1

Arizona Public Service Company

ACC Natural Gas Forum

September 8, 2005

2

Energy Markets and Hedging Practices

Tom Carlson

Portfolio Manager

APS Marketing & Trading

3

Overview of How APS Manages Gas Costs

• General Market Issues

• APS Gas and Infrastructure Requirements

• APS Hedge Policy

4

Energy Market Overview

Natural gas prices at historical highs

Wholesale power prices follow natural gas

US economy remains strong

Increased world demand on crude oil

Natural gas storage surplus is shrinking

Impact from Katrina still being assessed

Deliverability issue on horizon

LNG not a factor for Arizona until 2008

5

Historical Nymex Natural Gas PricesJan 2004 - Aug 2005

Prompt Month Contract

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

1/5/

2004

2/5/

2004

3/5/

2004

4/5/

2004

5/5/

2004

6/5/

2004

7/5/

2004

8/5/

2004

9/5/

2004

10/5

/200

4

11/5

/200

4

12/5

/200

4

1/5/

2005

2/5/

2005

3/5/

2005

4/5/

2005

5/5/

2005

6/5/

2005

7/5/

2005

8/5/

2005

Pri

ce

$/M

MB

tu

6

APS Energy Sources(Projected)

Summer 2006 Winter 2005

Nuclear: 25% 37%

Coal 40% 43%

Natural Gas 22% 15%

Purchased Power 13% 5%

7

2006 Monthly Requirements for Natural Gas

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Jan 06 Feb 06 Mar 06 Apr 06 May 06 Jun 06 Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06

Bill

ion

Cu

bic

Fee

t

APS Projected Gas Requirements

8

Gas and Infrastructure Issues

Hedging

Gas Transportation El Paso Natural Gas

Upcoming FERC rate case = higher costs

Transwestern?

North Baja – Yuma?

Gas Storage Copper Eagle?

Red Lake?

Picacho?

9

APS Hedge Policy

Natural Gas and Purchased Power Designed to minimize price volatility Strict guidelines – little trader discretion Significant compliance requirements Forward hedge for three years Credit limitations Liquidity limitations Load forecast variability impacts hedge levels

10

Current Hedge Position(Total Energy – Gas and Purchased Power)

% Hedged

Balance of 2005: 85

Calendar 2006: 85

Calendar 2007: 55

Calendar 2008: 30

Natural gas hedges at NYMEX (Henry Hub)

Purchased power hedges at PV, FC, Mead

11

Impact of Hurricane Katrina on NYMEX Natural Gas Futures

November 2005 – March 2006 Pricing Impact

– August 1st: $ 9.28/mmBTU

– August 31st: $11.93/mmBTU

Increase of $2.65/mmBTU

12

Customer Education & Outreach Activities

Terry Orlick

Manager

APS Customer Information & Programs

13

Customer Programs and Outreach

• PSA and Gas Cost Communication• How customers can mitigate the impact of

high gas costs• Demand Side Management• Time of Use options• Equalizer

• Low Income programs• What’s on the horizon

14

PSA & Surcharge Impact Communication Plan - 2005

Q1 Q2 Q3 Q4

Newsletter article-PSA

-Surcharge

-Conservation tips

X

X

X

X X

APS.com – Educational content

Link to Natural Gas weekly update

PSA Monthly cost per kWh chart

X

X

X

X

X

X

X

X

X

Bill insert – Surcharge

Energy conservation tips

X

X X

Service Plan Brochures, New Customer Mailing & Customer Care Associates

X X X

Bill messages – conservation tips X X X

Press releases X X

Power Partners X X

Broadcast & Print– Energy, Enough to Use X X

15

16

17

Page from APS Web Site on PSA Costs

18

Program Participation

2003 2004 June 2005

DSM

Consumer’s Guide to HVAC

Homebuyer’s Guide

Qualified Contractor Referrals

Performance Built Homes

Energy Guide on-line surveys

Builder & Contractor training

2,000

1,600

4,000

3600

10,000

900

4,000

3,300

5,500

2300

13,800

700

5,000

20,000

3,400

376

6,230

180

Equalizer – Balanced Payment Plan

174,728 175,059 173,300

Low Income Discount 25,013 26,692 27,180LIWP - Weatherization

LIWP - Bill Assistance

287

253

320

455

235

263

19

DSM Communication PlanQ1 Q2 Q3 Q4

Bill Inserts Consumer/Homebuyer Guide X

NewslettersEnergy Guide on-line survey

Qualified Contractor

Energy Savings Tips

X

X

X

X

X

X

X

X

X

X

X

TrainingHVAC Contractor Training

Builder/Sales Agent TrainingX

X

X

X X

X

X

AdvertisingPBH – print, online, POS

Qualified Contractor TV

Southwestern Home Journal

Power Tips

X

X

X

X

X

X

X

X

X

X

X

20

Time-of-Use Rate Options

Two options kWh only kWh plus demand

Over 373,000 residential customers (42%) The highest percentage nationally

21

Equalizer Communication Plan

Q1 Q2 Q3 Q4Customer Care Associates X X X X

APS.com & IVR X X X X

New Customer Mailing X X X X

Direct Mail X X

Bill Messages X X X

Bill Inserts X

EZ Promo X

TV Power Tip X

22

Low Income Programs Communication Plan

Q1 Q2 Q3 Q4

APS.com X X X X

New Customer Mailing X X X X

APS Customer Care Associates

X X X X

DES X X X X

Newsletter articles X X

Bill Messages X

Bill insert w/ application X

Community Action Agencies

X X X X

23

SHARE Communication Plan

Q1 Q2 Q3 Q4

Aps.com X X X X

APS Customer Care Associates

X X X X

New Customer Mailing

X X X X

Newsletter article X

Bill message X X X X

Bill insert X

24

On the horizon…

– DSM Portfolio and 10 program plans submitted for Commission approval Compact Fluorescent Lighting promotion

approved; available in stores fall of 2005– Upon approval, DSM programs available for

additional market segments and applications– Additional TOU rate