress a proposal to reduce the fee to zero until certain conditions are met. While the reporting of volumes will continue, effective May 16, 2014, the rate changed to 0.0 mill per kilowatt hour (0 / M / kWh), or no fee.

On January 12, 2017, the Interim Consolidated Storage Act of 2017 was introduced into the U.S. House of Representatives to authorize the U.S. Secretary of Energy to enter into contracts for the storage of certain high-level radioactive waste and spent nuclear fuel. To date, the DOE has not accepted used fuel from any domestic commercial nuclear power plant. According to the filings in one recent suit brought against the DOE, at least 66 cases have been filed in the Court of Federal Claims against the DOE related to its failure to meet its obligations under the NWPA by the existing owners or operators of nuclear facilities seeking damages related to ongoing used nuclear fuel storage costs. In early 2016, a federal district court in Washington, D.C. ruled against the DOE, ordering the government to clean up the Hanford Nuclear Reservation in response to NWPA violations. Entergy Nuclear Generation Company ("Entergy") and Boston Edison Company ("Boston Edison") filed suits alleging a $40 million claim before the Court of Federal Claims regarding allegations that the DOE failed to compensate a nuclear energy company for nuclear waste storage fees incurred. In an opinion and order addressing both companies' claims, dated February 14, 2017, the court dismissed Boston Edison's complaint (based on the rationale that such claim was not yet ripe) and dismissed the government's motion to stay discovery related to the Entergy case due to Boston Edison's claim resolution by the court.

On August 31, 2000, in Maine Yankee Atomic Power Company, et al. v. US, the United States Court of Appeals for the Federal Circuit affirmed that the DOE has breached its obligations to commercial nuclear power plant owners for failing to live up to its obligations to dispose of used nuclear fuel. Subsequent to that decision, the DOE has settled with certain commercial nuclear power plant owners and agreed to provide funds to pay for storage costs while the DOE continues to develop a permanent high-level waste repository. In early February 2013, STPNOC, on behalf of the owners of STP, entered into a similar settlement with the DOE. Under the terms of the settlement, the DOE will reimburse STP for certain costs that will be incurred in continuing onsite storage of all of its used nuclear fuel. As with similar settlements throughout the nuclear industry, the terms of the agreement call for the DOE to reimburse for certain costs incurred through December 2013. In early November 2013, STPNOC and its outside counsel received notice from the Department of Justice ("DOJ") that the DOE was offering to extend the terms of the settlement to allow for the DOE to reimburse for costs incurred through December 2016. The settlement extension (addendum) was executed on January 24, 2014, and extends the term of the Spent Fuel Settlement Agreement with the DOE through December 31, 2016. In November 2016, STPNOC and its outside counsel received notice from the DOJ that the DOE extended the terms of the settlement through December 31, 2019. Additionally, In re Aiken County, 725 F.3d 255 (D.C. Cir. 2013), the court ordered the NRC to comply with the NWPA and use available funds to resume consideration of the DOE's Yucca Mountain application as a possible depository. NRC staff concluded the Yucca Mountain to be a safe location, but the DOE must still obtain acquisition rights and complete licensing requirements. On May 6, 2016, NRC issued its final supplement to the environmental impact statement examining the use of the Yucca Mountain as a permanent repository for used nuclear fuel and high-level radioactive waste. After analyzing the potential impacts on groundwater and surface groundwater discharge, the NRC determined all impacts would be "small". The adjudicatory hearing, which must be completed before a licensing decision can be made, remains suspended. On December 16, 2016, the DOE released its "Draft Plan for a Defense Waste Repository", evaluating the possibility of a separate disposal repository (other than the Yucca Mountain). The preliminary plan describes the technical regulatory, risk management, cost, and schedule consideration thereof and remained open for comment until March 20, 2017. On March 14, 2017, Texas Attorney General Ken Paxton filed suit in the United States Court of Appeals for the Fifth Circuit alleging various federal agencies and officials violated federal law by failing to license the Yucca Mountain as a nuclear waste repository.

Until the DOE is able to fulfill its responsibilities under the NWPA (which includes a permanent underground disposal facility), the NWPA has provisions directing the NRC to create procedures to provide for interim storage of used nuclear fuel at the site of a commercial nuclear reactor. Pursuant to STPNOC analysis of recent NRC guidance, STPNOC has started the process of planning, licensing, and building an on-site independent spent fuel storage installation ("ISFSI" also known as "Dry Cask Storage") with an expectation that the ISFSI will be operational towards the later part of the decade. Expenditures for the spent fuel management project are being funded by the STP owners as the costs are incurred. CPS Energy funds its 40% ownership share of these costs and periodically requests reimbursement from its Decommissioning Trusts for allowable costs. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Investments – Trust Funds – STP Decommissioning Trust" herein.

48 Annually, STPNOC submits claims to the DOE for the reimbursement of allowable costs for spent fuel management. Allowable costs are returned by STP to the owners upon receipt of funds from the DOE. CPS Energy reimburses the Decommissioning Trusts for the settlement amount received from the DOE. Qualifying spent fuel management costs not reimbursable by the DOE are funded by the Decommissioning Trusts. Any costs not reimbursable by the DOE or the Trusts are recorded as STP operational and maintenance expenses or capital costs.

CPS Energy received reimbursement for certain initial costs related to the Dry Cask Storage project incurred prior to May 1, 2012. A second claim submitted to the DOE under the Spent Fuel Settlement Agreement was submitted on October 31, 2013, sought reimbursement for covered costs during the period of May 1, 2012 through July 31, 2013. On April 14, 2014, the DOE issued a letter that denied reimbursement for certain costs associated with upgrading the spent fuel dry cask handling cranes. On May 8, 2014, STPNOC agreed to accept the DOE's decision but reserved the right to seek reimbursement for future costs associated with upgrading the cranes. CPS Energy expects that the DOE will render its decision regarding the eligibility for reimbursement of future crane upgrade costs as part of the review process for each annual claim. For those costs that have been deemed, or that in the future may be determined to be, non-reimbursable by the DOE, CPS Energy expects to pay these costs using funds currently held in the STP Decommissioning Trusts. CPS Energy received its share of the allowable reimbursement costs from the DOE on August 6, 2014. The third claim with the DOE under the Spent Fuel Settlement Agreement was submitted on October 31, 2014, and seeks reimbursement for covered costs during the period of August 1, 2013 through July 31, 2014. In January 2015, $3.2 million was recorded for STP spent fuel management project capital costs. On February 25, 2015, STPNOC received DOE's "Determination letter" regarding this claim which disallowed reimbursement of certain costs associated with dry cask handling crane upgrades. STPNOC filed a Request for Reconsideration with the DOE on March 27, 2015. On June 25, 2015, the DOE issued a Supplemental Determination letter which determined that a portion of the costs to upgrade the dry cask handling cranes was reimbursable as an allowable cost. CPS Energy received its share of the allowable reimbursement costs from the DOE on August 21, 2015 for the third claim. The fourth claim with the DOE under the Spent Fuel Settlement Agreement was submitted on October 30, 2015, and seeks reimbursement for covered costs during the period of August 1, 2014 through July 31, 2015. On March 3, 2016, STPNOC received DOE's "Determination Letter" regarding this claim which disallowed reimbursement of certain costs. On June 13, 2016, CPS Energy received its share of the allowable reimbursement costs from the DOE for the fourth claim. The fifth claim with DOE under the Spent Fuel Settlement Agreement was submitted on October 28, 2016. On February 13, 2017, STPNOC received DOE’s "Determination Letter" regarding this claim for reimbursement of certain costs. On June 14, 2017, CPS Energy received its share of the allowable reimbursement costs from the DOE for the fifth claim under the Spent Fuel Settlement Agreement.

A June 2012 decision by the United States Court of Appeals for the District of Columbia vacated the NRC's waste confidence rule update. In response, the NRC issued an order stating that final approval of licenses dependent on the waste confidence rule, such as new reactor licenses and license renewals (combined construction and operating license application - "COLA"), would not be granted until the court ruling had been addressed. Subsequently, the NRC directed staff to develop a new waste confidence rule and GEIS by September 2014. In January 2014, the NRC revised the review schedule for the GEIS and to have a new final rule by October 3, 2014. The slight delay in schedule was related to time lost during the government shutdown and lapse of appropriations in October 2013. On August 26, 2014, the NRC approved the GEIS and final rule (renamed the Continued Storage Rule). In a separate order, NRC approved lifting the licensing suspension once the Continued Storage Rule becomes effective. The rule became effective on October 20, 2014. On September 29, 2014, intervenors filed a petition to suspend the new rule with the Atomic Safety and Licensing Board (a unit of the NRC) and a proposed contention opposing the NRC's action. On February 26, 2015, the NRC issued a decision that rejects the petition, the proposed contention, and the motion to reopen filed by the intervenors in September 2014. On January 28, 2015, the intervenors filed a petition with the NRC to require reactor specific environmental impact statement for each license application for a new reactor and license extension (renewal). The NRC issued a decision in April 2015 that denied the petition. On April 24, 2015, the intervenors filed a petition with the NRC to intervene in the STP1 and STP2 license renewal and STP3 and STP4 license application proceedings regarding the Continued Storage Rule. On May 1, 2015, NRC staff responded to the intervener's hearing request and motion to reopen the record in the license renewal proceeding for STP1 and STP2. The NRC concluded the intervention petition was inadmissible because it raised an issue that was beyond the scope of the proceedings by challenging a NRC rule without requesting a waiver of the rule. Furthermore, the NRC noted that the petition failed to raise a genuine issue of material fact or law and was filed late without good cause. The motion to reopen was deemed inadmissible because it was "untimely without addressing an extremely grave issue", did not address a significant environmental issue, and did not demonstrate that a materially different result would be likely if its proposed new contention had been raised at the beginning of the proceeding. Furthermore, a move to reopen and request to allow "placeholder" contentions to challenge the 2014 Continued Storage Rule and GEIS were denied by the NRC on June 9, 2015.

In late October 2014, the states of New York, Vermont, Massachusetts, and Connecticut filed a timely petition for review of the Continued Storage Rule by the U.S. Court of Appeals for the D.C. Circuit. The NRC issued further guidance in February 2015 determining the AEA does not require a waste confidence safety filing and declined to suspend final licensing decisions. Intervenor- Respondents filed a brief with the D.C. Circuit Court on September 11, 2015 in support of the Continued Storage Rule. Petitioners' reply briefs were due by October 23, 2015. The U.S. Court of Appeals heard oral arguments on February 12, 2016. On June 3, 2016, the U.S. Court of Appeals for the D.C. Circuit upheld the NRC's justification for allowing spent nuclear fuel to be stored on-

49 site at active facilities. Petitions for rehearing were later denied by the court. CPS Energy expects that STPNOC's license renewal applications for STP1 and STP2 will be approved in 2017. Upon approval of these applications, it is expected that STP1 and STP2 will be licensed for a total of 60 years of operation.

Additional Generation Opportunities

One of CPS Energy's strongest aspects of operational and financial effectiveness has been the benefit it has derived from its diverse and low-cost generation portfolio. Continued diversification is a primary objective of the CPS Energy management team. Accordingly, this team periodically assesses future generation options that would be viable for future decades. This extensive assessment of various options involves projections of customer growth and demand; technological viability; financial investment requirements; annual asset operation and maintenance costs; environmental impacts; and other factors.

CPS Energy continues to monitor proposed regulatory changes that could raise the costs of operating plants, such as those that have been proposed for units that use carbon-based fuels. To work towards mitigating this carbon based regulatory risk, CPS Energy management announced the planned deactivation of its two oldest non-scrubbed coal units, Deely1 and Deely2, at the end of 2018 (and whose native load will be substantially replaced with the Rio Nogales Plant output; see footnote 6 to the table appearing under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Capability" and "Generating Station Events – Rio Nogales" herein). CPS Energy management is pursuing a multifaceted strategy with the goal of maintaining a well balanced portfolio, in addition to analyzing traditional generation sources and aggressively growing its renewable energy portfolio as described in the "Generating Capability" table, and expanding its efforts towards community-wide energy efficiency and conservation. These mitigation efforts are also referred to as the "5th Fuel" and are very important to CPS Energy's strategic energy plans and specifically to its new generation needs. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Fuel and Gas Cost Adjustment" herein. Additionally, CPS Energy management has explored and continues to cooperatively develop opportunities with the City Council for potential changes in ordinances, codes and administrative regulations focused on encouraging commercial and residential utility customers, builders, contractors and other market participants to implement energy conservation measures. For additional information on CPS Energy's energy efficiency and conservation program, see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Energy Conservation And Public Safety Programs" herein.

CPS Energy annually conducts an assessment of generation resource options to meet its expected future electric requirements. This assessment includes updates to fuel prices, wholesale electric market forecasts and its electric peak demand forecast which incorporates the most recent economic, demographic and historical demand data for the CPS Energy service territory. Additionally, this assessment includes updated demand reductions due to the STEP energy efficiency and conservation program.

Before a commitment is made to construct the next generation facility, CPS Energy management pursues several objectives. These objectives include the pursuit of additional stakeholder input; expanded community education about the long-term energy and conservation needs of the San Antonio community; continued option analyses and evaluations, including CPS Energy's own formalized cost estimates; additional Board approval to move forward; and expanded presentations to the City Council, which governs the related rate increases and bond issuances that may be required to support any generation construction project or existing generation asset purchase.

Nuclear

In mid-2006, CPS Energy management directed that staff conduct an initial investigation, study and analysis of additional nuclear capacity as one type of possible generation infrastructure. In 2007, CPS Energy received Board approval to participate in the early development phase of two additional nuclear projects that involved third-party co-owners. The first possible nuclear project was development of two additional reactors at the STP site, also known as STP3 and STP4. The second possible nuclear project was a proposed new two-unit facility tentatively located in Victoria County, which is also located in south Texas.

In June 2009, CPS Energy management provided the Board its formal assessment and recommendations concerning these options compared to other possible new generation types including the first public estimate of the cost of the first possible project at $13 billion, inclusive of financing costs. Reports of higher cost estimates, however, resulted in reconsideration of the advisability of participating in the STP3 and STP4 Project and, ultimately, in CPS Energy's decision to limit participation in further development of STP3 and STP4. In a settlement negotiated with NRG and the other participants in the development of STP3 and STP4, CPS Energy received a 7.625% ownership interest in the combined STP3 and STP4. CPS Energy is not liable for any STP3 and STP4 Project development costs incurred after January 31, 2010, however, once the new units reach commercial operation, CPS Energy will be responsible for its 7.625% share of ongoing costs to operate and to maintain the units. CPS Energy will also receive two $40 million installment payments upon award of a DOE loan guarantee to Nuclear Innovation North America LLC ("NINA"), a NRG / Toshiba joint venture. NINA also agreed and has made, a contribution of $10.0 million over a four-year period to the Residential Energy Assistance Partnership, which provides emergency bill payment assistance to low-income customers in the City and Bexar County. In August 2015, Toshiba announced that it planned to write down its semiconductor, home appliance,

50 and nuclear business units following an investigation into accounting issues that have resulted in the need for Toshiba to restate their past financial results. On April 25, 2016, media reports indicated the preliminary operating loss after it wrote down the value of Westinghouse nuclear power subsidiary was $6.2 billion. Previously in 2011, NRG announced it had written off its investment in STP3 and STP4. On October 1, 2015, the NRC issued a press release indicating that NRC staff had completed its Final Safety Evaluation Report (report) for the Combined Licenses ("COL") for the proposed STP3 and STP4. The NRC staff will provide the report along with the Final Environmental Impact Statement on the application to the NRC for the mandatory hearing phase of the licensing process. The Mandatory Hearings took place on November 19, 2015, when the NRC staff provided the Final Safety Evaluation Report and Final Environmental Impact Statement on the application to the NRC. On February 9, 2016, the NRC commissioners authorized issuance of the COL for STP3 and STP4 and the licenses were issued on February 12, 2016. Prior to the write off, CPS Energy performed a thorough reǦevaluation of its investment in the STP3 and STP4 to reassess the ongoing viability of the project and the appropriateness of continuing to report the cost of the project on its Statements of Net Position. Despite the project having secured the NRC's authorization for issuance of the COL, in January 2016, CPS Energy concluded that, as a result of sustained changes in a number of environmental and economic factors directly affecting the projected economic feasibility of completing construction of STP Units 3 and 4, the project experienced a permanent impairment. CPS Energy determined it appropriate to write off the entire $391.4 million investment in STP Units 3 and 4 and has not performed a re- evaluation since. The impairment loss was reported as an extraordinary item on CPS Energy's Statements of Revenues, Expenses, and Changes in Net Position for the period ending January 31, 2016. This noncash transaction did not impact CPS Energy's debt service coverage ratio; however, there was a resulting increase from 61.1% to 63.7% in the debt to debt and net position ratio at January 31, 2016. Going forward, CPS Energy continues to retain a legal interest in STP Units 3 and 4.

In addition to the STP3 and STP4, CPS Energy explored another potential nuclear project with Exelon. In December 2007, CPS Energy and Exelon signed an agreement granting CPS Energy an option to participate in a possible joint investment in a nuclear-powered electric generation facility in southeast Texas ("Exelon Project"). On August 28, 2012, Exelon announced that they had notified the NRC that they intended to withdraw the Early Site Permit application, effectively ending development of the Exelon Project. CPS Energy wrote-off its $2.7 million investment in the Exelon Project during the third quarter of Fiscal Year 2013.

Generating Station Events

In addition to routine planned generation maintenance and repairs conducted from time to time, there were several unforeseen events at the power generation facilities that occurred during past years. Those unplanned events that had potential financial impact to CPS Energy greater than $1 million (including costs to address loss of revenue and costs of replacement load) are hereafter described.

Braunig

On March 24, 2016, Braunig1 was forced offline due to high turbine bearing vibrations. The turbine bearings were repaired, and the unit was released for dispatch on April 27, 2016.

On June 23, 2015, Braunig3 was made unavailable due to the failure of a second boiler circulating water pump. The repairs to one of the two failed pumps was completed by the Original Equipment Manufacturer ("OEM"). The unit was returned to full capacity on August 1, 2015.

On October 6, 2014, Braunig2 was placed in a maintenance outage until December 31, 2014. A request was also submitted to ERCOT on October 7, 2014 to mothball the unit beginning January 4, 2015 for five to 17 months. In late October 2014, ERCOT granted permission to CPS Energy's mothball request. The mothball remained in effect until February 10, 2015. An inspection of the turbine was completed in January of 2015. A crack in the turbine rotor was found and repaired. The unit was made available for dispatch on March 3, 2015.

During a planned overhaul on the Braunig1 unit in April 2014, a crack was identified on the High Pressure / Low Pressure steam turbine rotor. The rotor was sent off-site for repairs. The repaired rotor was placed back into service and the unit was released for dispatch on August 13, 2014.

On October 2, 2013, Braunig3 was shut down due to excessive vibration on the steam turbine. Upon examination, it was determined that the High Pressure / Intermediate Pressure rotor contained a crack. The rotor has since been repaired, reinstalled, tested, and proven ready for operation. The unit was released for dispatch on April 10, 2014.

On August 12, 2013, Braunig1 was made unavailable due to the failure of an excitation transformer. The excitation transformer was replaced and tested, and made available for dispatch in October 2013.

51 Deely

On August 9, 2016, Deely2 was derated to 407 MWs net due to elevated condenser backpressure. Plant personnel investigated the issue, and determined that the turbine steam seals need to be replaced. The unit was returned to full load capacity following these replacements, which occured during the unit's planned overhaul beginning February 3, 2017 and ending on March 17, 2017.

On September 10, 2013, Deely1 was forced offline due to an explosion in the coal cascade conveyor building. A coal dust explosion damaged the cascade building and conveyor equipment. Staff and outside consultants investigated the event and recommended modifications to the conveyor system and operation practices and procedures. The modifications were made and Deely1 returned to service on October 11, 2013. Since then, the modifications made to Deely1 were also made to Deely2.

On November 5, 2012, Deely1 was removed from service due to high vibration on the generator rotor. The rotor was removed and sent to Alstom for evaluation. Alstom indicated that the rotor had two winding shorts and recommended that the rotor be rewound. The work was approved by CPS Energy and completed by Alstom. The generator rotor was reinstalled in February of 2013. The unit was returned to service on February 20, 2013 and is operating at full load capability and within normal vibration limits.

Rio Nogales

In May 2013, CPS Energy completed a 53-day overhaul of the Rio Nogales Plant. The outage included a planned major inspection of the CT101 gas turbine and the steam turbine. The L-0 blading on the steam turbine was replaced on the low pressure turbine due to the potential failure of the L-0. A planned steam turbine generator rotor test revealed a problem with the rotor windings where a shorted winding and damaged end blocks were repaired. Planned borescope inspection revealed cracking in 30 of 55 of the bottom half row #17 stationary blades on CT201; all blades were replaced. The original 30-day planned outage was extended by 23 days as a result of the repairs.

Milton B. Lee (MBLCT6)

On April 7, 2017, MBLCT6 was forced offline due to a damaged combustion can. The damage was found during a routine inspection. The combustion can was replaced, and the unit was returned to service on May 9, 2017.

Sommers

On August 6, 2016, Sommers2 was derated to 355 MWs net due to condensate flow issues. Plant personnel investigated the issue, and determined that the derate was due to reduced performance from one of the unit's condensate pumps. The unit was returned to full load capacity following the replacement of the condensate pump, which occurred during the unit's previously planned overhaul that began on January 13, 2017 and ended on February 17, 2017.

On March 23, 2012, Sommers1 experienced a generator ground fault due to a failed isolated phase bus connection, resulting in a unit trip and a 6-week forced outage to repair the damaged components. Detailed electrical testing was performed on the generator and transformers, which revealed no damage to these assets. The connection components were repaired, and the unit was returned to service on May 4, 2012.

Spruce2

On April 8, 2017, Spruce2 was derated to 645 MWs net due to baghouse damper issues. Baghouse bypass dampers would inadvertently open which could cause an environmental opacity exceedance. As a result, the particular bypass dampers had to be pinned in the closed position. The derate was to protect the baghouse by allowing enough relieving capacity of the remaining bypass dampers if the unit experienced a full bypass situation. On May 29, 2017, modifications were made to allow the unit to be released back to full load capacity.

Since its commercial operation in May 2010, Spruce2 realized boiler tube failures that had an adverse effect on unit reliability. CPS Energy worked with the OEM to identify the root cause of the failures and to provide permanent solutions to all failures. There were two outages, one in April 2013 and the other in October 2013 that addressed the boiler tube issues. Large sections of the boiler tubes were replaced to address the failures. Spruce2 was brought on line December 2013. On June 2014, Spruce2 experienced failures in the finishing superheat section of the steam generator. These failures were predominantly in the finishing superheat. The superheat section was replaced in the spring of 2016 to address the tube failures.

On November 21, 2014, Spruce2 was brought offline due to a fault in the internal section of the generator. The generator was disassembled and inspected to determine the extent of damage. Stator core hot spots were discovered in the flux shunt. The generator stator defects were repaired by Toshiba including a partial restack of the generator stator core and complete generator stator rewind. The unit was released under restrictions for dispatch on May 4, 2015. At this time, the capacity limit was reduced 52 to 600 MW Net. The reactive power limits were also reduced to 50 MegaVAR in the lagging direction and 0 MegaVAR in the leading direction. These restrictions were re-evaluated with the OEM and plant personnel in June of 2016. As a result of this evaluation, the capacity limit was removed, releasing the unit back to the original designed capacity of 785 MWs net. The reactive power limits were also changed to 220 MegaVAR in the lagging direction, but remained 0 MegaVAR in the leading direction. These limits will remain until further notice. CPS Energy is currently planning a generator replacement in November 2018 to return the generator reactive power limits to their original as-designed capacity, and expected remaining life.

STP1

On March 17, 2017, STP1 reactor was manually shutdown due to a piping leak on the open cooling loop system. On January 15, 2017, STP identified a small piping leak in the system that they were closely monitoring and managing. STP planned to correct the leak during the spring 2017 planned refueling outage. The cause of the increased leakage rate that led to the manual shutdown was investigated and subsequent repairs were made to the pipe. STP1 was scheduled to commence a planned refueling outage on Saturday, March 18, 2017. STP1 returned to service on April 29, 2017, following the planned refueling outage.

On May 1, 2016, STP1 reactor automatically tripped due to a main generator lockout. Subsequent investigation into the event identified that a small strip of hard rubber booting from the cooling duct that directs air flow into the bushing area of the "Bravo" iso-phase had degraded and intermittently came in contact with the "Bravo" phase causing a path to ground. The other rubber boots for the "Alpha" and "Charlie" phase were inspected and replaced. The cause was identified and corrected and STP1 was returned to service on May 6, 2016.

On January 26, 2016, STP1 reactor was manually tripped due to lowering water level in the 1C steam generator. The main feed water regulating valve was observed to go closed and attempts to open the valve in automatic and manual were not successful. An investigation into the event determined the cause was due to failure of a feed water level control circuit card. The cause was identified and corrected and STP1 was returned to service and resumed full power operation on January 30, 2016.

On December 21, 2015, while STP1 was operating at 48% reactor power, the "Main Turbine" governor valve #2 began to oscillate causing large load swings. As a result, the Main Turbine was manually tripped and following the manual trip of the Main Turbine, a set of steam dump valves did not operate as expected. With the steam dumps not performing as expected the resulting steam demand changes required a manual trip of the reactor. The issues that caused this event were identified and corrected prior to returning the Unit to service. STP1 was returned and resumed full power operation on December 30, 2015.

On November 13, 2015, STP1 declared an Unusual Event (a "UE") due to unidentified leakage from the reactor coolant system ("RCS") being greater than 10 gallons per minute. Shortly after declaring the UE, the source of the leakage was identified and stopped. Subsequently, after further review of the UE, STPNOC formally withdrew the Notice of Unusual Event because the source of the leakage was not from the RCS.

On October 17, 2015, STP1 commenced a scheduled refueling and maintenance outage. On November 18, 2015, as the outage was nearing completion, STP1 Shutdown Bank Control Rod D6 was determined to be inoperable. Following extensive analyses, on December 3, 2015, STPNOC submitted an Emergency License Amendment Request to the NRC seeking authorization to operate Unit 1 during the next 18-month operating cycle with 56 full-length control rods instead of 57. The NRC approved the license amendment on December 11, 2015. The approved license amendment supports STP Unit 1 operation with Control Rod D6 and the associated control rod drive shaft removed. Unit 1 was returned to service on December 20, 2015, completing a scheduled refueling that was extended due to the issue associated with Control Rod D6. The outage duration was 30 days longer than planned. On April 7, 2016, STPNOC submitted to the NRC a permanent license amendment request to allow for the continued operation of STP1 in this configuration. On December 21, 2016, STP received notification from the NRC that its Unit 1 Control Rod D6 License Amendment Request ("LAR") had been approved. The LAR allows permanent operation of Unit 1 with 56 full-length control rods. The approved LAR permanently changes the Unit 1 Technical Specifications to reflect future operations without Shutdown Bank Control Rod D6. The approved changes were implemented during the spring 2017 Unit 1 refueling outage.

On March 15, 2014, STP1 commenced a scheduled outage to refuel the reactor and rewind the main generator. The outage duration was 17 days longer than planned and STP1 resumed full power operation on June 5, 2014.

On January 18, 2014, STP1 declared a UE due to indications of a potential fire within the protected area of the plant. The UE was terminated approximately 5 hours after being declared. There were no injuries and STP1 remained stable at 100% power throughout the event. The UE was reported to the NRC.

On December 26, 2013, STP1 reactor power was lowered from 100% to 99.6% to perform recalibration of the ultrasonic feed water flow ("UTF") measurement system. Earlier in December 2013, while STP2 was shutdown in a scheduled refueling outage, a similar issue was identified with the STP2 UTF measurement system. The extent of condition investigation identified the issue in STP1. Following recalibration of the STP1 and STP2 UTF systems in January 2014, reactor power was increased to 100% in both Units. 53 However, the generator electric output of STP1 decreased by approximately 22 MWe (of which CPS Energy's share is approximately 9 MWe per hour) and the generator electric output of STP2 decreased by approximately 18 MWe (of which CPS Energy's share is approximately 7 MWe per hour), corresponding to an overall decrease at the station level of approximately 40 MWe per hour compared to net electric output prior to the units being derated to 99.6% reactor power. STPNOC's investigation into this matter identified that both units had been in a slight over-power condition. Initially, the STP1 over-power condition was determined to be a reportable event to the NRC. However, in June 2014, further analysis determined that the condition was not reportable and the report was retracted. STPNOC identified a repair option (replacement of the UTF systems in both Units with a system more commonly used in the nuclear industry) and submitted a License Amendment Request ("LAR") to replace the existing UTF which was approved by the NRC in March 2015. It is anticipated that when installed in both Units, the new feedwater flow measurement system will restore the approximate 40 MWe per hour at the station level (approximately 16 MWe per hour of which is CPS Energy's share) by late calendar year 2015. The UTF system and venturi flow system were replaced with the new feed water flow measurement system in STP1 during the fall calendar year 2015 refueling outage. Following the outage, electric output in STP1, like STP2, is lower than expected. STPNOC worked with an independent consultant and the vendor to analyze and validate the electric output. STPNOC has made several minor adjustments; however, these changes have not and are not expected to restore the lost generation in STP1 or STP2.

In late August 2013, STP1 was de-rated to 86.5% due to a failed extraction steam expansion joint. On October 1, 2013, STP1 was taken offline to repair the issue. STP1 was returned to service on October 16, 2013, and achieved 100% power on October 17, 2013.

On May 11, 2013, STP1 was taken offline to address material conditions aimed at maximizing reliability during the upcoming summer season. The most significant work scope addressed the main generator as well as a single point vulnerability within the rod control system that had previously impacted STP2. STP1 was returned to service on May 16, 2013, and achieved 100% power on the afternoon of May 17, 2013.

STP2

On March 28, 2015, STP2 commenced a scheduled outage to refuel the reactor and complete several major maintenance projects. The outage duration was 12 days longer than planned and STP2 was returned to service on May 9, 2015.

On November 16, 2013, STP2 commenced a scheduled refueling outage. STP2 was returned to service on December 22, 2013, and reached 99.6% reactor power on December 25, 2013. In early December 2013, during the STP2 refueling outage an issue was identified with the UTF measurement system (an extent of condition investigation identified a similar issue in STP1). The STP2 UTF system was recalibrated in January 2014 and reactor power was increased to 100%. However, the generator electric output of STP2 decreased by approximately 18 MWe per hour (of which CPS Energy's share is approximately 7 MWe per hour) compared to net electric output prior to the derate to 99.6% reactor power. STPNOC has identified a repair option (replacement of the UTF systems in both Units) that should restore the approximate 40 MWe per hour at the station level (approximately 16 MWe per hour of which is CPS Energy's share) by late 2015. STPNOC identified a repair option (as stated above, replacement of the UTF systems in both Units with a system more commonly used in the nuclear industry) and submitted a LAR to replace the existing UTF and venturi flow systems which was approved by the NRC in March 2015. The new feedwater flow measurement system and venturi system were replaced in STP2 during the spring 2015 refueling outage. Following the outage, STP 2 electric output was lower than expected. STPNOC worked with an independent consultant and the vendor to analyze and validate the electric output. STPNOC has made several minor adjustments; however, these changes have not and are not expected to restore the lost generation in STP2.

On January 4, 2013, STP2 was manually tripped due to two dropped control rods that occurred during scheduled control rod testing. The root cause was identified as a failed electrical switch. STP2 was returned to 100% power on January 8, 2013. On January 8, 2013, approximately 2 ½ hours after reaching 100% power, STP2 experienced an automatic trip due to a main transformer lockout associated with an internal fault in Main Transformer 2A. The fault resulted in a fire, which was extinguished by the onsite fire brigade. Following the trip, the Main Turbine experienced a loss of lube oil due to a failed DC Emergency Oil Pump, resulting in damage to the turbine (primarily low pressure turbine blades and bearings). Upon replacement of Main Transformer 2A and completion of repairs to the Main Turbine, STP2 was returned to service on April 22, 2013, and achieved 100% power on the morning of April 23, 2013. CPS Energy received reimbursement for the costs to replace the damaged main transformer and repair of the main turbine, with the exception of the applicable insurance deductible and certain non-recoverable costs such as root-cause analysis, after an insurance claim filed with NEIL, property insurance carrier for STP.

STP2 completed a scheduled refueling outage in the fall of 2011, returning to full power operation on November 24, 2011. On November 29, 2011, STP2 Main Generator experienced a fault that resulted in a reactor trip and a forced outage to repair the main

54 generator. Detailed electrical testing identified extensive damage that required a complete rewind of the generator stator and of the generator rotor. Several other generator components required repair or refurbishment. STP2 was returned to 100% power on April 24, 2012. See the "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Nuclear" section for additional information on the South Texas Project. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Generating Capability" table for more details on CPS Energy's generating units.

FUEL SUPPLY

CPS Energy acquires and manages the fuel supply for its electric generating units and natural gas distribution system. CPS Energy's generating units utilize a diverse fuel supply that includes coal, natural gas, nuclear, and fuel oil. While coal, natural gas, and nuclear fuel represent the primary fuel supply, certain CPS Energy power plants also have the capability to burn petroleum coke to supplement coal, while others can burn fuel oil (diesel) as an alternate fuel or to supplement natural gas. This dual fuel capability provides greater reliability and operational flexibility.

CPS Energy's coal units are designed to use Powder River Basin ("PRB") coal from Wyoming. Coal is secured through contracts providing both fixed and variable prices that reflect current market conditions. Delivery of PRB coal to CPS Energy occurs on the Union Pacific ("UP") railroad with BNSF Railway having access rights to CPS Energy's coal yard at Calaveras Power Station. While CPS Energy will take every reasonable step to assure the continuity of its coal supply, CPS Energy cannot predict whether any future coal shipment delays or curtailments could have a material adverse effect on the availability of its coal-fired generating stations.

CPS Energy owns 1,205 and leases 661 aluminum railroad cars, which are used in unit trains to haul coal from mines in the Southern Powder River Basin of Wyoming to the Deely Plant and the Spruce Plant. CPS Energy performs railcar maintenance and servicing on owned railcars at its railroad car maintenance facility located at Calaveras Power Station.

CPS Energy acquires and manages the combined natural gas supply requirements for its gas-fired generating units and gas distribution system through a diversified contract portfolio with a number of suppliers. In accordance with the CPS Energy Fuels Management Procedures, designated CPS Energy staff may enter into natural gas supply transactions using master enabling agreements, which incorporate standard commercial terms. CPS Energy has over 80 master enabling contracts with natural gas suppliers under which CPS Energy purchases its natural gas requirements. CPS Energy manages firm natural gas transportation and storage contracts with various service providers to meet local distribution and generation requirements and to serve the Rio Nogales Plant, with limited ability to share services between CPS Energy facilities.

CPS Energy also owns and operates natural gas transmission facilities, consisting of two larger systems and some short segments connected to power plants. The North Gate Pipeline and the South Gate Pipeline are the two larger systems. The North Gate Pipeline is a 24-inch steel pipeline which extends 17.2 miles from southern Comal County into northern Bexar County, Texas. Natural gas can be supplied to the pipeline through Energy Transfer's 36-inch Oasis Pipeline and Enterprise Texas Pipeline's ("Enterprise") 30-inch West Texas Pipeline.

The South Gate Pipeline comprises 60.3 miles of 24 and 30-inch steel pipeline, of which 46.9 miles of 30-inch pipeline extends south into Karnes County. A major meter station in Karnes County connects to the joint venture pipeline owned by Kinder Morgan and Energy Transfer. In early 2016, CPS Energy added a new pipeline interconnection at the Karnes meter station that provides direct access to gas supplies from the Eagle Ford Shale production area. CPS Energy also operates numerous taps throughout the system connecting to Enterprise, on the North Gate and South Gate Pipelines. Most of the major natural gas delivery stations are owned by CPS Energy and remotely monitored by the CPS Energy control center, assuring reliable operation. CPS Energy utilizes its diverse natural gas supply portfolio and interconnects with these pipelines to meet its power plant and distribution system natural gas requirements.

Periods of prolonged cold weather, during which natural gas supply may fall short of demand, may necessitate the curtailment of gas use for boiler fuel. The Natural Gas Policy Act subjects intrastate gas, including gas intended for boiler fuel uses, to Presidential emergency purchase authority and emergency allocation authority to assist in meeting interstate natural gas requirements for high priority uses. CPS Energy's gas supply has not experienced a regulatory curtailment since 1983. Nevertheless, CPS Energy's gas supply is subject to the ability of its gas suppliers to make available sufficient quantities of supply, as well as fluctuations in market prices.

Fuel oil can be used for generation, when needed, at the Sommers Plants, Braunig Plants and in the Milton B. Lee East Plant. At these plants, CPS Energy maintains fuel oil inventory and fuel oil receipt capability by truck. Inventory and receipt capability at these plants supports continued operation during natural gas supply disruptions or price events.

55 An Energy Price Risk Management Policy was implemented in 2002 to reduce the effects of energy price volatility consistent with the policy. At times, financial derivative instruments are utilized to hedge natural gas prices. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES – Wholesale Power" and "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Enterprise Risk Management And Solutions" herein.

On June 14, 2007, CPS Energy entered into a prepaid natural gas transaction with SA Energy Acquisition Public Facility Corporation ("SAEA" or "PFC"), a non-profit public facility corporation previously created by the City pursuant to Chapter 303, as amended, Texas Local Government Code, and J. Aron & Company, a subsidiary of Goldman Sachs Group ("J. Aron"). This transaction enabled the PFC to purchase a 20-year supply of natural gas from J. Aron totaling approximately 20,000 MMBtu per day. CPS Energy has contracted to purchase this gas for use in its gas distribution system under a take-and-pay gas purchase agreement, obligating CPS Energy to pay a monthly index-based price less a fixed discount for delivered gas. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Gas System" herein. The PFC prepaid for this gas by issuing $644,260,000 of tax-exempt fixed rate bonds and used the proceeds to make the prepayment to the natural gas supplier. This prepaid gas transaction was described in the official statement relating to such PFC bonds, in which the transaction and related risks were disclosed. On February 25, 2013, and June 30, 2016, SAEA executed certain amendments to the Prepaid Gas Agreement and related documents. Under the 2013 amendments, Goldman, Sachs & Co. surrendered for cancellation $111,060,000 of the SAEA bonds which were owned by J. Aron, Goldman, Sachs & Co., or affiliates. In exchange, SAEA agreed to reduce future required natural gas delivery volumes from 104.6 million MMBtu to 81.3 million MMBtu, reflecting a reduction in required volumes to be delivered that corresponds to the par value of the bonds that were surrendered. Under the 2016 amendments, the investment contract for the debt service fund for the bonds was novated from DEPFA Bank, PLC to J. Aron. The amendments contain provisions in the event of a downgrade in the credit rating on the guaranteed investment contract ("GIC") provider. If the higher rating between J. Aron and its guarantor, Goldman, Sachs & Co., falls below "BB+" by S&P, or "Ba1" by Moody's, which results in a ratings event, J. Aron is required to provide collateral equal to 100% of the invested balance held by J. Aron plus any accrued interest. At January 31, 2017, no collateral balances were posted.

The PFC bonds are currently rated by Fitch, Moody's and S&P at "A", "A3", and "BBB+", respectively. The PFC credit ratings have no impact on the day-to-day operations of CPS Energy or its respective credit ratings. CPS Energy continues to purchase and receive natural gas at the discounted price, but only if and when delivered. However, if a party providing funds (or gas to be sold to produce funds) used to pay the PFC's bonds were to default, the PFC's gas supply agreement could be terminated, thereby eliminating future fuel expense savings passed through to CPS Energy customers.

Nuclear fuel procurement for STP is managed by the STPNOC staff with oversight and guidance provided by the Participants. STP fuel supply requires uranium oxide, conversion of uranium oxide to uranium hexafluoride, enrichment of fissile uranium 235 isotope from 0.7% to about 4.5%, design and fabrication of fuel assemblies. Prior to May 2014, fuel supply also provided for disposal of spent fuel assemblies. In May of 2014, the DOE suspended the collection of the spent fuel disposal fee pending identification of an alternative disposal facility. No plan to reinstitute the fee has been identified. Uranium supply is typically provided by primary producers, either through long-term contracts or through favorable short-term and / or spot market purchases. Uranium conversion services are obtained under contracts with primary producers of several years duration, covering STP's current operating license term. Enrichment requirements are contracted with Urenco USA through STP's current operating license term. Fabrication requirements are contracted with Westinghouse through STP's current operating license term. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – External Events Impacting Nuclear Power Generation Industry and STP1 and STP2, and CPS Energy's Response – Used Nuclear Fuel Management" herein.

GAS SYSTEM

Transmission System

The gas transmission system consists of a network of approximately 89 miles of steel mains that range in size from 4 to 30 inches. Over 62 miles of the gas transmission was placed into service since 2000 and approximately 70% is less than 25 years old. The entire system is coated and cathodically protected to mitigate corrosion. The gas transmission system operates at pressures between 135 psig and 1,100 psig, and supplies gas to the distribution system and CPS Energy Generating Plants. A Supervisory Control and Data Acquisition ("SCADA") computer system monitors the gas pressure and flow rates at many strategic locations within the transmission system. Additionally, most of the critical pressure regulating stations and isolation valves are remotely controlled by SCADA.

CPS Energy has completed the required baseline assessments of the gas transmission system, in accordance with State and federal transmission integrity rules, using the most recently available technology. Furthermore, CPS Energy maintains an ongoing reassessment plan and maintains a more conservative leak survey and patrol schedule interval than is required by regulation.

56 Heath Consultants – Falsification Performance of Cathodic Protection Reads

A CPS Energy Gas Delivery employee notified Gas Delivery Management of a concern regarding the accuracy of work performed by one of CPS Energy's Gas Delivery contractors, Heath Consultants. Heath Consultants performs, among other things, cathodic protection reads. It was suspected that employees of Heath Consultants falsified cathodic protection reads. When advised of this concern, Heath Consultants performed internal field audits of their employees' cathodic protection reads. Their audit revealed inconsistencies that supported the accusation and resulted in the termination of two Heath Consultants employees. Heath Consultants is no longer performing cathodic protection work for CPS Energy, and CPS Energy's Gas Delivery employees are performing the reads until a new contract is awarded. A mitigation and follow up plan was created to address the issue. The mitigation plan included hiring a separate contractor to perform cathodic protection reads on the entire gas system at an accelerated schedule to ensure the accuracy of all cathodic protection reads. This contractor started working on these reads on December 14, 2016, which were completed in April 2017. On November 21, 2016, CPS Energy communicated with the RRCT to discuss these findings and CPS Energy's mitigation plan.

RRCT Annual Audit Results for 2016

The results of the 2016 RRCT Annual Distribution Audit resulted in four alleged violations that are being addressed with a mitigation plan (the "Gas Delivery Risk Mitigation Plan") and corrections. The final response to the four alleged violations were sent to the RRCT on November 30, 2016. The first of these alleged violations involved low cathodic protection reads at eleven locations in the gas system. These low reads were corrected and the reads are now at acceptable levels. The second alleged violation involved four locations that indicated atmospheric corrosion concerns. The atmospheric corrosion concerns were addressed with piping paint as an initial solution. A new painting contract was awarded and this new contractor permanently re- painted these stations according to CPS Energy specifications. This work was completed on January 27, 2017. The third alleged violation involved two grids within the gas system that did not have critical valves inspected within the appropriate timeframe. All valves were inspected in 2016 and all records were validated for accuracy. The final alleged violation included the identification of five regulator station locations that require the installation of over-pressure protection devices. The over-pressure protection issue will be addressed in CPS Energy's regulator replacement plan that is part of the Gas Delivery Risk Mitigation Plan.

Distribution System

The gas distribution system consists of 313 pressure regulating stations and a network of approximately 5,415 miles of mains. The system consists of 2 to 30-inch steel mains and 1-1/4 to 8-inch high-density polyethylene (plastic) mains. The distribution system operates at pressures between 9 psig and 274 psig. All steel mains are coated and cathodically protected to mitigate corrosion. Critical areas of the distribution system are also remotely monitored by SCADA and designated critical pressure regulating stations and isolation valves are also remotely controlled by SCADA.

CPS Energy has been methodical in its assessment and renewal of distribution infrastructure utilizing a risk-based leak survey approach to identify both mains and services that are in highest need of replacement and has an annual budget for on-going system renewal.

Rule Relating to Replacement of Gas Distribution Facilities

On August 1, 2011, CPS Energy implemented its plans in compliance with RRCT Rule § 8.209 Distribution Facilities Replacement as set forth at 16 TAC Chapter 8 - Pipeline Safety Regulations and the Federal Distribution Integrity Management Program ("DIMP") rules. CPS Energy has utilized a risk-based approach to facility replacement for a number of years, and it has been successful in significantly reducing system leak rates and mains and services as well as lost and unaccounted for gas. These plans will continue to strengthen CPS Energy's renewal processes and support the continued safe operation of the Gas System.

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57 OTHER ELECTRIC AND GAS SYSTEMS STATISTICS(1)

Electric System Gas System Overhead Underground Distr. Transmission Distribution System & Gas Supply Distribution System System Network Pipe Line System Substations 16(2) 89 Miles of Lines 1,530 7,866 5,476(3) Miles of Lines 86(4) Kilovolts 138 / 345 13.2 / 34.5 13.2 / 34.5

Miles of Main 89 5,415 Main Sizes (inches) 4 - 30 1 1/4 - 30 Main Pressures (psig) 135 – 1,100 9 – 274(5) ______(1) As of January 31, 2017. (2) Includes switchyards. (3) Underground single phase, includes 430 miles three-phase commercial, industrial lines. (4) Downtown Network three-phase. (5) Maximum allowable operating pressure.

GENERAL PROPERTIES

Operation Control System

CPS Energy's electric transmission and distribution systems, substations, power plant switchyards, and major gas regulating points are continually monitored. Abnormalities register an alarm and system operators can control certain circuit breakers and valves as required, maintaining delivery of gas and electric service. In addition to control capability, the system gathers data that is electronically recorded for various reporting needs.

CPS Energy's operations are highly dependent on a comprehensive information technology ("IT") infrastructure that is supported by a team of technical experts. The IT systems are regularly updated and are monitored for vulnerabilities in order to best ensure security of CPS Energy and customer information. Continuous monitoring and risk mitigation will continue to be necessary as CPS Energy implements customer-facing portals and increases its dependency on technology and software.

CPS Energy is identified as a creditor by the standards set forth in the Fair and Accurate Credit Transactions Act of 2003 ("FACT Act"). One of the intended purposes of the FACT Act was to protect customer information. CPS Energy is currently compliant with the FACT Act and has existing internal policies, procedures and trainings in place for continued compliance.

CPS Energy makes a concerted effort to maintain its geographical information mapping system, which supports its gas, electric transmission and distribution system activities. This system is used to maintain information on locations of CPS Energy's infrastructure. From time-to-time, location errors are detected by individuals (contractors, other utilities and CPS Energy employees). When such problems are detected, the specific issue is addressed promptly, including correcting the problem encountered and updating of the mapping information system.

Support Facilities

Core business operations are supported by various support facilities used for maintenance of such items as meters, transformers, communication equipment, vehicles, railroad cars and heavy construction equipment. These maintenance facilities, together with warehouses, administrative offices, customer service centers and storage areas, are strategically located throughout the service area to minimize driving time to work locations. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Debt and Asset Management Program" for a brief discussion concerning CPS Energy's sale of its communication towers, which were support assets that were divested for the purpose of redirecting the capital associated therewith.

General Offices and Customer Service Centers

The Main Office Complex, comprising the Main Office and Navarro Office Building, makes up CPS Energy's General Offices, and is located at the intersection of Navarro and Villita Streets in downtown San Antonio. Executive, administrative, financial, information technology and engineering functions are located at the complex. The Main Office Building includes eleven floors of office space with attached structured parking and adjacent surface level parking. The Navarro Office Building provides five floors for office space, is connected to the Main Office Complex by an enclosed elevated walkway, and includes a seven floor parking garage. The current Main Office Complex is not sufficient to accommodate all of CPS Energy's office and parking needs, and CPS Energy plans to sell the Main Office Complex.

58 Following extensive analysis of diverse options, CPS Energy has selected a campus location at 500-530 McCullough Avenue in San Antonio, Texas, as the new headquarters site. Construction is estimated for completion in late 2019 and ready for occupancy in early 2020. The building has 433,000 square feet of space, and consists of 11-story and 14-story towers joined by a 3-story section. This building will permit consolidation of all headquarters' functions in a single campus to improve operational efficiency. An adjacent garage will be constructed to accommodate employee and company vehicle parking, as well as housing amenities available to employees and the community in the area. Architects Corgan Associates Inc., and Patrinely Group disseminated preliminary designs of the new headquarters in October 2016, and the City's Historic Design and Review Commission approved the final design in March 2017. On June 26, 2017, the Board approved the selection of Sundt Construction as the construction manager at risk via a competitive process.

CPS Energy's customer service center staff provides information concerning customer accounts and processes customer payments. Customer service centers and authorized pay agents are located geographically in all sectors of the service area. These centers are convenient to the customers' homes and in locations readily accessible to freeways and public transportation. The Northside Customer Service Center serves as a walk-in center, customer call center, and additional general office space for personnel, at the present time.

Construction Centers and Service Centers

CPS Energy owns four construction centers, accommodating electric and gas construction, repair and maintenance services, support personnel for administration, planning, training, warehousing functions and garage facilities. The Salado Street Central Garage Service Center serves as the primary central garage for heavy equipment and vehicle repair and maintenance functions, with separate buildings housing a central printing shop, billing operations, remittance processing, and warehousing. Land has been acquired to relocate the primary central garage to another site in the service territory.

CPS Energy owns the Green Mountain facility that houses the System Measurement & Technology, Customer Engineering business units, all the electric metering operations equipment, test and calibration labs, and associated warehousing functions. This facility serves as the inventory and asset management point for electric metering and the deployment point for the AMI Program. Local builders and developers also visit the Green Mountain facility to coordinate new construction services with the support personnel in Customer Engineering.

On February 1, 2013, CPS Energy purchased approximately eleven acres of land from the San Antonio Water System, which formerly served as the headquarters for Bexar Metropolitan Water District. The Malone Avenue property serves as the site for underground construction staff and equipment and could potentially serve as a site for a future substation.

CPS Energy occupied a new 66,000 sq. ft., 1 megawatt, Tier III data center. Total cost of the facility was approximately $47.0 million. The property will also be the site of a future electric substation, now under construction.

Villita Assembly Building

The Villita Assembly Building is located in downtown San Antonio at 401 Villita Street near the CPS Energy Main Office Complex. The main floor of the building has a capacity to accommodate 1,800 people in an auditorium type seating, or 900 for a dinner function. The building is leased out to individuals and to corporate, civic, community, and non-profit organizations for weddings, quinceañeras, banquets, meetings and social events. The Villita Assembly Building is also used for large CPS Energy internal meetings and events.

Vehicles and Work Equipment

CPS Energy operates and maintains a diversified vehicle and equipment fleet, ranging from light to heavy duty vehicles and construction equipment. A total of eight shops, seven district shops and one central shop, are staffed with Automotive Service Excellence and manufacturer certified trained technicians. CPS Energy technicians use manufacturers' diagnostics software to perform in-house, proactive maintenance and repairs. CPS Energy's mission is to be an industry leader in operational performance in fleet and vehicle maintenance by driving efficient, effective and expedient service to CPS Energy's customers.

Real Estate Holdings

CPS Energy owns various properties throughout the service territory and a collection of buildings, totaling 2.6 million square feet, which includes office buildings, service centers, warehouses, data centers, parking garages, vehicle maintenance facilities, tool shops and a community center. CPS Energy is divesting itself of its Jones Avenue Service Campus. One-half of the property will be conveyed to the adjacent San Antonio Museum of Art in the public interest. The other half of the property will be sold via competitive offering.

59 CPS Energy owns approximately eight (8) acres of land and a newly-constructed shell building in northwest San Antonio. This property has been declared surplus and is being marketed for sale.

IBM Audit Notice

IBM, who provides Systems operational software to CPS Energy by license, engaged KPMG to conduct an audit to confirm the number of software licenses being used by CPS Energy versus the number of software licenses for which it has paid. Results of the audit required CPS Energy to make an additional payment in Fiscal Year 2017 for software licenses. The payment did not have a material financial impact on the Systems or its operations.

COMPLIANCE AND REGULATION

GENERAL REGULATORY CLIMATE

The election of President Trump in November 2016 resulted in a host of new administrators to top government agencies, especially those positions affecting the environment. On February 17, 2017, the U.S. Senate confirmed Oklahoma Attorney General Scott Pruitt as the administrator of the Environmental Protection Agency ("EPA"). The President's preliminary budget proposals include wide-spread cuts to EPA funding.

ENVIRONMENTAL MATTERS

CPS Energy operations have the potential to affect the environment in a variety of ways, but primarily through discharges to air, land and water. To minimize environmental impact, CPS Energy constructs and operates its facilities according to, and, in certain areas, in excess of, the standards established for the utility industry by federal, State, and local laws and regulations. CPS Energy's commitment to the environment is evidenced by its official environmental policy, which places the responsibility for regulatory compliance on all CPS Energy employees, regardless of job function or title. CPS Energy maintains a full-time Environmental Department consisting of educated and trained professionals who oversee the enforcement of this policy. Since 1996, internal environmental operating procedures have been developed to provide guidance to CPS Energy employees as to how to perform their jobs in a way that protects the environment.

CPS Energy endeavors to ensure its facilities comply with applicable environmental regulations and standards; however, no assurance can be given that normal operations will not encounter occasional technical difficulties or that necessary permits and authorizations will be received. Federal and State standards and procedures that govern the control of the environment and Systems' operations can change. These changes may arise from legislation, regulatory action, appeals of past judicial decisions, and judicial interpretations regarding the standards, procedures, and requirements for compliance and issuance of permits. Therefore, there is no assurance that the Systems' current operations, current or future construction related thereto, and contemplated projects will remain subject to the regulations that are currently in effect. Furthermore, changes in environmental law and standards may result in increased capital and operating costs of the Systems.

Federal Clean Air Act

Congress enacted the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments") with the intent of improving ambient air quality throughout the United States. All of CPS Energy's generating sites in Bexar County have been issued Federal Operating (Title V) permits and Federal Acid Rain (Title IV) permits under the Clean Air Act by the Texas Commission on Environmental Quality ("TCEQ"), the environmental agency for the State. CPS Energy received a Plantwide Applicability Limit ("PAL") permit from the TCEQ for the Calaveras Power Station. This PAL permit sets a cap on emissions at the site based on past emissions. This is a voluntary permit submitted by CPS Energy to provide flexibility to better manage facility-wide emissions. The PAL permit allows CPS Energy to have limited flexibility in maintaining its generating units at the Calaveras Power Station while enhancing environmental protection. CPS Energy's PAL permit includes a commitment to maintain emission reductions already achieved. On September 8, 2009, the EPA proposed to disapprove key aspects of the Texas clean-air permitting program that do not meet federal Clean Air Act requirements followed by other states. On August 13, 2012, the Fifth Circuit ruled the EPA overstepped its regulatory authority in violation of the Clean Air Act when it belatedly rejected revisions to the State plan, known as the Texas Flexible Permit Program ("TFPP"), for issuing air permits. In late December 2014, the EPA signed off on the TFPP, of which the proposed rule was published in the Federal Register on December 31, 2014. Several citizen and environmental groups disagreed with the EPA's decision and brought suit in early 2015, asserting the EPA's approval was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law". In a notice dated April 17, 2015, the EPA extended public comment on the TFPP to May 18, 2015. The Fifth Circuit issued an opinion in July 2015 affirming the EPA's original approval of the TFPP. EPA

60 officials stated they would continue to work with the TCEQ to implement the TFPP as approved. In early February 2017, the EPA gave final approval of the TFPP. On July 3, 2017, the United States Court of Appeals for the District of Columbia Circuit held in Clean Air v. Pruitt that the EPA's decision to stay implementation of portions of a final rule concerning methane and other greenhouse gas emissions lacked authority, and the court vacated the stay. Subsequently on July 10, 2017, the EPA asked the court to recall its mandate vacating the stay, in an effort to gain additional time for consideration of further appeal. On August 10, 2017, the court rejected a request by States and industry groups to reconsider the July panel ruling that lifted the EPA's stay of portions of the rule intended to curb methane emissions from new oil and gas infrastructure.

Sulfur Dioxide ("SO2"): One objective of the Clean Air Act Amendments is to reduce emissions of SO2, a gaseous emission formed during the combustion of coal by coal-burning power plants. Although the Spruce1, Deely1, and Deely2 units and older gas units are the only units that receive allowances, all the CPS Energy generating units are subject to the Clean Air Act Amendments' Acid Rain program SO2 emission allowance system. All new units also have to comply with the program even though no new allowances are provided for them. An allowance is an authorization to emit one ton of SO2 during or after a specified year. Under the emission allowance system, each affected generating facility is issued annual allowances based upon a variety of factors. No utility may emit more tons of SO2 in a year than are authorized by its total allowances. Allowances issued to one generating facility may be used by a utility to offset the emissions of another generating facility. Allowances not needed by the recipient utility for its current emissions may be banked for future use, or they may be sold or otherwise transferred. CPS Energy upgraded the Spruce1 scrubber in early 2009 prior to the Spruce2 unit coming on line because of a commitment made in the Spruce2 air permitting process which required Spruce1 to reduce SO2 emissions by the amount expected to be emitted by Spruce2.

In addition to the Acid Rain program, the EPA wrote the Clean Air Interstate Rule ("CAIR") that would further reduce SO2 by reducing the value of the Acid Rain program allowances. On July 11, 2008, the District of Columbia Court of Appeals (the "D.C. Circuit Court") vacated the CAIR in its entirety. In late December 2008, the D.C. Circuit Court granted the EPA's petition to remand CAIR to the Agency to be "fixed" rather than be vacated. The EPA finalized a rule to replace CAIR in July of 2011. The new rule is the Cross State Air Pollution Rule ("CSAPR"), which required a 50% reduction in SO2 starting January 2012. CPS Energy planned to meet the reductions by utilizing ultra low sulfur coal and by reduced dispatch of the Deely units. In January 2013, the courts denied an EPA petition to keep CSAPR in place.

On April 29, 2014, the United States Supreme Court (the "Supreme Court") reversed a D.C. Circuit Court decision that vacated CSAPR in its entirety. The Supreme Court remanded the case back to the D.C. Circuit Court for additional proceedings consistent with its opinion. The decision did require the EPA to begin immediate implementation of CSAPR, so CAIR remained in place while additional issues were addressed. On January 16, 2015, the EPA filed its brief on the merits in the D.C. Circuit Court regarding the remaining legal challenges to CSAPR that were not decided by the April 29, 2014 decision. With the use of ultra- low sulfur coal at the Deely units, CPS Energy had enough SO2 allowances to meet the CAIR requirements.

On October 23, 2014, the D.C. Circuit Court lifted its stay of the EPA's CSAPR. Compliance options under the rule began on January 1, 2015. Phase 1 emission budgets began to apply on January 1, 2015, for the annual programs and also applied in 2016. On June 1, 2015, the EPA published a proposed rule providing notice of the availability of preliminary calculations of emission allocations to certain units under CSAPR, specifically in regard to the first round of new unit set-aside allowance allocations for the 2015 year. On July 28, 2015, the D.C. Circuit Court issued an opinion that upheld EPA's CSAPR but remanded without vacating EPA's 2014 SO2 and ozone season NOx budgets for several states, including Texas. The court did not vacate any emissions' budgets, but instead declared them "invalid" and instructed EPA to reconsider them. Some Texas units received additional allowances. Phase 2 emission budgets which began January 1, 2017. As stated above, with the use of Ultra Low Sulfur Coal at the Deely units, CPS Energy will be able to meet the SO2 targets for CSAPR.

The EPA issued the final primary SO2 National Ambient Air Quality Standards ("NAAQS") on June 2, 2010. The EPA is determining designations for potential non-attainment areas in different rounds. On August 10, 2015, the EPA signed a final standard that requires state agencies, like TCEQ to submit additional information. Specifically, the TCEQ has to provide additional data for sources that emit greater than 2,000 tons per year, such as the Calaveras Power Station site. The TCEQ identified 25 sources in the State with emissions greater than 2,000 tons per year (with the Calaveras Power Station the only location identified in Bexar County), and notified the EPA on January 15, 2016 of these locations. The State identified the characterization approach planned for each identified source prior to the July 2016 deadline. For any source to be evaluated with modeling, states were required to submit a modeling protocol by July 1, 2016 (of which the State complied), a modeling analysis by January 13, 2017, and annual reports thereafter, to the EPA. On June 30, 2016, the EPA submitted the final second round SO2 NAAQS designations to be published in the Federal Register. For sources to be monitored, the SO2 monitors must have been in operation by January 1, 2017. Any enforceable emissions limits agreed to must have been adopted and effective by January 13, 2017. States and tribes were permitted to submit exceptional events' demonstrations to the EPA explaining event-influenced SO2 by July 14, 2017. On or about August 12, 2017, the EPA will notify states and tribes of any modifications of their Round 3 SO2 NAAQS' designations, which must be finalized by December 31, 2017. Designations for Round 4 must be promulgated by December 31, 2020. With plans to shut down the Deely units in 2018, the Calaveras Power Station site will be under the 2,000 tons per year threshold.

61 The emission reductions expected from the EPA's Mercury and Air Toxics Standards ("MATS") are not included in the estimated emission reductions from CSAPR; once those standards are implemented, emissions from the power sector are likely to be reduced even further. On March 17, 2016, the EPA finalized a number of clarifying changes and corrections to the final MATS, including action to remove the rule provision establishing an affirmative defense for malfunction.

Nitrogen Oxides ("NOx"): In addition to SB 7 regulations that require NOx reductions at CPS Energy's formerly grandfathered gas units, the TCEQ implemented additional rules. Chapter 117 of Title 30 of the Texas Administrative Code, regarding Control of Air Pollution from Nitrogen Compounds regulations ("Chapter 117"), requires all fossil fuel power plants to achieve a NOx emission level cap. For coal units this cap is based on a NOx emission rate of 0.165 lb / MMBtu (pounds per million British thermal units) by mid-2005; for gas units this cap is based on a NOx emissions rate of 0.14 lb / MMBtu. However, CPS Energy management chose to comply with a system cap rather than the emission specifications. CPS Energy has met the system cap for the past compliance years. The revised CAIR reduced the NOx emission rate to less than 0.15 lb / MMBtu in the first phase and were accomplished via statewide allocations that were required to be met in 2009 with further reductions by 2015. The CAIR rule was a cap and trade rule which means that specific units are not required to meet any particular emission limit, only that they have adequate NOx allowances for the amount they actually emit. CPS Energy made further reductions in NOx by installing selective catalytic reduction ("SCR") technology on Deely2 in 2011, and is evaluating adding the same technology to Spruce1.

As stated earlier, the EPA, in July 2011, finalized CSAPR for the purpose of replacing CAIR. The proposal included Texas in an Ozone Season only NOx program and an Annual NOx program. Ozone season includes the summer months of May - September. Because CPS Energy began installing NOx reduction technologies in 1997, the targets for CSAPR can be met with current equipment (but such compliance does not provide reserve margins for future regulations). CSAPR was intended to be effective on January 1, 2012; however, the D.C. Circuit Court put the rule on hold, and on August 21, 2012, the Court vacated CSAPR and required EPA to continue administering CAIR pending the promulgation of a valid replacement. In January 2013, the courts denied a petition to keep CSAPR in place, so CAIR remained as the requirement for NOx. See the SO2 disclosure above for a discussion concerning the current status of CSAPR litigation.

On October 23, 2014, the D.C. Circuit Court lifted its stay of the EPA's CSAPR. Compliance options under the rule began in 2015. Phase 1 emission budgets began to apply on January 1, 2015, for the annual programs and May 1, 2015, for the ozone-season NOx program and also applied in 2016. Phase 2 emission budgets began to apply in 2017 and subsequent years. On September 14, 2015, the EPA issued a preliminary Notice of Data Availability, as required by CSAPR, which lists new units eligible for a "2nd Round" 2015 CSAPR NOx Ozone Season allowance allocation. With the use of the Deely and Spruce2 SCRs CPS Energy will be able to meet the NOx targets. On November 12, 2015, the EPA issued a final Notice of Data Availability, as required by CSAPR, which details the 2015 allowance allocations to certain new units eligible for a 2nd round CSAPR ozone season new unit set-aside allocation, and to CSAPR existing units in states in which the new unit set-asides for the 2015 CSAPR ozone season were undersubscribed. On November 16, 2015, the EPA proposed an update to the CSAPR for the 2008 NAAQS by issuing the proposed CSAPR Update Rule. On December 15, 2015, the EPA issued a preliminary Notice of Data Availability, as required by CSAPR, which lists new units eligible for a "2nd Round" 2015 CSAPR NOx Annual, SO2 Group 1, or SO2 Group 2 allowance allocation. The EPA later issued, on February 12, 2016, a final Notice of Data Availability, as required by CSAPR, that details compliance year 2015 allowance allocations to certain new units eligible for a "2nd Round" CSAPR NOx Annual, Group 1 SO2, or Group 2 SO2 new unit set-aside allocation and to CSAPR existing units in states in which the new unit set-asides for 2015 for those annual CSAPR Trading Programs that were undersubscribed. On February 26, 2016, the EPA issued a ministerial action affirming changes to CSAPR that align the dates in CSAPR's rule text with its revised implementation schedule for 2015 Phase 1 implementation and 2017 Phase 2 implementation (this change was made in 2014 on an interim basis). On May 27, 2016, the EPA issued a preliminary Notice of Data Availability, as required by CSAPR, that listed new units eligible for a "1st Round" 2016 CSAPR NOx Annual, NOx Ozone Season, or SO2 Group 1 or SO2 Group 2 allowance allocation and allocation amounts. On June 21, 2017, the EPA issued a Notice of Data Availability on emission allowance allocations to certain units from the new unit set asides for the 2017 control periods and posted the calculations on the EPA website.

On September 7, 2016, the EPA released its final CSAPR update rule for the 2008 ozone NAAQS. The final rule makes a few key changes, by establishing a one-time allowance conversion that transitions a limited number of banked 2015 and 2016 allowances for compliance use in CSAPR Update states in 2017 and beyond. In May 2017, this rule began to reduce summertime (May through September) NOx emissions from power plants in 22 states in the eastern U.S., providing up to $880 million in benefits and reducing ground-level ozone exposure for millions of Americans. The rule will reduce air quality impacts of ozone pollution that crosses state lines and will help downwind areas meet and maintain the 2008 ozone air quality standard. EPA also refined its methodology for establishing emission budgets to better reflect power sector NOx reduction potential by using historical data in combination with projections of potential NOx emission rate improvements in each state. These refinements resulted in changes to individual state emission budgets and the combined total increased slightly (by less than 5 percent) from the proposed rule. For CPS Energy, this resulted in a reduction of Ozone Season NOx allowances from 4,650 to 3,698 tons, with only about a third of the banked allowances from 2015 and 2016 rolling over. In response to the D.C. Circuit Court's remand of the CSAPR Phase 2 SO2 emissions' budgets, the EPA proposed to remove the State from the CSAPR SO2 and NOx trading programs on November 3, 2016. Such removal

62 includes withdrawal of the Federal Implementation Plan ("FIP"), sources in the State will not contribute significantly to nonattainment, and therefore the EPA will have no requirement to issue a new FIP. The proposal also includes a sensitivity analysis showing actions taken in response to the remand. The rule was published on January 4, 2017, and a public hearing was held on January 10, 2017. Comments to the rule were closed on March 6, 2017.

Mercury: In early 2004, the EPA published a proposed rule to reduce mercury to a level of 21 X 10-6 lb / MWh (pounds per megawatt hour) from new units (about 2.0 lb / trillion Btu) and CPS Energy agreed to this level for the new Spruce2 unit. The final rule published in May 2005, called the Clean Air Mercury Rule, established mercury emission limits on new and existing units and set up a cap and trade system starting in January 1, 2010. The final rule had a less stringent mercury limit for new units; however, CPS Energy agreed to the previously proposed level and the final Spruce2 unit permit has a mercury limit (2.0 X 10-5 lb / MWh), which is currently being met. The EPA's goal was that emissions of mercury from power plants be reduced by 70% from 1999 levels which will result in a 15 ton cap nation-wide in 2018. The final rule also required continuous mercury monitoring to be installed and operational by January 1, 2009.

On February 8, 2008, the D.C. Circuit Court vacated the Clean Air Mercury Rule. Since the procurement and installation of continuous mercury monitors was already in process, CPS Energy decided to complete the installation. The EPA proposed a rule in March 2011 for all Hazardous Air Pollutants ("HAPs") including mercury, commonly referred to as the MATS rule. The limits are very stringent and all four CPS Energy coal units will need mercury specific reduction technologies added in order to comply. The rule allows three years for compliance from the final rule date. The rule was finalized on December 16, 2011. The rule also included limits for hazardous air pollutants such as non-mercury metals (measured as particulate matter and acid gases (measured as hydrochloric acid or sulfur dioxide). The rule requires continuous monitoring of mercury, particulate matter and acid gases by March 2015 and CPS Energy is in compliance. On April 21, 2015, the EPA completed review of requests to reconsider certain aspects of MATS, denying all such requests. The Supreme Court consolidated three EPA cases in early 2015 and agreed to hear arguments regarding whether the EPA unreasonably refused to consider costs in determining whether it is appropriate to regulate HAPs emitted by electric utilities. On June 29, 2015, the Supreme Court overturned the EPA's rules limiting mercury and HAPs released from power plants, thus ruling the EPA should have considered the compliance costs when crafting the regulations. In December 2015, the D.C. Circuit Court agreed to leave intact the MATS rule while government officials decided how to best account for implementation costs. Subsequently, 20 states asked the Supreme Court to stay the Clean Air Mercury Rule, which the court rejected in March 2016. On June 13, 2016, the Supreme Court of the United States denied a writ of certiorari, but sent the rule back to the D.C. Circuit Court after finding the EPA improperly failed to consider the cost of the rule before promulgating it. The D.C. Circuit Court allowed the rule to stay in place while the EPA revised to comply with the U.S. Supreme Court's finding. In April 2016, the EPA released a cost analysis that determined the rule still valid. On February 10, 2017, several states, local governments, and two energy companies submitted an intervenor brief supporting the rule, stating the EPA proved its necessity. On April 27, 2017, a three-judge panel at the United States Court of Appeals for the D.C. Circuit granted the EPA's request to pause the MATS litigation. Since the coal units already have technologies to control particulate matter and acid gases, the only additional technology required was mercury reduction technology. CPS Energy installed activated carbon injection (a mercury reduction technology) on Spruce1 and Spruce2 in early 2013 and Deely 1 and 2 in July 2014 to meet the April 2015 compliance deadline. On April 14, 2016, the EPA issued a final finding that it is appropriate and necessary to set standards for emissions of air toxics from coal- and oil-fired power plants. This finding responds to a decision by the U.S. Supreme Court that the EPA must consider cost in the appropriate and necessary findings supporting the MATS. The EPA subsequently denied two petitions for reconsideration related to the standard for periods of startup and shutdown authorized in lieu of numeric standards for coal- and oil-fired power plants. The EPA is now proposing changes to its electronic reporting requirements for MATS.

Ozone ("O3"): On March 12, 2008, the EPA revised the NAAQS for ground-level ozone (the primary component for smog). This revision was part of a required review process mandated by the Clean Air Act, as amended in 1990. Prior to the revision, an area met the ground-level ozone standards if the three-year average of the annual fourth-highest daily maximum eight-hour average at every ozone monitor (the "eight-hour ozone standard") was less than or equal to 0.08 parts per million ("ppm"). Because ozone is measured out to three decimal places, the standard effectively became 0.084 as a result of rounding. The EPA's March 2008 revision changed the NAAQS such that an area's eight-hour ozone standard must not exceed 0.075 ppm rather than the previous 0.084 ppm.

The Clean Air Act requires the EPA to designate areas as "attainment" (meeting the standards), "nonattainment" (not meeting the standards), or "unclassifiable" (insufficient data to classify). As a result of the revisions to the NAAQS, states were required to make recommendations to the EPA no later than March 12, 2009 for areas to be classified attainment, nonattainment, or unclassifiable. In 2009 former Texas Governor Rick Perry submitted a list of 27 counties in Texas, including Bexar County that should be designated as nonattainment. The final designations were put on hold while the EPA worked on revising the standard even further downward.

On January 6, 2010, the EPA formally proposed a regulation that would lower the primary NAAQS for ozone to a level within a range of 0.060 to 0.070 ppm. The EPA postponed issuing a final rule revising the ozone NAAQS standards from August 31, 2010 to October 2010. At the end of 2010, the EPA postponed the final rule until July 2011. On September 2, 2011, President Obama

63 requested that the EPA withdraw their draft of the NAAQS revision. On September 22, 2011, the EPA issued a memorandum stating it would designate areas as non-attainment under the 2008 ozone standard of 0.075 ppm. On December 18, 2014, the EPA completed its initial nonattainment designations under the 2012 annual fine particle standard, issuing a revision to the list on March 31, 2015.

On November 26, 2014, the EPA proposed ozone standards to within a range of 65 to 70 parts per billion ("ppb"), while taking comment on a level as low as 60 ppb. The proposed revision to the NAAQS was published in December 2014. On October 1, 2015, the EPA lowered the NAAQS for ground level ozone from 75 ppb to 70 ppb, "based on extensive scientific evidence about the ozone's effects on public health and welfare". The EPA was under a court order to finalize this rulemaking on or before such date. Under the Clean Air Act, the EPA has two years from the time it finalizes a revised NAAQS to complete the designation process. Therefore, final designations for all areas should be issued by the EPA no later than 2017, unless there is insufficient information to make such designations. On February 25, 2016, the EPA issued the area designations for the 2015 NAAQS in a memorandum, which also outlined the important factors that the EPA intends to evaluate in making the final nonattainment area boundary decisions for these standards. On August 3, 2016, the TCEQ approved a recommended nonattainment designation for Bexar County and submitted that recommendation to Texas Governor Greg Abbott for consideration. Texas Governor Greg Abbott's recommendations of area designations within the State were due to the EPA by October 1, 2016. The EPA was expected to make final designations by October 1, 2017. On June 6, 2017, the EPA sent a letter to each state Governor stating that designations will be delayed by one year, making October 2018 the new deadline; however, on August 11, 2017, the EPA stated it would provide designations by the original October 1, 2017 date. If the EPA issues a designation that deviates from a state's recommendation, it must notify the state at least 120 days prior to promulgating the final designations. Following the issuance of final designations, states are required to submit State Implementation Plans ("SIPs") outlining how they will reduce pollution to meet the new standards. See "Cross-State Air Pollution Rule Upheld" herein for further discussions regarding SIPs. These SIPs are due to the EPA by a date established under a separate rule, but will be no later than three years after the EPA's final designations (e.g., 2021 if the EPA makes its designations in 2018.) In conjunction with the revised NAAQS, the EPA proposed separate rules to address monitoring the new standard. Generally, the proposal from the EPA would require a greater number of EPA-approved monitors in both urban and non-urban areas and longer ozone monitoring seasons in many states. For Texas, the proposal calls for year-round monitoring throughout the state.

The San Antonio metropolitan statistical area currently has three monitoring sites which are likely to be used to determine the area's compliance with the ozone standard. As of August 14, 2017, the area's three-year average was 70 ppb.

Any State plan formulated to reduce ground-level ozone may curtail new industrial, commercial and residential development in San Antonio and adjacent areas (the "San Antonio Area"). Examples of past efforts by the EPA and the TCEQ to provide for annual reductions in ozone concentrations in areas of nonattainment under the former NAAQS include imposition of stringent limitations on emissions of volatile organic compounds ("VOCs") and nitrogen oxides ("NOx") from existing stationary sources of air emissions, as well as specifying that any new source of significant air emissions, such as a new industrial plant, must provide for a net reduction of air emissions by arranging for other industries to reduce their emissions by 1.3 times the amount of pollutants proposed to be emitted by the new source. Studies have shown that standards significantly more stringent than those currently in place in the San Antonio Area and across the State are required to meaningfully impact an area's ground-level ozone reading, which will be necessary to achieve compliance with the new 70 ppb ozone standard. Due to the magnitude of air emissions reductions required as well as the limited availability of economically reasonable control options, the development of a successful air quality compliance plan for areas of nonattainment within the State has proven to be extremely challenging and will inevitably impact a wide cross-section of the business and residential community.

Failure by an area to comply with the ozone standard by the requisite time could result in the EPA's imposing a moratorium on the awarding of federal highway construction grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of emissions for which construction has not already commenced.

Other constraints on economic growth and development include lawsuits filed under the Clean Air Act by plaintiffs seeking to require emission reduction measures that are even more stringent than those approved by the EPA. From time to time, various plaintiff environmental organizations have filed lawsuits against the TCEQ and the EPA seeking to compel the early adoption of additional emission reduction measures, many of which could make it more difficult for businesses to construct or expand industrial facilities or which could result in travel restrictions or other limitations on the actions of businesses, governmental entities and private citizens. Any successful court challenge to the currently effective air emissions control plan could result in the imposition of even more stringent air emission controls that could threaten continued growth and development in the San Antonio Area.

Although currently in compliance with the new 70 ppb ozone standard, CPS Energy has planned as though the City's area will be designated as nonattainment under the EPA's revised ozone standards, making capital investments in anticipation of addressing possible outcomes from such a designation. Though CPS Energy cannot predict the extent of the impact of such a designation on the local economy or CPS Energy operations, it anticipates taking the necessary action to respond thereto in a fiscally responsible

64 manner. CPS Energy continues to work closely with the TCEQ and the Alamo Area Council of Governments on strategies for reducing ozone levels in the San Antonio area and surrounding counties.

Cross-State Air Pollution Rule Upheld: As required by the Clean Air Act, the EPA establishes NAAQS to protect public health. The EPA periodically revises or creates additional standards to those currently in place and identifies locations ("Nonattainment Areas") that fail to meet the NAAQS. Within three years from the effective date of a new standard or modification, each state is required to propose and submit a SIP to the EPA evidencing prospective compliance with the updated NAAQS. If the EPA determines a SIP to be inadequate, the EPA must implement a FIP remedying these inadequacies within two years. On June 14, 2016, the D.C. Circuit Court ordered the EPA to create, under the Clean Air Act, a "good neighbor" FIP for the State to meet national standards on particulate matter.

Congress previously noted a persistent issue of certain states ("Upwind States") emitting toxins beyond their borders, contributing to pollution in neighboring states ("Downwind States"). Consequently, Congress mandated all SIPs adhere to the Clean Air Act's Good Neighbor Provision (the "Provision"), which prohibits Upwind States from emitting pollution in an amount that would interfere with another state's ability to maintain compliance with NAAQS. The EPA previously identified and attempted to regulate states contributing to other states' nonattainment status by enacting measures controlling nitrogen oxide and sulfur dioxide emissions, yet the issue persisted and courts found these measures insufficient. The EPA's latest promulgation implementing the Provision, the CSAPR, controlled states' hazardous emissions through a two-step process. The EPA analyzed the level of pollution emitted by Upwind States and identified those states exceeding a pre-determined pollution threshold. The EPA then evaluated the cost of reducing various emissions in 27 selected states and regulated their pollution according to the most efficient method (highest level of emission reduction at the lowest cost), while simultaneously issuing FIPs. The EPA rationalized the controlled states' SIPs failed to comply with the updated Provision, triggering the obligation to issue a FIP within the two-year limitation period.

Challengers, comprised of state and local governments as well as industry leaders, filed suit to overturn the CSAPR and to allow states the ability to submit an amended SIP after the EPA's determination of inadequacy. On April 29, 2014, the Supreme Court of the United States rendered a decision in Environmental Protection Agency v. EME Homer City Generation, L.P., 134 S. Ct. 1584 (2014). The Supreme Court found CSAPR to be a reasonable and appropriate implementation of the Provision. Under 42 U.S.C. § 7410(a)(2)(D)(i), the EPA is afforded deference in determining an acceptable manner to satisfy the Provision. Because the CSAPR analyzes the most cost-effective method of achieving the highest level of attainment in affected states, the CSAPR is a permissible interpretation of the Provision. On July 28, 2015, the D.C. Circuit Court, on remand, considered individual states' challenges to the EPA's determinations regarding emission budgets. The D.C. Circuit Court held the emissions budgets imposed by the EPA for SO2 in regard to four states and NOx in regard to 11 states were invalid, and the EPA overregulated emissions beyond the statute. Therefore, the D.C. Circuit Court remanded to the EPA for reconsideration of the invalid emissions budgets and subsequent compliance. The CSAPR remained valid. In response to this court decision, on November 16, 2015, the EPA issued a press release regarding proposed updates to CSAPR, which would reduce summertime emissions of NOx from power plants that contribute to downwind ozone problems. Specifically, the proposed updates identify cuts in power plant NOx emissions in 22 states in the eastern half of the country that contribute significantly to downwind ozone air quality problems. The EPA held a public hearing on this matter on December 17, 2015 and received public comments until February 1, 2016. To assist some Downwind States meet their 2018 ozone attainment deadlines, the EPA is updating the existing CSAPR ozone season program expeditiously. In late November 2016, five states challenged the EPA's incorporation of the 2008 national ozone standards into CSAPR, which require upwind states to reduce NOx emissions from power plants.

In its 2014 opinion, the Supreme Court determined it unnecessary for states to be given the opportunity to submit an additional SIP after the EPA issued limitations to states' toxic emissions. The statute, 42 U.S.C. § 7410(c)(1), allows the EPA to issue FIPs upon a finding of inadequacy, regardless of whether CSAPR's additional regulations implementing the Provision were enacted subsequently to an Upwind State's initial submission of its SIP. The plain text of the statute does not necessitate the EPA to give a state the opportunity to cure its SIP in order to issue a FIP.

On September 7, 2016, the EPA released its final CSAPR update rule for the 2008 ozone NAAQS. The update adopts FIPs for all 22 states, updating the existing CSAPR NOx ozone season emission budgets for each state's fleet of electricity generating units (to be implemented through the existing CSAPR NOx ozone season allowance trading program). States can replace the EPA's FIP starting in 2018 by submitting an approvable transport SIP. The final rule makes a few key changes, by establishing a one-time allowance conversion that transitions a limited number of banked 2015 and 2016 allowances for compliance use in CSAPR update states in 2017 and beyond. Starting in May 2017, the final CSAPR began reducing ozone season emissions of NOx from power plants in 22 states in the eastern United States, providing both monetary benefits and reducing overall exposure. EPA changed individual state emission budgets and the combined total increased slightly (by less than 5 percent) from the proposed rule. For CPS Energy, this resulted in a reduction of Ozone Season NOx allowances from 4,650 to 3,698 tons, with only about a third of the banked allowances from 2015 and 2016 rolling over.

Best Achievable Retrofit Technology ("BART"): The BART program is administered by the EPA / TCEQ in response to regional haze. The pollutants addressed by BART are NOx and SOx, the same as by CSAPR. CPS Energy was not included in a

65 BART regulation in 2010 that required some Texas coal units to install SO2 Scrubbers; however, BART is once again being looked at by EPA/TCEQ as a way to control NOx and SOx.

On July 28, 2015, the D.C. Circuit Court remanded the CSAPR allowances budgets for Texas. As a result, Texas could no longer rely on CSAPR as a way to comply with BART. As a result of the CSAPR action, the TCEQ was required to propose BART eligible units by December 9, 2016, under a consent decree. CPS Energy received and responded to an Information Collection Request ("ICR") from the EPA, in March 2016 for the Calaveras and Braunig sites. Based on the date of construction, the Deely, Sommers and Braunig steam boilers are all BART eligible. The Spruce units are newer and not under consideration.

On July 21, 2016, the EPA informed CPS Energy that due to revisions to the BART screening modeling with improved information, they determined that the Braunig facility screened out and thus does not have any units that are subject to BART. As a result Braunig units 1, 2 and 3 are no longer eligible. CPS Energy has four potential BART eligible sources: Deely units 1 & 2 and Sommers units 1 & 2. While EPA has not completed the subject to BART modeling, CPS Energy believes the Deely units would trigger impacts over the BART contribution threshold. Sommers units 1 & 2 could potentially be included due to ability to burn fuel oil and because they are on same site as the Deely units.

In late February 2017, environmental groups submitted a brief to the D.C. Circuit Court challenging the emissions trading programs within CSAPR, or the "Transport Rule", to achieve more environmental progress at national parks and wilderness areas than BART. On March 22, 2017, the Fifth Circuit allowed the EPA to revise and change the State’s regional haze FIP when the court granted the EPA’s motion to remand the plan to the EPA for revision.

On December 9, 2016, a pre-publication of the EPA's BART rule was issued. The proposal is requiring 0.7% sulfur fuel oil for Sommers Units 1 & 2. CPS Energy already committed to 0.1% during the Spruce 2 permitting process, so no further action is required. The proposal also requires sulfur dioxide (SO2) scrubbers on Deely Units 1 & 2 that can meet 0.04 lbs/mmbtu to be installed and operating five years after this rule is final, likely by 2022 if the rule stays on schedule. The rule also proposes a lower rate for particulate matter, but with the Baghouses on the Deely Units, CPS Energy is already in compliance with the proposed limit. The rule was published in the Federal Register on January 4, 2017, and a public hearing was held on January 10, 2017. The deadline for comments was extended until May 5, 2017. CPS Energy did not provide written comments.

Carbon Dioxide ("CO2") and Greenhouse Gases ("GHG"): In 2007, the Supreme Court rendered its first major decision in the climate change arena. In Massachusetts v. EPA, 549 U.S. 497 (2007), the Supreme Court held that CO2 and other greenhouse gases from motor vehicles are "air pollutants" and are subject to regulation under the Clean Air Act. There have also been several bills introduced in Congress that propose to regulate GHG through a cap and trade and / or quasi-carbon tax program. In July 2008, the EPA issued an Advance Notice of Proposed Rulemaking ("ANPR") outlining issues and options associated with regulating GHG under the Clean Air Act.

In a noteworthy Clean Air Act decision, in the wake of Massachusetts v. EPA, the Environmental Appeals Board ("EAB") avoided the key question of whether CO2 is currently "subject to regulation" under the Clean Air Act. In re Deseret Power Electric Cooperative, E.A.D. App. No. PSD 07-03 (EAB 2008) it appears that the decision was carefully designed to leave open for the Obama Administration the question of whether CO2 would be regulated under a key EPA permitting program. EAB sided with the EPA, agreeing that EPA is not required to treat CO2 as "subject to regulation" for purposes of the Prevention of Significant Deterioration ("PSD") permitting program. However, EAB found that EPA could exercise its discretion to treat CO2 as "subject to regulation," and thus require permit limits for CO2 based on the best available control technology ("BACT"). Based upon guidance from the Bush Administration, EPA made it clear that, for both legal and policy reasons, it did not want to treat CO2 as "subject to regulation" under the Clean Air Act. This position was confirmed in a memorandum dated December 18, 2008, from Stephen L. Johnson, the Administrator of the EPA, establishing that CO2 is not "subject to regulation" under the Clean Air Act. The EAB found, however, that the Deseret permitting record was not adequate to support this position. It then remanded the permit back to the EPA with instructions that made it difficult for the EPA to respond to the remand without an Obama Administration directive. The EAB has created significant uncertainty for anyone planning to construct virtually any type of commercial building or industrial facility (such as a new power plant). In January 2015, environmental groups filed petitions with the EAB challenging Deseret Power Cooperative ("Deseret'') and its ability to operate the Bonanza Power Plant in Utah. In a proposed settlement agreement, Deseret would submit an application for a minor New Source Review permit which would provide for installation of low NOx burners with over-fire air controls, along with other operator-requested permit terms and conditions. Under the settlement agreement, the pending PSD permit application and a proposed PSD permit would also be withdrawn. The EPA signed the settlement agreement on October 5, 2015. As CPS Energy is not currently seeking a new PSD permit for any of its facilities, CPS Energy is not currently affected by this decision.

In April 2009, the EPA signed two distinct findings under Section 202(a) of the Clean Air Act ("Section 202(a)"). The first was an endangerment finding, in that concentrations of GHG in the atmosphere threaten the public health and welfare. The second was a cause or contributing finding, in that combined emissions of GHG from motor vehicles and engines contribute to GHG pollution, which threatens the public health and welfare. An endangerment finding under Section 202(a), or any other similar section, is the

66 necessary prerequisite to mandatory regulation. In most instances, once an endangerment finding is made, the Clean Air Act requires the EPA to regulate the subject pollutant. That mandatory duty to regulate, combined with the cascading effect of a single endangerment finding, means that the EPA may face a burden of needing a regulatory regime in place for all emission sources at the time it starts to regulate the first source. Accordingly, the creation of GHG emission standards for new motor vehicles could trigger a duty for the EPA to regulate GHG emissions from stationary sources under other Clean Air Act sections, such as the development of NAAQS, New Source Performance Standards ("NSPS"), the PSD program, Title V, and National Emission Standards for Hazardous Air Pollutants ("NESHAP"). Senators John Kerry (D-MA) and Joseph Lieberman (I-CT), on May 12, 2010, released the comprehensive climate change and clean energy bill, titled the "American Power Act". The bill included similar targets to ACES to reduce economy-wide GHG emissions from 2005 levels, but this bill was never enacted.

CPS Energy is monitoring and evaluating proposed legislation, and continues to document its climate change activities, particularly its GHG emissions. CPS Energy includes a potential carbon dioxide cost in its assumptions when it evaluates alternatives for meeting the growing demand for electricity in the CPS Energy service territory. In conjunction with the Alamo Area Council of Governments, the City coordinated the development of a regional GHG emission inventory and entity-specific emission inventories for SAWS, Bexar County, CPS Energy and itself. The baseline year chosen for the inventory is 2005. CPS Energy now tracks an annual GHG inventory and is working with the City and its Mission Verde Alliance, to address a wide range of issues affecting the community.

On September 22, 2009, the EPA finalized the nation's first greenhouse gas reporting system and monitoring regulations. On January 1, 2010, the EPA, for the first time, required large emitters of heat-trapping emissions to begin collecting GHG data, under a new reporting system. This new program covered approximately 85 percent of the nation's GHG emissions and applied to roughly 10,000 facilities. The EPA's new reporting system aimed to provide a better understanding of where GHGs are coming from and will guide the development of policies and programs to reduce emissions. Fossil fuel and industrial GHG suppliers, motor vehicle and engine manufacturers, and facilities that emit 25,000 metric tons or more of CO2 equivalents per year will be required to report GHG emissions data to the EPA annually. The first annual reports for the largest emitting facilities, which include CPS Energy plants, were submitted to the EPA in 2011. On December 1, 2010, the EPA finalized a rule to include the reporting of GHG from large sources of fluorinated GHG, which includes SF6; annual reporting to the EPA began in 2012. On November 29, 2013, the EPA finalized amendments to the GHG reporting program, effective January 1, 2014. The amendments consist of three parts: technical amendments, amendments related to global warming potentials, and confidentiality determinations for new or revised data. The EPA released its 21st Annual Inventory of U.S. Greenhouse Gas Emissions and Sinks (GHG Inventory) on April 13, 2017, which presented a national-level overview of annual GHG emissions since 1990. The inventory shows GHGs in the United States have decreased at an average annual rate of 1% since 2005.

On September 30, 2009, using the power and authority of the Clean Air Act, the EPA proposed a rule requiring new or modified power plants and other large stationary CO2 emitters to have the BACT installed. Such rule would have applied to industrial facilities that emit at least 25,000 tons of GHGs each year. The new rule conflicted with a Clean Air Act provision calling for regulation of facilities that emit over 250 tons per year. The GHGs covered include CO2, methane, nitrous oxide, hydro- fluorocarbons, fluorocarbons and sulfur hexafluoride. The EPA estimated 400 new sources and modifications would be subject to review each year for GHG emissions and, in total, 14,000 sites would have to get permits under the proposal. The administration has not done any calculations on how much emissions the law would cut or the costs to industry. BACT would be decided somewhat on a case-by-case basis, with EPA staff doing technical work to see what the best options are. The most promising technology for fossil generation is carbon capture and storage, but that is at least a decade away from commercial viability. BACT would change over time. Permitting delays and increased Title V permit fees are projected. In January 2016, the U.S. Department of the Interior proposed updates to natural gas emissions regulations for oil and gas operations, including a requirement that producers adopt modern techniques and equipment to limit flaring, since venting and leaks during oil and gas operations are major sources of GHG emissions.

The EPA issued a final endangerment finding on December 7, 2009, that GHGs pose a danger to human health and the environment, clearing the way for a Clean Air Act regulation limiting CO2 emissions from power plants, vehicles and other major sources. Power plants and other large stationary sources of CO2 are now required to use BACT to reduce emissions when they modify or construct plants. The next time CPS Energy constructs or modifies a plant, its permits will have to include CO2 limits, and it will have to meet those limits using the traditional BACT process. Acquisition of the Rio Nogales Plant, acquired with proceeds of certain Senior Lien Obligations on April 9, 2012, did not result in the application of these limitations to such facility. Currently, there is no commercially available technology to reduce CO2 emissions. The EPA may push for BACT determinations for coal and gas fired generation (new and existing fleet) to meet 50-80% reduction in CO2 through carbon capture and sequestration ("CCS"). Possibly as an alternative to reducing CO2 emissions through a removal technology, offsets could be purchased to meet the limits. On December 2009, the EPA denied the petitions to reconsider the Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act.

In March 2012, the EPA proposed New Source Performance Standards ("NSPS") for coal units and natural gas combined cycle units, so any new units will have a CO2 limit to meet. Based on the NSPS, the EPA is also in the process of creating limits for

67 existing units. Standards of Performance for New Stationary Sources, 40 C.F.R. § 60 (2015) contains the existing standards, which are continually updated and it remains unforeseen what compliance measures will need to be taken.

On June 24, 2013, President Obama announced his Climate Change Action Plan. In the plan, he called for a 17% reduction in GHG emissions by 2020 from 2005 levels. He asked the EPA to revise and re-propose the new unit standard by September 30, 2013. On September 20, 2013, the EPA re-proposed the standard, but it did not differ drastically from the previous March 2012 proposal. They did separate coal and natural gas combined cycle into separate categories with the rates of 1,000 and 1,100 lbs / MWh, respectively. An Electric Generating Unit ("EGU") can either meet a 1,100 CO2 / MWh-gross standard over a 12-operating month period or meet a slightly tighter 1,000-1,050 CO2 / MWh-gross standard over an 84-operating month period, allowing the unit to phase in the use of partial CCS over 7 years as an option. In November 2014, President Obama announced a plan to reduce by 2025 the GHG emissions by 26 to 28% below the 2005 levels. On March 31, 2015, the United States submitted these goals in a formal statement, known as an Intended Nationally Determined Contribution, to the United Nations Framework Convention on Climate Change. On April 21, 2015, President Obama announced two executive actions to support energy infrastructure resilience. The first includes $72 million from the USDA to support rural electric infrastructure projects with major investments to drive solar energy, and the DOE announced the Partnership for Energy Sector Climate Resilience, which will improve U.S. energy infrastructure resilience against extreme weather and climate change impacts. Furthermore, on July 2, 2015, the EPA finalized its rule to reduce hydrofluorocarbon emissions (a GHG), which was revised in November 2016 to set forth policies and procedures for the acquisition of items that contain ozone-depleting substances and hydrofluorocarbons, and also addresses public disclosure of GHG emissions and reduction goals. Initial projections indicate this rule will reduce emissions by 54 to 64 million metric tons of carbon dioxide equivalent by 2025. On February 9, 2015, the Supreme Court ordered the Obama Administration not to take any steps to carry out its Clean Power Plan ("CPP"). The order spares the operators of coal-fired power plants from having to take action to begin planning for a shift to "cleaner" energy sources.

On June 2, 2014, the EPA proposed the much awaited CPP that calls for a 30% reduction by 2030 in carbon emissions from power generation sources, when compared to 2005 levels. This proposal follows through on the steps laid out in President Obama's Climate Action Plan and the June 2013 Presidential Memorandum. The rule follows section 111(d) of the Clean Air Act in the fact that it does propose guidelines but allows the flexibility for states to customize a plan that works for their state. On June 23, 2014, the Supreme Court issued a decision addressing the application of stationary source permitting requirements to GHG. In Utility Air Regulatory Group v. Environmental Protection Agency, 124 S. Ct. 2427 (2014) (the "UARG Decision"), the Supreme Court said that the EPA may not treat GHG as an air pollutant for purposes of determining whether a source is a major source required to obtain a prevention of significant deterioration ("PSD", or "title V permit"). The Supreme Court also said that the EPA could continue to require PSD permits, otherwise required based on emissions of conventional pollutants, contain limitations on GHG emissions based on the application of BACT. The EPA subsequently issued memorandums outlining the next steps on the application of the Clean Air Act in light of the UARG Decision, including revisions to the EPA's PSD regulations. In early 2016, the EPA began approving rescission requests for PSD permits.

On August 3, 2015, the EPA released the final rule for the CPP. States have 2 to 3 years to submit final plans (depending upon whether they work alone or in partnership with other states). This rule applies to existing units and sets goals for CO2 reduction. The final rule calls for CO2 emissions from existing power plants to be 32% below 2005 levels when the CPP is fully in place in 2030. The baseline year is still 2012. The final CPP rule becomes effective 60 days after it is published in the Federal Register. State Plans were due September 4, 2016, but final complete State Plans (pursuant to any extension received) must be submitted no later than September 6, 2018. Plans (state or federal) do not go into effect until 2022. States will develop and implement plans that ensure that the power plants in their state, either individually, together or in combination with other measures, achieve the interim CO2 emissions performance rates over the period of 2022 to 2029 and the final CO2 emission performance rates, rate-based goals or mass-based goals by 2030. States have up to 15 years to achieve full implementation of all emission reduction measures.

Since the promulgation of the CPP, the EPA received 38 petitions requesting the EPA reconsider, withdraw, or re-propose various elements of the CPP; all but two issues were denied consideration. The EPA also received 22 petitions that the EPA issue an administrative stay until judicial resolution of the CPP or completion of the EPA's reconsideration process; all of these requests were denied (collectively referred to as the "CPP Petitions").

The proposal in 2014 had four "building blocks" making up the best system of CO2 emission reductions ("BSER") under the Clean Air Act. Under the final rule, there will be three building blocks, not four. The end use Energy Efficiency ("EE") block was eliminated. The final rate for Texas changed from 791 lbs / mwh in 2030 to 1,042 lbs / mwh, but the assumptions used to calculate the target also changed. (The baseline for Texas went from 1,298 to 1,566 lbs / mwh). No existing nuclear is counted in the target formula, not even the 5.8% at risk as in the proposal. And no EE is counted in the target. However, under some scenarios EE may be used for compliance.

68 In addition, EPA released a proposed Federal Plan, which would establish unit-by-unit emission reduction obligations for affected units in a state that did not submit an approvable state plan. It is unclear at this time if Texas will be submitting a State Plan. CPS Energy will review the EPA's Federal Plan and likely submit comments within the 90 day comment period in case CPS Energy has to comply with a Federal Plan.

Various parties asked the court to put a stay on the CPP. On January 22, 2016, the D.C. Circuit Court issued an order denying the motions to stay the CPP. However, the court did grant a second motion to expedite the schedule for briefing of the case. The court's order required the parties to complete the briefing of all issues by April 15, 2016, and oral arguments, originally scheduled for June 2, 2016, were postponed.

On January 29, 2016, the EPA proposed revisions and confidentiality determinations for the petroleum and natural gas systems source category of the GHG reporting program. In particular, the EPA intends to add new monitoring methods for detecting leaks from oil and gas equipment in petroleum and natural gas systems consistent with the leak detection methods in recently proposed new source performance standards for the oil and gas industry. The EPA is also proposing to add emission factors for leaking equipment to be used in conjunction with the monitoring methods to calculate and report GHG emissions resulting from equipment leaks.

On February 9, 2016, the Supreme Court granted the applications of numerous parties to stay the CPP pending judicial review of the rule. The stay will remain in effect pending disposition of the applicant's petition for writ of certiorari, if such review is sought. States were required to submit an emission reduction plan or request an extension by September 6, 2016. For states receiving an extension, progress updates are due to the EPA on September 6, 2017, with final plans due September 6, 2018.

The D.C. Circuit Court, on its own motion, issued an order delaying oral arguments, which such arguments were heard en banc on September 27, 2016. The litigation is massive in scale — nearly every state in the nation is involved in some capacity. West Virginia is leading a coalition of 27 states who are challenging the rule, while 18 states have come to the CPP's defense. The parties are currently awaiting a decision on the merits. On March 28, 2017, President Trump signed an executive order directing the EPA Administrator to immediately review and begin steps to rescind the CPP, which included a request to delay the court proceedings. The EPA asked the D.C. Circuit Court to delay issuing an opinion on the matter in March 2017. On April 5, 2017, seventeen states and seven municipalities filed a brief in opposition to this delay. On April 28, 2017, the D.C. Circuit Court granted the EPA's request, holding the litigation in abeyance for 60 days and requested briefing on consolidated cases concerning whether the CPP should be remanded to the EPA or held in abeyance. On August 8, 2017, the court postponed the litigation for 60 more days. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Federal Energy Policy" herein for further information regarding the case status.

Environmental groups have since filed a motion requesting the D.C. Circuit Court consolidate the court's review of the CPP Petitions in combination with the court's review of this main suit challenging the CPP, West Virginia v. Environmental Protection Agency.

CPS Energy has been on an aggressive path to diversify and reduce the carbon intensity of its own generation fleet for several years now, through the increased use of natural gas, wind and solar energy. CPS Energy's longtime investment in carbon-free nuclear power also helps keep the fleet's carbon intensity down, while robust energy efficiency and demand response programs shrink demand, and in turn emissions. CPS Energy reviewed and commented on the proposed rule. As a result of the rule, CPS Energy will continue to diversify its generation fleet with renewable energy sources, low carbon generation and energy conservation and demand response.

Federal Clean Water Act

The National Pollutant Discharge Elimination System ("NPDES") program is administered by the EPA under the federal Clean Water Act. The NPDES program provides the framework for monitoring and regulating the discharge of pollutants to surface waters of the United States. In 1998, the EPA delegated NPDES authority to the State through the TCEQ and the RRCT. With the exemption of discharges resulting from exploration, development, and production of oil and gas over which the RRCT has authority, the TCEQ administers the Texas Pollutant Discharge Elimination System ("TPDES") in Texas to control discharges of pollutants to state water or "waters of the United States". CPS Energy has historically operated all of its generating facilities with no significant compliance issues. Discharges resulting from hydrostatic testing of gas pipelines meet RRCT requirements.

CPS Energy currently has individual TPDES permits for the discharge of industrial waste water to Braunig and Calaveras Lakes and into Leon Creek for the Leon Creek Power station. The focus of these permits is to reduce discharge of industrial waste and other constituents that could impair water quality in the San Antonio River basin and meet the current effluent standards that apply to steam electric plant operations under the Steam Electric Power Generating Point Source Category (40 C.F.R. Part 423). Additionally, the TCEQ has broad powers under the Texas Water Code to adopt rules and procedures equally or more stringent

69 than federal standards, and to issue permits to control the quality of discharges into or adjacent to waters in the State. These standards and requirements are incorporated in each individual permit as permit conditions that must be met or satisfied by the permittee.

On February 28, 2017, President Trump executed an executive order mandating the EPA formally reconsider the Clean Water Rule, as well as the definition of "Waters of the U.S" (the "Water Executive Order" or "WOTUS"). On June 27, 2017, the EPA initiated the repeal of the WOTUS by proposing to reinstate prior Clean Water Rule policies. The proposed re-codification of the pre- existing rules was published in the Federal Register on July 27, 2017. WOTUS repeal could affect CPS Energy's electric and gas projects in the future.

New Effluent Standards: Prior to 2015, effluent standards for the steam electric category were last revised in 1982. EPA completed a multi-year study of the electric power industry and concluded that power plant discharges have changed significantly over time and that regulations have not kept up with the changes in industry, in particular, waste water discharges resulting from air pollution controls installed at coal-fired power plants. EPA conducted an Information Collection Request ("ICR") from over 750 power plant owners to provide information regarding power plant effluent, available treatment technologies, and the impact on industry of changes in water quality standards. CPS Energy participated in this ICR by completing questionnaires for the Calaveras Power Station units. On November 3, 2015, the EPA finalized the Effluent Limits Guidelines ("ELG") rule, which became effective on January 4, 2016. The final rule sets the first federal limits on the amount of toxic metals and other harmful pollutants that steam electric power plants are allowed to discharge in several of their largest sources of wastewater, based on technology improvements in the steam electric power industry over the last three decades. Rule compliance will be phased in based on the facility permitting cycle. CPS Energy requested an applicability of the rule extension from the TCEQ for the Deely bottom ash ponds through the end of 2018 when the Deely units are scheduled to be deactivated. Studies are being performed to evaluate the best technology to treat flue-gas desulfurization (FGD) discharges from the J.K. Spruce coal units to meet the new standards that will be applied in the 2019 wastewater permitting cycle. The TCEQ has indicated they are amenable to an extension of the compliance date as long as adequate justification is provided for sites with early permit renewals.

On June 6, 2017, the EPA proposed a rule to officially postpone the compliance deadlines for the wastewater ELG rule in response to President Trump's February 28, 2017 executive order. The comment period ended July 6, 2017. Recently, the D.C. Circuit denied EPA's motion to dismiss the challenge to the EPA's stay of the rule. Additional information is anticipated from the EPA on the new compliance dates in September 2017; however, on August 14, 2017, The EPA Administrator filed a letter with the Fifth Circuit, which is hearing legal challenges to the wastewater rule, notifying the public of potential rulemaking to revise the regulations related to increased treatment from wastewater steam electric power-generating plants. Currently, CPS Energy anticipates compliance with the rule by 2023, until this further guidance is prospectively received. The cost estimate of compliance over the course of at least six years is estimated at $47 million, calculated pursuant to a third-party engineering study completed for CPS Energy. The costs of compliance were historically and are currently allocated for within CPS Energy's budget.

Clean Water Act Section 316(b): The power plants at Braunig and Calaveras Lakes use the lakes as the source for once-through cooling water. Section 316(b) of the Clean Water Act requires that adverse environmental impacts by cooling water intake structures on aquatic species be minimized. Numerous lawsuits from both environmental and industry groups have resulted in the previously issued regulations being suspended and remanded; after contentious litigations and consent decree agreements with environmental groups, the EPA issued the final rule for existing facilities on August 1, 2014, effective 60 days later. Both Braunig and Calaveras plants are affected by the rule. The final rule allows some flexibility for permitting authorities to determine best technology available (BTA) for protecting fish and shellfish from impingement and entrainment and based on site–specific conditions, cost-benefit analysis, and best professional judgment. The final rule provided waivers of some requirements for surface impoundments that were originally built for cooling, are managed fisheries, and with minimized water use, which apply to both Braunig and Calaveras. Since most Texas reservoirs are man-made and meet the waiver criteria provided under the final rule, CPS Energy requested 316(b) waivers for both Braunig and Calaveras during the 2014 TPDES permit renewal applications submitted to the TCEQ. TCEQ granted exemptions and waivers for both Braunig and Calaveras in the TPDES permits issued in 2016.

Proper Venue for Clean Water Act Challenges

On January 13, 2017, the Supreme Court granted a request filed by the National Association of Manufacturers, which asked the court to determine whether the U.S. Court of Appeals for the Sixth Circuit erred when it claimed exclusive jurisdiction to decide petitions to review the Obama Administration's Clean Water Act rules. In light of the Water Executive Order, the federal government asked the Supreme Court to hold a briefing schedule on this issue in abeyance pending a new draft of the rule.

On February 28, 2017, President Trump executed an executive order mandating the EPA to formally reconsider the Clean Water Rule, as well as the definition of "Waters of the U.S". On June 27, 2017, the EPA initiated the repeal of the WOTUS by proposing to reinstate prior Clean Water Rule policies, including jurisdictional provisions provided for in prior codifications. The proposed re-codification of the pre-existing rules was published in the Federal Register on July 27, 2017. WOTUS repeal could affect CPS Energy's electric and gas projects in the future.

70 Water Resources Planning

The Texas Legislature Senate Bill 3 ("SB3"), which was adopted in 2007, required the TCEQ to adopt by rule appropriate environmental flow standards for each river basin and bay system in the State, to manage the State's water resources and availability of water supply. CPS Energy participated in this environmental flow process for the Guadalupe and San Antonio ("GSA") River basins, bays and estuaries. The process culminated in environmental flow recommendations to the TCEQ for adoption and implementation. These recommendations will impact future appropriations of State water. CPS Energy owns surface water rights from the San Antonio River for Braunig and Calaveras Lakes. The TCEQ finalized the new environmental flow regulations for the GSA river basins in 2012. Although the current flow requirements will not affect existing permit holders per SB3 mandate, future legislative actions may change the current protection for existing surface water permits. CPS Energy participated in the Edwards Aquifer Recovery Implementation Program ("EARIP") which was another stakeholder process tasked to develop a plan to protect federally protected species at Comal and San Marcos Springs while managing pumping from the Edwards Aquifer, the primary source of drinking water in the San Antonio metropolitan area and surrounding counties. The EARIP participants developed a Habitat Conservation Plan ("HCP") which was approved by the United States Fish and Wildlife Department, to manage the aquifer and protect the endangered species at Comal and San Marcos Springs. Successful implementation of the HCP will ensure a stable water supply for the San Antonio region, protect the endangered species, and minimize the risk of federal intervention (court litigation) regarding use of the aquifer. The cost of the program is $10 million in start–up costs and $20 million annually. The majority of this cost is borne by the municipal and industrial pumpers of the aquifer with an increase in their aquifer management fees. As an Edwards Aquifer groundwater user, CPS Energy's current aquifer management fee is $84 acre-foot. CPS Energy owns 3,064 acre-feet of Edwards Aquifer pumping rights. In addition, as a "downstream beneficiary" of this plan, CPS Energy also contributed $100,000 annually to the program. To offset some of its costs, CPS Energy leased 1,000 acre-feet of unused Edwards Aquifer water rights to the Edwards Aquifer Authority to support the HCP. CPS Energy leases an additional of 1,000 acre-feet of unused Edwards Aquifer water to SAWS.

In 2011, the U.S. Fish and Wildlife Service ("USFWS") published the 12-month findings which identifies five Central Texas freshwater mussels as threatened and endangered species. Two of the identified mussels, the Texas Fatmucket and the Golden Orb, have historical ranges in the San Antonio River basin. CPS Energy is currently participating in the Texas Comptroller’s Office initiative to develop a conservation agreement amongst stakeholders to preempt USFWS potential listing of the mussels as endangered species.

CPS Energy has a Strategic Water Resources Plan and a Drought Contingency Plan. As part of its strategic planning, in 2011, CPS Energy renewed until 2060 its waste water contract with SAWS for an additional 10,000 acre-feet of treated effluent for re- use at Braunig and Calaveras Lake for a total contract volume of 50,000 acre-ft. CPS Energy coordinates closely with SAWS to optimize pumping to match discharge from Dos Rios in order to minimize the effects of drought on cooling lake levels.

CPS Energy carefully monitors the flow in the San Antonio River and the Calaveras and Braunig Lake levels. CPS Energy, working with the United States Geological Survey, installed a flow meter upstream of CPS Energy's river pumps at IH37 / Loop 410 to improve river pumping operations and lake management operations. In the fall of 2017, CPS Energy will begin installation of a variable flow drive to its San Antonio River pumps to optimize diversion from the river.

On March 11, 2013, the federal district court issued its ruling in The Aransas Project ("TAP") v. Bryan Shaw, et al. The primary issue in the case was whether the TCEQ's water management practices in the San Antonio and Guadalupe River basins violated the Endangered Species Act by not providing sufficient fresh water inflows to support the endangered Whooping Cranes and their habitat. In its opinion, the court ordered the TCEQ to (1) stop issuing new water permits in both river basins, (2) obtain a United States Fish and Wildlife Service Incidental Take Permit, and (3) design, implement, and fund a HCP that protects the Whooping Crane habitat. Although the ruling did not directly affect CPS Energy's water rights, an HCP could have impacted CPS Energy's existing water rights, especially during low flow periods. On June 30, 2014, the U.S. 5th Circuit Court of Appeals (the "5th Circuit") reversed the lower court's ruling. The 5th Circuit found that linking the Whooping Crane deaths to the State's water use program was too remote. On December 15, 2014, the 5th Circuit denied a petition for rehearing en banc. On March 16, 2015, TAP filed a petition for a writ of certiorari to the Supreme Court. On June 22, 2015, the Supreme Court denied the petition for writ of certiorari.

Water Conservation

CPS Energy recognized the importance of preserving the Edwards Aquifer water resource and began planning to reduce consumption of Edwards Aquifer water for power plant cooling shortly after the drought of record in the 1950s. CPS Energy built Braunig and Calaveras Lakes to utilize treated sewage effluent and runoff waters to maintain operating levels at these man-made cooling lakes. CPS Energy has conserved billions of gallons of Edwards Aquifer water. For these water conservation efforts, the Association of Environmental Professionals selected CPS Energy as one of eight 2001 recipients of the National Environmental Excellence Award. As part of CPS Energy's sustainability efforts, on March 30, 2009, the Board approved a resolution supporting a mutually beneficial cooperative relationship between CPS Energy and SAWS that promotes conservation of both energy and water. To address future water requirements, CPS Energy shifted its generation capacity to less water intensive technologies and

71 added renewables to its energy mix. Approximately 1,500 MW of generating capacity will be from renewables by 2020. By using this strategy, CPS Energy has saved millions of gallons of water. Additionally, recognizing energy saved is water saved, CPS Energy implemented demand reduction and conservation programs for its customers to derive a 771 MW energy savings by year 2020 which also translates to water consumption savings. Additional information on CPS Energy's sustainability programs can be found in "ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS" herein.

While the State currently maintains adequate water supplies, long term drought conditions and / or water shortages are possible throughout most of Texas. Effective July 14, 2017, the City is currently under Stage One water restrictions. No CPS Energy surface water resources were impacted by the 2013 State and local drought, and no impact on electrical generation occurred. CPS Energy carefully monitors the resources on which it relies upon for generation.

Other Environmental Issues

Polychlorinated Biphenyls: By the early 1990s, CPS Energy completed a program aimed at removing from its system all electrical equipment accessible to the public that was known to contain polychlorinated biphenyls ("PCBs") in concentrations of 500 ppm or greater, as required by the Federal Toxic Substances Control Act. In addition, all oil-filled equipment is tested at the time of servicing as part of an ongoing program at CPS Energy for voluntarily eliminating electrical equipment containing mineral oil with any level of PCBs. Since 1996, in connection with capital improvements being made to many of its substation sites, CPS Energy has identified and remediated areas found to be contaminated by pollutants, such as PCBs. The TCEQ allows the disposal at a local landfill of soil and debris contaminated with 1-49 ppm of PCBs from electrical equipment spills, in lieu of distant disposal sites, resulting in considerable cost savings.

The EPA published an Advance Notice of Proposed Rulemaking ("ANPRM") in the Federal Register in April 2010, seeking both comments and data regarding EPA's intent to curtail and / or eliminate numerous existing provisions of the PCB regulations found PCBs Manufacturing, Processing, Distribution in Commerce, and Use Prohibitions (40 CFR Part 761), specifically regarding use, handling, reuse, and storage. The EPA is soliciting information and data relating to PCB inventories, testing data, PCB management accomplishments, servicing practices, failure rates, weather-related incidents, removal and replacement costs, non-liquid PCBs et al. The Notice of Proposed Rulemaking is projected to be published in the Federal Register in November 2017. On July 18, 2017, the D.C. Circuit Court ruled that a petition submitted by the Sierra Club regarding emissions of the EPA's claimed surrogates did not correlate with PCB's emissions, causing the court to remand to the EPA for further determinations.

CPS Energy also operates its own Class 1 non-hazardous waste landfill, which is registered with the TCEQ, an initiative that reduces disposal costs and CPS Energy's reliance upon off-site disposal facilities. Since 1990, CPS Energy has significantly reduced the amount of hazardous waste (defined under RCRA) generated by its operations. CPS Energy also has an extensive recycling program which includes electronics, wood, paper, cardboard, metals, plastic bottles, aluminum cans, used oil, coal- combustion by-products, concrete and asphalt.

Coal Combustion Residuals: The EPA considered a proposal to regulate coal ash generated during the combustion of coal to produce electricity (referred to as coal combustion residuals or "CCRs") and classify it as a hazardous waste. The rule was finalized on December 19, 2014, published in the Federal Register on April 17, 2015, and became effective on October 4, 2016. The rule did not list CCRs as a hazardous waste. CPS Energy's CCRs have been analyzed and have tested non-hazardous for the following constituents: mercury, selenium, chromium, cadmium, silver, arsenic, barium and lead. For the past several years, CPS Energy has recycled nearly all of its CCRs and will continue to do so. CPS Energy is currently in full compliance with the CCR self- implementing rule requirements. On December 16, 2016, the President signed into law water infrastructure legislation that contained coal ash provisions that enable states to implement and enforce the requirements of the final CCR rule through state permitting programs. The coal ash legislation is necessary because the EPA and states lack the statutory authority to implement and enforce the current requirements of the federal CCR rule through permit programs. This legislation fills a major regulatory gap and will provide greater regulatory certainty and flexibility while ensuring the protection of the environment.

Power Plant Decommissioning: In 2013, CPS Energy completed the decommissioning and remediation of the Mission Road Power Plant which began in 2009. In 2011, CPS Energy retired Tuttle Power Plant located at 9911 Perrin Beitel Road in northeast San Antonio. This plant consists of four gas-fired steam electric generation plants which began commercial operation in the 1950s. Environmental remediation and decommissioning of the plants commenced in 2013. Property around Tuttle Power Plant is not fully remediated and remediation will take a few years to complete. Decommissioning of the plant was completed in early 2017. A general contractor has been retained to transform the Mission Road Power Plant into a "think tank" for renewal energy companies.

OSHA Hazard Communication Standard: In March 2012, OSHA adopted the new Globally Harmonized System-Hazard Communication Standard. Although, the proposal required all labels and Safety Data Sheets ("SDSs") for chemicals and products to be in compliance with the new standardized requirements within three years after publication (or by August 2014) the final rule required manufacturers and importers to modify labels and SDSs by June 1, 2015, and gives distributors an additional six months, until December 1, 2015, to ship and sell stock labeled 269 under the current standard. In addition, employers were given another

72 six months, until June 1, 2016, to update their training and their hazard communication program with any new hazard information received because of the final rule. Private employers had until December 1, 2013, to complete employee training. CPS Energy will have to acquire new SDSs so they are available to all employees and CPS Energy will be working with all applicable business units on the new hazard communication program requirements. Applicable CPS Energy employees were trained on how to read and understand the new labels and SDS elements.

Chemetco Superfund Site: CPS Energy received a January 21, 2014 Special Notice Letter ("SNL") from the EPA naming CPS Energy as one of 115 Potentially Responsible Parties ("PRP") for the Chemetco Superfund Site ("Chemetco") in Chouteau Township, Illinois. The EPA is directing remediation efforts under the CERCLA to address metals contamination at the site which operated as a secondary copper smelter that produced copper cathodes and anodes. Copper wire and lead covered cable that CPS Energy sold in 2000 and 2001 on a material bid were ultimately sent to the Chemetco site. Based on available information, CPS Energy believes it should be treated as a de minimis contributor to the site.

On March 19, 2014, CPS Energy joined the PRP group. The PRP group conducted a Remedial Investigation and Feasibility Study ("RI / FS") of the off-site property. On February 3, 2015, parties signed the RI / FS Study, Order, and Statement of Work detailing actions moving forward. The cost of the RI / FS is expected to be approximately $2,500,000. CPS Energy paid $5,000 for its share of the RI / FS work. The total cost of the necessary remediation and CPS Energy's liability is unknown.

Compliance: On October 2, 2015, CPS Energy notified the TCEQ of its plans to conduct an Environmental, Health and Safety compliance audit under the Texas Audit Privilege Act at the Calaveras, Braunig, Leon Creek and Rio Nogales Power Stations. The audit commenced on October 12, 2015. The scope of the audit is a review of the sites' compliance with state and federal water quality and waste requirements, including but not limited to sampling and analysis processes and procedures, applicable monitoring, and reporting requirements. Any issues disclosed to the TCEQ are protected from enforcement as long as CPS Energy corrects them in a timely manner as required by the Texas Audit Privilege Act. CPS Energy has completed the action items identified, has notified the TCEQ of completion, and is commenting on draft TPDES wastewater permits for Calaveras and Braunig Power Stations.

CPS Energy received a proposed agreed enforcement order from the TCEQ on June 30, 2017 for failing to investigate a suspected release of a regulated substance within 30 days of discovery and for failing to report a suspected release to the TCEQ within 24 hours of discovery for the underground petroleum storage tank system located at the northwest service district facility. Monthly inventory control records for March and April 2016 indicated a suspected release that was not investigated or reported. A penalty of $11,700 is proposed. CPS Energy submitted all documentation for the completed investigation on March 28, 2017 and again on June 22, 2017, including the tank system tightness test which indicated no release occurred. Malfunctioning pulsars on the fuel dispensers were replaced. Additional training, procedures and internal controls are being implemented.

ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS

Energy Conservation

CPS Energy programs and activities to assist customers in understanding energy and ways to reduce electric and gas usage include:

 comprehensive suite of energy efficiency programs offering rebates and incentives for residential, commercial and industrial customers;  maintaining a secure web site, Manage My Account at https://www.cpsenergy.com/en/customer-support/manage-my- account.html. Using an Internet connection to log in, CPS Energy customers can: access My Energy Portal; view their current bill; view current balance due; view past bills; pay by check or credit card; start / stop / transfer service; sign up for a payment plan; view payment history; view energy usage; update mailing address; update phone number; authorize contacts; set up alert preferences; and manage their profile;  maintaining a secure web site, named My Energy Portal at https://www.cpsenergy.com/en/customer-support/my-home- billing-acct/my-energy-portal.html. The portal is available through Manage My Account. With a smart meter and the My Energy Portal, customers can see energy usage (both gas and electric) as recently as the day before. Customers are able to: see their monthly bill, as far back as a year; compare energy efficiency to similar "neighbors"; access over 150 energy efficiency tips; set up their own customized energy savings plan; and compare month-to-month energy usage billing and see reasons for a decrease or increase. These additional insights will eventually be available to all customers as CPS Energy continues its four-year smart meter deployment; smart meters should be deployed by the end of 2018;  maintaining a phone number where customers can obtain conservation and other energy-related information;  providing a free comprehensive weatherization program for low-income customers at or below 200% of the federal poverty level;  providing load curtailment programs for commercial and industrial customers;

73  providing multiple residential thermostat offerings under My Thermostat Rewards umbrella, that help residential customers to save energy and reduce demand at peak times;  offering a full suite of rebate programs for energy efficiency improvements by residential, small commercial, multi-family and large commercial customers;  scheduling consumer information exhibits at high-traffic locations such as customer care fairs, special events and trade shows;  conducting utility-related presentations for schools, community service organizations, business and professional groups, and home owner associations; and  making available a residential home energy assessment at https://residential.savenow.cpsenergy.com/assessment.

On January 20, 2009, the Board approved a new Sustainable Energy Policy Statement. Centralized power plants, including utility scale solar, and the traditional electric utility business model are needed now to bridge the gap to the future. However, in the future, more electricity will come from distributed renewable resources and stored energy, and will be distributed on a "smart grid," to customers empowered with the information to better control their own energy cost and consumption. CPS Energy offers rebates for residential and commercial customers who elect to install a "rooftop" solar PV system. In addition to receiving a rebate, these customers currently receive the additional benefit of being placed on net metering, in which the credit value of the energy their system produces is equivalent to the retail value of the energy delivered by the utility. The current net metering program does not include recovery of the utility's costs for maintaining and upgrading its systems. In order to address this disparity, CPS Energy originally proposed (and later withdrew) SunCredit, a regulatory mechanism to resolve cost recovery issues and replace net metering. A team comprised of the City, solar stakeholders, and CPS Energy met regularly from June 2013 to September 2014 to discuss these concerns and potential revisions to the net metering program. On May 21, 2014, the Board approved a plan to expand the City's rooftop solar program, which includes net metering, partial cost recovery, additional funding for rooftop solar rebates and evaluation of pilot leasing and community solar projects. At this time, the City Council has directed CPS Energy to continue discussions with all parties to determine what regulatory mechanisms should be approved. Proposed changes still require approval from City Council, who postponed a vote in June 2014 to examine funding, the basis of cost recovery, and feedback on efficiency from customers and stakeholders. In October 2014, CPS Energy issued the first of two one-megawatt (AC) solar Requests for Proposal. Responses to these pilot program requests for proposal were evaluated and two vendors were selected. CPS Energy selected Clean Energy Collective ("CEC"), the world's leading community solar provider, to bring the first "Roofless" community solar pilot project to the City. CEC has since developed a 1.2 MW (DC) solar PV facility, providing CPS Energy customers the opportunity to own local clean energy generation through the Roofless Solar program. The Roofless Solar program went live August 26, 2016, and is fully subscribed. CPS Energy also selected PowerFin Partners ("PowerFin"), a solar development firm based in Austin and San Antonio, to launch SolarHostSA, a groundbreaking pilot program allows participants to host photovoltaic systems on their rooftops in exchange for credits on their energy bill. Working under a power purchase agreement with CPS Energy, PowerFin installs and operates up to 5 MW (AC) of rooftop solar on homes and businesses throughout the CPS Energy service territory, offering the community the chance to realize the benefits of local solar at no cost to them. The two new programs, Roofless Solar and SolarHostSA, are being marketed to customers under the trademarked name Simply Solar. Beginning February 1, 2016, CPS Energy allocated an additional $30 million of solar rebates for customer-owned PV systems. The rebate extension was designed so the rebate amount would decline at predetermined spending levels. The first $10 million of rebate funds were designated with a rebate of $1.20 per watt, the second $10 million at $1.00 per watt, and the last $10 million at $0.80 per watt. On January 30, 2017, CPS Energy announced its intention to fund an additional $15 million in solar rebates ($9 million for residential and $6 million for commercial projects) allocated for this initiative. The new solar incentive, which took effect April 2017, is at $0.60 per watt, with an additional $0.10 per watt applicable to systems that utilize locally-manufactured components.

In connection with CPS Energy's development of a Strategic Energy Plan that includes energy efficiency as well as generation, CPS Energy has committed to STEP. The goal of the STEP program is to save 771 MW of demand between 2009 and 2020. The 771 MW is equivalent to the amount of energy produced by a medium-sized power plant on an annual basis. To put this into perspective, the CPS Energy Spruce1 power plant generates 555 MW and the newest Spruce2 generates 785 MW of electricity. Cumulatively, the STEP program has, since its implementation, saved approximately 522 MW through fiscal year 2017. On May 23, 2016, CPS Energy approved three-year agreements to outsource the delivery of its energy efficiency program. CPS Energy selected CLEAResult, the nation's largest implementer of energy efficiency programs, to deliver its commercial efficiency programs. CPS Energy selected Franklin Energy Services, a leading implementer of energy efficiency programs for utility, state and municipality clients nationwide and in Canada, to deliver its residential efficiency and weatherization programs. The agreements are expected to expand the portfolio of program offerings to customers and increase adoption toward achievement of the STEP goal.

CPS Energy has plans to evaluate and modify program offerings annually to target the most effective methods for energy reduction. To facilitate program development, CPS Energy has hired a leading consulting firm. It is estimated that the programs will cost approximately $849 million through 2020 and CPS Energy worked with the City to establish a fair and equitable funding mechanism to support these goals. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Fuel and Gas Cost Adjustment" herein.

74 On June 8, 2010, CPS Energy committed to partner with the Texas Sustainable Energy Research Institute (the "Institute") at the University of Texas at San Antonio for sustainable energy research. CPS Energy agreed to invest up to $50 million over 10 years in the Institute. From its inception in September 2010 through January 2017, CPS Energy has invested $7.3 million in the Institute. Future funding will be determined by the scope of the projects defined by the partnership and will be subject to annual approval by the Board.

Public Safety Programs

CPS Energy's Public Safety Awareness ("PSA") program provides natural gas safety messaging, in accordance with the RRCT's RP 1162 guidance (which requires pipeline operators to develop and implement public awareness programs that follow the guidance provided by the American Petroleum Institute), to public officials, emergency officials, excavators and the general public within Bexar and surrounding counties. In addition to formal presentations to the stakeholder audiences referred to, PSA is in constant face-to-face contact with excavators in the area to disseminate messaging regarding Texas' 811 Call Before You Dig program.

In addition, PSA has taken steps above and beyond RP1162 to make sure all stakeholders working and / or living around natural gas pipelines get the safety messages through additional mailings, media, billboards, excavator events and at public gatherings.

Additionally, CPS Energy has contracted with a third party to publish and maintain a webpage at www.cpsenergy.com/safety that provides up to date safety tips and training resources for contractors, first responders, educators, students and families.

LITIGATION AND REGULATORY COMPLIANCE

The City of San Antonio

This section describes the litigation involving the City that does not directly involve CPS Energy or claims payable out of Systems' revenues. This section describes litigation which has been determined by the City Attorney's office as being material (that the financial results of a decision adverse to the City could have a negative result on the City's financial position). Please see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Litigation and Regulatory Compliance – Systems Litigation and Claims" herein for a description of litigation involving CPS Energy.

The City is a defendant in various lawsuits and is aware of pending claims arising in the ordinary course of its municipal and enterprise activities, certain of which seek substantial damages. That litigation includes lawsuits claiming damages that allege that the City caused personal injuries and wrongful deaths; class actions and promotional practices; various claims from contractors for additional amounts under construction contracts; and property tax assessments and various other liability claims. The amount of damages in most of the pending lawsuits is capped under the Texas Tort Claims Act ("TTCA"). Therefore, as of the City's fiscal year ended September 30, 2016, the amount of $18,556,298 is included as a component of the reserve for claims liability. The estimated liability, including an estimate of incurred but not reported claims, is recorded in the Insurance Reserve Fund of the City. The status of such litigation ranges from early discovery stage to various levels of appeal of judgments both for and against the City. The City intends to defend vigorously against the lawsuits, including the pursuit of all appeals; however, no prediction can be made, as of the date hereof, with respect to the liability of the City for such claims or the outcome of such lawsuits.

In the opinion of the City Attorney, it is improbable that the lawsuits now outstanding against the City could become final in a timely manner, as determined by the date posted hereof, so as to have a material adverse financial impact upon the City that should be reflected in the financial information of the City included herein.

The City provides the following information related to the lawsuits:

Shavonda Bailey, et. al. v. City of San Antonio, et. al. Plaintiffs allege that San Antonio police officers used excessive force when they arrested Pierre Abernathy after a low speed vehicle pursuit. Plaintiffs, the survivors of Mr. Abernathy, allege that he was subjected to excessive force during the arrest including the uses of tasers. Mr. Abernathy died at the scene after allegedly suffering an episode of "excited delirium". Plaintiffs sued the City and seven police officers under 42 U.S.C. § 1983 alleging excessive use of force. They seek damages for Mr. Abernathy's pain and suffering as well as damages for his death. Plaintiffs seek damages of at least $1 million. The City was dismissed from this case on May 5, 2015. Summary judgment was entered in favor of the officers on April 1, 2016. The parties argued before the Fifth Circuit Court of Appeals on Tuesday, March 7, 2017, and are awaiting a decision.

Cheryl Jones, et al. v. City of San Antonio et al. On February 28, 2014, Marquise Jones was shot by a San Antonio police officer at Chacho's Restaurant. Plaintiffs are asserting claims under 42 U.S.C. § 1983 against the City and the police officer for excessive force, racial profiling, and failure to train and under the Texas Survival Statute and Texas Wrongful Death Statute for assault and battery, intentional infliction of emotional distress, and gross negligence. Plaintiffs seek damages of at least $5 million for loss of affection, consortium, financial assistance, pain and suffering of decedent prior to death, mental anguish, emotional distress, quality

75 of life, exemplary and punitive damages, attorney's fees, and costs of court. This case was tried beginning on March 27, 2017. A jury rendered a verdict in favor of the City and the officer on April 4, 2017. Plaintiffs have filed their notice of intent to appeal to the Fifth Circuit. Plaintiffs filed a motion for new trial and the City responded. The parties are awaiting the judge's decision.

Jimmy Maspero and Regina Maspero, et al. v City of San Antonio et al. Plaintiffs allege that on September 19, 2012, Plaintiffs' vehicle was involved in a collision with a vehicle being pursued by a San Antonio Police Department ("SAPD") patrol car causing the death of two of Plaintiffs' children and severe permanent injuries to the remaining Plaintiffs (two children, two adults). The Plaintiffs have asserted a "state-created danger" theory under 42 U.S.C. § 1983 alleging a violation of Plaintiffs' 14th Amendment substantive due process. Plaintiffs are also asserting State law theories of negligence. Plaintiffs seek to recover damages for mental anguish, physical pain, impairment, medical expenses, and the wrongful death of two of their children. Plaintiffs are seeking monetary damages of at least $3 million. This case has been remanded back to State district court. There is no trial date set in the state court. The City has filed a plea to the jurisdiction and is awaiting the plaintiffs' response.

Roxana Tenorio, Individually and on behalf of Pedro Tenorio, Deceased v. Benito Garza and City of San Antonio. Plaintiff claims that a SAPD high-speed pursuit of Defendant Benito Garza was the cause of a vehicle accident on September 21, 2012 in which Pedro Tenorio was killed. The accident occurred in the 9400 block of SW Loop 410. Plaintiff sued Benito Garza and the City under the TTCA for negligence. Plaintiff is seeking monetary relief in excess of $1.0 million for past and future mental anguish, loss of consortium, loss of inheritance, loss of companionship and pecuniary damages under the Texas Wrongful Death Act and Texas Survival Act. The City's plea to the jurisdiction was denied. The City filed an interlocutory appeal to the Fourth Court of Appeals. The trial court's denial of the plea was affirmed, with one justice dissenting. The City has filed a Petition for Review with the Texas Supreme Court. The Texas Supreme Court has requested responsive briefing.

Estate of Jesse Aguirre, Deceased, et al. v. City of San Antonio, et al. Plaintiffs filed suit alleging that after handcuffing Plaintiffs' decedent, SAPD officers flipped him over a barricade, knocking him unconscious. Attempts to revive decedent were unsuccessful, resulting in his death while in custody. Plaintiffs filed suit alleging violations of the TTCA and 42 U.S.C. § 1983. Discovery is ongoing and this matter is not yet set for trial. Damages could be in excess of $250,000. A motion of summary judgment ("MSJ") was filed on behalf of the City and the officers. The City and the officers were granted a MSJ. The Plaintiff appealed on June 14, 2017.

David Brian Ricks v. City of San Antonio et al. Plaintiff was arrested for public intoxication. He alleges that SAPD officers used excessive force during his arrest, causing severe bodily injuries. Plaintiff sued pursuant to 42 U.S.C. § 1983. Discovery is ongoing and this matter has not been set for trial. Damages could be in excess of $250,000. The City was dismissed from the lawsuit by the Plaintiff on May 23, 2017. The officers are still in the case. No trial date has been set.

Estate of Norman Cooper, et al. v. City of San Antonio, et al. SAPD officers were called to a residence on a report of domestic violence. At the scene, decedent was tased on two separate occasions. Decedent later collapsed and died. Decedent's estate and family members have filed suit against the City and named officers alleging use of excessive force in violation of 42 U.S.C. § 1983. Plaintiffs seek damages in excess of $250,000. Discovery is ongoing. This matter is not yet set for trial.

Elena Scott, Individually and as Representative of the Estate of Antronie Scott v City of San Antonio, et al./Diane Peppar, et. al. v City of San Antonio, et. al. An SAPD officer was attempting to execute an arrest warrant when Plaintiff's decedent exited his vehicle with an object the officer believed was a weapon. The office discharged his service weapon, fatally wounding decedent. Plaintiffs have filed suit under 42 U.S.C. § 1983 alleging use of excessive force. This case was consolidated with Diane Peppar vs. City of San Antonio. Diane Peppar is Decedent Antronie Scott's mother. At present, no trial date is set; but, per the scheduling order, the discovery period does not end until January 2018.

Rogelio Carlos III, et. al. v Carlos Chavez, et. al. SAPD SWAT officers were assisting High-Intensity Drug Trafficking Areas ("HIDTA") in searching for a fleeing suspect. Plaintiff was misidentified by the HIDTA officer as being the suspect. The HIDTA officer engaged and attempted to physically apprehend Plaintiff and was assisted by SAPD SWAT officers. Plaintiff suffered minor injuries as a result of the arrest, although he later complained of neck and shoulder/arm pain. Several months after the incident, Plaintiff underwent surgery, during which procedure, Plaintiff was paralyzed. Plaintiff has filed suit against the City and various officers under 42 U.S.C. § 1983. Discovery is ongoing. This case has not been set for trial.

Neka Scarborough Jenkins v. City of San Antonio. Plaintiff's decedent was driving northbound on Blanco Road and attempted to turn left onto Lockhill Selma at a controlled traffic signal. Plaintiff contends that the traffic signal for her lane of traffic was facing the wrong direction. While making the turn, decedent was struck by an oncoming vehicle and was killed. Plaintiff claims the City had prior notice but failed to correct the issue within a reasonable period of time. Plaintiff also claims the investigation revealed the light was placed too low and was not at the correct height for a traffic signal. This is fairly new litigation and is brought under the TTCA. Facts and damages have not been vetted through the discovery process at this time. Under the TTCA, damages are capped at $250,000. Discovery is ongoing. Plaintiff requested a trial date in February 2018 but no trial date has been entered at this time.

76 Thomas Mathieu v. City of San Antonio, Juan Campacos, Individually, and Patrick Thomas, Individually. Plaintiff claims that on January 13, 2014 he fell ill while driving and pulled to the side of the road on Evers Road and Loop 410. After he pulled over, he lost consciousness. A call was made for help for a sick or injured person. When the two Defendant SAPD Officers approached Plaintiff, they opened the unlocked door and struck Plaintiff in the face in an effort to gain his cooperation, then pulled him out of his vehicle. Plaintiff claims he was confused and awakening from a diabetic episode and was not thinking clearly and pulled away from Campacos. They then realized Plaintiff was diabetic and called EMS for help. Plaintiff claims serious injuries including trauma to his chest, abdomen, and shoulder, and two fractured ribs. Plaintiff sued under 42 U.S.C. § 1983 for violation of his civil rights by use of excessive force, and under Texas law for assault and battery. He seeks an unspecified amount of money for past medical expenses, lost income, lost wages, and criminal attorney's fees. He also seeks punitive damages against the individual defendants. The City was granted summary judgment on June 1, 2017. The Officers' MSJ was denied. No current trial date is set.

Systems Litigation and Claims

CPS Energy is involved in various legal proceedings related to alleged personal and property damages, condemnation appeals and discrimination cases. As the operator of the Systems, various claims have been asserted against CPS Energy. Most of those claims, including those in active litigation, do not merit individual disclosure, and in all cases, except where mentioned below, CPS Energy maintains a litigation reserve that CPS Energy management believes to be sufficient to satisfy reasonable outcomes concerning these pending claims and litigation. Subject to the foregoing, CPS Energy separately discloses certain pending litigation and potential claims, as follows:

Casey Industrial, Inc. v. City of San Antonio. CPS Energy was sued by Casey Industrial, Inc. ("Casey"), relating to Casey's work on the design build contract for CPS Energy's Deely Baghouse Project, on which Casey and Wheelabrator Air Pollution Control, Inc. ("Wheelabrator") were contractors. Casey alleges that it is due $12 million in additional compensation because of delays and additional work it performed. CPS Energy asserted a counter-claim for $1.6 million for work not performed by Casey. The trial court granted Casey's motion for summary judgment, holding that the design-build contract was void and denied CPS Energy's claim of immunity. CPS Energy appealed the decision to the Court of Appeals. The Court of Appeals reversed the summary judgment in favor of Casey and granted summary judgment for CPS Energy, holding that the contract was not void and that CPS Energy was immune from claims for work outside the contract. Casey's motion for rehearing was denied.

Wheelabrator also sued CPS Energy for $4.2 million in retainage that CPS Energy is withholding pending the outcome of the Casey litigation. The trial court granted Wheelabrator's motion for summary judgment denying CPS Energy's claim of immunity. The Court of Appeals reversed the trial court and held that CPS Energy is immune from claims for work outside the contract. Both Casey and Wheelabrator appealed the Court of Appeals' rulings to the Texas Supreme Court, which refused to hear their appeal. On March 31, 2014, the Bexar County District Court granted CPS Energy's request to consolidate the cases. On May 21, 2014, the trial court heard CPS Energy's plea to the jurisdiction, which asserted governmental immunity on approximately $10 million of Casey's $12 million in alleged damages. CPS Energy also asserted immunity against having to pay Casey's and Wheelabrator's attorney fees should they ultimately prevail. The trial court denied CPS Energy's claim of immunity against Casey's damages but awarded CPS Energy immunity from paying attorney's fees. CPS Energy appealed the trial court's ruling on Casey's damages to the Court of Appeals. The Court of Appeals ruled in Casey's favor and CPS Energy sought review from the Texas Supreme Court. The Texas Supreme Court, in a companion case, ruled that cities performing a proprietary function do not have immunity in a case involving a contract dispute. Wheelabrator appealed the attorney's fees decision and the Court of Appeals reversed the trial court's ruling. Wheelabrator appealed the decision to the Texas Supreme Court, which ruled in their favor. The Texas Supreme Court found that CPS Energy does not have governmental immunity because it performed a proprietary function. Both the Wheelabrator and Casey cases are set for trial on February 12, 2018.

Time Warner Cable San Antonio, L.P. v. City Public Service of San Antonio. Texas law prohibits discrimination by a MOU in the rates and terms the MOU charges a certificated telecommunications provider ("CTP") for the attachments the CTP makes to an MOU's poles and, beginning September 1, 2006, required the MOU to charge a single, uniform pole attachment rate to all CTPs. Beginning with its 2007 invoices, CPS Energy started charging all CTPs the same pole attachment rate, but since inception of uniform invoicing of pole attachment rates AT&T has claimed that under its 1987 joint use pole attachment agreement with CPS Energy it is entitled to pay a lower contractual rate. The 1987 joint use contract was terminated July 31, 2016. Effective August 1, 2016, AT&T executed a new pole attachment agreement with CPS Energy under which there is no dispute as to the appropriate pole attachment rate.

AT&T's position asserting the right to pay a lower pole attachment rate under the joint use contract was the basis for the lawsuit filed against CPS Energy by Time Warner Cable San Antonio, L.P. ("TWC"), which is now owned by Charter Communications, Inc.*, TWC sued CPS Energy in State district court in Bexar County, claiming CPS Energy's failure to collect the outstanding balance from AT&T is in violation of the statutory requirement and that CPS Energy had discriminated against TWC by charging TWC and AT&T different pole attachment rates. TWC seeks damages of no less than $5 million. CPS Energy responded to the lawsuit by asking the court to abate the lawsuit pending a final outcome in a PUCT docket CPS Energy filed, Petition of CPS Energy for Enforcement Against AT&T and Time Warner Cable Regarding Pole Attachments, Docket No. 36633. CPS Energy also

77 counter-sued for TWC's outstanding balance, which has resulted from TWC paying for its pole attachments at the 30-year-old AT&T rate instead of the 2008 rate CPS Energy is uniformly charging all CTPs for pole attachments. By order issued March 17, 2009, the Bexar County District Court abated the proceeding pursuant to CPS Energy's request, and on April 3, 2009, the PUCT issued an order assuming jurisdiction over the case. The State Office of Administrative Hearings ("SOAH") heard the PUCT docket on September 8-14, 2011. The SOAH issued a Proposal for Decision on March 9, 2012, and the PUCT released a final Order on February 1, 2013. CPS Energy, TWC and AT&T appealed the PUCT order to the Travis County District Court, which heard the case on January 22, 2014 and issued its order on March 3, 2014. The Travis County District Court's March 3, 2014, final judgment reversed the PUCT on the grounds that the PUCT lacked jurisdiction to make determinations about private pole attachment agreements, about whether a breach of contract had occurred, and about whether discrimination under PURA caused harm. The final judgment also reversed the PUCT's determinations on using a rate of return other than the FCC's default rate of return and on using three attaching entities in its calculation of the pole attachment rate for billing years 2005-2010. The final judgment affirmed the PUCT's final order in all other respects and remanded it to the PUCT. CPS Energy, AT&T, and TWC all appealed the district court's decision to the Third Court of Appeals in May and June 2014. The case was argued before the Third Court of Appeals on April 22, 2015. On July 31, 2016, TWC's existing pole attachment agreement was terminated and it executed a new agreement effective August 1, 2016. CPS Energy's potential exposure under the case may not extend beyond July 31, 2016.

On February 24, 2017, the State's Third Court of Appeals (the "Third Court of Appeals") issued its opinion in the appeal of the PUCT order. The Third Court of Appeals found that the PUCT has jurisdiction to review and modify CPS Energy's pole attachment rate formula inputs because it was not setting rates, but rather calculating the highest annual pole attachment rate allowed by statute. On a related jurisdictional issue, the Third Court of Appeals vacated the district court's judgment that the Federal Communications Commission's (the "FCC") 2011 amendment to the pole attachment formula was prospectively applicable to CPS Energy under State law, finding that the PUCT's ruling on the matter was advisory, not ripe for adjudication, and outside the scope of the Third Court of Appeals' jurisdiction to review. Regarding formula inputs, the Third Court of Appeals ruled that (i) three was the appropriate average number of attaching entities per pole to consider in the pole-attachment rate calculation, finding that CPS Energy met its burden of proof to overcome the FCC formula's presumptive average of five for a metropolitan area; and (ii) the default rate of return of 11.25% in the FCC formula applied to CPS Energy for all years in dispute, including 2005, and rejected the argument that the PUCT had the authority to set CPS Energy's rate of return. On the issue of discrimination, the Third Court of Appeals ruled that CPS Energy had provided discriminatory terms for a four month period between September 1, 2006 and December 31, 2006 (the result of different billing period applicable to AT&T and TWC); otherwise, CPS Energy did not engage in discriminatory treatment for the rest of the billing years in dispute (2007 to 2010). The court reached this conclusion by finding that CPS Energy had properly charged a non-discriminatory, uniform rate throughout the billing period in dispute as required by statute. On March 9, 2017, the Third Court of Appeals granted TWC's request for a 30-day extension to file a motion for rehearing. On April 12, 2017, TWC filed its motion for rehearing and en banc reconsideration. The Third Court of Appeals has not ruled on TWC's motions. ______*On October 5, 2012, the PUCT approved the consolidation of State-Issued Certificates of Franchise Authority ("SICFA") granted to Time Warner Cable San Antonio, LP (SICFA No. 90007) and Time Warner Cable Texas LLC (SICFA No. 90008), both affiliated companies of Time Warner Cable, Inc., into SICFA No. 90008. PUCT Project No. 40756, Notice of Approval (October 5, 2012), Joint Application of Time Warner Entertainment, Advance/Newhouse Partnership and Time Warner Cable San Antonio, L.P to Amend Its State-Issued Certificate of Franchise Authority; Name Change, Expansion of SAF & Other. On May 18, 2016, Time Warner Cable Texas LLC became an indirectly, wholly owned subsidiary of Charter Communications, Inc. On July 13, 2016, the PUCT amended SICFA No. 90008 to recognize the change of ownership from Time Warner Cable, Inc. to Charter Communications, Inc., but otherwise the name of SICFA No. 90008 remained in the name of Time Warner Cable Texas LLC d/b/a Time Warner Cable. PUCT Project No. 46020, Notice of Approval (July 13, 2016), Application of Time Warner Cable Texas LLC for Amendment to a State-Issued Certificate of Franchise Authority for Name Change and Transfer of Ownership.

Frances Serna, Individually and As Next Friend of JXXXXX GXXXXXXXX and JXXXXXX GXXXXXXXX (Jupiter Street Structure Fire). Four people- two teens, and two children under the age of 5- were injured in a fire that took place at a duplex located at 2022 Jupiter Street on December 13, 2014. Attorneys representing the individuals filed suit on July 29, 2016, and December 5, 2016, against CPS Energy suggesting that the fire was caused by a leak at the CPS Energy meter gas shut off valve. The Plaintiffs' attorneys have not presented details of their injuries or specific damages. However, they have generally stated that the claimants suffered second and third degree burns over 40-60% of their bodies and that one claimant has medical expenses in excess of $300,000. Discovery is underway. There is no mediation date or trial date set at this time.

Chris Smith v. CPS Energy. CPS Energy was served with a lawsuit on June 12, 2015. Plaintiff Chris Smith alleges that he was injured when traveling on the north bound ramp to I-37 from eastbound I-10 on June 16, 2014 when his motorcycle collided with a downed light standard that was protruding into the right lane of the highway. Plaintiff claims that CPS Energy was negligent in permitting the light standard to remain on the roadway when it knew or should have known of the existence of the dangerous condition; that the placement of the light standard so close to the road was negligent; and/or that the SAPD was negligent in not removing the pole from the roadway after it had notice that it was downed. CPS Energy has answered the suit. Plaintiff's request for a trial setting indicates damages in excess of $1,000,000. The plaintiff has recently amended his petition to sue the City of San

78 Antonio, and L.E. Myers, CPS Energy's lighting maintenance contractor. Meyers has been dismissed from the suit. Discovery is ongoing. Trial is currently set for October 23, 2017.

Beverly Harvey Lay, Individually and as Personal Representative of the Heirs and Estate of Arthur L. Lay, Jr. v. A. W. Chesterton, et al. CPS Energy was sued, along with thirty-five other defendants, by Ms. Beverly Lay who alleges that her deceased husband, Arthur L. Lay, a former CPS Energy power plant employee who retired with over twenty-five years of service, was exposed to asbestos-containing products, contracted mesothelioma and died shortly thereafter. Each named defendant is alleged to be jointly and severally liable under the doctrines of enterprise liability, market share liability, concert of action, and alternative liability. Mr. Lay, as an employee of CPS Energy, had Workers' Compensation Insurance coverage at the time. As such, Ms. Lay will be required to prove gross negligence in order to attribute any liability to or collect monetary damages from CPS Energy. While exposure could be potentially high if liability were imposed, CPS Energy believes proving gross negligence against it will be extremely difficult. CPS Energy has successfully defended this type of claim in the past and this case will be vigorously defended. No trial date has been set.

Patricia Alvarez v. CPS Energy. CPS Energy received a claim on May 3, 2016 from Patricia Alvarez alleging personal injuries as a result of a minor car wreck with a CPS Energy truck in April 2015. She filed her lawsuit August 8, 2016. Discovery is underway. There is no trial setting at this time.

No Litigation Certificate

On the date of delivery of the Bonds to the Remarketing Agent, the City will execute and deliver to the Remarketing Agent a certificate to the effect that, except as disclosed herein, no litigation of any nature has been filed or is pending, as of that date, to restrain or enjoin the issuance or delivery of the Bonds or which would affect the provisions made for their payment or security or in any manner question the validity of the Bonds.

Regulatory Compliance

By the nature of its business and through its ownership of nuclear assets, CPS Energy is required to comply with a variety of state and federal regulations involving environmental, system reliability, nuclear plant safety, physical and cyber security, employee and operational safety, and other business issues. Responsibility for ensuring compliance lies within the responsible business units and, at an enterprise level, with the Deputy General Counsel and Chief Compliance and Ethics Officer. The STPNOC also has a strong compliance program which CPS Energy monitors closely. On occasion, violations are found either through internal review processes or during a regulatory agency compliance audit. In these instances, CPS Energy is fully cooperative with regulators in ensuring that steps are taken to identify the cause of the compliance gap and to implement a mitigation plan to prevent a recurrence. The violations that do occur are typically minor and do not reflect serious lapses in business processes or attention to regulatory requirements. Violations involving significant monetary penalties or business risks would be disclosed individually, if they were to occur.

CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY

THE ELECTRIC UTILITY INDUSTRY GENERALLY

The electric utility industry in general has been, and in the future may be, affected by a number of factors which could impact the business affairs, financial condition and competitiveness of an electric utility, and the level of utilization of generating facilities, such as those of the Systems. One of the most significant of these factors has been the effort on national and local levels to restructure the electric utility industry from a heavily regulated monopoly to an industry in which there is open competition for power supply on both the wholesale and retail level. For a description of the competition in the electric utility industry in Texas and the response of CPS Energy thereto. See "CERTAIN FACTORS AFFECTING THE ELECTRIC INDUSTRY – THE ELECTRIC UTILITY INDUSTRY GENERALLY – ELECTRIC UTILITY RESTRUCTURING IN TEXAS" herein.

Such factors include, among others, (i) effects of compliance with rapidly changing cyber, environmental, safety, licensing, regulatory, and legislative requirements; (ii) changes resulting from conservation and demand-side management programs on the timing and use of electric energy; (iii) changes that might result from a national energy policy; (iv) increased competition from independent power producers; (v) "self-generation" by certain industrial and commercial customers; (vi) issues relating to the ability to issue tax-exempt obligations; (vii) severe restrictions on the ability to sell to non-governmental entities electricity from generation projects financed with outstanding tax-exempt obligations; (viii) changes from previously projected future electricity requirements; (ix) increases in costs; (x) shifts in the availability, intermittency and relative costs of different fuels; (xi) management and integration of renewable generation into the supply portfolio; and (xii) effects of the financial difficulties confronting the power marketers. Any of these factors (as well as other factors) could have an effect on the financial condition of any given electric utility and likely will affect individual utilities in different ways. CPS Energy cannot predict what future effects

79 these factors may or will have on its business operations and financial condition, but the effects could be significant. The following is a brief discussion of several factors. This discussion does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date of this Remarketing Memorandum. Extensive information on the electric utility industry is available from sources in the public domain, and potential purchasers of the Bonds should obtain and review such information.

FEDERAL ENERGY POLICY

The November 8, 2016 election of President Trump and the retention of control of the Senate by Republicans created an opportunity for the incoming administration to shape federal policies not seen since George W. Bush came into office in 2001. President Trump's administration promised regulatory reforms of the Obama Administration's policies that are expected to have an impact on federal energy policy. Specifically, President Trump has vowed to drastically alter the country's direction on climate and energy policy. His promises include actions such as withdrawing from the Paris Agreement and dismantling the EPA as well as repealing restrictions on domestic energy development.

Regulatory reform continues to be a focus of the administration in calendar year 2017. Notable actions by President Trump in the energy sector include an Executive Order he signed on March 28, 2017, directing the EPA to start the process of re-evaluating and rewriting the Clean Power Plan — the EPA’s rule, issued in final form in late 2015, to reduce carbon dioxide emissions from fossil fuel-fired power plants. Federal agencies are in the process of gathering information to comply with this directive. More specific to the electricity sector, in Executive Order 13783, President Trump directed the EPA to immediately review and, as appropriate, suspend, revise or rescind the regulations relating to greenhouse gas emissions from the electric sector. Because such an action is governed by processes established in federal law, the EPA will have to go through a formal rulemaking process, subject to input from the public, before electric utilities will know how this administration wants to regulate greenhouse gases. This process could take considerable time.

President Trump announced on June 1, 2017 that the United States would withdraw from the international climate accord that was reached in Paris, France, in 2015. In the announcement, President Trump said the Paris agreement "is unfair to the U.S. in a number of ways, explaining that nations such as China and India will have fewer restrictions on using coal to produce energy than would be imposed on the United States." He said the accord "is less about the climate and more about other countries getting a financial advantage over the U.S."

Currently, numerous pieces of energy legislation are pending in the 115th Congress regarding conservation of resources, security measures, infrastructure projects, among others.

On December 16, 2016, former President Obama signed into law the Water Infrastructure Improvements for the Nation Act ("WIIN Act"), which included industry-supported coal ash legislation and funding for water improvements. The WIIN Act was the product of bipartisan negotiations, and it includes the Water Resources Development Act ("WRDA") of 2016. Under the new law, the Resource Conservation and Recovery Act ("RCRA") is amended to allow states to design a coal ash permit program that will then be approved by the EPA. If states do not design a coal ash permit program, the federal coal ash rule remains in effect.

In 2013, President Obama issued an Executive Order "Improving Critical Infrastructure Cybersecurity", to develop a voluntary risk-based cybersecurity framework. The NIST framework (the "Framework") was finalized and released in mid-February 2014. The Framework is designed to be a living document and continual updates occur concerning its development. The Framework covers 16 sectors and the portion pertaining to the energy sector will be implemented by the DOE. Compliance is voluntary. The DOE continues to explore methods to encourage compliance, such as possibly issuing grants. In an update provided July 1, 2015, NIST has engaged in education and outreach efforts, as well as a campaign to clarify and highlight guides consistent with the Framework. On December 11, 2015, NIST issued an additional request for information on its "Views on the Framework for Improving Critical Infrastructure Cybersecurity", to receive feedback. NIST released an analysis of the responses received to this request on March 24, 2016, and circulated and updated draft version refining, clarifying, and enhancing the Framework on January 10, 2017. During the 114th Congressional Session, cybersecurity remained a priority and bills were introduced to protect against threats, including the Cybersecurity Act of 2015, which then-President Obama signed into law in December 2015. The 115th Congress made cybersecurity and grid security a priority in 2017 with a focus on holding hearings regarding preparedness of the electric utility sector for cybersecurity threats. Numerous pieces of cybersecurity legislation, in various stages, are pending before the Congress. Pursuant to an executive order issued by President Trump on May 11, 2017, entitled Strengthening the Cybersecurity of Federal Networks and Critical Infrastructure, all federal agencies are required to use the Framework to manage cybersecurity risks.

The DOE, the DHS, and a number of other agencies held 10 briefings nationwide, which concluded in early February 2014. These meetings follow an April 2013 attack on Pacific Gas & Electric Company's infrastructure, which has also led to heightened consideration by members of Congress regarding the federal government's role in addressing cybersecurity risks directed at the country's critical infrastructure.

80 CPS Energy uses multiple security measures to protect its physical assets. In-house and third-party physical security audits and analysis are routinely performed. Access control / card reader systems are located throughout CPS Energy, including at substation fences and control houses. Other technologies, such as cameras, photoelectronic ("PE") beams, fiber optic fence detection systems and lighting, are also employed to deter security threats.

On March 7, 2014, the Federal Energy Regulatory Commission ("FERC") directed NERC to develop reliability standards requiring owners and operators of the bulk-power system to address risks due to physical security threats and vulnerabilities. The order gave NERC 90 days to submit one or more proposed standards that require owners and operators of the bulk-power system to take at least three steps to protect physical security. NERC met the deadline and drafted a standard ("CIP-014-1"), which requires transmission owners and operators to (1) perform a risk assessment of their system to identify facilities that, if damaged, could have a critical impact on the operation of the bulk-power system; (2) evaluate potential threats and vulnerabilities to those facilities; and (3) develop and implement a security plan to address potential threats and vulnerabilities. The final rule was issued on November 20, 2014. CPS Energy has taken steps to comply with the CIP-014 standard requirements.

The FERC acted in July 2016 to improve the cyber security of the bulk electric system ("BES") NERC to develop a supply chain risk management standard to address risks to information systems and related electric system assets. FERC directed NERC to develop a Critical Infrastructure Protection ("CIP") Reliability Standard that requires entities to develop and implement a supply chain management plan for industrial control system hardware, software, and vendor services associated with electric system operations. NERC was required to submit the new CIP standard within one year. The standard was developed and approved by NERC on June 16, 2017. The new standard will become effective after FERC's approval. CPS Energy will continue monitoring the development of this new CIP standard.

During the final months of the 112th United States Congress, lawmakers extended various tax credits. The Senate Finance Committee had approved a $205 billion package on tax credit extenders that includes extensions and changes to a number of energy- related tax credits. The package expired on December 31, 2013, including the tax credit for electricity produced by wind and other renewable resources. Congress in 2014 failed to pass legislation extending these tax credits. At the end of 2015, the 114th Congress passed a five-year extension, modification and phase-out of the Investment Tax Credit ("ITC") for solar power and the Production Tax Credit ("PTC") for wind and other renewables. The bill extended the PTC as-is for two years (including one retroactive year because the credit expired at the end of 2014), and phases out the credit to 80% in 2017, 60% in 2018, and 40% in 2019. The 30% temporary ITC was extended for three additional years (from its original December 31, 2016 expiration), and would then be phased out with a 26% credit in 2020, a 22% credit in 2021, and a 10% credit in 2022.

On September 22, 2009, the EPA finalized the nation's first greenhouse gas reporting system / monitoring regulations that will require large emitters of heat-trapping emissions to collect GHG data. While Congressional action on environmental policy has been limited, the focus has been at the administrative level at the EPA. Additional information can be found in the "ENVIRONMENTAL MATTERS" section herein. On August 3, 2015, the EPA released its Clean Power Plan that proposes to reduce carbon dioxide emissions from power plants by 32% (relative to 2005 levels) by 2030. See "COMPLIANCE AND REGULATION – Environmental Matters – Carbon Dioxide ("CO2") and Greenhouse Gases ("GHG") herein. In February 2016, the U.S. Supreme Court granted an emergency stay of the Clean Power Plan that puts implementation of the rule on hold while the courts hear legal challenges to it. In September 2016, the D.C. Court of Appeals heard oral arguments. In early 2016, President Trump directed the Justice Department to ask the court to postpone or forego consideration of the Clean Power Plan. Further legal action was stayed for 60 days by court order issued on April 28, 2017. In the latest court-ordered status report, dated as of June 29, 2017, the EPA requested abeyance pending the conclusion of President Trump's expected forthcoming rulemaking regarding the Clean Power Plan. President Trump's replacement for the Clean Power Plan is being reviewed by the Office of Management and Budget, a necessary step before releasing to the public for comment.

The Energy Policy Act of 2005 ("2005 Energy Act") extended limited FERC jurisdiction, known as "FERC-Lite", over public power entities within ERCOT, such as CPS Energy that own transmission lines, and gave FERC authority to delegate certain transmission reliability standard-setting responsibilities to the Energy Reliability Organization ("ERO") and to establish mandatory reliability standards for operation of the nation's transmission system. CPS Energy has operated its electric system under compatible ERCOT reliability standards for many years, so CPS Energy does not anticipate any problems with FERC's reliability standards. CPS Energy's Transmission Owner ("TO"), Transmission Operator ("TOP"), Distribution Owner ("DO"), Generator Owner ("GO"), and Generator Operator ("GOP") functions have all undergone periodic audits. Any findings discovered during the audits were quickly mitigated. Additional information on FERC's authority over CPS Energy can be found in "FERC Authority" below.

The 2005 Energy Act included several provisions that could affect CPS Energy's business and continue to be evaluated by management, including:

 repeal of existing Public Utility Holding Company Act of 1935 requirements;

81  conditional termination of the mandatory federal purchase and sale requirements for co-generation and small power production;  expansion of FERC's merger review authority;  re-authorization of renewable energy production incentives for solar, wind, geothermal, and biomass, and authorization of new incentives for landfill gas;  incentives for development of new commercial nuclear power plants and other non- or low-carbon emitting technologies;  establishment of a 7.5% goal for increased renewable energy use by the federal government by 2013, and of a 20% required reduction in energy use by federal buildings by 2015; and  increased funding for weatherization of low-income homes and state energy efficiency programs.

The 2005 Energy Act also included provisions affecting existing nuclear generating units, including:

 extension of the Price-Anderson Act to 2025 and increases in the retrospective premiums for which licensees are liable for claims resulting from a nuclear incident;  expansion of the NRC authority to regulate decommissioning trust funds (primarily affecting funds held by former plant licensees);  direction of the DOE to take responsibility for safe disposal of high-level radioactive waste;  procedural protections for individuals filing claims under federal whistleblower provisions;  enhanced provisions relating to NRC oversight of the security of licensed facilities; and  various decommissioning tax-related adjustments beneficial to federal tax-paying licensees.

Furthermore, the 2005 Energy Act amended the Public Utility Regulatory Policies Act of 1978 ("PURPA") by adding five new standards that Municipal Utilities must consider and determine whether to implement. These new standards address net metering, diversity of fuel sources, efficiency of fossil-fuel-fired generation, time-based or "smart" metering, and the interconnection of distributed generation. CPS Energy considered the new standards and developed five modified standards that more accurately reflect local conditions and priorities. These new standards were approved by the Board on June 25, 2007.

In December 2007, the President signed the Energy Independence and Security Act ("EISA") requiring utilities to consider, for adoption, rejection, or modification by December 19, 2009, the implementation of (1) integrated resource planning; (2) rate design modifications to promote energy efficiency investments; (3) smart grid investments; and (4) smart grid information. CPS Energy studied technologies that would allow implementation of the standards, as modified to fit its needs, and has completed the regulatory assessment as required under the EISA. Municipal Utilities, such as CPS Energy, are designated as "non-regulated" under EISA, as well as the 2005 Energy Act, because those utilities are not regulated by state utility commissions.

FERC AUTHORITY

In 1992, pursuant to the Energy Policy Act of 1992 ("1992 Energy Act"), the FERC required utilities under its jurisdiction to provide access to their electric transmission systems for interstate wholesale transactions on terms and at rates comparable to those available to the owning utility for its own use. Municipal Utilities are subject to FERC orders requiring provision of wholesale transmission service to other utilities, qualifying cogeneration facilities, and independent power producers. Under FERC rules promulgated subsequent to the 1992 Energy Act, FERC further expanded open access wholesale transmission by requiring public utilities operating in interstate commerce to file open access non-discriminatory transmission tariffs. Because the interconnected ERCOT grid operates outside interstate commerce and because PURA95 and SB 7, State laws discussed below, provide comparable wholesale transmission authority to the PUCT for utilities in ERCOT pursuant to which the PUCT has required open access of transmission facilities in ERCOT, the exercise of FERC authority relating to open access transmission has not been a major factor in the operation of the wholesale market in ERCOT. The 2005 Energy Act authorizes FERC to encourage and approve the voluntary formation of regional transmission organizations in order to promote fair and open access to electric transmission service and facilitate wholesale competition. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – THE ELECTRIC UTILITY INDUSTRY GENERALLY – Federal Energy Policy" herein. The ERCOT open access system is administered by an ISO conducting many of the functions that would be administered by a Regional Transmission Organization. Section 1211 of the 2005 Energy Act amended the Federal Power Act to include a new section, designated as Section 215, which directed FERC to certify an ERO and develop procedures for establishing, approving and enforcing electric reliability standards. As discussed herein under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System - Interconnected System", FERC designated NERC to serve as the ERO and to set and monitor through Regional Entities ("RE") implementation of electric reliability standards. A separate group within the ERCOT region, the Texas Reliability Entity, was selected to serve as the RE for the ERCOT service area, and CPS Energy has developed a comprehensive framework to ensure compliance with the electric reliability standards.

On November 16, 2016, FERC proposed to amend its regulations under the Federal Power Act to remove barriers to the participation of electric storage resources and distributed energy resource aggregations in the capacity, energy, and ancillary service markets

82 operated by regional ISOs. Specifically, FERC proposed to require each ISO to revise its tariff to (1) establish a participation model consisting of market rules that, recognizing the physical and operational characteristics of electric storage resources, accommodates their participation in the organized wholesale electric markets and (2) define distributed energy resource aggregators as a type of market participant that can participate in the organized wholesale electric markets under the participation model that best accommodates the physical and operational characteristics of its distributed energy resource aggregation. In a per curiam opinion issued by the United States Court of Appeals for the District of Columbia on June 20, 2017, the court denied Advanced Energy Management Alliance's petition to vacate FERC's approval as to capacity performance program changes. In August 2017 the U.S. Senate confirmed two of President Trump's FERC nominees, producing a quorum for the agency (the first since February 2017).

CPS Energy and the STPNOC will continue to monitor and evaluate FERC developments with a potential to impact the gas and electric systems; however, it is unclear what changes, if any, will be proposed as a result of the Memorandum of Agreement.

THE PUBLIC UTILITY COMMISSION OF TEXAS (PUCT)

The PUCT exercises regulatory authority over the retail and wholesale markets of Texas. The PUCT is comprised of two commissioners and a chair appointed by the Governor. The PUCT writes rules that determine the workings of the ERCOT market and has enforcement authority relating to violations of its rules and the ERCOT protocols. Beginning in 2021, as a result of legislation passed by the 84th Legislature in 2015, the PUCT will require MOUs to file certificates of convenience and necessity ("CCN") to build transmission outside its city limits. The PUCT thereafter set a rulemaking schedule to revise the current process for obtaining CCNs in accordance with the new legislation ("Project No. 45124"). The rulemaking also considered modification to the Competitive Renewable Energy Zones Rule. The proposed rules were published February 11, 2016, with a comment period following. Commissioners adopted the rules at the June 9, 2016 Open Meeting and were effective July 5, 2016. These rules allow for MOUs to continue building transmission outside their service areas plus 10 miles until the 2021 effective date, without having to go to the PUCT for a CCN. Effective May 28, 2017, the PUCT issued a new rule allowing the PUCT, after notice and hearing, to revoke or amend any CCN if the PUCT finds that certain adverse conditions exist. The PUCT does not directly regulate retail rate cases of municipally owned electric utilities, but it does have limited appeal jurisdiction related to ratepayers outside of municipal jurisdiction.

TEXAS RELIABILITY ENTITY, INC. (TEXAS RE)

Headquartered in Austin, Texas, Texas Reliability Entity, Inc. ("Texas RE") performs the regional entity functions described in the 2005 Energy Act, which created Section 215 of the Federal Power Act, for the ERCOT region, as mandated by the delegation agreement with the NERC. The delegation agreement was approved by FERC. Texas RE is authorized by NERC to develop, monitor, assess, and enforce compliance with NERC Reliability Standards within the geographic boundaries of the ERCOT region, as well as to assess and periodically report on the reliability and adequacy of the bulk power system. In addition, Texas RE has been authorized by the PUCT and is permitted by NERC to investigate compliance with the ERCOT Protocols and Operating Guides, working with the PUCT staff regarding any potential protocol violations. Texas RE is independent of all users, owners, and operators of the bulk power system. The regional entity functions and protocol compliance were previously performed by Texas Regional Entity, a functionally independent division of ERCOT. Texas RE took over all responsibilities of Texas Regional Entity on July 1, 2010.

ERCOT

ERCOT is one of eight Regional Reliability Councils in NERC. The ERCOT bulk electric system is located entirely within the State and serves approximately 24 million customers, representing approximately 90% of the State's electrical load. The ERCOT service region covers 75%, or 200,000 square miles, of the State and contains a total of 46,500 miles of transmission lines, including 9,249 miles at 345-kV. On June 14, 2017, the ERCOT Board of Directors endorsed a transmission project that includes two new 345-kV lines to address future reliability concerns in West Texas. ERCOT only has asynchronous ties to other reliability councils and is only connected through two direct current ("DC") ties to the eastern interconnect and three small DC ties to Mexico, providing only limited import / export capability.

In response to legislative directive, ERCOT amended its articles of incorporation to establish an ISO in 1996. Under ERCOT's organizational structure, the ISO reports to the ERCOT Board of Directors, but the PUCT has complete authority to oversee and investigate ERCOT's finances, budget, and operations as necessary to ensure that ERCOT is accountable. ISO responsibilities include security operations of the bulk system, facilitation and efficient use of the transmission system by all market participants, and coordination of regional transmission planning among transmission owning utilities and providers.

ERCOT's statutory functions include establishing and enforcing procedures relating to the reliability of the regional electrical network and accounting for the production and delivery of electricity among generators and all other market participants. The procedures are subject to PUCT oversight and review, and the PUCT chairman is an ex-officio member of the ERCOT Board. The PUCT may authorize ERCOT to charge a reasonable and competitively neutral rate to wholesale buyers and sellers to cover the 83 independent organization's costs. Individual electric utilities own sections or components of the ERCOT transmission grid and are responsible for operating and maintaining their own transmission lines and equipment. The ISO coordinates the operation of the transmission grid to ensure its reliability, and ERCOT coordinates with the various transmission-owning electric utilities to make sure the transmission system will meet the needs of the electric market. The 1999-enacted SB 7 (described in greater detail below under "ELECTRIC UTILITY RESTRUCTURING IN TEXAS") provides that a retail electric provider, municipally owned utility, electric cooperative, power marketer, transmission and distribution utility, or Power Generation Company shall observe all scheduling, operating, planning, reliability, and settlement policies, rules, guidelines and procedures established by the ISO.

Under the PUCT's transmission open access rules, each transmission service provider in ERCOT is required to provide transmission service to transmission customers in ERCOT. As compensation for this service, each transmission service provider annually recovers, through ERCOT-wide transmission charges, its Transmission Cost of Service ("TCOS"), which is set by the PUCT. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates – Transmission Access and Rate Regulation" herein.

On June 3, 2014, CPS Energy filed an Application for Interim Update of Wholesale Transmission Rates with the PUCT, pursuant to P.U.C. Subst. R. 25.192(h)(1). The application was approved on July 23, 2014 and resulted in an annual transmission revenue requirement of $169.5 million. This represents an increase of $74.3 million from the $95.2 million transmission revenue requirement previously established.

In September 2006, the PUCT selected Potomac Economics ("Potomac"), an energy consulting firm, to serve as the independent market monitor ("IMM") for ERCOT, a function that was legislated at the request of the PUCT by the 2005 Texas Legislature. The IMM has the authority to conduct monitoring, analysis and reporting activities but has no enforcement authority. A PUCT rule provides that the IMM shall report directly to the PUCT any potential market manipulations, including market power abuse, and any violations of PUCT rules or ERCOT protocols.

The PUCT rule establishes the IMM as an office independent from ERCOT, which is not subject to the supervision of ERCOT with respect to its monitoring and investigative activities. ERCOT funds the operations of the IMM, but the budget and expenditures of the IMM are subject to PUCT supervision and oversight. The ethical standards governing the IMM director and staff are intended to prevent conflicts of interest between the IMM and a market participant or an affiliate of a market participant. The rule took effect in April 2006.

ELECTRIC UTILITY RESTRUCTURING IN TEXAS

During the 1999 Legislative Session, the Texas Legislature enacted SB 7, providing for retail electric open competition. The enactment of SB 7 modified the PURA and required that retail and wholesale competition begin on January 1, 2002. SB 7 continues Texas electric transmission wholesale open access, which came into effect in 1997 and requires all transmission system owners to make their transmission systems available for use by others at prices and on terms comparable to each respective owner's use of its system for its own wholesale transactions. SB 7 modifications to PURA also fundamentally redefined and restructured the Texas electric industry. The following discussion of SB 7 applies primarily to ERCOT.

SB 7 includes provisions that apply directly to Municipal Utilities, such as CPS Energy, as well as other provisions that govern investor owned utilities ("IOUs") and electric co-operatives ("Electric Co-ops"). As of January 1, 2002, SB 7 allows retail customers of IOUs to choose their electric energy suppliers. SB 7 also allows retail customers of those Municipal Utilities and Electric Co-ops that elect to opt-in, on or after that date, to choose their electric energy suppliers. Provisions of SB 7 that apply to the CPS Energy electric system, as well as provisions that apply only to IOUs and Electric Co-ops, are described below, the latter for the purpose of providing information concerning the overall restructured electric utility market in which CPS Energy and the City could choose to directly participate in the future.

SB 7 required IOUs to separate their retail energy service activities from regulated utility activities by September 1, 2000, and to unbundle their generation, transmission / distribution and retail electric sales functions into separate units by January 1, 2002. An IOU may choose to sell one or more of its lines of business to independent entities, or it may create separate but affiliated companies and possibly operating divisions. If so, these new entities may be owned by a common holding company, but each must operate largely independent of the others. The services offered by such separate entities must be available to other parties on non- discriminatory bases. Municipal Utilities and Electric Co-ops which open their service territories ("opt-in") to retail electric competition are not required to, but may, unbundle their electric system components. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – RETAIL AND WHOLESALE ELECTRIC AND GAS SALES – Retail Service Area" herein.

ENTITIES THAT HAVE OPTED-IN TO COMPETITION

The following discussion relates to entities that are currently in electric competition in Texas and does not apply to CPS Energy, but could apply if CPS Energy and the City opt-in to electric competition. Generation assets of IOUs are owned by Power 84 Generation Companies, which must register with the PUCT and must comply with certain rules that are intended to protect consumers, but they otherwise are unregulated and may sell electricity at market prices. IOU owners of Transmission and Distribution Utilities ("TDUs") are fully regulated by the PUCT. Retail sales activities are performed by Retail Electric Providers ("REPs") which are the only entities authorized to sell electricity to retail customers (other than Municipal Utilities and Electric Co-ops within their service areas, or, if they have adopted retail competition, also outside their service areas). REPs must register with the PUCT, demonstrate financial capabilities, and comply with certain consumer protection requirements. REPs buy electricity from Power Generation Companies, power marketers, and / or other parties and may resell that electricity to retail customers at any location in ERCOT (other than within service areas of Municipal Utilities and Electric Co-ops that have not opened their service areas to retail competition). TDUs, Municipal Utilities, and Electric Co-ops that have chosen to participate in competition are obligated to deliver electricity to retail customers and are also required to transport electricity to wholesale buyers.

The PUCT is required to approve the construction of TDUs' new transmission facilities and may order the construction of new facilities in Texas in order to relieve transmission congestion. TDUs are required to provide access to both their transmission and distribution systems on a non-discriminatory basis to all eligible customers. Retail rates for the use of distribution systems of Municipal Utilities and Electric Co-ops are exclusively within the jurisdiction of these entities' governing bodies rather than that of the PUCT.

SB 7 also provides a number of consumer protection provisions. Each service area within the State that participates in retail competition has a designated Provider of Last Resort; those Providers of Last Resort serving in former service areas of IOUs are selected and approved by the PUCT. CPS Energy has the option to be designated as a Provider of Last Resort for its service area if it chooses to opt-in. The Provider of Last Resort is a REP that must offer to sell electricity to any retail customer in its designated area at a standard rate approved by the PUCT. The Provider of Last Resort must also serve any customer whose REP has failed to provide service. Each Municipal Utility and Electric Co-op that opts-in to retail competition may designate itself or another qualified entity as the Provider of Last Resort for its service territory. In such cases, the respective Municipal Utility or Electric Co-op, not the PUCT, will set the electric rates for such respective Provider of Last Resort.

Under SB 7, IOUs may recover a portion of their "stranded costs" (the net book value of certain "non-economic" assets less market value and certain "above market" purchased-power costs) and "regulatory assets", which is intended to permit recovery of the difference between the amount necessary to pay for the assets required under prior electric regulation and the amount that can be collected through market-based rates in the open competition market. SB 7 establishes the procedure to determine the amount of IOU stranded costs and regulatory assets. The PUCT has determined the stranded costs, which have been and will be collected through a non-bypassable competitive transition charge collected from the end retail electric users within the IOU's service territory as it existed on May 1, 1999. The charge is collected primarily as an additional component to the rate for the use of the retail electric distribution system delivering electricity to such end user.

IOUs may recover a certain portion of their respective stranded costs through the issuance of bonds, with a maturity not to exceed 15 years, whereby the principal, interest and reasonable costs of issuing, servicing, and refinancing such bonds is secured by a qualified rate order of the PUCT that creates the "competitive transition charge". Neither the State nor the PUCT may amend the qualified rate order in any manner that would impair the rights of the "securitized" bondholders.

ADDITIONAL IMPACTS OF SENATE BILL 7 DEREGULATION

Municipal Utilities and Electric Co-ops are largely exempt from the requirements of SB 7 that apply to IOUs. While IOUs became subject to retail competition beginning on January 1, 2002, the governing bodies of Municipal Utilities and Electric Co-ops have the sole discretion to determine whether and when to opt-in to retail competition. However, if a Municipal Utility or Electric Co- op has not voted to opt-in, it will not be able to compete for retail energy customers at unregulated rates outside its traditional electric service area or territory.

SB 7 preserves the PUCT's regulatory authority over electric transmission facilities and open access to such transmission facilities. SB 7 provides for an independent transmission system operator (an ISO as previously defined) that is governed by a board comprised of market participants and independent members and is responsible for directing and controlling the operation of the transmission network within ERCOT. The PUCT has designated ERCOT as the ISO for the portion of Texas within the ERCOT area. In addition, SB 7 (as amended by the Texas Legislature after 1999) directs the PUCT to determine electric wholesale transmission open access rates on a 100% "postage stamp" pricing methodology.

The greatest potential impact on CPS Energy's electric system from SB 7 could result from a decision by the Board and the City Council to participate in a fully competitive market, particularly in light of the fact that CPS Energy is among the lowest cost producers of electric energy in Texas. On April 26, 2001, the City Council passed a resolution stating that the City did not intend to opt-in to the deregulated electric market beginning January 1, 2002. However, CPS Energy currently believes that it is taking all steps necessary to prepare for possible competition in the unregulated energy market, should the Board and the City Council make a decision to opt-in, or if future legislation forces Municipal Utilities and Electric Co-ops into retail competition.

85 Any future decision of the Board and the City Council to participate in full retail competition would permit CPS Energy to offer electric energy service to customers located in areas participating in retail choice that are not presently within the certificated service area of CPS Energy. The Board and the City Council could likewise choose to open the CPS Energy service area to competition from other suppliers while choosing not to have CPS Energy compete for retail customers outside its certified service area.

As discussed above, Municipal Utilities and Electric Co-ops will also determine the rates for retail use of their distribution systems after they open their territories to retail competition, although the PUCT has established by rule the terms and conditions applicable to have access to those systems. SB 7 also permits Municipal Utilities and Electric Co-ops to recover their stranded costs through collection of a non-bypassable transition charge from their customers if so determined by such entities through procedures that have the effect of procedures available to IOUs under SB 7. Unlike IOUs, the governing body of a Municipal Utility determines the amount of stranded costs to be recovered pursuant to rules and procedures established by such governing body. Municipal Utilities and Electric Co-ops are also permitted to recover their respective stranded costs through the issuance of bonds in a similar fashion to the IOUs. Any decision by CPS Energy as to the magnitude of its stranded costs, if any, would be made in conjunction with the decision as to whether or not to participate in retail competition.

A Municipal Utility that decides to participate in retail competition and to compete for retail customers outside its traditional service area will be subject to a PUCT-approved code of conduct governing affiliate relationships and anti-competitive practices. The PUCT has established by a standard rule the terms and conditions, but has no jurisdiction over the rates, for open access by other suppliers to the distribution facilities of Municipal Utilities electing to compete in the retail market.

Among other provisions, SB 7 provides that nothing in that act or in any rule adopted under it may impair any contracts, covenants that may impair the tax-exempt status of municipalities or compel them to use facilities in a manner that violates any bond covenants, or obligations between municipalities and bondholders of revenue bonds issued by municipalities. The bill also improves the competitive position of Municipal Utilities by allowing local governing bodies, whether or not they implement retail choice, to adopt alternative procurement processes under which less restrictive competitive bidding requirements can apply and to implement more liberal policies for the sale and exchange of real estate. Also, matters affecting the competitiveness of Municipal Utilities are made exempt from disclosure under the open meetings and open records acts and the right of Municipal Utilities to enter into risk management and hedging contracts for fuel and energy is clarified. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Fuel Supply", "– RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES – WHOLESALE POWER" and "– FINANCIAL MANAGEMENT OF THE SYSTEMS – ENTERPRISE RISK MANAGEMENT & SOLUTIONS" herein for discussion of the Energy Price Risk Management Program in use at CPS Energy.

During its 83rd Legislative Session in 2013, the Texas Legislature reviewed and passed the mission and performance of the PUCT and the RRCT as required by the Texas Sunset Act. This act provides that the Sunset Advisory Commission, composed of legislators and public members, periodically evaluate a state agency to determine if the agency is still needed, and what improvements are needed to ensure that tax dollars are appropriately utilized. Based on recommendations of the Sunset Advisory Commission, the Texas Legislature ultimately decides whether an agency continues to operate into the future.

The Sunset Advisory Commission reviewed the PUCT and the RRCT in 2013 and made recommendations to the 83rd Legislature on the agencies, including their continuance. The 83rd Legislature approved the PUCT Sunset bill (HB 1600), continuing the PUCT until 2023. The Sunset legislation for the RRCT failed to pass in both 2013 and 2015, triggering a third consecutive review of the agency. In December 2016, the Sunset Advisory Commission recommendations were finalized and filed as the RRCT's Sunset Bill for consideration by the 85th Texas Legislature in February 2017. The Sunset Advisory Commission determined that no major structural changes to the RRCT or its name were needed. Instead, the report issued in January 2017 focused on improving the RRCT's oil and gas enforcement programs. The resulting legislation, HB 1818, was passed by the 85th Legislature and signed into law by Governor Abbott in May 2017. CPS Energy is only regulated by the RRCT with regards to pipeline safety and damage prevention.

The 84th Regular Legislative Session ended June 1, 2015. The most notable piece of legislation that passed impacting CPS Energy was SB 776 requiring a MOU to obtain a CCN from the PUCT for the construction of a transmission facility outside the certificated area of a municipality. MOUs must get PUC-approved CCNs outside of their service territory plus ten miles until 2021 and outside their city limits thereafter, MOUs can make payments in lieu of taxes on external transmission. A MOU required to apply for a CCN would be entitled to recover payments in lieu of property taxes through its wholesale transmission fees if the utility had a written agreement with the taxing entity, the payments in lieu of taxes were equivalent to the taxes it would have paid if it were a private entity, the governing body of the taxing entity was not the same as the governing body of the utility, and the utility provided the PUCT with a copy of the written agreement and any other information the PUCT deemed necessary.

SB 776 was signed by the Texas Governor on June 19, 2015 and took effect on September 1, 2015. The PUCT rulemaking process on implementation of SB 776 was initiated in September 2015 and completed on June 9, 2016. See "CERTAIN FACTORS

86 AFFECTING THE ELECTRIC UTILITY INDUSTRY – The Electric Utility Industry Generally – The Public Utility Commission of Texas (PUCT)".

In 2017, the 85th Texas Legislature convened in general and special sessions. The most notable piece of legislation that passed during these sessions impacting CPS Energy was SB 758, which amends the utility’s bill payment assistance program for low- income customers. The enactment of this legislation removed the statutory requirement for CPS Energy and SAWS to notify a low- income customer with disconnection before they could be enrolled in the program. The bill payment assistance program for utility system customers now only requires a determination by the municipality as to low-income status.

Another notable piece of legislation important to CPS Energy was the passage of HB 1818, the Railroad Commission Sunset Bill. The passage of HB 1818 was significant as this is the third attempt to pass a Railroad Commission Sunset bill in the last four legislative sessions. HB 1818 continues the functions of the RRCT until September 2029. Additionally, it focuses on agency efficiencies and has a strong emphasis on pipeline safety by granting the RRCT the ability to create a pipeline permit fee to potentially help the commission fill a budget shortfall in its pipeline safety program. The fees would be assessed on new permits or the renewal of permits. HB 1818 also repeals the Alternative Fuels Promotion Program and the Oil and Gas Regulation and Cleanup Fund Advisory Committee.

ENVIRONMENTAL RESTRICTIONS OF SENATE BILL 7 AND OTHER RELATED REGULATIONS

SB 7, enacted in 1999, contains specified emissions reduction requirements for certain older electric generating units, which would otherwise be exempt from the TCEQ permitting program by virtue of "grandfathered" status. Under SB 7, annual emissions of NOx from such units were reduced by 50% from 1997 levels, beginning May 1, 2003. These emissions have been reported on a yearly basis, and CPS Energy has met the requirements of its NOx cap for the applicable units for the past compliance years. CPS Energy has final Electric Generating Facility ("EGF") state permits from the TCEQ for its remaining seven older electric generating gas-fired units. CPS Energy may require future additional expenditures for emission control technology. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Environmental Matters – Federal Clean Air Act" and "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – FINANCIAL MANAGEMENT OF THE SYSTEMS – Capital Program" herein for discussion of the cumulative economic effect of these requirements together with requirements under Federal Clean Air Act permits.

Although SB 7 instituted many of the changes to environmental emission controls which affect grandfathered electric generating plants, another TCEQ regulation, Chapter 117, is directed at all units in the State, including CPS Energy's coal plants. These regulations required a 50% reduction in NOx emissions statewide beginning May 1, 2005, and system-wide on an annual basis. CPS Energy has met the Chapter 117 cap for each compliance period. As a result of the Spruce2 air permitting process, CPS Energy has committed to tighter NOx emission limitations than what is required under Chapter 117 at the Calaveras Power Station upon the Spruce2 unit coming on line. The final CAIR has imposed even more NOx restrictions on CPS Energy power plants as described in "ENVIRONMENTAL MATTERS" herein. CAIR has been replaced by the CSAPR. CSAPR was made final in July 2011, and is more stringent than CAIR. Texas is included in the annual and ozone season NOx reduction programs. The CSAPR was put on hold on December 30, 2011, until several legal challenges were resolved. CAIR was effective for the 2014 reporting periods, but otherwise, CSAPR is effective. On October 23, 2014, the D.C. Circuit Court lifted its stay of the EPA's CSAPR. Compliance options under the rule began on January 1, 2015. Phase 1 emission budgets began to apply on January 1, 2015, for the annual programs and also applied in 2016. On June 6, 2017, EPA Administrator Scott Pruitt announced a one-year delay of EPA's final designation of areas under the 2015 ozone standard. The 2015 standard was issued on October 26, 2015 and tightened the existing 2008 standard from 75 ppb to 70 ppb. In general, EPA is required to issue designations within two years of publication of a new standard. Designations for the 2015 standard were originally due by October 2017, and EPA would have been required to preview for the states its intended designations at least 120 days in advance of the October deadline, or August 2017.

Section 107(d) of the Clean Air Act explicitly authorizes EPA to extend the timeframe for final area designations by up to one year "in the event the Administrator has insufficient information to promulgate the designations." Administrator Pruitt sent a letter to state governors announcing the extension of the designation deadline that states: "I have determined that there is insufficient information, and taking additional time is appropriate to consider completely all designation recommendations provided by state governors".

Changes to environmental emission controls may have the greatest effect on coal plants. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – COMPLIANCE AND REGULATION – Environmental Matters – Federal Clean Air Act" herein. Further statutory changes and additional regulations may change existing cost assumptions for electric utilities. Such changes could have a material impact on the cost of power generated at affected electric generating units.

SB 7 established the State's goal for renewable energy in 1999 but made no special provisions for transmission to interconnect renewable resources. The rapid development of wind power in west Texas since 2001 has shown that wind farms can be built more quickly than traditional transmission facilities. This timing difference poses a dilemma for planning, as it is difficult to know 87 whether a new line will be needed if the generation facilities do not yet exist. A wind farm is difficult to finance if there is no certainty that sufficient transmission will be available to deliver generated electricity. Senate Bill 20, enacted by the Texas Legislature in 2005 ("SB 20"), authorized the PUCT to regulate in this area, and specifically authorized the PUCT to identify areas with sufficient renewable energy potential, known as competitive renewable energy zones ("CREZs") and pre-designate the need for transmission facilities serving the area even if no specific renewable generation projects exist or are under construction. The designation of CREZs in regions with developable renewable resources would be partially based on financial commitments of wind project developers desirous of building in the CREZ. In July 2008, the PUCT voted to create five CREZs in west Texas and the Panhandle. In August 2008, the PUCT further decided that an additional 18,456 MW of wind energy from the five CREZs would be delivered into ERCOT via transmission lines estimated to cost ERCOT rate payers a minimum of $4.93 billion. The PUCT awarded the construction of those transmission lines to transmission service providers ("TSPs") in whose service areas the lines will be located and new entrants seeking to become TSPs. The PUCT's decision was appealed by the City of Garland, and a State District Court has determined that the PUCT should have given municipally owned utilities consideration in the CREZ award process. The PUCT reconsidered and awarded a CREZ line for the City of Garland to construct. CPS Energy does not plan to renew its request for authority to construct any part of the CREZ lines. Under the statewide transmission costs allocation process, CPS Energy will pay approximately 7% of these construction costs. Payments will not start until the lines are constructed and placed into service. In the PUCT's January 2017 "Report to the 85th Texas Legislative – Scope of Competition in Electric Markets in Texas", the PUCT determined that the CREZ project established in 2008 was complete following the installation of a second circuit on a Sharyland line.

The Legislature increased the State's renewable energy goal in 2005 with the enactment of SB 20. As amended by SB 20, PURA directs that the cumulative installed renewable capacity in the State must total 2,280 MW by January 1, 2007; 3,272 MW by January 1, 2009; 4,264 MW by January 1, 2011; 5,256 MW by January 1, 2013; and 5,880 MW by January 1, 2015. Further, the PUCT is directed to establish a target of 10,000 MW by January 1, 2025. The legislation includes a target of 500 MW from renewable resources other than wind power. In addition, on April 2, 2008, ERCOT filed a report with the PUCT concerning wind power and the transmission facilities that may be necessary to transfer the electric power across the State.

According to ERCOT, about 20% of the electricity generated in Texas during calendar year 2016 came from wind energy resources, up from 11.7% for all of 2015. The total capacity of renewable facilities in Texas as of May 2017 is approximately 18,787 MW which exceeds the 5,256 MW January 1, 2013 goal specified in the PUCT Substantive Rule 25.173 – Goal for Renewable Energy, and is above the January 1, 2025 "target" of 10,000 MW wind generation. On March 31, 2017, wind generation in ERCOT produced a new record of 16,141 MW. ERCOT's wind penetration record was set on March 23, 2017, at 50% of load.

Looking to the future, CPS Energy plans to evolve from a company focused on providing low-cost power from traditional generation sources to a company providing competitively priced power from a variety of sustainable and lower carbon emitting sources. CPS Energy will continue to focus on high levels of reliability to the communities it serves, while working on customer retention and loyalty.

WHOLESALE MARKET DESIGN DEVELOPMENTS

On December 1, 2010, ERCOT transitioned from a zonal market design to a nodal market similar to those in Midwest Independent System Operator ("MISO"), Pennsylvania, New Jersey, Maryland Independent System Operator ("PJM"), New York Independent System Operator ("NYISO"), and the New England Independent System Operator.

In 2011, the ERCOT market saw significant weather events. The first event, consisting of extreme cold weather, occurred on February 2, and continued through that week. ERCOT had between 8,000 and 12,000 MWs of generation trip off-line due to extreme cold weather. As a result of lost generation, ERCOT was forced to shed firm load resulting in mandatory investigations. Regulatory authorities, including NERC, conducted reviews of these events. Following the February 2, 2011 event, both regulatory and market design changes were implemented. The market design changes consisted of: 1) changing the reporting timeline for resource outages; 2) changing the dispatch sequence for Emergency Response Service ("ERS"); 3) changing the Energy Emergency Alert process to allow ERCOT to facilitate ERCOT communications with Qualified Scheduling Entities during emergencies; and 4) changes to the Black Start (power restoration) processes. Regulatory actions centered around: 1) recognizing the value of effective communication and action between the PUCT, the TCEQ, and the RRCT; 2) hiring a contractor to study and report on generators, preparedness for cold weather events; and 3) improving communication between ERCOT and public officials and decision makers.

The second weather event experienced in the ERCOT wholesale market was the extreme high temperatures during June, July, and August of 2011 and accompanying drought. The market experienced over 70 consecutive days with temperatures over 100 degrees Fahrenheit. During this time period ERCOT came close to shedding firm load for capacity insufficiency. Prices during the daily peaks hit $3,000 per MWh for sustained periods. Several market design changes were discussed to improve the market in these resource-constrained periods and, as hereafter described, have been implemented.

88 Specifically, in response to concerns about capacity reserves and the need to provide incentives for investment in new generation resources, the PUCT initiated two rulemaking proceedings addressing resource and reserve adequacy and shortage pricing. The first proposal (in PUCT Docket 40268) amended an existing rule relating to the scarcity pricing mechanism by increasing high and low system offer caps and the peaker net margin. A second rule (in PUCT Docket 37897) was adopted on July 3, 2012 allowing resources to offer energy and ancillary services in the ERCOT market at a cap of $4,500 per MW and $4,500 per MW, respectively, beginning August 1, 2012 through the effective date of amendments to the high system-wide offer cap adopted in rulemaking proceeding 40268. Through the rulemaking comment process, the PUCT explored whether the proposed changes would have the desired effect on resource adequacy and what effect the changes would have on the financial exposure of market participants, among other issues. On June 1, 2012, the PUCT and ERCOT commissioned the Brattle Group to examine the capacity shortage issue. The Brattle Report concluded that the existing market design supports about an 8% reserve margin and that the energy only approach (even if modified) supports, on average, a 10% reserve margin. In response the PUCT took action to determine: a) what is the appropriate reserve margin; b) is the reserve margin a target or a minimum requirement; and c) what is the best market design to achieve the answers to a) and b). On October 25, 2012, the PUCT voted to double the cap on wholesale electricity offers over the next three years. The maximum wholesale rate rose from $5,000 per MWh to $7,500 per MWh in June 2014 and rose to $9,000 per MWh in June 2015. The PUCT consolidated its resource adequacy activities under a new docket in the fall of 2012 – PUCT Docket 40000. In Docket 40000, the PUCT went back to the Brattle Group to study the economically optimal reserve margin in ERCOT. In January 2014, Brattle reported that the economically optimal reserve margin to be 10.2%. Brattle further concluded that the existing market design supported a reserve margin of 11.5%. Both of these numbers are compared to a reserve margin of 14.1% to cover a one loss of load event in ten years. In May 2017, ERCOT updated its Capacity Demand Reserves ("CDR") report showing reserves projected to be 18.9% for summer 2018. The reserve margin drop from the December 2016 CDR reflects delays in forecasted commercial operation dates beyond 2018 for several generation projects. Margins for the subsequent three years continue to exceed 18%. CPS Energy will monitor these proceedings closely to assess the effect of the new regulations on its business.

In order to improve scarcity price signals, the PUCT instructed ERCOT to implement an Operating Reserve Demand Curve ("ORDC") in June 2014. The ORDC is currently operational as an energy price enhancement mechanism that adds to the energy price based on system conditions. ERCOT calculates the adder based on the probability of a loss of load and the cost of a loss of load. Therefore, as systems reserves drop the adder calculated by ERCOT increases and the price of energy increases. The ERCOT market has not experienced any significant scarcity events since the implementation of ORDC; however, the mechanism is expected to improve scarcity price signals, but it also induces additional volatility into the ERCOT electricity market.

The 82nd Legislature passed Senate Bill 1613 ("SB 1613"), which modifies the competitive matters exemption in the Public Information Act for public power utilities concerning public power "competitive matters". SB 1613 updates the existing law based on a decade of experience with competitive electricity markets. It continues to allow CPS Energy and other MOUs to protect "competitive matters" from disclosure under the open meetings and open records laws. SB 1613 protects the consumers of MOUs because their utility can participate in wholesale electric markets without being disadvantaged.

CONTINUING DISCLOSURE OF INFORMATION

In the Ordinance, the City, acting by and through the Board (who has accepted such responsibility by resolution of the Board adopted on October 30, 2014) made the agreement described below for the benefit of the owners and Beneficial Owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Board, on behalf of the City, will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified events, to the MSRB through its EMMA System, where such information will be available to the general public, free of charge, through an internet website at www.emma.msrb.org.

ANNUAL REPORTS

Under Texas law, including, but not limited to, Chapter 103, as amended, Texas Local Government Code, Texas Government Code Sections 1502.66, 1502.67 and 1502.68, as amended, and the City's Home Rule Charter, the Board must keep its fiscal records in accordance with generally accepted accounting principles, must have its financial accounts and records audited by an independent certified public accountant, and must file each audit report with the Secretary of the Board, within 180 days after the close of the Board's fiscal year. The Board's financial statements and independent auditors' reports are available for public inspection to the extent information contained in them is not excepted from disclosure under the Texas Public Information Act, as amended, Texas Government Code, Chapter 552. Persons may obtain copies of the portions of these documents not excepted from disclosure under the Texas Public Information Act upon submission of a written request to the Secretary of the Board, and paying the reasonable copying, handling and delivery charges for providing this information.

The Ordinance obligates the City, acting by and through the Board, to provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the Board of the general type included in this Remarketing Memorandum under the headings "SAN ANTONIO 89 ELECTRIC AND GAS SYSTEMS – RETAIL AND WHOLESALE ELECTRIC AND NATURAL GAS SALES – Retail Service Area – Customer Base as of January 31, 2017"; "TEN-YEAR ELECTRIC CUSTOMER STATISTICS", "FIVE-YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY" and "FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE" Tables under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – CUSTOMERS AND RATES – Customer Rates"; "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System - Generating Capability"; "Five-Year South Texas Project Capacity Factor" Table under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Electric System – Power Generation Sources"; "Other Electric and Gas Systems Statistics" under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – DESCRIPTION OF FACILITIES – Gas System – Rule Relating to Replacement of Gas Distribution Facilities"; and APPENDIX B. The Board will update and provide this information within six months after the end of each fiscal year of the Board. See "CONTINUING DISCLOSURE OF INFORMATION – Availability of Information" below.

The Board may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by the SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements, if the Board commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Board will provide unaudited financial statements by the required time and audited financial statements when and if the audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in APPENDIX B, or such other accounting principles as the Board may be required to employ from time to time pursuant to State law or regulation.

NOTICE OF CERTAIN EVENTS

The Board will also provide timely notices of certain events to the MSRB. The Board will provide notice in a timely manner (not in excess of ten business days after the occurrence of the event) of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City or CPS Energy, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the City or CPS Energy or the sale of all or substantially all of the assets of the City or CPS Energy, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional Paying Agent / Registrar or change in the name of the Paying Agent / Registrar, if material. Neither the Bonds nor the Ordinance make any provision for liquidity enhancement, credit enhancement, or debt service reserves. In addition, the Board will provide timely notice of any failure by the Board to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports."

For these purposes, any event described in clause (12) of the preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City or CPS Energy in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City or CPS Energy, or if jurisdiction has been assumed by leaving the governing body and officials or officers of the City or CPS Energy in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City or CPS Energy.

AVAILABILITY OF INFORMATION

Effective July 1, 2009 ("EMMA Effective Date"), the SEC implemented amendments to the Rule approving the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities information repositories with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the Board in accordance with its undertakings, including its undertaking for the Bonds, will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB. To view CPS Energy's latest financial information, please visit CPS Energy's website at: https://www.cpsenergy.com/en/about-us/who-we-are/financial-information.

With respect to debt of the City secured by revenues of the Systems and issued prior to the EMMA Effective Date, the City, acting by and through the Board, remains obligated to make annual required filings, as well as notices of material events, under its 90 continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information depository ("SID")). Prior to the EMMA Effective Date, the Municipal Advisory Council of Texas ("MAC") had been designated by the State and approved by the SEC staff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRB pursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documents and related information posted to EMMA's website simultaneously with such posting. Until the City receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the City has determined, in reliance on guidance from the MAC, that making its continuing disclosure filings solely with the MSRB will satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to the EMMA Effective Date.

LIMITATIONS AND AMENDMENTS

The City, acting by and through the Board, has agreed to update information and to provide notices of specified events only as described above. The City, acting by and through the Board, has not agreed to provide other information that may be relevant or material to a complete presentation of the Board's financial results of operations, conditions, or prospects or agreed to update any information that is provided, except as described above. The City and the Board make no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The City and the Board disclaim any contractual or tort liability for damages resulting in whole or in part from any breach of their continuing disclosure agreement or from any statement made pursuant to their agreement, although holders and Beneficial Owners of Bonds may seek a writ of mandamus to compel the City and the Board to comply with their agreements.

The City may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City or the Board, if the agreement, as amended, would have permitted an underwriter to purchase or sell the Bonds in the offering described herein in compliance with the Rule and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Board (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the Beneficial Owners of the Bonds. The City may also repeal or amend the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City also may amend these provisions in its discretion in any other manner or circumstance, but in either case, only if and to the extent that the provisions of this sentence would not have prevented an underwriter from lawfully purchasing or selling Bonds in the primary offering of bonds, giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the City amends its agreement, it has agreed that the Board, on behalf of the City, shall include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided.

COMPLIANCE WITH PRIOR UNDERTAKINGS

CPS Energy became obligated to make annual disclosure of certain financial information in 1996. Except as hereinafter provided, CPS Energy, during the past five years, has complied in all material respects with continuing disclosure agreements made by the City for which CPS Energy has agreed to comply on the City's behalf, in accordance with the Rule.

Due to an administrative oversight discovered in 2012, CPS Energy neglected to file its annual financial disclosure information (Annual Financial Report and other requisite financial statements) for the City's outstanding obligations having a base CUSIP number of 796300. This information was timely filed with respect to all other CPS Energy obligations (where it was available to the general public from the MSRB through EMMA) and, on October 9, 2012, was filed with respect to the outstanding obligations having this base CUSIP number, as well. CPS Energy is now current with respect to all continuing disclosure obligations required to be made by CPS Energy in accordance with the Rule.

LEGAL MATTERS

At the time of the initial issuance of the Bonds, the City furnished a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving Original Opinion of Original Co-Bond Counsel with respect to the Bonds issued in compliance with the provisions of the Ordinance, which Original Opinion is attached to this Remarketing Memorandum as APPENDIX D hereto.

Though they represent one of the Co-Financial Advisors and the Remarketing Agent from time to time in connection with matters unrelated to the Bonds, Norton Rose Fulbright US LLP and Kassahn & Ortiz, P.C., as Co-Bond Counsel to the City in connection with the remarketing of the Bonds that is the subject of this Remarketing Memorandum ("Co-Bond Counsel"), was engaged by and

91 only represents the City with respect to the remarketing of the Bonds. Co-Bond Counsel did not take part in the preparation of the Remarketing Memorandum and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that, in its capacity as Co-Bond Counsel, such firm has reviewed the information describing the Bonds in this Remarketing Memorandum to verify that such description conforms to the provision of the Ordinance. The legal fee to be paid Co-Bond Counsel for services rendered in connection with this remarketing of the Bonds is contingent upon the settlement of the remarketing of the Bonds. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Bonds, or which would affect the provisions made for their payment or security, or in any manner questioning the validity of Bonds was also furnished. In connection with the remarketing of the Bonds, certain legal matters will be passed upon for the Remarketing Agent by its counsel, McCall, Parkhurst & Horton L.L.P., San Antonio, Texas.

TAX MATTERS

GENERAL

Original Co-Bond Counsel stated in the Original Opinion, dated January 7, 2015, that, as of such date, interest on the Bonds for federal income tax purposes (1) would be excludable from gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date of such opinion (the "Code"), pursuant to section 103 of the Code and existing regulations, published rulings, and court decisions, and (2) would not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as described herein, corporations. A form of Original Co-Bond Counsel's Original Opinion is reproduced as APPENDIX D hereto.

The statutes, regulations, rulings, and court decisions on which such opinion was based are subject to change. Original Co-Bond Counsel's Original Opinion does not cover the effect on excludability of interest of subsequent action under the terms of the Ordinance may be taken only upon receipt of an opinion of counsel of nationally recognized standing in the field of municipal bond law.

Original Co-Bond Counsel’s Original Opinion assumed continued compliance with covenants contained in the Ordinance related to exclusion from gross income interest on the Bonds for federal income tax purposes and relied upon representations and certifications of the City made in the certificate dated the date of initial delivery of the Bonds pertaining to the use, expenditure, investment of the proceeds of the Bonds. If the City failed or fails to comply with the covenants in the Ordinance or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Bonds may become taxable from the date of initial delivery of the Bonds, regardless of the date on which the event causing such taxability occurs.

Because the Bonds are being converted from the Initial SIFMA Index Mode Interest Period to the Current Term Mode Interest Period, which is a Term Mode Interest Period under the Ordinance, the Ordinance does not require that an Opinion of Counsel be delivered in connection with such conversion. As a result, neither Original Co-Bond Counsel nor Co-Bond Counsel has been asked to undertake, and Co-Bond Counsel is not undertaking, any review or investigation of and has not been asked to express and does not express any opinion concerning the continuing treatment of the interest on the Bonds as excludable from gross income for federal income tax purposes. Co-Bond Counsel will, however, render an opinion to the Paying Agent / Registrar (on which the Remarketing Agent will be allowed to rely) that such remarketing will not adversely affect the excludability of interest on the Bonds for federal income tax purposes if the remarketing of the Bonds results in a reissuance under applicable federal tax law.

In the Original Opinion, Original Co-Bond Counsel expressed no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a financial asset securitization investment trust, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances.

Neither Original Co-Bond Counsel nor Co-Bond Counsel has expressed any opinion as to the treatment for federal income tax purposes of the interest paid by any liquidity provider on the Bonds or the effect on the excludability from gross income for federal income tax purposes of any action taken under the Ordinance which requires that the City shall have received an opinion of counsel nationally recognized in the field of municipal finance to the effect that such action will not adversely affect the excludability of the interest on the Bonds from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax

92 purposes. The Ordinance provides that prior to taking certain actions, including converting the interest rate on the Bonds from one rate mode to another rate mode, the City must have received such an opinion.

Original Co-Bond Counsel’s Original Opinion was and is not a guarantee of a result, but represented its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling was sought from the Internal Revenue Service (the "IRS") with respect to the matters addressed in the Original Opinion and Original Co-Bond Counsel’s Original Opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the Issuer as the "taxpayer", and the owners of the Bonds would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the City may have different or conflicting interests from the owners of the Bonds. Public awareness of any audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome. TAX CHANGES

Existing law may change to reduce or eliminate the benefit to bondholders of the exclusion of interest on the Bonds from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors with respect to any proposed or future changes in tax law.

TAX ACCOUNTING TREATMENT OF PREMIUM BONDS

The initial public offering price to be paid for certain Bonds may be greater than the stated redemption price on such Bonds at maturity (the "Premium Bonds"). An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and its stated redemption price at maturity constitutes premium to the initial purchaser of such Premium Bonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium with respect to the Premium Bonds. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity.

Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Bonds.

LEGAL INVESTMENTS IN TEXAS

Section 1201.041 of the Public Securities Procedures Act (Chapter 1201, as amended, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, as amended, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at least one million dollars of capital, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value.

The City has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. The City has made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states.

SECURITIES LAWS

No registration statement relating to the Bonds has been filed with the SEC under the Securities Act of 1933, as amended, in reliance upon exemptions provided thereunder. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities laws of any other jurisdiction. The City assumes no responsibility for registration or qualification of the Bonds under the securities laws 93 of any such jurisdiction in which the Bonds may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds must not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdictions.

RATINGS

Fitch, Moody's and S&P have each assigned and reaffirmed the long-term ratings of "AA+", "Aa2", and "AA-", respectively, to the Junior Lien Obligations (including the Bonds). An explanation of the significance of such ratings may be obtained from Fitch, Moody's and S&P. The rating of the Bonds by Fitch, Moody's and S&P reflects only the view of said companies at the time the rating is given, and the City makes no representations as to the appropriateness of any rating. There is no assurance that the ratings will continue for any given period of time, or that the ratings will not be revised downward or withdrawn entirely by Fitch, Moody's and S&P if in the judgment of Fitch, Moody's and S&P circumstances so warrant. Any such downward revision or withdrawal of any rating may have an adverse effect on the market price of the Bonds.

CO-FINANCIAL ADVISORS

PFM Financial Advisors LLC, FirstSouthwest, a Division of Hilltop Securities Inc., and Estrada Hinojosa & Company, Inc. ("Co-Financial Advisors") are employed as Co-Financial Advisors to the Board in connection with the remarketing of the Bonds. The Co-Financial Advisors' fee for services rendered with respect to the remarketing of the Bonds is contingent upon the successful remarketing of the Bonds. Although the Co-Financial Advisors have read and participated in the preparation of this Remarketing Memorandum, they have not independently verified any of the information set forth herein. The information contained in this Remarketing Memorandum has been obtained primarily from the City's and the Board's records and other sources which are believed to be reliable, including financial records of the Board and other entities, which may be subject to interpretation. No person, therefore, is entitled to rely upon the participation of the Co-Financial Advisors as implicit or explicit expression of opinions as to the completeness and accuracy of the information contained in this Remarketing Memorandum. The Co-Financial Advisors have relied on the opinion of Co-Bond Counsel and have not verified and do not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

SETTLEMENT OF REMARKETING

Morgan Stanley, as the Remarketing Agent for the Bonds from the Initial SIFMA Mode Interest Period to the Current Term Mode Interest Period, has agreed, subject to certain conditions, to remarket the Bonds, at the price and interest rate indicated on the inside cover page hereof, in exchange for compensation in the amount of $______. The Remarketing Agent will be obligated to remarket all of the Bonds if any Bonds are remarketed. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Remarketing Agent and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Remarketing Agent.

The Remarketing Agent has provided the following sentence for inclusion in this Remarketing Memorandum. The Remarketing Agent has reviewed the information in this Remarketing Memorandum in accordance with, and as part of, its responsibility to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agent does not guarantee the accuracy or completeness of such information.

Morgan Stanley, the Remarketing Agent of the Bonds, has entered into a retail distribution arrangement with its affiliate Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds.

INDEPENDENT AUDITORS

This Remarketing Memorandum includes the basic financial statements of CPS Energy for the fiscal years ended January 31, 2017 and 2016. These financial statements included in this Remarketing Memorandum as APPENDIX B have been audited by Baker Tilly Virchow Krause, LLP, Garza, Preis & Co., L.L.C., and Robert J. Williams, CPA, independent accountants, as stated in their report thereon, which also appears in APPENDIX B hereto.

As part of its external audit procurement process, CPS Energy issued a Request for Proposal for annual financial audits and related services in May 2013. In July 2013, CPS Energy selected Baker Tilly Virchow Krause, LLP; Garza, Preis & Co., L.L.C.; and Robert J. Williams, CPA, to serve as its external auditors. The current contract is set to expire on August 25, 2017 and will be extended for one-year until August 25, 2018.

94 USE OF INFORMATION IN REMARKETING MEMORANDUM

No person has been authorized to give any information or to make any representations other than those contained in this Remarketing Memorandum, and if given or made, such other information or representations must not be relied upon as having been authorized by the City or the Board. This Remarketing Memorandum does not constitute an offer to sell or solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer of solicitation.

References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader's convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Remarketing Memorandum for purposes of, and as that term is defined in, SEC Rule 15c2-12.

FORWARD-LOOKING STATEMENTS

This Remarketing Memorandum, including the Appendices hereto, contains forward-looking statements within the meaning of the federal securities laws. Such statements are based on currently available information, expectations, estimates, assumptions and projections, and management's judgment about the power utility industry and general economic conditions. Such words as "expects", "intends", "plans", "believes", "estimates", "anticipates" or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. Actual results may vary materially from what is contained in a forward-looking statement. Factors which may cause a result different from those expected or anticipated include, among other things, new legislation, increases in suppliers' prices, particularly prices for fuel in connection with the operation of the Systems, changes in environmental compliance requirements, acquisitions, changes in customer power use patterns, natural disasters and the impact of weather on operating results.

Although CPS Energy believes in making any such forward-looking statement, and its expectations are based on assumptions considered reasonable by CPS Energy, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to factors both identified within this Remarketing Memorandum and from publicly available resources about the electric and gas businesses, regulation and regulatory authorities for that business, and the City that could cause the actual results of CPS Energy to differ materially from those contemplated in such forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and CPS Energy undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for CPS Energy to predict all of such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

MISCELLANEOUS

The description of the Bonds contained in this Remarketing Memorandum does not purport to be complete. All references to the Bonds are qualified by reference to the Ordinance and to the complete form of the Bonds. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Remarketing Memorandum are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. So far as any statements made in this document involve budgeted amounts or other estimates or projections, whether or not so expressly stated, they should not be considered statements of fact or representations that the budgeted amount, estimate or projection will approximate actual results.

This Remarketing Memorandum has been approved by the authorized representatives of the Board.

CITY PUBLIC SERVICE BOARD OF SAN ANTONIO, TEXAS

By: /s/ Chairman, Board of Trustees City Public Service Board of San Antonio, Texas

95 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A

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CPS ENERGY

GENERAL DEMOGRAPHIC AND ECONOMIC INFORMATION

[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A

CITY OF SAN ANTONIO, TEXAS GENERAL DEMOGRAPHIC AND ECONOMIC INFORMATION

This Appendix contains a brief discussion of certain economic and demographic characteristics of the City of San Antonio, Texas (the “City” or “San Antonio”) and of the metropolitan area in which the City is located. Although the information in this Appendix has been provided by sources believed to be reliable, no investigation has been made by the City to verify the accuracy or completeness of such information.

Population and Location

The 2010 Decennial Census (“2010 Census”), prepared by the United States Census Bureau (“U.S. Census Bureau”), found a City population of 1,327,407. For the 2010 San Antonio population, it was determined that the U.S. Census Bureau had erroneously assigned 35 census blocks to the City that are actually outside of the City limits. The revised 2010 San Antonio population is 1,326,539.

The City’s Information Technology Services Department has estimated the City’s population to be 1,475,416 in 2017. The U.S. Census Bureau ranks the City as the second largest in the State of Texas (the “State”) and the seventh largest in the United States (“U.S.”).

The City is the county seat of Bexar County. Bexar County had a population of 1,714,773 according to the 2010 Census. The City’s Information Technology Services Department has estimated Bexar County’s population to be 1,983,356 and the San Antonio-New Braunfels Metropolitan Statistical Area (“MSA”) population to be 2,507,082 in 2017. The City is located in south central Texas approximately 80 miles south of the State capital of Austin, 165 miles northwest of the Gulf of Mexico, and approximately 150 miles from the U.S./Mexico border cities of Del Rio, Eagle Pass, and Laredo.

The following table provides the population of the City, Bexar County, and the San Antonio-New Braunfels MSA for the years shown:

San Antonio- City of Bexar New Braunfels Year San Antonio County MSA 1 1920 161,379 202,096 255,928 1930 231,542 292,533 351,048 1940 253,854 338,176 393,159 1950 408,442 500,460 556,881 1960 587,718 687,151 749,279 1970 654,153 830,460 901,220 1980 785,880 988,800 1,088,710 1990 935,933 1,185,394 1,324,749 2000 1,144,646 1,392,931 1,711,703 2 2010 1,326,539 1,714,773 2,142,508 3 ______1 Data for 1920-1990 has been restated from the redefined eight-county MSA to the original four-county MSA. 2 As of June 2003, the U.S. Office of Management and Budget redefined the MSA by increasing the number of counties from four to eight: Atascosa, Bandera, Kendall, and Medina Counties were added to its mainstays of Bexar, Comal, Guadalupe, and Wilson Counties. (The 2000 figure reflects the new 2003 redefined eight-county area.) As of December 2009, New Braunfels, Texas qualified as a new principal city of the San Antonio MSA, and the MSA was re-titled San Antonio-New Braunfels MSA. 3 Provided by the 2010 Decennial Census. Sources: U.S. Census Bureau; Texas Association of Counties – County Information Project; and City of San Antonio, Information Technology Services Department.

A-1 Area and Topography

The area of the City has increased through numerous annexations and now contains approximately 505.5 square miles. The topography of San Antonio is generally hilly with heavy black to thin limestone soils. There are numerous streams fed with underground spring water. The average elevation is 795.5 feet above mean sea level.

Three-Year Annexation Plan Process

Through both full and limited-purpose annexations, the City has grown from its original size of 36 square miles to its current area, encompassing approximately 500.5 square miles in 2016, and having a net taxable assessed value of $99.2 billion in tax year 2016.

By City Charter and State law, City Council has the power to annex territory by passage of an ordinance following an open public process. State law provides two methods by which properties may be annexed. Full-purpose annexation entails that municipalities prepare a Municipal Annexation Plan that specifically identifies the areas that may be annexed and that no annexation may occur until the third anniversary of the date such plan was adopted. State law allows exemptions from the Three-Year Municipal Annexation Plan process, including property owner-initiated annexation, also referred to as voluntary annexation, and areas with less than 100 residences. Limited-purpose annexation extends city limits, certain City regulations, and plans for capital improvements, where by the end of the third year of limited-purpose annexation, the area must be annexed for full purposes.

2016 Annexations and Municipal Boundary Adjustments

In June 2016, City Council approved the voluntary annexation of the 202.8 acre, II Southfork Development Property. In October 2016, the City Council approved the release of 93.1 acres of corporate area to the City of Kirby. These City Council actions were effective within 30 days of their respective approval dates.

On September 8, 2016, City Council adopted a Three-Year Municipal Annexation Plan that included the US 281 North residential area (11 square miles) and the IH 10 West area (15 square miles). The IH 10 West area will be considered by City Council for full-purpose annexation before October 8, 2019. The US 281 North residential area does not include the US 281 North commercial corridor, which was annexed on December 1, 2016. The inclusion of the US 281 North residential area in the annexation plan allowed the City to negotiate a non-annexation agreement with the annexation area’s representatives in 2017.

In November 2016, City Council approved the full-purpose annexation of approximately 19.1 square miles of limited-purpose area and 10 voluntary annexation tracts in South San Antonio. [Since the limited-purpose areas were already included in San Antonio’s corporate area, City Council’s action converted their limited-purpose status to full-purpose.] On December 1, 2016, City Council approved the full-purpose annexation of the 1.9 square mile US 281 North commercial corridor. The US 281 North commercial corridor was exempted from the Three-Year Municipal Annexation Plan because the area had less than 100 homes. All of these annexations were effective on December 31, 2016.

2017 Annexations and Municipal Boundary Adjustments

On March 2, 2017, City Council approved a non-annexation agreement for the US 281 North residential area. The term of the proposed non-annexation agreement will correspond with the expiration of two adjacent non- annexation agreements and the consent to voluntarily annexation will be effective in 2034.

On March 9, 2017, City Council approved an interlocal agreement with the City of Converse (“Converse”) that will culminate with the annexation by Converse of approximately 12 square miles and a transfer to Converse of 3.6 square miles through boundary adjustments, over the course of seventeen years. The transferred area includes the commercial corridors of IH 10 East, Loop 1604, FM 78-Seguin Road, and Gibbs Sprawl Road. This also includes transferring the Northampton neighborhood and area along Graytown Road to Converse’s jurisdiction by January 2018.

A-2 On June 22, 2017, City Council approved the full-purpose annexation of the Neal Road Area, which is effective July 13, 2017. The area consists of approximately 5.9 square miles in southern Bexar County, generally located south of Mauermann Road and the Medina River, west of Pleasanton Road, north of S. Loop 1604 E., and east of Applewhite Road.

Governmental Structure

The City is a Home Rule Municipality that operates pursuant to the City Charter, which was adopted on October 2, 1951, became effective on January 1, 1952 and was last amended pursuant to an election held on May 9, 2015, whereby, subject only to the limitations imposed by the Texas Constitution, Texas statutes, and the City Charter, all powers of the City are vested in an 11-member City Council which enacts legislation, adopts budgets, and determines policies. The City Charter provides for a Council-Manager form of government with ten council members elected from single-member districts, and the Mayor elected at-large, each serving two-year terms, limited to four full terms of office as required by the City Charter. The Office of the Mayor is considered a separate office. All members of the City Council stand for election at the same time in odd-numbered years. The City Council appoints a City Manager who administers the government of the City and serves as the City’s chief administrative officer. The City Manager serves at the pleasure of City Council.

City Charter

The City may only hold an election to amend its City Charter every two years. Since its adoption, the City Charter has been amended on nine separate occasions including: November 1974, January 1977, May 1991, May 1997, November 2001, May 2004, November 2008, May 2012, and May 2015.

At a special election held on May 9, 2015, the City submitted four propositions to amend the City Charter to the voters for their consideration. The Charter amendments were as follows: Proposition 1 provided that the City may not alter or damage a public way or appropriate any funds for a streetcar unless first approved by a majority of the voters at a subsequent election on the matter; Proposition 2 provided for an annual salary of $45,722 (which is the median household income in the San Antonio area) to the City Council Members and $61,725 (median household income plus 35%) for the Mayor; Proposition 3 provided for the filling of City Council and Mayoral vacancies at a special election, rather than by appointment, if more than 120 days remain in the unexpired council term, and allows the City Council to appoint a temporary Council Member or Mayor until such special election can be held; and Proposition 4 provided for the “clean-up” of language or provisions in the Charter because the provisions have been superseded by State law or to update the language to current usage. All four propositions passed by a majority vote and became effective May 20, 2015. The City Charter was amended to reflect these changes.

A Charter Review Commission (“Commission”) was authorized by an ordinance passed by the City Council in 2014 to study and make recommendations regarding provisions that were in conflict with current State law, did not reflect current practices, or were outdated and obsolete. Current membership of the Commission is studying and preparing recommendations on the following potential changes: staggering City Council elections; extending City Council terms; changing the general election date; using bond funds for affordable housing developments; reforming the composition of the Planning Commission; and restructuring ethics oversight. The Commission may make recommendations to the full City Council, who will then decide which amendments to place on the ballot for consideration by the voters at a future election.

Services

The full range of services provided to its constituents by the City includes ongoing programs to provide health, welfare, art, cultural, and recreational services; maintenance and construction of streets, highways, drainage, and sanitation systems; public safety through police and fire protection; and urban redevelopment and housing. The City also considers the promotion of convention and tourism and participation in economic development programs high priorities. The funding sources from which these services and capital programs are provided include ad valorem, sales and use, and hotel occupancy tax receipts, grants, user fees, debt proceeds, tax increment financing, and other sources.

A-3 In addition to the above described general government services, the City provides services financed by user fees set at levels adequate to provide coverage for operating expenses and the payment of outstanding debt. These services include airport and solid waste management.

Electric and gas services to the San Antonio area are provided by CPS Energy (“CPS”), an electric and gas utility owned by the City that maintains and operates certain utilities infrastructure. This infrastructure includes a 21- generating unit electric system and the gas system that serves the San Antonio area. CPS’ operations and debt service requirements for capital improvements are paid from revenues received from charges to its customers. As specified in the City ordinances authorizing the issuance of its system debt, CPS is obligated to transfer a portion of its revenues to the City. CPS revenue transfers to the City for the City’s fiscal year ended September 30, 2016 were $331,846,513. (See “San Antonio Electric and Gas Systems” herein.)

Water services to most of the City are provided by the San Antonio Water System (“SAWS”), San Antonio’s municipally-owned water supply, water delivery, and wastewater treatment utility. SAWS is in its 25th year of operation as a separate, consolidated entity. SAWS’ operating and debt service requirements for capital improvements are paid from revenues received from charges to its customers. SAWS is obligated to transfer a portion of its revenues to the City. SAWS revenue transfers to the City for the City’s fiscal year ended September 30, 2016 were $13,819,868. (See “San Antonio Water System” herein.)

On January 28, 2012, by operation of legislation passed by the 82nd Texas Legislature and popular vote in an election held on November 8, 2011, the City, acting by and through SAWS, assumed the Bexar Metropolitan Water District, and the San Antonio Water System District Special Project (“SAWS DSP”) was created. (See “San Antonio Water System – Former Bexar Metropolitan Water District and the District Special Project” herein.) In accordance with a plan to fully integrate SAWS DSP into SAWS, on February 25, 2016, SAWS issued sufficient bonds and commercial paper to retire all outstanding debt of SAWS DSP. SAWS DSP was then dissolved and SAWS assumed all assets, liabilities, and operations of SAWS DSP. Since SAWS reports comparative financial statements, all financial and statistical information has been restated to incorporate the financial results of SAWS DSP for 2015 and 2016.

Economic Factors

The City facilitates a favorable business environment that supports economic diversification and growth. San Antonio’s economic base is composed of a variety of industries, including convention and tourism, healthcare and bioscience, government employment, automotive manufacturing, information security, financial services, and oil and gas, all with growing international trade. Support for these economic activities is demonstrated in the City’s commitment to ongoing infrastructure improvements and development, and investment in a growing and dedicated work force. This commitment and San Antonio’s continued status as one of the top leisure and convention destinations in the country support a strong and growing economy.

San Antonio’s rate of unemployment fares well when compared to the State and nation. The San Antonio- New Braunfels MSA unemployment rate remained at 3.6% in May 2017, matching the rate reported in April 2017.

The Texas unadjusted (actual) unemployment rate decreased to 4.4% in May 2017, down from 4.5% reported in April 2017. The nation’s unadjusted (actual) unemployment rate remained at 4.1% in May 2017, matching the rate reported in April 2017.

Total nonfarm employment in the San Antonio-New Braunfels MSA for May 2017 was 1,041,600. Since May 2016, the San Antonio-New Braunfels MSA has added 25,500 jobs for an annual growth rate of 2.5%.

Healthcare and Bioscience Industry

The healthcare and bioscience industry is the largest industry in the San Antonio economy and has experienced robust growth since the early 1990s. The industry is composed of related industries such as research, pharmaceuticals, and medical device manufacturing contributing approximately the same economic impact as health services. According to the San Antonio’s Health Care and Bioscience Industry: 2015 Economic Impact Study commissioned by the Greater San Antonio Chamber of Commerce, the economic impact from this industry sector

A-4 totaled approximately $37 billion in 2015. The industry provided 172,094 jobs, or more than 17% of the City’s total employment. The healthcare and bioscience industry’s annual payroll in 2015 approached $8.9 billion, a 14% increase over 2013. The 2015 average annual wage of San Antonio workers was $46,411, compared to $51,731 for healthcare and bioscience employees. The healthcare and bioscience industry has added 49,355 net new jobs over the past decade, an increase of 46%.

Health Care. According to the 2014 South Texas Medical Center Area Progress Report written by the San Antonio Medical Foundation, the 900-acre South Texas Medical Center (the “Medical Center”) has over 100 medically related treatment, education, and research facilities. There are several nursing facilities and more than 20 medical professional office buildings. Other support activities include banks, a post office, a power plant, pharmacies, and housing facilities. Approximately 300 acres are held for future expansion. Over 29,000 Medical Center employees have provided care for over 5.64 million outpatients and over 106,728 inpatients. Physical plant values, not adjusted for inflation, representing the original investments in physical facilities and equipment (less depreciation) represent approximately $3.352 billion. Capital projects in progress as of January 2014 represent $438 million, with an additional $509 million planned over the next five years, for a total of approximately $947 million.

Central to the Medical Center is the University of Texas Health Science Center at San Antonio (the “UT Health Science Center”), located on more than 100 acres in the heart of the Medical Center. A total of 4,400 students (including residents and fellows) are enrolled in the UT Health Science Center’s five schools – the School of Allied Health Sciences, the Dental School, the Graduate School of Biomedical Sciences, the Medical School, and the School of Nursing. The UT Health Science Center has nearly two million square feet of education, research, treatment and administrative facilities. The UT Health Science Center employs approximately 5,400 persons with a total annual operating budget of approximately $802 million, supporting six campuses in San Antonio, Laredo, Harlingen, and Edinburg. The UT Health Science Center also oversees the federally funded Regional Academic Health Center in the Rio Grande Valley with facilities in Harlingen, McAllen, Brownsville, and Edinburg.

The UT Health Science Center is one of the country’s leading health sciences universities, and ranks in the top 3% of all institutions worldwide receiving federal funding from the National Institutes of Health (“NIH”). The university’s schools of medicine, nursing, dentistry, health professions, and graduate biomedical sciences have produced more than 32,000 graduates since inception.

The UT Health Science Center’s Medical Arts and Research Center offers state-of-the-art patient care under UT Medicine San Antonio and its Cancer Therapy & Research Center, and is one of only four National Cancer Institute (“NCI”) designated Cancer Centers in Texas. In September 2015, UT Health Science Center’s Dental School, regarded as one of the top in the nation, opened its newly built 198,000 square foot Center for Oral Health Care & Research.

There are numerous other medical facilities outside the boundaries of the Medical Center, including 25 short- term general hospitals, two children’s psychiatric hospitals, and two State hospitals. The U.S. Department of Defense (“DoD”) has historically operated two major regional hospitals in San Antonio, Wilford Hall Medical Center (“Wilford Hall”), today known as the Wilford Hall Ambulatory Surgical Center (“WHASC”), and Brooke Army Medical Center (“BAMC”), today known as the San Antonio Military Medical Center (“SAMMC”). As a result of the 2005 Base Realignment and Closure actions (“BRAC 2005”), DoD is investing over $1.3 billion in two projects, expanding BAMC into one of two national DoD Regional Medical Centers and constructing a new outpatient clinic to replace Wilford Hall. BAMC also participates with UT Health Science Center and University Hospital in operating two Level I trauma centers in the community.

On February 2, 2012, City Council authorized an economic development incentive package for the Metropolitan Methodist Hospital Expansion, including a $120,000 grant for the creation of 40 jobs located in the City’s downtown area. Methodist Healthcare System proposed a $43.6 million expansion of its intensive care unit located at 1310 McCullough Avenue. The project was to be constructed in two phases and include the following: Phase 1, an investment of $36.9 million in real and personal property; construction of a 65,000 square foot facility that includes 24 Intensive Care Unit (“ICU”) beds and their respective support facilities that would enable the relocation of existing laboratory facilities and allow for the expansion of the endoscopy facilities; the creation of 30 new full-time jobs; and Phase 2, construction of 12 additional ICU beds and their respective support facilities, and the creation of five full-time jobs. Since opening in January 2014, the Methodist Hospital has reported creating 1,146

A-5 jobs and investing $50 million for the project which added 85,000 square feet of new space to the downtown hospital. That space houses expanded radiology and emergency department services, a new gastrointestinal lab, and a 24-bed ICU. Additional space in the new tower is reserved for future growth needs.

Biomedical Research and Development. Research and development are important areas that strengthen San Antonio’s position as an innovator in the biomedical field.

The Texas Research Park (the “Park”) is a 1,236-acre campus owned and operated by the Texas Research & Technology Foundation (“TRTF”), a 501(c)(3) non-profit organization. TRTF is San Antonio’s champion for driving economic development in the biosciences and technology industry. The Park is home to the UT Health Science Center’s Research Park Campus, which includes the Institute for Biotechnology, the South Texas Centers for Biology in Medicine, and the Barshop Institute for Longevity and Aging. Several biopharmaceutical and medical device commercial ventures call the Park home as well. TRTF also develops and funds new innovative technology ventures focused on building San Antonio’s emerging technology economy.

The Texas Biomedical Research Institute (“Texas Biomed”), formerly the Southwest Foundation for Biomedical Research, which conducts fundamental and applied research in the medical sciences, is one of the largest independent, non-profit, biomedical research institutions in the U.S. and is internationally renowned. As one of the world’s leading independent biomedical research institutions, Texas Biomed is dedicated to advancing the health of San Antonio’s global community through innovative biomedical research. Today, Texas Biomed’s multidisciplinary team of 72 doctoral-level scientists works on more than 200 major research projects.

Located on a 200-acre campus in the City, Texas Biomed partners with hundreds of researchers and institutions around the world, pursuing advances in the prevention and treatment of heart disease, diabetes, obesity, cancer, osteoporosis, psychiatric disorders, tuberculosis, AIDS, hepatitis, malaria, parasitic infections, and a host of other diseases. Texas Biomed is the site of the Southwest National Primate Research Center and home to the world’s largest baboon research colony, including a unique pedigreed baboon colony that is invaluable for genetic studies on complex diseases.

Texas Biomed enjoys a distinguished history in the innovative, humane and appropriate use of nonhuman primates in biomedical research. Texas Biomed also is home to other extraordinary resources that give its scientists and their collaborators an advantage in the search for discoveries to fight disease. With the nation’s only privately owned biosafety level 4 laboratory, designed for maximum containment, Texas Biomed investigators can safely study deadly pathogens for which there currently are no treatments or vaccines, including potential bio-terror agents and emerging diseases. Another resource that puts the TRTF on the cutting edge of biomedical research is the AT&T Genomics Computing Center, which houses the world’s largest computer cluster for human genetic and genomic research. This high-performance computing facility allows scientists to search for disease-influencing genes at record speed.

The UT Health Science Center has been a major bioscience research engine since its inception, with strong research groups in cancer, cancer prevention, diabetes, drug development, geriatrics, growth factor and molecular genetics, heart disease, stroke prevention, and many other fields. Established by the largest single oncology endowment in the nation’s history, $200 million from the State tobacco settlement, the Greehey Children’s Cancer Research Institute is part of the UT Health Science Center. The UT Health Science Center, along with the Cancer Therapy and Research Center, form the San Antonio Cancer Institute, a NCI-designated Comprehensive Cancer Center. The University of Texas at San Antonio (“UTSA”) houses a number of research institutes. The Neuroscience Research Center, which is funded by $6.3 million in ongoing grants, is tasked with training students in research skills while they perform basic neuroscience research on subjects such as aging and Alzheimer’s disease. UTSA is also a partner in Morris K. Udall Centers of Excellence for Parkinson’s Disease Research, which provides research for the causes and treatments of Parkinson’s disease and other neurodegenerative disorders. A joint partnership between UTSA, the UT Health Science Center, and the participation of Texas Biomed and the Southwest National Primate Research Center, has resulted in the formation of the San Antonio Institute of Cellular and Molecular Primatology (“SAICMP”). The focus of the SAICMP is the study of primate stem cells and early embryos to develop nonhuman model systems for studies of primate stem cells and their applications to regenerative medicine, as well as to develop methods of primate transgenesis and to facilitate other investigations of primate embryology and biogenesis. The

A-6 South Texas Center for Emerging Infectious Diseases (“STCEID”) was established to focus State and national attention on UTSA in the fields of molecular microbiology, immunology, medical mycology, virology, microbial genomics, vaccine development, and biodefense. One of the major areas of emphasis at STCEID is on the pathogenic mechanisms of emerging infectious diseases.

A number of highly successful private corporations, such as Mission Pharmacal, DPT Laboratories, Ltd., and Genzyme Oncology, Inc., operate their own research and development groups and act as guideposts for numerous biotech startups, bringing new dollars into the San Antonio area’s economy. A notable example of the results of these firms’ research and development is Genzyme Oncology, Inc., which has developed eight of the last 11 cancer drugs approved for general use by the U.S. Food and Drug Administration (“FDA”).

As an equity investment, InCube Labs, LLC (“InCube”) was the impetus for the City to establish the San Antonio Economic Development Corporation (“SAEDC”). The mission of the SAEDC is to foster the commercialization of intellectual property in San Antonio through direct equity investment in projects. This model represents a new economic development strategy that seeks to realize a direct return on investment back to the City through its economic development efforts. By making equity investments in later stage companies or key entrepreneurs with proven track records, the City seeks to support commercialization of intellectual property in San Antonio, creating more jobs, investment, and entrepreneurs.

On June 17, 2010, InCube Chairman and CEO Mir Imran announced that InCube planned to establish a branch of its operations in San Antonio and launch five life science companies in San Antonio over the next five years. InCube, formerly located in San Jose, California, is a life sciences research laboratory focused on developing medical breakthroughs that dramatically improve patient outcomes. The organization is led by Mr. Imran who has founded more than 20 companies and holds more than 200 patents. Mr. Imran has created many innovations that have resulted in new standards of care, including the first FDA-approved Automatic Implantable Cardioverter Defibrillator. Mr. Imran and his partners also manage a venture fund, InCube Ventures, which invests in life science companies and has raised approximately $30 million from local investors. InCube will create at least 50 jobs within the business incubator with salaries ranging from $50,000 to over $200,000. In September 2010, the State awarded $9.2 million through the Emerging Technology Fund for three existing InCube start-up life science companies to relocate to San Antonio from San Jose, California. By April 27, 2011, InCube had relocated three companies and begun its operations in San Antonio, and on May 2, 2013, InCube announced the formation of two new companies, Theracle and iBridge Medical, fulfilling a requirement to create two new companies in San Antonio prior to July 1, 2013. Incube has recently agreed to create three additional companies in the next five years. As of March 31, 2016, InCube has raised $20,568,779 in non-public funds on its activities in San Antonio toward a requirement to spend $15 million during the five-year term. InCube is also collaborating with UTSA and the UT Health Science Center on research opportunities.

In June 2011, the City approved an economic development grant (“EDG”) through the SAEDC to assist in funding the construction of the UT Health Science Center South Texas Research Facility (the “STRF”). This action also authorized the SAEDC to enter into an economic development agreement with the UT Health Science Center. The City, through the SAEDC, committed funding in the amount of $3.3 million through June 2014 with the potential to receive repayment of the principal amount plus a return on its investment through acquiring a percentage equity interest in UT Health Science Center start-up companies over a ten-year period.

The STRF is a state-of-the-art $200 million research building. The project is a significant economic generator for the community, creating over 150 new high-paying research and scientific jobs. The facility primarily houses the Institute of Integration of Medicine and Science, which is the home for the $26 million National Institutes of Health Clinical and Translational Science Awards program. The facility also houses other core research programs on cancer, diseases affecting the elderly, disorders such as stroke, diabetes in children and adults, and the engineering of new body tissues to cure diseases in partnership with the military.

The City’s $3.3 million investment in the STRF at UT Health Science Center greatly enhances the university’s research capabilities by increasing opportunities for growing local entrepreneurs and companies, helping attract top tier researchers and scientists, demonstrating an investment in the City’s local institutions and talent, and providing opportunities to leverage other research, such as military medicine.

A-7 The $3.3 million investment also provides the City the opportunity to leverage its investment through the SAEDC, which was created by the City as a nonprofit corporation in May 2010. Through the SAEDC, the City can invest in economic development projects and take out an equity position in a project to potentially achieve a return on the public’s investment. The UT Health Science Center agreed to enter into an economic development agreement with the SAEDC and provide the SAEDC, over ten years, a 15% interest in any equity position (e.g., founders shares of stock) taken by the university in start-up companies formed through the discovery of intellectual property owned by the university. The SAEDC could then potentially receive a return on its investment up to a cap of $4,000,000 (the $3,300,000 principal amount plus an additional $700,000 return) during the term of the agreement from the university’s distribution to the SAEDC based on its equity interest in start-up companies as those companies are acquired or go public. The SAEDC has an equity interest in two UT Health Science Center startup companies.

Also through the SAEDC, the City invested $300,000 in assisting Innovative Trauma Care, Inc. (“ITC”) to establish its first U.S. based operations in San Antonio to market, sell, and distribute the ITClamp, and entered into an economic development agreement with ITC on August 30, 2012. The device is a wound clamp designed to control severe bleeding within seconds of application. In exchange for financial assistance, ITC agreed to provide the City, through its SAEDC, an equity interest in the parent company’s stock. ITC will add high-paying jobs in the targeted SA2020 Bioscience and Healthcare industry, and will also bring its life-saving device to the world, from San Antonio. ITC has secured approval and initiated the marketing and selling of the ITClamp in Canada and 16 countries in Europe. Approval to market and sell the ITClamp in the U.S. was received from the FDA in May 2013. Additionally, ITC has achieved its fourth regulatory milestone with an expanded indication for use from the FDA to include the temporary control of severe bleeding of the scalp. ITC has already created eight full-time jobs in San Antonio with plans to add more personnel as sales increase.

Another SAEDC equity investment was approved by City Council on October 21, 2013 for StemBioSys, Inc. (“SBS”). SBS, a local bioscience startup company, was formed in November 2010 by Dr. Xiao-Dong Chen, of the UT Health Science Center, and Dr. Steve Davis, a local dermatologist. While at the UT Health Science Center, Dr. Chen discovered a way to isolate and expand adult stem cells for research, diagnostics, and therapeutic treatments. SBS has secured two patents on its stem cell technology platforms, and has three other patents pending. In May 2011, SBS signed an agreement with the UT Health Science Center to license, develop, and commercialize Dr. Chen’s technologies in the regenerative medicine market which is expected to grow by 48% over the next six years. City Council authorized the SAEDC to invest these funds in SBS through a loan at a 5% interest rate for five years in exchange for a Convertible Promissory Note (the “Note”) for $200,000. The Note would provide the SAEDC the option to convert the loan into preferred shares of SBS stock during the term or to accept repayment of the loan at the end of the term with interest ($255,256). For the loan, SBS agreed to retain its business operations in San Antonio for the term of the Note or until such time as the SAEDC may exercise its option to convert the Note into shares of equity. SBS also agreed to retain and create a minimum of six full-time jobs by December 2014 and pay an average annual salary of at least $50,000. As of December 2016, SBS employs 9 people.

In June 2015, City Council approved a $1,000,000 grant over five years to recruit German based Cytocentrics, Inc. (“Cytocentrics”) to San Antonio, further adding to the biosciences ecosystem that positively impacts the community. Cytocentrics has unique patented technology called a cytopatch machine that conducts an automated cell analysis called “patch clamping” for drug testing to more quickly meet FDA testing requirements; this technology replaces the current manual testing methods. The company plans to create 300 high-wage jobs with an average salary of at least $70,000 and invest $15 million. Additionally, Cytocentrics will enter into a research development partnership with the Center for Innovative Drug Discovery, a joint venture between the UTSA and UT Health Science Center, as well as a partnership for workforce development with Alamo Colleges.

Military Health Care. San Antonio’s military healthcare facilities have positively impacted the City for decades. Many military medical transformations came as a result of the BRAC 2005 legislation.

Historically, BAMC at Joint Base San Antonio-Fort Sam Houston (“JBSA-Fort Sam Houston”) was known as a hospital and an Army Unit, but the BAMC name is now specifically the unit that commands Army medical activity in San Antonio. BAMC’s medical facilities include SAMMC, Center for the Intrepid, Fort Sam Houston Primary Care Clinic, McWethy Troop Medical Clinic, Taylor Burk Clinic at Camp Bullis, and the Schertz Medical Home. These BAMC facilities have a total workforce of over 7,500 personnel.

A-8 The renowned hospital known as BAMC became SAMMC in September 2011 and has expanded to 2.1 million square feet due to BRAC 2005 legislation. SAMMC is the largest inpatient medical facility in the DoD, the only DoD Burn Center, and the only DoD Level 1 Trauma Center in the U.S. SAMMC hosts Centers of Excellence for amputee care, burn care, and breast imaging and contains dedicated inpatient units for bone marrow transplant, maternal-child and neonatal intensive care; as well as pediatric, burn, cardiac and psychiatric care. On any given day at SAMMC, the emergency department averages 174 visits and admits approximately five civilian emergencies, four babies are born and 238 inpatient beds are occupied.

WHASC at Joint Base San Antonio-Lackland (“JBSA-Lackland”) is the largest outpatient ambulatory surgical center in the DoD with more than 29 sub-specialties and 30 Credited Graduate Medical Education training programs. The facility is manned by more than 2,600 personnel and provides primary and specialty care; outpatient surgery; a sleep center; a contingency aeromedical staging facility; and eye, hearing and diabetes centers of excellence. The new 681,000 square foot Ambulatory Surgical Center at JBSA-Lackland opened in 2015. It is part of the $450 million recapitalization of the old Wilford Hall Medical Center facility.

The San Antonio Military Health System (“SAMHS”) oversees the healthcare delivery of 230,000 DoD beneficiaries in the San Antonio metropolitan region. Healthcare services are provided by the SAMMC and the WHASC. The SAMHS treatment facility manages a total combined budget of over $839 million and contributes over $138 million annually in inpatient/outpatient private sector care expenses.

Previously, all U.S. Army combat medic training was conducted at Fort Sam Houston. As a result of BRAC 2005, all DoD military enlisted combat medic training is now accomplished at the new Medical Education and Training Campus at JBSA-Fort Sam Houston.

San Antonio received a new medical research mission due to BRAC 2005. BRAC 2005 transformed the U.S. Army Institute of Surgical Research (“USAISR”) into a tri-service Battlefield Health and Trauma (“BHT”) Research Institute that has been operating at Fort Sam Houston since August 2010. The BHT is composed of the USAISR, Naval Medical Research Unit San Antonio and the Air Force Dental Evaluation and Consultation Service. This new research facility is adjacent to the SAMMC and was created to remove redundancy and create a synergy in combat casualty care research.

Finance Industry

The largest private sector employer in the industry is United Services Automobile Association (“USAA”). The company has about 9.4 million customers, comprised of military members, veterans and their families. The company currently employs a total of 17,000 people. While this sector is led by USAA, San Antonio is home to other insurance company headquarters such as Catholic Life and GPM Life, as well as being the home to many regional operations centers for many health care insurers. Insurers with substantial regional operations centers in San Antonio include Allstate Insurance Company (“Allstate”), Nationwide Mutual Insurance Company (“Nationwide”), Caremark, United Health, and PacifiCare.

After considering Little Rock, Tulsa, and Raleigh, Nationwide established a new regional corporate headquarters location in San Antonio in October 2009. Nationwide, headquartered in Columbus, Ohio, is a national insurance provider with over 34,000 employees, and had $26 billion in revenue in 2015, up 3% from 2014. With its announcement to expand in San Antonio, Nationwide committed to retaining 932 current employees and creating an additional 838 new jobs over the life of the agreement with the City which ends in 2028. Phase I of the project involved a consolidation of existing operations into an existing facility, and $3 million in new personal property improvements. Nationwide has broken ground on Phase II of its investment in San Antonio with an $89 million corporate campus.

On September 27, 2012, the City and Nationwide officials inaugurated the grand opening of the 300,000 square foot facility which is located in the master-planned Westover Hills community, near the intersection of Hyatt Resort Drive and State Highway 151 on the City’s far west side. As of December 2016, Nationwide reported that it employs 1,551 people at this location.

A-9 On February 9, 2010, Allstate announced its decision to locate a customer operations center, invest $12 million, and create 600 new full-time jobs in San Antonio. The core function of this operations center will support direct sales calls and selling additional insurance products to existing clients. Allstate is the nation’s largest publicly held personal lines insurer. Allstate’s main lines of insurance include automobile, property, life, and retirement and investment products. Allstate has two other sales support centers located in Northbrook, Illinois (its headquarters) and Charlotte, North Carolina. As of December 2016, Allstate reported that it employs 261 people at its San Antonio operations center and eventually expects the center will employ 600 employees, who will sell Allstate products and provide service to the company’s customers.

San Antonio is also the home of many banking headquarters and regional operations centers such as Frost Bank, Broadway National Bank, and USAA Federal Savings Bank. In December 2014, Security Service Federal Credit Unit (“SSFCU”), the largest credit union in Texas and seventh largest credit union in the United States, established its corporate headquarters in San Antonio City Council District 8. City Council approved an incentive package based on a capital investment of $120,000,000 that will allow SSFCU to employ a planned total of 947 full- time banking and financial professionals. One hundred percent of the incentives the company receives during this time will go toward infrastructure improvements. Other companies with large regional operations centers in San Antonio include Bank of America, Wells Fargo, J.P. Morgan Chase, and Citigroup.

Hospitality Industry

The City’s diversified economy includes a significant sector relating to the hospitality industry. An Economic Impact Report of San Antonio’s Hospitality Industry (representing 2015 data) found that the hospitality industry has an economic impact of $13.6 billion. The estimated annual payroll for the industry is $2.9 billion, and the industry provided an average of 130,796 jobs.

In 2016, the City’s overall level of hotel occupancy was flat at 0.5%; room supply was increased 2.2%; total room nights sold increased 2.7%; the average daily room rate increased 1.8%; revenue per available room increased 2.3%; and overall revenue increased 4.5%.

Tourism. The list of attractions in the San Antonio area includes, among many others, the Alamo and other sites of historic significance, the River Walk, and two major theme parks, SeaWorld San Antonio and Six Flags Fiesta Texas. San Antonio attracts 34.4 million visitors a year. Of these, over 18.2 million are overnight visitors, placing San Antonio as one of the top U.S. destinations in Texas. Recent FY 2016 accomplishments contributing to the City’s success include: (1) the grand opening of the transformed Henry B. Gonzalez Convention Center. On January 26, 2016, the $325 million expansion marked the largest capital improvement project in the City of San Antonio’s history and increased the footprint to 1.6 million square feet. The project provided a clear opportunity to further secure the convention center’s position as a top destination for conferences and events, while challenging the convention center design team to find a creative way to integrate the convention center into the surrounding downtown area and Hemisfair Park; (2) in FY 2016, there was an addition of 686 new San Antonio Tourism Ambassadors. The San Antonio Tourism Ambassadors Program is designed to create an inspired, informed and resourced community to enhance the San Antonio visitor experience and keep visitors coming back. The program provides an affordable, credible way to teach skills needed to exceed visitor expectations, enhance corporate training with destination-specific information and reinforce customer service training. It incorporates key destination training featuring area history, hidden gems, interesting facts and more. Ultimately, it helps the San Antonio tourism industry to speak with one voice, stay competitive and raise the level of professional development for everyone who participates; and (3) reported an estimated $33.7 million in Earned Media Value for FY 2016. This media value is the dollar value of the positive media coverage generated by San Antonio Convention & Visitors Bureau’s (“CVB”) communications team, which represents the stories and articles in print (i.e., magazines, newspapers, etc.), TV, radio, and online media; the dollar figure aligns with what the advertising cost of that coverage would have been if the City had purchased the exposure.

In September 2016, the San Antonio City Council approved a new management agreement that essentially transitioned the CVB to a new public-private nonprofit called Visit San Antonio. The management agreement for the 501(c)(6) nonprofit took effect October 1, 2016 with the organization’s staff and structure moving under the Visit San Antonio model on January 1, 2017. This significant vote from City Council for a nonprofit model came after months of collaborative work between the City Council, CVB, industry leaders, and other community stakeholders. With a

A-10 more nimble speed-to-market capability under the new Visit San Antonio structure, the goal is to see the organization’s marketing budget and operations grow to keep pace with the rising competition.

Conventions. San Antonio is also one of the top convention cities in the country and hosts 6.3 million business visitors a year who come to the area for a convention, meeting or other business purpose. In FY 2016, the CVB sales staff booked over 936,000 room nights for current and future years. Significant meetings booked included: National Corn Growers Association & American Soybean Association with 20,944 room nights for 2021; Golf Course Superintendents Association of America with a total of 19,800 room nights for 2024; American Society of Safety Engineers with a total of 16,833 room nights for 2018; and a multi-year agreement to host American Football Coaches Association with a total of 18,390 room nights for 2028 and 2030. In addition, the new Visit San Antonio will continue to be proactive in attracting convention business through its management practices and marketing efforts.

The following table shows both overall City performance as well as convention activity hosted by the CVB for the calendar years indicated:

Revenue per Available Calendar Hotel Room Room Convention Convention Year Occupancy 1 (RevPAR) 1 Nights Sold 1 Attendance 2 Room Nights 2 2006 69.1 69.43 7,439,783 467,426 736,659 2007 66.3 69.90 7,397,123 455,256 647,386 2008 64.6 70.82 7,669,475 563,164 691,525 2009 57.1 55.94 7,167,603 399,408 660,736 2010 59.3 57.02 7,768,002 535,400 736,325 2011 61.3 58.08 8,236,019 499,171 637,593 2012 63.5 60.79 8,651,826 449,202 635,829 2013 63.1 63.44 8,610,676 712,577 734,190 2014 64.9 67.32 8,817,338 652,443 725,333 2015 65.7 69.55 8,913,575 699,662 773,569 2016 65.9 71.12 9,116,363 637,658 676,501

1 Data obtained from Smith Travel Research based on hotels in the San Antonio selected zip code reports dated January 2017 (reporting 2016 numbers), and historical annual reports for prior years. 2 Reflects only those conventions hosted by the CVB. Source: City of San Antonio, Convention and Visitors Bureau.

Military Industry

The growth in new missions and significant construction activities brought about by BRAC 2005 strengthened San Antonio’s role as a leading military research, training, and education center. One of the major outcomes of BRAC 2005 was the creation of Joint Base San Antonio (“JBSA”) which is the largest joint base in the United States. JBSA consolidates all the base support functions, real property, and land for JBSA-Lackland, JBSA- Randolph, and JBSA-Fort Sam Houston (including Camp Bullis) under the 502nd Air Base Wing. JBSA includes over 46,500 acres, supports 80,000 personnel, has a plant replacement value of $10.3 billion, and an annual budget of $800 million. Over 132,000 personnel are trained at JBSA facilities every year.

JBSA and its more than 266 mission partners represent a significant component of the City’s economy providing an annual economic impact, when combined with other DoD contracts and contractors, military retirees, veterans, and direct and indirect jobs, of over $29 billion for the City and $49 billion to the State of Texas. In addition, the property of the former Brooks Air Force Base (“Brooks AFB”), a fourth major military installation, was transferred from the U.S. Air Force to the City-created Brooks Development Authority (“BDA”) in 2002 as part of the Brooks City-Base Project (“Brooks City-Base”). Furthermore, the military is still leasing over 1.7 million square feet of space at Port San Antonio (the “Port”), which is the former Kelly Air Force Base that was closed in 2001.

A-11 One of the other significant events brought about by BRAC 2005 is the realignment of medical facilities resulting in a major positive impact on military medicine in San Antonio, with $3.2 billion in construction and the addition of approximately 12,500 jobs at the JBSA complex.

JBSA-Fort Sam Houston. JBSA-Fort Sam Houston is engaged in military-community partnership initiatives to help reduce infrastructure costs and pursue asset management opportunities using military facilities. In April 2000, the U.S. Army entered into a partnership with the private organization, Fort Sam Houston Redevelopment Partners, Ltd. (“FSHRP”), for the redevelopment of the former BAMC and two other buildings at Fort Sam Houston. These three buildings, totaling about 500,000 square feet in space and located in a designated historic district, had been vacant for several years and were in a deteriorating condition. On June 21, 2001, FSHRP signed a 50-year lease with the U.S. Army to redevelop and lease these three properties to commercial tenants.

Some of the major mission partner organizations on JBSA-Fort Sam Houston are: U.S. Army North, the Army Installation Management Command, the Army Medical Command, U.S. Army South, the Army Medical Department and School, the Southern Regional Medical Command, BAMC, the Medical Educational and Training Campus, the Mission and Installation Contracting Command, the Navy Medicine Education and Training Command, Three Army Reserve Depots, a Navy/Marine Reserve Operations Center, and a Texas Army National Guard armory.

The potential economic impact from JBSA-Fort Sam Houston due to the BRAC 2005 expansion, along with major growth from the Army Modular Force and Army Grow the Force programs, is estimated at nearly $8.3 billion. The economic impact due to the amount of construction on post to accommodate the new mission accounts for approximately 80% of the impact ($6.7 billion). While the major surge of construction from BRAC 2005 and the other major force programs are complete, the economic impact from JBSA-Fort Sam Houston will increase by nearly $1.6 billion annually with additional annual sales tax revenue of $4.9 million. The major personnel moves under BRAC 2005 were completed by September 15, 2011, and this increase in personnel and missions at JBSA-Fort Sam Houston could support the employment of over 15,000 in the community.

Various construction projects continue at JBSA-Fort Sam Houston. The new Walters Street Gate and Entry Control Point and a new Medical Education and Training Campus Headquarters Building have been completed. A new Student Activity Center opened in November 2013 and construction was completed on a new BAMC Visitor Control Center and Entry Control Point in January 2014. A new 310-room hotel was completed in October 2014, and a new 192-room apartment style dormitory broke ground in 2016. A small addition to the hospital for a hyperbaric chamber was completed in June 2017 and a new two story Army-Air Force Exchange Services Exchange Main Store is planned for 2018 or 2019. In 2016, the USO in partnership with JBSA, completed a new all-service facility located in the Sam Houston Community Center.

JBSA-Camp Bullis. Armed Forces medics at JBSA-Fort Sam Houston receive additional field training at JBSA-Camp Bullis, which comprises 28,000 acres. JBSA-Camp Bullis is also used by the 37th Training Wing for Security Forces technical and professional development training. Additionally, JBSA-Camp Bullis is home to the USAF Medical Training Readiness Center, which encompasses four medical-related courses. It is also home to multiple Army Reserve and Army National Guard units of all types, to include Military Intelligence, Engineer, Medical, Infantry and Special Forces. The 470th Military Intelligence Brigade, headquartered at JBSA-Fort Sam Houston, operates the INSCOM Detention Training Facility at JBSA-Camp Bullis, and the Defense Medical Readiness Training Institute operates the Combat Casualty Care Course. JBSA-Camp Bullis also supports regular use by local law enforcement agencies and Federal entities. In 2013-2016, JBSA-Camp Bullis supported the training of approximately 550,000 personnel. Because of its geographical size, numerous units and missions are continually looking at JBSA-Camp Bullis as a viable place to locate and train.

JBSA-Lackland. JBSA-Lackland is home to the 37th Training Wing, situated on 9,700 acres, all within the city limits of San Antonio. According to a recent Economic Impact Analysis, over 53,000 military, civilian, student, contractors and military dependents work, receive training, or utilize JBSA-Lackland services. JBSA-Lackland hosts the Air Force’s only Basic Military Training (“BMT”) function for all enlisted Airmen, which is known as the “Gateway to the Air Force”. Additionally, JBSA-Lackland hosts many of the technical training courses which the BMT graduates are routed to prior to their first assignment. On an annual basis, JBSA-Lackland is expected to graduate 86,000 Airmen and international students. The Air Force is in the middle of a $900 million program to replace the BMT Recruit Housing and Training buildings that have been in continuous operation since construction

A-12 in the late 1960s. Construction is now complete for four of the Airmen Training Complexes (“ATC”) and the first two Dining/Classroom Facilities (“DCF”) that support the ATCs. Construction is also complete for the Pfingston BMT Reception Center, every new recruit’s entry into BMT. The beginning of the second half of the Basic Military Training Complex replacement program is planned for FY 2018 with the start of the fifth ATC and the third DCF. Each ATC will house up to 1,200 trainees and the DCF includes dining halls and classroom facilities for two ATCs. The BMT replacement program is estimated to be complete by FY 2020.

Projected growth also includes a 160,000 square foot expansion of the 24th Air Force, the Cyber Command, facilities, and a potential increase of 1,500 students at the Defense Language Institute English Learning Center. Permanent bed down of the Transportation Security Agency’s Canine Academy is on-going as construction of their headquarters, additional kennels, and training lab facilities began in 2014.

Adjacent and contiguous to JBSA-Lackland is the Port, where the Air Force maintains a significant presence. The Air Force and the Port jointly utilize the Kelly Field runway for military and commercial airfield operations. The Air Force continues to lease over 30 buildings, which consist of 1.75 million square feet of space and over 270 acres. The largest Air Force leaseback is at Building 171, a 460,000 square foot facility previously closed from the 1995 Base Realignment and Closure of Kelly AFB. Approximately 7,000 Air Force and other DoD employees work at this and other facilities on the Port in this post-BRAC 2005 era.

Much of the new BRAC 2005 growth which occurred on the Port property is at Building 171. The Air Force spent $26.5 million to renovate the building, which houses 11 missions. Seven missions and approximately 800 personnel have relocated to the building from Brooks City-Base. These include the Air Force Civil Engineer Center, four medical missions including Air Force Medical Operations Agency, and other support missions. Building 171 also houses the new “Cyber” 24th Air Force consisting of approximately 450 personnel and the Air Force Real Property Agency.

JBSA-Randolph. JBSA-Randolph, which is known as “the Showplace of the Air Force” because of its consistent Spanish Colonial Revival architectural standard retained from when the installation was first constructed in the early 1930s, is on the northeast side of San Antonio and houses the Headquarters Air Education and Training Command and the Air Force Personnel Center. Other major tenant organizations include the Air Force Manpower Agency, 19th Air Force, the Air Force Recruiting Service, and the Air Force Office of Special Investigations (Region 4). The main operational mission is carried out by the 12th Flying Training Wing (the “Wing”) which equips and trains aviators and supports worldwide contingency operations. The Wing operates parallel runways on either side of the main installation facilities and conducts 24-hour-a-day flight training operations. In a related aviation mission, JBSA-Randolph, which recently added 85 instructors and staff to its Remotely Piloted Aircraft (“RPA”) training unit, will produce RPA pilots to man an Unmanned Aerial Systems (“UAS”) force which now encompasses 8.5% of total Air Force pilot manning. The UAS force is projected to grow by approximately 25% between FY 2013 and FY 2017.

The BRAC 2005 growth supported the City’s economic development strategy to promote development in targeted areas of the City, to leverage military installation economic assets to create jobs, and to assist the City’s military installations in reducing base support operating costs.

San Antonio is home to two large projects which serve all of the military branches. The Audie L. Murphy Veterans Administration Hospital, which includes a new $67 million Level I Polytrauma Center, was completed in 2011. This hospital is designed to be the most advanced in the world and is capable of providing state-of-the art medical care to veterans with multiple serious injuries. San Antonio is also home to the National Trauma Institute (“NTI”), a collaborative military-civilian trauma institute involving BAMC, University Hospital, the UT Health Science Center, and the USAISR. The NTI coordinates resources from the institutions to most effectively treat the trauma victims and their families.

In 2005, the San Antonio community put in place organizations and mechanisms to assist the community and the military with the BRAC 2005 and other military-related issues. The Military Transformation Task Force (“MTTF”) is a City, Bexar County, and Greater San Antonio Chamber of Commerce organization which provides a single integrated voice from the community to the military. The MTTF is formed of several committees each dedicated to working with the community and military on the BRAC 2005 actions and post-BRAC 2005 actions.

A-13 In January 2007, the City established the Office of Military Affairs (“OMA”) as the single point of contact for the City on military and veteran related issues. The mission of OMA is to work with the military to sustain and enhance mission readiness, develop and institutionalize relations to strengthen a community-military partnership, and to provide an official formalized point of contact for the military and veteran community on issues of common concern. OMA provides staff support to the MTTF and works closely with each MTTF committee in order to facilitate their work. OMA is also working with the local military bases to address compatible land-use issues around the installations in order to enhance mission readiness. Finally, OMA assists the Mayor with the Commission on Veterans Affairs. Chartered in 2001, this eleven-member board serves the Mayor and ten City Council Districts in an advisory capacity focused on all veteran issues within the community.

In 2008, OMA introduced the Growth Management Plan as one of the responses to the growth brought about by the BRAC 2005 actions, and it clearly laid out the partnership between the San Antonio community and the military. One example of the partnership is the City’s effort to gather over $30 million in resources and funding from bond proceeds, City funding, federal earmarks, and grants to provide significant infrastructure improvements around Fort Sam Houston. The premier project was the reconstruction and widening of Walters Street, a primary entrance to Fort Sam Houston. This project was substantially completed in June of 2013. This project was complex, since it was the center segment of a cooperative effort joining the already completed Texas Department of Transportation (“TxDOT”) improvements on IH-35 to a new, high security gate entrance that was completed by Fort Sam Houston. An even more unique project is the City’s construction of a much improved bridge over Salado Creek on Binz Engleman Road, which was actually built on federal property and was gifted to the military upon completion in June of 2012. Other key projects include intersection improvements on Harry Wurzbach Road between the JBSA-Fort Sam Houston Gate and Rittiman Road, and the construction of a new bridge on Rittman Road, west of IH-35. The City also expended significant funding to support development along Walters Street by improving utilities, installing a new water line and improving numerous side streets in that area. These improvements are now complete. The City was also selected by the DoD’s Office of Economic Adjustment to receive an award of $25 million in federal funds to construct new ramp connectors between IH-35 and Loop 410 near BAMC. This project is under construction. This initiative with TxDOT will greatly improve traffic flow and safety for personnel seeking access to the medical facility area.

On March 24, 2017, the United States Patent and Trademark Office granted San Antonio the Trademark Military City, USA. The trademark was a result of a year-long process to ensure that no other city had previously met the criteria. For over 300 years, San Antonio has had a rich military history. The moniker Military City, USA became most prominent after World War II. During this time, five military installations operated in San Antonio and the surrounding areas. The trademark emphasizes San Antonio’s rich military history and honors its approximately 250,000 veterans.

Currently, DoD is the community’s largest employer, supporting the employment of over 805,685 people, with an economic impact of approximately $137 billion to the Texas economy. JBSA alone directly employs 282,995 people and has a total economic impact of $49 billion in payroll, contract expenditures, and value of jobs created. Over 250,000 veterans reside in San Antonio and receive over $1.5 billion in annual benefit payments. The BRAC 2005 program in San Antonio concluded in 2011, but the construction momentum continues. Multiple projects are planned through FY 2021. The value of the proposed construction projects during this time period is anticipated to average between $200 and $300 million per year.

Other Major Industries

Aerospace. According to the Economic Impact Study commissioned by the Greater San Antonio Chamber of Commerce in 2010, the aerospace industry’s annual economic impact to the City was about $5.4 billion. This industry provides approximately 13,616 jobs, with employees earning total annual wages of over $678 million. The aerospace industry continues to expand as the City leverages its key aerospace assets, which include San Antonio International Airport, Stinson Municipal Airport, the Port, JBSA-Randolph, JBSA-Lackland, and training institutions. Many of the major aerospace industry participants such as Boeing, Lockheed Martin, General Electric, Pratt & Whitney, Raytheon, Cessna, San Antonio Aerospace – a division of Singapore Technologies, Southwest Airlines, American Airlines, Delta Air Lines, United Airlines, US Airways, FedEx, UPS, and others, have significant operations in San Antonio. The aerospace industry in San Antonio is diversified with continued growth in air passenger service, air cargo, maintenance, repair, overhaul, and general aviation.

A-14 In February 2011, Southwest Airlines (“SWA”) finalized its acquisition of AirTran Holdings, Inc. for $1.4 billion in cash and stock. The acquisition provided SWA with a presence in 37 new cities, including Hartsfield- Jackson Atlanta International Airport (AirTran’s main hub) and two AirTran customer service centers in Orlando, Florida and Atlanta, Georgia. As of March 1, 2012, SWA and AirTran are operating under a single operating certificate. Following this acquisition, SWA began discussions with City staff about its intent to consolidate customer service operations in San Antonio or at one or more of their other customer service centers.

In 1981, SWA opened its customer services and support center in San Antonio. This facility accommodated the existing workforce of 478 employees, but could not expand to include the additional 322 employees SWA planned to hire. Therefore, SWA began exploring other sites in San Antonio to accommodate a potential consolidation and growth. Other expansion sites SWA considered included Orlando, Florida, Atlanta, Georgia, Oklahoma City, Oklahoma, and Phoenix, Arizona. After consideration, SWA decided that due to changing needs and requirements in the company, and new technology being utilized to meet customer needs, it would only need to hire an additional 227 employees for a total of 705. SWA remains committed to its Customer Support and Service Operations in San Antonio, having signed a long-term lease at its new facility, and plans to maintain its workforce in San Antonio.

In early 2012, Boeing announced that its San Antonio facility would gain 300 to 400 workers and maintenance responsibilities for the nation’s executive fleet due to a decision to close a Wichita, Kansas plant. The aircraft maintenance and support work, which moved to San Antonio, included improvements to the nation’s fleet of executive jets, including Air Force One, the Boeing 747s that transport the President of the United States, and the jets that transport the Vice President, Cabinet members, and other government officials.

Applied Research and Development. The Southwest Research Institute (“SwRI”) is one of the original and largest independent, nonprofit, applied engineering and physical sciences research and development organizations in the U.S., serving industries and governments around the world in the engineering and physical sciences field. SwRI has contracts with the Federal Aviation Administration (the “FAA”), General Electric, Pratt & Whitney, and other organizations to conduct research on many aspects of aviation, including testing synthetic jet fuel, developing software to assist with jet engine design, and testing turbine safety and materials stability. SwRI occupies 1,200 acres and provides nearly two million square feet of laboratories, test facilities, workshops, and offices for approximately 3,000 scientists, engineers, and support personnel. SwRI’s total revenue for FY 2016 was $559 million, managing 106 projects with expenditures of more than $7.4 million to its internally sponsored research and development program which is designed to encourage new ideas and innovative technologies.

Information Technology. The information technology (“IT”) industry plays a major role in San Antonio. The economic impact of IT and cyber business already measures in the billions ($10 billion in 2010, with conservative estimates of growth to $15 billion in 2015). The industry itself is both large and diverse, including IT and Internet- related firms that produce and sell IT products. San Antonio is particularly strong in information security. In fact, San Antonio is recognized as a national leader in this vital field, with the U.S. Air Force’s Air Intelligence Agency, a large and growing National Security Agency (“NSA”) presence, and the Center for Infrastructure Assurance and Security (“CIAS”) at UTSA.

San Antonio boasts some of the most sophisticated uses of IT in the world, even though much of that advanced usage remains undisclosed for security reasons, since the community is home to a large concentration of military and intelligence agencies charged with the missions of intelligence, surveillance and reconnaissance, information operations and network defense, attack and exploitation. Prominent activities in cyber warfare, high tech development, acquisition and maintenance are found among the Air Intelligence Agency, Joint Information Operations Warfare Command, NSA/Central Security Service Texas, 67th Network Warfare Wing, Air Force Information Operations Center, and Cryptology Systems Group.

The CIAS at UTSA is one of the leading research and education institutions in the area of information security in the country. The CIAS has established partnerships with major influential governmental and non-governmental organizations such as the DoD, Department of Homeland Security, and the United States Secret Service. The CIAS has also been actively involved with sector-based Information Sharing and Analysis Centers’ security preparedness exercises for organizations in critical infrastructures.

A-15 Chevron U.S.A. Inc. (“Chevron”) selected San Antonio as the site for the construction of a 130,000 square foot data center to consolidate all of its North American data center operations. City Council approved the execution of a tax abatement agreement with Chevron. The data center involves a capital investment of over $335 million over ten years and will create 17 new jobs that pay approximately $60,000 annually in the targeted industry of IT. Chevron completed construction of the data center on a 33.82 acre site in Westover Hills (adjacent to the Microsoft Center), located at 5200 Rogers Road, and commenced operations in September 2014.

CyrusOne is a publicly traded owner, operator, and developer of enterprise-class data center properties. CyrusOne currently owns and operates a 107,000 square foot co-location data center at 9999 Westover Hills Blvd. The company’s customers include 15 of the top 100 global companies and five of the top 10 companies, including local companies such as Christus Health, Schlumberger, and Halliburton. City Council approved a six year, 50% tax abatement agreement with CyrusOne on its planned investment of approximately $120 million in real and personal property improvements, and the creation of 15 new full-time jobs.

In August and September 2016, Council voted and approved incentive packages for three tech-industry projects to open offices in downtown San Antonio: Easy Expunctions; Dialpad, Inc.; and LiquidWeb.

Additionally, the SAEDC supported two economic developments IT projects. Parlevel Systems (“Parlevel”) is a local technology startup located in downtown San Antonio that offers software and hardware platforms for the food vending industry. In June 2016, City Council approved an economic development agreement for the company to remain and expand in San Antonio. Parlevel must retain its headquarters and business operations in San Antonio, maintain at least 30 jobs, and add 10 jobs for a total of at least 40 jobs by December 2017. In September 2016, City Council approved an investment for downtown San Antonio IT startup HelpSocial, Inc. (“HelpSocial”). Founded in 2014, HelpSocial graduated the Techstars Cloud program in 2016. The company has developed web and mobile apps for integrating social media to support customer service center operations. HelpSocial will retain its six current jobs and add four more jobs by December 2017.

Manufacturing Industry. Toyota Motor Corporation (“Toyota”), one of the largest manufacturing employers in San Antonio with an estimated workforce of over 3,000, expanded its local production in 2010, adding the production of the Tacoma truck at its manufacturing facility in San Antonio. Toyota shifted its Tacoma manufacturing from Fremont, California to San Antonio, creating an additional 1,000 jobs and investing $100 million in new personal property, inventory, and supplies. Toyota and its 23 on-site suppliers, located on San Antonio’s south side, support Toyota’s production of Tundra and Tacoma vehicles, generating an estimated annual impact of $1.7 billion. Toyota and the 17 suppliers that have contracts with the City have created a total of 7,415 new and retained jobs through December 2016.

NBTY Manufacturing Texas, LLC (“NBTY”) is the largest vertically integrated manufacturer of nutritional supplements in the United States. The company manufactures, wholesales, and retails more than 25,000 products including vitamins, minerals, herbs, and sports drinks. The company sells its goods through pharmacies, wholesalers, supermarkets, and health food stores around the world. NBTY is owned by the investment firm, The Carlyle Group, which purchased 100% of the firm’s publicly traded shares on October 1, 2010. NBTY considered an expansion of its vitamin manufacturing operations at 4266 Dividend – the site of the former Judson-Atkinson Candies, Inc., which closed its operations in November 2011. NBTY also considered other potential sites in Long Island, New York and Hazelton, Pennsylvania. To attract NBTY to San Antonio, the City offered the company a cash grant of $200,000 over four years and the annual reimbursement of ad valorem taxes paid on new real and personal property improvements over ten years not to exceed $201,546 for a total cumulative grant of up to $401,546. Based on the City’s offer of incentives, NBTY indicated its intent to expand in San Antonio, create 65 new jobs by January 1, 2016, occupy the former Judson-Atkinson facility, and invest $6 million in improvements. NBTY also intends to offer employment to former Judson Candy Factory employees by hiring the former plant director to connect with former employees with production experience with the existing manufacturing equipment. As of December 31, 2016, NBTY has created 66 jobs and invested over $66 million in real and personal property improvements.

Xenex Healthcare Services LLC (“Xenex”), formerly headquartered in Austin, Texas, manufactures a patented mobile disinfection machine to decontaminate patient care environments. Xenex is an early stage company selling its disinfection machines to hospitals around the country. City Council authorized an EDG of $150,000 from the Economic Development Incentive Fund to Xenex contingent upon Xenex relocating its headquarters and

A-16 operations from Austin to San Antonio and creating 27 jobs over two years. Xenex relocated the company to San Antonio in 2012. Xenex business operations in San Antonio have expanded as more hospitals and health facilities are investing in the company’s disinfecting robot. Since moving to San Antonio in 2012, Xenex has grown from 15 employees to 72 employees.

Support Operations. On November 22, 2010, PETCO Animal Supplies, Inc. (“PETCO”) announced it had selected San Antonio over 47 other communities as the site of a new satellite support center, which is as an extension of the company’s San Diego headquarters and called the National Support Center. The National Support Center in San Antonio houses 400 PETCO associates in functions including accounting, human resources, internal audit, loss prevention, risk management, and ethics and compliance over the life of the agreement with the City which ends in 2027. These 400 new jobs have an annual average wage of approximately $58,000 with at least 10% of the jobs paying $80,000 or more. Many of these jobs are corporate-level positions with decision-making authority over major company functions. As of December 2016, PETCO has reported employing 357 people in its facility. PETCO is the second-largest U.S. retailer of specialty pet supplies. PETCO operates more than 1,000 stores in all 50 states and the District of Columbia, making it the only pet store to cover the entire U.S. market.

Glazer’s Wholesale Drug Company (“Glazer’s”), headquartered in Dallas, is one of the largest beverage distributors in the U.S. The company represents a wide variety of wine, spirits, malt beverage, and non-alcoholic suppliers in 11 states and employs over 6,000 people. Glazer’s has operated in San Antonio since 1940 and is currently located at 3030 Aniol Street, where it employs 613 people. Glazer’s requested an amendment to a Tax Abatement Agreement with the City, dated August 19, 2010, to reflect a new investment of over $32 million in real and personal property at a new facility purchased by Glazer’s, and creation of 100 new jobs and retainment of 350 jobs, for a total of 450 jobs to be located at the new facility. Glazer’s also purchased an additional 9.37 acres of City-owned land adjacent to the previous 35-acre purchase to accommodate the larger facility. City staff negotiated to sell the additional land for $399,999 plus a $75,000 charitable donation by Glazer’s to the City for the benefit of targeted area redevelopment, such as the City’s West side, with payments of $25,000 over each of the three years from 2014 to 2016.

Green Technology. In response to an April 2009 Request for Proposal, CPS negotiated and entered into a 30-year power purchase agreement with TX Solar I, LLC to construct a clean, dependable, and renewable energy solar farm in San Antonio and Bexar County, known as the “Blue Wing Solar Energy Generation Project”. TX Solar I, LLC, a wholly owned subsidiary of Duke Energy, is one of the largest electric power companies in the U.S. The project consists of 214,500 ground-mounted thin film panels manufactured by First Solar with an annual generation of about 14 megawatts (“MW”). This project created approximately 100 green jobs during the construction and operation phases with a capital investment of approximately $41,590,000 in real and personal property. The site is located southwest of the City near the intersection of IH-37 and U.S. Highway 181. Approximately 80% of the property site lies within Bexar County and approximately 20% is within the City limits.

In June 2010, CPS and UTSA announced a ten-year, $50 million agreement to position San Antonio as a national leader in green technology research. The agreement established the Texas Sustainable Energy Research Institute at UTSA. Dr. Les Shephard, the USAA Robert F. McDermott Distinguished Chair in Engineering at UTSA, heads the institute formerly known as the Institute for Conventional, Alternative and Renewable Energy. This research institute works with other academic and research entities with robust green programs including the SwRI as well as the Mission Verde Center, a City partnership that includes the Alamo Colleges and the Texas A&M University Texas Engineering Experiment Station. It also has an active military establishment looking to address specific energy needs. CPS began investing $50 million over ten years in the UTSA Institute in 2011.

The City continues to maximize the municipally-owned CPS utility to develop investment and employment in San Antonio. Through a combination of power purchase agreements and local economic development incentives, the City and CPS are steadily securing jobs, investment, and enhancing university research and development in the area of renewable energy.

As of January 31, 2017, CPS’ renewable energy capacity totals 1,409.8 MW in service with another 160.2 MW under contract. CPS has one of the strongest renewable energy programs in Texas with a renewable capacity under contract totaling 1,570.0 MW. CPS executed a Master Agreement with OCI Solar Power (“OCI”) for 400 MW from seven facilities. The last of the seven facilities became operational in early 2017. Each individual

A-17 facility comprising OCI’s 400 MW has an existing Purchase Power Agreement (“PPA”). OCI's Alamo 1 project facility of 40.7 MW achieved commercial operation in December 2013; St. Hedwig (Alamo 2) for 4.4 MW achieved commercial operation in March 2014; Eclipse (Alamo 4) facility at 39.6 MW, achieved commercial operation in August 2014; Walzem (Alamo 3) project at 5.5 MW achieved commercial operation in January 2015. The Uvalde (Helios – Alamo 5) facility at 95 MW became operational at the end of December 2015. The Haskell (Solara – Alamo 7) facility at 106.4 MW became operational in September 2016. The Sirius 1 (Alamo 6), at 110.2 MW in Pecos County, Texas, became operational in March 2017. Alamo 6 is currently one of the largest solar PV plants in Texas.

On June 20, 2011, CPS and the City announced the expansion of five companies into the area directly related to renewable energy and energy efficiency technologies. These firms were: Consert, GreenStar, ColdCar USA, Summit Power, and SunEdison. Since that time, these companies have begun implementing their commitments to San Antonio. In early January 2014, CPS allowed its agreement with Summit Power to expire. Recent developments include the following:

 Three separate purchase power contracts have been signed with SunEdison that will bring approximately 30 MW of renewable solar energy to CPS. CPS will provide about 60% of the long-term capital for development of the project by prepaying for a portion of the anticipated electrical output. SunEdison will utilize these funds to reduce the interest cost of the project. These uniquely structured contracts, a first in the solar industry, will ultimately provide CPS ratepayers with more than $32 million in energy savings over the next 25 years. The two 10 MW solar farm projects on approximately 200 acres at the SAWS Dos Rios Water Recycling Center are operational. The third solar farm achieved commercial operation in August 2012.  GreenStar, a manufacturer of LED streetlights, has moved into a new manufacturing space in the Alamo Downs area. Currently, the company employs about 42 people in its San Antonio location. At the end of September 2011, the first shipment containing 100 LED lights was delivered to CPS. A total of 25,000 LED streetlights will be installed throughout the City over the next several years.  Consert relocated its corporate headquarters from North Carolina to San Antonio and has hired 53 employees. Consert has completed close to 17,000 installations of its innovative energy management technology in the San Antonio area.  ColdCar USA continues to actively seek a manufacturing facility site in San Antonio. In November 2011, ColdCar USA delivered its first all electric refrigeration truck to Ft. Collins, Colorado.  On January 11, 2012, OCI and Mission Solar (formerly Nexolon) were selected by CPS to build one of the country’s largest solar projects, a 400-MW solar power manufacturing plant in San Antonio, resulting in an investment of more than $100 million. This solar project is the largest in the nation and will catapult Texas into the top five U.S. solar producing states. CPS reached an agreement with OCI to build the 400-MW solar energy project, and entered into a 25-year Power PPA on July 23, 2012. The PPA with CPS requires OCI to ensure the following: (1) establishment of an “anchor” facility to manufacture solar energy related products and one or more manufacturing facilities for multiple components of the solar energy value chain, such as racking systems; (2) investment of at least $100 million for the proposed “anchor” facility; and (3) the creation of at least 800 total solar energy related jobs with an annual payroll of $30 million. One of OCI’s partners, Mission Solar will initially create 404 solar manufacturing jobs toward meeting the total job requirement and both companies plan to establish their U.S. corporate headquarters in San Antonio, with OCI creating 76 corporate jobs and Mission Solar creating 40 corporate jobs.

Inner City Development

On February 4, 2010, the City Council approved the Inner City Reinvestment/Infill Policy as a strategy to stimulate growth in the inner city. Current market trends support a renewed interest in the heart of San Antonio, as illustrated by studies conducted for San Antonio such as the Downtown Housing Study, the Real Estate Market Value Analysis, and the Housing + Transportation Affordability Index. In particular, the Real Estate Market Value Analysis shows that a substantial portion of San Antonio’s core has very high rates of vacant properties, properties that could be put to use to support increasing demand for near-downtown housing, jobs, and services. This policy establishes the Inner City Reinvestment/Infill Policy Target Area as the highest priority for incentives. Specifically, the following actions are endorsed: (1) waiver of certain City fees and SAWS fees within the target area, and (2) greater incentives for economic development projects within the target area. The policy is designed to combat sprawl by strengthening San Antonio’s vibrant urban core and driving investment into the heart of the City.

A-18 Argo Group US, Inc. (“Argo”) moved its insurance operations from Menlo, California to San Antonio in 2001 and maintains its U.S. corporate headquarters in San Antonio. In 2007, Argo merged with PXRE Group Ltd., a Bermuda-based property reinsurer, and established its international headquarters in Bermuda. Argo has about 1,300 employees worldwide in eight countries, including 17 offices in 12 states, with annual revenues of approximately $1.3 billion. Argo was located at 10101 Reunion Place and considering relocation of its San Antonio operations to other sites within San Antonio, as well as to sites in other U.S. cities. In order to retain these good-paying corporate headquarters jobs in San Antonio, the City offered Argo free parking at the St. Mary’s garage for ten years valued at approximately $2,850,120 for up to 300 parking spaces. In exchange for this financial incentive, Argo located over 200 jobs at the IBC Centre building at 175 E. Houston Street and has agreed to retain these jobs at this location for the ten-year term of the agreement. Argo also agreed to meet the City’s minimum wage requirements and pay an average annual salary of at least $50,000. These incentives were approved by City Council on September 15, 2011.

HVHC Inc. (“HVHC”) established its headquarters in San Antonio in 1988 and currently employs 440 people at its headquarters facility downtown with plans to add another 100 jobs over the next two years. HVHC operates the third largest optical retail sector in the U.S. under several brand names, such as Visionworks. The company currently operates over 540 retail stores in 36 states and plans to grow to 1,000 stores in the next five years. City staff met with representatives of the company in December 2010 as part of the community’s Business Retention and Expansion program administered through the City’s contract with the Economic Development Foundation. During this meeting, City staff learned the company planned to relocate from its current facility at 11103 West Avenue and was considering a consolidation and expansion of its operations at either another site in San Antonio or in other Texas cities, including Dallas and Austin. In order to retain the company’s operations and headquarters in San Antonio, the City offered the following financial incentives to HVHC: (1) a cash grant of $1,050,000 payable over two years at $3,000 per job created/retained, and (2) approximately $2,923,200 in parking subsidies in the St. Mary’s garage over ten years, to include free parking for up to 350 employees for five years and parking at a 60% discount for up to 350 employees for another five years. In exchange for these financial incentives, HVHC agreed to: (1) retain its operations and corporate headquarters in San Antonio; (2) relocate 265 corporate jobs to the IBC Centre building on Houston Street; (3) relocate its vision care benefits subsidiary, Davis Vision, from Latham, New York to San Antonio; (4) add 85 new jobs for a total of 350 jobs at the IBC Centre no later than December 31, 2012; (5) meet the City’s minimum wage requirements in the Tax Abatement Guidelines; and (6) pay an annual average salary of at least $50,000. These incentives were approved by City Council on September 1, 2011. As of December 31, 2015, HVHC has complied with all of the outlined requirements.

Additionally, HVHC entered into another agreement with the City, expanding its headquarter operations by agreeing to create an additional 150 jobs for a total of 500 jobs by December 31, 2015 and retaining these jobs downtown for the remainder of the term of the grant through September 11, 2021. In turn, City Council approved an amendment to the current parking grant agreement in the amount of $360,000 payable over five years at $72,000 per year. In September 2012, HVHC advised City staff that the company was considering San Antonio and two sites in the Dallas area for the expansion of their manufacturing operations. To secure the manufacturing project for San Antonio, City staff recommended City Council approve a cash grant of up to $1,140,000 for the manufacturing project. For this grant, HVHC must locate its new manufacturing operations at 655 Richland Hills for a term of at least ten years, create up to 600 jobs, pay the living wage of $11.08/hour to all employees, designate a minimum of 50 “high wage” jobs paying an annual salary of at least $43,186 and invest approximately $25 million in personal property improvements. Both of these incentives were approved by City Council on April 11, 2013, and as of December 2016, HVHC has created a total of 505 jobs.

On June 21, 2012, City Council adopted the Center City Housing Incentive Policy (“CCHIP”) to encourage high-density housing development in the targeted growth areas identified in the City’s Downtown Strategic Framework Plan. CCHIP encourages historic rehabilitation, adaptive reuse, brownfield redevelopment, transit oriented development, and encourages mixed-use and mixed-income redevelopment. CCHIP is an as-of-right housing incentive policy that applies to multi-family rental and for-sale housing projects within the Community Revitalization Action Group (“CRAG”), San Antonio’s original 36 square mile boundary. Eligible projects may receive City fee waivers, SAWS fee waivers, and real property tax reimbursement grants for new residential development and residential conversions in the center city. Additionally, low interest construction loans and mixed-use forgivable loans may be awarded based on the geographic location of the housing project. Projects located within the urban core are eligible to receive a higher grant amount per housing unit. As of June 13, 2017, 63 incentive agreements have been executed under the program which will produce 6,275 new housing units in the center city.

A-19 Port San Antonio

The Port is a logistics-based industrial platform on the 1,900-acre site of the former Kelly Air Force Base. It was created by the Texas Legislature in 2001 following the closure of the base and tasked with redeveloping and managing the property to ensure that it continues serving as an economic engine for the region. Though created by the local government, the Port is self-sustaining and operates like a business – receiving its income from the properties it leases and services it provides, and reinvesting profits into further development of the property.

The Port is the region’s single largest real estate management and leasing firm, overseeing 12.9 million square feet of facilities and logistics assets that include an industrial airport, Kelly Field, SKF, and a 350-acre railport, East Kelly Railport. The entire site is contained within a foreign-trade zone, FTZ #80-10, and has quick road connections to Interstate Highways 35, 10, and 37.

The Port redevelopment efforts to date have attracted almost 80 customers to its site, including aerospace, logistics and military/governmental organizations. These customers employ more than 14,000 workers and generate over $4 billion in regional economic activity each year. The Port has received numerous recognitions for its innovative work, including being named Redevelopment Community of the Year in 2010 by the Association of Defense Communities. A regional sustainability leader since 2009, two of the Port’s newly developed properties have been LEED-certified by the U.S. Green Building Council.

Fourteen of the Port’s customers are aerospace-related firms, including industry leaders Boeing, Lockheed Martin, StandardAero, Chromalloy, Gore Design Completions (“Gore”), and Pratt & Whitney. Of the 14,000 workers at the Port, about 5,000 are employed in the aerospace sector.

The Port reached important milestones in 2011, as further described below, positioning it and its customers for further growth as an important economic engine for the region.

In the aerospace sector, Boeing San Antonio continues the legacy of aviation as a high performance, nationally-recognized facility. The company, which has been operating at Kelly Field since 1998 with a focus on maintenance, repair, and overhaul of military aircraft, welcomed its first 787 Dreamliner in the spring of 2011. The airplane is one of four scheduled to undergo change incorporation (electronics and software upgrades) at the Port before final completion and delivery to customers worldwide. In addition, the first of six new 747-8 tankers arrived at Boeing’s Port facility in 2011 where they underwent change incorporation through 2013. Based on the success of this project, the Port San Antonio Boeing facility will continue to incorporate commercial maintenance, repair, and overhaul into their operations.

Similarly, Gore (now called GDC Technics), which is North America’s largest outfitter of custom interiors for wide body jets and the third largest company of its type in the world, has been steadily growing since its arrival at the Port in 2005. In 2010, Gore added over 100,000 square feet to its hangar and workshop facilities at Kelly Field, giving it the necessary room to deliver luxury interiors for a Boeing 767 and its first Boeing 777 completion to foreign heads of state in 2011. Projects in the GDC Technics portfolio include green completions, refurbishments, or maintenance for aircraft such as the Boeing 727, Boeing 737 BBJ, Boeing 767-300, Boeing 777-200LR, Boeing 757, and Boeing 777, along with the Airbus 320, Airbus 330, Airbus A340-200, and Airbus A340-500.

Elsewhere at the Port, efforts to upgrade a 450,000 square foot office facility known as Building 171 continued in 2011. The facility accommodates 11 Air Force agency headquarters and 3,000 personnel. Since 2009, the Port has managed over $60 million in upgrades to the property to meet new Anti-Terrorism Force Protection standards that ensure the safety of its occupants and the sensitive work that takes place within. In 2012, the completion of final bays allowed the 24th Air Force-Cyber Command to become the final occupant of the building. There, the unit leads operations to defend the Air Force’s information systems worldwide against the new frontier in warfare- cyber attacks.

Four properties adjacent to Building 171 are also undergoing upgrades managed by the Port to support Air Force expansion within a single 70-acre containment area. Buildings 178, 179, and 200, measuring a combined 218,000 square feet, provide additional offices and specialized space for important servers and other computer equipment, including those utilized by the 24th Air Force-Cyber Command.

A-20 In 2010, the Port also completed a $10 million upgrade to a former World War II era warehouse, which now comprises 85,000 square feet of modern office space. The building allowed ACS, a Xerox Company and Port customer since 2000, to relocate from a 45,000 square foot space it previously occupied into its new facility as it grew its workforce from 400 to over 800 employees throughout 2010 and 2011. The company provides business support services to private and governmental customers, including serving as the State Disbursement Unit for Texas child support payments.

The Port will reach an important milestone as two road construction phases which began in 2011 are expected to be completed in 2017. The first phase of construction which was completed in 2013 starts on the Port’s northwest entrance, where 36th Street intersects with Growdon Road, and stretches for almost a mile to the south until it intersects with Billy Mitchell Boulevard. The new 36th Street extension creates an enhanced route inside the Port. The first phase of construction, also known as the 36th Street Project, is now fully open inside the Port between U.S. Highway 90 and Billy Mitchell Boulevard, and has improved overall access to the Port and opens 150 acres at Kelly Field for the development of new air-served facilities. In late 2015, the City began the second phase of construction on work that extends the road from Billy Mitchell Boulevard to General Hudnell Drive, creating additional connections for Port workers and commercial drivers.

The new sites opened by the 36th Street extension will enable the construction of new hangars and workshops that can support an additional 8,000 new jobs in that part of the Port alone – further positioning the region as an important and thriving aerospace center. The project is headed by the City’s Capital Improvement Management Services Department. Additional project partners include the Metropolitan Planning Organization, CPS, SAWS, and TxDOT.

While San Antonio is securing its position as the premier cybersecurity hub, the Port is embarking on a new path to become a major subhub in securing cybersecurity operations at the Port’s campus. The Port is moving forward with planning a new cybersecurity complex facility to accommodate growing demand by both military and private- sector cybersecurity operations. The Port’s initial plan is to build an 80,000 square foot office space at a cost of $15 million. If demand builds and cyber and technology operations continue to grow, the Port will bring additional phases to create over 500,000 square feet of additional office space to accommodate the possibility of 1,000 jobs.

Brooks City-Base

Brooks City-Base continues to foster the development of its business and technology center on the south side of San Antonio through its aggressive business attraction and retention efforts. Recognized as one of the most innovative economic development projects in the United States, Brooks City-Base is a 1,200 acre campus with approximately 250 acres available for immediate development. The U.S. Air Force ceased all operations at Brooks City-Base on September 15, 2011.

Since the project’s inception, more than 3,000 jobs have been created with an average salary of $50,000. More than $300 million in real estate development has occurred on campus, with another $170 million in projects being planned and constructed at Brooks City-Base through 2018.

Brooks Development Authority (“BDA”) encouraged economic growth noting the following projects:

 VMC Consulting expanded its center at Brooks City-Base creating 600 additional jobs to support San Antonio client base.  Brooks City-Base has completed restoration of Hangar 9, thereby maintaining its historical presence on campus.  Spine and Pain Center of San Antonio, PLLC signed a ten-year lease agreement with BDA. The center opened its doors with approximately 9,622 rentable square feet.  The Landings at Brooks City-Base completed the first phase of construction on a 300 unit multi-family apartment complex. The development is owned by the BDA and the NRP Group is the co-developer.  The City completed construction of its new Fire and Police Emergency Dispatch Center, a state-of-the- art communications facility located across from the City’s Emergency Operations Center and replaced the 9-1-1 center located at the police headquarters downtown.

A-21  BDA finalized a land sale to Head and Neck, a medical facility, to establish a 20,000 square foot medical office building on the Brooks City-Base Campus.  On June 27, 2011, the Mission Trail Baptist Hospital, located on 28 acres at Brooks City-Base, opened its doors. This facility consists of three stories, with the capability of adding additional floors and square footage as needed. It currently employs 567 people.  In June 2014, the University of the Incarnate Word (“UIW”) announced plans to build the city’s first osteopathic medical school on the campus of Brooks City-Base.  Phase 1 of the medical school will begin with four buildings in the historic district of Brooks City-Base. The cost of building the school is approximately $12 million. UIW began leasing the buildings in 2014 and will take ownership after 25 years. The school is scheduled to open in 2017.  Construction has begun on The Residences at Kennedy Hill, a 306-unit high-end apartment project at Brooks City-Base. NRP Group is partnering with Brooks City-Base on the roughly $40 million project. The Residences at Kennedy Hill are intended to house the 500 or so faculty, staff and students expected to occupy the adjacent University of the Incarnate Word’s School of Osteopathic Medicine, under construction on the site of Brooks’ former School of Aerospace Medicine. Both are scheduled to open in fall 2017.  On June 26, 2015, BDA closed on a bridge loan in the amount of $7,422,569, for development costs as part of a financing package for the construction of the Embassy Suites by Hilton Hotel Project. The hotel opened in May 2017.

To continue fostering economic activities on the south side of San Antonio, BDA leveraged its resources and BDA was awarded $1.9 million from the State Energy Conservation Office (“SECO”) for energy saving upgrades to eight buildings and 163 residential housing units. The SECO loans were obtained by BDA for energy saving upgrades to various residential housing units, new chiller systems for various buildings, replacement of heating, ventilation, and air conditioning systems associated with Buildings 160 and 170, and upgrades to Buildings 532, 570, 775, and 150, for installation of rooftop solar panels and the replacement of the HVAC system.

On December 13, 2012, City Council designated Brooks City-Base as a Reinvestment Zone in accordance with State statute for the purpose of the Mission Solar project. A Reinvestment Zone designation to the Brooks City- Base site will contribute to the retention and expansion of primary employment and attract major investment in the zone. Mission Solar has decided to locate its solar panel manufacturing operations and its U.S. corporate headquarters at Brooks City-Base. Mission Solar has also agreed to support the creation and sustainment of a renewable energy and advanced manufacturing workforce through a $350,000 contribution to the Alamo Colleges. These funds will be used by the Alamo Colleges to continue its efforts to develop a customized curriculum and training program to support the development of a renewable energy workforce. ______Sources: The Greater San Antonio Chamber of Commerce; San Antonio Medical Foundation; City of San Antonio, Department of International and Economic Development Department; Convention and Visitors Bureau; and the Strategic Alliance for Business and Economic Research Institute.

A-22 Growth Indices

San Antonio Average Electric and Gas Customers

For the Month Average of December Electric Customers Gas Customers 2007 681,312 319,122 2008 693,815 320,407 2009 706,235 321,984 2010 717,109 324,634 2011 728,344 328,314 2012 741,556 330,945 2013 754,893 333,587 2014 770,588 336,367 2015 783,767 337,920 2016 802,712 342,928 ______Source: CPS.

SAWS Average Customers per Fiscal Year

Fiscal Year Ended December 31 Water Customers 1 2007 341,220 2008 346,865 2009 350,859 2010 355,085 2011 358,656 2012 362,794 2013 367,388 2014 371,573 2015 2 479,100 2016 2 486,649 ______1 Average number billed, excluding SAWS irrigation customers. 2 Amounts reflect the merger with SAWS DSP effective January 1, 2015. Source: SAWS.

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A-23 Construction Activity

Set forth below is a table showing building permits issued for construction within the City at December 31 for the years indicated:

New Residential Residential Calendar Single Family 1 Multi-Family 2 Other 3 Year Permits Valuation Permits Valuation Permits Valuation 2007 4,035 $533,453,592 329 $203,966,595 12,788 $2,023,856,110 2008 2,575 $386,407,251 414 $336,579,967 11,106 $2,006,112,379 2009 2,119 $309,815,331 145 $216,621,122 10,634 $1,473,424,436 2010 1,982 $295,097,549 154 $186,518,798 10,489 $1,174,710,884 2011 1,650 $245,542,976 270 $205,177,825 10,290 $1,594,888,560 2012 1,993 $323,925,290 226 $302,749,653 11,390 $1,636,131,582 2013 1,902 $336,790,668 268 $320,007,487 9,888 $1,664,008,739 2014 2,290 $407,108,162 252 $501,829,279 11,214 $2,496,182,001 2015 2,161 $408,047,290 263 $500,853,131 11,580 $2,096,065,163 2016 2,150 $409,048,513 219 $408,327,871 19,106 $2,093,010,308 ______1 Includes new single family attached and detached projects. 2 Includes new two-, three- and four-family projects, townhomes, and multifamily apartment complexes. Apartment complexes are permitted per building. 3 Includes commercial building permits, commercial additions, improvements, extensions, and certain residential improvements. Source: City of San Antonio, Development Services Department.

Total Municipal Sales Tax Collections – Ten Largest Texas Cities

Set forth below in alphabetical order is total municipal sales tax collections for the calendar years indicated:

2016 2015 2014 2013 2012 Amarillo $ 74,412,781 $ 74,423,001 $ 72,301,582 $ 70,744,051 $ 65,386,227 Arlington 102,892,000 98,718,419 93,694,878 94,043,810 88,941,229 Austin 204,636,966 195,469,522 182,254,926 167,597,270 158,855,261 Corpus Christi 1 N/A 77,787,653 80,774,939 76,088,455 72,581,730 Dallas 284,659,887 272,645,990 256,926,027 242,456,290 232,445,766 El Paso 83,879,102 81,307,487 78,615,134 75,831,660 74,164,329 Fort Worth 139,042,987 131,705,412 126,263,002 118,919,449 112,745,847 Frisco 1 74,691,991 N/A N/A N/A N/A Houston 630,172,429 659,339,722 646,063,653 608,189,684 569,942,545 Plano 78,286,505 77,558,042 75,393,702 69,804,509 68,410,251 SAN ANTONIO 324,561,595 315,346,501 303,992,585 269,947,330 244,094,371 ______1 In 2016 the City of Frisco replaced the City of Corpus Christi as the 10th largest city in the state. Source: State of Texas, Comptroller’s Office.

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A-24 Education

There are 15 independent school districts within Bexar County with a combined enrollment of 327,389 encompassing 44 high schools, 69 middle/junior high schools, 263 early education/elementary schools, 21 magnet schools, and 50 alternative schools as of October 2016. There are an additional 23 charter school districts with 55 open enrollment charter schools at all grade levels. In addition, Bexar County has 79 accredited private and parochial schools at all education levels. Generally, students attend school in the districts in which they reside. There is currently no busing between school districts in effect. The seven largest accredited and degree-granting universities, which include a school of medicine, a school of nursing, a dental school, a law school, and five public community colleges, had combined enrollments of 117,706 for Fall 2016. ______Sources: Texas Education Agency; and Texas Higher Education Coordinating Board.

Employment Statistics

The following table shows current nonagricultural employment estimates by industry in the San Antonio- New Braunfels MSA for the period of May 2017, as compared to the prior periods of April 2017 and May 2016, respectively.

Employment by Industry

San Antonio-New Braunfels MSA 1 May 2017 April 2017 May 2016 Mining and Logging 7,200 7,000 6,800 Construction 54,500 52,400 51,200 Manufacturing 49,000 48,700 47,300 Trade, Transportation, and Utilities 178,000 178,300 177,000 Information 20,600 20,600 21,600 Financial Activities 86,700 87,200 87,200 Professional and Business Services 133,400 133,400 128,500 Education and Health Services 167,100 167,600 156,800 Leisure and Hospitality 132,900 130,400 131,800 Other Services 38,100 37,300 37,300 Government 174,100 173,800 170,600 Total Nonfarm 1,041,600 1,036,700 1,016,100 ______1 Based on Labor Market Information Department, Texas Workforce Commission (model-based methodology).

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A-25 The following table shows civilian labor force estimates, the number of persons employed, the number of persons unemployed, and the unemployment rate in the San Antonio-New Braunfels MSA, Texas, and the United States for the period of May 2017, as compared to the prior periods of April 2017 and May 2016, respectively.

Unemployment Information (all estimates in thousands)

San Antonio-New Braunfels MSA 1 May 2017 April 2017 May 2016 Civilian Labor Force 1,154.0 1,156.8 1,130.4 Number of Employed 1,112.3 1,115.2 1,091.5 Number of Unemployed 41.7 41.6 38.9 Unemployment Rate (%) 3.6 3.6 3.4

Texas (Actual) 1 May 2017 April 2017 May 2016 Civilian Labor Force 13,449.2 13,506.9 13,245.5 Number of Employed 12,857.2 12,895.1 12,679.1 Number of Unemployed 592.0 611.8 566.4 Unemployment Rate (%) 4.4 4.5 4.3

United States (Actual) 1 May 2017 April 2017 May 2016 Civilian Labor Force 159,979.0 159,817.0 158,800.0 Number of Employed 153,407.0 153,262.0 151,594.0 Number of Unemployed 6,572.0 6,555.0 7,206.0 Unemployment Rate (%) 4.1 4.1 4.5 ______1 Based on Labor Market Information Department, Texas Workforce Commission (model-based methodology).

San Antonio Electric and Gas Systems

San Antonio Electric and Gas Systems are covered in the body of this Official Statement.

San Antonio Water System

History and Management

In 1992, the City Council consolidated all of the City’s water-related systems, functions, agencies, and activities into one agency. This action was taken due to the myriad of issues confronting the City related to the development and protection of its water resources. The consolidation provided the City a singular voice of representation when promoting or defending the City’s goals and objectives for water resource protection, planning, and development when dealing with local, regional, state, and federal water authorities and officials.

Final City Council approval for the consolidation was given on April 30, 1992 with the approval of Ordinance No. 75686 (the “System Ordinance”), which approved the creation of the City’s water system into a single, unified system consisting of the former City departments comprising the waterworks, wastewater, and water reuse systems, together with all future improvements and additions thereto, and all replacements thereof. In addition, the System Ordinance authorizes the City to incorporate into SAWS a stormwater system and any other water-related system to the extent permitted by law.

The City believes that establishing SAWS has allowed the City greater flexibility in meeting future financing requirements. More importantly, it has allowed the City to develop, implement, and plan for its water needs through a single agency.

The complete management and control of SAWS is vested in a board of trustees (the “SAWS Board”) currently consisting of seven members, including the City’s Mayor and six persons who are residents of the City or reside within the SAWS service area. With the exception of the Mayor, all SAWS Board members are appointed by the City Council for four-year staggered terms and are eligible for reappointment for one additional four-year term. Four SAWS Board members must be appointed from four different quadrants in the City, and two SAWS Board

A-26 members are appointed from the City’s north and south sides, respectively. SAWS Board membership specifications are subject to future change by City Council.

With the exception of fixing rates and charges for services rendered by SAWS, condemnation proceedings, and the issuance of debt, the SAWS Board has absolute and complete authority to control, manage, and operate SAWS, including the expenditure and application of gross revenues, the authority to make rules and regulations governing furnishing services to customers, and their subsequent payment for SAWS’ services, along with the discontinuance of such services upon the customer’s failure to pay for the same. The SAWS Board, to the extent authorized by law and subject to certain various exceptions, also has authority to make extensions, improvements, and additions to SAWS and to acquire, by purchase or otherwise, properties of every kind in connection therewith.

Service Area

SAWS provides water and wastewater service to the majority of the population within the corporate limits of the City and Bexar County, which totals approximately 1.7 million residents. SAWS employs approximately 1,700 personnel and maintains over 12,300 miles of water and sewer mains. The tables that follow show historical water consumption and water consumption by class for the fiscal years indicated.

Historical Water Consumption (Million Gallons) 1 Total Direct Rate Gallons of Gallons Gallons Average Gallons of Water Sewer f f Fiscal Water Water Water Percent Wastewater Base Usage Base Usage Year Production a Usage Unbilled Unbilled Treated b Rate c Rate d Rate e Rate f 2016 g 76,857 63,934 12,923 16.81% 49,282 $10.90 $21.18 $12.35 $14.48 2015 g 76,227 62,896 13,331 17.49% 48,563 7.75 19.73 12.75 14.04 2014 68,265 57,261 11,004 16.12% 50,689 7.49 18.99 11.99 13.20 2013 66,391 55,108 11,283 16.99% 50,076 7.31 17.81 11.54 12.71 2012 66,596 55,320 11,276 16.93% 49,055 7.31 17.96 9.92 10.91 2011 70,699 59,133 11,566 16.36% 49,918 7.10 15.72 8.73 9.60 2010 61,272 52,578 8,694 14.19% 48,151 7.10 16.03 8.73 9.60 2009 62,649 55,295 7,354 11.74% 51,987 6.77 18.74 7.76 8.58 2008 68,250 58,828 9,422 13.81% 50,347 6.56 18.60 7.37 8.15 2007 56,813 49,511 7,302 12.85% 49,218 6.56 18.31 7.37 8.15 ______1 Unaudited. a Pumpage is total potable water production less Aquifer Storage and Recovery recharge. b Represents amounts billed to customers. Residential Class customers are billed based on water usage during a consecutive three month billing period from November through March. All other customer classes are billed for wastewater treatment based on actual water usage during each monthly billing period. c Rate shown is for 5/8” meters. Includes the State-Imposed TCEQ fee. d Represents standard (non-seasonal) usage charge for monthly residential water usage of 7,092 gallons per month. Includes water supply and Edwards Aquifer Authority (“EAA”) fees. e Minimum service availability charge (includes charge for first 1,496 gallons). Includes the State-Imposed TCEQ fee. f Represents usage charge for a residential customer based on winter average water consumption of 5,668 gallons per month. g Amounts reflect the merger with SAWS DSP effective January 1, 2015. Source: SAWS.

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A-27 Water Consumption by Customer Class (Million Gallons) 1 2016 a 2015 a 2014 2013 2012 2011 2010 2009 2008 2007 Water Sales b: Residential Class 35,360 35,769 29,310 29,206 30,070 34,153 28,932 30,667 33,025 26,651 General Class 23,293 23,212 20,870 20,614 20,393 20,986 19,465 20,309 20,297 19,166 Wholesale Class 1,174 354 3,861 1,943 1,412 128 101 119 108 90 Irrigation Class 4,107 3,561 3,220 3,345 3,445 3,866 4,080 4,200 5,398 3,604 Total Water 63,934 62,896 57,261 55,108 55,320 59,133 52,578 55,295 58,828 49,511

Wastewater Sales: Residential Class 26,462 26,048 27,896 27,617 26,572 27,371 26,746 29,825 28,148 27,383 General Class 20,503 20,281 20,502 20,100 20,066 20,134 20,002 20,338 20,352 19,634 Wholesale Class 2,317 2,234 2,291 2,359 2,417 2,413 1,404 1,824 1,847 2,200 Total Wastewater 49,292 48,563 50,689 50,076 49,055 49,918 48,152 51,987 50,347 49,217

Conservation – Residential Class c, d 6,611 2,284 2,296 2,520 3,026 4,106 2,935 3,469 3,948 2,432 Recycled Water Sales 18,436 18,421 18,323 18,359 18,129 18,990 14,968 16,321 16,559 14,148 ______1 Unaudited. a Amounts reflect the merger with SAWS DSP effective January 1, 2015. b Water Supply and EAA fees are billed based on the gallons billed for potable water sales. c Gallons billed for conservation are included in the gallons billed for potable water sales. d As part of a rate restructuring which took place on January 1, 2016, a portion of all monthly residential water sales in excess of 7,482 gallons is allocated to fund conservation related programs. Prior to 2016, this allocation was limited to monthly sales in excess of 17,205 gallons. Source: SAWS.

SAWS System

SAWS includes all water resources, properties, facilities, and plants owned, operated, and maintained by the City relating to supply, storage, treatment, transmission, and distribution of treated potable water, and chilled water (collectively, the “waterworks system”), collection and treatment of wastewater (the “wastewater system”), and treatment and reuse of wastewater (the “water reuse system”) (the waterworks system, the wastewater system, and the water reuse system, collectively, the “System”). The System does not include any “Special Projects”, which are declared by the City, upon the recommendation of the SAWS Board, not to be part of the System and are financed with obligations payable from sources other than ad valorem taxes, certain specified revenues, or any water or water- related properties and facilities owned by the City as part of its electric and gas system.

In addition to the water-related utilities that the SAWS Board has under its control, on May 13, 1993, the City Council approved an ordinance establishing initial responsibilities over the stormwater quality program with the SAWS Board and adopted a schedule of rates to be charged for stormwater drainage services and programs. As of the date hereof, the stormwater program is not deemed to be a part of the System.

SAWS’ operating revenues are provided by its four core businesses: Water Delivery, Water Supply, Wastewater, and Chilled Water. The SAWS rate structure is designed to provide a balance between residential and business rates and strengthen conservation pricing for all water users. For detailed information on the current rates charged by SAWS, see www.saws.org/service/rates.

Waterworks System. The City originally acquired its waterworks system in 1925 through the acquisition of the San Antonio Water Supply Company, a privately owned company. Since such time and until the creation of SAWS in 1992, management and operation of the waterworks system was under the control of the City Water Board. The SAWS’ waterworks system service area currently extends over approximately 934 square miles, making it the largest water purveyor in Bexar County. SAWS serves approximately 93% of the water utility customers in Bexar

A-28 County. As of December 31, 2016, SAWS provided potable water service to approximately 489,000 customer connections, which includes residential, commercial, multifamily, industrial, and wholesale accounts. To service its customers, the waterworks system utilizes 57 elevated storage tanks and 68 ground storage reservoirs, of which 28 act as both, with combined storage capacities of 269.2 million gallons. As of December 31, 2016, the waterworks system had approximately 6,961 miles of distribution mains, ranging in size from four to 61 inches in diameter (the majority being between six and 12 inches).

Wastewater System. The City Council created the City Wastewater System in 1894. A major sewer system expansion program began in 1960 with bond proceeds that provided for new treatment facilities and an enlargement of the wastewater system. In 1970, the City became the Regional Agent of the Texas Commission on Environmental Quality (“TCEQ”) (formerly known as the Texas Water Commission and the Texas Water Quality Board). In 1992, the wastewater system was consolidated with the City’s waterworks and recycling systems to form the System.

SAWS serves a substantial portion of the residents of the City, 12 governmental entities, and other customers outside the corporate limits of the City. As Regional Agent, SAWS has certain prescribed boundaries that currently cover an area of approximately 852 square miles. SAWS also coordinates with the City for wastewater planning for the City’s total planning area, extraterritorial jurisdiction (“ETJ”), of approximately 1,109 square miles. The population for this planning area is approximately 1.6 million people. As of December 31, 2016, SAWS provided wastewater services to approximately 437,500 customer connections.

In addition to the treatment facilities owned by SAWS, there are six privately owned and operated sewage and treatment plants within the City’s ETJ.

The wastewater system is composed of approximately 5,375 miles of mains and three major treatment plants, Dos Rios, Leon Creek, and Medio Creek. All three plants are conventional activated sludge facilities. SAWS holds Texas Pollutant Discharge Elimination System wastewater discharge permits, issued by the TCEQ for 187 million gallons per day (“MGD”) in treatment capacity and 46 MGD in reserve permit capacity. The permitted flows from the wastewater system’s three regional treatment plants represent approximately 98% of the municipal discharge within the City’s ETJ.

The System has applied to the TCEQ to expand its Certificates of Convenience and Necessity (“CCN”) or service areas for water and sewer from the existing boundaries initially to the ETJ boundary of the City. When the TCEQ grants a CCN to a water or sewer purveyor, it provides that purveyor with a monopoly for retail service. By expanding the CCN to the ETJ, developments needing retail water and sewer service within the ETJ must apply to SAWS. Service can then be provided according to System standards, avoiding small, undersized systems servicing new development. Since 2006, the System has submitted 21 separate applications to the TCEQ to expand its CCN or service areas, for water and sewer service, to the ETJ boundary of the City. These applications have added 28,309 acres to the water service area and 276,849 acres to the sewer service area. The expansion of the CCN to the ETJ supports development regulations for the City. Within the ETJ, the City has certain standards for the development that ensure areas developed in the ETJ and then annexed by the City will already have some City development regulations in place.

Recycling Water System. SAWS is permitted to sell Type I (higher quality) recycled water from its water recycling centers located on the City’s south side, and has been doing so since 2000. The water recycling program is designed to provide up to 25,000 acre-feet per year of recycled water to commercial and industrial businesses in the City. The original system was comprised of two major transmission lines, running east and west. In 2008, these two major transmission lines were interconnected at the northern end, providing additional flexibility to this valuable water resource. In 2013, an additional water recycling center and pipeline was connected to the western line, providing further recycled water system redundancy. Currently, approximately 130 miles of pipeline deliver highly treated effluent to over 60 customers. Recycled water is being delivered for industrial processes, cooling towers, and irrigation of golf courses and parks, all of which would otherwise rely on potable-quality water. Aside from supporting the local economy, this water recycling system also releases water into the upper San Antonio River and Salado Creek to sustain base flows. The result has been significant and lasting environmental improvements for the aquatic ecosystems in these streams.

A-29 SAWS also provides 50,000 acre-feet of recycled water to San Antonio’s municipally-owned electric and gas utility, CPS. This water is discharged into the San Antonio River from the Dos Rios wastewater treatment facility. CPS diverts the water downstream into Braunig and Calaveras Lakes to provide cooling water for its nearby power plants. The revenues derived from such agreement have been restricted in use to only recycling activities and are excluded from both the calculation of SAWS gross revenues and any transfers to the City’s General Fund. Revenues derived from this agreement are approximately $3.2 million each year.

Chilled Water System. SAWS owns, operates, and maintains five thermal energy facilities providing chilled water services to governmental and private entities. Two of the facilities, located in the City’s downtown area, provide chilled water to 21 customers. They include various City facilities such as the Henry B. Gonzalez Convention Center and the Alamodome, which constitute a large percentage of the SAWS’ downtown chilled water annual production requirements. In addition to City facilities, the two central plants also provide chilled water service to a number of major hotels in the downtown area, including the Grand Hyatt, Marriott Riverwalk, and Hilton Palacio Del Rio. The other three thermal facilities, owned and operated by SAWS, are located at the Port and provide chilled water to large industrial customers that include Lockheed Martin and Boeing Aerospace. SAWS’ chilled water producing capacity places it as one of the largest producers of chilled water in south Texas.

Prior to June 2014, SAWS was providing thermal steam services to 11 downtown customers from a central downtown plant. In light of advancements in modular heating technology, it became increasingly apparent in recent years that continuing to operate a centralized steam system was not sustainable economically over the long term for the System or its customers. As a consequence, working in close coordination with customers to ensure uninterrupted heating service, SAWS discontinued steam service in June of 2014. SAWS has recognized a positive financial impact as a result of operational cost savings outweighing any loss in revenue.

Stormwater System. In September 1997, the City created its Municipal Drainage Utility and established its Municipal Drainage Utility Fund to capture revenues and expenditures for services related to the management of the municipal drainage activity in response to EPA-mandated stormwater runoff and treatment requirements under the 40 CFR 122.26 Storm Water Discharge. The City, along with SAWS, has the responsibility, pursuant to the permit from the TCEQ, for water-quality monitoring and maintenance. The City and SAWS have entered into an interlocal agreement to set forth the specific responsibilities of each regarding the implementation of the requirements under the permit. The approved annual budget for the SAWS share of program responsibilities for SAWS FY 2017 is approximately $4.6 million, for which SAWS anticipates being reimbursed in full from the stormwater utility fee imposed by the City.

Water Supply

The primary source of water for the City is the Edwards Aquifer. The Edwards Aquifer is also the primary source of water for the agricultural economy in the two counties west of San Antonio and is the source of water for Comal and San Marcos Springs in New Braunfels and San Marcos, respectively, which depend upon springflow for their tourist-based economy. Edwards Aquifer water from these springs provides the habitat for species listed as endangered by the United States Fish & Wildlife Service (the “USFWS”) under the federal Endangered Species Act and provides base flow for the Guadalupe River. Water levels in the Edwards Aquifer are affected by rainfall or lack thereof, water usage region-wide, and discharge from the aforementioned springs. One unique aspect of the Edwards Aquifer is its prolific rechargeability and the historical balance between recharge and discharge in the form of well withdrawals and spring discharges.

During the 1980s, increasing demand on the Edwards Aquifer threatened to exceed average historical recharge, generating concerns by the areas dependent upon springflow for water and the local economy. Also, the fluctuations in Edwards Aquifer levels threatened to jeopardize flow from Comal and San Marcos Springs. Since groundwater, including the Edwards Aquifer, is subject to the rule of capture in Texas, meaningful management could not be accomplished in the absence of new State legislation.

Regional planning efforts to address these issues were undertaken in the mid-1980s, resulting in recommendations for new State legislation for management of the Edwards Aquifer. Failure to adopt this legislation in the 1989 Texas Legislative Session resulted in the initiation of various lawsuits and regulatory efforts by regional interests dependent upon springflow to force limitations on overall usage from the Edwards Aquifer. In addition to

A-30 the litigation discussed below, litigation was initiated in State District Court to have the Edwards Aquifer declared an underground river under State law, and therefore owned by the State. This litigation was unsuccessful. In addition, efforts were undertaken to have the Texas Water Commission (now the TCEQ) regulate the Edwards Aquifer. In April 1992, the Texas Water Commission adopted emergency rules declaring the Edwards Aquifer to be an underground stream, and therefore State water subject to regulation by the State. After final adoption of permanent rules, litigation was initiated in State court challenging the Texas Water Commission’s determination. The Texas Water Commission’s permanent rules and the Commission’s determination that the Edwards Aquifer was an underground stream, and, therefore, subject to regulation by the State, were declared invalid by the State courts.

The various litigations and regulatory efforts to manage withdrawals from the Edwards Aquifer resulted in passage of the Edwards Aquifer Authority Act in 1993 and its amendment in 1995 to allow its implementation. The Edwards Aquifer Authority (“EAA”) began operation on July 1, 1996, with a goal of implementing State regulatory legislation aimed at the elimination of uncertainties concerning access to and use of Edwards Aquifer water by the City and all other Aquifer users.

The Board of the EAA has adopted rules for: (1) drought management and (2) withdrawal permits governing the use of water from the Edwards Aquifer. Drought management rules mandate staged reductions in water supplies withdrawn from the Edwards Aquifer. The City currently has a series of accompanying demand restrictions targeting discretionary water use, such as use of decorative water features and landscape irrigation. Drought demand rules do not materially adversely affect revenues or SAWS’ ability to supply water to its customers for primary needs.

In 2007, the Texas Legislature passed Senate Bill 3 establishing a cap on annual pumping from the Edwards Aquifer of 572,000 acre-feet and placing restrictions into State statute regarding supply availability during drought periods, thus making these restrictions State law. SAWS currently has access to approximately 50% of the 572,000 acre-feet available. In connection with the EAA’s directive from the Texas Legislature to ensure that continuous minimum spring flows of the Comal Springs and the San Marcos Springs are maintained to protect endangered and threatened species, the Edwards Aquifer Recovery Implementation Program (“EARIP”) was established in 2007. The EARIP was developed through a consensus-based process that involved input from the USFWS, other appropriate federal agencies, and all interested stakeholders in the Edwards Aquifer region. Together, these entities, over a four- year period, developed and approved a springflow protection and habitat restoration plan, the Edwards Aquifer Habitat Conservation Plan (“EAHCP”).

The primary parties to the EAHCP include the EAA, SAWS, the City of New Braunfels, the City of San Marcos, and Texas State University. The EAHCP was used by the USFWS as the basis for issuing an Incidental Take Permit (“ITP”), which will protect San Antonio and the region from the threat of future environmental lawsuits and federal control of the aquifer over a 15-year term. This ITP was issued by the USFWS on March 18, 2013.

For additional information on the EAHCP, see the official statement for the CITY OF SAN ANTONIO, TEXAS WATER SYSTEM JUNIOR LIEN REVENUE REFUNDING BONDS, SERIES 2017A (NO RESERVE FUND) - EDWARDS AQUIFER RECOVERY IMPLEMENTATION PROGRAM AND THE EDWARDS AQUIFER HABITAT CONSERVATION PLAN filed with the Municipal Securities Rulemaking Board (“MSRB”) through its Electronic Municipal Market Access (“EMMA”) system.

Edwards Aquifer Authority

Pursuant to applicable Texas law, including the Edwards Aquifer Authority Act and legislation enrolled subsequent thereto serving to supplement and/or amend this legislation, the EAA has adopted rules that require a reduction in the amount of permitted Edwards Aquifer water rights that may be pumped annually for the duration of a drought event. During a period of drought management, water rights are impacted on a pro rata basis based on the number of days of a calendar year that there exists a particular category of drought (depending on severity) requiring a reduction in pumping. Reductions of permitted rights to withdraw water are generally applied to all permit holders, though there do exist some limited exceptions applicable to agriculture users. The various stages of reduction in permitted water rights are declared by the EAA Board of Directors and impact SAWS’ access to its permitted Edwards Aquifer water rights, without input or action by the City or SAWS. The EAA’s drought triggers and requisite reduction in pumping for the San Antonio and Uvalde Pools of the Edwards Aquifer are indicated in the following tables. The entirety of SAWS’ Edwards Aquifer water rights is subject to the restrictions associated with the San Antonio Pool.

A-31 SAN ANTONIO POOL Comal San Marcos Index Well Critical Period Withdrawal Springs Flow 1 Springs Flow 1 J-17 Level 2 Stage 3 Reduction (%) < 225 < 96 < 660 I 20 < 200 < 80 < 650 II 30 < 150 N/A < 640 III 35 < 100 N/A < 630 IV 40 < 45/40 4 N/A < 625 V 4 44

UVALDE POOL Comal San Marcos Index Well Critical Period Withdrawal Springs Flow 1 Springs Flow 1 J-27 Level 2 Stage 3 Reduction (%) N/A N/A N/A I N/A N/A N/A < 850 II 5 N/A N/A < 845 III 20 N/A N/A < 842 IV 35 N/A N/A < 840 V 44 ______1 Measured in cubic feet per second. 2 Measured in mean sea level. 3 A change to a critical period stage with higher withdrawal reduction percentages, including initially into Stage I for the San Antonio Pool and Stage II for the Uvalde Pool, is triggered if the 10-day average of daily springflows at the Comal Springs or the San Marcos Springs or the 10-day average of daily Aquifer levels at the J-17 or J-27 Index Wells, as applicable, drop below the lowest number of any of the trigger levels for that stage. A change from any critical period stage to a critical period stage with a lower withdrawal reduction percentage, including existing from Stage I for the San Antonio Pool and Stage II for the Uvalde Pool, is triggered only when the 10-day average of daily springflows at the Comal Springs and the San Marcos Springs and the 10-day average of daily Aquifer levels at the J-17 or J-27 Index Wells, as applicable, are all above the same stage trigger level. 4 In order to enter into Critical Period Stage V, the applicable springflow trigger is either less than 45 cubic feet per second based on a ten-day rolling average or less than 40 cubic feet per second based on a three-day rolling average. Expiration of Critical Period Stage V is based on a ten-day rolling average of 45 cubic feet per second or greater.

Due to the above-average rainfall in 2015, the EAA lifted all Stage restrictions in 2015, ending critical period management for users within the San Antonio Pool and the Uvalde Pool. The change was effective within the Uvalde Pool on August 5, 2015 and the San Antonio Pool on November 9, 2015. As a result of continued above-average rainfall in 2016, the region was not subject to any Stage restrictions during that year. For additional information on the various levels of drought restrictions imposed by the EAA and current level of the Edwards Aquifer, see www.edwardsaquifer.org.

City’s Edwards Aquifer Management Plan

In addition, and separate and apart from the EAA’s rules governing withdrawal of Edwards Aquifer water during drought, the City has established a proactive Aquifer Management Plan to manage the region’s water resources during periods of drought. Established by City ordinance, the Aquifer Management Plan also restricts water use based on specific levels of the Edwards Aquifer. The City approved the following Edwards Aquifer level triggers in 2009 and updated certain revisions to the water use restrictions in 2014.

Year Round – Year round restrictions are in effect when the Edwards Aquifer level is above 660 feet mean sea level at the monitored well (J-17 Index Well). During year round watering restrictions, SAWS customers are permitted to water landscape with an irrigation system or sprinkler any day of the week before 11 a.m. or after 7 p.m.

Stage One – Stage One restrictions begin when the 10-day rolling average of the Edwards Aquifer level drops to 660 feet mean sea level at the monitored well (J-17 Index Well). SAWS customers are limited to one-day-per week

A-32 landscape watering with an irrigation system or sprinkler based on the last number of the customer’s street address and are only allowed to water before 11 a.m. or after 7 p.m.

Stage Two – Stage Two restrictions begin when the 10-day rolling average of the Edwards Aquifer level drops to 650 feet mean sea level at the monitored well (J-17 Index Well). SAWS customers are limited to one-day- per week landscape watering with an irrigation system or sprinkler based on the last number of the customer’s street address and are only allowed to water from 7 a.m. to 11 a.m. and from 7 p.m. to 11 p.m. on their assigned day.

Stage Three – Stage Three restrictions may begin when the 10-day rolling average of the Edwards Aquifer level drops to 640 feet mean sea level at the monitored well (J-17 Index Well) and the total supply of water to SAWS from the Edwards Aquifer and other available sources is insufficient to meet customer demand while complying with applicable regulations governing water supply withdrawals. SAWS customers are limited to landscape watering with an irrigation system or sprinkler once every other week based on the last number of the customer’s street address and are only allowed to water from 7 a.m. to 11 a.m. and from 7 p.m. to 11 p.m. on their assigned day.

Stage Four – Stage Four restrictions may be declared if the total supply of water from the Edwards Aquifer and other available water sources to SAWS is insufficient to meet customer demand while complying with applicable regulations governing water supply withdrawals. Stage Four restrictions may be declared at the discretion of the City Manager upon completion of a 30-day monitoring period following Stage Three declaration. SAWS customers are limited to landscape watering with an irrigation system or sprinkler once every other week based on the last number of the customer’s street address and are only allowed to water from 7 a.m. to 11 a.m. and from 7 p.m. to 11 p.m. on their assigned day. Also during Stage Four, a drought surcharge is assessed on all accounts for water used or assumed to be used for landscape irrigation. The surcharge is the highest volumetric rate assessed by SAWS and is assessed on any residential and irrigation account with monthly water usage exceeding 12,717 and 5,236 gallons, respectively. The surcharge rate is assessed in addition to the regular water and wastewater rates.

Due to above-average rainfall in both 2015 and 2016, the City has been out of any drought restrictions since late 2015. Year round water use rules are currently in place (effective December 2, 2015).

Water Transmission and Purchase Agreement for Carrizo and Simsboro Aquifer Water

In an effort to achieve significant diversification of the City’s water supply, the SAWS Board, on January 14, 2011, solicited requests for competitive sealed proposals for the provision and delivery of alternative water supplies for the purpose of meeting the SAWS system’s water supply needs (the “Solicitation”). In response to the Solicitation, the SAWS Board received nine responses, from which three finalists were selected and reviewed prior to determining that a joint-venture proposal (such proposer, Abengoa Vista Ridge, LLC, hereafter referred to as “Abengoa VR”) to deliver Carrizo and Simsboro aquifer water presented the most advantageous possibility for the City to obtain an alternative water source. On July 1, 2014, the SAWS Board formally selected the water supply proposal of Abengoa VR as the most advantageous to the SAWS system, subject to negotiation of an acceptable contract and City Council support.

On September 29, 2014 and October 15, 2014 the SAWS Board adopted resolutions, and on October 30, 2014 the City Council unanimously adopted an ordinance, approving the execution of a Water Transmission and Purchase Agreement (the “Agreement”) between the City, acting by and through SAWS, and Abengoa VR (who is indirectly owned by Abengoa S.A., a company organized and existing under the laws of the Kingdom of Spain, and referred to herein as the “Abengoa Parent”), pursuant to which Abengoa VR has committed to make available to SAWS, and SAWS has agreed to pay for, up to 50,000 acre-feet of potable water (“Project Water”) per year for an initial period of 30 years plus a limited (10 year) extension period under certain events (hereinafter referred to as the “operational” phase). To produce and deliver the Project Water, Abengoa VR will develop well fields to withdraw water from the Carrizo and Simsboro aquifers in Burleson County, Texas pursuant to currently-held long-term leases with landowners and construct (or cause to be constructed) a 142-mile pipeline from this well field to northern Bexar County (the well fields and the pipeline, together, the “Project”). The pipeline will be connected to the SAWS distribution system at this delivery point in northern Bexar County (the “Connection Point”).

The Agreement is separated into three distinct phases. The “development” phase commenced on November 4, 2014, which was the date of complete execution and delivery of the Agreement, and is scheduled to last between 18 and 30 months. The “development” phase concludes upon satisfaction of certain contractual requirements, the

A-33 most significant of which is when Abengoa VR obtains construction and operational period financing for the Project. These events are referred to as “financial closure” and its occurrence results in the conclusion of the “development” phase and commencement of the “construction” phase of the Project by Abengoa VR. During the “construction” phase of the Project, SAWS will also begin construction of improvements to the SAWS system necessary to accept and integrate the Project Water, at an anticipated capital cost to SAWS of approximately $145 million. This “construction” phase is scheduled to last 42 months and its conclusion will result in the commencement of the aforementioned 30 year “operational” phase, during which period SAWS is obligated to pay for Project Water (up to 50,000 acre-feet annually) made available to it by Abengoa VR at the Connection Point.

During the “development” phase, SAWS has retained the right to terminate the Agreement for its convenience, subject to its payment of a termination fee to Abengoa VR (determined based on the costs incurred by Abengoa VR pursuant to the Agreement from commencement of the “development” phase to the date of termination, such termination fee being capped at $40.1 million). After “financial closure”, SAWS has also retained the right to terminate the Agreement by purchasing the Project for the aggregate amount of the outstanding Project debt, contract breakage costs and return of and on equity contributions by Abengoa VR’s principals (no cap is imposed upon such amount as exists if the Agreement is terminated during the “development” phase). At the end of the “operational” phase, ownership of the Project will be transferred to SAWS at no cost. SAWS has also entered into a separate agreement with Blue Water Vista Ridge, LLC, the lessee of the Project Water, to continue to acquire the 50,000 acre- feet of untreated groundwater, for an additional 30 year period, upon the termination of the Agreement and transfer of the Project to SAWS, and the cost of such water at the end of the Agreement will be tied to the costs of then-prevailing two-year Edwards Aquifer water leases.

Pursuant to the terms of the Agreement, SAWS will pay costs arising under the Agreement, as a maintenance and operating expense of the SAWS system, only for Project Water made available at the Connection Point (which payment will include the costs of operating and maintaining the Project). SAWS will have no obligation to pay for any debt issued by Abengoa VR, and any such debt will be non-recourse to SAWS. At the time of execution of the Agreement in 2014, SAWS originally anticipated that Project Water (the cost of which is paid directly to Abengoa VR), together with Project operations and maintenance (as a direct pass through under the Agreement) and Project electricity (paid directly by SAWS to the utility providers), would initially cost approximately $2,200 per acre foot (with the actual cost of Project Water estimated at $1,852 to $1,959 per acre foot and the balance attributable to Project operation and maintenance expenses and electricity), resulting in an annual charge to the SAWS system of approximately $110 million (which amount does not take into account potential revenue increases resultant from Project Water being available to SAWS for sale).

On November 19, 2015, the City Council approved a series of increases to the water supply fee to finance the acquisition of new water supplies, including the Project. SAWS currently projects that, absent any increase in SAWS system revenues attributable to the availability of Project Water for sale, its payment obligation under the Agreement will result in a rate increase of approximately 14% to the average monthly SAWS residential bill by 2020 (which increase does not include other projected rate increases anticipated to occur by such time). Any such fee will only be imposed by SAWS so that revenues are not generated and received until needed. Accordingly, SAWS will not impose this approved fee to pay costs of the Project until payment for Project Water is imminent.

The execution of the Agreement represents a significant diversification of the City’s water source, as SAWS projects that Project Water, if delivered at the maximum amount (which is the expectation of both SAWS and Abengoa VR), will account for approximately 20% of the SAWS system’s current annual usage.

On November 25, 2015, national and international media reported Abengoa Parent’s commencement of pre- insolvency proceedings in Spain, indicating the beginning of an approximately four-month period during which Abengoa Parent negotiated with its creditors in an effort to reach an accord to guarantee Abengoa Parent’s continued financial viability. On February 3, 2016, Abengoa Parent presented its viability plan to its main creditors, who were to agree to a restructuring plan prior to March 28, 2016 for Abengoa Parent to avoid filing for insolvency. On March 28, 2016, Abengoa Parent reported that it had obtained backing from 75 percent of its creditors for a seven-month standstill agreement, which it filed with the court in Seville, Spain as it sought more time to restructure its debt, thus avoiding filing for insolvency. In addition, it was reported on March 29, 2016 that Abengoa Parent and several of its affiliated entities (specifically excluding Abengoa VR) filed for Chapter 15 bankruptcy protection in the United States Bankruptcy Court in Wilmington, Delaware while it continued discussions with banks and bondholders on its restructuring plan. The Chapter 15 filing has no direct impact on SAWS’ rights and obligations.

A-34 In early 2016, SAWS became aware that Abengoa was soliciting proposals to sell up to 80% of the equity interest in Abengoa VR. Under the terms of the Agreement, SAWS has the right to consent to any assignment or change of control of Abengoa VR in SAWS’ sole and absolute discretion. On March 22, 2016, SAWS received notice that Garney P3 LLC (“Garney”, who is wholly owned by Garney Companies, Inc. and referred to herein as “Garney Company”, who is wholly owned by Garney Holding Company, and referred to herein as “Garney Parent”; Garney, Garney Company and Garney Parent are collectively referred to herein as the “Garney Parties”) had reached agreement with Abengoa Parent, Abengoa Water USA LLC (“Abengoa Water”) and Abengoa VR (Abengoa Parent, Abengoa Water and Abengoa VR collectively referred to herein as the “Abengoa Parties”), for the sale and purchase of an 80% equity interest in Abengoa VR (such agreement, the “Equity Purchase Agreement”; such transferred interest in Abengoa VR, the “Transferred Project Company Interest”). The transaction memorialized pursuant to the Equity Purchase Agreement closed on June 10, 2016, at which time Garney acquired the Transferred Project Company Interest. Accordingly, Garney now owns an 80% equity stake in and all control rights of Abengoa VR. Abengoa Parent affiliate, Abengoa Water, retains its silent 20% equity interest in Abengoa VR. As a result, Abengoa affiliates will no longer have any active participating role in the Project. Garney has indicated an interest in finding a long term operating service provider, potentially in conjunction with a future equity sale. SAWS will continue to have approval rights of any equity sale that results in Garney not controlling a majority interest in the Abengoa VR, and selection of any operating service provider under the Agreement.

On May 17, 2016, SAWS exercised its contractual right to fix the “Capital and Raw Groundwater Unit Price” under the Agreement based on the methodology provided for therein. This action reduced the price of the Project Water component of SAWS annual payment requirement from the possible maximum amount of $1,959 per acre foot to $1,606 per acre foot, which will remain fixed for the entire 30 year term (and any extension of that term) of the Agreement. This action results in savings to SAWS of more than $17 million per year and more than $529 million over the maximum that could have been charged under the 30 year term of the Agreement.

On May 18, 2016, the SAWS Board approved an Amendment to the Agreement (the “First 2016 Amendment”) which includes approval of the transfer to Garney of the Transferred Project Company Interest and other miscellaneous and conforming amendments to the Agreement, approved other related agreements, including a Project Real Property Conveyance Agreement between SAWS and the Central Texas Regional Water Supply Corporation, and authorized the President and Chief Executive Officer, upon determining that all necessary prerequisites have occurred, to undertake all necessary actions and execute the First 2016 Amendment (which occurred contemporaneously with the closing under the Equity Purchase Agreement). The SAWS President and Chief Executive Officer exercised this authority on June 10, 2016, at which time the First Amendment became effective.

On December 18, 2015, Metropolitan Water Company, L.P. (“Met Water”) filed a lawsuit in Travis County District Court, 201st Judicial District, styled Metropolitan Water Company, L.P. v. Blue Water Systems, LP; Blue Water Regional Supply Project, LP; Blue Water Vista Ridge LLC; Abengoa Vista Ridge LLC; and Wilmington Trust National Association, Cause No. D-1-GN-15-005774 (“Lawsuit”). In this Lawsuit, Met Water alleged various Blue Water entities breached certain agreements with Met Water and failed to pay Met Water money owed under said agreements. Met Water also alleges that an assignment of leases to Blue Water Vista Ridge, LLC was entered into based upon a fraudulent inducement. Met Water sought rescission of the agreements with the Blue Water Vista Ridge, LLC-affiliated entities, including the assignment of leases, and/or money damages. The leases that are the subject of the assignment in dispute give Abengoa VR the right to produce the Project Water to be sold to SAWS under the Agreement. On May 11, 2016, the litigating parties filed a Notice of Non-Suit with Prejudice, effectively dismissing all claims that could adversely affect performance of the Agreement.

On September 16, 2016, the Board of Directors of Abengoa VR changed the Company name to Vista Ridge LLC.

On November 1, 2016, the SAWS Board approved a second amendment to the Agreement (the “Second 2016 Amendment”) to accommodate the declaration of financial closure under the Agreement. Once again, the SAWS Board authorized the SAWS President and Chief Executive Officer to approve the effectiveness of the Second 2016 Amendment upon prior confirmation of satisfaction of necessary prerequisites. The Second 2016 Amendment was made effective on November 2, 2016 concurrent with a declaration of financial closure under the Agreement, as amended by the First 2016 Amendment and the Second 2016 Amendment. The Second 2016 Amendment also contemplated finalization of infrastructure related to the Connection Point and selection of an operating service provider to operate the Project during the “operational phase” of the Project. Neither the First 2016 Amendment nor

A-35 the Second 2016 Amendment altered the Agreement’s structure or provisions in a manner that differs from its description provided above.

Sewer Management Program

In March 2007, SAWS was orally notified by Region 6 of the United States Environmental Protection Agency (the “EPA”) of alleged failures to comply with the Clean Water Act due to the occurrence of sanitary sewer overflows (“SSOs”). The EPA subsequently referred the matter to the DOJ for enforcement action. SAWS engaged in settlement negotiations with the EPA and the DOJ to resolve the allegations. On June 4, 2013, the SAWS Board approved a Consent Decree between SAWS and the United States of America and the State to resolve this enforcement action. SAWS signed the Consent Decree on June 5, 2013 and the Consent Decree was subsequently executed by the United States of America and the State. On September 13, 2013, after consideration of the comments received, the United States of America filed its Motion for entry of the Consent Decree, requesting the Court to approve the Consent Decree by signing and entering it. The Consent Decree was signed and entered by the Court on October 15, 2013. During the 10 to 12 year term of the Consent Decree, SAWS estimates the cost to perform the operating and maintenance requirements of the Consent Decree will be approximately $250 million. Additionally, SAWS estimates that capital investments of approximately $850 million will be required over the Consent Decree term. As with any estimate, the actual amounts incurred could differ materially. Since entry into the Consent Decree, SAWS has performed its obligations under the terms of the Consent Decree and is in material compliance with its terms, conditions, and requirements. Since 2010, SAWS has seen a significant reduction in SSOs, from 538 in 2010 to 196 in 2014. During the above-normal rainfall realized by the City in 2015 (being in excess of 44 inches), SSOs increased to 263 in 2015; however, this is well below the annual average since 2010 of 335. The above-normal levels of rainfall continued into 2016 with a total of 43.9 inches falling during the year. Once again, and as a result of several significant rainfall events during 2016, SAWS has experienced an increase in SSOs, with 304 having been recorded year-to-date through December 31, 2016. During the last several years, through flow monitoring during significant rainfall events, physical inspection and televising, SAWS has accumulated additional information relative to the performance of its collection system. Based upon this additional information, SAWS has identified the potential need for additional capital expenditures in excess of the amounts discussed above. Very preliminary estimates of the cost of such additional capital expenditures could exceed $200 million, depending on the course of action ultimately implemented.

SAWS operates the Mitchell Lake Site Wastewater Treatment Facility pursuant to a Texas Pollutant Discharge Elimination Permit issued by the TCEQ under a delegation of authority from the EPA (the “Permit”). In October 2015, during the presentation of SAWS’ annual report, the EPA orally notified SAWS that SAWS violated the effluent discharge limitations of that Permit as a result of discharges occurring during significant rainfall events. The EPA stated that it would likely issue a “Notice of Violation” to SAWS for these alleged violations. On August 18, 2016 SAWS received an administrative order from EPA that alleges that SAWS violated the Permit by failing to meet effluent limits as required by the Permit. SAWS responded to the administrative order within the time required by the order on September 15, 2016. SAWS does not know what actions may ultimately be required or the costs associated with those actions.

Former Bexar Metropolitan Water District and the District Special Project

BexarMet was created by the 49th Texas Legislature in 1945 to serve anticipated growth in Bexar County. From an initial account base of 4,765 primarily residential accounts, it grew to more than 92,000 residential and commercial accounts served in 2011. Over several years, repeated customer complaints about inadequate service, alleged mismanagement, and excessive rates resulted in repeated legislative intervention regarding its management and operations that culminated in the passage of Senate Bill 341 (“SB 341”) by the 82nd Texas Legislature in 2011. SB 341 established several key measures including the immediate monitoring and review of BexarMet operations by the TCEQ. The primary component of SB 341, however, required the conduct of an election (the “Election”) by BexarMet ratepayers to vote on the dissolution of BexarMet and consolidation with SAWS, which Election was held on November 8, 2011. At this Election, BexarMet ratepayers voted in favor of dissolution (9,047 votes for versus 3,172 votes against). Resultant from the enrollment of SB 341 and the subsequent conduct of the Election, the City, acting by and through SAWS, assumed the BexarMet waterworks system on January 28, 2012 and BexarMet, as an existing and operating entity, was subsequently dissolved.

A-36 To accommodate the assumption of the former BexarMet waterworks system, the City, by ordinance of the City Council, created a “Special Project”, as authorized by SB 341 and pursuant to City ordinances authorizing then- outstanding Senior Lien Obligations, where that waterworks system resided from the time of assumption as a segregated component unit of SAWS until the occurrence of operational integration within SAWS. The Special Project is referred to herein as the “District Special Project” or the “DSP”; the former BexarMet waterworks system assumed by the City and held in the DSP is referred to as the “DSP System”.

To accomplish the combination of the DSP System into SAWS, the City was required to retire all indebtedness of the DSP System. The City accomplished this by refunding outstanding obligations secured by a lien on and pledge of and payable from the DSP System revenues (the “DSP Obligations”), with certain proceeds of the City of San Antonio, Texas Water System Junior Lien Revenue Refunding Bonds, Series 2016A (No Reserve Fund) and City of San Antonio, Texas Water System Junior Lien Revenue Refunding Bonds, Taxable Series 2016B (No Reserve Fund). Following the retirement of all obligations secured by a lien on and pledge of and payable from the revenues of the DSP System, the DSP was dissolved and the DSP System was consolidated into SAWS.

For additional information on the DSP System, see the official statement for the CITY OF SAN ANTONIO, TEXAS WATER SYSTEM JUNIOR LIEN REVENUE REFUNDING BONDS, SERIES 2017A (NO RESERVE FUND) – INTEGRATION OF FORMER BEXARMET SYSTEM UNDER SB 341 filed with the MSRB through its EMMA system.

Please refer to “Table 18 – Comparison of Selected Sources of Revenues” in the Official Statement for historical transfers from SAWS to the City’s General Fund.

SAWS Summary of Pledged Revenues for Debt Coverage (Dollars in Thousands) 1 Net Maximum Annual Debt Service Requirements Gross Operating Available Revenue Bond Debt Servicea Total Senior Lien Year Revenuesb Expensesc Revenue Principal Interestd Total Coverage Debte Coverage Debte Coveragef 2016 g $622,947 $315,395 $307,552 $78,570 $98,413 $176,983 1.74 $185,149 1.66 $84,008 3.66 2015 g 555,712 291,246 264,466 71,355 106,281 177,636 1.49 175,209 1.51 117,126 2.26 2014 498,334 245,055 253,279 57,850 91,704 149,554 1.69 160,510 1.58 117,126 2.16 2013 460,776 244,348 216,428 47,315 86,058 133,373 1.62 152,496 1.42 117,126 1.85 2012 437,253 237,576 199,677 44,780 80,320 125,100 1.60 138,420 1.44 122,816 1.63 2011 417,077 209,058 208,019 39,730 79,534 119,264 1.74 132,226 1.57 112,715 1.85 2010 367,847 226,489 141,358 38,590 77,098 115,688 1.22 127,264 1.11 108,947 1.30 2009 366,753 215,812 150,941 34,900 71,824 106,724 1.41 121,367 1.24 101,917 1.48 2008 384,228 205,486 178,742 27,630 67,810 95,440 1.87 98,840 1.81 86,140 2.08 2007 344,772 185,561 159,211 24,880 69,693 94,573 1.68 102,880 1.55 86,138 1.85 ______1 Unaudited. a Represents current year debt service payments. All bonded debt is secured by revenue and is included in these totals. b Gross Revenues are defined as operating revenues plus nonoperating revenues less revenues from the City Public Service contract, interest on Project Funds, and federal subsidy on Build America Bonds. c Operating Expenses reflect operating expenses before depreciation as shown on the Statement of Revenues, Expenses, and Changes in Net Position. d Interest reported net of the U.S. federal interest subsidy on the Series 2009B & 2010B revenue bonds. e Debt service requirements consist of principal and interest payments net of the U.S. federal interest subsidy on the Series 2009B & 2010B revenue bonds. f SAWS bond ordinance requires the maintenance of a debt coverage ratio of at least 1.25x the maximum annual debt service on outstanding senior lien debt in order to issue additional bonds. g Amounts reflect the merger with SAWS DSP effective January 1, 2015. Source: SAWS.

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A-37 The Airport System

General

The San Antonio International Airport (the “Airport” or “SAT”), located on a 2,600-acre site that is adjacent to Loop 410 freeway and U.S. Highway 281, is nine miles north of the City’s downtown business district. The Airport consists of three runways with the main runway measuring 8,502 feet and able to accommodate up to and including Group V passenger aircraft. Its two terminal buildings contain 25 second-level gates. Presently, the following domestic air carriers provide scheduled service to San Antonio: American Airlines, Delta Air Lines, Southwest Airlines, United Airlines, Allegiant, Alaska and Frontier, as well as associated affiliates of certain of the aforementioned air carriers. AeroMexico, Southwest, United, Interjet, Volaris, and associated affiliates, provide passenger service to four Mexico destinations. New air service that started in 2015 includes American to Miami, Southwest to New Orleans, Delta to Los Angeles, and Allegiant to three markets: Ft. Lauderdale, Las Vegas and Orlando-Sanford. New air service that started in 2016 includes Frontier to four markets: Atlanta, Denver, Las Vegas and Philadelphia, Southwest to Kansas City and added frequency to Houston-Hobby. In April 2017, Frontier began direct service to Chicago, and on May 1, 2017, Air Canada began service to Toronto.

The Airport is classified as a medium hub facility by the FAA. A “medium hub facility” is defined as a facility that enplanes between 0.25% and 0.50% of all passengers enplaned on certificated route air carriers in all services in the 50 states, the District of Columbia, and other designated territorial possessions of the United States. According to Airports Council International – North America (“ACI-NA”), an airport industry group, the Airport ranked 43rd based on preliminary total U.S. airport’s passenger traffic for calendar year 2015. For the calendar year ended December 31, 2016, the Airport enplaned approximately 4.3 million passengers. Airport management has determined that approximately 98% of the Airport’s domestic passenger traffic is origination and destination in nature, which is important because it demonstrates strong travel to and from the City independent from any one airline’s hub strategies. A variety of services is available to the traveling public from approximately 245 commercial businesses which lease facilities at the Airport and Stinson Municipal Airport (“Stinson” and, together with the Airport, the “Airport System”).

The City updated the Master Plan (“Vision 2050”) for the Airport, which was approved by City Council on March 31, 2011 and provides direction for the development of the Airport for five, ten, and 20 years into the future. For the five-year plan, the Vision 2050 update recommends modest improvements to complement the Capital Improvement Plan (defined below). Among the recommended improvements to be financed and constructed by the City are renovating and renewing Terminal A, land acquisition, and constructing a taxiway connector, Airport maintenance facility, and an administrative center. Additionally, recommended improvements included in Vision 2050 to be financed and constructed by non-City sources, such as customer facility charges and third party and/or tenant financing, include an expansion of the Airport fuel farm, a consolidated rental car center, and the expansion of tenant ground service equipment maintenance and storage facilities.

Stinson, located on 300 acres approximately 5.2 miles southeast of the City’s downtown business district, was established in 1915, and is one of the country’s first municipally-owned airports. It is the second oldest continuously operating airport in the U.S. and is the FAA’s designated general aviation reliever airport to the Airport. The Airport Master Plan for Stinson was updated in May 2013 to establish a long range development strategy or “blueprint” for the sustained, and fiscally responsible, growth of the Airport through 2031. The Airport Master Plan for Stinson seeks to balance airport growth against the need to minimize impacts on the surrounding environment. In doing so, the study focused on optimizing operations at the airport and providing flexible options for growth, while identifying possible areas suitable for new facilities.

The City entered into an Airport Project Participation Agreement with TxDOT for a Federally Assisted Airport Development Grant on April 11, 2013 for engineering/design services for: evaluation of FAA Advisory Circular 1050/5300-13A on Runway 14/32 and Taxiway A; overlay and mark of Runway 14/32; overlay of Taxiway A, B, and C; replacement of medium intensity lights on Taxiway A, B, and C; replacement of medium intensity runway lights on Runway 14/32; upgrade of airfield guidance signs on Runway 14/32 and Taxiway A, B, and C. A second agreement with TxDOT was made on April 18, 2013 for engineering/design services to relocate the air traffic control tower.

A-38 Capital Improvement Plan

The proposed six-year (FY 2015 – FY 2020) Capital Improvement Plan (the “CIP”) totals approximately $261 million and is comprised of certain projects including the design and construction of a consolidated rental car facility, airfield improvements, land acquisition, residential acoustical treatment, road improvements, aircraft apron expansion, and cargo improvements.

The CIP consists of the following:

Terminal Facilities  Terminal A Renovations and Refurbishments, Phase II. This project is for design and construction for the expansion of the customs facility in Terminal A which will be constructed in phases along with addressing building infrastructure not captured in the first phase.  TSA-Advanced Surveillance Program. This project provides greater surveillance of the various Terminal locations to enhance security, aid in the speedy resolution of claims, and assist in the resolution of law enforcement issues.  Terminal A Security Checkpoint Expansion. This project designs and constructs the expansion of Terminal A Security Checkpoint for additional security lines and provides a connector between Terminals A and B to improve checkpoint congestion.

Airfield Improvements  Terminal Area Reconstruction. Phased to minimize construction impacts on airport operations. Package I provides the reconstruction of the southeastern section of Taxiway G, from Runway 4/22 to Taxiway A. Package II provides a reconstruction of Taxiway G at intersections of Taxiway N and L, along with the South Inner Taxilane parallel to Terminal A.  Perimeter Road Reconstruction. This project provides for the design and phased reconstruction of critical areas of the perimeter road.

Acoustical Treatment Program  Acoustical Program. Continuation of the Residential Acoustical Treatment Program.

Other Projects  Consolidated Rental Car Facility. This project provides a consolidated rental car facility, which centralizes Airport rental car operators into a single facility.  Support Service Building. Provides for the construction of an administrative office facility to house the Airport System staff.  Outside Plant Campus IT Ring. This project will complete the Outside Plant Communication Ring around the campus.  Other Capital Projects. Miscellaneous projects at the Airport and at Stinson.

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A-39 The anticipated sources of funding for the CIP are as follows:

Funding Sources Projected Funding ($) Federal Grants Entitlements 6,400,000 Discretionary 16,623,760 General Discretionary Noise Discretionary 6,400,000 TxDOT Grant 50,000 Passenger Facility Charges (“PFCs”) Pay-As-You-Go 122,500 PFC-Secured Bonds 1,600,000 Other Funding Airport Funds 71,919,251 Airport Revenue Bonds 6,937,278 Customer Facility Charge Bonds 150,551,805 Total 260,604,594

The CIP includes capital improvements, which are generally described as follows:

Improvement Amount ($) Airport Terminal Facilities 17,249,134 Airfield Improvements 31,278,773 Acoustical Treatment Program 8,300,000 Consolidated Rental Car Facility 150,551,805 Other Projects 48,325,882 Stinson 4,899,000 Total 260,604,594

PFC Projects. Public agencies wishing to impose PFCs are required to apply to the FAA for such authority and must meet certain requirements specified in the 49 USC § 40117, and the implementing regulations issued by the FAA.

The FAA issued a “Record of Decision” on August 29, 2001 approving the City’s initial PFC application. The City, as the owner and operator of the Airport, received authority to impose a $3.00 PFC and to collect, in the aggregate, approximately $102,500,000 in PFC Revenues. On February 15, 2005, the FAA approved an application amendment increasing the PFC funding by a net amount of $13,893,537. On February 22, 2005, the FAA approved the City’s application for an additional $50,682,244 in PFC collections to be used for 11 new projects. On June 26, 2007, the FAA approved two amendments to approved applications increasing the PFC funding by a net amount of $121,611,491 for two projects and $67,621,461 for four projects. Additionally, the FAA approved the increased collection rate from $3.00 to $4.50, effective October 1, 2007. In May 2010, the FAA approved amendments to the City’s PFC collection authorization to increase the scope of the PFC funding for certain PFC projects and permitted the addition of several elements. The May 28, 2010 FAA approvals increased the PFC funding amount from $380,958,549 to $574,569,629. On March 18, 2015, the City submitted an amendment to reduce the PFC Collection authority from the amount of approximately $573.8 million to approximately $463.7 million (a reduction of approximately $110.1 million). This reduction was due to (i) estimated finance and interest costs that were overstated in the submittals compared to actual finance and interest costs and (ii) lower project costs in some cases. The FAA issued the Final Agency Decision on April 13, 2015, approving the proposed PFC amendment.

On October 1, 2007, the City began collecting a $4.50 PFC (less a $0.11 air carrier collection charge) per qualifying enplaned passenger. The City has received PFC “impose and use” authority, meaning that it may impose the PFC and use the resultant PFC Revenues for all projects, contemplated to be completed using proceeds of the Parity PFC Bonds. As of April 30, 2017, the City has collected $207,482,922 (unaudited) in PFC Revenues since authority to impose and collect the PFC was received. The estimated PFC collection expiration date is June 1, 2028.

A-40 To date, the following projects have been approved as “impose and use” projects:

 Replace Remain Overnight Apron  Implement Terminal Modifications  Reconstruct Perimeter Road  Construct New Terminal B  Acoustical Treatment Program  Construct Elevated Terminal Roadway  Upgrade Central Utility Plant  Construct Apron – Terminal Expansion  Install Utilities – Terminal Expansion  Replace Two Aircraft Rescue and Fire Fighting Vehicles  Conduct Environmental Impact Statement  Reconstruct Terminal Area Roadway  Install Noise Monitoring Equipment  Install Terminal and Airfield Security Improvements  Install Airfield Electrical Improvements  PFC Development and Administration Costs

CFC and CFC Projects. The City Council, by ordinance adopted on March 8, 2012, authorized the Airport to impose the collection of a $4.50 per transaction day Customer Facility Charge (“CFC”) for rental car customers to pay for all costs and expenses associated with the planning, financing, and construction and certain other costs for a Consolidated Rental Car Facility (the “ConRAC”) to open in three to five years. The rental car companies (RACs) began collecting the CFC on all car rentals at the Airport on April 1, 2012. The CFC was reapproved at a collection rate of $5.00 per transaction day, effective July 1, 2015, pursuant to the ordinance adopted by the City Council on June 18, 2015. The ConRAC project cost is estimated at $165.6 million. As of April 30, 2017, the City has received $47,817,619 (unaudited) in CFC Revenues since the April 1, 2012 inception of the CFC.

ConRAC Update: Construction is proceeding according to schedule. In June 2016, Council approved an amendment to the construction contract to accelerate substantial completion of the car rental portion to July 2017 versus the previous date of September 2017. Overall, the project is 62% complete. The Slab on Grade and Level 2 decks are 100% complete. Level 3 is 80% complete. All piers have been completed. The Quick Turnaround Area (“QTA”) Slab on Grade, Level 2 and Level 3 are 100% complete. SkyBridge structural steel has been installed. Customer Service Center Level 4 exterior glass is being installed.

Airport Operations

Direct supervision of airport operations is managed by the Department of Aviation (the “Department”). The Department is responsible for: (1) managing, operating, and developing the Airport System and any other airfields that the City may control in the future; (2) negotiating leases, agreements, and contracts; (3) computing and supervising the collection of revenues generated by the Airport System under its management; and (4) coordinating aviation activities under the FAA.

The Department is an enterprise fund of the City. The operations and improvements at the Airport and Stinson are paid for by airport user charges, bond funds, and funds received from the FAA. No general tax fund revenues are used to operate or maintain the Airport System. The City Council appoints a 19-member Airport Advisory Commission. The Commission’s primary purpose is to advise the Department regarding policies, including any noise-related issues affecting the Airport System and air transportation initiatives.

Russell J. “Russ” Handy was appointed in January 2017 to serve as the City’s Aviation Director. In this role, he oversees the day-to-day operations for the Airport System. Mr. Handy is a retired Air Force Lieutenant General who previously served as Commander of Alaskan Command, Eleventh Air Force and the Alaskan Region of the North American Aerospace Defense Command.

A-41 The Airport System has police and fire departments on premises. The police and fire fighters are assigned to duty at the Airport System from the City’s police and fire departments, but their salaries are paid by the Department as an operation and maintenance expense of the Airport System.

The FAA has regulatory authority over navigational aid equipment, air traffic control, and operating standards for the Airport System.

The passage of the Aviation and Transportation Security Act in November of 2001, created the Transportation Security Administration (“TSA”). The Department has worked closely with the TSA to forge a higher level of security for the traveling public. TSA employs about 300 individuals at the Airport System to meet the federal security requirements.

As of October 1, 2016, the Airport System has 473 authorized positions:

Planning, Development & Maintenance 164 Airport Operations 150 Police 58 Fire Rescue 32 Finance & Administration 31 Aviation Director 30 Stinson Airport 8

Comparative Statement of Gross Revenues and Expenses - San Antonio Airport System

The historical financial performance of the Airport System is shown below for the last five fiscal years:

Fiscal Year Ended September 30 2012 2013 2014 2015 1 2016

Gross Revenues 2 $90,163,733 $89,323,659 $91,034,569 $91,617,612 $96,847,128 Expenses (47,048,746) (50,987,401) (50,938,202) (56,198,508) (58,913,011) Net Revenues $43,114,987 $38,336,258 $40,096,367 $35,419,104 $37,934,117 ______1 2015 data has been restated to match CAFR amounts. 2 As reported in the City’s audited financial statements. Source: City of San Antonio, Department of Finance.

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A-42 Total Domestic and International Enplaned Passengers - San Antonio Airport

The total domestic and international enplaned passengers on a calendar year basis, along with year-to-year percentage change are shown below:

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2007 4,030,571 27,668 0.69 2008 4,167,440 136,869 3.40 2009 3,905,439 (262,001) (6.29) 2010 4,022,070 116,631 2.99 2011 4,071,781 49,711 1.24 2012 4,103,364 31,583 0.78 2013 4,119,039 15,675 0.38 2014 4,191,391 72,352 1.76 2015 4,257,688 66,297 1.58 2016 4,309,761 52,073 1.20

______Source: City of San Antonio, Department of Aviation.

Total Enplaned and Deplaned International Passengers - San Antonio Airport

The total enplaned and deplaned for international passengers on a calendar year basis, along with year-to- year percentage change are shown below:

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2007 197,585 (1,553) (0.78) 2008 177,219 (20,366) (10.31) 2009 139,286 (37,933) (21.40) 2010 136,970 (2,316) (1.66) 2011 182,031 45,061 32.90 2012 1 421,718 239,687 131.67 2013 474,609 52,891 12.54 2014 464,765 (9,844) (2.07) 2015 511,076 46,311 9.96 2016 2 400,061 (111,015) (21.72) ______1 The increase in total enplaned and deplaned international passengers from 2011 to 2012 is attributable to 3 new airlines operating in 2012. These airlines are AirTran, InterJet, and Viva AeroBus. 2 The decline in international is in large part a result of capacity reductions by Southwest to Mexico City and Interjet to Toluca. In addition to capacity adjustments, the continuing devaluation of the Peso to the U.S. Dollar may be contributing to decreased leisure travel between the two countries. In December 2016, the Peso had 13.7% less value than the same time in 2015, and 47.0% less value than two years prior to that. Source: City of San Antonio, Department of Aviation.

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A-43 Air Carrier Landed Weight - San Antonio Airport

The historical aircraft landed weight in 1,000-pound units on a calendar year basis is shown below. Landed weight is utilized in the computation of the Airport’s landed fee.

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2007 6,098,276 152,044 2.56 2008 6,209,192 110,916 1.82 2009 5,487,537 (721,655) (11.62) 2010 5,632,203 144,666 2.64 2011 5,707,294 75,091 1.33 2012 5,812,227 104,933 1.84 2013 5,784,738 (27,490) (0.47) 2014 5,662,482 (122,256) (2.11) 2015 5,719,952 57,470 1.01 2016 5,729,257 9,305 0.16 ______Source: City of San Antonio, Department of Aviation.

* * *

A-44 APPENDIX B

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CPS ENERGY

BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JANUARY 31, 2017 AND 2016 AND INDEPENDENT AUDITOR'S REPORT

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MANAGEMENT’SDISCUSSIONANDANALYSIS

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TotalRevenuesandNonoperatingIncome

FY2017-#.0#1#,2',%[ZTW$-$2-2 *0#4#,3#1 ,",-,-.#0 2',%',!-+#Q#*#!20'! ,"% 10#4#,3#1-$ $TQVXWTU+'**'-,"#!0# 1#" 7$URTR+'**'-,Q-0STT$Q!-+. 0#"2- TRSXT

-+##2'21!-+ ',#"1 *#10#/3'0#+#,21$-00#2 '*!312-+#015'2&',2&#%0# 2#0 ,,2-,'-!#02'$'! 2#" 0#  ,"5&-*#1 *#!312-+#01-321'"#-$2&'1 0# Q#*#!20'!#,#0%7'1.0'+ 0'*7%#,#0 2#" 7  ,#0%7 $0-+2&0##1-30!#1!- *Q,3!*# 0 ,"% 1 -'*T..0-6'+ 2#*7ZTTY$ ,"YXTT$-$'21!312-+#01_#*#!20'! #,#0%7,##"1', TRSY ," TRSXQ0#1.#!2'4#*7Q5#0#.0-"3!#"$0-+  ,#0%7_1%#,#0 2',%3,'21T 0, ""'2'-,2-2&##,#0%7.0-"3!#"$0-+-+. ,7V-5,#"$ !'*'2'#1Q  ,#0%7 *1-.30!& 1#".-5#0 $0-+2&'0". 02'#1Q',!*3"',%.0-"3!#01-$0#,#5 *##,#0%7Q13!& 11-* 0V%#,#0 2#" ,"5',"V%#,#0 2#" .-5#0T

-#.0#1#,2',%[STZ$-$  ,#0%7_12-2 *0#4#,3#1 ,",-,-.#0 2',%',!-+#Q#*#!20'!-.#0 2',%0#4#,3# -$ $TQT[[TW +'**'-, "#!0# 1#" $TRTW+'**'-, $0-+   TRSXT  -,20' 32',% 2- 2&# "#!0# 1# 5#0# *-5#0 5&-*#1 *#0#4#,3#1"3#2-*-5#05&-*#1 *#4-*3+#1Q. 02' **7-$$1#2 7&'%�0#2 '*0#4#,3#1"3#2- &'%�,-,$3#*0#!-4#0'#10#13*2',%$0-+&'%�0#2 '*4-*3+#1 ,"&'%�0#%3* 2-070#!-4#0'#1T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T V[   ,#0%7 TRSY,,3 *-#.-02  

-#.0#1#,2',% XTX$ -$ 2-2 * 0#4#,3#1 ," ,-,-.#0 2',% ',!-+#Q % 1 0#4#,3# 2-2 *#" $SXWTZ+'**'-,Q  $[TW+'**'-,"#!0# 1#$0-+ TRSXT&'1"#!0# 1#5 1"3#2-*-5#0,-,$3#*0#!-4#0'#1 1 0#13*2-$ *-5#04-*3+#1"30',%+'*"#05',2#0+-,2&1Q. 02' **7-$$1#2 7 &'%� 4#0 %#3,'2!-12-$$3#*T

<#2,-,-.#0 2',%',!-+#-$$UZTZ+'**'-,',!0# 1#"$TTY+'**'-,$0-+ TRSXQ.0'+ 0'*7"3#2-&'%� ',4#12+#,2',!-+#0#* 2#"2-2&#+#!-++'11'-,',%03121"3#2-+-0#$ 4-0 *#+ 0)#2.#0$-0+ ,!#-, #/3'2'#1',2&#!300#,27# 0T

FY2016-#.0#1#,2',%[ZTX$-$2-2 *0#4#,3#1 ,",-,-.#0 2',%',!-+#Q#*#!20'! ,"% 10#4#,3#1-$ $TQV[WTU+'**'-,"#!0# 1#" 7$SUVTV+'**'-,Q-0WTS$Q!-+. 0#"2- TRSWT

..0-6'+ 2#*7 YXTT$ ," ZWTZ$ -$ '21 !312-+#01_ #*#!20'! #,#0%7 ,##"1 ',  TRSX ,"  TRSWQ 0#1.#!2'4#*7Q5#0#.0-"3!#"$0-+  ,#0%7_1%#,#0 2',%3,'21T

-#.0#1#,2',%[STY$-$  ,#0%7_12-2 *0#4#,3#1 ,",-,-.#0 2',%',!-+#Q#*#!20'!-.#0 2',%0#4#,3# -$ $TQUTRTR +'**'-, "#!0# 1#" $ZSTS+'**'-, $0-+   TRSWT  -,20' 32',% 2- 2&# "#!0# 1# 5#0# *-5#0 5&-*#1 *#0#4#,3#1"3#2-*-5#01 *#14-*3+#1 1 0#13*2-$.* ,2-32 %#1 ,"*-5#0+ 0%',1"30',%2&# 7# 0T 02' **7-$$1#22',%2&#"#!0# 1#5#0#&'%�0#2 '*0#!-4#0'#10#13*2',%$0-+2&#&'%� 4#0 %#3,'2 !-12-$$3#* ,"&'%�0#%3* 2-070#!-4#0'#1T

-#.0#1#,2',% XT[$ -$ 2-2 * 0#4#,3#1 ," ,-,-.#0 2',% ',!-+#Q % 1 0#4#,3# 2-2 *#" $SYWTU+'**'-,Q  $WUTU+'**'-,"#!0# 1#$0-+ TRSWT&'1"#!0# 1#5 1"3#2-*-5#0$3#*0#4#,3#1 1 0#13*2-$2&# *-5#0 4#0 %#3,'2!-12-$$3#*T

<#2,-,-.#0 2',%',!-+#-$$UXTR+'**'-,"#!0# 1#"$SRTY+'**'-,$0-+ TRSWQ.0'+ 0'*7"3#2- 1+ **#0 -4#0 **',4#12+#,2.-02$-*'- * ,!#T

TotalRevenuesandNonoperatingIncome FiscalYearEndedJanuary31,

OperatingExpenses

FY20174.#0 2',%#6.#,1#1-$$SQ[VSTU+'**'-,5#0#$URTS+'**'-,Q-0STX$Q -4#* 127# 0_12-2 *-$ $SQ[SSTS+'**'-,T

-+ ',#"#*#!20'! ,"% 1$3#*!-121Q5&'!& 0#. 11#"2&0-3%&2-!312-+#01Q2-2 *#"$YWSTX+'**'-, ," !-+.0'1#"UZTY$-$2-2 *-.#0 2',%#6.#,1#1T *#!20'!$3#* ,".30!& 1#".-5#0!-121-$$XYZT[+'**'-, "#!0# 1#"$UVTY+'**'-,QVT[$Q #*-5* 127# 0.0'+ 0'*7"3#2-*-5#05&-*#1 *#1 *#14-*3+#1 15#** 1

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSR     ,#0%7 TRSY,,3 *-#.-02

4#0 %#3,'2!-12T+'120' 32'-,% 1!-121-$$YTTY+'**'-,"#!0# 1#" 7$TTZ+'**'-,Q-0UTY$Q$0-+* 127# 0 "3#2-*-5#01 *#14-*3+#1$0-++'*"5',2#05# 2�T

4.#0 2'-, ," + ',2#, ,!# #6.#,1#1 ',!*3"',% ,,3 * 4  ," .#,1'-, !-121 ,"   4( -$ $W[ZTY+'**'-, 5#0# $TZTS+'**'-,Q -0 VT[$Q &'%� 2& , * 12 7# 0 "3# 2- &'%� .#,1'-, ," -321'"# 1#04'!#1!-121Q. 02' **7-$$1#2 7*-5#0 4(!-121 1 0#13*2-$-,#1!&#"3*#"0#$3#*',%-32 %#', TRSX!-+. 0#"2-25-',TRSWT

  #6.#,1# 5 1 $SRTTT +'**'-, ," 5 1 &'%� 2& ,   TRSX #6.#,1# "3# 2- .* ,,#" .0-%0#11'4# 1.#,"',% -, 2&'1 .0-%0 +T  
# +-3,21 0#.0#1#,2 !-121 ',!300#" ', 2&# !300#,2 7# 0 -4# 2&# ..0-6'+ 2#*7$[TR+'**'-,$3,"#"2&0-3%&2&# 1#0 2# ,"0#!-0"#" 14(#6.#,1#1T&#0#* 2#" !-,20 #6.#,1# !!-3,2Q ,#2!-1210#!-4#0 *#Q0#$*#!212&#,#2!& ,%#"30',%2&#.#0'-"',#6.#,1#1 "#* 7#" 2- $3230# .#0'-"1 5&#, 2 5'** # 0#!-%,'8#" !-,!300#,2 5'2& 2&#'0 0#!-4#07 2&0-3%& 0 2# "(312+#,21T&'1!-,20 #6.#,1#5 1$U[TZ+'**'-,!-+. 0#"2-$XTW+'**'-,$-0 TRSXT

-#%3* 2-07 11#11+#,21Q',!*3"',%2&-1#!& 0%#" 72&# 3 *'!22'*'27-++'11'-,-$#6 1b 2c ," 2&# *#!20'!-#*' '*'27-3,!'*-$#6 1b -4cQ-$$YWTR+'**'-,5#0#$ZTR+'**'-,&'%�2& ,* 127# 0 "3#2-',!0# 1#"20 ,1+'11'-,!-12-$1#04'!#b4c#6.#,1#1T

+#!-++'11'-,',%#6.#,1#-$$TXTY+'**'-,5 1$[TR+'**'-,Q-0WSTR$Q&'%�2& ,* 127# 01#6.#,1#-$ $SYTY+'**'-, .0'+ 0'*7 "3# 2- , ',!0# 1# ', 2&# ',$* 2'-, 0 2# 31#" 2- #12'+ 2# 2&# ,,3 * #6.#,1# !!03 *T

+#.0#!' 2'-, ," +-02'8 2'-,#6.#,1#-$$VTXTZ+'**'-,5 1&'%� 7$SXTW+'**'-,Q-0VTR$Q!-+. 0#" 2-* 127# 0"3#2-2&#,-0+ *',!0# 1#-$.* ,2V',V1#04'!#T

FY20164.#0 2',%#6.#,1#1-$$SQ[SSTS+'**'-,5#0#$SSVTU+'**'-,Q-0WTX$Q #*-52&# TRSW2-2 * -$$TQRTWTV+'**'-,T

-+ ',#"#*#!20'! ,"% 1$3#*!-121Q5&'!& 0#. 11#"2&0-3%&2-!312-+#01Q2-2 *#"$YZ[TS+'**'-, ," 0#.0#1#,2#"VSTU$-$2-2 *-.#0 2',%#6.#,1#1T *#!20'!$3#* ,".30!& 1#".-5#0!-121-$$YSUTX+'**'-, "#!0# 1#"$YYTX+'**'-,Q-0[TZ$Q!-+. 0#"2- TRSW.0'+ 0'*7"3#2-*-5#05&-*#1 *#1 *#14-*3+#1T +'120' 32'-,% 1!-121-$$YWTW+'**'-,"#!0# 1#" 7$VUTV+'**'-,Q-0UXTW$Q$0-+ TRSW"3#2- *-5#0 4#0 %#3,'2!-12T

4.#0 2'-, ," + ',2#, ,!# #6.#,1#1 ',!*3"',% ,,3 * 4  ," .#,1'-, !-121 ,"   4( -$ $WYRTY+'**'-, 5#0# $XTX+'**'-,Q -0 STT$Q &'%� 2& ,   TRSWT  &# ',!0# 1# 5 1 .0'+ 0'*7 "3# 2- #6.#,"'230#1 11-!' 2#"5'2&2&#"#4#*-.+#,2-$  ,#0%7_1+ 02B0'"0,'2' 2'4# ,"2&#,#5" 2  !#,2#0$ !'*'27Q. 02' **7-$$1#2 7*-5#0* -0V0#* 2#"#6.#,1#1', TRSWT

  #6.#,1# 5 1 $XTT[ +'**'-, ," 5 1 &'%� 2& ,   TRSW #6.#,1# "3# 2- .* ,,#" .0-%0#11'4# 1.#,"',% -, 2&'1 .0-%0 +T  
# +-3,21 0#.0#1#,2 !-121 ',!300#" ', 2&# !300#,2 7# 0 -4# 2&# ..0-6'+ 2#*7$[TR+'**'-,$3,"#"2&0-3%&2&# 1#0 2# ,"0#!-0"#" 14(#6.#,1#1T&#0#* 2#" !-,20 #6.#,1# !!-3,2Q ,#2!-1210#!-4#0 *#Q0#$*#!212&#,#2!& ,%#"30',%2&#.#0'-"',#6.#,1#1 "#* 7#" 2- $3230# .#0'-"1 5&#, 2 5'** # 0#!-%,'8#" !-,!300#,2 5'2& 2&#'0 0#!-4#07 2&0-3%& 0 2# "(312+#,21T&'1!-,20 #6.#,1#5 1$XTW+'**'-,!-+. 0#"2-$WTV+'**'-,$-0 TRSWT

-#%3* 2-07 11#11+#,21Q ',!*3"',% 2&-1# !& 0%#" 7 2&# 2 ," -4Q -$ $XYTR +'**'-, 5#0# $STTV+'**'-,*-5#0"3#2-*-5#04Q 1 0#13*2-$  ,#0%7_1',2#0'+4$'*',%Q-$$1#2 7',!0# 1#" 4 '**#" 7-2�20 ,1+'11'-,1#04'!#.0-4'"#01T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSS   ,#0%7 TRSY,,3 *-#.-02  

+#!-++'11'-,',%#6.#,1#-$$SYTY+'**'-,5 1$VTZ+'**'-,Q-0TSTV$Q #*-52&# TRSW#6.#,1#-$ $TTTW+'**'-,.0'+ 0'*7"3#2- "#!0# 1#',2&#',$* 2'-,0 2#31#"2-#12'+ 2#2&# ,,3 *#6.#,1# !!03 *T

+#.0#!' 2'-, ," +-02'8 2'-,#6.#,1#-$$VSRTT+'**'-,',!0# 1#" 7$SVTV+'**'-,Q-0UTX$Q!-+. 0#" 2- TRSW 1 0#13*2-$,-0+ *',!0# 1#1',2-2 *.* ,2V',V1#04'!# * ,!#1T

TotalOperatingExpenses '1! * # 0 ,"#"" ,3 07USQ 0,+'**'-,1                     

NonoperatingIncome(Expenses)

FY20170,2#0#12 #6.#,1# ," -2� "# 2V0#* 2#" !-121Q ',!*3"',% +-02'8 2'-, -$ "# 2 #6.#,1# ," 2+Q2-2 *#"$S[YTR+'**'-, ,"5#0#$UTR+'**'-,Q-0STW$Q*-5#02& ,* 127# 0T&#"#!0# 1#5 1"3# 2-',!0# 1#" +-02'8 2'-,-$"# 2.0#+'3+1"3#2-TRSX0#$3,"',% -,"'113 ,!#1 15#** 1 &'%� 11#213,"#0!-,1203!2'-,c2cQ. 02' **7-$$1#2 7',!0# 1#"',2#0#12#6.#,1#T

&#0#!-0"#". 7+#,212-2&#'27Q2-2 *#"$UTVTW+'**'-, ,"5#0#$VTR+'**'-,&'%�2& ,* 127# 0"3# 2-&'%�#*#!20'!0#2 '*0#4#,3#1T

FY20160,2#0#12#6.#,1# ,"-2�"# 2V0#* 2#"!-121-$$S[[T[+'**'-,5#0#$SWT[+'**'-,Q-0YTV$Q *#112& , TRSWT&#"#!0# 1#5 1"3#2- 0#"3!2'-,',',2#0#12#6.#,1# 1 0#13*2-$2&#+ 230'27-$ 2&#TRRT -,"1 ,"2&#TRRX -,"1T*1-!-,20' 32',%5 1 ,',!0# 1#', +-02'8#" -,".0#+'3+"3# 2-2&#,#5'113 ,!#12& 2-!!300#"* 2#0', TRSWT

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VST     ,#0%7 TRSY,,3 *-#.-02

&#0#!-0"#". 7+#,212-2&#'272-2 *#"$UTRTW+'**'-, ,"5#0#!-+. 0 *# 2$RTW+'**'-,Q-0RTS$Q *-5#02& , TRSWT##42�& ,%#1',<#2 -1'2'-,$-0',$-0+ 2'-,-,-2�. 7+#,212-2&#'27T

OtherChangesinNetPosition

FY2017 <#2 ',!-+# -$ $VSTV +'**'-, 5 1 $WZTV +'**'-, *-5#0 2& , 2&# ,#2 ',!-+# $-0   TRSX -$ $[[TZ+'**'-,T 0'+ 0'*7!-,20' 32',%2-2&#4 0' ,!#5#0#*-5#05&-*#1 *#,-,$3#*0#4#,3#1 ,"&'%� .#,1'-, ,"-321'"#1#04'!#1!-121Q. 02' **7-$$1#2 7*-5#0 4(!-121T

42�. 7+#,212-2&#'272-2 *#"$SSTX+'**'-,', TRSY ,"5#0#!-+. 0 *#2-* 127# 0T

-,20' 32#"! .'2 *-$$W[TW+'**'-,5 1$SUTR+'**'-,&'%�2& ,* 127# 0T 0'+ 0'*7!-,20' 32',%2-2&# ',!0# 1#5 1 %0# 2#0,3+ #0-$0#'+ 301#".0-(#!21!-+.*#2#"',2&#!300#,27# 0T

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&##$$#!2-$2&# "#$',#" #,#$'2.* ,$3,"',%- *'% 2'-,1Q5&'!&0#.0#1#,21VR$-$2&#!& ,%#',2&# 3,$3,"#".#,1'-, ,"-2�.-12V0#2'0#+#,2 #,#$'21*' '*'27 2 Q5 1$[TU+'**'-,!-+. 0#"2- $TTU+'**'-,* 127# 0Q0#$*#!2',% ,#2!& ,%#-$$SSTX+'**'-,.0'+ 0'*7"3#2-2&#0#+# 130#+#,2-$2&#  "#$',#" #,#$'2.* ,- *'% 2'-,1T

  ,#0%7_1!& ,%#',,#2.-1'2'-,5 1$Y[T[+'**'-,!-+. 0#"2-$TWVTV+'**'-,* 127# 0T 0'+ 0'*7 !-,20' 32',%2-2&#$ 4-0 *#!& ,%#-$$UUVTU+'**'-,5#0#2&#$ !2-01+#,2'-,#" -4# $$#!2',%,#2 ',!-+# ,"2&# 2,'21U ,"V'+. '0+#,2*-110#!-0"#"',* 127# 0_10#13*21T

FY2016<#2 ',!-+# -$ $[[TZ +'**'-, 5 1 $SVTV+'**'-, *-5#0 2& , 2&# ,#2 ',!-+# $-0   TRSW -$ $SSVTU+'**'-,T 0'+ 0'*7!-,20' 32',%2-2&#4 0' ,!#5#0#*-5#05&-*#1 *#,-,$3#*0#4#,3#1 ,"&'%� "#.0#!' 2'-,Q. 02' **7-$$1#2 74 '**',%1Q*-5#0"# 21#04'!# ,"&'%�0#2 '*,-,$3#*0#4#,3#T

42�. 7+#,212-2&#'272-2 *#"$SSTX+'**'-,', TRSXT&'1 +-3,25 1$UTY+'**'-,*-5#02& ,  TRSW.0'+ 0'*7"3#2- $VTT+'**'-,0 +$3,""'120' 32'-,2-2&#'27', TRSWT

-,20' 32#" ! .'2 * -$ $VXTW +'**'-, 5 1 !-+. 0 *# 2 $TTZ +'**'-, &'%� 2& ,   TRSWT  0'+ 0'*7 !-,20' 32',%2-2&#',!0# 1#5 1$VTZ+'**'-,!-,20' 32#"! .'2 *$-02&#.-02'-,-$2&#+07 1)2-0 %# 0-(#!2! .'2 *!-1212- #0#'+ 301#" 72&#+4 T

0, TRSXQ2&#-+. ,70#!-0"#" ,#620 -0"', 07'2#+*-11-$$U[STV+'**'-,0#* 2#"2-2&#,-,! 1& '+. '0+#,2-$  ,#0%7_1',4#12+#,2', 2,'21U ,"VT##<-2#V .'2 *11#21Q<#2T

&##$$#!2-$2&# "#$',#" #,#$'2.* ,$3,"',%- *'% 2'-,1Q5&'!&0#.0#1#,21VR$-$2&#!& ,%#',2&# 3,$3,"#" .#,1'-, ," -2� .-12V0#2'0#+#,2 #,#$'21 *' '*'27 2  Q 5 1 $TTU +'**'-, !-+. 0#" 2- $SUTR+'**'-,* 127# 0Q0#$*#!2',% !& ,%#-$$SWTU+'**'-,0#13*2',%$0-+2&#0#+# 130#+#,2-$2&#  "#$',#" #,#$'2.* ,$3,"',%- *'% 2'-,1', TRSWT

  ,#0%7_1 !& ,%# ', ,#2 .-1'2'-, 5 1 $TWVTV +'**'-, !-+. 0#" 2- $SYUTS +'**'-, $-0   TRSWT 0'+ 0'*7!-,20' 32',%2-2&#"#!0# 1#5#0#2&#$ !2-01+#,2'-,#" -4# $$#!2',%,#2',!-+# ,"2&#  TRSX,-,! 1&'+. '0+#,2*-110#!-0"#" 1 ,#620 -0"', 07'2#+T



## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSU   ,#0%7 TRSY,,3 *-#.-02  

FINANCIALPOSITION StatementsofNetPositionSummary +-** 01',2&-31 ,"1

 " ,3 07USQ & ,%#  2017 TRSX TRSW TRSY41TTRSX TRSX41TTRSW 11#21 300#,2 11#21 $876,524 $ ZWXQXU[ $ ZXZQR[U $ S[QZZW TTU$ $ SSQVWV VSTU$  <-,!300#,2 11#21  -#120'!2#" 1,160,578 SQWRSQZYR SQUTXQSUX UVSQT[T VTTTY$ SYWQYUV SUTU$  42�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�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

CurrentAssets

FY2017300#,2 11#21 2" ,3 07USQTRSYQ-$$ZYXTW+'**'-,5#0#$S[T[+'**'-,&'%�2& ,2&# * ,!# 2 " ,3 07USQ TRSXQ "3# 2- ',!0# 1#1 -$ $SVTR +'**'-, ', !300#,2 ',2#0#12 ," -2� 0#!#'4 *#1Q $ZTR+'**'-,',2&#B#,#0 *3,"Q$UTX+'**'-,',',130 ,!#0#1#04#1Q ,"$TTY+'**'-,',!312-+#0"#.-1'21T 
#',!0# 1#15#0#. 02' **7-$$1#2 7"#!0# 1#1-$$VTT+'**'-,',!312-+#0 !!-3,210#!#'4 *# ," $VTS+'**'-,',!300#,2.0#. 7+#,21T

FY2016300#,2 11#21 2" ,3 07USQTRSXQ-$$ZWXTX+'**'-,5#0#$SSTW+'**'-,*-5#02& ,2&# * ,!# 2" ,3 07USQTRSWQ"3#2-"#!0# 1#1-$$TWT[+'**'-,',2&#B#,#0 *3,"Q$SSTT+'**'-,',!312-+#0 !!-3,210#!#'4 *#Q$VTZ+'**'-,',!300#,2+'1!#** ,#-310#!#'4 *#1 ,"$VTX+'**'-,',% 1',4#,2-07T 
#"#!0# 1#15#0#. 02' **7-$$1#2 7',!0# 1#1-$$SZTW+'**'-,',!- *',4#,2-07"3#2-*-5#0!- * %#,#0 2'-, 1  0#13*2 -$ .* ,2 -32 %#1Q $SSTT +'**'-, ', !300#,2 .0#. 7+#,21 $-0 ! 1& !-** 2#0 * ," 1#04'!# %0##+#,20#/3'0#+#,21Q$TTZ+'**'-,',',130 ,!#! 1&0#1#04#1Q ,"$TTU+'**'-,',!312-+#0 "#.-1'21T

NoncurrentRestrictedAssets

FY2017<-,!300#,2 0#120'!2#" 11#21 2-2 *#" $SQSXRTX +'**'-, 2 " ,3 07 USQ TRSYQ  "#!0# 1# -$ $UVSTU+'**'-,!-+. 0#"2-" ,3 07USQTRSXT&#-4#0 **4 0' ,!#5 1* 0%#*7 220' 32 *#2-"#!0# 1#1 -$$UTYTZ+'**'-,',2&# .'2 * 0-(#!213,""3#2-,#5!-,1203!2'-,$3,"',% ,"$T[TV+'**'-,',2&# -#. '0 ,"-#.* !#+#,2!!-3,2T
#"#!0# 1#15#0#. 02' **7-$$1#2 7 ,',!0# 1#-$$SVTS+'**'-,', 2&#+#!-++'11'-,',%03121 * ,!#1T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSV     ,#0%7 TRSY,,3 *-#.-02

FY2016<-,!300#,2 0#120'!2#" 11#21 2-2 *#" $SQWRST[ +'**'-, 2 " ,3 07 USQ TRSXQ , ',!0# 1# -$ $SYWTY+'**'-,!-+. 0#"2-" ,3 07USQTRSWT&#-4#0 **4 0' ,!#5 1* 0%#*7 220' 32 *#2-',!0# 1#1 -$ $SZVTW +'**'-, ', 2&#  .'2 * 0-(#!21 3," 0#13*2',% $0-+ -," .0-!##"1 -$ $VWYT[ +'**'-, ', +#!#+ #0TRSWQ. 02' **7-$$1#2 7$TYVTY+'**'-,',7# 0V2-V" 2#!-,1203!2'-,$3,"',% ,"$XTZ+'**'-, ', 2&# -#. '0 ," -#.* !#+#,2 !!-3,2T  
# ',!0# 1#1 5#0# . 02' **7 -$$1#2 7  "#!0# 1# -$ $SXTX+'**'-,',2&#+#!-++'11'-,',%03121 * ,!#1"3#2- 0#"3!2'-,',2&#! 1&!-** 2#0 * !!-3,2T

OtherNoncurrentAssets

FY201742�,-,!300#,2 11#21',!0# 1#"2-$WRZTZ+'**'-, 2" ,3 07USQTRSYQ$0-+$VXSTR+'**'-, 2 " ,3 07 USQ TRSXT  &# $VYTY +'**'-, !& ,%# 0#$*#!21 ',!0# 1#1 -$ $U[TU +'**'-, ',   ,#2 !-121 0#!-4#0 *#Q $SZTY +'**'-, ', *-,%V2#0+ 1#04'!# %0##+#,2 ',4#,2-07 ," $STR +'**'-, ', 3, +-02'8#" -," #6.#,1#T  
# ',!0# 1#1 5#0# . 02' **7 -$$1#2 7 "#!0# 1#1 -$ $XTZ +'**'-, ', 2&# ,#2 4  - *'% 2'-,1"3#2-,-0+ * ,,3 *4 !-121,#2-$$3,"',%!-,20' 32'-,1Q ,"$WTU+'**'-,',2&#.#,1'-, 0#%3* 2-07 11#2T

FY201642�,-,!300#,2 11#21',!0# 1#"2-$VXSTR+'**'-, 2" ,3 07USQTRSXQ$0-+$VWRTT+'**'-, 2 " ,3 07 USQ TRSWT  &# $SRTZ +'**'-, !& ,%# 0#$*#!21 ',!0# 1#1 -$ $SVTU +'**'-, ', 2&# ,#2 4  - *'% 2'-, "3# 2- ',!0# 1#" $3,"',% !-,20' 32'-,1 ',   TRSXQ -$$1#2 7 ,-0+ * ,,3 * 4  !-121R $UT[+'**'-, ',   ,#2 !-121 0#!-4#0 *#R ," $TTR +'**'-, ', 3, +-02'8#" -," #6.#,1#T  
# ',!0# 1#15#0#. 02' **7-$$1#2 7"#!0# 1#1-$$WTU+'**'-,',2&#.#,1'-,0#%3* 2-07 11#2 ,"$VTR+'**'-, ',,-,!300#,2.0#. 7+#,21 ,"-2�T

DeferredOutflowsofResources

FY2017+#$#00#" -32$*-51 -$ 0#1-30!#1 ',!0# 1#" $SSRTR +'**'-,Q $0-+ $S[XTY +'**'-, 2 " ,3 07USQTRSXQ2-$URXTY+'**'-, 2" ,3 07USQTRSYQ.0'+ 0'*7"3#2-',!0# 1#1-$$SSRT[+'**'-,', "#$#00#"-32$*-510#* 2#"2-.#,1'-, ,"$T[TT+'**'-,',3, +-02'8#"0# !/3'1'2'-,!-121Q. 02' **7-$$1#2 7 "#!0# 1#-$$URTS+'**'-,',3,0# *'8#"*-11#1-,$3#*&#"%#1T&#',!0# 1#',"#$#00#"-32$*-51 0#* 2#" 2- .#,1'-, 5 1 .0'+ 0'*7 "3# 2- !& ,%#1 ', !23 0' * 4 *3 2'-,1 2- 0#$*#!2 !23 * + 0)#2 .#0$-0+ ,!#T*1-!-,20' 32',%5 1 ,',!0# 1#',3, +-02'8#"0# !/3'1'2'-,!-121"3#2-2&#,#51#0'#1 TRSX 0#4#,3# 0#$3,"',% -," '113 ,!# ', "3*7 TRSXT  -0 +-0# ',$-0+ 2'-, -, "#$#00#" -32$*-51 -$ 0#1-30!#1Q1##<-2#S3++ 07-$'%,'$'! ,2!!-3,2',% -*'!'#1T

FY2016+#$#00#" -32$*-51 -$ 0#1-30!#1 ',!0# 1#" $TZTR +'**'-,Q $0-+ $SXZTY +'**'-, 2 " ,3 07USQTRSWQ2-$S[XTY+'**'-, 2" ,3 07USQTRSXQ.0'+ 0'*7"3#2- ,',!0# 1#-$$S[TV+'**'-,', "#$#00#"-32$*-510#* 2#"2-.#,1'-, ,"$ZTS+'**'-,',3,0# *'8#"*-11#1-,$3#*&#"%#1T&#',!0# 1#', "#$#00#"-32$*-510#* 2#"2-.#,1'-,5 1.0'+ 0'*7"3#2-2&##$$#!2-$!& ,%#1', !23 0' * 113+.2'-,1T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSW   ,#0%7 TRSY,,3 *-#.-02  

CapitalAssets,Net  SummaryofCapitalAssets NetofAccumulatedDepreciationandAmortization +-** 01',2&-31 ,"1

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� VQRXZ VQTWU SZV VVTW$ SZW VVTU$ 3,884 -2 *%#,#0 *.* ,2 464,987 VWXQSWR UZYQVWU ZQZUY ST[$ XZQX[Y SYTY$ 0,2 ,%' *#1 -$25 0# 104,923 SRVQWWU ZYQRRW UYR RTV$ SYQWVZ TRTT$ 42� 23,373 TVQUZX TWQVSV SQRSU VVTT$ SQRTZ VVTR$ -2 *',2 ,%' *#1 128,296 STZQ[U[ SSTQVS[ XVU VRTW$ SXQWTR SVTY$ <3!*# 0$3#* 130,673 SRXQVSS SR[QS[V TVQTXT TTTZ$ TQYZU VTTW$ -2 *"#.0#!' *#  +-02'8 *# 11#21 7,253,861 YQSUUQVRU YQRRYQYUZ STRQVWZ STY$ STWQXXW STZ$ -2 *! .'2 * 11#21Q,#2 $8,053,304 $YQYYYQWRW $YQ[WTQ[TV TYWQY[[$ UTW$$ SYWQVS[ VTTT$

FY20172 " ,3 07 USQ TRSYQ ,#2 ! .'2 * 11#21 -$ $ZQRWUTU +'**'-, ',!0# 1#" $TYWTZ +'**'-, $0-+ $YQYYYTW+'**'-, 2" ,3 07USQTRSXT&#',!0# 1#5 1.0'+ 0'*7"3#2- $SUZTS+'**'-,',!0# 1#',2&# !-,1203!2'-,V',V.0-%0#11 !-+.-,#,2 -$ 2-2 * ,-,"#.0#!' *# 11#21T  -2 * "#.0#!' *# +-02'8 *# 11#21',!0# 1#"$STRTW+'**'-,T

4$ 2&# 2-2 * .* ,2V',V1#04'!# ," !-,1203!2'-,V',V.0-%0#11 ""'2'-,1Q $XYUTU+'**'-, 0#* 2#" 2- ,#5 !-,1203!2'-, ," ,#2 0#+-4 * !-121T  
# ""'2'-,1 ',!*3"#" $3,"',% 5'2& $UTZTS+'**'-, -$ "# 2Q $WUTX+'**'-, $0-+ !-,20' 32#" ! .'2 * ," $T[STX +'**'-, $0-+ 2&# -#. '0 ," -#.* !#+#,2 !!-3,2T 0,!*3"#"',! .'2 * 11#21'1  ,#0%7_1VR$',2#0#12', 2,'21S ,"TT

0,"3,#TRSXQ2&#- 0" ..0-4#"2&#.30!& 1#-$ ,#6'12',% 3'*"',% ,"* ,"',"-5,2-5, ,,2-,'-Q 5&'!&5'** #!-+#  ,#0%7_1,#5!-0.-0 2#&# "/3 02#01T&#25-2-5#01-,2&#.0-.#0275'** # 0#"#4#*-.#" ,"2&#1'2#'1#6.#!2#"2- #0# "7$-0#+.*-7##1',TRS[T&# 3'*"',%'1!300#,2*70#!-0"#" 1!-,1203!2'-,V',V.0-%0#113,2'*0#,-4 2'-,1 0#!-+.*#2#T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSX     ,#0%7 TRSY,,3 *-#.-02

FY20162 " ,3 07 USQ TRSXQ ,#2 ! .'2 * 11#21 -$ $YQYYYTW +'**'-, "#!0# 1#" $SYWTV +'**'-, $0-+ $YQ[WTT[+'**'-, 2" ,3 07USQTRSWT&#"#!0# 1#5 1.0'+ 0'*7"3#2-2&# 2,'21U ,"V50'2#V-$$ -$ $U[STV +'**'-, ', !-,1203!2'-,V',V.0-%0#11Q . 02' **7 -$$1#2 7 , ',!0# 1# -$ $[RTU +'**'-, ', -2� !-,1203!2'-,V',V.0-%0#11 !2'4'27T  -2 * "#.0#!' *# +-02'8 *# 11#21 ',!0# 1#" $STWTY +'**'-, 1  0#13*2-$,#5! .'2 * 11#21 #',%.* !#"',2-1#04'!#T

4$ 2&# 2-2 * .* ,2V',V1#04'!# ," !-,1203!2'-,V',V.0-%0#11 ""'2'-,1Q $XTWTZ+'**'-, 0#* 2#" 2- ,#5 !-,1203!2'-, ," ,#2 0#+-4 * !-121T  
# ""'2'-,1 ',!*3"#" $3,"',% 5'2& $TYVTY+'**'-, -$ "# 2Q $VTTY+'**'-,$0-+!-,20' 32#"! .'2 * ,"$URZTW+'**'-,$0-+2&#-#. '0 ,"-#.* !#+#,2!!-3,2T

CurrentLiabilities

FY2017 6!*3"',%!300#,2+ 230'2'#1-$"# 2-$$SZTTR+'**'-,Q!300#,2*' '*'2'#1',!0# 1#"$YTR+'**'-,Q $0-+$U[YTU+'**'-, 2" ,3 07USQTRSXQ2-$VRWTV+'**'-, 2" ,3 07USQTRSYT&#&'%� * ,!#5 1 .0'+ 0'*7"3#2- ,',!0# 1#-$$TUTY+'**'-,', -.#0 2',%Q+ ',2#, ,!# ,"!-,1203!2'-,. 7 *#1 "3#2- 30 ,'3+.30!& 1#'," ,3 07TRSYQ$STY+'**'-,',!312-+#0"#.-1'21Q$STS+'**'-,',.-**32'-, 0#+#"' 2'-, ,"$STS+'**'-,',. 7 *#2-2&#'27T
#',!0# 1#15#0#. 02' **7-$$1#2 7"#!0# 1#1-$ $SZTT +'**'-, ', !!-3,21 . 7 *# ," !!03#" *' '*'2'#1 ," $TTY +'**'-, ', !312-+#0 "4 ,!#1 $-0 !-,1203!2'-,T

FY2016 6!*3"',% !300#,2 + 230'2'#1 -$ "# 2 -$ $SZWTT+'**'-, ,"$SYVTW+'**'-, $-0   TRSX ,"  TRSWQ0#1.#!2'4#*7Q!300#,2*' '*'2'#15#0#!-+. 0 *# 2$U[YTU+'**'-, 1-$" ,3 07USQTRSX ," TRSWT

OtherNoncurrentLiabilities

FY2017 6!*3"',% 2&# ,-,!300#,2 .-02'-, -$ "# 2 -$ $WQYSXTU +'**'-,Q ,-,!300#,2 *' '*'2'#1 ',!0# 1#"$TSUTU +'**'-, 2- $SQSYTTU +'**'-, 2 " ,3 07 USQ TRSYQ .0'+ 0'*7 "3# 2- ',!0# 1#1 -$ $SXZTS+'**'-,',,#2.#,1'-,*' '*'27Q$UUTS+'**'-,',*-,%2#0+1#04'!# %0##+#,2*' '*'27Q$TTTR+'**'-, ',"#!-++'11'-,',%*' '*'27Q$XTS+'**'-,',2&# 4  ,".#,1'-,*' '*'27Q$UT[+'**'-,',-.#0 2',% 0#1#04#1 ," $STR +'**'-, ', ,-,!300#,2 !312-+#0 "#.-1'21T  
# ',!0# 1#1 5#0# . 02' **7 -$$1#2 7 "#!0# 1#1-$$SZTU+'**'-,',-2�*' '*'2'#1 ,"$UTW+'**'-,',"#!-++'11'-,',%,#2!-1210#$3," *#T

FY2016 6!*3"',% 2&# ,-,!300#,2 .-02'-, -$ "# 2 -$ $WQZYRTU +'**'-,Q ,-,!300#,2 *' '*'2'#1 "#!0# 1#"$SZTS+'**'-,2-$[W[TS+'**'-, 2" ,3 07USQTRSXQ.0'+ 0'*7"3#2-"#!0# 1#1-$$SVTS+'**'-, ', "#!-++'11'-,',% ,#2 !-121 0#$3," *#Q $[TS +'**'-, ', 2&#   4  ," .#,1'-, *' '*'2'#1 ," $VTY+'**'-, ', 2&# "#!-++'11'-,',% *' '*'27T  
# "#!0# 1#1 5#0# . 02' **7 -$$1#2 7 ',!0# 1#1 -$ $XTW+'**'-,',-2�*' '*'2'#1Q$TTZ+'**'-,',-.#0 2',%0#1#04#1 ,"$STT+'**'-,',,-,!300#,2!312-+#0 "#.-1'21T

DeferredInflowsofResources

FY2017+#$#00#"',$*-51-$0#1-30!#1"#!0# 1#"$UTTR+'**'-,Q$0-+$Y[TW+'**'-, 2" ,3 07USQTRSXQ 2-$VYTW+'**'-, 2" ,3 07USQTRSYQ.0'+ 0'*7"3#2- "#!0# 1#-$$USTY+'**'-,',"#$#00#"',$*-51 0#* 2#"2-.#,1'-,T

FY2016+#$#00#"',$*-51-$0#1-30!#1',!0# 1#"$SRTV+'**'-,Q$0-+$X[TS+'**'-, 2" ,3 07USQTRSWQ 2-$Y[TW+'**'-, 2" ,3 07USQTRSXQ.0'+ 0'*7"3#2- ,',!0# 1#-$$SSTT+'**'-,',"#$#00#"',$*-51 0#* 2#"2-.#,1'-,T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSY   ,#0%7 TRSY,,3 *-#.-02  

FINANCINGANDDEBTCOVENANTSCOMPLIANCE

LongTermDebt(ExcludingCommercialPaper)

FY2017–2" ,3 07USQTRSYQ  ,#0%7_12-2 *"# 25 1$WQSZUTR+'**'-,Q#6!*3"',%!-++#0!' *. .#0Q 2&# --

Issuances–4,"3*7TZQTRSXQ  ,#0%7'113#"$WVVTU+'**'-,-$<#5#0'#1TRSX#,'-0A'#,-#4#,3# -#$3,"',%-,"1T 0-!##"1Q',!*3"',%2&#$STTTY+'**'-,.0#+'3+ 11-!' 2#"5'2&2&# -,"1Q5#0#31#" 2-0#$3,"$TVUTW+'**'-, ,"$UXWTX+'**'-,. 04 *3#-$2&#<#5#0'#1TRRZ-#4#,3#-,"1 ,"<#5 #0'#1TRR[-#4#,3#-#$3,"',%-,"1Q0#1.#!2'4#*7T&#0#$3,"',%20 ,1 !2'-,0#13*2#"', ,#2.0#1#,2 4 *3#"# 21#04'!#1 4',%1-$$SR[TT+'**'-,Q-0SYT[$-$2&#. 04 *3#-$2&# -,"1 #',%0#$3,"#"T&# 203#',2#0#12!-12$-02&'1'113#Q5&'!&& 1+ 230'2'#1',TRTR2&0-3%&TRUVQ'1TTSV$T

4,+#!#+ #0SQTRSXQ  ,#0%70#+ 0)#2#"$VYTW+'**'-,-$#0'#1TRST? 0' *#V- 2#"3,'-0A'#, -#4#,3#-#$3,"',%-,"1T&#'113 ,!#-$ $RTW+'**'-,.0#+'3+Q',!-,(3,!2'-,5'2&2&#0#+ 0)#2',%Q 0#13*2#"', .0',!'. *. 7"-5,$-02&#0#+ 0)#2#" -,"1-$ ..0-6'+ 2#*7$RTT+'**'-,T&# -,"1& 4# + 230'2'#1',TRTV2&0-3%&TRTYT&#!-3.-,0 2#$-02
# -,"1'1TTR$Q5'2& !300#,27'#*"-$STWR$ ,"203#',2#0#12!-12-$XTVR$Q5&'!&0#$*#!21 12#..#"',2#0#12-$ZTR$5&'!&'1-,*7 ..*'! *#'$2&# -,"1 0#,-20#+ 0)#2#" #$-0#2&#'0#6.'0 2'-," 2#T

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Reductions–  ,#0%7+ "# .0',!'. * . 7+#,21-$$SXRTR +'**'-,',   TRSYT ""'2'-, * .0',!'. * . 7"-5,10#* 2#"2-0#$3,"',% ,"0#+ 0)#2',%20 ,1 !2'-,1"30',%2&#7# 02-2 *#"$YZSTY+'**'-,T

SummaryofDebtRollforwardActivityS 0,2&-31 ,"1   * ,!# Balance  43212 ,"',% ""'2'-,1 +#!0# 1#1  Outstanding # 03 07SQTRSX +30',% # 0 +30',% # 0  January31,2017  $WQVRZQUXW $YSXQUSW $[VSQX[W $5,182,985   S 6!*3"#1!-++#0!' *. .#0Q2&#--

FY2016–2" ,3 07USQTRSXQ  ,#0%7_12-2 *"# 25 1$WQVRZTV+'**'-,Q#6!*3"',%!-++#0!' *. .#0Q 2&# --

Issuances–4,3%312SUQTRSWQ  ,#0%7'113#"$UTRTW+'**'-,-$<#5#0'#1TRSW#,'-0A'#,-#4#,3# -#$3,"',%-,"1T 0-!##"1Q',!*3"',%2&#$VUTU+'**'-,.0#+'3+ 11-!' 2#"5'2&2&# -,"1Q5#0#31#"

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VSZ     ,#0%7 TRSY,,3 *-#.-02

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Reductions  ,#0%7+ "# .0',!'. * . 7+#,21-$$SV[TU +'**'-,',   TRSXT ""'2'-, * .0',!'. * . 7"-5,10#* 2#"2-0#$3,"',% ,"0#+ 0)#2',%20 ,1 !2'-,1"30',% TRSX2-2 *#"$UZYTU+'**'-,T

SummaryofDebtRollforwardActivityS 0,2&-31 ,"1   * ,!#  * ,!#  43212 ,"',% ""'2'-,1 +#!0# 1#1 43212 ,"',%  # 03 07SQTRSW +30',% # 0 +30',% # 0 " ,3 07USQTRSX   $WQSVSQYXR $ZRUQSZR $WUXQWYW $WQVRZQUXW  S 6!*3"#1!-++#0!' *. .#0Q2&#--

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VS[   ,#0%7 TRSY,,3 *-#.-02  

AllocationofDebt atJanuary31, 20172016 Note:GraphsexcludecommercialpaperandtheFRRN.

CommercialPaper

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FY2017 �#5#0#,-!-++#0!' *. .#0'113 ,!#1-00#"3!2'-,1"30',% TRSYT2" ,3 07USQTRSYQ 2&#-3212 ,"',%!-++#0!' *. .#0 * ,!#5 1$UXRTR+'**'-,Q **-$5&'!&5 1'113#" 12 6V#6#+.2T

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VTR     ,#0%7 TRSY,,3 *-#.-02

SummaryofCommercialPaperRollforwardActivity 0,2&-31 ,"1   * ,!# Balance  43212 ,"',% ""'2'-,1 +#!0# 1#1 Outstanding # 03 07SQTRSX +30',% # 0 +30',% # 0 January31,2017 $UXRQRRR $V $V  $360,000

FY2016 �#5#0#,-!-++#0!' *. .#0'113 ,!#1-00#"3!2'-,1', TRSXT2" ,3 07USQTRSXQ2&# -3212 ,"',%!-++#0!' *. .#0 * ,!#5 1$UXRTR+'**'-,Q **-$5&'!&5 1'113#" 12 6V#6#+.2T

SummaryofCommercialPaperRollforwardActivity 0,2&-31 ,"1   * ,!#  * ,!#  43212 ,"',% ""'2'-,1 +#!0# 1#1 43212 ,"',%  # 03 07SQTRSW +30',% # 0 +30',% # 0 " ,3 07USQTRSX  $UXRQRRR $V $V $UXRQRRR 

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FlexibleRateRevolvingNote

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Compliance

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## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T VTW INDEPENDENT AUDITORS' REPORT

To the Board of Trustees City Public Service of San Antonio, Texas San Antonio, Texas

We have audited the accompanying financial statements of City Public Service of San Antonio, Texas (“CPS Energy”), a component unit of the City of San Antonio, Texas as of and for the years ended January 31, 2017 and 2016, and the related notes to the financial statements, which collectively comprise CPS Energy’s basic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements 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 from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to CPS Energy’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CPS Energy’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

VTX To the Board of Trustees City Public Service of San Antonio, Texas

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CPS Energy as of January 31, 2017 and 2016, and the respective changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matter

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the required supplementary information as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

San Antonio, Texas Austin, Texas April 26, 2017

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VVR     ,#0%7 TRSY,,3 *-#.-02 

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VVS   ,#0%7 TRSY,,3 *-#.-02

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2.Cash,CashEquivalentsandInvestments

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CashandCashEquivalents 0,2&-31 ,"1  " ,3 07USQ  2017 TRSX   1&  #227! 1&$3,"1-,& ," $74 $YR  +#.-1'215'2&$', ,!' *',12'232'-,1  2,0#120'!2#"  ,#0%7"#.-1'21 43,639 W[QTTT  -#120'!2#"  ,#0%7"#.-1'21   .'2 *.0-(#!21 202 SXW  +# 21#04'!# 1,229 VZV  0-(#!2I 0+ 204 TUW  -2 *! 1& 45,348 XRQSYX    1&#/3'4 *#,21  0,4#12+#,215'2&-0'%', *+ 230'2'#1-$[R" 71-0*#11    ,#0%73,0#120'!2#"!300#,2 147,779 [ZQTR[    ,#0%70#120'!2#",-,!300#,2 89,999 TYXQVWX  +#!-++'11'-,',%031210#120'!2#",-,!300#,2 22,806 T[QTTS  -2 *! 1&#/3'4 *#,21 260,584 VRUQZZX  -2 *! 1& ,"! 1&#/3'4 *#,21 $ 305,932 $ VXVQRXT

SummaryofCash,CashEquivalentsandInvestments 0,2&-31 ,"1  " ,3 07USQ  2017 TRSX   1& ,"! 1&#/3'4 *#,21    ,#0%73,0#120'!2#" ,"0#120'!2#" $ 283,126 $ VUVQZVS  +#!-++'11'-,',%031210#120'!2#" 22,806 T[QTTS  -2 *! 1& ,"! 1&#/3'4 *#,21 VXVQRXT  305,932  B0-11',4#12+#,21!300#,2 ,",-,!300#,2    ,#0%73,0#120'!2#" ,"0#120'!2#" 917,817 SQTVVQUSR  +#!-++'11'-,',%031210#120'!2#" 536,407 WSVQR[[  -2 *%0-11',4#12+#,21 1,454,224 SQYWZQVR[  0,4#12+#,215'2&-0'%', *+ 230'2'#1-$[R" 71  -0*#11',!*3"#"',! 1& ,"! 1&#/3'4 *#,21    ,#0%73,0#120'!2#" ,"0#120'!2#" (237,779) UYVQXXW  +#!-++'11'-,',%031210#120'!2#" (22,806) T[QTTS  -2 *! 1&#/3'4 *#,21 (260,585) VRUQZZX  <#2,-,!300#,2',4#12+#,21 SQUWVQWTU  1,193,639  -2 *! 1&Q! 1&#/3'4 *#,21 ,"',4#12+#,21 $ 1,499,571 $ SQZSZQWZW

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Investments of the Decommissioning Trusts    ,#0%7_1 ',4#12+#,21 ', 2&# +#!-++'11'-,',% 03121 0#&#*" 7 ,',"#.#,"#,220312##T0,4#12+#,21 0#*'+'2#"2-2&-1#"#$',#" 7- 0"0#1-*32'-,Q 2&#-32&#6 1 0-(#!2+#!-++'11'-,',%03120,4#12+#,2 -*'!7Q2&#0,4#12+#,2-++'22##Q2&#0312 %0##+#,21 ," 12 2# * 5Q 1 5#** 1 2 ," <3!*# 0 -#%3* 2-07 -++'11'-, b<-c %3'"#*',#1T**-5 *#',4#12+#,21$-02&#+#!-++'11'-,',%03121',!*3"# **27.#1"'0#!2*7.#0+'11' *# $-0   ,#0%7Q #6!#.2 $-0 ',4#12+#,2 .--*1T  ""'2'-, **7 .#0+'22#" 0# ',4#12+#,21 ', #/3'2'#1 ," !-0.-0 2# -,"1',!*3"',%',2#0, 2'-, *1#!30'2'#120 "#"',2TT"-** 01 ,"-,2TT12-!)#6!& ,%#1T0, !!-0" ,!#5'2&2&#03121_0,4#12+#,2 -*'!7Q2-2 *',4#12+#,21! ,',!*3"# + 6'+3+-$XR$#/3'27 1#!30'2'#1T0,2&#13++#0-$TRSVQ  ,#0%70#$',#"'212 0%#2 **-! 2'-,1$-0 -2&03121', ,#$$-022- $302�0#"3!#2&#-4#0 **0'1)-$2&#.-02$-*'-1T&#0#4'1#"2 0%#2 **-! 2'-,1$-0 -2&03121 0#XUTW$ $'6#"',!-+#QTZTR$#/3'2'#1 ,"ZTW$2TT0# *#12 2#',4#12+#,2203121T

PermissibleInvestments

 Decommissioning  CPSEnergy Trusts  InvestmentDescription Investments Investments 2TTB-4#0,+#,2Q2TTB-4#0,+#,2%#,!7Q-02TT    B-4#0,+#,2V%3 0 ,2##"- *'% 2'-,1  -** 2#0 *'8#"+-02% %#- *'% 2'-,1'113#" 72&#2TT  B-4#0,+#,2Q-0-2�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�1.#!'$'!27.#1-$1#!30#"-0%3 0 ,2##"',4#12+#,21 

VVV     ,#0%7 TRSY,,3 *-#.-02 

Cash,CashEquivalentsandInvestmentsbyFund 0,2&-31 ,"1 " ,3 07USQ  2017 TRSX  2,0#120'!2#"   1& ,"! 1&#/3'4 *#,21 $ 191,492 $ SWYQWRS  0,4#12+#,21 160,241 SY[Q[SR  -2 *3,0#120'!2#"!300#,2 351,733 UUYQVSS  -#120'!2#"  +# 21#04'!#   1& ,"! 1&#/3'4 *#,21 14,951 SVQSVR  -2 *"# 21#04'!# 14,951 SVQSVR   .'2 *.0-(#!21   1& ,"! 1&#/3'4 *#,21 75,013 SVSQURT  0,4#12+#,21 TXRQUSY  -2 *! .'2 *.0-(#!21 75,013 VRSQXS[  40"', ,!#  1& ,"! 1&#/3'4 *#,21 STSQXWR  1,449 0,4#12+#,21 VTSQ[SW  512,443 -2 *-0"', ,!# 513,892 WVUQWXW  0-(#!2I 0+   1& ,"! 1&#/3'4 *#,21 221 TVZ  0,4#12+#,21 7,354 YQWRU  -2 * 0-(#!2I 0+ 7,575 YQYWS  +#!-++'11'-,',%03121   1& ,"! 1&#/3'4 *#,21 22,806 T[QTTS  0,4#12+#,21 513,601 VZVQZYZ  -2 *+#!-++'11'-,',%03121 536,407 WSVQR[[  -2 *0#120'!2#"   1& ,"! 1&#/3'4 *#,21 114,440 URXQWXS  0,4#12+#,21 1,033,398 SQSYVQXSU  -2 *0#120'!2#",-,!300#,2 1,147,838 SQVZSQSYV  -2 *! 1&Q! 1&#/3'4 *#,21 ," ',4#12+#,213,0#120'!2#" ,"0#120'!2#" $ 1,499,571 $ SQZSZQWZW

RiskExposure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

  ,#0%7_1 ',4#12+#,21 ," 2&# ',4#12+#,21 ', 2&# +#!-++'11'-,',% 03121 0# + , %#" 5'2&  !-,1#04 2'4#$-!31T&#0,4#12+#,2 -*'!'#1 0#1203!230#"2-#,130#!-+.*' ,!#5'2& -,"-0"', ,!#1Q 2&# 0Q2&# 3 *'!3,"1-** 2#0 *!2Q2&#<-Q2&# 2Q-2� ..*'! *#12 2#12 232#1 ,"- 0" 0#1-*32'-,10#* 2',%2-',4#12+#,21T  ,#0%7'"#,2'$'#1 ,"+ , %#10'1)1 7$-**-5',% , ..0-.0' 2# ',4#12+#,2 -4#01'%&2 120 2#%7Q #12 *'1&',% ," +-,'2-0',% !-+.*' ,!# 5'2& 0,4#12+#,2 -*'!'#1 ," .0-!#"30#1Q ,"!-,2',3 **7+-,'2-0',%.03"#,2!-,20-*1-4#00'1)1T

VVW   ,#0%7 TRSY,,3 *-#.-02

SummaryofInvestments(IncludingCashEquivalents) byOrganizationalStructureandTypeS 0,2&-31 ,"1  " ,3 07USQ  2017 TRSX    ,#0%7',4#12+#,21  2TT0# 130'#1Q2TT%#,!'#1Q+3,'!'. * -,"1Q  +1Q!-++#0!' *. .#0Q',4#12+#,2.--*1  ,"+-,#7+ 0)#2+323 *$3,"1 $ 917,817 $ SQTVVQUSR  +#!-++'11'-,',%03121  2TT0# 130'#1Q2TT%#,!'#1Q+3,'!'. * -,"1  ,"+-,#7+ 0)#2+323 *$3,"1 211,131 S[ZQTXX  -0.-0 2# -,"1 123,398 STUQVUW  -0#'%, -,"1 12,521 TRQSXT  3 2-2 * 347,050 UVSQZXU  -++-,12-!) 136,765 STXQSTT  -# *#12 2#',4#12+#,2203121 51,895 VWQVRR  0#$#00#"12-!) 697 YSV  -2 *+#!-++'11'-,',%03121 536,407 QQWSVQR[[  -2 *',4#12+#,21 $ 1,454,224 $ SQYWZQVR[   S 6!*3"#1! 1&-$$VWTU+'**'-, ,"$XRTT+'**'-, 1-$" ,3 07USQTRSY ,"TRSXQ0#1.#!2'4#*7T

InvestmentPolicies0, !!-0" ,!#5'2&12 2#* 5Q2&#03121_0,4#12+#,2 -*'!7 **-51$-0',4#12+#,2 ', ""'2'-, * 27.#1 -$ 1#!30'2'#1Q 13!& 1 !-0.-0 2# -,"1 ," #/3'27 1#!30'2'#1T  &# .-*'!7 .0-4'"#1 %3'"#*',#12-#,130# **$3,"1 0#',4#12#"', 32&-0'8#"1#!30'2'#1',-0"#02-# 0, 0# 1-, *#0#230,T &#.0'+ 07#+.& 1'1'1.* !#"-,*-,%V2#0+%0-52&!-++#,130 2#5'2&2&#,##"2-.0#1#04#2&#4 *3# -$2&# 11#21 ,"Q 22&#2'+#$3,"1 0#,##"#"$-0"#!-++'11'-,',%!-121Q-,*'/3'"'27T&#0,4#12+#,2 -*'!7!-,2',3#12-$-**-52&#b.03"#,2.#01-,c!-,!#.2T

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CPSEnergyInvestments

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Creditrisk0, !!-0" ,!#5'2&'210,4#12+#,2 -*'!7Q  ,#0%7+ , %#1#6.-130#2-!0#"'20'1) 7 *'+'2',% *-,%V2#0+ "# 2 1#!30'27 ',4#12+#,21 2- 2&-1# 5'2&  !0#"'2 0 2',% -$ bVc -0 #22#0T  1 -$ " ,3 07USQTRSY ,"TRSXQ  ,#0%7&#*",-"# 21#!30'2'#15'2& *-,%V2#0+!0#"'20 2',% #*-5bVQc -0#/3'4 *#,2Q-0 1&-02V2#0+!0#"'20 2',% #*-5bVS VS VSTc

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DecommissioningTrustsInvestments

1 +#,2'-,#" .0#4'-31*7Q 2&# +#!-++'11'-,',% 03121 0#.-02 2&#'0 11#21 -,  ! *#," 0V7# 0 1'1R 2�#$-0#Q',$-0+ 2'-,0#* 2#"2-2&#03121'1 1-$+#!#+ #0USQTRSX ,"TRSWT&#2 *#1',2&'11#!2'-, ""0#11 ',2#0#12 0 2# 0'1) #6.-130# 7 ',4#12+#,2 27.#Q !-,!#,20 2'-, -$ !0#"'2 0'1)Q !0#"'2 0'1)Q ," $-0#'%,!300#,!70'1)T**',4#12+#,21&#*" 72&#+#!-++'11'-,',%03121 0#*-,%V2#0+',, 230# ," 0#0#!-0"#" 2$ '04 *3#T

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+-** 01',2&-31 ,"1 December31,2016 +#!#+ #0USQTRSW InvestmentType–28%Trust FairValue **-! 2'-, I+  '0? *3# **-! 2'-, I+ 2TT0# 130'#1 $44,577 SYTUX$ SRTX $ TXQS[W SRTUY$ VTZ 2TT%#,!'#1  #"#0 *< 2'-, *(-02% %#11, 36,553 SVTTV$ VTX U[QUV[ SWTWZ$ VTW #"#0 *6-+#A- ,(-02% %#-0. 39,460 SWTUY$ WTS TUQYXW [TVS$ XTU  #"#0 * 0+0#"'2 ,) 5,398 TTSR$ STR V V V  + **31',#11"+','120 2'-, 3,785 STVY$ WTX XQYX[ TTXZ$ XTZ  B-4#0,+#,2< 2'-, *(-02% %#11, 3,323 STT[$ WTX V V V (3,'!'. * -,"1#6 1 872 RTUV$ ZTS SQR[V RTVU$ [TW (3,'!'. * -,"1-2�12 2#1 TTWW$ ZTU SRQ[ZW VTUW$ ZTY  6,555 -0.-0 2# -,"1 90,395 UWTTR$ XTZ SRVQYSV VSTVY$ YTR -0#'%, -,"1 10,105 UT[V$ XTV TRQSXT YT[Z$ XTR (-,#7+ 0)#2+323 *$3,"1 15,756 XTSV$ V S[QV[X YTYU$ V  -2 *TZ$0312$'6#"V',!-+#.-02$-*'- 256,779 SRRTRR$ XTY TWTQWT[ SRRTRR$ XTT InvestmentType–12%Trust 2TT0# 130'#1 14,500 SXTRX$ SVTS UXQ[VX VSTUX$ WTV 2TT%#,!'#1  #"#0 *< 2'-, *(-02% %#11, 11,968 SUTTX$ VTX SSQUSV STTXX$ XTU #"#0 *6-+#A- ,(-02% %#-0. 13,659 SWTSU$ VTT YQUYX ZTTX$ XTU  #"#0 * 0+0#"'2 ,) 2,477 TTYV$ STS V V V  + **31',#11"+','120 2'-, 1,343 STV[$ WTW V V V  B-4#0,+#,2< 2'-, *(-02% %#11, 1,582 STYW$ WTX W[X RTXY$ UT[ (3,'!'. * -,"1#6 1 416 RTVX$ ZTS SQWZT STYY$ SSTT (3,'!'. * -,"1-2�12 2#1 1,857 TTRX$ ZTW UQRYV UTVV$ [TR -0.-0 2# -,"1 33,003 UXTWX$ XTZ SZQYTS TRT[X$ XTS -0#'%, -,"1 2,416 TTXZ$ WT[ V V V (-,#7+ 0)#2+323 *$3,"1 7,050 YTZS$ V [QYTW SRTZZ$ V  -2 *ST$0312$'6#"V',!-+#.-02$-*'- 90,271 SRRTRR$ YTS Z[QUUV SRRTRR$ XTR -2 *03121$'6#"V',!-+#.-02$-*'- $ 347,050 $ UVSQZXU

Creditrisk0, !!-0" ,!#5'2&2&#0,4#12+#,2 -*'!7Q#6.-130#2-!0#"'20'1)'1+ , %#" 7*'+'2',% ** $'6#"V',!-+#',4#12+#,212- !0#"'20 2',%-$bVcQ-0#/3'4 *#,2Q-0 #22#0$0-+ 2*# 1225-, 2'-, **7 0#!-%,'8#"!0#"'20 2',% %#,!'#1T0$ 1#!30'27_10 2',%$ **1 #*-52&#+','+3+',4#12+#,2%0 "#0 2',% -$bVc $2#0'2& 1 ##,.30!& 1#"Q2&#0,4#12+#,2 -*'!7 **-51',4#12+#,2+ , %#012-!-,2',3#2-

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 +-** 01',2&-31 ,"1 December31,2016 +#!#+ #0USQTRSW  CreditRating–28%Trust FairValue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reditRating–12%Trust 2TT0# 130'#1& 14,500 SXTRX$ UXQ[VX VSTUX$   18,842 TRTZY$ SUQUSZ SVT[S$ &  S 30,988 UVTUU$ S[Q[Y[ TTTUX$   T 727 RTZS$ SQVSY STW[$ V  U 1,536 STYR$ TQTRY TTVY$ & S RTZR$ V V 725  T 4,194 VTXW$ UQU[[ UTZR$ V U 5,615 XTTT$ TQZWY UTTR$ &  S 7,643 ZTVY$ WQWWW XTTT$   T 3,486 UTZX$ SQYYU ST[Z$ V  U 1,191 STUT$ SQZZU TTSS$ <-2- 2#"] 824 RT[S$ V V -2 *ST$0312$'6#"V',!-+#.-02$-*'- SRRTRR$ Z[QUUV SRRTRR$ 90,271 -2 *03121$'6#"V',!-+#.-02$-*'- $ 347,050 $ UVSQZXU

S &#<+0,4#12+#,2( , %#01 0#%'4#,"'1!0#2'-,2-',4#12',3,0 2#"1#!30'2'#1 2& 2 0# -$13'2 *# /3 *'27 ," ',*',#5'2&2&#'0 ',4#12+#,2 120 2#%7Q 1*-,% 12&-1#"-,-2#6!##" 2&#SR$*'+'2.0#1!0' #" $-02&#.-02$-*'- 72&#<+0,4#12+#,2 -*'!7T

Foreign currency risk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3.DisaggregationofCurrentAccountsReceivableandAccountsPayable

AccountsReceivable<#2!312-+#0 !!-3,210#!#'4 *# 1-$" ,3 07USQTRSYQ',!*3"#"$TYTY+'**'-, $-03, '**#"0#4#,3#0#!#'4 *# ,"$S[TTV+'**'-,$-0 '**#"32'*'271#04'!#1T0,2#0#12 ,"-2� !!-3,21 0#!#'4 *# ',!*3"#" $XTV +'**'-, $-0 0#%3* 2-07V0#* 2#" !!-3,21 0#!#'4 *#Q $RTS +'**'-, $-0 ',2#0#12 0#!#'4 *# ,"$UZTS+'**'-,$-0-2�+'1!#** ,#-31 !!-3,210#!#'4 *#T

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4.CapitalAssets,Net

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

InvestmentinSTPUnits1and2 '1!300#,2*7 25-V3,'2,3!*# 0.-5#0.* ,2*-! 2#"',( 2 %-0"  -3,27Q#6 1T02'1+ ',2 ',#" ,"-.#0 2#" 7 <4Q ,-,.0-$'2#6 1!-0.-0 2'-,1.#!' *V.30.-1# #,2'27Q5&'!&'1$', ,!#" ,"!-,20-**#" 72&#-5,#01T  ,#0%7_1VR$',2#0#12', 2,'21S ,"T'1 ',!*3"#"',.* ,2 11#21T##<-2#SV-32&#6 1 0-(#!2T

STPCapitalInvestment,Net +-** 01',2&-31 ,"1 " ,3 07USQ 2017 TRSX  ! .'2 * 11#21Q,#2 A ," $5,701 $WQYRS -,1203!2'-,V',V.0-%0#11Q 2,'21S ,"T 64,107 WTQRWV *#!20'! ,"%#,#0 *.* ,2 841,782 [RSQXRY 0,2 ,%' *#11-$25 0# 12 ST <3!*# 0$3#* 130,673 SRXQVSS -2 * ! .'2 * 11#21Q,#2 $1,042,275 $SQRXWQYZW -2 *  ,#0%7! .'2 * 11#21Q,#2 $8,053,304 $YQYYYQWRW  ! .'2 *',4#12+#,2 1 .#0!#,2 %# -$2-2 *  ,#0%7! .'2 * 11#21Q,#2 SUTY$ 12.9%

VWT     ,#0%7 TRSY,,3 *-#.-02 

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VWU   ,#0%7 TRSY,,3 *-#.-02

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5.RevenueBondandCommercialPaperOrdinancesRequirements

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6.RevenueBonds

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7.CommercialPaperandRelatedRevolvingCreditAgreements

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8.FlexibleRateRevolvingNote

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9.EmployeePensionPlan

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10.OtherPostemploymentBenefits

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12.OtherFinancialInstruments

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13.FairValueMeasurement

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FairValueMeasurementsasofJanuary31,2017and2016 0,2&-31 ,"1

 January31,2017 " ,3 07USQTRSX  Level1 Level2 Level3 Total A#4#*S A#4#*T A#4#*U -2 * Assets FairValueInvestments  CPSEnergy 2TT0# 130'#1 $10,046 $ $$ 10,046 $VWQTVU V$ $V $ VWQTVU  2TT%#,!'#1  #"#0 *6-+#A- ,(-02% %#-0. 126,866 126,866 V  SWWQT[W V  SWWQT[W  #"#0 *< 2'-, *(-02% %#11, 111,608 111,608 V  SRWQYRU V  SRWQYRU #"#0 *6-+#A- , ,) 86,943 86,943 V X[QVUY V X[QVUY  #"#0 * 0+0#"'2 ,) 101,205 101,205 V  SUUQWWW V  SUUQWWW  + **31',#11"+','120 2'-, 37,498 37,498 V [QRUV V [QRUV (3,'!'. * -,"1 144,337 144,337 V  SRXQTUV V  SRXQTUV  -2 *  ,#0%7$ '04 *3#',4#12+#,21 10,046 608,457 618,503 VWQTVU WY[QTWZ V  XTVQWRS   December31,2016 +#!#+ #0USQTRSW Level1 Level2 Level3 Total A#4#*S A#4#*T A#4#*U -2 *  DecommissioningTrustsInvestments  28%Trust 2TT0# 130'#1 44,577 44,577 TXQS[W V V TXQS[W  2TT%#,!'#1  #"#0 *< 2'-, *(-02% %#11, 36,553 36,553 V U[QUV[ V U[QUV[ #"#0 *6-+#A- ,(-02% %#-0. 39,460 39,460 V TUQYXW V TUQYXW  #"#0 * 0+0#"'2 ,) 5,398 5,398 V V V V  + **31',#11"+','120 2'-, 3,785 3,785 V XQYX[ V XQYX[  B-4#0,+#,2< 2'-, *(-02% %#11, 3,323 3,323 V V V V (3,'!'. * -,"1V#6 1 872 872 V SQR[V V SQR[V  (3,'!'. * -,"1V-2�12 2#1 6,555 6,555 V  SRQ[ZW V SRQ[ZW  -0.-0 2# -,"1 90,395 90,395 V  SRVQYSV V  SRVQYSV -0#'%, -,"1 10,105 10,105 V TRQSXT V TRQSXT  -2 *TZ$0312$ '04 *3#$'6#"V',!-+#  ',!-+#.-02$-*'- 44,577 196,446 241,023 TXQS[W TRXQZUZ V  TUUQRUU /3'271#!30'2'#1  -++-,12-!) 97,983 97,983 Z[Q[XZ V V Z[Q[XZ  -# *#12 2#',4#12+#,2203121 38,263 38,263 UUQZRR V V UUQZRR 0#$#00#"12-!) 697 697 V YSV V YSV  -2 *TZ$0312$ '04 *3#',4#12+#,21 180,823 197,143 377,966 SV[Q[XU TRYQWWT V  UWYQWSW   12%Trust 2TT0# 130'#1 14,500 14,500 UXQ[VX V V UXQ[VX  2TT%#,!'#1  #"#0 *< 2'-, *(-02% %#11, 11,968 11,968 V SSQUSV V SSQUSV #"#0 *6-+#A- ,(-02% %#-0. 13,659 13,659 V YQUYX V YQUYX  #"#0 * 0+0#"'2 ,) 2,477 2,477 V V V V  + **31',#11"+','120 2'-, 1,343 1,343 V V V V B-4#0,+#,2< 2'-, *(-02% %#11, 1,582 1,582 V W[X V W[X  (3,'!'. * -,"1V#6 1 416 416 V SQWZT V SQWZT  (3,'!'. * -,"1V-2�12 2#1 1,857 1,857 V  UQRYV V UQRYV  -0.-0 2# -,"1 33,003 33,003 V SZQYTS V SZQYTS -0#'%, -,"1 2,416 2,416 V V V  -2 *ST$0312$ '04 *3#$'6#"V',!-+#  ',!-+#.-02$-*'- 14,500 68,721 83,221 UXQ[VX VTQXXU V Y[QXR[ /3'271#!30'2'#1  -++-,12-!) 38,782 38,782 UXQSWV V V UXQSWV  -# *#12 2#',4#12+#,2203121 13,632 13,632 SSQXRR V V SSQXRR -2 *ST$0312$ '04 *3#',4#12+#,21 ZVQYRR VTQXXU V  STYQUXU  66,914 68,721 135,635 -2 *03121$ '04 *3#',4#12+#,21 TUVQXXU TWRQTSW V  VZVQZYZ  247,737 265,864 513,601 -2 *$ '04 *3#',4#12+#,21 TY[Q[RX$ $ZT[QVYU $V $ SQSR[QUY[  $257,783 $874,321 $ $1,132,104

 January31,2017 " ,3 07USQTRSX Liabilities Level1 Level2 Level3 Total A#4#*S A#4#*T A#4#*U -2 * FinancialInstruments  300#,2$3#*&#"%#1 $(6,603) 292$ $$ (6,311) $TRQWTR W[$ $V $ TRQVXS  <-,!300#,2$3#*&#"%#1 (753) 756 3 SVQ[ZY ZVV V SWQZUS  -2 *$', ,!' *',1203+#,21 $(7,356) 1,048$ $$ (6,308) $UWQWRY $YZW $V $ UXQT[T 

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16.Leases

CapitalLeases

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Generally Accepted Accounting Principles (“GAAP”): -,4#,2'-,1Q 03*#1 ," .0-!#"30#1

V[Y   ,#0%7 TRSY,,3 *-#.-02    Management’s Discussion & Analysis -.#0 2'-, -$ 2&# -+. ,7_1 #*#!20'! ," % 1 (“MD&A”):1#!2'-,-$2&# 1'!$', ,!' * 1712#+1 $2#02&#"#"3!2'-,-$+ ',2#, ,!# ," 12 2#+#,212& 2!-,2 ',1- (#!2'4# ,"# 1'*7 -.#0 2',%#6.#,1#1T 0# " *# , *71'1 $0-+ + , %#+#,2 -32 2&# !-+. ,7_1$', ,!' *!-,"'2'-, ,"'21-.#0 2'-,1 NewSeriesBonds:  ,#0%72#0+31#"2- 2- 11'12 31#01 ', 11#11',% 2&# !-+. ,7_1 "'12',%3'1& -,"12& 2& 4# $'012*'#,-,2&#,#2 $', ,!' *.-1'2'-,T 0#4#,3#1-$  ,#0%7_1712#+1T

Megawatt(“MW”):   +# 130# -$ #*#!20'! Other Postemployment Benefits (“OPEBs”): .-5#0T   +#% 5 22 #/3 *1 SQRRR )'*-5 221 -0 -12#+.*-7+#,2 #,#$'21 -2� 2& , .#,1'-, SQRRRQRRR5 221T #,#$'21T 4 1 ',!*3"# .-12#+.*-7+#,2 &# *2&! 0# #,#$'21Q 0#% 0"*#11 -$ 2&# 27.# -$ Mothballed:   %#,#0 2'-, 0#1-30!# 2& 2 '1 .* ,2& 2.0-4'"#12&#+Q ," ** .* !#"', ,', !2'4#12 2#1-2& 2'2! ,,#'2� .-12#+.*-7+#,2 #,#$'21 .0-4'"#" 1#. 0 2#*7 # 0-3%&2',2--.#0 2'-,'++#"' 2#*7,-0 $0-+ .#,1'-,.* ,Q#6!*3"',% #,#$'21"#$',#" !-3,2#"2-5 0"12&##*#!20'!20 ,1+'11'-,%0'"_1 12#0+', 2'-, #,#$'21T 0#1#04#+ 0%',T PublicUtilityCommissionofTexas(“PUCT”): National Association of Regulatory Utility &# %-4#0,+#,2 * !-++'11'-, 2& 2 0#%3* 2#1 Commissioners (“NARUC”):  ,-,.0-$'2 2&# 0 2#1 ," 1#04'!#1 -$ 2#*#.&-,# 32'*'2'#1R -0% ,'8 2'-,5&-1#+#+ #01',!*3"#2&# ',4#12-0V-5,#" #*#!20'!Q 5 2#0 ," 1#5#0 %-4#0,+#,2 * %#,!'#12& 2 0##,% %#"',2&# 32'*'2'#1R #*#!20'!Q 5 2#0 ," 1#5#0 32'*'2'#1 ', 0#%3* 2'-, -$ 32'*'2'#1 ," ! 00'#01 ', 2&# WR 3,',!-0.-0 2#" 0# 1R ," 0 "'- !-+. ,'#1 2,'2#" 2 2#1Q 2&# +'120'!2 -$ -*3+ ' Q 3#02- 12 2#5'"#T&# 2"-#1,-2& 4# 32&-0'272- -'!- ,"2&#?'0%',01* ,"1T<-2_1+#+ #0 0#%3* 2# 0#2 '* !2'4'2'#1 -$ +3,'!'. **7 -5,#" %#,!'#10#%3* 2#2&# !2'4'2'#1-$#,#0%7Q5 2#0 32'*'2'#1T ,"2#*#!-++3,'! 2'-,132'*'2'#1T Refunding: -#2'0',% ** -0  .-02'-, -$ , Natural GasBasis Swap:  $', ,!' * !-,20 !2 -3212 ,"',% -,"'113# $2#02&#$'012! **" 2# 7 2& 2 **-512&#.30!& 1#02-*-!)',2&#.0'!# 31',%+-,#7$0-+2&#1 *#-$ ,#5-$$#0',%T "'$$#0#,!# #25##, 25- , 230 * % 1 "#*'4#07 .-',21-0&3 1Q13!& 12&#6-312-,&'.& ,,#* Regulatory Asset/Liability: .#!'$'! !-121Q ,"6#,0763 QA-3'1' , T 0#4#,3#1 -0 % ',1 2& 2  %-4#0,+#,2 5'2& /3 *'$7',% 0 2#V0#%3* 2#" -.#0 2'-,1 '1 **-5#" Net Costs Recoverable/Refundable: #02 ', 2- "#$#0Q 3,2'* 0#!-4#0#" 2&0-3%& $3230# 0 2#1Q !-121 2& 2 0# 0#/3'0#" 2- # !!03#" 1  2& 2 5-3*" -2'1# # '++#"' 2#*7 0#%3* 2-07 11#2 -0  0#%3* 2-07 *' '*'27 3,"#0 0#!-%,'8#" ', 2&# 12 2#+#,2 -$ 0#4#,3#1Q B2 2#+#,2<-TXT'$0#%3* 2'-,.0-4'"#1 #6.#,1#1 ,"!& ,%#1',,#2.-1'2'-,T 1130 ,!#2& 22
#!-121! , #0#!-4#0#"-0 0#$3,"#"2&0-3%&0 2#1',2&#$3230#T Required Supplementary Information (“RSI”): !&#"3*#1Q 12 2'12'! * " 2  ," -2� Net OPEB Obligation: &# !3+3* 2'4# ',$-0+ 2'-,2& 2 0# ,#11#,2' *. 02-$$', ,!' * "'$$#0#,!# #25##, 2&# ,,3 * 4  !-12 ," 0#.-02',% ,"1&-3*" #.0#1#,2#"5'2&Q 32 0# 2&##+.*-7#01!-,20' 32'-,12-2&#.* ,T ,-2. 02-$Q2&# 1'!$', ,!' *12 2#+#,21-$  %-4#0,+#,2 *#,2'27T NetPensionLiability:&#"'$$#0#,!# #25##, 2&# !23 0' *2-2 *.#,1'-,*' '*'27 ," .#,1'-, Retail Sales: -#2 '* #*#!20'! 1 *#1 5'2&',  .* ,_1 $'"3!' 07 ,#2 .-1'2'-, -$ 1 2&# 32'*'27_1 !#02'$'! 2#" 1#04'!# 0# T *1- 1## +# 130#+#,2" 2#T bI&-*#1 *# *#1Tc

Net Revenue: #0 2&# <#5 #0'#1 -,"  40"', ,!#Q ** ',!-+# ," 0#4#,3#1 $0-+ 2&#

V[Z     ,#0%7 TRSY,,3 *-#.-02   Revenue Bonds: -,"1 '113#" 7  True Interest Cost: &# 0 2#Q !-+.-3,"#" +3,'!'. *'27',5&'!&2&#'113#0.*#"%#12-2&# 1#+'V ,,3 **7Q ,#!#11 07 2- "'1!-3,2 2&# -,"&-*"#01 '21 0#4#,3#1 1 1#!30'27 $-0 2&# +-3,21. 7 *#-,2&#0#1.#!2'4#.0',!'. * ," -,"1T ',2#0#12 . 7+#,2 " 2#1 2- 2&# .30!& 1# .0'!# 0#!#'4#"$-02&#,#5'113#-$ -,"1T SA Energy Acquisition Public Facility Corporation (“PFC”):  .3 *'! ,-,.0-$'2 VariableRate Demand Obligation:  *-,%V !-0.-0 2'-, -0% ,'8#" 3,"#0 2&# * 51 -$ 2&# 2#0+ -," 5'2&  $*- 2',% ',2#0#12 0 2# 2& 2 12 2# -$ #6 1 .3013 ,2 2- 2&# #6 1 3 *'! 4 0'#1 1'2'10#V"#2#0+',#".#0'-"'! **7" '*7Q  !'*'27 -0.-0 2'-, !2Q & .2#0 URUQ #6 1 5##)*7Q1#+'V ,,3 **7Q ,,3 **7Q#2!TT A-! *B-4#0,+#,2-"#T&#-0.-0 2'-,5 1 -0% ,'8#"2- 11'122&#'27-$ ,,2-,'-', WeightedAverage Duration (“WAD”): &# $', ,!',%Q 0#$', ,!',% -0 .0-4'"',% .3 *'! 5#'%&2#"V 4#0 %# 2'+# 2- 0#230,  "-** 0 -$ $ !'*'2'#1Q',!*3"',%, 230 *% 1Q2- #"#4-2#"2- .0',!'. * ," ',2#0#12 ," *1- ',!-0.-0 2#1 .3 *'!31#T .-2#,2' *!& ,%#1',2&#2'+',%-$.0',!'. * ," ',2#0#12 0#230, 2& 2 + 7 -!!30 1  0#13*2 -$ Securities Lending: , ',4#12+#,2 120 2#%7 !& ,%#1',',2#0#120 2#1T02+ )#1 113+.2'-,1 2& 2',4-*4#12&#2#+.-0 07*- ,-$1#!30'2'#12- 0#% 0"',%2&#+-12*')#*72'+',% ," +-3,21-$ ,-2�. 027Q27.'! **7"# *#01T-02&#$3**2'+# 4 0' *#! 1&$*-51 ,"'131#" 1 ,#12'+ 2#-$ 2& 22&#1#!30'2'#1 0#-32-,*- ,Q2 0# 2&# ',2#0#12 0 2# 0'1) -$  $'6#"V',!-+# 1#!30#"5'2&! 1& ," -0,-,! 1&!-** 2#0 *', ',4#12+#,2#1.#!' **7 2&-1# 5'2& . 7+#,2 #6!#11-$2&#4 *3#-$2&#1#!30'2'#12& 2 0#*#,2T 2#0+1"#.#,"#,2-,+ 0)#2',2#0#120 2#1T 0, 0#230, $-0 2&# 31# -$ 1#!30'2'#1Q 2&# *#,"#0 # 0,1 1.0# "-,2&#! 1&.*#"%#" 1!-** 2#0 *T WeightedAverage Maturity (“WAM”): &#  5#'%&2#"V 4#0 %# 2'+# 2- 0#230,  "-** 0 -$ South Texas Project (“STP”):  25-V3,'2 .0',!'. * 1#"-, ,',4#12+#,2_112 2#"$', * ,3!*# 0.* ,25'2& ! . !'27-$TQYRR(I-$ + 230'27T02'131#" 1 ,#12'+ 2#-$2&#',2#0#12 #*#!20'!'27Q #,-3%& 2- .0-4'"# 1#04'!# $-0 +-0# 0 2#0'1)-$ $'6#"V',!-+#',4#12+#,2T 2& ,-,#+'**'-,&-+#1 ," 31',#11#1T WholesaleSales:I&-*#1 *##*#!20'!1 *#1 South Texas Project Nuclear Operating -321'"# 32'*'27_1!#02'$'! 2#"1#04'!# 0# T Company (“STPNOC”):,-2V$-0V.0-$'2#,2'27 *1-1##b-#2 '* *#1Tc 2& 2 .0-4'"#1 $-0 2&# *'!#,1',%Q !-,1203!2'-,Q -.#0 2'-, ,"+ ',2#, ,!#-$2&#(-',2*7-5,#"  ,"-.#0 2#"#*#!20'!%#,#0 2'-,$ !'*'2'#1-$ T   TaxExemptBond: -,"313 **7'113#" 7  +3,'!'. *Q!-3,27-012 2#%-4#0,+#,2$-05&'!& ',2#0#12 . 7+#,21 0# ,-2 13 (#!2 2- 2&# -,"&-*"#01_ $#"#0 * ',!-+# 2 6 ,"Q ', 1-+# ! 1#1Q12 2# ,"*-! *',!-+#2 6T

Transmission Costs of Service (“TCOS”):  $3,!2'-, *!* 11'$'! 2'-,-$#6.#,1#1 ,"! .'2 * #6.#,"'230#1 0#* 2',% 2- 2&# -.#0 2'-, ," + ',2#, ,!#-$2&#20 ,1+'11'-,.* ,2T&# 20 ,1+'11'-, $3,!2'-, '1 2& 2 .-02'-, -$ 2&# 32'*'27 1712#+ 31#" $-0 2&# .30.-1# -$ 20 ,1+'22',% #*#!20'! * #,#0%7 ', 3*) 2- -2� .0',!'. *. 021-$2&#1712#+-02--2�32'*'27 1712#+1T

V[[ [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX C

______

CPS ENERGY

CERTAIN PROVISIONS OF THE ORDINANCE

[THIS PAGE INTENTIONALLY LEFT BLANK] SELECTED PROVISIONS OF THE ORDINANCE

The following constitutes a summary of certain selected provisions of the Ordinance. This summary should be qualified by reference to other provisions of the Ordinance referred to elsewhere in this Official Statement, and all references and summaries pertaining to the Ordinance in this Official Statement are, separately and in whole, qualified by reference to the exact terms of the Ordinance, a copy of which may be obtained from the City.

SECTION 9: Definitions. For all purposes of this Ordinance (as defined below), except as otherwise expressly provided or unless the context otherwise requires: (i) the terms defined in this Section have the meanings assigned to them in this Section, and certain terms used in Sections 37 and 52 of this Ordinance have the meanings assigned to them in such Sections, and all such terms include the plural as well as the singular; (ii) all references in this Ordinance to designated “Sections” and other subdivisions are to the designated Sections and other subdivisions of this Ordinance as originally adopted; and (iii) the words “herein”, “hereof”, and “hereunder” and other words of similar import refer to this Ordinance as a whole and not to any particular Section or other subdivision.

A. The term Additional Junior Lien Obligations shall mean (i) bonds, notes, warrants, certificates of obligation or other obligations hereafter issued by the City payable wholly or in part from and equally and ratably secured, together with the currently outstanding Junior Lien Obligations, by a junior and inferior lien and pledge of the Net Revenues of the System, that is junior and inferior to the lien on and pledge thereof securing the payment of the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City, all as further provided in Section 21 of this Ordinance, and (ii) any obligations issued to refund the foregoing that are payable from and secured by a junior lien on and pledge of the Net Revenues of the System as determined by the City Council in accordance with any applicable law.

B. The term Additional Senior Lien Obligations shall mean (i) any bonds, notes, warrants, certificates of obligation, or other evidences of indebtedness which the City reserves the right to issue or enter into, as the case may be, in the future under the terms and conditions provided in Section 21 of this Ordinance and which are equally and ratably secured solely by a prior and first lien on and pledge of the Pledged Revenues of the System and (ii) any obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and secured by a prior and first lien on and pledge of the Pledged Revenues as determined by the City Council in accordance with applicable law.

C. The term Additional Subordinate Lien Obligations means (i) any bonds, notes, warrants, certificates of obligation, or other Debt hereafter issued by the City that are payable, in whole or in part, from and equally and ratably secured by a lien on and pledge of the Net Revenues, such pledge being subordinate and inferior to the lien on and pledge of the Net Revenues that are or will be pledged to the payment of the currently outstanding Senior Lien Obligations and Junior Lien Obligations and any Additional Senior Lien Obligations or Additional Junior Lien Obligations hereafter issued by the City, but prior and superior to the lien on and pledge of the Net Revenues that are or will be pledged to the payment of any Inferior Lien Obligations hereafter issued by the City, and (ii) obligations hereafter issued to

41423745.2 C-1 refund any of the foregoing if issued in a manner that provides that the refunding bonds are payable from and equally and ratably secured, in whole or in part, by a subordinate and inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

D. The term Authorized Officials shall mean any of the Mayor, the City Clerk, the City Manager, the City’s Chief Financial Officer, the President/Chief Executive Officer of the Board and/or the Senior Vice President/Chief Financial Officer of the Board.

E. The term Average Annual Debt Service Requirements shall mean that average amount which, at the time of computation, will be required to pay the Debt Service Requirements on the Bonds when due (either at Stated Maturity or mandatory redemption) and derived by dividing the total of such Debt Service Requirements by the number of Fiscal Years then remaining before Stated Maturity of such Bonds. For purposes of this definition, a fractional period of a Fiscal Year shall be treated as an entire Fiscal Year. Capitalized interest payments provided from bond proceeds shall be excluded in making the aforementioned computation.

F. The term Board shall mean the Board of Trustees of the System created and described in Section 41 of this Ordinance.

G. The term Bond Fund shall mean the special Fund or account created and established by the provisions of Section 13 of this Ordinance.

H. The term Bonds shall mean the $303,235,000 “CITY OF SAN ANTONIO, TEXAS WATER SYSTEM JUNIOR LIEN REVENUE AND REFUNDING BONDS, SERIES 2015B (NO RESERVE FUND)”, dated February 1, 2015, authorized by this Ordinance.

I. The term City shall mean the City of San Antonio, Texas, located in the State of Texas and, where appropriate, the City Council of the City.

J. The term Closing Date shall mean the date of physical delivery of the Initial Bond(s) for the payment in full by the Purchaser.

K. The term CPS Contract shall mean the Wastewater Contract executed on September 15, 1990 between the Alamo Conservation and Reuse District and the City Public Service Board of San Antonio. Pursuant to Ordinance No. 74983 the City Council abolished the Alamo Conservation and Reuse District and assumed all of such entity’s assets and obligations by creating the Department of Water Reuse as a new City department and a part of the System pursuant to the provisions of the City’s Home Rule Charter.

L. The term Credit Agreement shall mean a loan agreement, revolving credit agreement, agreement establishing a line of credit, letter of credit, reimbursement agreement, insurance contract, commitments to purchase Debt, purchase or sale agreements, interest rate swap agreements, or commitments or other contracts or agreements authorized, recognized, and approved by the City as a Credit Agreement in connection with the authorization, issuance, security, or payment of any Debt.

41423745.2 C-2 M. The term Credit Facility shall mean (i) a policy of insurance or a surety bond, issued by an issuer of policies of insurance insuring the timely payment of debt service on governmental obligations, provided that a rating agency having an outstanding rating on any Debt would rate such Debt fully insured by a standard policy issued by the insurer in its highest generic rating category for such obligations (provided that, at such time that the Previously Issued Junior Lien Obligations issued prior to January 1, 2010 are no longer Outstanding, the requirement of a credit rating in the highest general category shall no longer be of any effect); or (ii) a letter or line of credit issued by any financial institution, provided that a rating agency having an outstanding rating on any Debt would rate such Debt in one of its two highest generic rating categories for such obligations if the letter or line of credit proposed to be issued by such financial institution secured the timely payment of the entire principal amount of such Debt and the interest thereon.

N. The term Debt shall mean

(1) all indebtedness payable from Pledged Revenues and/or Net Revenues incurred or assumed by the City for borrowed money (including indebtedness payable from Pledged Revenues and/or Net Revenues arising under Credit Agreements) and all other financing obligations of the System payable from Pledged Revenues and/or Net Revenues that, in accordance with generally accepted accounting principles, are shown on the liability side of a balance sheet; and

(2) all other indebtedness payable from Pledged Revenues and/or Net Revenues (other than indebtedness otherwise treated as Debt hereunder) for borrowed money or for the acquisition, construction, or improvement of property or capitalized lease obligations pertaining to the System that is guaranteed, directly or indirectly, in any manner by the City, or that is in effect guaranteed, directly or indirectly, by the City through an agreement, contingent or otherwise, to purchase any such indebtedness or to advance or supply funds for the payment or purchase of any such indebtedness or to purchase property or services primarily for the purpose of enabling the debtor or seller to make payment of such indebtedness, or to assure the owner of the indebtedness against loss, or to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether or not such property is delivered or such services are rendered), or otherwise.

For the purpose of determining Debt, there shall be excluded any particular Debt if, upon or prior to the maturity thereof, there shall have been deposited with the proper depository (a) in trust the necessary funds (or investments that will provide sufficient funds, if permitted by the instrument creating such Debt) for the payment, redemption, or satisfaction of such Debt or (b) evidence of such Debt deposited for cancellation; and thereafter it shall not be considered Debt. No item shall be considered Debt unless such item constitutes indebtedness under generally accepted accounting principles applied on a basis consistent with the financial statements of the System in prior Fiscal Years.

O. The term Debt Service Requirements shall mean as of any particular date of computation, with respect to any obligations and with respect to any period, the aggregate of the amounts to be paid or set aside by the City as of such date or in such period for the payment of

41423745.2 C-3 the principal of, premium, if any, and interest (to the extent not capitalized) on such obligations; assuming, in the case of obligations without a fixed numerical rate, that such obligations bear interest calculated by assuming (i) that the interest rate for every 12-month period on such bonds is equal to the rate of interest reported in the most recently published edition of The Bond Buyer (or its successor) at the time of calculation as the “Revenue Bond Index” or, if such Revenue Bond Index is no longer being maintained by The Bond Buyer (or its successor) at the time of calculation, such interest rate shall be assumed to be 80% of the rate of interest then being paid on United States Treasury obligations of like maturity and (ii) that the principal of such bonds is amortized such that annual debt service is substantially level over the remaining stated life of such bonds, and further assuming in the case of obligations required to be redeemed or prepaid as to principal prior to Stated Maturity, the principal amounts thereof will be redeemed prior to Stated Maturity in accordance with the mandatory redemption provisions applicable thereto.

P. The term Depository shall mean one or more official depository banks of the Board.

Q. The term Designated Financial Officer shall mean the President/Chief Executive Officer of the Board, the Senior Vice President/Chief Financial Officer of the Board, or such other financial or accounting official of the Board so designated by the City Council.

R. The term District Special Project means the Special Project created by the City pursuant to Ordinance No. 2011-10-20-0845 adopted by the City Council on October 20, 2011 for the purpose of assuming and operating the former Bexar Metropolitan Water District until integrated with the System.

S. The term Engineer shall mean an individual, firm, or corporation engaged in the engineering profession, being a registered professional engineer under the laws of the State of Texas, having specific experience with respect to water, wastewater, reuse water, and/or stormwater drainage systems similar to the System and such individual, firm, or corporation may be employed by, or may be an employee of, the City or the Board.

T. The term Fiscal Year shall mean the twelve month accounting period used by the Board in connection with the operation of the System, currently ending on December 31 of each year, which may be any twelve consecutive month period established by the Board, but in no event may the Fiscal Year be changed more than one time in any three calendar year period.

U. The term Government Securities means direct obligations of, including obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America, which are non-callable prior to their stated maturities and which may be United States Treasury Obligations such as the State and Local Government Series and may be in book-entry form; however, when the Previously Issued Junior Lien Obligations issued on or before June 3, 1999, are no longer Outstanding, the term Government Securities, as used herein, shall mean (i) direct noncallable obligations of the United States, including obligations that are unconditionally guaranteed by, the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body

41423745.2 C-4 of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; or (iv) any additional securities and obligations hereafter authorized by the laws of the State of Texas as eligible for use to accomplish the discharge of obligations such as the Bonds.

V. The term Gross Revenues for any period means all revenue during such period in respect or on account of the operation or ownership of the System, excluding refundable meter deposits, restricted gifts, grants in aid of construction, any amounts payable to the United States as rebate pursuant to the provisions of Section 37, any impact fees charged by the System pursuant to the provisions of Chapter 395, as amended, Local Government Code, payments received pursuant to the CPS Contract together with earnings and interest thereon, and earnings and income derived from the investment or deposit of money in the Construction Fund and, until the Reserve Fund contains the Required Reserve Amount, the Reserve Fund, but including, earnings and income derived from the investment or deposit of money in the Bond Fund, the Reserve Fund after it contains the Required Reserve Amount, and any earnings and income from any special fund or account created and established for the payment or security of the Senior Lien Obligations, the Junior Lien Obligations, the Bonds, the Subordinate Lien Obligations, or Inferior Lien Obligations, unless the ordinance which authorizes the issuance of any such obligations specifically provides that any such earnings and income are to be deposited to another fund or account other than the System Fund.

W. The term Holder or Holders shall mean the registered owner, whose name appears in the Security Register, for any Bond.

X. The term Inferior Lien Obligations means (i) any bonds, notes, warrants, certificates of obligation, or other Debt hereafter issued by the City that are payable from and equally and ratably secured by a lien on and pledge of the Net Revenues that is subordinate and inferior to the pledge thereof securing payment of the currently outstanding Senior Lien Obligations, Junior Lien Obligations, and Subordinate Lien Obligations or any Additional Senior Lien Obligations, Additional Junior Lien Obligations, or Additional Subordinate Lien Obligations hereafter issued by the City, (ii) any obligations that are issued subject to the limitations in Section 1502.052, as amended, Texas Government Code, and (iii) obligations hereafter issued to refund any of the foregoing if issued in a manner that provides that the refunding bonds are payable from and equally and ratably secured, in whole or in part, by an inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

Y. The term Interest Payment Date shall mean the date semiannual interest is payable on the Bonds, being May 15 and November 15 of each year, commencing May 15, 2015, while any of the Bonds remain Outstanding.

41423745.2 C-5 Z. The term Junior Lien Obligations shall mean the Previously Issued Junior Lien Obligations, the Junior Lien Obligations-No Reserve Fund, and any Additional Junior Lien Obligations (whether issued as Junior Lien Obligations-No Reserve Fund or Reserve Fund- Secured Junior Lien Obligations) hereafter issued by the City or bonds issued to refund any of the foregoing (as determined within the sole discretion of the City Council in accordance with applicable law) if issued in a manner so as to be payable from and equally and ratably secured by a junior lien on and pledge of the Net Revenues of the System.

AA. The term Junior Lien Obligations–No Reserve Fund shall mean the

(1) “City of San Antonio, Texas Water System Junior Lien Revenue Refunding Bonds, Series 2012 (No Reserve Fund)” dated April 1, 2012, in the original principal amount of $31,890,000;

(2) “City of San Antonio, Texas Water System Junior Lien Revenue Refunding Bonds, Series 2013B (No Reserve Fund)”, dated May 1, 2013, in the original principal amount of $82,855,000;

(3) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2013E (No Reserve Fund)” dated October 1, 2013, in the original principal amount of $79,350,000;

(4) “City of San Antonio, Texas Water System Variable Rate Junior Lien Revenue and Refunding Bonds, Series 2013F (No Reserve Fund)” dated October 1, 2013, in the original principal amount of $100,000,000;

(5) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2014A (No Reserve Fund)” dated April 1, 2014, in the original principal amount of $103,930,000;

(6) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2014B (No Reserve Fund)” dated April 1, 2014, in the original principal amount of $100,000,000;

(7) Upon issuance, the Bonds; and any Additional Junior Lien Obligations hereafter issued that are not additionally secured by a lien on and pledge of the Reserve Fund.

BB. The term Maintenance and Operating Expenses shall mean all current expenses of operating and maintaining the System not paid from the proceeds of any Debt, including (1) the cost of all salaries, labor, materials, repairs, and extensions necessary to render efficient service, but only if, in the case of repairs and extensions, that are, in the judgment of the Board (reasonably and fairly exercised), necessary to maintain operation of the System and render adequate service to the City and the inhabitants thereof and other customers of the System, or are necessary to meet some physical accident or condition which would otherwise impair the payment of Debt, (2) payments to pension, retirement, health, hospitalization, and other employee benefit funds for employees of the Board engaged in the operation or maintenance of

41423745.2 C-6 the System, (3) payments under contracts for the purchase of water supply, treatment of sewage, or other materials, goods, or services for the System to the extent authorized by law and the provisions of such contract, (4) payments to auditors, attorneys, and other consultants incurred in complying with the obligations of the City or the Board hereunder, (5) the payments made on or in respect of obtaining and maintaining any Credit Facility, and (6) any legal liability of the City or the Board arising out of the operation, maintenance, or condition of the System, but excluding any allowance for depreciation, property retirement, depletion, obsolescence, and other items not requiring an outlay of cash and any interest on the Bonds or any Debt.

CC. The term Net Revenues shall mean Gross Revenues of the System, with respect to any period, after deducting the System’s Maintenance and Operating Expenses during such period.

DD. The term Ordinance shall mean this ordinance adopted by the City Council on December 11, 2014.

EE. The term Outstanding, when used in this Ordinance with respect to Bonds shall mean as of the date of determination, all Bonds issued and delivered under this Ordinance, except:

(1) those Bonds canceled by the Paying Agent/Registrar or delivered to the Paying Agent/Registrar for cancellation;

(2) those Bonds for which payment has been duly provided by the City in accordance with the provisions of Section 39 of this Ordinance by the irrevocable deposit with the Paying Agent/Registrar, or an authorized escrow agent, of money or Government Obligations, or both, in the amount necessary to fully pay the principal of, premium, if any, and interest thereon to maturity or redemption, as the case may be, provided that, if such Bonds are to be redeemed, notice of redemption thereof shall have been duly given pursuant to this Ordinance or irrevocably provided to be given to the satisfaction of the Paying Agent/Registrar, or waived; and

(3) those Bonds that have been mutilated, destroyed, lost, or stolen and for which replacement Bonds have been registered and delivered as provided in Section 32 of this Ordinance.

FF. The term Pledged Revenues means (1) the Net Revenues, plus (2) any additional revenues, income, receipts, or other resources, including, without limitation, any grants, donations, or income received or to be received from the United States Government, or any other public or private source, whether pursuant to an agreement or otherwise, which hereafter are pledged by the City to the payment of the Senior Lien Obligations, and excluding those revenues excluded from Gross Revenues.

GG. The term Previously Issued Junior Lien Obligations shall mean (i) the outstanding and unpaid obligations of the City that are payable solely from and equally and ratably secured by a junior and inferior lien on and pledge of the Pledged Revenues of the System, identified as follows:

41423745.2 C-7 (1) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2007”, dated December 15, 2006 (the Series 2007 Bonds), in the original principal amount of $8,070,000;

(2) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2007A”, dated December 15, 2006(the Series 2007A Bonds), in the original principal amount of $35,375,000;

(3) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2008”, dated May 15, 2008, in the original principal amount of $30,000,000;

(4) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2008A”, dated May 15, 2008, in the original principal amount of $23,260,000;

(5) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2009”, dated November 1, 2009, in the original principal amount of $54,300,000;

(6) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2009A”, dated November 1, 2009, in the original principal amount of $35,000,000;

(7) “City of San Antonio, Texas Water System Junior Lien Revenue Refunding Bonds, Series 2010”, dated February 1, 2010, in the original principal amount of $59,145,000;

(8) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2010A”, dated December 1, 2010 (the Series 2010 Refunding Bonds), in the original principal amount of $17,930,000;

(9) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2011”, dated May 15, 2011, in the original principal amount of $24,550,000;

(10) “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2011A”, dated May 15, 2011, in the original principal amount of $18,095,000;

(11) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2012”, dated August 1, 2012, in the original principal amount of $19,630,000;

(12) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2013A”, dated April 1, 2013, in the original principal amount of $50,000,000;

(13) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2013D”, dated October 1, 2013 in the original principal amount of $60,100,000;

(14) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2013C”, dated November 1, 2013 in the original principal amount of $26,370,000;

41423745.2 C-8 (15) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2014C”, dated May 15, 2014 in the original principal amount of $38,260,000;

(16) “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2014D”, dated May 15, 2014 in the original principal amount of $22,400,000;

(17) Upon issuance, the Series 2015A Bonds; and (ii) obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and equally and ratably secured by a junior and inferior lien on and pledge of the Net Revenues of the System as determined by the City Council in accordance with any applicable law.

HH. The term Prudent Utility Practice shall mean any of the practices, methods, and acts, in the exercise of reasonable judgment, in the light of the facts, including but not limited to the practices, methods, and acts engaged in or previously approved by a significant portion of the public utility industry, known at the time the decision was made, that would have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety, and expedition. It is recognized that Prudent Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather is a spectrum of possible practices, methods, or acts which could have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety, and expedition. In the case of any facility included in the System which is operated in common with one or more other entities, the term Prudent Utility Practice, as applied to such facility, shall have the meaning set forth in the agreement governing the operation of such facility.

II. The term Purchaser shall mean the initial purchaser or purchasers of the Bonds named in Section 33 of this Ordinance.

JJ. The term Rating Agency shall mean any nationally recognized securities rating agency which has assigned a rating to the Senior Lien Obligations.

KK. The term Required Reserve Amount shall mean the amount required to be deposited and maintained in the Reserve Fund under the respective City ordinances authorizing the issuance of each series of Reserve Fund–Secured Junior Lien Obligations.

LL. The term Required Reserve Fund Deposits shall mean the monthly deposits, if any, required to be deposited and maintained in the Reserve Fund under the respective City ordinances authorizing the issuance of each series of Reserve Fund–Secured Junior Lien Obligations.

MM. The term Reserve Fund-Secured Junior Lien Obligations shall mean the Previously Issued Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued that are secured by a parity lien on and pledge of the Reserve Fund and specifically excluding the Junior Lien Obligations–No Reserve Fund.

NN. The term Reserve Fund shall mean the special fund of the City known as the “City of San Antonio, Waterworks and Sewer System Junior Lien Bond Reserve Fund”

41423745.2 C-9 established and maintained pursuant to the terms and provisions of the respective City ordinances authorizing the issuance of each series of Reserve Fund-Secured Junior Lien Obligations.

OO. The term Senior Lien Obligations shall mean (i) the outstanding and unpaid obligations of the City that are payable solely from and equally and ratably secured by a prior and first lien on and pledge of the Pledged Revenues of the System, identified as follows:

(1) “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 2005”, dated November 15, 2005 in the original principal amount of $298,220,000;

(2) “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 2007”, dated January 15, 2007 in the original principal amount of $311,160,000;

(3) “City of San Antonio, Texas Water System Revenue and Refunding Bonds, Series 2009”, dated January 15, 2009 in the original principal amount of $163,755,000;

(4) “City of San Antonio, Texas Water System Revenue Bonds, Series 2009A”, dated November 1, 2009 in the original principal amount of $12,250,000;

(5) “City of San Antonio, Texas Water System Revenue Bonds, Taxable Series 2009B (Direct Subsidy–Build America Bonds)”, dated November 1, 2009 in the original principal amount of $102,750,000;

(6) “City of San Antonio, Texas Water System Revenue Bonds, Taxable Series 2010B (Direct Subsidy–Build America Bonds)”, dated November 15, 2010 in the original principal amount of $110,000,000;

(7) “City of San Antonio, Texas Water System Revenue and Refunding Bonds, Series 2011”, dated March 15, 2011 in the original principal amount of $46,555,000;

(8) “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 2011A”, dated August 15, 2011 in the original principal amount of $165,090,000;

(11) “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 2012”, dated February 1, 2012 in the original principal amount of $225,255,000; and

(12) “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 2012A”, dated September 1, 2012 in the original principal amount of $163,435,000; and (ii) obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and equally and ratably secured by a first lien on and pledge of the Pledged

41423745.2 C-10 Revenues of the System as determined by the City Council in accordance with any applicable law.

PP. The term Series 1992 Bonds shall mean the “City of San Antonio, Texas Water System Revenue Refunding Bonds, Series 1992” originally issued in the aggregate principal amount of $635,925,000 pursuant to Ordinance No. 75686 that are no longer outstanding.

QQ. The term Series 2015A Bonds shall mean the “City of San Antonio, Texas Water System Junior Lien Revenue Bonds, Series 2015A, dated November 15, 2014, in the original principal amount of $75,920,000, authorized pursuant to a City ordinance adopted by the City Council on December 11, 2014, issued as Additional Junior Lien Obligations and sold to the Texas Water Development Board pursuant to its Drinking Water State Revolving Fund Program for the purpose of financing system improvements and paying the costs of their issuance.

RR. The term Special Project shall mean, to the extent permitted by law, any water, sewer, wastewater reuse, or municipal drainage system property, improvement, or facility declared by the City, upon the recommendation of the Board, not to be part of the System, for which the costs of acquisition, construction, and installation are paid from proceeds of a financing transaction other than the issuance of bonds payable from ad valorem taxes, Pledged Revenues, or Net Revenues and for which all maintenance and operation expenses are payable from sources other than ad valorem taxes, Pledged Revenues, or Net Revenues, but only to the extent that and for so long as all or any part of the revenues or proceeds of which are or will be pledged to secure the payment or repayment of such costs of acquisition, construction, and installation under such financing transaction and which includes the District Special Project.

SS. The term Stated Maturity shall mean the annual principal payments of the Bonds payable on May 15 of each year, as set forth in Section 2 of this Ordinance.

TT. The term Subordinate Lien Obligations shall mean (i) the currently outstanding and unpaid obligations of the City that are payable wholly or in part from a lien on and pledge of the Net Revenues that is subordinate and inferior to the pledge thereof securing payment of the currently outstanding Senior Lien Obligations and the Junior Lien Obligations or any Additional Senior Lien Obligations or Additional Junior Lien Obligations, all as further provided in Section 21 of the Ordinance, identified as follows:

(1) “City of San Antonio, Texas Water System Commercial Paper Notes, Series A” and “City of San Antonio, Texas Water System Commercial Paper Notes, Series B”, authorized in the aggregate principal amount of $500,000,000, and including the currently outstanding Commercial Paper Notes and Loan Notes (each as defined in the ordinance authorizing the issuance of such series of Commercial Paper Notes); and (ii) obligations hereafter issued to refund any of the foregoing if issued in a manner that provides that the refunding bonds are payable from and equally and ratably secured, in whole or in part, by an inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

UU. The term System shall mean all properties, facilities, and plants currently owned, operated, and maintained by the City and/or the Board for the supply, treatment, and

41423745.2 C-11 transmission and distribution of treated potable water, chilled water, and steam, for the collection and treatment of wastewater, and for water reuse, together with all future extensions, improvements, purchases, repairs, replacements and additions thereto, whether situated within or without the limits of the City, all water (in any form) owned by the City, and any other projects and programs of the Board; provided, however, that the City expressly retains the right to incorporate (1) a stormwater system as provided by the provisions of Section 402.041 through 402.054, as amended, Local Government Code, or other similar law, and (2) any other related system as provided by the laws of the State of Texas as a part of the System. The System shall not include any Special Project or any water or water-related properties and facilities owned by the City as part of its electric and gas systems.

SECTION 11: Rates and Charges. For the benefit of the Holders of the Bonds and in addition to all provisions and covenants in the laws of the State of Texas and in this Ordinance, the City hereby expressly stipulates and agrees, while any of the currently outstanding Junior Lien Obligations are Outstanding, to establish and maintain rates and charges for facilities and services afforded by the System that are reasonably expected, on the basis of available information and experience and with due allowance for contingencies, to produce Gross Revenues in each Fiscal Year sufficient:

A. To pay all Maintenance and Operating Expenses, or any expenses required by statute to be a first claim on and charge against the Gross Revenues of the System;

B. To produce Pledged Revenues, together with any other lawfully available funds, sufficient to satisfy the rate covenant contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations and to pay the principal of and interest on the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City and the amounts required to be deposited in any reserve or contingency fund or account created for the payment and security of the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City, and any other obligations or evidences of indebtedness issued or incurred that are payable from and secured solely by a prior and first lien on an pledge of the Net Revenues of the System;

C. To produce Net Revenues, together with any other lawfully available funds, to pay the principal of and interest on the currently outstanding Junior Lien Obligations as the same become due and payable and to deposit the amounts required to be deposited in any special fund or account created and established for the payment and security of the Additional Junior Lien Obligations hereafter issued by the City, and any other obligations or evidences of indebtedness issued or incurred that are payable from and secured solely by a junior lien on and pledge of the Net Revenues of the System;

D. To produce Net Revenues, together with any other lawfully available funds, to pay the principal of and interest on the currently outstanding Subordinate Lien Obligations and any Additional Subordinate Lien Obligations hereafter issued by the City as the same become due and payable and to deposit the amounts required to be deposited in any special fund or account created and established for the payment and security of the currently outstanding Subordinate Lien Obligations and any Additional Subordinate Lien Obligations, and any other

41423745.2 C-12 obligations or evidences of indebtedness issued or incurred that are payable from and secured, in whole or in part, by a subordinate lien on and pledge of the Net Revenues of the System;

E. To produce Net Revenues, together with any other lawfully available funds, to pay the principal of and interest on any Inferior Lien Obligations hereafter issued by the City as the same become due and payable and to deposit the amounts required to be deposited in any special fund or account created and established for the payment and security of any Inferior Lien Obligations hereafter issued by the City, and any other obligations or evidences of indebtedness issued or incurred that are payable from and secured by a lien on and pledge of the Net Revenues of the System in accordance with applicable law;

F. To produce Net Revenues, together with any other lawfully available funds, to fund the transfers as permitted by the provisions of Section 15 of this Ordinance; and

G. To pay, together with any other lawfully available funds, any other legally incurred Debt payable from the Net Revenues of the System and/or secured by a lien on the System.

SECTION 12: System Fund. The City hereby covenants, agrees, and reaffirms that the Gross Revenues of the System shall be deposited, as collected and received, into a separate Fund or account (previously created, established, and to be maintained with the Depository) known as the “City of San Antonio, Texas Water System Revenue Fund” (the System Fund) and that the Gross Revenues of the System shall be kept separate and apart from all other funds of the City. All Gross Revenues deposited into the System Fund shall be pledged and appropriated to the extent required for the following uses and in the order of priority shown:

• FIRST: to the payment of all necessary and reasonable Maintenance and Operating Expenses as defined herein or required by statute, including, but not limited to, Chapter 1502, as amended, Texas Government Code (formerly Texas Revised Civil Statutes Annotated Article 1113, as amended), to be a first charge on and claim against the Gross Revenues, including a two-month reserve amount based upon the budgeted amount of Maintenance and Operating Expenses for the current Fiscal Year, which amount shall be retained in the System Fund.

• SECOND: to the payment of the amounts required to be deposited into the special funds and accounts created and established for the payment, security and benefit of the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City.

• THIRD: to the payment of the amounts required to be deposited into the special funds and accounts created and established for the payment, security and benefit of the currently outstanding Junior Lien Obligations, and any Additional Junior Lien Obligations hereafter issued by the City.

• FOURTH: to the payment of the amounts that must be deposited in any special funds and accounts created and established for the payment, security and benefit

41423745.2 C-13 of the currently outstanding Subordinate Lien Obligations and any Additional Subordinate Lien Obligations hereafter issued by the City.

• FIFTH: to the payment of the amounts that must be deposited in any special funds and accounts created and established for the payment, security, and benefit of any Inferior Lien Obligations hereafter issued by the City.

• SIXTH: to the payment of the amounts to be transferred to the City’s General Fund as provided in Section 15 hereof and into the Renewal and Replacement Fund created and established by Section 16 hereof.

Any Net Revenues remaining in the System Fund after satisfying the foregoing payments, or making adequate and sufficient provision for the payment thereof, may be appropriated and used for any other City purpose now or hereafter permitted by law and the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations.

SECTION 13: Bond Fund; Excess Bond Proceeds. For purposes of providing funds to pay the principal of and interest on the currently outstanding Junior Lien Obligations as the same become due and payable, the City agrees to maintain, at the Depository, a separate and special Fund or account to be created and known as the “City of San Antonio, Texas Water System Junior Lien Revenue and Refunding Bonds, Series 2015B Interest and Sinking Fund” (the Bond Fund). The City covenants that there shall be deposited by the Designated Financial Officer into the Bond Fund prior to each principal and Interest Payment Date from the available Net Revenues an amount equal to one hundred percent (100%) of the amount required to fully pay the interest on and the principal of the currently outstanding Junior Lien Obligations then falling due and payable, such deposits to pay maturing principal and accrued interest on the currently outstanding Junior Lien Obligations to be made in substantially equal monthly installments on or before the tenth day of each month, beginning on or before the tenth day of the month next following the delivery of the Bonds to the Purchaser. If the Net Revenues in any month are insufficient to make the required payments into the Bond Fund, then the amount of any deficiency in such payment shall be added to the amount otherwise required to be paid into the Bond Fund in the next month.

The required monthly deposits to the Bond Fund for the payment of principal of and interest on the currently outstanding Junior Lien Obligations shall continue to be made as hereinabove provided until such time as (i) the total amount on deposit in the Bond Fund and Reserve Fund is equal to the amount required to fully pay and discharge all outstanding Junior Lien Obligations (principal and interest) or, (ii) the Junior Lien Obligations are no longer Outstanding.

Accrued interest, if any, received from the Purchaser shall be taken into consideration and reduce the amount of the monthly deposits hereinabove required to be deposited into the Bond Fund from the Net Revenues of the System. Additionally, any proceeds of the Bonds, and investment income thereon, not expended for authorized purposes shall be deposited into the Bond Fund and shall be taken into consideration and reduce the amount of monthly deposits required to be deposited into the Bond Fund from the Net Revenues of the System.

41423745.2 C-14 SECTION 14: Reserve Fund. For the benefit of the Reserve Fund-Secured Junior Lien Obligations and not the Junior Lien Obligations–No Reserve Fund (which includes the Bonds), the City has heretofore established and now maintains the Reserve Fund. The Reserve Fund is maintained pursuant to the provisions of the respective City ordinances authorizing the issuance of the Reserve Fund-Secured Junior Lien Obligations. Though the Reserve Fund does not secure the Bonds or the other Junior Lien Obligations–No Reserve Fund, the City hereby acknowledges and affirms its rights duties, and obligations with respect to the Reserve Fund included in the respective City ordinances authorizing the issuance of the Reserve Fund-Secured Junior Lien Obligations.

The City hereby acknowledges, reserves and confirms its right to issue Additional Junior Lien Obligations as Junior Lien Obligations–No Reserve Fund, being obligations not benefited by the additional pledge of the Reserve Fund, provided that such Additional Junior Lien Obligations issued as Junior Lien Obligations–No Reserve Fund are not sold to the Texas Water Development Board. In such instance, those Additional Junior Lien Obligations issued as Junior Lien Obligations–No Reserve Fund shall be (i) designated as such by including the parenthetical “(No Reserve Fund)” to the style of the subject obligations in all related transaction documentation (including, but not limited to, the City ordinance authorizing the issuance of such Additional Junior Lien Obligations and the Form of Bond therefor) to clearly distinguish such Additional Junior Lien Obligations from those Junior Lien Obligations that are Reserve Fund– Secured Junior Lien Obligations and (ii) excluded from all calculations identified in and requirements of this Section and other applicable sections of any ordinance authorizing the issuance of Additional Junior Lien Obligations concerning amounts at any time required to be deposited to and held in the Reserve Fund. Any disclosure or similar document used to market and sell Additional Junior Lien Obligations issued as Junior Lien Obligations–No Reserve Fund shall clearly indicate that the holders of such Additional Junior Lien Obligations shall have no right to or claim on the funds at any time held in the Reserve Fund.

SECTION 15: Payments to City General Fund.

A. The Designated Financial Officer of the Board shall transfer no later than the last business day of each month, an amount of money calculated, subject to the second paragraph of Section 16, not to exceed 5% (or such lesser amount as may be determined from time to time by the City Council) of the Gross Revenues (after making each of the payments required by the provisions of subparagraphs First through Fifth of Section 12 hereof) for the preceding month to be utilized by the City in the manner permitted by the provisions of Chapter 1502, as amended, Texas Government Code (formerly Texas Revised Civil Statutes Annotated Article 1113a, as amended). The amount so transferred shall be net of all amounts owed by the City to the Board for the utility services described in Section 25E hereof; provided, however, that the Board shall provide the City with a sufficiently detailed statement of charges for such utility services to permit the City to allocate the charges for such utility services to the appropriate office, division, or department of the City.

B. To the extent that the available Net Revenues in any month are insufficient for the Board to make all or part of the transfer required by the preceding paragraph, the Board shall make up such shortfall (i) in the next month in which available Net Revenues exceed the amounts required to make the transfer to the City pursuant to the preceding paragraph and the

41423745.2 C-15 pari passu payment to the Renewal and Replacement Fund under Section 16 or (ii) to the extent such shortfall has not been made up by the last month of the Fiscal Year, solely from any surplus funds deposited into the Renewal and Replacement Fund for such Fiscal Year. The Board’s obligation to make up any shortfall in a Fiscal Year shall not carry over to a subsequent Fiscal Year.

SECTION 16: Renewal and Replacement Fund. There has previously been created and established and there shall be maintained on the books of the Board, and accounted for separate and apart from all other funds of the City and the Board, a separate fund to be entitled the “City of San Antonio, Texas Water System Renewal and Replacement Fund” (the Renewal and Replacement Fund). The Renewal and Replacement Fund shall be used for the purpose of (1) paying the costs of improvements, enlargements, extensions, additions, replacements, or other capital expenditures related to the System, or (2) paying the costs of unexpected or extraordinary repairs or replacements of the System for which System funds are not available, or (3) paying unexpected or extraordinary expenses of operation and maintenance of the System for which System funds are not otherwise available, or (4) depositing any funds received by the City pursuant to the CPS Contract, and such funds, including any interest or income thereon, shall be maintained in a separate, segregated account of the Renewal and Replacement Fund and shall only be used to pay Maintenance and Operating Expenses of the water reuse facilities of the System or the debt service requirements on any obligations incurred as permitted by the CPS Contract and in no event shall any such amount, including interest and income thereon, be transferred to the general fund of the City except as permitted by the CPS Contract, or (5) paying bonds or other obligations of the System for which other System revenues are not available, or (6) in the last month of any Fiscal Year to make up any shortfall as required by Section 15B, or (7) for any other lawful purpose in support of the System. The Renewal and Replacement Fund shall be maintained at the Depository.

Deposits to the Renewal and Replacement Fund shall be pari passu with the gross amount payable to the City pursuant to Section 15 (prior to the deduction of any charges for utility services provided pursuant to Section 25E) until the full amount payable to the City under such Section has been paid. That is, such deposits to the Renewal and Replacement Fund shall be made equally and ratably, without preference, and on a dollar-for-dollar basis with the gross amount payable to the City pursuant to Section 15, prior to the deduction of any charges for services, until the full amount to be paid to the City in a Fiscal Year under Section 15 has been transferred to the City’s General Fund. Thereafter, all surplus Net Revenues shall be deposited to the Renewal and Replacement Fund.

SECTION 17: Deficiencies - Excess Net Revenues.

A. If on any occasion there shall not be sufficient Net Revenues of the System (after making all payments pertaining to the currently outstanding Senior Lien Obligations or any Additional Senior Lien Obligations hereafter issued by the City) to make the required deposits into the Bond Fund and the Reserve Fund, then such deficiency shall be cured as soon as possible from the next available unallocated Net Revenues of the System, or from any other sources available for such purpose, and such payments shall be in addition to the amounts required to be paid into these Funds or accounts during such month or months.

41423745.2 C-16 B. Subject to making the required deposits to the Bond Fund and the Reserve Fund when and as required by this Ordinance, or any ordinance authorizing the issuance of any Additional Junior Lien Obligations (as applicable), or the payments required by the provisions of the ordinances authorizing the issuance of the currently outstanding Subordinate Lien Obligations and any Additional Subordinate Lien Obligations hereafter issued by the City and any Inferior Lien Obligations hereafter issued by the City, the excess Net Revenues of the System may be used by the City for any lawful purpose in accordance with the provisions of the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations.

SECTION 18: Payment of Bonds. While any of the Bonds are outstanding, any Designated Financial Officer or Authorized Official shall cause to be transferred to the Paying Agent/Registrar therefor, from funds on deposit in the Bond Fund, and, if necessary, in the Reserve Fund, amounts sufficient to fully pay and discharge promptly each installment of interest on and principal of the Bonds as such installment accrues or matures; such transfer of funds must be made in such manner as will cause immediately available funds to be deposited with the Paying Agent/Registrar for the Bonds at the close of the business day next preceding the date a debt service payment is due on the Bonds.

SECTION 21: Issuance of Additional Senior Lien Obligations, Additional Junior Lien Obligations, Additional Subordinate Lien Obligations, and Inferior Lien Obligations. The City hereby expressly reserves the right to hereafter issue bonds, notes, warrants, certificates of obligation, or similar obligations, payable, wholly or in part, as appropriate, from and secured by a pledge of and lien on the Net Revenues of the System with the following priorities, without limitation as to principal amount, but subject to any terms, conditions, or restrictions applicable thereto under existing ordinances, laws, or otherwise:

A. Additional Senior Lien Obligations payable from and equally and ratably secured by a first and prior lien on and pledge of the Pledged Revenues of the System upon satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations;

B. Additional Junior Lien Obligations (except for Additional Junior Lien Obligations that are insured by a municipal bond insurance policy, which need not satisfy the provisions of paragraph B(2) or B(3) hereof), payable from and equally and ratably secured by a junior and inferior lien on and pledge of the Net Revenues of the System, upon satisfying each of the following conditions precedent:

(1) the Chief Financial Officer of the City (or other official of the City having primary responsibility for the fiscal affairs of the City) shall have executed a certificate stating that (i) except for a refunding to cure a default, or the deposit of a portion of the proceeds of any Additional Junior Lien Obligations to satisfy the City’s obligations under this Ordinance, the City is not then in default as to any covenant, obligation, or agreement contained in any ordinance or other proceedings relating to any obligations of the City payable from and secured by a lien on and pledge of the Net Revenues of the System and (ii) all payments into all special funds or accounts created and established for the payment and security of all outstanding obligations payable from and secured by a lien on and pledge of the Net Revenues of the System have been duly made and that the amounts

41423745.2 C-17 on deposit in such special funds or accounts are the amounts then required to be deposited therein;

(2) with respect to Additional Junior Lien Obligations sold to the Texas Water Development Board (the TWDB) that are not insured by a municipal bond insurance policy, the City has secured from a Certified Public Accountant a certificate or opinion to the effect that, according to the books and records of the City, the Net Revenues of the System, for the preceding Fiscal Year or for any 12 consecutive months out of the 18 months immediately preceding the month the ordinance authorizing the Additional Junior Lien Obligations is adopted, are at least equal to one and one-fourth (1-1/4) times the average annual requirement for the payment of principal of and interest on all outstanding Junior Lien Obligations after giving effect to the Additional Junior Lien Obligations then proposed. In making a determination of the Net Revenues, the Accountant may take into consideration a change in the rates and charges for services and facilities afforded by the System that became effective at least sixty (60) days prior to the last day of the period for which Net Revenues are to be determined and, for purposes of satisfying the above Net Revenues test, make a pro forma determination of the Net Revenues for the period of time covered by his certification or opinion based on such change in rates and charges being in effect for the entire period covered by the Accountant’s certificate or opinion;

(3) with respect to Additional Junior Lien Obligations sold to any other entity other than the TWDB and that are not insured by a municipal bond insurance policy, the City has secured from a Certified Public Accountant a certificate or opinion to the effect that, according to the books and records of the City, the Net Revenues of the System, for the preceding Fiscal Year or for any 12 consecutive months out of the 18 months immediately preceding the month the ordinance authorizing the Additional Junior Lien Obligations is adopted, are at least equal to the average annual requirement for the payment of principal of and interest on all outstanding Junior Lien Obligations after giving effect to the Additional Junior Lien Obligations then proposed. In making a determination of the Net Revenues, the Accountant may take into consideration a change in the rates and charges for services and facilities afforded by the System that became effective at least sixty (60) days prior to the last day of the period for which Net Revenues are to be determined and, for purposes of satisfying the above Net Revenues test, make a pro forma determination of the Net Revenues for the period of time covered by his certification or opinion based on such change in rates and charges being in effect for the entire period covered by the Accountant’s certificate or opinion;

(4) the ordinance authorizing the issuance of the Additional Junior Lien Obligations provides for deposits to be made to the Bond Fund in amounts sufficient to pay the principal of and interest on such Additional Junior Lien Obligations as the same mature; and

(5) the ordinance authorizing the issuance of the Additional Junior Lien Obligations that are Reserved Fund–Secured Junior Lien Obligations provides that the amount to be accumulated and maintained in the Reserve Fund shall be in an amount equal to not less than the Average Annual Debt Service Requirements for the payment of the Junior Lien Obligations then outstanding, inclusive of the changes in the amount

41423745.2 C-18 resulting from the issuance of the proposed Additional Junior Lien Obligations that are Reserved Fund–Secured Junior Lien Obligations, and provides that any additional amount to be maintained in the Reserve Fund shall be accumulated within sixty (60) months from the date the Additional Junior Lien Obligations that are Reserved Fund– Secured Junior Lien Obligations are delivered; provided, however, that no such requirement as it relates to additional amounts to be deposited to the Reserve Fund shall be applicable to, or serve as a condition to the issuance of, Additional Junior Lien Obligations that are or will be Junior Lien Obligations–No Reserve Fund.

C. Additional Subordinate Lien Obligations secured by a subordinate and inferior lien on and pledge of the Net Revenues upon satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, outstanding Subordinate Lien Obligations, or this Ordinance, as appropriate.

D. Inferior Lien Obligations secured by a lien on and pledge of the Net Revenues of the System upon satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations or this Ordinance.

SECTION 22: Issuance of Special Project Obligations. Nothing in this Ordinance shall be construed to deny the City the right and it shall retain the right to issue Special Project obligations, provided, however, the City will not issue Special Project obligations unless the City concludes, upon recommendation of the Board, that (i) the plan for developing the Special Project is consistent with sound planning, (ii) the Special Project would not materially and adversely interfere with the operation of the System, (iii) the Special Project can be economically and efficiently operated and maintained, and (iv) the Special Project can be economically and efficiently utilized by the Board to meet water, wastewater, water reuse, or stormwater drainage requirements and the cost of such will be reasonable.

SECTION 23: Maintenance of System - Insurance. The City covenants and agrees that while the Junior Lien Obligations remain outstanding the Board will maintain and operate the System in accordance with Prudent Utility Practice and will maintain casualty and other insurance on the properties of the System and its operations of a kind and in such amounts customarily carried by municipal corporations in the State of Texas engaged in a similar type of business (which may include an adequate program of self-insurance); and that it will faithfully and punctually perform all duties with reference to the System required by the laws of the State of Texas. All money received from losses under such insurance policies, other than public liability policies, shall be retained for the benefit of the Holders of the Bonds until and unless the proceeds are paid out in making good the loss or damage in respect of which such proceeds are received, either by replacing the property destroyed or repairing the property damaged, and adequate provision for making good such loss or damage must be made within ninety (90) days after the date of loss. The payment of premiums for all insurance policies required under the provisions hereof and the costs associated with the maintenance of any self-insurance program shall be considered Maintenance and Operating Expenses. Nothing in this Ordinance shall be construed as requiring the City or the Board to expend any funds which are derived from sources other than the operation of the System, but nothing herein shall be construed as preventing the City or the Board from doing so.

41423745.2 C-19 SECTION 24: Records and Accounts - Annual Audit. The City covenants, agrees, and affirms its covenants that so long as any of the Bonds remain outstanding, it will keep and maintain separate and complete records and accounts pertaining to the operations of the System in which complete and correct entries shall be made of all transactions relating thereto, as provided by Chapter 1502, as amended, Texas Government Code, or other applicable law. The Holders of the Bonds or any duly authorized agent or agents of such Holders shall have the right to inspect the System and all properties comprising the same. The City further agrees that following (and in no event later than 120 days after) the close of each Fiscal Year, it will cause an audit of such books and accounts to be made by an independent firm of Certified Public Accountants. Expenses incurred in making the annual audit of the operations of the System are to be regarded as Maintenance and Operating Expenses.

SECTION 25: Special Covenants. The City hereby further covenants that:

A. It has the lawful power to pledge the Net Revenues supporting the Bonds and has lawfully exercised this power under the laws of the State of Texas, including the power existing under Chapters 1207, 1371, and 1502, as amended, Texas Government Code, and the City’s Home Rule Charter;

B. The Bonds shall be equally and ratably secured by a junior lien on and pledge of the Net Revenues of the System in a manner that one Bond shall have no preference over any other Bond;

C. Other than for the payment of the currently outstanding Senior Lien Obligations, Junior Lien Obligations, and the Subordinate Lien Obligations, the Net Revenues of the System have not in any manner been pledged to the payment of any debt or obligation of the City or of the System;

D. As long as any Bonds, or any interest thereon, remain Outstanding, the City will not sell, lease, or encumber the System or any substantial part thereof (except as provided in Section 21 of this Ordinance) provided that this covenant shall not be construed to prohibit the sale of such machinery, or other properties or equipment which has become obsolete or otherwise unsuited to the efficient operation of the System;

E. No free service (except water provided to the City for municipal fire-fighting purposes and certain stormwater utility service) of the System shall be allowed, and, should the City or any of its agencies or instrumentalities make use of the services and facilities of the System, payment of the reasonable value thereof shall be made, if necessary, by the City pursuant to Section 15; and

F. To the extent that it legally may, the City further covenants and agrees that, so long as any of the Bonds, or any interest thereon, are Outstanding, no franchise shall be granted for the installation or operation of any competing utility systems other than those owned by the City, and the operation of any such systems by anyone other than the City is hereby prohibited.

SECTION 26: Limited Obligations of the City. The Bonds are limited, special obligations of the City payable from and equally and ratably secured solely by a junior lien on and pledge of the Net Revenues of the System, and the Holders thereof shall never have the right

41423745.2 C-20 to demand payment of the principal or interest on the Bonds from any funds raised or to be raised through taxation by the City.

SECTION 27: Security of Funds. All money on deposit in the Funds or accounts for which this Ordinance makes provision (except any portion thereof as may be at any time properly invested as provided herein) shall be secured in the manner and to the fullest extent required by the laws of Texas for the security of public funds, and money on deposit in such Funds or accounts shall be used only for the purposes permitted by this Ordinance.

SECTION 28: Remedies in Event of Default. In addition to all the rights and remedies provided by the laws of the State of Texas, the City covenants and agrees particularly that in the event the City (a) defaults in the payments to be made to the Bond Fund or Reserve Fund, or (b) defaults in the observance or performance of any other of the covenants, conditions, or obligations set forth in this Ordinance, the Holders of any of the Bonds shall be entitled to seek a writ of mandamus issued by a court of proper jurisdiction compelling and requiring the governing body of the City and other officers of the City to observe and perform any covenant, condition, or obligation prescribed in this Ordinance.

SECTION 40: Ordinance a Contract; Amendments - Outstanding Bonds. The City acknowledges that the covenants and obligations of the City herein contained are a material inducement to the purchase of the Bonds. This Ordinance shall constitute a contract with the Holders from time to time, binding on the City and its successors and assigns, and it shall not be amended or repealed by the City so long as any Bond remains Outstanding except as permitted in this Section. The City may, without the consent of or notice to any Holders, from time to time and at any time, amend this Ordinance in any manner not detrimental to the interests of the Holders, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the City may, with the written consent of Holders holding a majority in aggregate principal amount of the Bonds then Outstanding affected thereby, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Holders of Outstanding Bonds, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission.

SECTION 41: Management of System.

A. Pursuant to the authority contained in Chapter 1502, as amended, Texas Government Code (formerly Texas Revised Civil Statutes Annotated Article 1115b, as amended), except as otherwise specifically provided in this Ordinance, the complete management and control of the System during such time as any Debt is outstanding shall be vested in a seven-member board of trustees to be known as the “San Antonio Water System Board of Trustees”. Such board is referred to in this Ordinance as the “Board.” The Mayor of the City from time to time shall ex-officio be one of the members of the Board, and the other current members of the Board as of the date of passage of this Ordinance are Heriberto “Berto” Guerra and Pat Merritt, each currently serving a term ending May 31, 2018; Louis E. Rowe,

41423745.2 C-21 Ernesto Arrellano, Jr., and W. Reed Williams, each serving terms ending May 31, 2017; and Patricia Jasso serving a term ending May 31, 2016. Notwithstanding the foregoing, the Members of the Board may be increased to a number greater than seven (7), to include the Mayor of the City as an ex-officio member, as otherwise appointed by the City.

B. Members of the Board must be citizens of the United States and must either reside inside the corporate limits of the City or inside the area served by the System. No person who is related within the second degree of consanguinity or affinity (or as further restricted by the City’s Home Rule Charter) to any Member of the Board or any member of the City Council shall be eligible for appointment as a Member of the Board. The term of office of each Member of the Board shall be four (4) years. All terms shall commence on a June 1 and shall terminate on May 31 four years later; provided, however, in the event a replacement for a Member has not been named by the City Council prior to the expiration of such Member’s term, such Member shall serve until such Member’s successor shall be appointed, and such successor’s term shall terminate on May 31st of the year in which such term normally would have terminated if the City Council had appointed such successor prior to the termination of such Member’s term. No person who has served as a Member of the Board for a total of two (2) terms shall be eligible for appointment as a Member of the Board. Any Member who is appointed to the Board to serve out an unexpired portion of another Member’s term shall not be considered to have served a term unless the unexpired portion of the term so served is two (2) years or more.

C. Removal of residence from the area served by the System by any Member of the Board shall cause such person to vacate office as a Member of the Board, and any Member of the Board (other than the Mayor of the City) who shall be continuously absent from all meetings of the Board for a period of four (4) consecutive months shall, unless such person has requested and been granted leave of absence by the unanimous vote of the remaining Members of the Board, be considered to have vacated such person’s office as a Member of the Board.

D. All vacancies in membership on the Board, whether occasioned by failure or refusal of any person to accept appointment or by resignation, failure to continue to qualify to serve, expiration of term of office, or otherwise, shall be filled by majority vote of all members of the City Council then holding office. Any Member of the Board other than the Mayor of the City may, by a two-thirds (2/3) vote of all members of the City Council then holding office, be removed from office, with or without cause. For purposes of this Section 41, the term members of the City Council then holding office shall be the number of persons authorized from time to time by the City’s Home Rule Charter to be members of the City Council, whether or not all such positions are filled at any particular time.

E. Except as otherwise specifically provided in this Ordinance, the Board shall have absolute and complete authority and power to control, manage, and operate the System and shall control the expenditure and application of the Gross Revenues of the System pursuant to this Ordinance. In connection with the control, management, and operation of the System and the expenditure and application of the Gross Revenues therefrom, the Board shall be vested with all of the powers of the City with respect thereto, including all powers necessary or appropriate for the performance of all the covenants, undertakings, and agreements of the City contained in this Ordinance, and, with the exception of fixing rates and charges for service rendered by the System, shall have full power and authority to make rules and regulations governing the

41423745.2 C-22 furnishing of services of the System to customers and for the payment of the same, and for the discontinuance of such services upon failure of customers to pay therefor and, to the extent authorized by law and by this Ordinance, shall have authority to make extensions, improvements, and additions to the System and to acquire by purchase or otherwise properties of every kind in connection therewith. The operational policies of the Board shall parallel those of the City Council insofar as practicable.

F. The Board shall determine the rates, fees, and charges for services rendered and to be rendered by the System, with due consideration being accorded to the terms, covenants, and conditions contained in this Ordinance and the ordinances authorizing the issuance of any Additional Senior Lien Obligations. In the event any such determination reflects a necessity for the adjustment either by an increase or a reduction of such rates, fees, and charges, then the Board shall submit to the City Council a full report of the basis upon which such proposed adjustment is predicated, accompanied by a formal request from the Board for approval and adoption of the rates, fees, and charges recommended by the Board. If the City Council approves the adjustment thus recommended by the Board, it shall pass an appropriate ordinance placing such adjusted rates, fees, and charges in effect; provided, however, that the rates, fees, and charges for services rendered by the System shall never be reduced in such amounts as will impair the performance of any of the covenants contained in this Ordinance or in any ordinance authorizing the issuance of any Additional Senior Lien Obligations.

G. The Mayor, with the concurrence of the City Council, annually shall appoint one of the other Members of the Board as the Chairman of the Board. The Board annually shall elect one of its Members as Vice-Chairman of the Board and shall appoint a Secretary and an Assistant Secretary, either or both of whom may, but need not be, a Member or Members of the Board. If a Member of the Board is not appointed as Secretary or Assistant Secretary, then an employee or employees of the Board may be so appointed. The Board may adopt rules for the orderly conduct of its meetings. The Board shall manage and conduct the affairs of the System in a manner consistent with practices ordinarily employed by the boards of directors of private utility corporations operating properties of a similar nature and with the same degree of prudence. The Board shall have at least one meeting monthly. All meetings of the Board shall be open to the public in accordance with the requirements of Chapter 551, as amended, Texas Government Code. The Board is authorized to adopt rules of procedure and standards of conduct for persons attending and participating in its meetings and any public hearings conducted by or on behalf of the Board.

H. The Board shall appoint and employ all officers, employees, and professional consultants which it may deem desirable, including, without limitation, a chief executive officer of the System, attorneys, auditors, engineers, architects, and other advisers; provided, however, that the City Attorney shall be the chief legal adviser of the Board. The selection of additional attorneys shall be made in consultation with the City Attorney, but the decision of the Board shall be final. The Board may delegate administrative duties and authority to its employees and consultants. No officer or employee of the Board may be employed who shall be related within the second degree of consanguinity or affinity (or as further restricted by the City’s Home Rule Charter) to any Member of the Board or any member of the City Council.

41423745.2 C-23 I. The Board shall obtain and keep continually in force an employees’ fidelity and indemnity bond (“blanket” form), or its equivalent, written by a solvent and recognized insurer and covering losses to the amount of not less than One Hundred Thousand Dollars ($100,000.00).

J. The Board shall make such provision for an employee retirement plan or pensions for employees of the Board as it may in its discretion determine. The Board may continue in existence the retirement plans in effect on the date of adoption of the ordinance authorizing the issuance of the Series 1992 Bonds for the Waterworks System, the Wastewater Department of the City, and the Water Reuse Department of the City and may change the same from time to time as it may determine. The title to and ownership of funds set aside in accordance with an employee retirement plan shall be held in trust for the benefit of the members of such pension plan.

K. The Members of the Board, other than the Mayor of the City shall each receive annual compensation in the amount of $2,500.00 or such additional amount as may be determined from time to time by the City Council. The Members of the Board shall be entitled to payment by the Board of their reasonable and necessary expenses for the discharge of their duties.

L. The Members of the Board shall not be personally liable, either individually or collectively, for any act or omission in the performance of their duties as Members of the Board not willfully fraudulent or in bad faith. The Board may authorize the use of Board funds to provide defense for its Members or its employees for civil actions brought against them for any such acts and may hold such Members and employees harmless from any damages awarded against them in any civil action.

M. The City Manager, or the City Manager’s designee, shall be authorized to attend meetings of the Board, and the Board shall provide the City Manager with notice of such meetings in the same manner that such notice is given by the Board to its Members.

N. The Board when expending funds for improvements and materials and supplies shall be governed by the then current provisions of applicable City policy and the laws of the State of Texas relating to notices to bidders, advertisement thereof, requirements as to the taking of sealed bids based upon specifications for such improvements or purchase, the furnishing of surety bonds by contractors, and the manner of letting contracts.

O. The City Council reserves the right to require the Board, at the System’s expense and payable from the Renewal and Replacement Fund, to conform its installations in the streets, alleys, and public ways of the City to any changes created by City construction projects; provided, however, such City-ordered relocation of System facilities at the System’s expense shall be limited, in any Fiscal Year, to an amount not to exceed 5% of the Board’s annual budget for Maintenance and Operating Expenses in such Fiscal Year. Relocation costs exceeding such 5% limitation shall be funded through direct payment of such excess costs by the City, through payment to the Board of such excess cost by the City, or through the issuance of Debt.

41423745.2 C-24 P. No Member of the Board, or any officer, agent, or employee of the Board shall have a financial interest, direct or indirect, in any contract with the Board or shall be financially interested, directly or indirectly, in the sale to the Board of any land, materials, supplies, or services except on behalf of the Board as an officer or employee or as permitted by the provisions of Chapter 171, as amended, Local Government Code, or any other similar general Texas law in effect from time to time, or the City’s Home Rule Charter, whichever is most restrictive.

Q. The Board shall prepare an annual budget to serve as a tool in controlling and administering the management and operation of the System. The annual budget shall reflect an estimate of Gross Revenues and an estimate of the disposition of these revenues in accordance with the flow of funds requirements of this Ordinance. The annual budget shall be presented and approved by the Board at least sixty (60) days prior to the beginning of the Board’s Fiscal Year. Immediately following approval of the annual budget by the Board, it shall be submitted to the City Council for review and consultation. The Board may subsequently modify its approved budget by giving notice thereof to the City.

R. The Board shall prepare and administer, and may amend from time to time, a master plan for the System (the Master Plan), addressing the water resource and capital improvement projects required to accommodate the projected growth and development of the service area of the System. The Master Plan (and any amendment thereof) shall be approved by the Board and submitted for consideration and approval by the City Council in accordance with applicable provisions of the City’s Home Rule Charter then in effect.

S. The Board shall provide the City Council with a complete briefing on any matter of litigation which is being contemplated involving the Board as a plaintiff against the City or any of its agencies, and City Council approval shall be obtained by the Board prior to the formal initiation of any such matter of litigation. Unless the City Attorney recommends City Council approval with respect to a particular matter of litigation proposed to be initiated by the Board, all other matters of litigation initiated by the Board may be approved by the Board without approval of the City Council.

T. The Board shall establish an appeals process for disciplinary actions involving its employees. An appeals committee composed of at least three (3) persons who are neither employees nor Members of the Board shall be appointed by the Board, and such committee shall operate under rules established by the Board from time to time. Such committee shall make recommendations to the Chief Executive Officer of the System, with the final determination concerning disposition of a disciplinary action being made by the Chief Executive Officer of the System. The Board shall further establish Equal Employment Opportunity and Affirmative Action programs in compliance with applicable federal and State of Texas guidelines. All personnel policies established by the Board shall parallel those of the City in effect from time to time insofar as practicable.

U. During each Fiscal Year, the Board shall prepare and formally present to the City Council a minimum of two (2) reports regarding the status of water resource planning and development, other water related issues being undertaken or contemplated by the Board, and other matters previously requested by the City Council.

41423745.2 C-25 V. The City Council reserves the right, by ordinance, to abolish the Board and thereafter transfer control, maintenance, and operation of the System to a department of the City in accordance with the provisions of the laws of the State of Texas and the City’s Home Rule Charter. The City Council may so abolish the Board at any regular or special meeting of the City Council upon the affirmative vote of 3/4 of the members of the City Council then holding office. Such vote must be preceded by at least two (2) public hearings conducted by the City Council at least 30 days apart. Notice of such public hearings and the subject matter to be discussed shall be published at least one (1) time prior to each such hearing in a newspaper of general circulation within the City at least 15 days prior to the hearing. Such hearings may be conducted at a regular or special meeting of the City Council or in some other location designated by the City Council, and the calling of such hearings and the authorization of the publication of such notices may be by majority vote of all members of the City Council then holding office at any regular or special meeting of the City Council. The ordinance abolishing the Board shall name the effective date of the abolition of the Board and the transfer of maintenance, control, and operation of the System to the City. By the same procedure, the City Council may subsequently reconstitute the Board and thereafter transfer control, maintenance, and operation of the System to such Board as otherwise set forth in this Ordinance.

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41423745.2 C-26 APPENDIX D

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CPS ENERGY

FORM OF OPINION OF CO-BOND COUNSEL

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CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS • VARIABLE RATE JUNIOR LIEN REVE

MUNICIPALLY OWNED ELECTRIC & GAS UTILITY SAN ANTONIO, TEXAS 2017 NUE REFUNDING BONDS, SERIES 2015B