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| CommissionFile Number | Registrant;      State of Incorporation;Address; and Telephone    Number                                                                                  | IRS Employer      Identification Number |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|
|                  |                                                                                                                                                      |                                    |
| 1-13739               | UNISOURCE      ENERGY CORPORATION(An Arizona      Corporation)One South      Church Avenue, Suite 100Tucson,      AZ  85701(520)      571-4000  | 86-0786732                              |
|                  |                                                                                                                                                      |                                    |
| 1-5924                | TUCSON      ELECTRIC POWER COMPANY(An Arizona      Corporation)One South      Church Avenue, Suite 100Tucson,      AZ  85701(520)      571-4000 | 86-0062700                              |

| UniSource      Energy Corporation  | Large      Accelerated Filer X  Accelerated      Filer__  Non-accelerated filer__Smaller      Reporting Company___ |
|------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
| Tucson      Electric Power Company | Large      Accelerated Filer__ ­Accelerated Filer__  Non-accelerated      filer XSmaller      Reporting Company___      |

| UniSource      Energy Corporation  | Yes | No   X |
|------------------------------------|-----|-----------------------|
| Tucson      Electric Power Company | Yes | No   X |

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Table 

| Definitions                                                                                                      | iv     |
|------------------------------------------------------------------------------------------------------------------|--------|
| --      PART I --                                                                                                |
|                                                                                                             |   |
| Reports of Independent Registered Public Accounting      Firm                                                    | 1      |
|                                                                                                             |   |
| Item 1. – Financial Statements                                                                             | 3      |
| UniSource Energy Corporation                                                                                     |   |
| Comparative Condensed Consolidated Statements of      Income                                                     | 3      |
| Comparative Condensed Consolidated Statements of Cash      Flows                                                 | 4      |
| Comparative Condensed Consolidated Balance      Sheets                                                           | 5      |
| Condensed Consolidated Statement of Changes in      Stockholders’ Equity andComprehensive Income           | 7      |
| Tucson Electric Power Company                                                                                    | 8      |
| Comparative Condensed Consolidated Statements of      Income                                                     | 9      |
| Comparative Condensed Consolidated Statements of Cash      Flows                                                 | 9      |
| Comparative Condensed Consolidated Balance      Sheets                                                           | 10     |
| Condensed Consolidated Statement of Changes in      Stockholder’s Equity and Comprehensive Income          | 12     |
| Notes to Condensed Consolidated Financial      Statements                                                        | 13     |
| Note 1.   Nature of Operations and Basis of      Accounting Presentation                          | 13     |
| Note 2.   Regulatory Matters                                                                      | 13     |
| Note 3.   Debt and Credit      Facilities                                                         | 18     |
| Note 4.   Business Segments                                                                       | 20     |
| Note 5.   Accounting for Derivative Instruments      and Trading Activities                       | 23     |
| Note 6.   Income Tax Matters                                                                      | 26     |
| Note 7.   Commitments and      Contingencies                                                      | 26     |
| Note 8.   Employee Benefits      Plans                                                            | 29     |
| Note 9.   Share-Based Compensation      Plans                                                     | 30     |
| Note 10. Fair Value Measurements                                                                                 | 33     |
| Note 11. UniSource Energy Earnings Per Share      (EPS)                                                          | 36     |
| Note 12. New Accounting Pronouncements                                                                           | 37     |
| Note 13. Supplemental Cash FlowInformation                                                                       | 38     |
| Note 14. Review by Independent Registered Public Accounting      Firm                                            | 39     |
|                                                                                                             |   |
| Item 2. – Management’s Discussion and Analysis of Financial      Condition and Results of Operations | 40     |
| UniSource Energy Consolidated                                                                                    | 40     |
| Overview of Consolidated Business                                                                                | 40     |
| Outlook and Strategies                                                                                           | 40     |
| Results of Operations                                                                                            | 41     |
| Contribution by Business Segment                                                                                 | 42     |
| Liquidity and Capital Resources                                                                                  | 42     |
| Tucson Electric Power Company                                                                                    | 45     |
| Results of Operations                                                                                            | 45     |
| Factors Affecting Results of Operations                                                                          | 50     |
| Liquidity and Capital Resources                                                                                  | 55     |
| UNS Gas                                                                                                          | 58     |
| Results of Operations                                                                                            | 58     |
| Factors Affecting Results ofOperations                                                                           | 60     |
| Liquidity and Capital Resources                                                                                  | 61     |
| UNS Electric                                                                                                     | 62     |
| Results of Operations                                                                                            | 62     |
| Factors Affecting Results ofOperations                                                                           | 63     |
| Liquidity and Capital Resources                                                                                  | 65     |
| Other Non-Reportable BusinessSegments                                                                            | 66     |
| Results of Operations                                                                                            | 66     |
| Critical Accounting Estimates                                                                                    | 67     |
| New Accounting Pronouncements                                                                                    | 68     |

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| Safe Harbor for Forward-Looking    Statements                                   | 68     |
|---------------------------------------------------------------------------------|--------|
| Item 3. – Quantitative and Qualitative Disclosures about      Market Risk | 69     |
| Item 4. – Controls and Procedures                                         | 73     |
|                                                                            |
| PART II – OTHER INFORMATION                                               |
|                                                                            |   |
| Item 1. – Legal Proceedings                                               | 74     |
|                                                                            |   |
| Item 1A. – Risk Factors                                                   | 74     |
|                                                                            |   |
| Item 2. – Unregistered Sale of Equity Securities and Use of      Proceeds | 74     |
|                                                                            |   |
| Item 5. – Other Information                                               | 74     |
| Issuance of Senior Unsecured Notes by UNS      Electric                         | 74     |
| Non-GAAP      Measures                                                          | 74     |
| Ratio of Earnings to Fixed Charges                                              | 77     |
|                                                                            |   |
| Item 6. Exhibits                                                                | 77     |
|                                                                            |   |
| Signatures                                                                      | 78     |
|                                                                            |   |
| Exhibit Index                                                                   | 79     |

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DEFINITIONS

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| ACC                              | Arizona      Corporation Commission.                                                                                                                                                                                |
|----------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| AECC                             | Arizonans for      Electric Choice and Competition.                                                                                                                                                                 |
| AMT                              | Alternative      Minimum Tax.                                                                                                                                                                                       |
| APS                              | Arizona      Public Service.                                                                                                                                                                                        |
| BMGS                             | Black      Mountain Generating Station under development by UED.                                                                                                                                                    |
| Btu                              | British      thermal unit(s).                                                                                                                                                                                       |
| Capacity                         | The ability      to produce power; the most power a unit can produce or the       maximum      that can be taken under a contract, measured in MWs.                              |
| Citizens                         | Citizens      Communications Company.                                                                                                                                                                               |
| Common      Stock                | UniSource      Energy’s common stock, without par value.                                                                                                                                                      |
| Company or      UniSource Energy | UniSource      Energy Corporation.                                                                                                                                                                                  |
| Cooling      Degree Days         | An index used      to measure the impact of weather on energy usage calculatedbysubtracting 75 from the average of the      high and daily low temperatures.                                                        |
| DSM                              | Demand side      management.                                                                                                                                                                                        |
| Emission      Allowance(s)       | An allowance      issued by the Environmental Protection Agency whichpermits emission of one ton of sulfur      dioxide or one ton of nitrogenoxide.  These allowances can be      bought and sold.       |
| Energy                           | The amount of      power produced over a given period of time measuredin MWh.                                                                                                                                       |
| ESP                              | Energy      Service Provider.                                                                                                                                                                                       |
| FAS      71                      | Statement of      Financial Accounting Standards No. 71: Accounting forThe Effects of Certain Types of      Regulation.                                                                                             |
| FAS      133                     | Statement of      Financial Accounting Standards No. 133: Accounting forDerivative Instruments and Hedging      Activities, as amended.                                                                             |
| FAS      143                     | Statement of      Financial Accounting Standards No. 143: Accounting forAsset Retirement    Obligations.                                                                                                            |
| FERC                             | Federal      Energy Regulatory Commission.                                                                                                                                                                          |
| Fixed      CTC                   | Competition      Transition Charge of approximately $0.009 per kWh that isincluded in TEP’s retail rate for the      purpose of recovering TEP’s$450 million TRA by December 31,      2008.             |
| Four      Corners                | Four Corners      Generating Station.                                                                                                                                                                               |
| Heating      Degree Days         | An index used      to measure the impact of weather on energy usagecalculated by subtracting the average of      the high and low dailytemperatures from 65.                                                        |
| ICRA                             | Implementation      Cost Regulatory Asset.                                                                                                                                                                          |
| IDBs                             | Industrial      Development Revenue Bonds.                                                                                                                                                                          |
| IRS                              | Internal      Revenue Service.                                                                                                                                                                                      |
| kWh                              | Kilowatt-hour(s).                                                                                                                                                                                                   |
| LIBOR                            | London      Interbank Offered Rate.                                                                                                                                                                                 |
| Luna                             | Luna Energy      Facility.                                                                                                                                                                                          |
| Mark-to-Market      Adjustments  | Forward      energy sales and purchase contracts that are considered to bederivatives are adjusted monthly by      recording unrealized gains and lossesto reflect the market prices at the end      of each month. |
| Millennium                       | Millennium      Energy Holdings, Inc., a wholly-owned subsidiary ofUniSource Energy.                                                                                                                                |
| MMBtu                            | Million      British Thermal Units.                                                                                                                                                                                 |
| MW                               | Megawatt(s).                                                                                                                                                                                                        |
| MWh                              | Megawatt-hour(s).                                                                                                                                                                                                   |
| Navajo                           | Navajo      Generating Station.                                                                                                                                                                                     |
| PGA                              | Purchased Gas      Adjuster, a retail rate mechanism designed to recoverthe cost of gas purchased for retail      gas customers.                                                                                    |
| Pima      Authority              | The      Industrial Development Authority of the County of Pima.                                                                                                                                                    |
| PPFAC                            | Purchased      Power and Fuel Adjustment Clause.                                                                                                                                                                    |
| PWMT                             | Pinnacle West      Marketing and Trading.                                                                                                                                                                           |

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| REST                                              | Renewable      Energy Standard and Tariff.                                                                                                                                                                                            |
|---------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| RUCO                                              | Residential      Utility Consumer Office.                                                                                                                                                                                             |
| Rules                                             | Retail      Electric Competition Rules.                                                                                                                                                                                               |
| Salt River      Project                           | A public      power utility serving more than 900,000 customers in Phoenix,      Arizona.                                                                                                                                             |
| San      Juan                                     | San Juan      Generating Station.                                                                                                                                                                                                     |
| 1999      Settlement Agreement                    | TEP’s 1999      Settlement Agreement approved by the ACC in November 1999that       provided      for electric retail competition and transition asset    recovery.                          |
| SO2.                                              | Sulfur      dioxide.                                                                                                                                                                                                                  |
| Springerville                                     | Springerville      Generating Station.                                                                                                                                                                                                |
| Springerville      Coal HandlingFacilities Leases |  Leveraged      lease arrangements relating to the coal handling facilitiesserving Springerville.                                                                                                                                |
| Springerville      CommonFacilities               |  Facilities at      Springerville used in common with Springerville Unit 1 andSpringerville Unit 2.                                                                                                                              |
| Springerville      CommonFacilities Leases        |  Leveraged      lease arrangements relating to an undivided one-halfinterest in certain Springerville Common      Facilities.                                                                                                    |
| Springerville      Unit 1                         | Unit 1 of the      Springerville Generating Station.                                                                                                                                                                                  |
| Springerville      Unit 1 Leases                  | Leveraged      lease arrangement relating to Springerville Unit 1 and anundivided one-half interest in certain      Springerville Common Facilities.                                                                                  |
| Springerville      Unit 2                         | Unit 2 of the      Springerville Generating Station.                                                                                                                                                                                  |
| Springerville      Unit 3                         | Unit 3 of the      Springerville Generating Station.                                                                                                                                                                                  |
| Springerville      Unit 4                         | Unit 4 of the      Springerville Generating Station.                                                                                                                                                                                  |
| SRP                                               | Salt River      Project Agricultural Improvement and Power District.                                                                                                                                                                  |
| Sundt                                             | H. Wilson      Sundt Generating Station.                                                                                                                                                                                              |
| Sundt Unit      4                                 | Unit 4 of the      H. Wilson Sundt Generating Station.                                                                                                                                                                                |
| TEP                                               | Tucson      Electric Power Company, the principal subsidiary of UniSourceEnergy.                                                                                                                                                      |
| TEP Credit      Agreement                         | Amended and      Restated Credit Agreement between TEP and a syndicate ofBanks, dated as of August 11,      2006.                                                                                                                     |
| TEP Letter of      Credit Facility                | Letter of      credit facility between TEP and a syndicate of Banks, dated as of      April      30,      2008.                                                                                         |
| TEP Revolving      Credit Facility                | Revolving      credit facility under the TEP Credit Agreement.                                                                                                                                                                        |
| Therm                                             | A unit of      heating value equivalent to 100,000 British thermal units      (Btu).                                                                                                                                                  |
| TOU                                               | Time of      use.                                                                                                                                                                                                                     |
| TRA                                               | Transition      Recovery Asset, a $450 million regulatory asset established in      TEP’s1999 Settlement Agreement to be fully      recovered by December 31, 2008.                                                             |
| Tri-State                                         | Tri-State      Generation and Transmission Association.                                                                                                                                                                               |
| UED                                               | UniSource      Energy Development Company, a wholly-owned subsidiaryof UniSource Energy, which engages in      developing generationresources and other project development      services and relatedactivities.                      |
| UES                                               | UniSource      Energy Services, Inc., an intermediate holding companyestablished to own the operating      companies (UNS Gas and UNSElectric) which acquired the Citizens’      Arizona gas and electricutility assets in2003. |
| UniSource      Credit Agreement                   | Amended and      Restated Credit Agreement between UniSource Energy and asyndicate of banks, dated as of August      11, 2006.                                                                                                        |
| UniSource      Energy                             | UniSource      Energy Corporation.                                                                                                                                                                                                    |
| UNS      Electric                                 | UNS Electric,      Inc., a wholly-owned subsidiary of UES, which acquiredthe Citizens’ Arizona electric utility      assets in 2003.                                                                                            |
| UNS      Gas                                      | UNS Gas,      Inc., a wholly-owned subsidiary of UES, which acquired theCitizens’ Arizona gas utility assets in      2003.                                                                                                      |
| UNS Gas/UNS      Electric Revolver                | Revolving      credit facility under the Amended and Restated CreditAgreement among UNS Gas and UNS Electric      as borrowers, UES asguarantor, and a syndicate of banks,      dated as of August 11, 2006.                          |

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PART 

| ITEM      1.  FINANCIAL STATEMENTS                    |   |                                                                                        |                                        |                                                           |
|-----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|---------------------------------------------|----------------------------------------------------------------|
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
| UNISOURCE ENERGY CORPORATION                                    |   |                                                                                        |                                        |                                                           |
| COMPARATIVE      CONDENSED CONSOLIDATED STATEMENTS OF INCOME    |   |                                                                                        |                                        |                                                           |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
| Three Months      Ended                                         |   |                                                                                        | Six Months      Ended                       |
| June      30,                                                   |   |                                                                                        | June      30,                               |
| 2008                                                            |   | 2007                                                                                        |                                        |                                                           |   | 2008 |   | 2007 |
| (Unaudited)                                                     |   |                                                                                        |                                        | (Unaudited)                                                    |
|   -Thousands      of Dollars-                         |   |                                                                                        |   -      Thousands of Dollars -   |
|   (Except      Per Share Amounts)                     |   |                                                                                        |   (Except      Per Share Amounts) |
|                                                            |   |                                                                                        |                                        | Operating      Revenues                                        |   |   |   |   |
|  $      249,106                                            |   |  $  249,462                                                                  |                                        |   Electric      Retail Sales                         |   |  $      446,838 |   |  $      445,212 |
|      (14,898)                          |   |                - |                                        |   Provision      for Rate Refunds - CTC Revenue      |   |      (14,898) |   |                - |
|     234,208                                 |   |      249,462                                                       |                                        |   Net      Electric Retail Sales                     |   |     431,940 |   |     445,212 |
|       77,457                      |   |       44,525                                                  |                                        |   Electric      Wholesale Sales                      |   |     129,825 |   |       93,290 |
|       29,649                      |   |       22,850                                                  |                                        |   Gas      Revenue                                   |   |       95,047 |   |       84,960 |
|       19,008                      |   |       12,935                                                  |                                        |   Other      Revenues                                |   |       33,644 |   |       24,151 |
|     360,322                                 |   |      329,772                                                       |                                        |     Total      Operating Revenues          |   |     690,456 |   |     647,613 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|                                                            |   |                                                                                        |                                        | Operating      Expenses                                        |   |   |   |   |
|       74,321                      |   |       72,208                                                  |                                        |   Fuel                                               |   |     142,271 |   |     133,288 |
|     120,003                                 |   |       81,229                                                  |                                        |   Purchased      Energy                              |   |     221,876 |   |     167,036 |
|       74,614                      |   |       63,304                                                  |                                        |   Other      Operations and Maintenance              |   |     145,651 |   |     134,120 |
|       36,281                      |   |       34,515                                                  |                                        |   Depreciation      and Amortization                 |   |       72,434 |   |       68,981 |
|         6,695           |   |       19,219                                                  |                                        |   Amortization      of Transition Recovery Asset     |   |       23,945 |   |       34,205 |
|       12,525                      |   |       12,166                                                  |                                        |   Taxes      Other Than Income Taxes                 |   |       25,119 |   |       24,653 |
|     324,439                                 |   |      282,641                                                       |                                        |     Total      Operating Expenses          |   |     631,296 |   |     562,283 |
|       35,883                      |   |       47,131                                                  |                                        |       Operating      Income      |   |       59,160 |   |       85,330 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|                                                            |   |                                                                                        |                                        | Other      Income (Deductions)                                 |   |   |   |   |
|         3,039           |   |         4,686                                       |                                        |   Interest      Income                               |   |         6,204 |   |         9,244 |
|         2,699           |   |         4,098                                       |                                        |   Other      Income                                  |   |         5,198 |   |         5,299 |
|        (2,291)               |   |        (1,614)                                           |                                        |   Other      Expense                                 |   |        (2,882) |   |        (2,251) |
|         3,447           |   |         7,170                                       |                                        |     Total      Other Income (Deductions)   |   |         8,520 |   |       12,292 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|                                                            |   |                                                                                        |                                        | Interest      Expense                                          |   |   |   |   |
|       18,175                      |   |       18,276                                                  |                                        |   Long-Term      Debt                                |   |       35,420 |   |       36,265 |
|       14,331                      |   |       16,126                                                  |                                        |   Interest      on Capital Leases                    |   |       28,667 |   |       32,278 |
|           582 |   |         1,651                                       |                                        |   Other      Interest Expense                        |   |         1,723 |   |         3,412 |
|        (1,628)               |   |        (1,634)                                           |                                        |   Interest      Capitalized                          |   |        (3,175) |   |        (3,029) |
|       31,460                      |   |       34,419                                                  |                                        |     Total      Interest Expense            |   |       62,635 |   |       68,926 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|         7,870           |   |       19,882                                                  |                                        | Income      before Income Taxes                                |   |         5,045 |   |       28,696 |
|         3,123           |   |         8,076                                       |                                        |   Income      Tax Expense                            |   |         2,913 |   |       11,947 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|  $     4,747                      |   |  $    11,806                                                       |                                        | Net      Income                                                |   |  $     2,132 |   |  $   16,749 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|       35,612                      |   |       35,472                                                  |                                        | Weighted-average      Shares of Common Stock Outstanding (000) |       35,585 |   |       35,447 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|  $       0.13           |   |  $       0.33                                       |                                        | Basic      Earnings per Share                                  |   |  $       0.06 |   |  $       0.47 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|  $       0.13           |   |  $       0.32                                       |                                        | Diluted      Earnings per Share                                |   |  $       0.06 |   |  $       0.46 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
|  $     0.240                      |   |  $     0.225                                                  |                                        | Dividends      Declared per Share                              |   |  $     0.480 |   |  $     0.450 |
|                                                            |   |                                                                                        |                                        |                                                           |   |   |   |   |
| See Notes to      Condensed Consolidated Financial Statements.  |   |                                                                                        |                                        |                                                           |

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| UNISOURCE      ENERGY CORPORATION                                                                 |                                                                                                                      |   |                                                                                                                      |
|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH      FLOWS                                  |                                                                                                                      |   |                                                                                                                      |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
|                                                                                              | Six Months      Ended                                                                                                     |
|                                                                                              | June      30,                                                                                                             |
|                                                                                              | 2008                                                                                                                      |   | 2007                                                                                                                      |
|                                                                                              | (Unaudited)                                                                                                               |
|                                                                                              |   -Thousands      of Dollars-                                                                                   |
| Cash      Flows from Operating Activities                                                         |                                                                                                                      |   |                                                                                                                      |
|      Cash      Receipts from Electric Retail Sales                       |  $   462,364                                                                                          |   |  $   461,510                                                                                          |
|      Cash      Receipts from Electric Wholesale Sales                    |       168,457                                                                               |   |       158,217                                                                               |
|      Cash      Receipts from Gas Sales                                   |       120,351                                                                               |   |       114,813                                                                               |
|      Cash      Receipts from Operating Springerville Unit 3              |         28,221                                                                    |   |         18,123                                                                    |
|      Interest      Received                                              |         10,973                                                                    |   |         10,068                                                                    |
|      Performance      Deposits                                           |                     - |   |          (3,000)                                                             |
|      Sale      of Excess Emission Allowances                             |            1,494                                                   |   |            6,920                                                   |
|      Income      Tax Refunds Received                                    |         13,082                                                                    |   |            1,016                                                   |
|      Other      Cash Receipts                                            |            7,475                                                   |   |            6,048                                                   |
|      Purchased      Energy Costs Paid                                    |     (254,533)                                                                                         |   |     (225,584)                                                                                         |
|      Fuel      Costs Paid                                                |     (135,114)                                                                                         |   |     (124,525)                                                                                         |
|      Wages      Paid, Net of Amounts Capitalized                         |        (57,303)                                                                        |   |        (59,416)                                                                        |
|      Payment      of Other Operations and Maintenance Costs              |        (77,309)                                                                        |   |        (80,292)                                                                        |
|      Capital      Lease Interest Paid                                    |        (27,980)                                                                        |   |        (33,891)                                                                        |
|      Taxes      Paid Other than Income Taxes, Net of Amounts Capitalized |        (76,816)                                                                        |   |        (74,971)                                                                        |
|      Interest      Paid, Net of Amounts Capitalized                      |        (29,799)                                                                        |   |        (34,830)                                                                        |
|      Income      Taxes Paid                                              |          (9,900)                                                             |   |        (17,823)                                                                        |
|      Excess      Tax Benefit from Stock Options Exercised                |             (594)                                             |   |             (440)                                             |
|      Other      Cash Payments                                            |          (2,893)                                                             |   |          (2,497)                                                             |
| Net      Cash Flows – Operating Activities                                                  |       140,176                                                                               |   |       119,446                                                                               |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
| Cash      Flows from Investing Activities                                                         |                                                                                                                      |   |                                                                                                                      |
|      Capital      Expenditures                                           |     (186,875)                                                                                         |   |     (118,522)                                                                                         |
|      Deposit      - Collateral Trust Bond Trustee                        |     (133,111)                                                                                         |   |                     - |
|      Proceeds      from Investment in Springerville Lease Debt           |         11,333                                                                    |   |         11,206                                                                    |
|      Proceeds      from the Sale of Land                                 |               537                                   |   |            2,018                                                   |
|      Return      of Investment from Millennium Energy Business           |               816                                   |   |                 10                        |
|      Other      Cash Receipts                                            |            4,040                                                   |   |            2,467                                                   |
|      Investment      in and Loans to Equity Investees                    |                (66)                            |   |             (366)                                             |
|      Other      Cash Payments                                            |             (699)                                             |   |          (2,657)                                                             |
| Net      Cash Flows - Investing Activities                                                        |     (304,025)                                                                                         |   |     (105,844)                                                                                         |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
| Cash      Flows from Financing Activities                                                         |                                                                                                                      |   |                                                                                                                      |
|      Proceeds      from Issuance of Long-Term Debt                       |       220,745                                                                               |   |                     - |
|      Proceeds      from Borrowings under Revolving Credit Facilities     |       167,000                                                                               |   |       128,000                                                                               |
|      Payments      on Borrowings under Revolving Credit Facilities       |     (122,000)                                                                                         |   |        (77,000)                                                                        |
|      Payments      on Capital Lease Obligations                          |        (62,177)                                                                        |   |        (55,900)                                                                        |
|      Common      Stock Dividends Paid                                    |        (17,000)                                                                        |   |        (15,878)                                                                        |
|      Repayments      of Long-Term Debt                                   |        (13,000)                                                                        |   |          (3,000)                                                             |
|      Payment      of Debt Issue/Retirement Costs                         |          (2,089)                                                             |   |             (285)                                             |
|      Proceeds      from Stock Options Exercised                          |            1,861                                                   |   |            1,345                                                   |
|      Excess      Tax Benefit from Stock Options Exercised                |               594                                   |   |               440                                   |
|      Other      Cash Receipts                                            |            4,280                                                   |   |            4,940                                                   |
|      Other      Cash Payments                                            |          (1,581)                                                             |   |          (4,375)                                                             |
| Net      Cash Flows - Financing Activities                                                        |       176,633                                                                               |   |        (21,713)                                                                        |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
| Net Increase      (Decrease) in Cash and Cash Equivalents                                         |         12,784                                                                    |   |          (8,111)                                                             |
| Cash and Cash      Equivalents, Beginning of Year                                                 |         90,373                                                                    |   |       104,241                                                                               |
| Cash      and Cash Equivalents, End of Period                                                     |  $   103,157                                                                                          |   |  $     96,130                                                                               |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
| See Note 13      for supplemental cash flow information.                                          |                                                                                                                      |   |                                                                                                                      |
|                                                                                              |                                                                                                                      |   |                                                                                                                      |
| See Notes to      Condensed Consolidated Financial Statements.                                    |                                                                                                                      |   |                                                                                                                      |

----

Table of Contents

| UNISOURCE      ENERGY CORPORATION                                      |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE CONDENSED CONSOLIDATED BALANCE      SHEETS                 |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|                                                                   | June      30,                                                                                                                                                                         |   |   December      31,                                                                                                                                                         |
|                                                                   | 2008                                                                                                                                                                                  |   | 2007                                                                                                                                                                                  |
|                                                                   |   (Unaudited)                                                                                                                                                               |
| ASSETS                                                                 |         -      Thousands of Dollars -                                                                                                                                       |
| Utility      Plant                                                     |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|   Plant      in Service                                      |  $      3,710,527                                                                                                                                  |   |  $      3,565,735                                                                                                                                  |
|   Utility      Plant under Capital Leases                    | 702,337                                                                                                                                                                               |   | 702,337                                                                                                                                                                               |
|   Construction      Work in Progress                         | 203,385                                                                                                                                                                               |   | 195,105                                                                                                                                                                               |
|     Total      Utility Plant                       | 4,616,249                                                                                                                                                                             |   | 4,463,177                                                                                                                                                                             |
|   Less      Accumulated Depreciation and Amortization        | (1,576,259)                                                                                                                                                                           |   | (1,534,424)                                                                                                                                                                           |
|   Less      Accumulated Amortization of Capital Lease Assets | (534,215)                                                                                                                                                                             |   | (521,458)                                                                                                                                                                             |
|     Total      Utility Plant - Net                 | 2,505,775                                                                                                                                                                             |   | 2,407,295                                                                                                                                                                             |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
| Investments      and Other Property                                    |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|   Investments      in Lease Debt and Equity                  | 140,734                                                                                                                                                                               |   | 152,544                                                                                                                                                                               |
|   Other                                                      | 66,469                                                                                                                                                                                |   | 70,677                                                                                                                                                                                |
|     Total      Investments and Other Property      | 207,203                                                                                                                                                                               |   | 223,221                                                                                                                                                                               |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
| Current      Assets                                                    |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|   Cash      and Cash Equivalents                             | 103,157                                                                                                                                                                               |   | 90,373                                                                                                                                                                                |
|   First      Collateral Trust Bond Deposit                   | 133,111                                                                                                                                                                               |   |                               - |
|   Accounts      Receivable - Retail and Other                |              74,883                                                                                                  |   |              67,885                                                                                                  |
|   Accounts      Receivable - Wholesale Sales                 | 58,517                                                                                                                                                                                |   |              46,316                                                                                                  |
|   Unbilled      Accounts Receivable                          |              68,357                                                                                                  |   |              62,101                                                                                                  |
|   Allowance      for Doubtful Accounts                       |             (19,045)                                                                                                      |   |             (18,446)                                                                                                      |
|   Materials      and Fuel                                    | 88,588                                                                                                                                                                                |   | 82,433                                                                                                                                                                                |
|   Regulatory      Assets                                     | 9,812                                                                                                                                                                                 |   | 9,554                                                                                                                                                                                 |
|   Energy      Contracts - Derivative Assets                  | 70,795                                                                                                                                                                                |   | 5,489                                                                                                                                                                                 |
|   Deferred      Income Taxes - Current                       | 37,991                                                                                                                                                                                |   | 60,055                                                                                                                                                                                |
|   Income      Tax Receivable                                 | 15,591                                                                                                                                                                                |   |                               - |
|   Interest      Receivable on Capital Lease Debt Investment  | 5,454                                                                                                                                                                                 |   | 6,033                                                                                                                                                                                 |
|   Interest      Receivable - Other                           | 86                                                                                                                                                                                    |   | 3,417                                                                                                                                                                                 |
|   Other                                                      |              17,770                                                                                                  |   |              15,030                                                                                                  |
|     Total      Current Assets                      | 665,067                                                                                                                                                                               |   | 430,240                                                                                                                                                                               |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
| Regulatory      and Other Assets                                       |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|   Income      Taxes Recoverable Through Future Revenues      | 28,071                                                                                                                                                                                |   | 30,009                                                                                                                                                                                |
|   Regulatory      Assets - Other                             | 35,777                                                                                                                                                                                |   | 37,015                                                                                                                                                                                |
|   Energy      Contracts - Derivative Assets                  | 27,782                                                                                                                                                                                |   | 8,339                                                                                                                                                                                 |
|   Regulatory      Assets - Transition Recovery Asset         |                               - |   | 23,944                                                                                                                                                                                |
|   Other      Assets                                          | 24,621                                                                                                                                                                                |   | 25,653                                                                                                                                                                                |
|     Total      Regulatory and Other Assets         | 116,251                                                                                                                                                                               |   | 124,960                                                                                                                                                                               |
| Total      Assets                                                      |  $      3,494,296                                                                                                                                  |   |  $      3,185,716                                                                                                                                  |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
| See Notes to      Condensed Consolidated Financial Statements.         |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
|                                                                   |                                                                                                                                                                                  |   |                                                                                                                                                                                  |
| (Continued)                                                            |

----

Table of Contents

| UNISOURCE      ENERGY CORPORATION                                                     |                                                                                                                      |   |                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE      CONDENSED CONSOLIDATED BALANCE SHEETS                                |                                                                                                                      |   |                                                                                                                                                                                  |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
|                                                                                  | June      30,                                                                                                             |   |   December      31,                                                                                                                                                         |
|                                                                                  | 2008                                                                                                                      |   | 2007                                                                                                                                                                                  |
|                                                                                  |   (Unaudited)                                                                                                   |
| CAPITALIZATION      AND OTHER LIABILITIES                                             |  - Thousands of Dollars  -                                                                                           |
| Capitalization                                                                        |                                                                                                                      |   |                                                                                                                                                                                  |
|   Common      Stock                                                         |  $         706,312                                                      |   |  $         702,368                                                                                                                  |
|   Accumulated      Deficit                                                  |             (16,097)                                          |   |                  (628)                                                                           |
|   Accumulated      Other Comprehensive Income (Loss)                        |                5,611                           |   |             (11,665)                                                                                                      |
|   Common      Stock Equity                                                  |            695,826                                                 |   |             690,075                                                                                                       |
|   Capital      Lease Obligations                                            | 521,107                                                                                                                   |   | 530,973                                                                                                                                                                               |
|   Long-Term      Debt                                                       | 1,306,615                                                                                                                 |   | 993,870                                                                                                                                                                               |
|     Total      Capitalization                                     | 2,523,548                                                                                                                 |   | 2,214,918                                                                                                                                                                             |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
| Current      Liabilities                                                              |                                                                                                                      |   |                                                                                                                                                                                  |
|   Current      Obligations under Capital Leases                             | 20,758                                                                                                                    |   | 58,599                                                                                                                                                                                |
|   Borrowing      Under Revolving Credit Facilities                          |              20,000                                      |   | 10,000                                                                                                                                                                                |
|   Current      Maturities of Long-Term Debt                                 |            134,300                                                 |   | 204,300                                                                                                                                                                               |
|   Accounts      Payable - Purchased Power                                   |              81,172                                      |   | 50,684                                                                                                                                                                                |
|   Accounts      Payable                                                     | 68,861                                                                                                                    |   | 72,003                                                                                                                                                                                |
|   Interest      Accrued                                                     | 35,527                                                                                                                    |   | 48,091                                                                                                                                                                                |
|   Accrued      Taxes Other than Income Taxes                                | 37,120                                                                                                                    |   | 36,775                                                                                                                                                                                |
|   Accrued      Employee Expenses                                            | 20,756                                                                                                                    |   | 24,585                                                                                                                                                                                |
|   Regulatory      Liabilities - Over-Recovered Purchased Energy Costs       | 11,095                                                                                                                    |   | 13,084                                                                                                                                                                                |
|   Customer      Deposits                                                    | 21,651                                                                                                                    |   | 21,425                                                                                                                                                                                |
|   Regulatory      Liabilities - Derivatives Instruments                     | 30,923                                                                                                                    |   | 3,410                                                                                                                                                                                 |
|   Regulatory      Liabilities - Deferred CTC Revenue                        | 14,912                                                                                                                    |   |                               - |
|   Regulatory      Liabilities - Other                                       | 2,520                                                                                                                     |   | 26                                                                                                                                                                                    |
|   Energy      Contracts - Derivative Liabilities                            |              20,976                                      |   | 3,193                                                                                                                                                                                 |
|   Other                                                                     |                2,197                           |   |                1,506                                                                                       |
|     Total      Current Liabilities                                | 522,768                                                                                                                   |   | 547,681                                                                                                                                                                               |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
| Deferred      Credits and Other Liabilities                                           |                                                                                                                      |   |                                                                                                                                                                                  |
|   Deferred      Income Taxes - Noncurrent                                   | 158,958                                                                                                                   |   | 149,730                                                                                                                                                                               |
|   Pension      and Other Post-Retirement Benefits                           | 76,048                                                                                                                    |   | 76,407                                                                                                                                                                                |
|   Regulatory      Liabilities - Net Cost of Removal for Interim Retirements | 118,701                                                                                                                   |   | 106,695                                                                                                                                                                               |
|   Regulatory      Liabilities - Derivatives Instruments                     | 13,146                                                                                                                    |   | 6,426                                                                                                                                                                                 |
|   Regulatory      Liabilities - Over-Recovered Purchased Power Costs        |                     - |   | 9,295                                                                                                                                                                                 |
|   Customer      Advances for Construction                                   |              30,791                                      |   | 28,798                                                                                                                                                                                |
|   Energy      Contracts - Derivative Liabilities                            |                6,952                           |   | 4,930                                                                                                                                                                                 |
|   Other                                                                     | 43,384                                                                                                                    |   | 40,836                                                                                                                                                                                |
|     Total      Deferred Credits and Other Liabilities             | 447,980                                                                                                                   |   | 423,117                                                                                                                                                                               |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
| Commitments      and Contingencies (Note 7)                                           |                                                                                                                      |   |                                                                                                                                                                                  |
| Total      Capitalization and Other Liabilities                                       |  $      3,494,296                                                                      |   |  $      3,185,716                                                                                                                                  |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
| See Notes to      Condensed Consolidated Financial Statements.                        |                                                                                                                      |   |                                                                                                                                                                                  |
|                                                                                  |                                                                                                                      |   |                                                                                                                                                                                  |
| (Concluded)                                                                           |

----

Table of Contents

| UNISOURCE      ENERGY CORPORATION                                                                 |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |
|---------------------------------------------------------------------------------------------------|--------------------------------------------------------|----------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|--------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN      STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           | Accumulated |   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                | Common                                                                        |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           | Other |   | Total |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                | Shares                                                                        |                                                                           | Common                                                                        |                                                                                | Accumulated                                                                             | Comprehensive                                                                                  | Stockholders' |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                | Issued*                                                                       |                                                                           | Stock                                                                         |                                                                                |  Deficit                                                                           |                                                                                           | Income      (Loss) | Equity |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                | (Unaudited)                                                                   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                | - Thousands      of Dollars -                                                 |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| Balances      at December 31, 2007                                                                |                                                   |           35,315                                 |                                                                                    |  $     702,368                                        |                                                                          |  $           (628) |                                                                          |  $      (11,665)                                 |                                                                                    |  $     690,075                                                   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| Impact of      Change in Pension Plan Measurement Date                                            |                                                   |                                                                                               |                                                                                    |              (603) |                                                                          |                                                                           |                                                                          |              (603) |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| Comprehensive      Income                                                                         |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |
|                                                                                              | 2008      Year-to-Date Net Income                      |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |             2,132 |                                                                                |                                                                                    |                                                                                           |             2,132 |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              | Unrealized      Gain on Cash Flow Hedges               |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |
|                                                                                              |                                                   | (net of      $12,768 income taxes)                                                                 |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |           19,473                             |   |           19,473 |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              | Reclassification      of Unrealized Gain on            |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |
|                                                                                              |                                                   | Cash Flow      Hedges to Net Income                                                                |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |
|                                                                                              |                                                   | (net of      $1,381 income taxes)                                                                  |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |            (2,107)                      |   |            (2,107) |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              | Employee      Benefit Obligations                      |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |
|                                                                                              |                                                   | Amortization      of net actuarial loss and prior service credit                                   |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |
|                                                                                              |                                                   | included in      net periodic benefit cost                                                         |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |
|                                                                                              |                                                   | (net of $59      income taxes)                                                                     |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                (90) |   |                (90) |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| Total      Comprehensive Income                                                                   |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |           19,408                             |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
|                                                                                              | Dividends      Declared                                |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |          (16,998)                |                                                                                |                                                                                    |                                                                                           |          (16,998) |
|                                                                                              | Shares Issued      under Stock Compensation Plans      |                 22 |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |
|                                                                                              | Shares Issued      for Stock Options                   |                                                                                               |               113 |                                                                                |             1,861 |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |             1,861 |
|                                                                                              | Tax Benefit      Realized from Stock Options Exercised |                                                                                               |               594 |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |               594 |
|                                                                                              | Other                                                  |                                                                                               |                                                                                    |                                                                                |             1,489 |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |             1,489 |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| Balances      at June 30, 2008                                                                    |                                                   |           35,450                                 |                                                                                    |  $     706,312                                        |                                                                          |  $      (16,097)                            |                                                                          |  $         5,611                  |                                                                                    |  $     695,826                                                   |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| * UniSource      Energy has 75 million authorized shares of Common Stock.                         |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |
|                                                                                              |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |                                                                                    |                                                                                           |   |   |   |
| See Notes to      Condensed Consolidated Financial Statements.                                    |                                                   |                                                                                               |                                                                                    |                                                                                |                                                                          |                                                                           |                                                                          |                                                                                |

----

Table of Contents

| TUCSON ELECTRIC POWER COMPANY                                         |   |                                                                                        |   |                                                         |                                      |   |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------------------------------------|--------|
| COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF      INCOME          |   |                                                                                        |   |                                                         |                                      |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
| Three Months      Ended                                               |   |                                                                                        |   | Six Months      Ended                                        |                                      |
| June      30,                                                         |   |                                                                                        |   | June      30,                                                |                                      |
| 2008                                                                  |   | 2007                                                                                        |   |                                                         |                                      |   | 2008 |   | 2007 |   |
| (Unaudited)                                                           |   |                                                                                        |   |                                                         | (Unaudited)                               |   |
|   -      Thousands of Dollars -                             |   |                                                                                        |   |                                                         |   -      Thousands of Dollars - |   |
|                                                                  |   |                                                                                        |   | Operating      Revenues                                      |                                      |   |   |   |   |   |
|  $  205,970                                            |   |  $  209,400                                                                  |   |   Electric      Retail Sales                       |                                      |   |  $   367,222 |   |  $     369,352 |   |
|       (14,898)                          |   |                - |   |   Provision      for Rate Refunds - CTC Revenue    |                                      |   | (14,898) |   |                   - |   |
|      191,072                                 |   |      209,400                                                       |   |   Net      Electric Retail Sales                   |                                      |   |      352,324 |   |         369,352 |   |
|        82,582                      |   |       43,750                                                  |   |   Electric      Wholesale Sales                    |                                      |   |      134,895 |   |          93,217 |   |
|        20,487                      |   |       15,221                                                  |   |   Other      Revenues                              |                                      |   |        35,524 |   |          25,431 |   |
|      294,141                                 |   |      268,371                                                       |   |     Total      Operating Revenues        |                                      |   |      522,743 |   |         488,000 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|                                                                  |   |                                                                                        |   | Operating      Expenses                                      |                                      |   |   |   |   |   |
|        72,749                      |   |       72,208                                                  |   |   Fuel                                             |                                      |   |      140,699 |   |         133,288 |   |
|        78,554                      |   |       39,162                                                  |   |   Purchased      Power                             |                                      |   |      110,776 |   |          57,017 |   |
|        63,911                      |   |       52,594                                                  |   |   Other      Operations and Maintenance            |                                      |   |      124,534 |   |         111,724 |   |
|        30,707                      |   |       29,579                                                  |   |   Depreciation      and Amortization               |                                      |   |        61,997 |   |          58,641 |   |
|          6,695           |   |       19,219                                                  |   |   Amortization      of Transition Recovery Asset   |                                      |   |        23,945 |   |          34,205 |   |
|        10,516                      |   |       10,189                                                  |   |   Taxes      Other Than Income Taxes               |                                      |   |        21,064 |   |          20,606 |   |
|      263,132                                 |   |      222,951                                                       |   |     Total      Operating Expenses        |                                      |   |      483,015 |   |         415,481 |   |
|        31,009                      |   |       45,420                                                  |   |       Operating      Income    |                                      |   |        39,728 |   |          72,519 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|                                                                  |   |                                                                                        |   | Other      Income (Deductions)                               |                                      |   |   |   |   |   |
|          2,678           |   |         3,908                                       |   |   Interest      Income                             |                                      |   |          5,466 |   |            7,688 |   |
|          2,260           |   |         1,784                                       |   |   Other      Income                                |                                      |   |          4,018 |   |            2,469 |   |
|           (258)     |   |        (1,271)                                           |   |   Other      Expense                               |                                      |   |            (731) |   |           (1,677) |   |
|          4,680           |   |         4,421                                       |   |     Total      Other Income (Deductions) |                                      |   |          8,753 |   |            8,480 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|                                                                  |   |                                                                                        |   | Interest      Expense                                        |                                      |   |   |   |   |   |
|        12,624                      |   |       12,676                                                  |   |   Long-Term      Debt                              |                                      |   |        24,337 |   |          25,115 |   |
|        14,327                      |   |       16,120                                                  |   |   Interest      on Capital Leases                  |                                      |   |        28,655 |   |          32,266 |   |
|            464 |   |         1,399                                       |   |   Other      Interest Expense                      |                                      |   |          1,469 |   |            2,958 |   |
|         (1,297)               |   |           (992)                           |   |   Interest      Capitalized                        |                                      |   |         (2,352) |   |           (1,867) |   |
|        26,118                      |   |       29,203                                                  |   |     Total      Interest Expense          |                                      |   |        52,109 |   |          58,472 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|          9,571           |   |       20,638                                                  |   | Income      Before Income Taxes                              |                                      |   |         (3,628) |   |          22,527 |   |
|          3,806           |   |         8,367                                       |   |   Income      Tax Expense (Benefit)                |                                      |   |            (530) |   |            9,435 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
|  $      5,765                      |   |  $    12,271                                                       |   | Net      Income (Loss)                                       |                                      |   |  $     (3,098) |   |  $       13,092 |   |
|                                                                  |   |                                                                                        |   |                                                         |                                      |   |   |   |   |   |
| See Notes to      Condensed Consolidated Financial Statements.        |   |                                                                                        |   |                                                         |                                      |   |

----

Table of Contents

| TUCSON      ELECTRIC POWER COMPANY                                                                |                                                                                                |   |                                                                                                                            |
|---------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH      FLOWS                                  |                                                                                                |   |                                                                                                                            |
|                                                                                              |                                                                                                |   |                                                                                                                            |
|                                                                                              | Six Months      Ended                                                                               |
|                                                                                              | June      30,                                                                                       |
|                                                                                              |                2008                                    |   |               2007                                                                      |
|                                                                                              | (Unaudited)                                                                                         |
|                                                                                              |   -Thousands      of Dollars-                                                             |
| Cash      Flows from Operating Activities                                                         |                                                                                                |   |                                                                                                                            |
|      Cash      Receipts from Electric Retail Sales                       |  $    380,725                                                              |   |  $    380,576                                                                                          |
|      Cash      Receipts from Electric Wholesale Sales                    |         168,272                                             |   |         158,217                                                                         |
|      Cash      Receipts from Operating Springerville Unit 3              |           28,221                                  |   |           18,123                                                              |
|      Income      Tax Refunds Received                                    |           11,484                                  |   |                      - |
|      Interest      Received                                              |             9,921                       |   |             8,476                                                   |
|      Reimbursement      of Affiliate Charges                             |             6,814                       |   |                      - |
|      Sale      of Excess Emission Allowances                             |             1,494                       |   |             6,920                                                   |
|      Other      Cash Receipts                                            |             3,569                       |   |             3,937                                                   |
|      Fuel      Costs Paid                                                |       (134,967)                                                       |   |       (124,525)                                                                                   |
|      Purchased      Power Costs Paid                                     |       (119,557)                                                       |   |       (106,577)                                                                                   |
|      Wages      Paid, Net of Amounts Capitalized                         |         (45,448)                                            |   |         (47,277)                                                                        |
|      Payment      of Other Operations and Maintenance Costs              |         (73,929)                                            |   |         (74,181)                                                                        |
|      Capital      Lease Interest Paid                                    |         (27,966)                                            |   |         (33,879)                                                                        |
|      Taxes      Other than Income Taxes Paid, Net of Amounts Capitalized |         (55,782)                                            |   |         (54,389)                                                                        |
|      Interest      Paid, Net of Amounts Capitalized                      |         (19,598)                                            |   |         (24,264)                                                                        |
|      Income      Taxes Paid                                              |  -                                                                                             |   |         (16,017)                                                                        |
|      Other      Cash Payments                                            |            (2,086)                           |   |            (1,937)                                                       |
| Net      Cash Flows – Operating Activities                                                  |         131,167                                             |   |           93,203                                                              |
|                                                                                              |                                                                                                |   |                                                                                                                            |
| Cash      Flows from Investing Activities                                                         |                                                                                                |   |                                                                                                                            |
|      Capital      Expenditures                                           |       (153,031)                                                       |   |         (82,397)                                                                        |
|      Deposit      - Collateral Trust Bond Trustee                        |       (133,111)                                                       |   |                      - |
|      Proceeds      from Investment in Springerville Lease Debt           |           11,333                                  |   |           11,206                                                              |
|      Proceeds      from Sale of Land                                     |                 537 |   |                 642                             |
|      Other      Cash Payments                                            |               (699)           |   |            (2,325)                                                       |
|      Other      Cash Receipts                                            |             4,040                       |   |                     8       |
| Net      Cash Flows - Investing Activities                                                        |       (270,931)                                                       |   |         (72,866)                                                                        |
|                                                                                              |                                                                                                |   |                                                                                                                            |
| Cash      Flows from Financing Activities                                                         |                                                                                                |   |                                                                                                                            |
|      Proceeds      from Issuance of Long-Term Debt                       |         220,745                                             |   |                      - |
|      Proceeds      from Borrowings under Revolving Credit Facility       |         120,000                                             |   |         105,000                                                                         |
|      Payments      on Borrowings under Revolving Credit Facility         |       (110,000)                                                       |   |         (52,000)                                                                        |
|      Payments      on Capital Lease Obligations                          |         (62,137)                                            |   |         (55,854)                                                                        |
|      Repayments      of Long-Term Debt                                   |         (10,000)                                            |   |                      - |
|      Payment      of Debt Issue/Retirement Costs                         |            (2,073)                           |   |               (271)                                       |
|      Other      Cash Receipts                                            |                 553 |   |             4,727                                                   |
|      Other      Cash Payments                                            |               (294)           |   |               (533)                                       |
| Net      Cash Flows - Financing Activities                                                        |         156,794                                             |   |             1,069                                                   |
|                                                                                              |                                                                                                |   |                                                                                                                            |
| Net Increase      in Cash and Cash Equivalents                                                    |           17,030                                  |   |           21,406                                                              |
| Cash and Cash      Equivalents, Beginning of Year                                                 |           26,610                                  |   |           19,711                                                              |
| Cash      and Cash Equivalents, End of Period                                                     |  $       43,640                                             |   |  $       41,117                                                                         |
|                                                                                              |                                                                                                |   |                                                                                                                            |
| See Note 13      for supplemental cash flow information.                                          |                                                                                                |   |                                                                                                                            |
|                                                                                              |                                                                                                |   |                                                                                                                            |
| See Notes to      Condensed Consolidated Financial Statements.                                    |                                                                                                |   |                                                                                                                            |

----

Table of Contents

| TUCSON      ELECTRIC POWER COMPANY                                     |                                                                                                                      |   |                                                                                                                      |
|------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE CONDENSED CONSOLIDATED BALANCE      SHEETS                 |                                                                                                                      |   |                                                                                                                      |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
|                                                                   |    June      30,                                                                                           |   |   December      31,                                                                                             |
|                                                                   | 2008                                                                                                                      |   | 2007                                                                                                                      |
|                                                                   |   (Unaudited)                                                                                                   |
| ASSETS                                                                 |         -      Thousands of Dollars -                                                                           |
| Utility      Plant                                                     |                                                                                                                      |   |                                                                                                                      |
|   Plant      in Service                                      |  $      3,214,279                                                                      |   |  $      3,143,823                                                                      |
|   Utility      Plant under Capital Leases                    | 701,631                                                                                                                   |   | 701,631                                                                                                                   |
|   Construction      Work in Progress                         | 179,058                                                                                                                   |   | 123,833                                                                                                                   |
|     Total      Utility Plant                       | 4,094,968                                                                                                                 |   | 3,969,287                                                                                                                 |
|   Less      Accumulated Depreciation and Amortization        | (1,533,928)                                                                                                               |   | (1,490,724)                                                                                                               |
|   Less      Accumulated Amortization of Capital Lease Assets | (533,768)                                                                                                                 |   | (521,057)                                                                                                                 |
|     Total      Utility Plant - Net                 | 2,027,272                                                                                                                 |   | 1,957,506                                                                                                                 |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
| Investments      and Other Property                                    |                                                                                                                      |   |                                                                                                                      |
|   Investments      in Lease Debt and Equity                  | 140,734                                                                                                                   |   | 152,544                                                                                                                   |
|   Other                                                      | 33,537                                                                                                                    |   | 35,460                                                                                                                    |
|     Total      Investments and Other Property      | 174,271                                                                                                                   |   | 188,004                                                                                                                   |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
|   Current      Assets                                        |                                                                                                                      |   |                                                                                                                      |
|   Cash      and Cash Equivalents                             | 43,640                                                                                                                    |   | 26,610                                                                                                                    |
|   First      Collateral Trust Bond Deposit                   | 133,111                                                                                                                   |   |                     - |
|   Accounts      Receivable - Wholesale Sales                 | 58,034                                                                                                                    |   |              46,316                                      |
|   Accounts      Receivable - Retail and Other                | 54,322                                                                                                                    |   | 44,431                                                                                                                    |
|   Unbilled      Accounts Receivable                          |              50,587                                      |   |              35,941                                      |
|   Allowance      for Doubtful Accounts                       |             (16,727)                                          |   |             (16,538)                                          |
|   Intercompany      Accounts Receivable                      | 23,633                                                                                                                    |   | 8,740                                                                                                                     |
|   Income      Tax Receivable                                 | 5,552                                                                                                                     |   |                8,070                           |
|   Materials      and Fuel Inventory                          | 78,266                                                                                                                    |   | 72,732                                                                                                                    |
|   Regulatory      Assets                                     | 9,812                                                                                                                     |   | 9,554                                                                                                                     |
|   Deferred      Income Taxes - Current                       | 38,346                                                                                                                    |   | 59,157                                                                                                                    |
|   Interest      Receivable on Capital Lease                  | 5,454                                                                                                                     |   | 6,033                                                                                                                     |
|   Interest      Receivable - Current                         |                     - |   | 3,350                                                                                                                     |
|   Energy      Contracts - Derivative Instruments             | 34,239                                                                                                                    |   | 2,036                                                                                                                     |
|   Other                                                      | 15,449                                                                                                                    |   | 13,062                                                                                                                    |
|     Total      Current Assets                      | 533,718                                                                                                                   |   | 319,494                                                                                                                   |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
| Regulatory      and Other Assets                                       |                                                                                                                      |   |                                                                                                                      |
|   Income      Taxes Recoverable Through Future Revenues      | 28,071                                                                                                                    |   | 30,009                                                                                                                    |
|   Regulatory      Assets - Other                             | 33,410                                                                                                                    |   | 34,123                                                                                                                    |
|   Energy      Contracts - Derivative Instruments             | 8,000                                                                                                                     |   | 492                                                                                                                       |
|   Regulatory      Assets - Transition Recovery Asset         |                     - |   | 23,945                                                                                                                    |
|   Other      Assets                                          | 19,331                                                                                                                    |   | 19,463                                                                                                                    |
|     Total      Regulatory and Other Assets         | 88,812                                                                                                                    |   | 108,032                                                                                                                   |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
| Total      Assets                                                      |  $      2,824,073                                                                      |   |  $      2,573,036                                                                      |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
| See Notes to      Condensed Consolidated Financial Statements.         |                                                                                                                      |   |                                                                                                                      |
|                                                                   |                                                                                                                      |   |                                                                                                                      |
| (Continued)                                                            |

----

Table of Contents

| TUCSON      ELECTRIC POWER COMPANY                                                    |                                                                                            |   |                                                                                                                      |
|---------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| COMPARATIVE      CONDENSED CONSOLIDATED BALANCE SHEETS                                |                                                                                            |   |                                                                                                                      |
|                                                                                  |                                                                                            |   |                                                                                                                      |
|                                                                                  | June      30,                                                                                   |   |   December      31,                                                                                             |
|                                                                                  | 2008                                                                                            |   | 2007                                                                                                                      |
|                                                                                  |   (Unaudited)                                                                         |
| CAPITALIZATION      AND OTHER LIABILITIES                                             |         -      Thousands of Dollars -                                                 |
| Capitalization                                                                        |                                                                                            |   |                                                                                                                      |
|   Common      Stock                                                         |  $         813,971                            |   |  $         813,971                                                      |
|   Capital      Stock Expense                                                |               (6,357)     |   |               (6,357)                               |
|   Accumulated      Deficit                                                  |           (222,112)                           |   |            (218,488)                                               |
|   Accumulated      Other Comprehensive Income (Loss)                        |                1,084 |   |             (11,777)                                          |
|   Common      Stock Equity                                                  |            586,586                       |   |             577,349                                           |
|   Capital      Lease Obligations                                            | 520,905                                                                                         |   | 530,714                                                                                                                   |
|   Long-Term      Debt                                                       | 903,615                                                                                         |   | 682,870                                                                                                                   |
|     Total      Capitalization                                     | 2,011,106                                                                                       |   | 1,790,933                                                                                                                 |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| Current      Liabilities                                                              |                                                                                            |   |                                                                                                                      |
|   Current      Obligations under Capital Leases                             | 20,661                                                                                          |   | 58,502                                                                                                                    |
|   Current      Maturities of Long-Term Debt                                 | 128,300                                                                                         |   | 138,300                                                                                                                   |
|   Borrowing      Under Revolving Credit Facility                            | 20,000                                                                                          |   |              10,000                                      |
|   Accounts      Payable                                                     | 62,940                                                                                          |   | 64,664                                                                                                                    |
|   Accounts      Payable - Purchased Power                                   | 62,069                                                                                          |   | 22,935                                                                                                                    |
|   Intercompany      Accounts Payable                                        |                8,304 |   | 4,512                                                                                                                     |
|   Interest      Accrued                                                     | 29,000                                                                                          |   | 41,394                                                                                                                    |
|   Accrued      Taxes Other than Income Taxes                                | 30,618                                                                                          |   | 28,690                                                                                                                    |
|   Accrued      Employee Expenses                                            | 18,777                                                                                          |   | 22,557                                                                                                                    |
|   Energy      Contracts - Derivative Instruments                            | 19,281                                                                                          |   | 2,460                                                                                                                     |
|   Regulatory      Liabilities - Deferred CTC Revenue                        | 14,912                                                                                          |   |                     - |
|   Regulatory      Liabilities - Other                                       | 2,134                                                                                           |   |                     - |
|   Other                                                                     | 16,937                                                                                          |   | 15,533                                                                                                                    |
|     Total      Current Liabilities                                | 433,933                                                                                         |   | 409,547                                                                                                                   |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| Deferred      Credits and Other Liabilities                                           |                                                                                            |   |                                                                                                                      |
|   Deferred      Income Taxes - Noncurrent                                   | 163,264                                                                                         |   | 163,834                                                                                                                   |
|   Regulatory      Liabilities - Net Cost of Removal for Interim Retirements | 91,325                                                                                          |   | 87,311                                                                                                                    |
|   Energy      Contracts - Derivative Instruments                            | 3,771                                                                                           |   | 3,278                                                                                                                     |
|   Pension      and Other Post-Retirement Benefits                           | 72,535                                                                                          |   | 72,755                                                                                                                    |
|   Other                                                                     | 48,139                                                                                          |   | 45,378                                                                                                                    |
|     Total      Deferred Credits and Other Liabilities             | 379,034                                                                                         |   | 372,556                                                                                                                   |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| Commitments      and Contingencies (Note 7)                                           |                                                                                            |   |                                                                                                                      |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| Total      Capitalization and Other Liabilities                                       |  $      2,824,073                                            |   |  $      2,573,036                                                                      |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| See Notes to      Condensed Consolidated Financial Statements.                        |                                                                                            |   |                                                                                                                      |
|                                                                                  |                                                                                            |   |                                                                                                                      |
| (Concluded)                                                                           |

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Table of Contents

| TUCSON      ELECTRIC POWER COMPANY                                                                |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |
|---------------------------------------------------------------------------------------------------|----------------------------------------------|------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|-------------------------------|------------------------------------------|---------------------------------------------------------------------------|-------------------------------------------------------------------------------------|---------------|------------------------------------------------------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN      STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           | Accumulated |   |   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     | Capital                                                                   |                                                                                |          |                                                                                           | Other |   | Total |
|                                                                                              |                                         |                                                             |   |                                                                                | Common                        |                                     | Stock                                                                     |                                                                                | Accumulated   |                                                                                           | Comprehensive | Stockholder's |
|                                                                                              |                                         |                                                             |   |                                                                                | Stock                         |                                     | Expense                                                                   |                                                                                |  Deficit |                                                                                           | Income      (Loss) | Equity |
|                                                                                              |                                         |                                                             |   |                                                                                | (Unaudited)                   |
|                                                                                              |                                         |                                                             |   |                                                                                | - Thousands      of Dollars - |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| Balances      at December 31, 2007                                                                |                                         |  $     813,971                     |   |  $        (6,357)                      |                          |  $    (218,488) |                                                                      |  $      (11,777)                                 |          |  $     577,349                                                   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| Impact of      Change in Pension Plan Measurement Date                                            |                                         |                                                             |   |              (526) |                          |                                     |                                                                      |              (526) |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| Comprehensive      Income:                                                                        |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |
|                                                                                              | 2008      Year-to-Date Net Loss              |                                                             |   |                                                                                |                          |                                     |            (3,098) |                                                                                |          |                                                                                           |            (3,098) |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              | Unrealized      Gain on Cash Flow Hedges     |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |
|                                                                                              |                                         | (net of      $9,800 income taxes)                                |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |           14,947                             |   |           14,947 |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              | Reclassification      of Unrealized Gains on |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |
|                                                                                              |                                         | Cash Flow      Hedges to Net Income                              |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |
|                                                                                              |                                         | (net of      $1,309 income taxes)                                |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |            (1,996)                      |   |            (1,996) |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              | Employee      Benefit Obligations            |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |
|                                                                                              |                                         | Amortization      of net actuarial loss and prior service credit |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |
|                                                                                              |                                         | included in      net periodic benefit cost                       |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |
|                                                                                              |                                         | (net of $59      income taxes)                                   |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                (90) |   |                (90) |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| Total      Comprehensive Income                                                                   |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |             9,763                  |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| Balances      at June 30, 2008                                                                    |                                         |  $     813,971                     |   |  $        (6,357)                      |                          |  $    (222,112) |                                                                      |  $         1,084                  |          |  $     586,586                                                   |
|                                                                                              |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |          |                                                                                           |   |   |   |
| See Notes to      Condensed Consolidated Financial Statements.                                    |                                         |                                                             |   |                                                                                |                          |                                     |                                                                      |                                                                                |

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NOTES 

----

NOTE

NOTE

----

Table of Contents

----

| ·   | an      independent regulator sets rates; |
|--------------------|-------------------------------------------|

| ·   | the regulator      sets the rates to recover the specific costs of providing service;      and |
|--------------------|------------------------------------------------------------------------------------------------|

| ·   | the service      territory lacks competitive pressures to reduce rates below the rates set      by the regulator. |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | a period from      November 1999 through 2008 for TEP to transition its generation assets      from a cost of service based rate structure to a market, or competitive,      rate structure; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the recovery      through rates during the transition period of $450 million of stranded      generation costs (Transition Recovery Asset) through a fixed competitive      transition charge (Fixed CTC); |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | capped rates      for TEP retail customers through2008; |
|--------------------|---------------------------------------------------------|

| ·   | an ACC      interim review of TEP retail rates in2004; |
|--------------------|--------------------------------------------------------|

| ·   | unbundling of      electric services with separate rates or prices for generation,      transmission, distribution, metering, meter reading, billing and      collection, and ancillary services; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a process for      Energy Service Providers (ESPs) to become licensed by the ACC to sell      generation services at market prices to TEP retail    customers; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | access for      TEP retail customers to buy market priced generation services from ESPs      beginning in 2000 (currently, no TEP customers are purchasing generation      services from ESPs); and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | transmission      and distribution services would remain subject to regulation on a cost of      service basis. |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | the 1999      Settlement Agreement and its effect on how TEP’s rates for generation      services will be determined after December 31,  2008; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | TEP’s      proposed amendments to the 1999 Settlement Agreement;  and |
|--------------------|-----------------------------------------------------------------------------|

| ·   | Demand-Side      Management (DSM), Renewable Energy Standards Tariffs (REST), and Time of      Use Tariffs (TOU). |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

----

Table of Contents

----

| (1)   | Market-based      generation and cost of service for transmission and distribution, showing      a revenue deficiency of $172 million, reflecting an overall increase of      approximately 22% over current retailrates. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Cost-of-service      for generation, transmission and distribution showing a revenue deficiency      of $181 million, reflecting an overall increase of approximately 23% over      current retail rates. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Hybrid      methodology with cost of service for generation, transmission and      distribution. However, certain generation assets would be excluded from      cost of service, showing a revenue deficiency of $117 million, reflecting      an overall increase of approximately 15% over current retail      rates. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (1)   | The PGA factor, computed      monthly, is a calculation of the twelve-month rolling weighted average gas      cost, and automatically adjusts monthly, subject to limitations on how      much the price per therm may change in a twelve month      period.  Effective December 2007, the ACC increased the annual      cap on the maximum increase in the PGA factor from $0.10 per therm to      $0.15 per therm in a twelve monthperiod. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | At any time      UNS Gas’ PGA bank balance is under-recovered, UNS Gas may request a PGA surcharge with the      goal of collecting the amount deferred from customers over a period deemed      appropriate by the ACC.  When the PGA bank balance reaches an      over-collected balance of $10 million on a billed basis, UNS Gas is      required to request a PGA      surcredit with the goal of returning the over-collected balance to      customers over a period deemed appropriate by the  ACC. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                             | UNSGas                                             | UNSElectric                                  |   | UNSGas                                       | UNSElectric                                              |
|----------------------------------|----------------------------------------------------|----------------------------------------------|--------|----------------------------------------------|----------------------------------------------------------|
|                             | -Millions of      Dollars-                         |
|                             | June      30, 2008                                 | December 31,      2007                       |
| Balance on the Revolver          | $        - | $     29            |   | $       - | $      26                  |
| Outstanding Letters of    Credit | $        - | $            1 |   | $    10                  | $         - |

NOTE

| (1)   | TEP, a      vertically integrated electric utility business, is UniSource Energy’s      largest subsidiary. |
|-----------------|-------------------------------------------------------------------------------------------------------------------|

| (2)   | UNS Gas is a      regulated gas distribution utilitybusiness. |
|-----------------|---------------------------------------------------------------|

| (3)   | UNS Electric      is a regulated electric distribution utility  business. |
|-----------------|---------------------------------------------------------------------------|

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|                                     |   | Reportable      Segments |   |   |   |   |   |                       |   |   | UniSource |   |
|------------------------------------------|--------|--------------------------|--------|--------|--------|--------|--------|----------------------------|--------|--------|-----------|--------|
|                                     |   | TEP                      |   |   | UNSGas |   |   | UNS      Electric          |   |   | Other     |   |   | Reconciling      Adjustments |   |   | EnergyConsolidated |   |
| Income      Statement                    |   |                     |   |   |   |   |   | -Millions of      Dollars- |   |   |      |   |
| Three      months ended June 30, 2008:   |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |
| Operating Revenues -      External       |   | $                        | 286    |   |   | $      | 30     |                       |   | $      | 44        |   |   | $ | - |   |   | $ | - |   |   | $ | 360 |   |
| Operating Revenues -      Intersegment   |   |                     | 8      |   |   |   | 2      |                       |   |   | 2         |   |   |   | 6 |   |   |   | (18 | ) |   |   | - |   |
| Income (Loss) Before Income      Taxes   |   |                     | 10     |   |   |   | -      |                       |   |   | 1         |   |   |   | (3 | ) |   |   | - |   |   |   | 8 |   |
| Net Income (Loss)                        |   |                     | 6      |   |   |   | -      |                       |   |   | 1         |   |   |   | (2 | ) |   |   | - |   |   |   | 5 |   |
|                                     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Three      months ended June 30, 2007:   |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Revenues -      External       |   | $                        | 266    |   |   | $      | 23     |                       |   | $      | 41        |   |   | $ | - |   |   | $ | - |   |   | $ | 330 |   |
| Operating Revenues -      Intersegment   |   |                     | 2      |   |   |   | -      |                       |   |   | -         |   |   |   | 4 |   |   |   | (6 | ) |   |   | - |   |
| Income (Loss) Before Income      Taxes   |   |                     | 21     |   |   |   | (2     | )                          |   |   | 3         |   |   |   | (2 | ) |   |   | - |   |   |   | 20 |   |
| Net Income (Loss)                        |   |                     | 12     |   |   |   | (1     | )                          |   |   | 2         |   |   |   | (1 | ) |   |   | - |   |   |   | 12 |   |
|                                     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six      months ended June 30, 2008:     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Revenues –      External |   | $                        | 512    |   |   | $      | 97     |                       |   | $      | 81        |   |   | $ | - |   |   | $ | - |   |   | $ | 690 |   |
| Operating Revenues -      Intersegment   |   |                     | 11     |   |   |   | 2      |                       |   |   | 2         |   |   |   | 8 |   |   |   | (23 | ) |   |   | - |   |
| Income (Loss) Before Income      Taxes   |   |                     | (4     | )      |   |   | 11     |                       |   |   | 2         |   |   |   | (4 | ) |   |   | - |   |   |   | 5 |   |
| Net Income (Loss)                        |   |                     | (3     | )      |   |   | 7      |                       |   |   | 1         |   |   |   | (3 | ) |   |   | - |   |   |   | 2 |   |
|                                     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six      months ended June 30, 2007:     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Revenues -      External       |   | $                        | 485    |   |   | $      | 86     |                       |   | $      | 76        |   |   | $ | - |   |   | $ | - |   |   | $ | 647 |   |
| Operating Revenues -      Intersegment   |   |                     | 3      |   |   |   | -      |                       |   |   | -         |   |   |   | 8 |   |   |   | (11 | ) |   |   | - |   |
| Income (Loss) Before Income      Taxes   |   |                     | 23     |   |   |   | 6      |                       |   |   | 3         |   |   |   | (3 | ) |   |   | - |   |   |   | 29 |   |
| Net Income (Loss)                        |   |                     | 13     |   |   |   | 3      |                       |   |   | 2         |   |   |   | (1 | ) |   |   | - |   |   |   | 17 |   |
|                                     |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet                       |   |                     |   |   |   |   |   |                       |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Assets, June 30,    2008           |   | $                        | 2,824  |   |   | $      | 270    |                       |   | $      | 286       |   |   | $ | 1,115 |   |   | $ | (1,001 | ) |   | $ | 3,494 |   |
| Total Assets, December 31,      2007     |   |                     | 2,573  |   |   |   | 276    |                       |   |   | 226       |   |   |   | 1,077 |   |   |   | (966 | ) |   |   | 3,186 |   |

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|                                          |   | Reportable      Segments |   |   |      |    |   |           |                       |    |        |   |
|-----------------------------------------------|--------|--------------------------|--------|--------|-----------|---------|--------|----------------|----------------------------|---------|-------------|--------|
|                                          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   UniSource |   |   |  UniSource |   |
|                                          |   |                     |   |   |  UNS |    |   |  UNS      |                       |    |        |   |   |  Energy |   |   |  Energy |   |
|                                          |   |  TEP                |   |   |  Gas |    |   |  Electric |                       |    | Other  |   |   |  Eliminations |   |   |  Consolidated |   |
|  Intersegment      Revenue               |   |                     |   |   |      |    |   |           | -Millions of      Dollars- |    |        |   |   |
| Three      months ended June 30, 2008:        |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |
| Wholesale Sales - TEP to      UNSE            |   | $                        | 5      |   |      | $       | -      |           |                       | $       | -           |   |   | $ | - |   |   | $ | (5 | ) |   | $ | - |   |
| Wholesale Sales  - UNSE to      TEP |   |                     | -      |   |      |    | -      |           |                       |    | 2           |   |   |   | - |   |   |   | (2 | ) |   |   | - |   |
| Wholesale Sales – UED to      UNSE      |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 1 |   |   |   | (1 | ) |   |   | - |   |
| Gas Revenue – UNSG to    UNSE           |   |                     | -      |   |      |    | 2      |           |                       |    | -           |   |   |   | - |   |   |   | (2 | ) |   |   | - |   |
| Other Revenue – TEP to Affiliates(1)    |   |                     | 2      |   |      |    | -      |           |                       |    | -           |   |   |   | - |   |   |   | (2 | ) |   |   | - |   |
| Other Revenue - MEH to TEP &      UNSE(2) |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 5 |   |   |   | (5 | ) |   |   | - |   |
| Other Revenue – TEP to UNSE(3)          |   |                     | 1      |   |      |    | -      |           |                       |    | -           |   |   |   | - |   |   |   | (1 | ) |   |   | - |   |
| Total Intersegment    Revenue                 |   | $                   | 8      |   |      | $  | 2      |           |                       | $  | 2           |   |   | $  | 6 |   |   | $  | (18 | ) |   | $ | - |   |
|                                          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Three      months ended June 30, 2007:        |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Revenue – TEP to Affiliates(1)    |   | $                        | 2      |   |      | $       | -      |           |                       | $       | -           |   |   | $ | - |   |   | $ | (2 | ) |   | $ | - |   |
| Other Revenue - MEH to TEP &      UNSE(2) |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 4 |   |   |   | (4 | ) |   |   | - |   |
| Total Intersegment    Revenue                 |   | $                   | 2      |   |      | $  | -      |           |                       | $  | -           |   |   | $  | 4 |   |   | $  | (6 | ) |   | $ | - |   |
|                                          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six      months ended June 30, 2008:          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale Sales - TEP to      UNSE            |   | $                        | 6      |   |      | $       | -      |           |                       | $       | -           |   |   | $ | - |   |   | $ | (6 | ) |   | $ | - |   |
| Wholesale Sales  - UNSE to      TEP |   |                     | -      |   |      |    | -      |           |                       |    | 2           |   |   |   | - |   |   |   | (2 | ) |   |   | - |   |
| Wholesale Sales – UED to      UNSE      |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 1 |   |   |   | (1 | ) |   |   | - |   |
| Gas Revenue – UNSG to    UNSE           |   |                     | -      |   |      |    | 2      |           |                       |    | -           |   |   |   | - |   |   |   | (2 | ) |   |   | - |   |
| Other Revenue – TEP to Affiliates(1)    |   |                     | 4      |   |      |    | -      |           |                       |    | -           |   |   |   | - |   |   |   | (4 | ) |   |   | - |   |
| Other Revenue - MEH to TEP &      UNSE(2) |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 7 |   |   |   | (7 | ) |   |   | - |   |
| Other Revenue – TEP to UNSE(3)          |   |                     | 1      |   |      |    | -      |           |                       |    | -           |   |   |   | - |   |   |   | (1 | ) |   |   | - |   |
| Total Intersegment    Revenue                 |   | $                   | 11     |   |      | $  | 2      |           |                       | $  | 2           |   |   | $  | 8 |   |   | $  | (23 | ) |   | $  | - |   |
|                                          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Six      months ended June 30, 2007:          |   |                     |   |   |      |    |   |           |                       |    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Revenue – TEP to Affiliates(1)    |   | $                        | 3      |   |      | $       | -      |           |                       | $       | -           |   |   | $ | - |   |   | $ | (3 | ) |   | $ | - |   |
| Other Revenue - MEH to TEP &      UNSE(2) |   |                     | -      |   |      |    | -      |           |                       |    | -           |   |   |   | 8 |   |   |   | (8 | ) |   |   | - |   |
| Total Intersegment    Revenue                 |   | $                   | 3      |   |      | $  | -      |           |                       | $  | -           |   |   | $  | 8 |   |   | $  | (11 | ) |   | $  | - |   |

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NOTE

| ·   | Cash Flow Hedges are      used by TEP and UNS Gas to hedge the changes in cash flows that are to be      received or paid in connection with gas swap agreements and forward power      sales.  These contracts hedge the cash flow risk associated with      TEP’s summer load requirements and its forecasted excess generation and      UNS Gas’ winter load requirement.  The effective portion of the      changes in the market prices of cash flow hedges are recorded as      unrealized gains and losses in Accumulated Other Comprehensive Income      (AOCI) and the ineffective portion, if any, is recognized in      earnings. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Mark-to-Market      transactions include: |
|--------------------|-------------------------------------------|

| o   | TEP      non-trading hedges, such as forward power purchase contracts indexed to      gas that did not qualify for cash flow hedge accounting treatment or did      not qualify for the normal scope exception.  Unrealized gains      and losses resulting from changes in the market prices of non-trading      hedges are recorded on the same line in the income statement as the hedged      transaction. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | TEP trading      derivatives which are forward power purchase and sale contracts entered      into to reduce our exposure to energy and commodity      prices.  Unrealized gains and losses resulting from changes in      the market prices of trading derivatives are recorded in the income      statement in Electric WholesaleSales. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | UNS Electric      derivatives such as forward power purchases and gas swaps.  In      December 2006, UNS Electric received authorization from the ACC to defer      the unrealized gains and losses on the balance sheet as a regulatory asset      or a regulatory liability rather than as a component of OCI or in the      income statement. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Normal Purchase and Sale      transactions are forward energy      purchase and sales contracts entered into by TEP, UNS Gas and UNS Electric      to support the current load forecast and entered into with a counterparty      with load serving requirements or generating capacity.  These      contracts are not required to be marked-to-market and are accounted for on      an accrual basis. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                              |   | UniSource      Energy      |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                              |   | Three      Months          |   |   | Six      Months |   |
|                                                                              |   | Ended June      30,        |   |   | Ended      June 30, |   |
| Cash      Flow Hedges  - Unrealized Gains (Losses)Recorded      to AOCI |   | 2008                       |   |   |           2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                              |   | -Millions of      Dollars- |   |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |
| Forward Power Sales                                                               |   | $                          | (1     | ) |   | $ | - |   |   | $ | (3 | ) |   | $ | (1 | ) |
| Gas Price Swaps                                                                   |   |                       | 22     |   |   |   | (6 | ) |   |   | 35 |   |   |   | (3 | ) |
| Interest Rate Swap                                                                |   |                       | 2      |   |   |   | 1 |   |   |   | - |   |   |   | 2 |   |
| Total Pre-Tax Unrealized Gain      (Loss)                                         |   | $                          | 23     |   |   | $ | (5 | ) |   | $ | 32 |   |   | $ | (2 | ) |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| After-Tax      Unrealized Gain (Loss) Recorded in AOCI                            |   | $                          | 14     |   |   | $ | (3 | ) |   | $ | 19 |   |   | $ | (1 | ) |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized      (Gain) Loss Reclassified to Net Income                            |   | $                          | (2     | ) |   | $ | - |   |   | $ | (2 | ) |   | $ | (2 | ) |

|                                                                              |   | TEP                        |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                              |   | Three      Months          |   |   | Six      Months |   |
|                                                                              |   | Ended June      30,        |   |   | Ended June      30, |   |
| Cash      Flow Hedges  - Unrealized Gains (Losses)Recorded      to AOCI |   | 2008                       |   |   |          2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                              |   | -Millions of      Dollars- |   |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |
| Forward Power Sales                                                               |   | $                          | (1     | ) |   | $ | - |   |   | $ | (3 | ) |   | $ | (1 | ) |
| Gas Price Swaps                                                                   |   |                       | 16     |   |   |   | (6 | ) |   |   | 28 |   |   |   | (3 | ) |
| Interest Rate Swap                                                                |   |                       | 2      |   |   |   | 1 |   |   |   | - |   |   |   | 2 |   |
| Total Pre-Tax Unrealized Gain      (Loss)                                         |   | $                          | 17     |   |   | $ | (5 | ) |   | $ | 25 |   |   | $ | (2 | ) |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| After-Tax      Unrealized Gain (Loss) Recorded in AOCI                            |   | $                          | 10     |   |   | $ | (3 | ) |   | $ | 15 |   |   | $ | (1 | ) |
|                                                                              |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized      (Gain) Loss Reclassified to Net Income                            |   | $                          | (2     | ) |   | $ | - |   |   | $ | (2 | ) |   | $ | (2 | ) |

|                                                           |   | UniSource      Energy and TEP |   |
|----------------------------------------------------------------|--------|-------------------------------|--------|
|                                                           |   | Three      Months             |   |   | Six      Months |   |
|                                                           |   | Ended June      30,           |   |   | Ended June      30, |   |
|                                                           |   | 2008                          |   |   |         2007 |   |   | 2008 |   |   | 2007 |   |
|                                                           |   | -Millions of      Dollars-    |   |
| Recorded in      Wholesale Sales:                              |   |                          |   |   |   |   |   |   |   |   |   |   |
| Forward Power Sales                                            |   | $                             | (10    | ) |   | $ | 1 |   |   | $ | (15 | ) |   | $ | (8 | ) |
| Forward PowerPurchases                                         |   |                          | 10     |   |   |   | (1 | ) |   |   | 14 |   |   |   | 7 |   |
| Forward Power      Purchases Recorded in Purchased Energy |   |                          | -      |   |   |   | - |   |   |   | (3 | ) |   |   | 1 |   |
| Forward Gas      Price Swaps Recorded in Fuel                  |   |                          | 4      |   |   |   | - |   |   |   | 5 |   |   |   | - |   |
| Total Pre-Tax Unrealized Gain      (Loss)                      |   | $                             | 4      |   |   | $ | - |   |   | $ | 1 |   |   | $ | - |   |

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|                                                                    |   | UniSource      Energy      |   |
|-------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                    |   | Three      Months          |   |   | Six      Months |   |
| Mark-to-Market      Transactions –  Increase (Decrease) |   | Ended June      30,        |   |   | Ended June      30, |   |
|   Recorded      in Regulatory Accounts on the Balance Sheet   |   | 2008                       |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                    |   | -Millions of      Dollars- |   |
| Recorded in      Current Regulatory Assets – Derivatives:         |   |                       |   |   |   |   |   |   |   |   |   |   |
| Gas Swaps                                                               |   | $                          | -      |   |   | $ | - |   |   | $ | 1 |   |   | $ | - |   |
| Recorded in      Current Regulatory Liabilities – Derivatives:    |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas Swaps                                                               |   |                       | 4      |   |   |   | - |   |   |   | 6 |   |   |   | - |   |
| Power Purchases                                                         |   |                       | 11     |   |   |   | - |   |   |   | 21 |   |   |   | - |   |
| Recorded in      Other Regulatory Liabilities – Derivatives:      |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas Swaps                                                               |   |                       | 3      |   |   |   | - |   |   |   | 4 |   |   |   | - |   |
| Power Purchases                                                         |   |                       | 1      |   |   |   | 4 |   |   |   | 3 |   |   |   | 5 |   |
| Total Increase      (Decrease)                                          |   | $                          | 19     |   |   | $ | 4 |   |   | $ | 35 |   |   | $ | 5 |   |

|                                                        |   |   | UniSource      Energy |   |
|-------------------------------------------------------------|--------|--------|-----------------------|--------|
|                                                        |   |   | June      30, 2008    |   |   |   | December      31, 2007 |   |
|                                                        |   |   | Mark-to-              |   |   |   | Cash  |   |   |   |   |   |   |   | Mark-to |   |   |   | Cash  |   |   |   |   |   |
|                                                        |   |   | Market           |   |   |   | Flow  |   |   |   |   |   |   |   | Market  |   |   |   |  Flow |   |   |   |   |   |
|                                                        |   |   | Contracts        |   |   |   | Hedges  |   |   |   | Total  |   |   |   | Contracts  |   |   |   |  Hedges |   |   |   | Total  |   |
|                                                        |   |   |                  |   |   |   |   |   |   |   | -Millions      of Dollars-  |   |   |   |   |   |
|         Derivative Assets – Current         |   | $      | 52                    |   |   | $ | 19 |   |   | $ | 71 |   |   | $ | 4 |   |   | $ | 1 |   |   | $ | 5 |   |
|         Derivative Liabilities – Current    |   |   | (19                   | )      |   |   | (2 | ) |   |   | (21 | ) |   |   | (2 | ) |   |   | (2 | ) |   |   | (4 | ) |
| Net Current      Derivative Assets (Liabilities)            |   | $      | 33                    |   |   | $ | 17 |   |   | $ | 50 |   |   | $ | 2 |   |   | $ | (1 | ) |   | $ | 1 |   |
|                                                        |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|         Derivative Assets – Noncurrent      |   | $      | 17                    |   |   | $ | 11 |   |   | $ | 28 |   |   | $ | 8 |   |   | $ | - |   |   | $ | 8 |   |
|         Derivative Liabilities – Noncurrent |   |   | (4                    | )      |   |   | (3 | ) |   |   | (7 | ) |   |   | (2 | ) |   |   | (3 | ) |   |   | (5 | ) |
| Net      Noncurrent Derivative Assets (Liabilities)         |   | $      | 13                    |   |   | $ | 8 |   |   | $ | 21 |   |   | $ | 6 |   |   | $ | (3 | ) |   | $ | 3 |   |

|                                                  |   | TEP                           |   |
|-------------------------------------------------------|--------|-------------------------------|--------|
|                                                  |   | June      30, 2008            |   |   | December      31, 2007 |   |
|                                                  |   | Mark-to-Market Contracts |   |   | Cash Flow Hedges |   |   | Total |   |   | Mark-to-Market      Contracts |   |   | Cash      Flow      Hedges |   |   |  Total |   |
|                                                  |   | - Millions of      Dollars -  |   |
|        Derivative Assets – Current         |   | $                             | 19     |   |   | $ | 15 |   |   | $ | 34 |   |   | $ | 1 |   |   | $ | 1 |   |   | $ | 2 |   |
|        Derivative Liabilities – Current    |   |                          | (18    | ) |   |   | (1 | ) |   |   | (19 | ) |   |   | (1 | ) |   |   | (2 | ) |   |   | (3 | ) |
| Net Current      Derivative Assets (Liabilities)      |   | $                             | 1      |   |   | $ | 14 |   |   | $ | 15 |   |   | $ | - |   |   | $ | (1 | ) |   | $ | (1 | ) |
|                                                  |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        Derivative Assets – Noncurrent      |   | $                             | -      |   |   | $ | 8 |   |   | $ | 8 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
|        Derivative Liabilities – Noncurrent |   |                          | (1     | ) |   |   | (3 | ) |   |   | (4 | ) |   |   | - |   |   |   | (3 | ) |   |   | (3 | ) |
| Net      Noncurrent Derivative Assets (Liabilities)   |   | $                             | (1     | ) |   | $ | 5 |   |   | $ | 4 |   |   | $ | - |   |   | $ | (3 | ) |   | $ | (3 | ) |

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|                                    |   | UniSource      Energy and TEP |   |
|-----------------------------------------|--------|-------------------------------|--------|
|                                    |   | Three      Months             |   |   | Six      Months |   |
|                                    |   | Ended June      30,           |   |   | Ended June      30, |   |
|                                    |   | 2008                          |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                    |   | -Millions of      Dollars-    |   |
| Recorded in      Wholesale Sales:       |   |                          |   |   |   |   |   |   |   |   |   |   |
| Forward Power Sales                     |   | $                             | 23     |   |   | $ | 1 |   |   | $ | 31 |   |   | $ | 42 |   |
| Forward PowerPurchases                  |   |                          | (23    | ) |   |   | (1 | ) |   |   | (32 | ) |   |   | (42 | ) |
| Total Pre-Tax Realized Gain      (Loss) |   | $                             | -      |   |   | $ | - |   |   | $ | (1 | ) |   | $ | - |   |

|                                                              |   | UniSource      Energy and TEP |   |
|-------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                              |   | Three      Months             |   |   | Six      Months |   |
|                                                              |   | Ended June      30,           |   |   | Ended June      30, |   |
|                                                              |   | 2008                          |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                              |   | -Millions of      Dollars-    |   |
| Recorded in      Wholesale Sales:                                 |   |                          |   |   |   |   |   |   |   |   |   |   |
| Forward Power Sales                                               |   | $                             | 3      |   |   | $ | 4 |   |   | $ | 12 |   |   | $ | 6 |   |
| Forward PowerPurchases                                            |   |                          | (3     | ) |   |   | (4 | ) |   |   | (12 | ) |   |   | (6 | ) |
| Total Sales and Purchases Not      Resulting in Physical Delivery |   | $                             | -      |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |

NOTE

NOTE

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|                                         |   | Pension      Benefits   |   |   | Other      PostretirementBenefits |   |
|----------------------------------------------|--------|-------------------------|--------|--------|-----------------------------------|--------|
|                                         |   | Three Months      Ended |   |   | Three Months      Ended           |   |
|                                         |   | June      30,           |   |   | June      30,                     |   |
|                                         |   | 2008                    |   |   | 2007                              |   |   | 2008 |   |   | 2007 |   |
|                                         |   |                    |   |   | -Millions of      Dollars -       |   |   |   |   |
|                                         |   |                    |   |   |                              |   |   |   |   |   |   |   |
| Components      of Net Periodic Benefit Cost |   |                    |   |   |                              |   |   |   |   |   |   |   |
| Service      Cost                            |   | $                       | 2      |   |                              | $      | 2 |   |   | $ | 1 |   |   | $ | - |   |
| Interest      Cost                           |   |                    | 3      |   |                              |   | 3 |   |   |   | 1 |   |   |   | 1 |   |
| Expected      Return on Plan Assets          |   |                    | (4     | )      |                              |   | (3 | ) |   |   | (1 | ) |   |   | - |   |
| Prior Service      Cost Amortization         |   |                    | -      |   |                              |   | 1 |   |   |   | - |   |   |   | - |   |
| Recognized      Actuarial Loss               |   |                    | -      |   |                              |   | - |   |   |   | - |   |   |   | - |   |
| Net      Periodic Benefit Cost               |   | $                       | 1      |   |                              | $      | 3 |   |   | $ | 1 |   |   | $ | 1 |   |

|                                         |   | Pension      Benefits |   |   | Other      PostretirementBenefits |   |
|----------------------------------------------|--------|-----------------------|--------|--------|-----------------------------------|--------|
|                                         |   | Six Months      Ended |   |   | Six Months      Ended             |   |
|                                         |   | June      30,         |   |   | June      30,                     |   |
|                                         |   | 2008                  |   |   | 2007                              |   |   | 2008 |   |   | 2007 |   |
|                                         |   |                  |   |   | -Millions of      Dollars -       |   |   |   |   |
|                                         |   |                  |   |   |                              |   |   |   |   |   |   |   |
| Components      of Net Periodic Benefit Cost |   |                  |   |   |                              |   |   |   |   |   |   |   |
| Service      Cost                            |   | $                     | 4      |   |                              | $      | 4 |   |   | $ | 1 |   |   | $ | 1 |   |
| Interest      Cost                           |   |                  | 7      |   |                              |   | 6 |   |   |   | 2 |   |   |   | 2 |   |
| Expected      Return on Plan Assets          |   |                  | (8     | )      |                              |   | (7 | ) |   |   | (1 | ) |   |   | - |   |
| Prior Service      Cost Amortization         |   |                  | -      |   |                              |   | 1 |   |   |   | - |   |   |   | (1 | ) |
| Recognized      Actuarial Loss               |   |                  | -      |   |                              |   | 1 |   |   |   | - |   |   |   | - |   |
| Net      Periodic Benefit Cost               |   | $                     | 3      |   |                              | $      | 5 |   |   | $ | 2 |   |   | $ | 2 |   |

NOTE

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|                                                           | 2008      Grant | 2007      Grant |
|----------------------------------------------------------------|-----------------|-----------------|
|                                                           |            |            |
| Expected term      (years)                                     | 6               | 6               |
| Risk-free      rate                                            | 3.1%            | 4.4%            |
| Expected      volatility                                       | 18.8%           | 20.2%           |
| Expected      dividend yield                                   | 2.8%            | 2.4%            |
| Weighted-average      grant-date fair value of options granted | $4.23           | $8.13           |

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|                                                                   |   | Six      Months Ended June 30, 2008  |                          |
|------------------------------------------------------------------------|--------|--------------------------------------|-------------------------------|
|                                                                   |   | Total      Stock Options Outstanding |                          |   | Non-Vested      Stock Options |   |
|                                                                   |   |                                 |                          |   | Weighted |   |   |   |   |   | Weighted |   |
|                                                                   |   |                                 |                          |   | Average |   |   |   |   |   | Average |   |
|                                                                   |   |                                 |                          |   | Exercise |   |   |   |   |   | Grant      Date |   |
| (Shares in      Thousands)                                             |   | Shares                               |                          |   | Price |   |   | Shares |   |   | Value |   |
| Options      Outstanding, December 31, 2007                            |   |                                 | 1,451                         |   |   | $ | 21.21 |   |   |   | 312 |   |   | $ | 7.83 |   |
| Granted                                                                |   |                                 | 304                           |   |   | $ | 26.18 |   |   |   | 304 |   |   | $ | 4.23 |   |
| Exercised or Vested                                                    |   |                                 | (113                          | ) |   | $ | 16.45 |   |   |   | (117 | ) |   | $ | 7.78 |   |
| Options      Outstanding, June 30, 2008                                |   |                                 | 1,642                         |   |   | $ | 22.46 |   |   |   | 499 |   |   | $ | 5.65 |   |
| Options      Exercisable, June 30, 2008                                |   |                                 | 1,143                         |   |   | $ | 19.26 |   |   |   |   |   |   |   |   |   |
|                                                                   |   |                                 |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Aggregate      Intrinsic Value of Options Exercised ($000’s)     |   |                                 | $                             | 1,512 |   |   |   |   |   |   |   |   |   |
|                                                                   |   |                                 |                          |   |   |
|                                                                   |   |                                 | At      June 30, 2008 ($000s) |   |
| Aggregate      Intrinsic Value for Options Outstanding                 |   |                                 | $                             | 15,428 |   |
| Aggregate      Intrinsic Value for Options Exercisable            |   |                                 | $                             | 13,937 |   |
| Weighted      Average Remaining Contractual Life                       |   |                                 | 5.2      years                |   |
| Weighted      Average Remaining Contractual Life of Exercisable Shares |   |                                 | 3.5      years                |   |

|                          | Options      Outstanding               | Options      Exercisable                         |
|-------------------------------|----------------------------------------|--------------------------------------------------|
| Range      of Exercise Prices | Number      of  Shares(000s) | Weighted-Average      Remaining Contractual Life |  Weighted-Average      Exercise Price | Number      of Shares(000s) | Weighted-Average      Exercise Price |
| $11.00 -      $15.56          | 418                                    | 1.7      years                                   | $14.12 | 418 | $14.12 |
| $17.44 -      $18.84          | 526                                    | 3.5      years                                   | $18.02 | 526 | $18.02 |
| $26.18 -      $37.88          | 698                                    | 8.5      years                                   | $30.80 | 199 | $33.31 |

| ·   | February 2008      - 3,130 stock units at a weighted average fair value of $28.75 per share,      and |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | May 2008 -      18,448 stock units at a weighted average fair value of $31.71 per      share. |
|--------------------|-----------------------------------------------------------------------------------------------|

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NOTE

| Level      1. | Financial      assets and liabilities whose values are based on unadjusted quoted prices      for identical assets or liabilities in an active market (examples include      active exchange-traded equity securities, listed    derivatives). |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Level      2. | Financial      assets and liabilities whose values are based on quoted prices for similar      assets or liabilities in active markets, quoted prices for identical or      similar assets or liabilities in non-active markets (examples include      corporate bonds, which trade infrequently), pricing models whose inputs      are observable for substantially the full term of the asset or liabilities      (examples include most non-exchange-traded derivatives, including interest      rate swaps), and pricing models whose inputs are derived principally from      or corroborated by observable market data through correlation or other      means for substantially the full term of the asset or      liability. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| Level      3. | Financial      assets and liabilities whose values are based on prices or valuation      techniques that require inputs that are both unobservable and significant      to the overall fair value measurement. These inputs reflect management’s      own assumptions about the assumptions a market participant would use in      pricing the asset or liability (examples include long-dated or complex      derivatives including certain long -dated options on gas and      power). |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                         |   | UniSource      Energy                                                   |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                                         |   | Quoted      Prices in Active Markets for Identical Assets(Level      1) |   |   | Significant      Other Observable Inputs(Level      2) |   |   | Significant      Unobservable Inputs(Level      3) |   |   | Total |   |
|                                                         |   | June      30, 2008                                                      |   |
|                                                         |   | - Millions of      Dollars -                                            |   |
| Assets                                                       |   |                                                                    |   |   |   |   |   |   |   |   |   |   |
| Energy      Contracts (1)                                    |   | $                                                                       | -      |   |   | $ | 44 |   |   | $ | 30 |   |   | $ | 74 |   |
| Investments      (2)                                         |   |                                                                    | -      |   |   |   | 14 |   |   |   | 12 |   |   |   | 26 |   |
|   Total      Assets                                |   | $                                                                       | -      |   |   | $ | 58 |   |   | $ | 42 |   |   | $ | 100 |   |
|                                                         |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                  |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred      Compensation                                   |   | $                                                                  | -      |   |   | $  | (6 | ) |   | $  | - |   |   | $  | (6 | ) |
| Interest Rate      Swap                                      |   |                                                                    | -      |   |   |   | (3 | ) |   |   | - |   |   |   | (3 | ) |
| Total      Liabilities                                       |   |                                                                    | -      |   |   |   | (9 | ) |   |   | - |   |   |   | (9 | ) |
|   Net      Total Assets and  Liabilities |   | $                                                                       | -      |   |   | $ | 49 |   |   | $ | 42 |   |   | $ | 91 |   |

|                                                         |   | TEP                                                                     |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                                         |   | Quoted      Prices in Active Markets for Identical Assets(Level      1) |   |   | Significant      Other Observable Inputs(Level      2) |   |   | Significant      Unobservable Inputs(Level      3) |   |   | Total |   |
|                                                         |   | June      30, 2008                                                      |   |
|                                                         |   | - Millions of      Dollars -                                            |   |
| Assets                                                       |   |                                                                    |   |   |   |   |   |   |   |   |   |   |
| Energy      Contracts (1)                                    |   | $                                                                       | -      |   |   | $ | 27 |   |   | $ | - |   |   | $ | 27 |   |
| Investments      (2)                                         |   |                                                                    | -      |   |   |   | 14 |   |   |   | - |   |   |   | 14 |   |
|   Total      Assets                                |   | $                                                                       | -      |   |   | $ | 41 |   |   | $ | - |   |   | $ | 41 |   |
|                                                         |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                  |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Energy      Contracts (1)                                    |   | $                                                                       | -      |   |   | $ | - |   |   | $ | (5 | ) |   | $ | (5 | ) |
| Deferred      Compensation                                   |   |                                                                    | -      |   |   |   | (6 | ) |   |   | - |   |   |   | (6 | ) |
| Interest Rate      Swap                                      |   |                                                                    | -      |   |   |   | (3 | ) |   |   | - |   |   |   | (3 | ) |
| Total      Liabilities                                       |   |                                                                    | -      |   |   |   | (9 | ) |   |   | (5 | ) |   |   | (14 | ) |
|   Net      Total Assets and  Liabilities |   | $                                                                       | -      |   |   | $ | 32 |   |   | $ | (5 | ) |   | $ | 27 |   |

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|                                                       |   | UniSource      Energy                     |   |
|------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                       |   | -      Millions of Dollars -              |   |
|                                                       |   |                                      |   |
|                                                       |   | Three      Months EndedJune      30, 2008 |   |
|                                                       |   | EnergyCommodity      Contracts            |   |   |  Investments |   |   |  Total |   |
| Balance      as of April 1, 2008                           |   | $                                         | 17     |   |   | $ | 14 |   |   | $ | 31 |   |
| Gains      and (Losses) (realized/unrealized) Recorded to: |   |                                      |   |   |   |   |   |   |   |   |   |   |
| Other      Expense                                         |   |                                      |   |   |   |   | (2 | ) |   |   | (2 | ) |
| Purchased      Energy                                      |   |                                      | -      |   |   |   |   |   |   |   | - |   |
| AOCI                                                       |   |                                      | (1     | ) |   |   |   |   |   |   | (1 | ) |
| Net      Regulatory Liabilities                            |   |                                      | 14     |   |   |   |   |   |   |   | 14 |   |
| Purchases,      Issuances, and Settlements                 |   |                                      | -      |   |   |   | - |   |   |   | - |   |
| Balance      as of June 30, 2008                           |   | $                                         | 30     |   |   | $ | 12 |   |   | $ | 42 |   |

|                                                       |   | UniSource      Energy                   |   |
|------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                       |   | -      Millions of Dollars -            |   |
|                                                       |   |                                    |   |
|                                                       |   | Six      Months EndedJune      30, 2008 |   |
|                                                       |   | EnergyCommodity      Contracts          |   |   |  Investments |   |   |  Total |   |
| Balance      as of January 1, 2008                         |   | $                                       | 10     |   |   | $ | 14 |   |   | $ | 24 |   |
| Gains      and (Losses) (realized/unrealized) Recorded to: |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Other      Expense                                         |   |                                    |   |   |   |   | (2 | ) |   |   | (2 | ) |
| Purchased      Energy                                      |   |                                    | (3     | ) |   |   |   |   |   |   | (3 | ) |
| AOCI                                                       |   |                                    | (2     | ) |   |   |   |   |   |   | (2 | ) |
| Net      Regulatory Liabilities                            |   |                                    | 25     |   |   |   |   |   |   |   | 25 |   |
| Purchases,      Issuances, and Settlements                 |   |                                    | -      |   |   |   | - |   |   |   | - |   |
| Balance      as of June 30, 2008                           |   | $                                       | 30     |   |   | $ | 12 |   |   | $ | 42 |   |

|                                                       |   | TEP                                       |   |
|------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                       |   | -      Millions of Dollars -              |   |
|                                                       |   |                                      |   |   |   |   |
|                                                       |   | Three      Months EndedJune      30, 2008 |   |   | Six      Months EndedJune      30, 2008 |   |
|                                                       |   | EnergyCommodity      Contracts            |   |
| Beginning      Balance                                     |   | $                                         | (4     | ) |   | $ | - |   |
| Gains      and (Losses) (realized/unrealized) Recorded to: |   |                                      |   |   |   |   |   |   |
| Purchased      Energy                                      |   |                                      | -      |   |   |   | (3 | ) |
| AOCI                                                       |   |                                      | (1     | ) |   |   | (2 | ) |
| Purchases,      Issuances, and Settlements                 |   |                                      | -      |   |   |   | - |   |
| Balance      as of June 30, 2008                           |   | $                                         | (5     | ) |   | $ | (5 | ) |

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NOTE

|                                                                                                 |   | Three Months      Ended            |   |   | Six Months      Ended              |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|--------|------------------------------------|--------|
|                                                                                                 |   | June      30,                      |   |   | June      30,                      |   |
|                                                                                                 |   |           2008 |   |   |           2007 |   |   |           2008 |   |   |           2007 |   |
|                                                                                                 |   | -Thousands of      Dollars-        |   |   | -Thousands of      Dollars-        |   |
| Numerator:                                                                                           |   |                               |   |   |                               |   |   |   |   |   |   |   |
| Net Income                                                                                           |   | $                                  | 4,747  |   |                               | $      | 11,806 |   |   | $ | 2,132 |   |   | $ | 16,749 |   |
| Assumed Conversion of Convertible Senior      Notes – reducedinterest expense      (after-tax) |   |                               | -      |   |                               |   | 1,097 |   |   |   | - |   |   |   | - |   |
| Adjusted      Numerator                                                                              |   | $                                  | 4,747  |   |                               | $      | 12,903 |   |   | $ | 2,132 |   |   | $ | 16,749 |   |
|                                                                                                 |   |                               |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Denominator:                                                                                         |   |                               |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average      Shares of Common Stock Outstanding:                                            |   |                               |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Common Shares Issued                                                                                 |   |                               | 35,401 |   |                               |   | 35,251 |   |   |   | 35,367 |   |   |   | 35,232 |   |
| Fully Vested Deferred Stock      Units                                                               |   |                               | 211    |   |                               |   | 221 |   |   |   | 218 |   |   |   | 215 |   |
| Total      Weighted-average Shares of Common StockOutstanding                                        |   |                               | 35,612 |   |                               |   | 35,472 |   |   |   | 35,585 |   |   |   | 35,447 |   |
| Effect of      Dilutive Securities:                                                                  |   |                               |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      Senior Notes                                                                        |   |                               | -      |   |                               |   | 4,000 |   |   |   | - |   |   |   | - |   |
| Options and Stock Issuable under      Employee Benefit Plansand the Directors’Plan             |   |                               | 563    |   |                               |   | 615 |   |   |   | 540 |   |   |   | 611 |   |
| Total      Shares                                                                                    |   |                               | 36,175 |   |                               |   | 40,087 |   |   |   | 36,125 |   |   |   | 36,058 |   |

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|                                                         | Three Months      Ended | Six Months      Ended |
|--------------------------------------------------------------|-------------------------|-----------------------|
|                                                         | June      30,           | June      30,         |
|                                                         |   2008        | 2007                  |   2008 | 2007 |
|                                                         | - In      Thousands -   | - In      Thousands - |
|                                                         |                    |                  |   |   |
| Stock Options      Excluded from the Diluted EPS Computation | 234                     | 184                   | 314 | 105 |

NOTE

| ·   | FAS 161,      Disclosures About      Derivative Instruments and Hedging Activities an amendment to FAS      133, Accounting for      Derivative Instruments and Hedging Activities, issued March 2008,      requires enhanced disclosures about an entity’s derivative and hedging      activities. The      standard requires that the objectives for using derivative instruments be      disclosed in terms of underlying risk so that the reader understands the      purpose of derivative use in terms of the risks that the entity is      intending to manage.  The standard also requires disclosure of      the location in the financial statements of derivative balances as well as      the location of gains and losses incurred during the reporting      period.  The standard will be applicable for fiscal years or      interim periods beginning on or after November 15, 2008, with early      adoption encouraged.  The Company is assessing the impact of      this standard. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | FAS 160,      Accounting and Reporting      of Noncontrolling Interests in Consolidated Financial Statements,      issued December 2007, will change the accounting and reporting for      minority interests, requiring such amounts to be classified as a component      of equity, and will also change the accounting for transactions with      minority-interest holders. The standard will be applicable for fiscal      years beginning on or after December 15, 2008 on a prospective      basis.  Early adoption is prohibited and business combinations      with acquisition dates prior to the effective date will not be adjusted      upon application.  We do not expect this pronouncement to have a      material impact on our financialstatements. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | FAS 141(R)      Business      Combinations - a replacement of FAS No. 141, issued December 2007,      requires companies to record acquisitions at fair value.  FAS      141(R) changes the definition of a business and a business combination and      is generally expected to increase the number of transactions that will      need to be accounted for at fair value.  The standard will be      applicable for fiscal years beginning on or after December 15, 2008 and      generally on a prospective basis.  Early adoption is prohibited      and business combinations with acquisition dates prior to the effective      date will not be adjusted upon application.  We do not expect      this pronouncement to have a material impact on our financial      statements. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                                            |   | UniSource      Energy       |    |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                            |   | Six Months      Ended       |    |
|                                                                                            |   | June      30,               |    |
|                                                                                            |   | 2008                        |    |   | 2007 |   |
|                                                                                            |   | -Thousands of      Dollars- |    |
|                                                                                            |   |                        |    |   |   |   |
| Net      Income                                                                                 |   | $                           | 2,132   |   |   | $ | 16,749 |   |
| Adjustments      to Reconcile Net Income                                                        |   |                        |    |   |   |   |   |   |
|   To Net Cash      Flows                                                                   |   |                        |    |   |   |   |   |   |
| Depreciation and Amortization      Expense                                                      |   |                        | 72,434  |   |   |   | 68,981 |   |
| Depreciation and Amortization Recorded      to Fuel and Other O&M Expense                   |   |                        | 3,296   |   |   |   | 3,482 |   |
| Amortization of Transition Recovery      Asset                                                  |   |                        | 23,945  |   |   |   | 34,205 |   |
| Provision for      Rate Refunds                                                                 |   |                        | 14,912  |   |   |   | - |   |
| Mark-to-Market      Transactions                                                                |   |                        | 327     |   |   |   | 836 |   |
|         Amortization of Deferred Debt-Related Costs included in Interest      Expense |   |                        | 1,916   |   |   |   | 1,927 |   |
| Provision for Bad Debts                                                                         |   |                        | 1,736   |   |   |   | 1,371 |   |
| Deferred Income Taxes                                                                           |   |                        | 22,299  |   |   |   | 20,582 |   |
| Pension and Postretirement      Expense                                                         |   |                        | 5,995   |   |   |   | 7,221 |   |
| Pension and Postretirement      Funding                                                         |   |                        | (6,929  | ) |   |   | (2,316 | ) |
|    Stock      Based Compensation Expense                                         |   |                        | 1,860   |   |   |   | 1,809 |   |
| Excess Tax Benefit from Stock Option      Exercises                                             |   |                        | (594    | ) |   |   | (440 | ) |
| Impairment of Millennium      Investments                                                       |   |                        | 1,936   |   |   |   | - |   |
| Net Unrealized Loss on MEG Trading      Activities                                              |   |                        | -       |   |   |   | 2,106 |   |
| Changes in Assets and Liabilities which      Provided (Used)                                    |   |                        |    |   |   |   |   |   |
|         Cash Exclusive of Changes Shown Separately                                    |   |                        |    |   |   |   |   |   |
|      Accounts      Receivable                                               |   |                        | (26,592 | ) |   |   | 13,226 |   |
|      Materials and      Fuel Inventory                                      |   |                        | (6,155  | ) |   |   | (7,580 | ) |
|      Over/Under      Recovered Purchased Energy Cost                        |   |                        | (11,284 | ) |   |   | 1,741 |   |
|      Accounts      Payable                                                  |   |                        | 53,479  |   |   |   | (4,814 | ) |
|      Interest      Accrued                                                  |   |                        | 1,922   |   |   |   | (2,822 | ) |
|      Income Tax      Receivable/Payable                                     |   |                        | (15,747 | ) |   |   | (25,661 | ) |
|      Taxes Other      Than Income Taxes                                     |   |                        | 345     |   |   |   | (18 | ) |
| Other                                                                                           |   |                        | (1,057  | ) |   |   | (11,139 | ) |
| Net      Cash Flows – Operating Activities                                                |   | $                           | 140,176 |   |   | $ | 119,446 |   |

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----

|                                                                          |   | TEP                         |    |
|-------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                          |   | Six Months      Ended       |    |
|                                                                          |   | June      30,               |    |
|                                                                          |   | 2008                        |    |   | 2007 |   |
|                                                                          |   | -Thousands of      Dollars- |    |
|                                                                          |   |                        |    |   |   |   |
| Net      Income (Loss)                                                        |   | $                           | (3,098  | ) |   | $ | 13,092 |   |
| Adjustments      to Reconcile Net Income (Loss)                               |   |                        |    |   |   |   |   |   |
|   To Net Cash      Flows                                                 |   |                        |    |   |   |   |   |   |
| Depreciation and Amortization      Expense                                    |   |                        | 61,997  |   |   |   | 58,641 |   |
| Depreciation and Amortization Recorded      to Fuel and Other O&M Expense |   |                        | 2,573   |   |   |   | 2,749 |   |
| Amortization of Transition Recovery      Asset                                |   |                        | 23,945  |   |   |   | 34,205 |   |
| Provision for Rate    Refunds                                                 |   |                        | 14,912  |   |   |   | - |   |
| Mark-to-Market    Transactions                                                |   |                        | 327     |   |   |   | 836 |   |
| Amortization of Deferred Debt-Related      Costs included in Interest Expense |   |                        | 1,362   |   |   |   | 1,331 |   |
| Provision for Bad Debts                                                       |   |                        | 866     |   |   |   | 478 |   |
| Deferred Income Taxes                                                         |   |                        | 14,092  |   |   |   | 16,234 |   |
| Pension and Postretirement      Expense                                       |   |                        | 5,201   |   |   |   | 6,342 |   |
| Pension and Postretirement      Funding                                       |   |                        | (6,143  | ) |   |   | (2,484 | ) |
| Stock Based Compensation      Expense                                         |   |                        | 1,435   |   |   |   | 1,409 |   |
| Changes in Assets and Liabilities which      Provided (Used)                  |   |                        |    |   |   |   |   |   |
| Cash Exclusive of Changes Shown      Separately                               |   |                        |    |   |   |   |   |   |
| Accounts Receivable                                                           |   |                        | (36,932 | ) |   |   | (6,289 | ) |
| Materials and Fuel      Inventory                                             |   |                        | (5,534  | ) |   |   | (7,291 | ) |
| Accounts Payable                                                              |   |                        | 62,329  |   |   |   | (2,476 | ) |
| Interest Accrued                                                              |   |                        | 2,092   |   |   |   | (2,724 | ) |
| Income Tax      Receivable/Payable                                            |   |                        | 2,518   |   |   |   | (22,412 | ) |
| Taxes Other Than Income      Taxes                                            |   |                        | 1,928   |   |   |   | 2,298 |   |
| Other                                                                         |   |                        | (12,703 | ) |   |   | (736 | ) |
| Net      Cash Flows – Operating Activities                              |   | $                           | 131,167 |   |   | $ | 93,203 |   |

NOTE

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Table of Contents

ITEM 

| · | outlook and      strategies, |
|--------|------------------------------|

| · | operating      results during the second quarter and six months ended June 30, 2008      compared with the same periods in2007, |
|--------|---------------------------------------------------------------------------------------------------------------------------------|

| · | factors which      affect our results and outlook, |
|--------|----------------------------------------------------|

| · | liquidity,      capital needs, capital resources, and contractual    obligations, |
|--------|-----------------------------------------------------------------------------------|

| · | dividends,      and |
|--------|---------------------|

| · | critical      accounting estimates. |
|--------|-------------------------------------|

UNISOURCE 

OVERVIEW 

OUTLOOK 

| · | Obtain ACC      approval of a rate increase for TEP, effective on or before January 1,      2009, that resolves the uncertainty surrounding TEP’s rates for generation      service after 2008, while providing adequate revenues to cover the rising      cost of serving TEP’s customers and preserving TEP’s benefits under the      1999 Settlement Agreement; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | File requests      for, and obtain ACC approval of, rate increases for UNS Gas and UNS      Electric to provide adequate revenues to cover the rising cost of      providing service to theircustomers; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Efficiently      manage our generation, transmission and distribution resources and seek      ways to control our operating expenses while maintaining and enhancing      reliability, safety andprofitability; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · | Diversify      TEP’s portfolio of generating and purchased power resources, along with      programs to expand renewable energy sources and demand side management, to      meet growing retail energy demand and respond to wholesale market      opportunities; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Expand UNS      Electric’s portfolio of generating and purchased power resources to meet      growing retail energy demand; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

| · | Enhance the      value of existing generation assets by working with SRP to support the      construction of Springerville Unit4; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

| · | Enhance the      value of TEP’s transmission system while continuing to provide reliable      access to generation for TEP and UNS Electric’s retail customers and      market access for all generatingassets; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Continue to      develop synergies between UNS Gas, UNS Electric and  TEP; |
|--------|----------------------------------------------------------------------------|

| · | Improve      UniSource Energy’s and TEP’s ratio of common equity to total      capitalization; and |
|--------|----------------------------------------------------------------------------------------------------------------|

| · | Promote      economic development in our serviceterritories. |
|--------|--------------------------------------------------------------|

|                               |   | Actual      Year-to-DateJune 30,      2008 |   |   | EstimateFull Year      2008 |   |
|------------------------------------|--------|--------------------------------------------|--------|--------|-----------------------------|--------|
|                               |   | -Millions of      Dollars-                 |   |
| TEP                                |   | $                                          | 153    |   |                        | $      | 317 |   |
| UNS      Gas                       |   |                                       | 8      |   |                        |   | 26 |   |
| UNS      Electric                  |   |                                       | 14     |   |                        |   | 36 |   |
| Other (1)                          |   |                                       | 12     |   |                        |   | 20 |   |
| UniSource      Energy Consolidated |   | $                                          | 187    |   |                        | $      | 399 |   |

RESULTS 

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CONTRIBUTION 

|                              |   | Three      Months Ended June 30, |   |   | Six      Months Ended June 30, |   |
|-----------------------------------|--------|----------------------------------|--------|--------|--------------------------------|--------|
|                              |   | 2008                             |   |   | 2007                           |   |   | 2008 |   |   | 2007 |   |
|                              |   | -Millions of      Dollars-       |   |   | -Millions of      Dollars-     |   |
| TEP                               |   | $                                | 6      |   |                           | $      | 12 |   |   | $ | (3 | ) |   | $ | 13 |   |
| UNS      Gas                      |   |                             | -      |   |                           |   | (1 | ) |   |   | 7 |   |   |   | 3 |   |
| UNS      Electric                 |   |                             | 1      |   |                           |   | 2 |   |   |   | 1 |   |   |   | 2 |   |
| Other (1)                         |   |                             | (2     | )      |                           |   | (1 | ) |   |   | (3 | ) |   |   | (1 | ) |
| Consolidated      Net Income Loss |   | $                                | 5      |   |                           | $      | 12 |   |   | $ | 2 |   |   | $ | 17 |   |

LIQUIDITY 

| Six  Months      Ended June 30, |   | 2008                       |   |   | 2007   |   |
|-------------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                      |   | -Millions of      Dollars- |   |
| Cash provided      by (used in):          |   |                       |   |   |   |   |
| Operating Activities                      |   | $                          | 140    |   |   | $      | 119 |   |
| Investing Activities                      |   |                       | (304   | )      |   |   | (106 | ) |
| Financing Activities                      |   |                       | 177    |   |   |   | (22 | ) |

|   Balances  as      ofAugust      5, 2008 |   | Cash      and Cash Equivalents |   |   | Borrowingsunder      RevolvingCredit Facility (1) |   |   | Amount      Available under Revolving Credit Facility |   |
|---------------------------------------------------------------|--------|--------------------------------|--------|--------|---------------------------------------------------|--------|--------|-------------------------------------------------------|--------|
|                                                          |   | -Millions of      Dollars-     |   |
| UniSource      Energy stand-alone                             |   | $                              | 3      |   |                                              | $      | 54     |                                                  |   | $ | 16 |   |
| TEP                                                           |   |                           | 26     |   |                                              |   | 20     |                                                  |   |   | 130 |   |
| UNS      Gas                                                  |   |                           | 19     |   |                                              |   | -      |                                                  |   |   | 45 | (2) |
| UNS      Electric                                             |   |                           | 6      |   |                                              |   | 38     |                                                  |   |   | 7 | (2) |
| Other                                                         |   |                           | 32     | (3)    |                                              |   | -      |                                                  |   |   | - |   |
| Total                                                         |   | $                              | 86     |   |                                              | $      | 91     |                                                  |   |   |   |   |

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| · | UES’      guarantee of senior unsecured notes issued by UNS Gas ($100 million) and      UNS Electric ($60 million maturing August 11,  2008); |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| · | UES’      guarantee of the $60 million UNS Gas/UNS Electric Revolver;      and |
|--------|--------------------------------------------------------------------------------------|

| · | UniSource      Energy’s guarantee of approximately $2 million in building lease payments      for UNS Gas. |
|--------|------------------------------------------------------------------------------------------------------------------|

| · | In August      2008, UES guaranteed senior unsecured notes totaling $100 million issued      by UNS Electric. |
|--------|---------------------------------------------------------------------------------------------------------------|

| · | In 2008, TEP      entered into additional power supply agreements for the periods July      through September 2008 and 2009.  Some of these contracts are      indexed to natural gas prices.  TEP estimates its minimum      payments under these contracts to be $49 million in 2008 and $12 million      in 2009 based on natural gas prices at June 30,  2008. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In 2008, TEP      entered into a five year gas transportation agreement with El Paso Natural      Gas.  TEP estimates its minimum payments under this contract to      be $2 million in 2008, $3 million in 2009, $4 million in each of the years      2010 through 2012, and less than $1 million in  2013. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In 2008, TEP      entered into additional forward gas purchase agreements through August      2011.  TEP estimates its minimum payments for these forward      purchases to be $40 million in 2008, $15 million in 2009, $9 million in      2010, and $2 million in 2011. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In 2008, UNS      Electric entered into forward gas purchase agreements through August      2011.  UNS Electric estimates its minimum payments for these      forward purchases to be $2 million in 2008, $3 million in each of the      years 2009 and 2010, and less than $1 million in 2011 based on natural gas      prices at June 30, 2008. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In 2008, UNS      Gas entered into forward gas purchase agreements through August      2011.  UNS Gas estimates its minimum payments for these forward      purchases to be $9 million in 2008, $15 million in 2009, $12 million in      2010, and $7 million in based on natural gas prices at June 30,      2008. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  Declaration      Date |  Record      Date |  Payment      Date | Dividend      AmountPer      Share of Common Stock |
|-----------------------------|------------------------|-------------------------|----------------------------------------------------|
| February 27,      2008      | March 10,      2008    | March 21,      2008     | $0.24                                              |
| May 1,      2008            | May 13,      2008      | May 27,      2008       | $0.24                                              |

TUCSON

RESULTS 

|   | · | a $14 million      decrease in total operating revenues less fuel and purchased power expense      due to the following: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|

| · | an $18      million decrease in retail revenues due primarily to a provision for rate      refunds of $15 million of retail revenues equivalent to the Fixed CTC      revenue that was collected from customers when the TRA was fully amortized      in early May 2008.  In addition, mild weather led to a 1.8%      decrease in retail kWh sales; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $5 million      increase in other revenues due primarily to fees and reimbursements      received for fuel and O&M costs related to Springerville Units 3 and      4; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $39 million      increase in wholesale revenues due to higher excess coal-fired energy      resulting from  increased coal plant output and lower retail      sales and an increase in the market price of wholesale      power.  Wholesale sales volumes increased 41% and the average      price per MWh of wholesale power sold increased by 31%;  and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $39 million      increase in purchased power expense.  Purchased power volumes      increased by 31% as a result of higher short-term wholesale sales      activity, while the average price paid per MWh increased 51% due to higher      market prices. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Other factors      impacting the comparability of second quarter 2008 results with 2007      include: |
|--------|-------------------------------------------------------------------------------------------------------|

|   · | an $11      million increase in O&M expense.  O&M related to      Springerville Units 3 and 4, which is reimbursed to TEP by the owners of      those units and recorded in other revenues, increased by $6      million.  O&M expense also includes lower pre-tax gains from      the sale of excess SO2 Emission Allowances of $4  million; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   · | a $13 million      decrease in the amortization of TEP’s TRA.  The TRA was fully      amortized in May 2008; and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|

|   · | a $3 million      decrease in total interest expense resulting primarily from lower balances      on capital lease obligations. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | a $26 million      decrease in total operating revenues less fuel and purchased power expense      due to the following: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|

| · | a $17 million      decrease in retail revenues due primarily to a provision for rate refunds      of $15 million of retail revenue equivalent to the Fixed CTC revenue that      was collected from customers after the TRA was fully amortized in May      2008; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $10 million      increase in other revenues due primarily to fees and reimbursements      received for fuel and O&M costs related to Springerville Units 3 and      4; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $42 million      increase in wholesale revenues due to higher excess coal-fired energy      resulting from an increase in coal plant output and lower retail sales,      and an increase in the market price of wholesale      power.  Wholesale sales volumes increased 27% and the average      price per MWh of wholesale power sold increased by  13%; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $7 million      increase in fuel expense due to higher coal-related fuel      costs.  Fuel expense includes an unrealized gain of $5 million      related to gas hedges; and |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $54 million      increase in purchased power expense.  Purchased power volumes      increased by 32% as a result of higher wholesale sales activity and      replacement power purchases during the first quarter.  The      average price paid per MWh increased 41% due to higher market prices for      wholesale energy. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Other factors      impacting the comparability of results for the first six months of 2008      with the same period in 2007include: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

| · | a $3 million      increase in depreciation and amortization expense due to additions to      plant in service; |
|--------|----------------------------------------------------------------------------------------------------------------|

| · | a $10 million      decrease in the amortization of TEP’s TRA.  In May 2008, the TRA      was fully amortized; and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

| · | a $6 million      decrease in total interest expense resulting primarily from lower balances      on capital lease obligations. |
|--------|---------------------------------------------------------------------------------------------------------------------------------|

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|                                              |   | Sales                  |   |   | Operating      Revenue     |   |
|---------------------------------------------------|--------|------------------------|--------|--------|----------------------------|--------|
| Three      Months Ended June 30,                  |   | 2008                   |   |   | 2007                       |   |   | 2008 |   |   | 2007 |   |
|                                              |   | -Millions of      kWh- |   |   | -Millions of      Dollars- |   |
| Electric      Retail Sales:                       |   |                   |   |   |                       |   |   |   |   |   |   |   |
| Residential                                       |   |                   | 944    |   |                       |   | 999 |   |   | $ | 88 |   |   | $ | 93 |   |
| Commercial                                        |   |                   | 542    |   |                       |   | 540 |   |   |   | 57 |   |   |   | 56 |   |
| Industrial                                        |   |                   | 567    |   |                       |   | 596 |   |   |   | 42 |   |   |   | 43 |   |
| Mining                                            |   |                   | 277    |   |                       |   | 244 |   |   |   | 14 |   |   |   | 12 |   |
| Public Authorities                                |   |                   | 73     |   |                       |   | 69 |   |   |   | 5 |   |   |   | 5 |   |
| Total      Electric Retail Sales                  |   |                   | 2,403  |   |                       |   | 2,448 |   |   | $ | 206 |   |   | $ | 209 |   |
| Provision for      Rate Refunds                   |   |                   | -      |   |                       |   | - |   |   |   | (15 | ) |   |   | - |   |
| Net      Electric Retail Sales                    |   |                   | 2,403  |   |                       |   | 2,448 |   |   | $ | 191 |   |   | $ | 209 |   |
| Electric      Wholesale Sales Delivered:          |   |                   |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Contracts                               |   |                   | 259    |   |                       |   | 255 |   |   |   | 13 |   |   |   | 13 |   |
| Other Sales                                       |   |                   | 902    |   |                       |   | 570 |   |   |   | 65 |   |   |   | 28 |   |
| Transmission                                      |   |                   | -      |   |                       |   | - |   |   |   | 5 |   |   |   | 4 |   |
| Total      Electric Wholesale Sales               |   |                   | 1,161  |   |                       |   | 825 |   |   |   | 83 |   |   |   | 45 |   |
| Total Electric    Sales                           |   |                   | 3,564  |   |                       |   | 3,273 |   |   | $ | 274 |   |   | $ | 254 |   |
|                                              |   |                   |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Weather      Data:                                |   | 2008                   |   |   | 2007                       |   |   |   |   |   |   |   |   |   |
|    Cooling Degree      Days        |   |                   |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |
|    Three      Months Ended June 30 |   |                   | 420    |   |                       |   | 465 |   |   |   |   |   |   |   |   |   |
|    10-Year      Average            |   |                   | 457    |   |                       |   | 440 |   |   |   |   |   |   |   |   |   |

|                           |   | Sales                  |   |   | Operating      Revenue     |   |
|--------------------------------|--------|------------------------|--------|--------|----------------------------|--------|
| Six      Months Ended June 30, |   | 2008                   |   |   | 2007                       |   |   | 2008 |   |   | 2007 |   |
|                           |   | -Millions of      kWh- |   |   | -Millions of      Dollars- |   |

| Electric      Retail Sales:                                                                      |   |   |      |   |   |   |      |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|-----------|--------|--------|--------|--------|--------|
| Residential                                                                                      |   |   | 1,717     |   |   |   | 1,773     |   |   | $      | 153    |   |   | $ | 158 |   |
| Commercial                                                                                       |   |   | 957       |   |   |   | 955       |   |   |   | 99     |   |   |   | 98 |   |
| Industrial                                                                                       |   |   | 1,084     |   |   |   | 1,127     |   |   |   | 78     |   |   |   | 80 |   |
| Mining                                                                                           |   |   | 544       |   |   |   | 483       |   |   |   | 28     |   |   |   | 24 |   |
| Public Authorities                                                                               |   |   | 128       |   |   |   | 122       |   |   |   | 9      |   |   |   | 9 |   |
| Total      Electric Retail Sales                                                                 |   |   | 4,430     |   |   |   | 4,460     |   |   | $      | 367    |   |   | $ | 369 |   |
|    Provision      for Rate Refunds                                                |   |   | -         |   |   |   | -         |   |   |   | (15    | )      |   |   | - |   |
| Net      Electric Retail Sales                                                                   |   |   | 4,430     |   |   |   | 4,460     |   |   | $      | 352    |   |   | $ | 369 |   |
| Electric      Wholesale Sales Delivered:                                                         |   |   |      |   |   |   |      |   |   |   |   |   |   |   |   |   |
| Long-term Contracts                                                                              |   |   | 570       |   |   |   | 540       |   |   |   | 28     |   |   |   | 27 |   |
| Other Sales                                                                                      |   |   | 1,534     |   |   |   | 1,120     |   |   |   | 98     |   |   |   | 60 |   |
| Transmission                                                                                     |   |   | -         |   |   |   | -         |   |   |   | 9      |   |   |   | 7 |   |
| Total      Electric Wholesale Sales                                                              |   |   | 2,104     |   |   |   | 1,660     |   |   |   | 135    |   |   |   | 94 |   |
| Total Electric    Sales                                                                          |   |   | 6,534     |   |   |   | 6,120     |   |   | $      | 487    |   |   | $ | 463 |   |
|                                                                                             |   |   |      |   |   |   |      |   |   |   |   |   |   |   |   |   |
| Weather      Data:                                                                               |   | 2008   |      |   | 2007   |   |      |   |   |   |   |   |   |   |
|    Cooling Degree      Days                                                       |   |   |      |   |   |   |      |   |   |   |   |   |   |   |   |   |
|    Six      Months Ended June 30,                                                 |   |   | 420       |   |   |   | 467       |   |   |   |   |   |   |   |   |   |
|    10-Year      Average for Six Months    Ended      June 30, |   |   |  457 |   |   |   |  441 |   |   |   |   |   |   |   |   |   |

----

Table of Contents

|                                                                       |   | Three      Months          |   |   | Six      Months     |   |
|----------------------------------------------------------------------------|--------|----------------------------|--------|--------|---------------------|--------|
| Mark-to-Market      Transactions –  Unrealized Gain (Loss) |   | Ended June      30,        |   |   | Ended June      30, |   |
|   Recorded      in Earnings                                      |   | 2008                       |   |   | 2007                |   |   | 2008 |   |   | 2007 |   |
|                                                                       |   | -Millions of      Dollars- |   |
| Recorded in      Wholesale Sales:                                          |   |                       |   |   |                |   |   |   |   |   |   |   |
| Forward Power Sales                                                        |   | $                          | (10    | )      |                | $      | 1 |   |   | $ | (15 | ) |   | $ | (8 | ) |
| Forward PowerPurchases                                                     |   |                       | 10     |   |                |   | (1 | ) |   |   | 14 |   |   |   | 7 |   |
| Forward Power      Purchases Recorded in Purchased Energy                  |   |                       | -      |   |                |   | - |   |   |   | (3 | ) |   |   | 1 |   |
| Forward Gas      Price Swaps Recorded in Fuel                              |   |                       | 4      |   |                |   | - |   |   |   | 5 |   |   |   | - |   |
| Total Pre-Tax Unrealized Gain      (Loss)                                  |   | $                          | 4      |   |                | $      | - |   |   | $ | 1 |   |   | $ | - |   |

|                                                                                                                                                                                                                 |   | Generation      and Purchased Power |   |   | Expense                    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|--------|----------------------------|--------|
| Three      Months Ended June 30,                                                                                                                                                                                     |   | 2008                                |   |   | 2007                       |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                 |   | -Millions of      kWh-              |   |   | -Millions of      Dollars- |   |
| Coal-Fired      Generation                                                                                                                                                                                           |   |                                |   |   |                       |   |   |   |   |   |   |   |
|    Four      Corners                                                                                                                                                                                  |   |                                | 133    |   |                       |   | 121 |   |   | $ | 2 |   |   | $ | 2 |   |
|    Navajo                                                                                                                                                                                             |   |                                | 329    |   |                       |   | 326 |   |   |   | 6 |   |   |   | 6 |   |
|    San      Juan                                                                                                                                                                                      |   |                                | 617    |   |                       |   | 639 |   |   |   | 17 |   |   |   | 16 |   |
|    Springerville                                                                                                                                                                                      |   |                                | 1,531  |   |                       |   | 1,385 |   |   |   | 26 |   |   |   | 23 |   |
|    Sundt      Unit 4                                                                                                                                                                                  |   |                                | 169    |   |                       |   | 197 |   |   |   | 6 |   |   |   | 6 |   |
| Total      Coal-Fired Generation                                                                                                                                                                                     |   |                                | 2,779  |   |                       |   | 2,668 |   |   |   | 57 |   |   |   | 53 |   |
| Gas-Fired      Generation                                                                                                                                                                                            |   |                                |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                 |   |                                | 155    |   |                       |   | 184 |   |   |   | 9 |   |   |   | 11 |   |
| Other Gas      Units                                                                                                                                                                                                 |   |                                | 61     |   |                       |   | 66 |   |   |   | 9 |   |   |   | 7 |   |
| Total      Gas-Fired Generation                                                                                                                                                                                      |   |                                | 216    |   |                       |   | 250 |   |   |   | 18 |   |   |   | 18 |   |
|    Unrealized      (Gains) on Gas Hedges                                                                                                                                                              |   |                                | -      |   |                       |   | - |   |   |   | (4 | ) |   |   | - |   |
| Net Gas-Fired      Generation                                                                                                                                                                                        |   |                                | 216    |   |                       |   | 250 |   |   |   | 14 |   |   |   | 18 |   |
| Solar and      Other                                                                                                                                                                                                 |   |                                | 3      |   |                       |   | 3 |   |   |   | - |   |   |   | - |   |
| Total      Generation (1)                                                                                                                                                                                            |   |                                | 2,998  |   |                       |   | 2,921 |   |   |   | 71 |   |   |   | 71 |   |
| Purchased      Power                                                                                                                                                                                                 |   |                                | 825    |   |                       |   | 629 |   |   |   | 79 |   |   |   | 40 |   |
| Total      Resources                                                                                                                                                                                                 |   |                                | 3,823  |   |                       |   | 3,550 |   |   | $ | 150 |   |   | $ | 111 |   |
| Less Line      Losses and Company Use                                                                                                                                                                                |   |                                | (259   | )      |                       |   | (277 | ) |   |   |   |   |   |   |   |   |
| Total Energy      Sold                                                                                                                                                                                               |   |                                | 3,564  |   |                       |   | 3,273 |   |   |   |   |   |   |   |   |   |
|  (1)      Fuel expense in 2008      and 2007 excludes $2 million and $1 million, respectively, related to      Springerville 3; these expenses are reimbursed by Tri- State and recorded      in Other Revenue. |   |

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|                                                                                                                                                                                                                                  |   | Generation      and Purchased Power |    |   | Expense                    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|--------|----------------------------|--------|
| Six      Months Ended June 30,                                                                                                                                                                                                        |   | 2008                                |    |   | 2007                       |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                  |   | -Millions of      kWh-              |    |   | -Millions of      Dollars- |   |
| Coal-Fired      Generation                                                                                                                                                                                                            |   |                                |    |   |                       |   |   |   |   |   |   |   |
|    Four      Corners                                                                                                                                                                                                   |   |                                | 283     |   |                       |   | 300 |   |   | $ | 5 |   |   | $ | 5 |   |
|    Navajo                                                                                                                                                                                                              |   |                                | 628     |   |                       |   | 617 |   |   |   | 11 |   |   |   | 10 |   |
|    San      Juan                                                                                                                                                                                                       |   |                                | 1,131   |   |                       |   | 1,131 |   |   |   | 32 |   |   |   | 28 |   |
|    Springerville                                                                                                                                                                                                       |   |                                | 2,880   |   |                       |   | 2,803 |   |   |   | 49 |   |   |   | 47 |   |
|    Sundt      Unit 4                                                                                                                                                                                                   |   |                                | 375     |   |                       |   | 361 |   |   |   | 14 |   |   |   | 12 |   |
| Total      Coal-Fired Generation                                                                                                                                                                                                      |   |                                | 5,297   |   |                       |   | 5,212 |   |   |   | 111 |   |   |   | 102 |   |
| Gas-Fired      Generation                                                                                                                                                                                                             |   |                                |    |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                                  |   |                                | 352     |   |                       |   | 350 |   |   |   | 22 |   |   |   | 20 |   |
| Other Gas      Units                                                                                                                                                                                                                  |   |                                | 65      |   |                       |   | 80 |   |   |   | 10 |   |   |   | 9 |   |
| Total      Gas-Fired Generation                                                                                                                                                                                                       |   |                                | 417     |   |                       |   | 430 |   |   |   | 32 |   |   |   | 29 |   |
|     Unrealized      (Gain) on Gas    Hedges                                                                                                                                                   |   |                                |  - |   |                       |   |  - |   |   |   | (5 | ) |   |   |  - |   |
| Net Gas-Fired      Generation                                                                                                                                                                                                         |   |                                | 417     |   |                       |   | 430 |   |   |   | 27 |   |   |   | 29 |   |
| Solar and      Other                                                                                                                                                                                                                  |   |                                | 5       |   |                       |   | 5 |   |   |   | - |   |   |   | - |   |
| Total      Generation (1)                                                                                                                                                                                                             |   |                                | 5,719   |   |                       |   | 5,647 |   |   |   | 138 |   |   |   | 131 |   |
| Purchased      Power                                                                                                                                                                                                                  |   |                                | 1,255   |   |                       |   | 953 |   |   |   | 108 |   |   |   | 58 |   |
|    Unrealized      (Gain)/Loss on Power      Purchases                                                                                                                                   |   |                                |  - |   |                       |   | - |   |   |   |  3 |   |   |   | (1 | ) |
| Net Purchased      Power                                                                                                                                                                                                              |   |                                | 1,255   |   |                       |   | 953 |   |   |   | 111 |   |   |   | 57 |   |
| Total      Resources                                                                                                                                                                                                                  |   |                                | 6,974   |   |                       |   | 6,600 |   |   | $ | 249 |   |   | $ | 188 |   |
| Less Line      Losses and Company Use                                                                                                                                                                                                 |   |                                | (440    | )      |                       |   | (480 | ) |   |   |   |   |   |   |   |   |
| Total Energy      Sold                                                                                                                                                                                                                |   |                                | 6,534   |   |                       |   | 6,120 |   |   |   |   |   |   |   |   |   |
| (1)      Fuel expense in the      first six months of 2008 and 2007 excludes $3 million and $2 million,      respectively, related to Springerville 3; these expenses are reimbursed by      Tri-State and recorded in Other Revenue. |   |

|                 |   | Three      Months Ended June 30,   |   |   | Six      MonthsEnded      June 30, |   |
|----------------------|--------|------------------------------------|--------|--------|------------------------------------|--------|
|                 |   | 2008                               |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
|                 |   | -cents      perkWh      generated- |   |   | -cents      perkWh      generated- |   |
| Coal                 |   |                               | 2.05   |   |                               |   | 1.99 |   |   |   | 2.10 |   |   |   | 1.96 |   |
| Gas                  |   |                               | 8.33   |   |                               |   | 7.20 |   |   |   | 7.67 |   |   |   | 6.74 |   |
| Purchased      Power |   |                               | 9.58   |   |                               |   | 6.36 |   |   |   | 8.61 |   |   |   | 6.09 |   |

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FACTORS 

| · | Base Rate      Increase.  A base rate increase of approximately 6% over      TEP’s current retail rate of 8.4 cents per kilowatt-hour      (kWh).  The proposed increase will result in an increase in      annual revenues of approximately $47 million, which would increase TEP’s      2006 test year base revenues of approximately $781 million to $828      million.  The average cost of fuel and purchased power embedded      in base rates is approximately 2.9 cents per  kWh. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Ratemaking Methodology for      Generation Assets.  Rates for generation service,      including Springerville Unit 1 (SGS 1) and the Luna Energy Facility      (Luna), will be based on a cost-of-service methodology.  For any      rates in effect after 2012, all generation assets acquired by TEP after      December 31, 2006 but before December 31, 2012 shall be included in TEP’s      rate base at their respective original depreciated cost, subject to      subsequent review by the ACC in future rate cases or other regulatory      proceedings. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Cost of      Capital.  TEP’s capital structure for ratemaking purposes      will be comprised of 57.5% debt and 42.5% common equity.  TEP’s      allowed return on equity will be 10.25% and the embedded cost of debt will      be 6.38% for ratemaking purposes. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Depreciation and Net Negative      Salvage.  Upon the effective date of an ACC order      approving the 2008 Proposed Settlement Agreement, TEP will implement new      depreciation rates that include: a component for  net |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | negative      salvage value for all generation assets except Luna; and new depreciation      rates for distribution and general plant assets that will extend the      depreciable lives of these assets.  The change in depreciation      rates will result in an increase in depreciation expense of approximately      $11 million per year, based on a December 31, 2006 test    year. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Implementation Cost Recovery      Asset and Coal Costs.  TEP’s original cost rate base will      include an Implementation Cost Recovery Asset (ICRA) of $14 million to      reflect costs incurred by TEP to transition to competition under the 1999      Settlement Agreement.  For ratemaking purposes, the ICRA will be      amortized over a four-year period. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Purchased Power and Fuel      Adjustor Clause.  The purchased power and fuel adjustor      clause (PPFAC) will be effective starting January 1, 2009.  The      PPFAC allows recovery of demand charges and the cost of contracts for      hedging fuel and purchased power costs.  The PPFAC will consist      of a forward component and a true-upcomponent. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | The forward      component will be updated on April 1 of each year, starting in      2009.  The forward component will be the forecasted fuel and      purchased power costs for the 12-month period from April 1 to March 31,      less the embedded base cost of fuel and purchased power of 2.9 cents per      kWh.  During this 12-month period, TEP will have the ability to      request an adjustment to the forward component should an extraordinary      event occur that causes a drastic change in forecasted fuel and purchased      power costs. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | The true-up      component will reconcile any over/under collected amounts from the      preceding 12-month period and will be credited to or recovered from      customers in the subsequent year. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | TEP will      credit the following against the PPFAC: 100% of short-term wholesale      revenues; 50% of the revenues from the sales of sulfur dioxide (SO2)      emission allowances; and 10% of TEP’s positive wholesale trading      profits. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Renewable Energy and      Demand-Side Management Adjustors.  TEP’s new rates will      include the Renewable Energy Standard Tariff (REST) adjustor mechanism      approved by the ACC in April 2008.  A demand-side management      (DSM) adjustor mechanism will provide initial funding of $6 million for      DSM programs.  TEP will file for ACC approval to reset the DSM      adjustor rate by April 1 of eachyear. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Base Rate Increase      Moratorium.  TEP’s base rates will be frozen through      December 31, 2012.  TEP will be prohibited from submitting a      base rate application before June 30, 2012.  The test year to be      used in TEP’s next base rate application must be no earlier than December      31, 2011.  Notwithstanding the rate increase moratorium, base      rates and adjustor mechanisms may be changed in emergency conditions which      are beyond TEP’s control if the ACC concludes such changes are required to      protect the public interest.  TEP will not be precluded from      seeking rate relief in the event of the imposition of a federal carbon tax      or related federal carbonregulations. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 1999 Settlement      Agreement.  All of TEP’s rights and claims under the 1999      Settlement Agreement would be waived if the proposed settlement agreement      is approved by the ACC without any significant    modifications. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| Average      Market Price for Around-the-Clock Energy |   | $/MWh  |   |
|-------------------------------------------------------|--------|--------|--------|
| Quarter ended June 30,    2008                        |   | $      | 79     |   |
| Quarter ended June 30,    2007                        |   |   | 55     |   |
|                                                  |   |   |   |   |
| Six months ended June 30,      2008                   |   | $      | 72     |   |
| Six months ended June 30,      2007                   |   |   | 52     |   |

| Average      Market Price for Natural Gas |   | $/MMBtu |   |
|-------------------------------------------|--------|---------|--------|
| Quarter ended June 30,      2008          |   | $       | 9.44   |   |
| Quarter ended June 30,      2007          |   |    | 6.59   |   |
|                                      |   |    |   |   |
| Six months ended June 30,      2008       |   | $       | 8.37   |   |
| Six months ended June 30,      2007       |   |    | 6.46   |   |

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|  Delivery                     |   | Allowances      Sold |   |   | Pre-tax      Gain |   |
|------------------------------------|--------|----------------------|--------|--------|-------------------|--------|
|    2007             |   |                 |   |   | -Millions-        |   |
|    1st      Quarter |   |                 | 2,500  |   |              | $      | 2 |   |
|    2nd      Quarter |   |                 | 7,500  |   |              |   | 5 |   |
|    3rd      Quarter |   |                 | 5,000  |   |              |   | 3 |   |
|    4th      Quarter |   |                 | 7,000  |   |              |   | 5 |   |
| Total      2007                    |   |                 | 22,000 |   |              | $      | 15 |   |
|                               |   |                 |   |   |              |   |   |   |
|    2008             |   |                 |   |   |              |   |   |   |
|    1st      Quarter |   |                 | -      |   |              | $      | - |   |
| 2nd      Quarter                   |   |                 | 4,000  |   |              |   | 1 |   |
| Total      2008                    |   |                 | 4,000  |   |              | $      | 1 |   |

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|                       |   | Tucson      Electric Power                                          |   |
|----------------------------|--------|---------------------------------------------------------------------|--------|
|                       |   | June      30, 2008- Millions of      Dollars -                      |   |
|                       |   | Quoted Prices      in Active Markets for Identical Assets (Level 1) |   |   | Significant      Other Observable Inputs (Level 2) |   |   | Significant      Unobservable Inputs (Level 3) |   |   | Total |   |
| Energy      Contracts (1)  |   | $                                                                   | -      |   |   | $ | 27 |   |   | $ | (5 | ) |   | $ | 22 |   |
| Cash      Collateral (2)   |   |                                                                | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Investments      (3)       |   |                                                                | -      |   |   |   | 14 |   |   |   | - |   |   |   | 14 |   |
| Deferred      Compensation |   |                                                                | -      |   |   |   | (6 | ) |   |   | - |   |   |   | (6 | ) |
| Interest Rate      Swap    |   |                                                                | -      |   |   |   | (3 | ) |   |   | - |   |   |   | (3 | ) |
|   Total          |   | $                                                                   | -      |   |   | $ | 32 |   |   | $ | (5 | ) |   | $ | 27 |   |

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LIQUIDITY 

| Six      Months Ended June 30,                                                                                              |   | 2008                       |   |   | 2007   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                                                                                                        |   | -Millions of      Dollars- |   |
| Net Cash      Flows – Operating Activities (GAAP)                                                                     |   | $                          | 131    |   |   | $      | 93 |   |
| Amounts from      Statements of Cash Flows:                                                                                 |   |                       |   |   |   |   |   |   |
| Less: Capital      Expenditures                                                                                             |   |                       | (153   | )      |   |   | (82 | ) |
| Net Cash      Flows after Capital Expenditures (non-GAAP)*                                                                  |   |                       | (22    | )      |   |   | 11 |   |
| Amounts from      Statements of Cash Flows:                                                                                 |   |                       |   |   |   |   |   |   |
| Less: Retirement of Capital Lease      Obligations                                                                          |   |                       | (62    | )      |   |   | (56 | ) |
| Plus:  Proceeds from      Investment in Lease Debt                                                                |   |                       | 11     |   |   |   | 11 |   |
| Net Cash      Flows after Capital Expenditures and Required Payments on Debt and Capital      Lease Obligations (non-GAAP)* |   | $                          | (73    | )      |   | $      | (34 | ) |

| Six      Months Ended June 30,                                                                                              |   | 2008                       |   |   | 2007   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                                                                                                        |   | -Millions of      Dollars- |   |
| Net Cash      Flows – Operating Activities (GAAP)                                                                     |   | $                          | 131    |   |   | $      | 93 |   |
| Net Cash      Flows – Investing Activities (GAAP)                                                                     |   |                       | (271   | )      |   |   | (73 | ) |
| Net Cash      Flows – Financing Activities (GAAP)                                                                     |   |                       | 157    |   |   |   | 1 |   |
| Net Cash      Flows after Capital Expenditures (non-GAAP)*                                                                  |   |                       | (22    | )      |   |   | 11 |   |
| Net Cash      Flows after Capital Expenditures and Required Payments on Debt and Capital      Lease Obligations (non-GAAP)* |   |                       | (73    | )      |   |   | (34 | ) |

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|   | · | a $13 million      decrease in cash receipts from retail and wholesale electric sales, less      fuel and purchased power costs, resulting from higher coal-related fuel      costs, mild weather and unplanned outages during the first quarter that      limited wholesale salesopportunities; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a $10 million      increase in cash receipts related to reimbursements received for the      operation of Springerville Units 3 and4; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | · | income tax      refunds of $11 million; |
|--------|--------|-----------------------------------------|

|   | · | a $5 million      decrease in proceeds from the sale of excess SO2 emission      allowances; |
|--------|--------|----------------------------------------------------------------------------------------------|

|   | · | an $11      million decrease in total interest paid due to lower capital lease      obligation balances; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

|   | · | a $16 million      decrease in income taxes paid due to lower taxable income and payments      made last year for amended taxreturns. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | · | proceeds of      $221 million received by TEP related to the issuance of tax-exempt IDB’s      through the Pima County Industrial Development  Authority; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a $43 million      decrease in net proceeds from borrowings under the TEP Revolving Credit      Facility; partially offset by |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | · | a $6 million      increase in scheduled payments made on capital lease obligations;      and |
|--------|--------|----------------------------------------------------------------------------------------------|

|   | · | $10 million      of long-term debt repayments. |
|--------|--------|------------------------------------------------|

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|   Leased      Asset               |   | Capital      Lease Obligation Balanceat      June 30, 2008 |   |   Expiration |
|---------------------------------------------|--------|------------------------------------------------------------|--------|------------------------|
|                                        |   | - In Millions      -                                       |   |                   |
| Springerville      Unit 1                   |   | $                                                          | 307    |                   | 2015 |
| Springerville      Coal Handling Facilities |   |                                                       | 102    |                   | 2015 |
| Springerville      Common Facilities        |   |                                                       | 107    |                   | 2020 |
| Sundt Unit      4                           |   |                                                       | 26     |                   | 2011 |
| Total Capital      Lease Obligations        |   | $                                                          | 542    |                   |   |

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Table of Contents

|                                                    |   | Lease      Debt Investment Balance |   |
|---------------------------------------------------------|--------|------------------------------------|--------|
| Leased      Asset                                       |   | June      30, 2008                 |   |   | December      31, 2007 |   |
|                                                    |   | - In Millions      -               |   |
| Investments      in Lease Debt:                         |   |                               |   |   |   |   |
|   Springerville      Unit 1                   |   | $                                  | 59     |   |   | $ | 71 |   |
|   Springerville      Coal Handling Facilities |   |                               | 34     |   |   |   | 34 |   |
| Total      Investment in Lease Debt                     |   | $                                  | 93     |   |   | $ | 105 |   |

UNS

RESULTS 

|                                                  |   | Sales                       |   |   | Revenue                      |   |
|-------------------------------------------------------|--------|-----------------------------|--------|--------|------------------------------|--------|
| Three      Months Ended June 30,                      |   | 2008                        |   |   | 2007                         |   |   | 2008 |   |   | 2007 |   |
|                                                  |   | - Millions of      Therms - |   |   | - Millions of      Dollars - |   |
| Retail      Therm Sales:                              |   |                        |   |   |                         |   |   |   |   |   |   |   |
|    Residential                         |   |                        | 10     |   |                         |   | 9 |   |   |   | 15 |   |   | $ | 12 |   |
|    Commercial                          |   |                        | 6      |   |                         |   | 5 |   |   |   | 7 |   |   |   | 6 |   |
|    Industrial                          |   |                        | -      |   |                         |   | - |   |   |   | - |   |   |   | - |   |
|    Public      Authorities             |   |                        | 1      |   |                         |   | 1 |   |   |   | 1 |   |   |   | 1 |   |
| Total      Retail Therm Sales                         |   |                        | 17     |   |                         |   | 15 |   |   |   | 23 |   |   |   | 19 |   |
|    Transport                           |   |                        | -      |   |                         |   | - |   |   |   | 1 |   |   |   | 1 |   |
|    Negotiated      Sales Program (NSP) |   |                        | 8      |   |                         |   | 5 |   |   |   | 8 |   |   |   | 3 |   |
| Total      Therm Sales                                |   |                        | 25     |   |                         |   | 20 |   |   | $ | 32 |   |   | $ | 23 |   |

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| Three      Months Ended June 30,                                                  |   | 2008                         |   |   | 2007   |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                                                              |   | - Millions of      Dollars - |   |
| Gas      Revenues                                                                 |   | $                            | 32     |   |   | $      | 23 |   |
| Other      Revenues                                                               |   |                         | 1      |   |   |   | - |   |
|      Total      Operating Revenues                       |   |                         | 33     |   |   |   | 23 |   |
| Purchased Gas      Expense                                                        |   |                         | 22     |   |   |   | 15 |   |
| Other      Operations and Maintenance Expense                                     |   |                         | 6      |   |   |   | 6 |   |
| Depreciation      and Amortization                                                |   |                         | 2      |   |   |   | 2 |   |
| Taxes other      than Income Taxes                                                |   |                         | 1      |   |   |   | 1 |   |
|      Total      Other Operating Expenses                 |   |                         | 31     |   |   |   | 24 |   |
|                                                                              |   |                         |   |   |   |   |   |   |
|           Operating      Income |   |                         | 2      |   |   |   | (1 | ) |
| Other      Income                                                                 |   |                         | -      |   |   |   | 1 |   |
| Total      Interest Expense                                                       |   |                         | 2      |   |   |   | 2 |   |
| Income Tax      Expense (Benefit)                                                 |   |                         | -      |   |   |   | (1 | ) |
|            Net      Income |   | $                            | -      |   |   | $      | (1 | ) |

|                                                  |   | Sales                       |   |   | Revenue                      |   |
|-------------------------------------------------------|--------|-----------------------------|--------|--------|------------------------------|--------|
| Six      Months Ended June 30,                        |   | 2008                        |   |   | 2007                         |   |   | 2008 |   |   | 2007 |   |
|                                                  |   | - Millions of      Therms - |   |   | - Millions of      Dollars - |   |
| Retail      Therm Sales:                              |   |                        |   |   |                         |   |   |   |   |   |   |   |
|    Residential                         |   |                        | 45     |   |                         |   | 43 |   |   | $ | 57 |   |   | $ | 53 |   |
|    Commercial                          |   |                        | 18     |   |                         |   | 17 |   |   |   | 20 |   |   |   | 19 |   |
|    Industrial                          |   |                        | 1      |   |                         |   | 1 |   |   |   | 1 |   |   |   | 1 |   |
|    Public      Authorities             |   |                        | 4      |   |                         |   | 4 |   |   |   | 4 |   |   |   | 4 |   |
| Total      Retail Therm Sales                         |   |                        | 68     |   |                         |   | 65 |   |   |   | 82 |   |   |   | 77 |   |
|    Transport                           |   |                        | -      |   |                         |   | - |   |   |   | 2 |   |   |   | 1 |   |
|    Negotiated      Sales Program (NSP) |   |                        | 14     |   |                         |   | 10 |   |   |   | 13 |   |   |   | 7 |   |
| Total      Therm Sales                                |   |                        | 82     |   |                         |   | 75 |   |   | $ | 97 |   |   | $ | 85 |   |

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Table of Contents

| Six      Months Ended June 30,                                                    |   | 2008                         |   |   | 2007   |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                                                              |   | - Millions of      Dollars - |   |
| Gas      Revenues                                                                 |   | $                            | 97     |   |   | $      | 85 |   |
| Other      Revenues                                                               |   |                         | 2      |   |   |   | 1 |   |
|      Total      Operating Revenues                       |   |                         | 99     |   |   |   | 86 |   |
| Purchased Gas      Expense                                                        |   |                         | 67     |   |   |   | 59 |   |
| Other      Operations and Maintenance Expense                                     |   |                         | 13     |   |   |   | 13 |   |
| Depreciation      and Amortization                                                |   |                         | 3      |   |   |   | 4 |   |
| Taxes other      than Income Taxes                                                |   |                         | 2      |   |   |   | 2 |   |
|      Total      Other Operating Expenses                 |   |                         | 85     |   |   |   | 78 |   |
|                                                                              |   |                         |   |   |   |   |   |   |
|           Operating      Income |   |                         | 14     |   |   |   | 8 |   |
| Other      Income                                                                 |   |                         | -      |   |   |   | 1 |   |
| Total      Interest Expense                                                       |   |                         | 3      |   |   |   | 3 |   |
| Income Tax      Expense (Benefit)                                                 |   |                         | 4      |   |   |   | 3 |   |
|            Net      Income |   | $                            | 7      |   |   | $      | 3 |   |

FACTORS

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Table of Contents

LIQUIDITY 

| Six      Months Ended June 30,                   |   | 2008                         |   |   | 2007   |   |
|--------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                             |   | - Millions of      Dollars - |   |
| Net Cash      Flows – Operating Activities |   | $                            | 6      |   |   | $      | 17 |   |
| Capital      Expenditures                        |   |                         | 8      |   |   |   | 11 |   |

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UNS

RESULTS 

|                                                                     |   | Sales                    |   |   | Revenue                      |   |
|--------------------------------------------------------------------------|--------|--------------------------|--------|--------|------------------------------|--------|
| Three      Months Ended June 30,                                         |   | 2008                     |   |   | 2007                         |   |   | 2008 |   |   | 2007 |   |
|                                                                     |   | - Millions of      kWh - |   |   | - Millions of      Dollars - |   |
| Electric      Retail Sales:                                              |   |                     |   |   |                         |   |   |   |   |   |   |   |
|    Residential                                            |   |                     | 184    |   |                         |   | 198 |   |   | $ | 20 |   |   | $ | 20 |   |
|    Commercial                                             |   |                     | 167    |   |                         |   | 163 |   |   |   | 18 |   |   |   | 16 |   |
|    Industrial                                             |   |                     | 54     |   |                         |   | 48 |   |   |   | 5 |   |   |   | 4 |   |
|    Other                                                  |   |                     | 1      |   |                         |   | 1 |   |   |   | - |   |   |   | - |   |
| Total      Electric Retail Sales                                         |   |                     | 406    |   |                         |   | 410 |   |   | $ | 43 |   |   | $ | 40 |   |
|     Electric      Wholesale Sales                    |   |                     | 26     |   |                         |   | - |   |   |   | 3 |   |   |   | - |   |
|       Total      Electric  Sales |   |                     | 432    |   |                         |   | 410 |   |   | $ | 46 |   |   | $ | 40 |   |

| Three      Months Ended June 30,                                                  |   | 2008                         |   |   | 2007   |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                                                              |   | - Millions of      Dollars - |   |
| Retail      Electric Revenues                                                     |   | $                            | 43     |   |   | $      | 40 |   |
| Wholesale      Electric Revenues                                                  |   |                         | 3      |   |   |   | - |   |
|      Total      Operating Revenues                       |   |                         | 46     |   |   |   | 40 |   |
| Purchased      Energy Expense                                                     |   |                         | 30     |   |   |   | 27 |   |
| Other      Operations and Maintenance Expense                                     |   |                         | 8      |   |   |   | 7 |   |
| Depreciation      and Amortization                                                |   |                         | 4      |   |   |   | 3 |   |
| Taxes other      than Income Taxes                                                |   |                         | 1      |   |   |   | 1 |   |
|      Total      Other Operating Expenses                 |   |                         | 43     |   |   |   | 38 |   |
|                                                                              |   |                         |   |   |   |   |   |   |
|           Operating      Income |   |                         | 2      |   |   |   | 2 |   |
| Other      Income                                                                 |   |                         | -      |   |   |   | 2 |   |
| Total      Interest Expense                                                       |   |                         | 1      |   |   |   | 1 |   |
| Income Tax      Expense                                                           |   |                         | -      |   |   |   | 1 |   |
|            Net      Income |   | $                            | 1      |   |   | $      | 2 |   |

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|                           |   | Sales                    |   |   | Revenue                      |   |
|--------------------------------|--------|--------------------------|--------|--------|------------------------------|--------|
| Six      Months Ended June 30, |   | 2008                     |   |   | 2007                         |   |   | 2008 |   |   | 2007 |   |
|                           |   | - Millions of      kWh - |   |   | - Millions of      Dollars - |   |

| Electric      Retail Sales:                                              |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|    Residential                                            |   |   | 367    |   |   |   | 380    |   |   | $      | 39     |   |   | $ | 38 |   |
|    Commercial                                             |   |   | 302    |   |   |   | 294    |   |   |   | 32     |   |   |   | 30 |   |
|    Industrial                                             |   |   | 105    |   |   |   | 95     |   |   |   | 9      |   |   |   | 7 |   |
|    Other                                                  |   |   | 1      |   |   |   | 1      |   |   |   | -      |   |   |   | - |   |
| Total      Electric Retail Sales                                         |   |   | 775    |   |   |   | 770    |   |   | $      | 80     |   |   | $ | 76 |   |
|     Electric      Wholesale Sales                    |   |   | 27     |   |   |   | -      |   |   |   | 3      |   |   |   | - |   |
|       Total      Electric  Sales |   |   | 802    |   |   |   | 770    |   |   | $      | 82     |   |   | $ | 76 |   |

| Six      Months Ended June 30,                                                    |   | 2008                         |   |   | 2007   |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                                                              |   | - Millions of      Dollars - |   |
| Electric      Revenues                                                            |   | $                            | 80     |   |   | $      | 76 |   |
| Other      Revenues                                                               |   |                         | 3      |   |   |   | 1 |   |
|      Total      Operating Revenues                       |   |                         | 83     |   |   |   | 77 |   |
| Purchased      Energy Expense                                                     |   |                         | 54     |   |   |   | 51 |   |
| Other      Operations and Maintenance Expense                                     |   |                         | 14     |   |   |   | 13 |   |
| Depreciation      and Amortization                                                |   |                         | 7      |   |   |   | 6 |   |
| Taxes other      than Income Taxes                                                |   |                         | 2      |   |   |   | 2 |   |
|      Total      Other Operating Expenses                 |   |                         | 77     |   |   |   | 72 |   |
|                                                                              |   |                         |   |   |   |   |   |   |
|           Operating      Income |   |                         | 4      |   |   |   | 5 |   |
| Other      Income                                                                 |   |                         | 1      |   |   |   | 2 |   |
| Total      Interest Expense                                                       |   |                         | 3      |   |   |   | 3 |   |
| Income Tax      Expense                                                           |   |                         | 1      |   |   |   | 2 |   |
|            Net      Income |   | $                            | 1      |   |   | $      | 2 |   |

FACTORS 

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Table of Contents

| Test year –      12 months ended June 30, 2006 | Requested by      UNS Electric | 2008 ACC      Order        |
|------------------------------------------------------|--------------------------------|----------------------------|
| Original cost      rate base                         | $141      million              | $131      million          |
| Revenue      deficiency                              | $8.5      million              | $4      million            |
| Total rate      increase (over test year revenues)   | 5.5%                           | 2.5%                       |
| Cost of      long-term debt                          | 8.2%                           | 8.2%                       |
| Cost of      equity                                  | 11.8%                          | 10.0%                      |
| Actual      capital structure                        | 49% equity /      51% debt     | 49% equity /      51% debt |
| Weighted      average cost of capital                | 9.9%                           | 9.0%                       |

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|                  |   | UNS      Electric                                                               |   |
|-----------------------|--------|---------------------------------------------------------------------------------|--------|
|                  |   | June      30, 2008- Millions of      Dollars -                                  |   |
|                  |   | Quoted Prices      inActive      Markets forIdentical      Assets(Level      1) |   |   | Significant      OtherObservableInputs      (Level      2) |   |   | SignificantUnobservableInputs (Level      3) |   |   | Total |   |
| Energy      Contracts |   | $                                                                               | -      |   |   | $ | 17 |   |   | $ | 35 |   |   | $ | 52 |   |

LIQUIDITY 

| Six      Months Ended June 30,                   |   | 2008                         |   |   | 2007   |   |
|--------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                             |   | - Millions of      Dollars - |   |
| Net Cash      Flows – Operating Activities |   | $                            | 11     |   |   | $      | 11 |   |
| Capital      Expenditures                        |   |                         | 14     |   |   |   | 21 |   |

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OTHER

RESULTS 

| Three      Months Ended June 30,               |   | 2008                         |   |   | 2007   |   |
|------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                           |   | - Millions of      Dollars - |   |
| UED                                            |   | $                            | -      |   |   | $      | - |   |
| Millennium      Investments                    |   |                         | (1     | )      |   |   | - |   |
| UniSource      Energy Parent Company           |   |                         | (1     | )      |   |   | (1 | ) |
|      Total      Other |   | $                            | (2     | )      |   | $      | (1 | ) |

| Six      Months Ended June 30,                 |   | 2008                         |   |   | 2007   |   |
|------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|
|                                           |   | - Millions of      Dollars - |   |
| UED                                            |   | $                            | -      |   |   | $      | - |   |
| Millennium      Investments                    |   |                         | -      |   |   |   | 1 |   |
| UniSource      Energy Parent Company           |   |                         | (3     | )      |   |   | (2 | ) |
|      Total      Other |   | $                            | (3     | )      |   | $      | (1 | ) |

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|        |                                                                             | June 30,      2008                                                               |                                                            |
|-------------|----------------------------------------------------------------------------------|----------------------------------------------------------------------------------|-----------------------------------------------------------------|
|        | - Millions of      Dollars -                                                     |
|        | Quoted Prices      inActive      Marketsfor      IdenticalAssets (Level      1)  | Significant      OtherObservableInputs (Level      2)                            | SignificantUnobservableInputs (Level      3)                    | Total |
| Investments | $             - | $             - | $          12 | $          12 |

CRITICAL 

|   | · | Accounting      for Rate Regulation |
|--------|--------|-------------------------------------|

|   | · | Accounting      for Asset Retirement Obligations |
|--------|--------|--------------------------------------------------|

|   | · | Pension and      Other Postretirement Benefit PlanAssumptions |
|--------|--------|---------------------------------------------------------------|

|   | · | Accounting      for Derivative Instruments, Trading Activities and Hedging      Activities |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | Unbilled      Revenue – TEP, UNS Gas and UNSElectric |
|--------|--------|------------------------------------------------------------|

|   | · | Plant Asset      Depreciable Lives – TEP, UNS Gas and UNS  Electric |
|--------|--------|---------------------------------------------------------------------------|

|   | · | Deferred Tax      Valuation |
|--------|--------|-----------------------------|

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NEW

|   | · | FAS 161,      Disclosures About      Derivative Instruments and Hedging Activities an amendment to FAS      133, Accounting for      Derivative Instruments and Hedging Activities, issued March 2008,      requires enhanced disclosures about an entity’s derivative and hedging      activity. The      standard requires that the objectives for using derivative instruments be      disclosed in terms of underlying risk so that the reader understands the      purpose of derivative use in terms of the risks that the entity is      intending to manage.  The standard also requires disclosure of      the location in the financial statements of derivative balances as well as      the location of gains and losses incurred during the reporting      period.  The standard will be applicable for fiscal years or      interim periods beginning on or after November 15, 2008, with early      adoption encouraged. The company is currently assessing the impact of this      statement. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | FAS 160,      Accounting and Reporting      of Noncontrolling Interests in Consolidated Financial Statements,      issued December 2007, will change the accounting and reporting for      minority interests, requiring such amounts to be classified as a component      of equity, and will also change the accounting for transactions with      minority-interest holders. The standard will be applicable for fiscal      years beginning on or after December 15, 2008 on a prospective      basis.  Early adoption is prohibited and business combinations      with acquisition dates prior to the effective date will not be adjusted      upon application.  We do not expect this pronouncement to have a      material impact on our financialstatements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | FAS 141(R)      Business      Combinations - a replacement of FAS No. 141, issued December 2007,      requires companies to record acquisitions at fair value.  FAS      141(R) changes the definition of a business and a business combination and      is generally expected to increase the number of transactions that will      need to be accounted for at fair value.  The standard will be      applicable for fiscal years beginning on or after December 15, 2008 and      generally on a prospective basis.  Early adoption is prohibited      and business combinations with acquisition dates prior to the effective      date will not be adjusted upon application.  We do not expect      this pronouncement to have a material impact on our financial      statements. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

SAFE

| 1. | The      resolution of pending retail rate case proceedings and the resulting rate      structures. |
|----|-----------------------------------------------------------------------------------------------------|

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| 2. | Demand      conditions in our retail service areas, including economic conditions,      weather conditions, rate structures, demographic patterns, competing      energy alternatives and the status of retail  competition. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Supply and      demand conditions in wholesale energy markets, including volatility in      market prices and illiquidity in markets, are affected by a variety of      factors, which include the availability of generating capacity in the      Western U.S., including hydroelectric resources, weather, natural gas      prices, the extent of utility restructuring in various states,      transmission constraints, environmental regulations and cost of      compliance, FERC regulation of wholesale energy markets, and economic      conditions in the Western U.S. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | Changes      affecting our cost of providing electric and gas service including changes      in fuel costs, generating unit operating performance, scheduled and      unscheduled plant outages, interest rates, tax laws, environmental laws,      and the general rate of inflation. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | Ability to      obtain financing through debt and/or equity issuance, which can be      affected by various factors, including interest rate fluctuations and      capital market conditions. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6. | The      creditworthiness of the entities with which we transact business or have      transacted business. |
|----|-------------------------------------------------------------------------------------------------------------|

| 7. | Changes in      accounting principles or the application of such principles to our      businesses. |
|----|-----------------------------------------------------------------------------------------------------|

| 8. | Changes in      the depreciable lives of ourassets. |
|----|-----------------------------------------------------|

| 9. | Unanticipated      changes in future liabilities relating to employee benefit plans due to      changes in market values of retirement plan assets and health care      costs. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10. | The outcome      of any ongoing or futurelitigation. |
|-----|------------------------------------------------------|

ITEM 

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|                        |   | Three      MonthsEnded      June 30, |   |   | Six      Months EndedJune      30, |   |
|-----------------------------|--------|--------------------------------------|--------|--------|------------------------------------|--------|
|                        |   | 2008                                 |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
|                        |   | -In      Millions-                   |   |   | -In      Millions-                 |   |
| Unrealized      Gain (Loss) |   | $                                    | (1     | )      |                               | $      | - |   |   | $ | (3 | ) |   | $ | (1 | ) |

|                        |   | Three      MonthsEnded      June 30, |   |   | Six      MonthsEnded      June 30, |   |
|-----------------------------|--------|--------------------------------------|--------|--------|------------------------------------|--------|
|                        |   | 2008                                 |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
|                        |   | -In      Millions-                   |   |   | -In      Millions-                 |   |
| Unrealized      Gain (Loss) |   | $                                    | -      |   |                               | $      | - |   |   | $ | (4 | ) |   | $ | (1 | ) |

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Table of Contents

|  Six      Months Ended June 30, |   | 2008         |      |   |  2007                      |   |    |  2008 |   |   |  2007 |   |
|--------------------------------------|--------|--------------|-----------|--------|---------------------------------|--------|---------|------------|--------|--------|------------|--------|
|                                 |   |  -MWhs- |      |   |  % of Total      Resources |   |
| Gas-Fired      Generation            |   |         | 417,000   |   |                            |   | 430,000 |       |   |   | 6          | %      |   |   | 7 | % |
| Purchased      Power                 |   |         | 1,255,000 |   |                            |   | 953,000 |       |   |   | 18         | %      |   |   | 14 | % |

|                        |   | Three      MonthsEnded      June 30, |   |   | Six      MonthsEnded      June 30, |   |
|-----------------------------|--------|--------------------------------------|--------|--------|------------------------------------|--------|
|                        |   | 2008                                 |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
|                        |   | -In      Millions-                   |   |   | -In      Millions-                 |   |
| Unrealized      (Loss) Gain |   | $                                    | 16     |   |                               | $      | (6 | ) |   | $ | 28 |   |   | $ | (3 | ) |

|                 |   | Three      MonthsEnded      June 30, |   |   | Six      MonthsEnded      June 30, |   |
|----------------------|--------|--------------------------------------|--------|--------|------------------------------------|--------|
|                 |   | 2008                                 |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
|                 |   | -In      Millions-                   |   |   | -In      Millions-                 |   |
| Unrealized      Gain |   | $                                    | 4      |   |                               | $      | - |   |   | $ | 5 |   |   | $ | - |   |

|                                                                           |   | Unrealized      Gain (Loss) of TEP’sHedging      and Trading Activities |            |
|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|-----------------|
|                                                                           |   | - Millions of      Dollars -                                                  |            |
|  Source of      Fair Value At June 30, 2008                               |   | Maturity 0 –      6months                                               |            |   | Maturity 6      – 12months |   |   | Maturityover 1      yr. |   |   | TotalUnrealizedGain      (Loss) |   |
| Prices      actively quoted                                                    |   | $                                                                             | 9               |   |   | $ | (5 | ) |   | $ | 2 |   |   | $ | 17 |   |
| Prices based      on models and other valuation    methods |   |                                                                          |    (4 | ) |   |   |    - |   |   |   |    (2 | ) |   |   | (7 | ) |
| Total                                                                          |   | $                                                                             | 5               |   |   | $ | (5 | ) |   | $ | - |   |   | $ | 10 |   |

|                                                                    |   | - Millions of      Dollars - |   |
|-------------------------------------------------------------------------|--------|------------------------------|--------|
| Change in      Market Price As of June 30, 2008                         |   | 10%      Increase            |   |   | 10%      Decrease |   |
| Non-Cash      Flow Hedges                                               |   |                         |   |   |   |   |
|     Forward      power sales and purchase contracts |   | $                            | 4      |   |   | $ | (4 | ) |
|     Gas      swap agreements                        |   |                         | 5      |   |   |   | (5 | ) |
|                                                                    |   |                         |   |   |   |   |   |   |
| Cash      Flow Hedges                                                   |   |                         |   |   |   |   |   |   |
|    Forward      power sales and purchase contracts       |   | $                            | (1     | ) |   | $ | 1 |   |
|    Gas      swap agreements                              |   |                         | 8      |   |   |   | (8 | ) |

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ITEM 

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PART 

ITEM 

ITEM 

ITEM 

ITEM 

ISSUANCE 

NON

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|                                                          |   | UniSource      Energy                |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                          |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                          |   | - Millions of      Dollars -         |   |
|   Adjusted      EBITDA (non-GAAP)                   |   | $                                    | 84     |   |   | $ | 110 |   |   | $ | 167 |   |   | $ | 204 |   |
|   Net      Cash Flows - Operating Activities (GAAP) |   | $                                    | 86     |   |   | $ | 55 |   |   | $ | 140 |   |   | $ | 120 |   |
|   Net      Cash Flows - Investing Activities (GAAP) |   | $                                    | (225   | ) |   | $ | (64 | ) |   | $ | (304 | ) |   | $ | (106 | ) |
|   Net      Cash Flows - Financing Activities (GAAP) |   | $                                    | 148    |   |   | $ | 11 |   |   | $ | 177 |   |   | $ | (22 | ) |

|                                                          |   | TEP                                  |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                          |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                          |   | - Millions of      Dollars -         |   |
|   Adjusted      EBITDA (non-GAAP)                   |   | $                                    | 75     |   |   | $ | 99 |   |   | $ | 137 |   |   | $ | 176 |   |
|   Net      Cash Flows - Operating Activities (GAAP) |   | $                                    | 76     |   |   | $ | 43 |   |   | $ | 131 |   |   | $ | 93 |   |
|   Net      Cash Flows - Investing Activities (GAAP) |   | $                                    | (208   | ) |   | $ | (47 | ) |   | $ | (271 | ) |   | $ | (73 | ) |
|   Net      Cash Flows - Financing Activities (GAAP) |   | $                                    | 139    |   |   | $ | 12 |   |   | $ | 157 |   |   | $ | 1 |   |

|                                                            |   | UniSource      Energy                |   |
|-----------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                            |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                            |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                            |   | - Millions of      Dollars -         |   |
| Adjusted EBITDA      (non-GAAP) (1)                        |   | $                                    | 84     |   |   | $ | 110 |   |   | $ | 167 |   |   | $ | 204 |   |
| Amounts from      the Income Statements:                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income      Taxes                  |   |                                 | 3      |   |   |   | 8 |   |   |   | 3 |   |   |   | 12 |   |
|   Less:  Total      Interest Expense        |   |                                 | 31     |   |   |   | 34 |   |   |   | 63 |   |   |   | 69 |   |
| Changes in      Assets and Liabilities and Other Non-Cash Items |   |                                 | 36     |   |   |   | (13 | ) |   |   | 39 |   |   |   | (3 | ) |
| Net Cash Flows - Operating      Activities (GAAP)               |   |                                 | 86     |   |   |   | 55 |   |   |   | 140 |   |   |   | 120 |   |
| Net Cash Flows - Investing      Activities (GAAP)               |   |                                 | (225   | ) |   |   | (64 | ) |   |   | (304 | ) |   |   | (106 | ) |
| Net Cash Flows - Financing      Activities (GAAP)               |   |                                 | 148    |   |   |   | 11 |   |   |   | 177 |   |   |   | (22 | ) |
| Net Increase (Decrease) in Cash      and Cash Equivalents(GAAP) |   | $                                    | 8      |   |   | $ | 2 |   |   | $ | 13 |   |   | $ | (8 | ) |

|                                                            |   | TEP                                  |   |
|-----------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                            |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                            |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                            |   | - Millions of      Dollars -         |   |
| Adjusted EBITDA      (non-GAAP) (1)                        |   | $                                    | 75     |   |   | $ | 99 |   |   | $ | 137 |   |   | $ | 176 |   |
| Amounts from      the Income Statements:                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income      Taxes                  |   |                                 | 4      |   |   |   | 8 |   |   |   | (1 | ) |   |   | 9 |   |
|   Less:  Total      Interest Expense        |   |                                 | 26     |   |   |   | 29 |   |   |   | 52 |   |   |   | 58 |   |
| Changes in      Assets and Liabilities and Other Non-Cash Items |   |                                 | 31     |   |   |   | (19 | ) |   |   | 45 |   |   |   | (16 | ) |
| Net Cash Flows - Operating      Activities (GAAP)               |   |                                 | 76     |   |   |   | 43 |   |   |   | 131 |   |   |   | 93 |   |
| Net Cash Flows - Investing      Activities (GAAP)               |   |                                 | (208   | ) |   |   | (47 | ) |   |   | (271 | ) |   |   | (73 | ) |
| Net Cash Flows - Financing      Activities (GAAP)               |   |                                 | 139    |   |   |   | 12 |   |   |   | 157 |   |   |   | 1 |   |
| Net Increase (Decrease) in Cash      and Cash Equivalents(GAAP) |   | $                                    | 7      |   |   | $ | 8 |   |   | $ | 17 |   |   | $ | 21 |   |

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|                                                                                                                                         |   | UniSource      Energy                |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                         |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                                                                                                         |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                         |   | - Millions of      Dollars -         |   |
| Net Income      (GAAP)                                                                                                                       |   | $                                    | 5      |   |   | $ | 12 |   |   | $ | 2 |   |   | $ | 17 |   |
| Amounts from      the Income Statements:                                                                                                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Plus:  Income      Taxes                                                                                               |   |                                 | 3      |   |   |   | 8 |   |   |   | 3 |   |   |   | 12 |   |
|            Total      Interest Expense                                                |   |                                 | 31     |   |   |   | 34 |   |   |   | 63 |   |   |   | 69 |   |
| Depreciation and      Amortization                                                                                                           |   |                                 | 36     |   |   |   | 35 |   |   |   | 72 |   |   |   | 69 |   |
|            Amortization      of Transition Recovery Asset                             |   |                                 | 7      |   |   |   | 19 |   |   |   | 24 |   |   |   | 34 |   |
|            Depreciation      included in Fuel and Other O&M                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Expense      (see Note 13 of Notes to Consolidated |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Financial      Statements)                         |   |                                 | 2      |   |   |   | 2 |   |   |   | 3 |   |   |   | 3 |   |
| Adjusted EBITDA      (non-GAAP)                                                                                                              |   | $                                    | 84     |   |   | $ | 110 |   |   | $ | 167 |   |   | $ | 204 |   |

|                                                                                                                                         |   | TEP                                  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                         |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|                                                                                                                                         |   | 2008                                 |   |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                         |   | - Millions of      Dollars -         |   |
| Net Income      (GAAP)                                                                                                                       |   | $                                    | 6      |   |   | $ | 12 |   |   | $ | (3 | ) |   | $ | 13 |   |
| Amounts from      the Income Statements:                                                                                                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Plus:  Income      Taxes                                                                                               |   |                                 | 4      |   |   |   | 8 |   |   |   | (1 | ) |   |   | 9 |   |
|             Total      Interest Expense                                          |   |                                 | 26     |   |   |   | 29 |   |   |   | 52 |   |   |   | 58 |   |
|             Depreciation      and Amortization                                   |   |                                 | 31     |   |   |   | 30 |   |   |   | 62 |   |   |   | 59 |   |
|             Amortization      of Transition Recovery Asset                       |   |                                 | 7      |   |   |   | 19 |   |   |   | 24 |   |   |   | 34 |   |
|             Depreciation      included in Fuel and Other O&M                 |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Expense      (see Note 13 of Notes to Consolidated |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Financial      Statements)                         |   |                                 | 1      |   |   |   | 1 |   |   |   | 3 |   |   |   | 3 |   |
| Adjusted EBITDA      (non-GAAP)                                                                                                              |   | $                                    | 75     |   |   | $ | 99 |   |   | $ | 137 |   |   | $ | 176 |   |

|                                                 |   | As      ofJune      30, 2008 |   |   | As      ofDecember31,      2007 |   |
|------------------------------------------------------|--------|------------------------------|--------|--------|---------------------------------|--------|
|                                                 |   | - Millions of      Dollars - |   |
| Net Debt      (non-GAAP)                             |   | $                            | 1,481  |   |                            | $      | 1,306 |   |
| Total Debt      and Capital Lease Obligations (GAAP) |   | $                            | 1,574  |   |                            | $      | 1,411 |   |

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|                                                   |   | As      ofJune      30, 2008 |   |   | As      ofDecember31,      2007 |   |
|--------------------------------------------------------|--------|------------------------------|--------|--------|---------------------------------|--------|
|                                                   |   | - Millions of      Dollars - |   |
| Total      Debt (GAAP)                                 |   | $                            | 1,032  |   |                            | $      | 821 |   |
|                                                   |   |                         |   |   |                            |   |   |   |
| Capital Lease      Obligations                         |   |                         | 521    |   |                            |   | 531 |   |
| Current      Portion – Capital Lease Obligations |   |                         | 21     |   |                            |   | 59 |   |
| Total Debt and Capital Lease      Obligations (GAAP)   |   |                         | 1,574  |   |                            |   | 1,411 |   |
|                                                   |   |                         |   |   |                            |   |   |   |
| Investment in      Lease Debt                          |   |                         | (93    | )      |                            |   | (105 | ) |
| Net Debt      (non-GAAP)                               |   | $                            | 1,481  |   |                            | $      | 1,306 |   |

Ratio 

|                  | 6      Months Ended | 12      Months Ended |
|-----------------------|---------------------|----------------------|
|                  | June      30, 2008  | June      30, 2008   |
| UniSource      Energy | 1.10                | 1.55                 |
|                  |                |                 |
| TEP                   | 0.93                | 1.55                 |

ITEM 

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SIGNATURES

|                                 | UNISOURCE ENERGY      CORPORATION(Registrant)    |
|--------------------------------------|------------------------------------------------------------|
| Date:  August      8, 2008 | /s/                                                        | Kevin P. Larson |
|                                 |                                                       | Kevin P.      LarsonSenior Vice      President and PrincipalFinancial      Officer |
|                                 |                                                       |           |
|                                 | TUCSON ELECTRIC POWER      COMPANY(Registrant)   |
| Date:  August      8, 2008 | /s/                                                        | Kevin P. Larson |
|                                 |                                                       | Kevin P.      LarsonSenior Vice      President and PrincipalFinancial      Officer |

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EXHIBIT 

|  | 4.1 | -- | Note Purchase and Guaranty Agreement, dated August 5,      2008, among UNS Electric, Inc.,and UniSource Energy Services, Inc., and certain      institutional investors. |
|--|-----|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 12(a) | -- | Computation of Ratio of Earnings to Fixed Charges –      UniSource Energy. |
|--------|-------|----|----------------------------------------------------------------------------------|

|   | 12(b) | -- | Computation of Ratio of Earnings to Fixed Charges –      TEP. |
|--------|-------|----|---------------------------------------------------------------------|

|   | 15 | -- | Letter regarding unaudited interim financial      information. |
|--------|----|----|----------------------------------------------------------------|

|   | 31(a) | -- | Certification Pursuant to Section 302 of the      Sarbanes-Oxley Act – UniSource Energy, by James S.      Pignatelli. |
|--------|-------|----|-----------------------------------------------------------------------------------------------------------------------------|

|   | 31(b) | -- | Certification Pursuant to Section 302 of the      Sarbanes-Oxley Act – UniSource Energy, by Kevin P.    Larson. |
|--------|-------|----|-----------------------------------------------------------------------------------------------------------------------|

|   | 31(c) | -- | Certification Pursuant to Section 302 of the      Sarbanes-Oxley Act – TEP, by James S.  Pignatelli. |
|--------|-------|----|------------------------------------------------------------------------------------------------------------|

|   | 31(d) | -- | Certification Pursuant to Section 302 of the      Sarbanes-Oxley Act – TEP, by Kevin P.  Larson. |
|--------|-------|----|--------------------------------------------------------------------------------------------------------|

|   | *32 | -- | Statements of Corporate Officers (pursuant to Section 906      of the Sarbanes-Oxley Act of2002). |
|--------|-----|----|---------------------------------------------------------------------------------------------------|

|   | *Pursuant to      Item 601(b)(32)(ii) of Regulation S-K, this certificate is not being filed      for purposes of Section 18 of |
|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | the      Securities Exchange Act of 1934, asamended. |
|--------|------------------------------------------------------|

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