BENEFIT PLAN REVIEW: DELIVERING VALUE

PRESENTED BY:

Debra WainscottSr Director, People Services

December 6, 2019

In fo rmat iona l Update

OBJECTIVES

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• REVIEW WORKFORCE DATA

• PROVIDE INSIGHT INTO THE MANAGEMENT & GOVERNANCE OF CPS ENERGY’S PENSION PLAN

• HIGHLIGHT PLAN PERFORMANCE & VALUE TO THE BUSINESS

AGENDA

• DRIVING PLAN VALUE

• WORKFORCE OVERVIEW

• PLAN & GOVERNANCE

• PENSION TRUST INVESTMENTS

• UTILITY INDUSTRY BENCHMARKING

• SUMMARY – DRIVING STRONG VALUE FOR OUR WORKFORCE

• DISCUSSION & QUESTIONS

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DRIVING PLAN VALUE

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OUR PROACTIVE MANAGEMENT TEAM IS DRIVING PLAN VALUE FOR OUR WORKFORCERETAINING CRITICAL SKILLS & TALENT

• Benefits are important to our employees and drive retention of skilled, mid-career employees at all levels.

• Our workforce is heavily reliant on STEM/STEAM skills, which are in high demand in fast-growing San Antonio/South Texas.

• Complex future increases the importance of retaining our current employees & attracting future talent.

WORKFORCE OVERVIEW

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WORKFORCE SNAPSHOT

3,155FTEs as of 12/31/18

23% 77%

2018 Avg Age / Tenure

44 / 15

BASIC DATA

• Active employees/positions have been maintained at about 3,150 – 3,200 since 2014. All-time high was 4,800+ in 2003.

• Our workforce remains largely male, likely driven by the physical nature of energy generation & delivery. The office functions have a more natural split/representation.

• Average age and tenure dropped by almost a year from 2017 to 2018, as we see more retirees depart.

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WORKFORCE SNAPSHOT

25%

51%

24% BoomerGeneration XMillennial

51%41%

6%2%

Hispanic/LatinoWhiteBlack or African AmericanAsian

Generation

Ethnic Origin

Pay Designation

Boomer 1946-1964Gen X 1965-1979Millennial 1980-2000Gen Z 2001-now

Millennials/Gen Z are more likely to select multi-ethnic or skip identifying by category.

Executive – Director, VP, ChiefSalaried Exempt – Analysts, professionals & front line managers, no overtimeSalaried Non-Exempt –Technicians, Administrative Assistants, eligible for overtimeSkilled Craft – Trades, Journeymen, Utility Workers, eligible for overtime.

4%

30%

24%

42%Executive

Salaried Exempt

Salaried Non-Exempt

Skilled Craft

DEMOGRAPHIC INSIGHTS

• The utility industry is facing dramatic shifts in workforce; CPS Energy is better positioned than many industry peers with more Baby Boomers.

• Racial/Ethnic diversity closely mirrors Bexar County.

• Salaried technician roles have increased as technology has evolved and human tasks have shifted to trouble-shooting & analysis.

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WORKFORCE SNAPSHOT

6.2%2018 Annual Turnover

18%2018 Annual Turnover with @3 Years or less tenure

37%Retirement Eligible w/in 3 years

TURNOVER INSIGHTS

• Enterprise turnover is holding steady at 6 to 7%, which is modest.

• Turnover for short-tenured employees has dropped as Customer Success has stabilized, but retention of Millennials remains challenging.

• Average age and tenure dropped by almost a year from 2017 to 2018, as we see more retirees depart.

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OUR PENSION IS A TOOL

• Base compensation is market competitive.– We use bracketed and overlapping pay grades.

– We generally pay at the 50th compensation percentile.

Note: Accordingly, our base pay is a good foundation, but not a differentiator.

• San Antonio competition remains fierce in STEM/STEAM

fields. Unemployment has remained steady at 3%. For some

job types, it’s 0%!

FOR RETENTION & RECRUITMENT

Our Defined Benefit (DB) plan contributes to low turnover, and

retention of highly skilled, mid-career employees at all levels.

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OUR PENSION IS A TOOL

• Retention of our skilled craft employees is critical:

– We invest 8+ years / ~$400,000 to “make” a proficient, card-carrying

electric journeyman.

– More than half of that investment is for the instruction and specific

training hours in our multi-year, Department of Labor-accredited

apprentice program.

FOR RETENTION & RECRUITMENT

RETIREMENT ELIGIBILITYBY AGE & YEARS OF SERVICE

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Over 40%

of our

workforce is

within a few

years of

retirement

eligibility.

544

779

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Total retirement eligible within 5 years 1361

÷ total active workforce 3155

= percent retirement eligible within 5 years 43%

Within 5 years of early retirement

Eilgible for early retirement

Eligible for normal retirement

PLAN & GOVERNANCE

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PLAN BENEFIT OVERVIEW

• Defined Benefit (DB) retirement plan provided since 1982.

• Employees must complete 1 year of service before they can participate.

• Retirement eligibility:– Age 55, with 11 years of service (10 years in the plan + 1 year to vest)– 26 years of service (25 years in the plan + 1 year to vest)– Age 65

• Formula is based on age, years of service, & average compensation.

• 3,000 active employees; 2,500 retirees participating.

• Vast majority of employees do not take cash-out/lump sum option.

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EMPLOYEES VEST @ AGE 40 / 7 YEARS' SERVICE

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GOVERNANCE OVERVIEW

External

InvestmentManagers (IMs)

External

Actuarial Consultants

External

Investment Brokers

External

Investment Consultant

Internal

ADMINISTRATIVE COMMITTEEActive Employees, Including a Labor

Representative & a Retiree(7 Members Total)

(& a Pool of Alternate Observers Designated by the President & CEO)

Internal

President & CEO

Internal

EMPLOYEE BENEFITSOVERSIGHT COMMITTEE

(EBOC)President & CEO, CFO & Board

Audit Committee(4 Members Total)

BOARD

• Engage Consultants, IMs, Custodial Trustees, Actuaries, Property Managers, Third Party Administrators, etc.

• Monitors Regulatory Compliance (Pension Review Board, GASB, etc.)

• Has Fiduciary & Training Accountability for all Plans

• Accepts each Plan’s Audited Financials

• Approves Actuarial Assumptions

• Analyzes & Recommends Plan Changes, Employee / Employer Contribution Rates & Annual Cash Funding & Expense

• Recommends Investment Policies, Including Revisions to the EBOC

• Oversees & Monitors the Performance of Invested Funds

• Recommends Annual Funding via Budget Process

• Appoints / Removes Observers & Addresses other Succession Planning Recommendations

• Participates on EBOC

• Reviews / Approves Administrative Committee Appointments / Removal

• Reviews / Approves:

• Plan Changes

• Trust Changes

• Investment Policy

• Plan Premiums

• Engages External Plan Auditors

• Prepares Annual Letter to Board Regarding the State of Affairs of all Plans

• Adopts & Terminates Plans / Trusts

• Approves Annual Expense & Cash Flow Funding via Budget Process

• Oversees the President & CEO & EBOC Actions with Respect to Plans / Trusts

• Approves the Statement of Governance

The expected return on assets (EROA) is an example of the closely monitored

assumptions, with consultation from our investment advisors & actuaries.

EMPLOYEE BENEFITS OVERSIGHT COMMITTEE

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John SteenCommittee Chair

Chair, Board of Trustees

Dr. Willis MackeyMember, Board of Trustees

Paula Gold-WilliamsCPS Energy

Chief Executive Officer

Delores Lenzy-JonesCPS Energy

Chief Financial Officer

ADMINISTRATIVE COMMITTEE MEMBERSHIP

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Paul BarhamChair

Sr VP, Delivery, Engineering, Integrated Planning, Substation &

Transmission

David JungmanVice Chair

Sr Director, Business & Economic Development

Richard MedinaMember

VP, Grid Transformation & Engineering

Lois EmersonMember

Retiree Representative

Shannon AlbertMember

Sr Director, Treasury

Paul WhiteMember

Labor Representative

Paul EscamillaMember

Sr Manager, Special Rates & Regulatory

ADMINISTRATIVE COMMITTEE MEMBERSHIP

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SUPPORT / NON-VOTING

Debra WainscottEx-Officio

Nonvoting MemberSr Director,

People Services

Shanna WadsworthSecretary

Manager, Benefits Trust Administration

Delores Lenzy-JonesEx-Officio

Nonvoting MemberChief Financial Officer

Trish VillaDirector, Construction &

Maintenance

ADMINISTRATIVE COMMITTEE MEMBERSHIP

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SUCCESSION PLANNING – CURRENT OBSERVERSPPORT

Yvette Cardiel-PerezDirector, Chief of Staff Chief Administrative & Business Development

Office

James BostonManager, Strategic

Research & Innovation

Mike FuentesDirector, Gas Operations

& Construction

Rodney JonesWarehouseman

Labor Representative

Ben JordanDirector, Labor Engagement

Jeff KruseSr Director, Coal/Gas

Generation Operations

Veronica UriegasInterim Director,

Compensation & Benefits

Maria GarciaVP, Community Engagement

“You have a solid plan—I’m interested in hearing more about how you achieved

such strong returns.”

JOE NATION, PH. D.THE PRACTICE OF PUBLIC POLICY, STANFORD UNIVERSITY

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PENSION TRUST INVESTMENTS

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WILSHIRE CONSULTING

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INVESTMENT GUIDANCE IS ROBUST

Significant DB Plan Expertise

• 40 corporate DB plan clients plans representing $78.6 billion under advisement

Proactive Ideas to Add Value for the

Trust

• Opportunities to increase potential returns while reducing risk

• Potentially lower investment management fees

Understanding of

CPS Energy

• Served CPSE since 2010

• Partner with many other energy and utility companies

Consulting & Research

70+ Professionals

Discretionary Solutions

75+ Professionals

Risk Management & Portfolio Analytics100+ Professionals

Wilshire recently provided an investment update to the Employee Benefits Oversight Committee.

PENSION TRUST ALLOCATION

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WE CULTIVATE A DIVERSE PORTFOLIOAsset Class % of Asset Class

US Equity 35.00%

Non-US Equity 10.00%

Global Low-Volatility Equity ("Low-Vol") 7.50%

Total Equities 52.50%

US Core Fixed Income 10.00%

High Yield Fixed Income 7.50%

Global Fixed Income 2.00%

Emerging Market Debt ("EMD") 2.00%

Bank Loans 4.00%

Total Fixed Income 25.50%

Real Estate 10.00%

Hedge Funds/Absolute Return 5.00%

Master Limited Partnerships ("MLPs") 7.00%

Total Alternatives 22.00%

Total 100.00%

With investment

consultant

guidance, the

Plan’s asset

allocation targets

were updated in

2017 to reduce risk

while increasing

returns.

-$0.60

-$0.20

$0.20

$0.60

$1.00

$1.40

$1.80

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Billions o

f D

ollars

% R

etu

rn

Pension Returns Pension Plan Net Assets

Since 1983 = 9.6%10-year return = 9.4%YTD Oct 2019 ≈ 13.5%

$0.81billion

$1.52billion

7.25% EROA

ASSETS CONTINUE TO DELIVER VALUEEVEN AS MARKETS FLUCTUATE

Expected Return on Assets (EROA)

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0.0%

Pension asset investment performance has been exceptionally strong since inception, with average annual growth of 9.6% & 13.5% YTD.

BENCHMARKING

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NATIONAL TRENDSPENSION PLANS ARE STILL VIABLE

• For state and local government

employees, a defined benefit plan

remains the norm at 77%.

• Only 13% of private industry employers

offer traditional defined benefit pension

plans.

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Source: Bureau of Labor Statistics, March 2018; Willis Towers Watson

53% of Utility Industry employers

offer a defined benefit retirement

plan today.

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SUMMARYOUR PENSION PLAN DRIVES STRONG VALUE FOR OUR WORKFORCE

• Benefits are important to our employees and drive retention of skilled, mid-career employees at all levels.

• Our workforce is heavily reliant on STEM/STEAM skills, which are in high demand in fast-growing San Antonio/South Texas.

• Complex future increases the importance of retaining our current employees & attracting future talent.

Discussion & Questions

Thank You

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