Arizona Corporation Commission Natural Gas Workshop September 8, 2005

1. Arizona Corporation Commission Natural Gas Workshop September 8, 2005 Presented by David Hutchens, General Manager, Fuels and Wholesale Power Joe Salkowski, Director, Corporate Communications

2. Tucson Electric Power • 1999 Settlement capped rates through 2008 • TEP hedges its summer gas and purchased power exposure on a three-year forward basis (similar to UNS Gas) • Minimal need for winter gas and purchased power to serve retail and long-term firm customers • No mechanism to pass through fuel cost to customers • Gas cost increases will not be passed through to customers before the end of 2008

3. UNS Electric • Power supplied through fixed-price, full requirements contract with PWCC through May 2008 • Changes in gas cost don’t affect the price of this contract • UNS Electric incurs minimal natural gas costs for Valencia substation, which is used only for emergency load restoration or economic dispatch by PWCC

4. UNS Gas • Winter gas commodity prices are currently projected to be in the $1.00/therm range ($10/mmBtu) • UNS Gas has ~45% of total expected gas consumption hedge for the 2005/2006 Winter (Oct – Mar) • Fixed price hedges ~$0.59/therm • Average price for winter gas commodity could be in the $0.80/therm range (including hedges)

5. UNS GasPrice Stabilization Policy • Part of UNS Wide Risk Control Policies • Timeframe – next 3 years in varying %’s • Target fixed price hedges = 45% • Utilizes “trigger dates” and “discretionary” purchases • Discretionary purchases must be approved by Risk Management Committee • Includes purchases made before trigger dates • Includes purchases over 45% • Products used • Physical gas • Options evaluated but not currently used • Remainder of gas is purchased at First Of Month and Gas Daily index

6. UNS GasCurrent Hedges

7. UNS GasValue of Current Hedges

8. UNS Gas Cost OutreachGoals • Provide customers with specific information about gas cost increases for this winter. • Explain issues that have driven those costs • Help customers make their winter bills more manageable through conservation, budget billing and low-income assistance programs

9. UNS Gas Cost OutreachMethods • Meetings with local government leaders • Bill Inserts • Press Releases • Direct Advertising • Proposed press conferences with ACC, local government representatives

10. UNS Gas Cost OutreachJune 2005 • Bill inserts announcing UES’ expectation of higher gas prices this winter (at right) • UES press release announcing volunteer weatherization campaign in Northern Arizona calls attention to benefits of weatherizing homes, directs readers to weatherization resources

11. UNS Gas Cost OutreachJuly 2005 • Press Release July 5: “UES Urges Customers to Prepare for Higher Winter Gas Bills” • Bill inserts promoting Budget Billing program as a way to make winter costs more manageable (at right)

12. UNS Gas Cost OutreachAugust 2005 • Bill inserts promoting CARES low income program (as they were in March and May) • Print and radio advertising campaign promoting CARES program in UES gas markets (at right)

13. UNS Gas Cost OutreachAugust 2005 (continued) • Press Release August 17: “Higher Natural Gas Costs force UES to Seek New Surcharge” • UESAZ.com web site updated with further information about surcharge, gas cost issues • Meetings and telephone conversations with local officials in Kingman, Lake Havasu City, Williams, Flagstaff, Prescott, Prescott Valley, Chino Valley and Santa Cruz County to discuss winter gas costs and pending PGA Surcharge filing

14. UNS Gas Cost OutreachSeptember 2005 • Advertising campaign advising customers of higher winter gas prices and promoting budget billing (Note: example at right is not the final ad) • Bill insert notifying customers of PGA Surcharge Request, hearing date

15. UNS Gas Cost OutreachOctober 2005 • Bill inserts promoting energy efficiency distributed to all customers (note: example at right is not final insert)

16. UNS Gas Cost OutreachNovember 2005 • Bill insert promoting CARES program • Bill insert announcing updated winter gas cost projections and average bill impacts • Advertising campaign advising customers of higher winter gas prices – including the final impact of any adopted PGA surcharge – and suggested responses, including conservation, low income assistance and Budget Billing • Possible joint press conferences with ACC, local officials calling attention to higher winter heating costs

17. UNS Gas Cost OutreachDecember 2005 • Bill inserts promoting energy efficiency distributed to all customers (note: example at right is not final insert)

18. UNS Gas Cost OutreachOngoing • Customer Care Representatives offer energy saving tips, promote Budget Billing and billing programs to customers who call for assistance • UESAZ.com Web site offers energy saving tips, interactive UES Energy Advisor and up to date information on gas cost issues and company programs • Printed brochures available on request to promote Budget Billing, CARES and other programs

19. UNS Gas Cost AssistanceBudget Billing • Eliminates seasonal swings in gas costs by allowing customers to pay a fixed monthly amount based on an estimate of their annual gas usage • Customers can sign up at any time • Budget Billing amount adjusted periodically to account for actual usage and gas cost changes • Easiest way for any customer to make winter gas costs more manageable

20. UNS Gas Cost AssistanceBudget Billing Participation

21. UNS Gas Cost AssistanceCARES • CARES (Customer Assistance Residential Energy Support) provides a 15 cent-per-therm discount for up to 100 therms of usage per month from November through April • Customers whose household income does not exceed 150 percent of the federal poverty level are eligible to apply • This winter, a family of four with a monthly income of less than $2,420 qualifies for CARES

22. UNS Gas Cost AssistanceCARES Program Participation

23. UNS Gas Cost AssistanceTotal CARES Discounts

24. UNS Gas Cost AssistanceWarm Spirit • Provides low-income customers with emergency bill payment assistance from funds provided through voluntary customer contributions and company funds • UES will match customer contributions dollar for dollar in 2005; contribution will be timed to make funds available for winter months • Program administered by local community agencies

25. UNS Gas Cost AssistanceCustomer Support of Warm Spirit

26. UNS Gas Cost AssistanceLow-Income Weatherization Supports the efforts of local service agencies to help low-income customers make their homes more energy efficient Elderly and disabled receive priority for funding Provides up to $2,000 per home for increased insulation, weather stripping, furnace replacement and other improvements Program Funding Increased from $25,000 in 2003 to $75,000 in 2004, 2005 Augmented by volunteer weatherization efforts of UNS Gas Community Action Team (Five homes in 2005)

27. UNS Gas Cost AssistanceHomes Weatherized with UES Funds*, Volunteer Efforts * Figures represent best estimates based on community group invoices

28. UniSource Energy Summary • Higher gas costs will not affect customers of TEP or UNS Electric this winter • Impact of higher wholesale prices on UNS Gas customers has been mitigated somewhat by price stabilization policy for gas purchases • UNS Gas is making proactive, continuous efforts to communicate with customers about gas costs and inform them of programs that can make their home heating bills more manageable