1. OPEBs: Implementation Issues For Public Power APPA 2005 Business & Finance Conference September 27, 2005 Jeffrey M. Tuttle, Vice President – Human Resources

2. Objectives Overview of GASB 43 & 45 Generic Implications For Public Power Share Some Of CPS Energy’s Response

3. Overview Nation’s Largest Municipally Owned Energy Company (Over 610,000 Electric & 300,000 Natural Gas Customers), Supporting The Nation’s 8th Largest City Founded In 1860, Bought By City In 1942 Highest Financial Rating of Any Electric System In US (AA+) Over $7 Billion in Assets, $1.4-1.5 Billion In Revenue & Roughly 3,900 Employees Over 5,500 Megawatts of Generation Capacity (Nuclear, Coal, Gas, Oil, & Wind)

4. GASB 43 & 45 GASB (GASB 43) entitled "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans" was enacted in April, 2004. GASB 43 requires the accrual of liabilities of other postemployment benefits (OPEB) generally over the working career of plan members rather than on a pay-as-you-go basis, which is the current practice for most government sponsored plans. GASB 45 entitled "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions" was enacted in June, 2004. GASB 45 requires the accrual of the OPEB expense over the same time period. The term "postretirement" is sometimes used instead of "postemployment".

5. GASB 43 & 45 Continued GASB 43 & 45 requires that the promise made to provide retirees benefits must now be accrued during the working years of employees and recognized as a financial obligation of the employer. Obligations must be reported on financial statements of all large public sector employers beginning the first tax reporting period after December 15, 2006, smaller employers have up to 2008. The obligation represents the actuarial present value of OPEBs expected to be paid to or on behave of the employees under the terms of the plan.

6. GASB 43 & 45 Continued OPEBs Are Post Employment Benefits Other Than Pension And Generally Takes The Form of Defined Benefit Health, Dental, Vision, Prescription Drug, and Life Insurance. Private Sector & Non-Profit Employers Have Been Subject to OPEB Reporting Since The Early 1990s Under FASB 106 Rules.

7. GASB Rules Will Effect Most of Us According to the Kaiser Family Foundation’s Employer Health Benefits 2004 Annual Survey, 77% of public sector employers employing more than 200 workers offer some form of retiree health care benefits. The effects will grow in the future considering the aging workforce, reduced and restricted budgets, increased competition, etc.. Rating Agencies have indicated that they will now consider GASB 45 obligations in their financial analyses of our companies.

8. Implications For Public Power Modify our plans/commitments for our retirees (major effect on recruitment & retention of qualified employees). Start funding OPEB expenses in trust funds (a drain on tight bottom lines). Financing impacts – ability to borrow and interest rates.

9. CPS Energy Response CPS Energy has been funding OPEBs since 1982/1983. –Health Trust established January 1, 1982, assets in excess of $130 million –Group Life Trust established December 15, 1983, assets in excess of $44 million –Disability Trust established November 1, 1983, assets in excess of $4 million

10. CPS Energy Response Initiated extensive health care claim and benchmarking study in 2005. –Review claim data –Review provider networks –Review plan design –Consider consumer-driven options

11. CPS Energy Response Review of Medicare Modernization Act (Medicare Part D – Prescription Drug Coverage) Several Options Reviewed: –Retain Current Plan & Take Subsidy, Retirees Turn Down Part D –Retain Current Plan & Integrate With Part D, Retirees Sign Up For Part D –Exit Retiree Prescription Drug Coverage, Have Retirees Sign Up For Part D

12. Pros/Cons of Part D Subsidy Advantages –Eligible for tax free federal subsidy equal to 28% of Rx spending between $250 - $5,000 per person ($1,330 maximum) –CPS maintains control over benefit design and cost sharing policy –Positive retiree perception (no disruption of coverage) Cons –Employer must file annual actuarial equivalence report –Retirees must not enroll in Part D –Will the subsidy survive budgetary and political pressures?

13. Questions Jeff Tuttle 210-353-4360 (office) 210-289-8400 (mobile) jmtuttle@cpsenergy.com (e-mail)