Table        of        Contents

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**FORM          10-Q**

**QUARTERLY          REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**                                                       THE SECURITIES EXCHANGE ACT OF 1934**

**TRANSITION          REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**                                              THE          SECURITIES EXCHANGE ACT OF 1934**

| CommissionFile                    Number | Registrant;                    State of Incorporation;Address;                    and Telephone Number                                                                                                                                                                            | IRSEmployer                    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__ |
|------------------------------------------------------|--------------------------------------------------|--------------------------------------------|------------------------------------------------|
| Tucson                        Electric Power Company | Large                        Accelerated Filer__ | Accelerated                        Filer__ | Non-accelerated                        filer X |

| Indicate                        by check mark whether the                        registrant is a shell company (as defined in Rule 12b-2 of                        the Exchange                        Act).    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| UniSource                          Energy Corporation                                                                                                                                                                          | Yes | No                          X |   |
| Tucson                          Electric Power Company                                                                                                                                                                         | Yes | No                          X |   |

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Table                  of Contents

**TABLE              OF CONTENTS**

| 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 and Comprehensive                          Income | 7      |
| Tucson                          Electric Power                          Company                                                                                               |   |
| Comparative                          Condensed Consolidated                          Statements of Income                                                                     | 8      |
| 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 Capital Leases                                                                                                                      | 17     |
| Note                          4. Business Segments                                                                                                                            | 18     |
| Note                          5. Accounting for Derivative Instruments and Trading                          Activities                                                        | 19     |
| Note                          6. Commitments and Contingencies                                                                                                                | 22     |
| Note                          7. Discontinued Operations - Sale of Global                          Solar                                                                      | 25     |
| Note                          8. TEP Wholesale Accounts Receivable and                          Allowances                                                                    | 25     |
| Note                          9. UniSource Energy Earnings Per Share                          (EPS)                                                                           | 25     |
| Note                          10. Employee Benefits Plans                                                                                                                     | 26     |
| Note                          11. Share-Based Compensation Plans                                                                                                              | 27     |
| Note                          12. Income and Other Taxes                                                                                                                      | 30     |
| Note                          13. Utility Plant and Jointly Owned                          Facilities                                                                         | 31     |
| Note                          14. New Accounting Pronouncements                                                                                                               | 31     |
| Note                          15. Supplemental Cash Flow                          Information                                                                                 | 33     |
| Note                          16. Review of Independent Registered Public Accounting                          Firm                                                            | 34     |
|                                                                                                                                                                          |   |
| Item                          2. - Management’s Discussion and Analysis of Financial                          Condition and Results of Operations                       | 35     |
| UniSource                          Energy                          Consolidated                                                                                               | 35     |
| Overview                          of Consolidated                          Business                                                                                           | 35     |
| Outlook                          and Strategies                                                                                                                               | 36     |
| Results                          of Operations                                                                                                                                | 36     |
| Contribution                          by Business Segment                                                                                                                     | 37     |
| Liquidity                          and Capital                          Resources                                                                                             | 39     |
| Tucson                          Electric Power Company                                                                                                                        | 43     |
| Results                          of Operations                                                                                                                                | 43     |
| Factors                          Affecting Results of                          Operations                                                                                     | 48     |
| Liquidity                          and Capital                          Resources                                                                                             | 52     |
| UNS                          Gas                                                                                                                                              | 56     |
| Results                          of Operations                                                                                                                                | 56     |
| Factors                          Affecting Results of                          Operations                                                                                     | 57     |
| Liquidity                          and Capital                          Resources                                                                                             | 58     |
| UNS                          Electric                                                                                                                                         | 60     |
| Results                          of Operations                                                                                                                                | 60     |
| Factors                          Affecting Results of                          Operations                                                                                     | 61     |
| Liquidity                          and Capital                          Resources                                                                                             | 62     |
| Other                                                                                                                                                                         | 63     |
| Results                          of Operations                                                                                                                                | 63     |

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Table                    of Contents

| Critical                          Accounting                          Estimates                                        | 64     |
|------------------------------------------------------------------------------------------------------------------------|--------|
| New                          Accounting                          Pronouncements                                        | 70     |
| Safe                          Harbor for Forward-Looking                          Statements                           | 71     |
| Item                          3. - Quantitative and Qualitative Disclosures about                          Market Risk | 72     |
| Item                          4. - Controls and Procedures                                                             | 76     |
|                                                                                                                   |
| **PART                          II - OTHER                          INFORMATION**                                      |
|                                                                                                                   |
| Item                          1. - Legal Proceedings                                                                   | 76     |
|                                                                                                                   |   |
| Item                          1A. - Risk Factors                                                                       | 77     |
|                                                                                                                   |   |
| Item                          4. - Submission of Matters to a Vote of Security                          Holders        | 78     |
|                                                                                                                   |   |
| Item                          5. - Other Information                                                                   | 78     |
| Non-GAAP                          Measures                                                                             | 78     |
| Ratio                          of Earnings to Fixed                          Charges                                   | 81     |
| SEC                          Reports Available on UniSource Energy’s                          Website            | 81     |
|                                                                                                                   |   |
| Item                          6. Exhibits                                                                              | 81     |
|                                                                                                                   |   |
| Signatures                                                                                                             | 82     |
|                                                                                                                   |   |
| Exhibit                          Index                                                                                 | 83     |

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Table                    of Contents

**DEFINITIONS**

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| 1992                          Mortgage                                        | TEP’s                          Indenture of Mortgage and Deed of Trust, dated as of December                          1, 1992, to                          the Bank of New York, successor trustee, as                          supplemented.                                                                                         |
|-------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1992                          Mortgage                          Bonds         | Bonds                          issued                          under the 1992 Mortgage.                                                                                                                                                                                                                                                     |
| ACC                                                                           | Arizona                          Corporation Commission.                                                                                                                                                                                                                                                                                    |
| ACC                          Holding                          Company Order   | The                          order                          approved by the ACC in November 1997 allowing TEP to form                          a holding                          company.                                                                                                                                                  |
| AMT                                                                           | Alternative                          Minimum Tax.                                                                                                                                                                                                                                                                                           |
| 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.                                                                                                                                                                                                                                                                                   |
| Citizens                          Settlement Agreement                        | An                          agreement                          with the ACC Staff dated April 1, 2003, addressing rate                          case and financing                          issues in the acquisition by UniSource Energy of the Citizens’ Arizona gas                          and electric assets.                  |
| 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 calculated                          by subtracting                          75 from the average of the high and low daily                          temperatures.                                                           |
| Emission                          Allowance(s)                                | An                          allowance                          issued by the Environmental Protection Agency which permits                          emission of                          one ton of sulfur dioxide or one ton of nitrogen oxide.                          These allowances                          can be bought and sold. |
| Energy                                                                        | The                          amount of                          power produced over a given period of time; measured in                          MWh.                                                                                                                                                                                       |
| EPA                                                                           | The                          Environmental Protection Agency.                                                                                                                                                                                                                                                                               |
| ESP                                                                           | Energy                          Service Provider.                                                                                                                                                                                                                                                                                           |
| FAS                          71                                               | Statement                          of                          Financial Accounting Standards No. 71: Accounting for the                          Effects of                          Certain Types of Regulation.                                                                                                                          |
| FAS                          133                                              | Statement                          of                          Financial Accounting Standards No. 133: Accounting for                          Derivative                          Instruments and Hedging Activities, as amended.                                                                                                          |
| FAS                          143                                              | Statement                          of                          Financial Accounting Standards No. 143: Accounting for                          Asset Retirement                          Obligations.                                                                                                                                       |
| FERC                                                                          | Federal                          Energy Regulatory Commission.                                                                                                                                                                                                                                                                              |
| Fixed                          CTC                                            | Competitive                          Transition Charge representing $0.009 that is included                          in TEP’s average                          retail rate of $0.083 per kWh.                                                                                                                                         |
| Four                          Corners                                         | Four                          Corners                          Generating Station.                                                                                                                                                                                                                                                          |
| Global                          Solar                                         | Global                          Solar                          Energy, Inc., a company that develops and manufactures                          thin-film                          photovoltaic cells. Millennium sold its interest in Global                          Solar in March                          2006.                         |
| Haddington                                                                    | Haddington                          Energy Partners II, LP, a limited partnership that funds                          energy-related                          investments.                                                                                                                                                                  |
| IPS                                                                           | Infinite                          Power Solutions, Inc., a company that develops thin-film                          batteries.                          Millennium owns 31.4% of IPS.                                                                                                                                                       |
| IRS                                                                           | Internal                          Revenue Service.                                                                                                                                                                                                                                                                                          |
| kWh                                                                           | Kilowatt-hour(s).                                                                                                                                                                                                                                                                                                                           |
| kV                                                                            | Kilovolt(s).                                                                                                                                                                                                                                                                                                                                |
| LIBOR                                                                         | London                          Interbank Offered Rate.                                                                                                                                                                                                                                                                                     |
| Luna                                                                          | Luna                          Energy                          Facility.                                                                                                                                                                                                                                                                     |
| MEG                                                                           | Millennium                          Environment Group, Inc., a wholly-owned subsidiary of Millennium,                          which                          manages and trades emission allowances and related financial                          instruments.                                                                            |
| MicroSat                                                                      | MicroSat                          Systems, Inc., a company formed to develop and commercialize                          small-scale                          satellites. Millennium sold its investment in MicroSat                          in January                          2006.                                                      |
| Millennium                                                                    | Millennium                          Energy Holdings, Inc., a wholly-owned subsidiary                          of                                                                                                                                                                                                                            |

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|                                                                            | UniSource                        Energy.                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| MMBtus                                                                          | Million                          British Thermal Units.                                                                                                                                                                                                                                                                                                                                                           |
| MW                                                                              | Megawatt(s).                                                                                                                                                                                                                                                                                                                                                                                                      |
| MWh                                                                             | Megawatt-hour(s).                                                                                                                                                                                                                                                                                                                                                                                                 |
| Navajo                                                                          | Navajo                          Generating Station.                                                                                                                                                                                                                                                                                                                                                               |
| NOL                                                                             | Net                          Operating                          Loss carryback or carryforward for income tax purposes.                                                                                                                                                                                                                                                                                           |
| Phelps                          Dodge                          Decision         | An                          Arizona                          Court of Appeals decision issued in 2005 that invalidated                          portions of the                          ACC’s Retail Electric Competition Rules.                                                                                                                                                                           |
| PGA                                                                             | Purchased                          Gas                          Adjuster, a retail rate mechanism designed to recover the                          cost of gas                          purchased for retail gas customers.                                                                                                                                                                                       |
| PPFAC                                                                           | Purchased                          Power and Fuel Adjustment Clause.                                                                                                                                                                                                                                                                                                                                              |
| PWCC                                                                            | Pinnacle                          West                          Capital Corporation.                                                                                                                                                                                                                                                                                                                              |
| Rules                                                                           | Retail                          Electric Competition Rules.                                                                                                                                                                                                                                                                                                                                                       |
| San                          Juan                                               | San                          Juan                          Generating Station.                                                                                                                                                                                                                                                                                                                                    |
| Settlement                          Agreement                                   | TEP’s                          Settlement Agreement approved by the ACC in November 1999                          that provided                          for electric retail competition and transition asset                          recovery.                                                                                                                                                            |
| Springerville                                                                   | Springerville                          Generating Station.                                                                                                                                                                                                                                                                                                                                                        |
| Springerville                          Coal Handling Facilities Leases          | Leveraged                          lease arrangements relating to the coal handling facilities                          serving                          Springerville.                                                                                                                                                                                                                                           |
| Springerville                          Common Facilities                        | Facilities                          at                          Springerville used in common with Springerville Unit 1                          and Springerville                          Unit 2 and partly by Springerville Unit 3.                                                                                                                                                                             |
| Springerville                          Common Facilities Leases                 | Leveraged                          lease arrangements relating to an undivided one-half interest                          in certain                          Springerville Common Facilities.                                                                                                                                                                                                                    |
| Springerville                          Unit 1                                   | Unit                          1 of the                          Springerville Generating Station.                                                                                                                                                                                                                                                                                                                 |
| Springerville                          Unit 1 Leases                            | Leveraged                          lease arrangements relating to Springerville Unit 1 and                          an undivided                          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.                                                                                                                                                                                                                                                                                                                 |
| SRP                                                                             | Salt                          River                          Project Agricultural Improvement and Power District.                                                                                                                                                                                                                                                                                                 |
| Sundt                                                                           | H.                          Wilson                          Sundt Generating Station (formerly known as the Irvington                          Generating                          Station).                                                                                                                                                                                                                      |
| SWG                                                                             | Southwest                          Gas                          Corporation.                                                                                                                                                                                                                                                                                                                                      |
| TEP                                                                             | Tucson                          Electric Power Company, the principal subsidiary of UniSource                          Energy.                                                                                                                                                                                                                                                                                    |
| TEP                          Credit                          Agreement          | Credit                          Agreement between TEP and a syndicate of banks, dated as                          of May 4,                          2005.                                                                                                                                                                                                                                                        |
| TEP                          Guarantee                          Home Program    | The                          TEP Home                          Guarantee Program provides incentives to new home builders                          to construct                          homes that meet the highest construction and energy-efficient                          standards                          available.                                                                                     |
| TEP                          Revolving                          Credit Facility | $60                          million                          revolving credit facility entered into under the TEP Credit                          Agreement,                          dated as of May 4, 2005, between a syndicate of banks and                          TEP.                                                                                                                                    |
| Therm                                                                           | A                          unit of                          heating value equivalent to 100,000 British thermal units                          (Btu).                                                                                                                                                                                                                                                             |
| Track                          A                                                | An                          order                          issued by the ACC in 2002 which eliminated the requirement                          in TEP’s                          Settlement Agreement that TEP transfer its generating assets                          to a                          subsidiary.                                                                                            |
| Track                          B                                                | An                          order                          issued by the ACC in 2003 which defined a competitive bidding                          process TEP                          must use to obtain capacity and energy requirements beyond                          what is                          supplied by TEP’s existing resources for the period 2003 through                          2006. |
| Tri-State                                                                       | Tri-State                          Generation and Transmission Association.                                                                                                                                                                                                                                                                                                                                       |
| UED                                                                             | UniSource                          Energy Development Company, a wholly-owned subsidiary of                          UniSource Energy,                          which engages in developing generation resources and other                          project                          development services and related activities.                                                                                 |
| UES                                                                             | UniSource                          Energy Services, Inc., an intermediate holding company                          established to own                          the operating companies (UNS Gas and UNS Electric) which                          acquired the                          Citizens Arizona gas and electric                                                                                          |

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Table                      of Contents

|                                                | utility                        assets in 2003.                                                                                                                                                                                                                                                                         |
|-----------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| UES                          Settlement Agreement   | An                          agreement                          with the ACC Staff dated April 1, 2003, addressing rate                          case and financing                          issues in the acquisition by UniSource Energy of Citizens’ Arizona gas and                          electric assets. |
| UniSource                          Credit Agreement | Credit                          Agreement between UniSource Energy and a syndicate of banks,                          dated as of                          April 15, 2005.                                                                                                                                             |
| UniSource                          Energy           | UniSource                          Energy Corporation.                                                                                                                                                                                                                                                                 |
| UNS                          Electric               | UNS                          Electric,                          Inc., a wholly-owned subsidiary of UES, which acquired                          the Citizens                          Arizona electric utility assets in 2003.                                                                                         |
| UNS                          Gas                    | UNS                          Gas,                          Inc., a wholly-owned subsidiary of UES, which acquired                          the Citizens                          Arizona gas utility assets in 2003.                                                                                                   |
| Valencia                                            | Valencia                          power plant owned by UNS                          Electric.                                                                                                                                                                                                                          |

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Table            of Contents

**Report          of Independent Registered Public Accounting          Firm**

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Table            of Contents

**Report          of          Independent Registered Public Accounting Firm **

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Table            of Contents

PART        I - FINANCIAL INFORMATION

**ITEM      1.      FINANCIAL STATEMENTS** 

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**UNISOURCE        ENERGY CORPORATION**

**COMPARATIVE          CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

| Three                  Months                  Ended |   |     | Six                  Months                  Ended |
|------------------------------------------------------|--------|----------|----------------------------------------------------|
| June                  30,                            |   |     | June                  30,                          |
| **2006**                                             |   | **2005** |                                               |   |   | **2006** |   | **2005** |

| **(Unaudited)**                                     |   |                       | **(Unaudited)**                                            |
|----------------------------------------------------------|--------|----------------------------|------------------------------------------------------------|
| -Thousands                  of                  Dollars- |   |                       | -                  Thousands                  of Dollars - |
|                                                     |   |                       |                                                       | **Operating                  Revenues** |   |   |   |   |
| **$                  247,387**                           |   | $                  231,785 |                                                       |                    Electric Retail Sales |   | **$                  430,056** |   | $                  403,375 |
| **34,639**                                               |   | 37,871                     |                                                       |                    Electric Wholesale Sales |   | **91,302** |   | 77,051 |
| **25,720**                                               |   | 26,058                     |                                                       |  Gas                  Revenue |   | **88,535** |   | 72,607 |
| **10,650**                                               |   | 3,579                      |                                                       |  Other                  Revenues |   | **13,456** |   | 6,932 |
| **318,396**                                              |   | 299,293                    |                                                       | **                     Total Operating Revenues** |   | **623,349** |   | 559,965 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
|                                                     |   |                       |                                                       | **Operating                  Expenses** |   |   |   |   |
| **69,143**                                               |   | 55,863                     |                                                       |                    Fuel |   | **119,359** |   | 103,154 |
| **77,408**                                               |   | 68,897                     |                                                       |                    Purchased Energy |   | **159,090** |   | 133,304 |
| **61,735**                                               |   | 58,133                     |                                                       |  Other                  Operations and Maintenance |   | **115,550** |   | 117,916 |
| **32,680**                                               |   | 32,596                     |                                                       |                    Depreciation and Amortization |   | **63,437** |   | 66,664 |
| **17,279**                                               |   | 14,136                     |                                                       |                    Amortization of Transition Recovery Asset |   | **29,121** |   | 23,623 |
| **12,360**                                               |   | 12,402                     |                                                       |  Taxes                  Other Than Income Taxes |   | **24,913** |   | 25,789 |
| **270,605**                                              |   | 242,027                    |                                                       | **                     Total Operating Expenses** |   | **511,470** |   | 470,450 |
| **47,791**                                               |   | 57,266                     |                                                       | **                       Operating Income** |   | **111,879** |   | 89,515 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
|                                                     |   |                       |                                                       | **Other                  Income (Deductions)** |   |   |   |   |
| **5,142**                                                |   | 5,076                      |                                                       |                    Interest Income |   | **10,069** |   | 10,037 |
| **1,987**                                                |   | 1,649                      |                                                       |  Other                  Income |   | **3,622** |   | 2,803 |
| **(246)**                                                |   | (998)                      |                                                       |  Other                  Expense |   | **(974)** |   | (2,242) |
| **6,883**                                                |   | 5,727                      |                                                       | **                     Total Other Income (Deductions)** |   | **12,717** |   | 10,598 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
|                                                     |   |                       |                                                       | **Interest                  Expense** |   |   |   |   |
| **19,208**                                               |   | 19,744                     |                                                       |                    Long-Term Debt |   | **37,892** |   | 40,096 |
| **18,526**                                               |   | 19,401                     |                                                       |                    Interest on Capital Leases |   | **37,073** |   | 39,147 |
| **-**                                                    |   | 5,427                      |                                                       |  Loss                  on Reacquired Debt |   | **-** |   | 5,427 |
| **1,267**                                                |   | 664                        |                                                       |  Other                  Interest Expense |   | **2,573** |   | 1,504 |
| **(1,436)**                                              |   | (1,561)                    |                                                       |                    Interest Capitalized |   | **(3,348)** |   | (2,390) |
| **37,565**                                               |   | 43,675                     |                                                       | **                     Total Interest Expense** |   | **74,190** |   | 83,784 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
| **17,109**                                               |   | 19,318                     |                                                       | **Income                  from Continuing Operations before Income Taxes** |   | **50,406** |   | 16,329 |
| **7,111**                                                |   | 8,239                      |                                                       |  Income                  Tax Expense |   | **20,917** |   | 7,627 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
| **9,998**                                                |   | 11,079                     |                                                       | **Income                  from Continuing Operations** |   | **29,489** |   | 8,702 |
| **-**                                                    |   | (1,611)                    |                                                       | **Discontinued                  Operations - Net of Tax** |   | **(2,669)** |   | (3,017) |
|                                                     |   |                       |                                                       |   |   |   |   |   |
| **$                  9,998**                             |   | $                  9,468   |                                                       | **Net                  Income** |   | **$                  26,820** |   | $                  5,685 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
| **35,245**                                               |   | 34,755                     |                                                       | **Weighted-average                  Shares of Common Stock Outstanding (000)** |   | **35,181** |   | 34,669 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
|                                                     |   |                       |                                                       | **Basic                  Earnings (Loss) per Share** |   |   |   |   |
| **$                  0.28**                              |   | $                  0.32    |                                                       | **                   Income from Continuing Operations** |   | **$                  0.84** |   | $                  0.25 |
| **-**                                                    |   | (0.05)                     |                                                       | **                   Discontinued Operations - Net of Tax** |   | **(0.08)** |   | (0.09) |
| **$                  0.28**                              |   | $                  0.27    |                                                       | **                   Net Income** |   | **$                  0.76** |   | $                  0.16 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
|                                                     |   |                       |                                                       | **Diluted                  Earnings (Loss) per Share** |   |   |   |   |
| **$                  0.28**                              |   | $                  0.28    |                                                       | **                   Income from Continuing Operations** |   | **$                  0.80** |   | $                  0.25 |
| **-**                                                    |   | (0.04)                     |                                                       | **                   Discontinued Operations - Net of Tax** |   | **(0.07)** |   | (0.09) |
| **$                  0.28**                              |   | $                  0.24    |                                                       | **                   Net Income** |   | **$                  0.73** |   | $                  0.16 |
|                                                     |   |                       |                                                       |   |   |   |   |   |
| **$                  0.21**                              |   | $                  0.19    |                                                       | **Dividends                  Declared per Share** |   | **$                  0.42** |   | $                  0.38 |

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Table          of Contents

**UNISOURCE        ENERGY CORPORATION**

**COMPARATIVE          CONDENSED CONSOLIDATED STATEMENTS OF CASH          FLOWS**

|                                                                                                                       |   | Six                  Months                  Ended       |         |
|----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------------|
|                                                                                                                       |   | June                  30,                                |         |
|                                                                                                                       |   | **2006**                                                 |         | **2005** |   |
|                                                                                                                       |   | **(Unaudited)**                                          |         |
|                                                                                                                       |   | -Thousands                  of                  Dollars- |         |
| **Cash                  Flows from Operating Activities**                                                                  |   |                                                     |         |   |   |
|     Cash                  Receipts                  from Electric Retail Sales                         |   | **$**                                                    | **438,716**  |   | $ | 417,057 |   |
|     Cash                  Receipts                  from Electric Wholesale Sales                      |   |                                                     | **132,098**  |   |   | 104,229 |   |
|     Cash                  Receipts                  from Gas Sales                                     |   |                                                     | **115,687**  |   |   | 95,382 |   |
|     MEG                  Cash                  Receipts from Trading Activity                          |   |                                                     | **194**      |   |   | 61,640 |   |
|     Interest                  Received                                                                 |   |                                                     | **11,705**   |   |   | 11,239 |   |
|     Performance                  Deposits                                                              |   |                                                     | **5,083**    |   |   | 7,193 |   |
|     Sale                  of Excess                  Emission Allowances                               |   |                                                     | **3,716**    |   |   | 5,018 |   |
|     Income                  Tax                  Refunds Received                                      |   |                                                     | **553**      |   |   | 1,484 |   |
|     Other                  Cash                  Receipts                                              |   |                                                     | **3,608**    |   |   | 4,041 |   |
|     Fuel                  Costs                  Paid                                                  |   |                                                     | **(115,683** | **)** |   | (99,108 | ) |
|     Purchased                  Energy Costs Paid                                                       |   |                                                     | **(187,974** | **)** |   | (160,582 | ) |
|     Wages                  Paid, Net                  of Amounts Capitalized                           |   |                                                     | **(50,177**  | **)** |   | (50,483 | ) |
|     Payment                  of                  Other Operations and Maintenance Costs                |   |                                                     | **(68,156**  | **)** |   | (81,992 | ) |
|     MEG                  Cash                  Payments for Trading Activity                           |   |                                                     | **(812**     | **)** |   | (63,943 | ) |
|     Capital                  Lease                  Interest Paid                                      |   |                                                     | **(39,862**  | **)** |   | (39,744 | ) |
|     Taxes                  Paid, Net                  of Amounts Capitalized                           |   |                                                     | **(72,101**  | **)** |   | (69,699 | ) |
|     Interest                  Paid,                  Net of Amounts Capitalized                        |   |                                                     | **(33,724**  | **)** |   | (39,132 | ) |
|     Income                  Taxes                  Paid                                                |   |                                                     | **(12,312**  | **)** |   | (5,689 | ) |
|     Excess                  Tax                  Benefit from Stock Option Exercises                   |   |                                                     | **(869**     | **)** |   | (1,874 | ) |
|     Net                  Cash Used                  by Operating Activities of Discontinued Operations |   |                                                     | **(2,710**   | **)** |   | (3,395 | ) |
|     Other                  Cash                  Payments                                              |   |                                                     | **(2,014**   | **)** |   | (2,309 | ) |
| **Net                  Cash Flows – Operating Activities**                                                           |   |                                                     | **124,966**  |   |   | 89,333 |   |
|                                                                                                                       |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Investing Activities**                                                                  |   |                                                     |         |   |   |   |   |
|     Capital                  Expenditures                                                              |   |                                                     | **(113,463** | **)** |   | (89,910 | ) |
|     Sale                  of                  Subsidiary                                               |   |                                                     | **16,000**   |   |   | - |   |
|     Proceeds                  from                  Investment in Springerville Lease Debt             |   |                                                     | **10,028**   |   |   | 8,251 |   |
|     Return                  of                  Investment from Millennium Energy Business             |   |                                                     | **4,743**    |   |   | 299 |   |
|     Other                  Cash                  Receipts                                              |   |                                                     | **2,178**    |   |   | 8,094 |   |
|     Payments                  for                  Investment in Springerville Lease Equity            |   |                                                     | **(48,025**  | **)** |   | - |   |
|     Investment                  in                  and Loans to Equity Investees                      |   |                                                     | **(3,876**   | **)** |   | (1,150 | ) |
|     Net                  Cash Used                  by Investing Activities of Discontinued Operations |   |                                                     | **(46**      | **)** |   | (44 | ) |
|     Other                  Cash                  Payments                                              |   |                                                     | **(1,487**   | **)** |   | - |   |
| **Net                  Cash Flows - Investing Activities**                                                                 |   |                                                     | **(133,948** | **)** |   | (74,460 | ) |
|                                                                                                                       |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Financing Activities**                                                                  |   |                                                     |         |   |   |   |   |
|     Proceeds                  from                  Borrowings under Revolving Credit Facilities       |   |                                                     | **117,000**  |   |   | 40,000 |   |
|     Payments                  on                  Borrowings under Revolving Credit Facilities         |   |                                                     | **(57,000**  | **)** |   | - |   |
|     Proceeds                  from                  Issuance of Long-Term Debt                         |   |                                                     | **-**        |   |   | 240,000 |   |
|     Repayments                  of                  Long-Term Debt                                     |   |                                                     | **(2,500**   | **)** |   | (283,016 | ) |
|     Payments                  on                  Capital Lease Obligations                            |   |                                                     | **(50,580**  | **)** |   | (48,600 | ) |
|     Proceeds                  from                  Stock Options Exercised                            |   |                                                     | **2,961**    |   |   | 7,104 |   |
|     Other                  Cash                  Receipts                                              |   |                                                     | **6,506**    |   |   | 5,452 |   |
|     Payment                  of Debt                  Issue/Retirement Costs                           |   |                                                     | **(140**     | **)** |   | (12,336 | ) |
|     Common                  Stock                  Dividends Paid                                      |   |                                                     | **(14,715**  | **)** |   | (13,108 | ) |
|     Excess                  Tax                  Benefit from Stock Option Exercises                   |   |                                                     | **869**      |   |   | 1,874 |   |
|     Other                  Cash                  Payments                                              |   |                                                     | **(2,800**   | **)** |   | (3,032 | ) |
| **Net                  Cash Flows - Financing Activities**                                                                 |   |                                                     | **(399**     | **)** |   | (65,662 | ) |
|                                                                                                                       |   |                                                     |         |   |   |   |   |
| Net                  Decrease                  in Cash and Cash Equivalents                                                |   |                                                     | **(9,381**   | **)** |   | (50,789 | ) |
| Cash                  and Cash                  Equivalents, Beginning of Year                                             |   |                                                     | **144,679**  |   |   | 154,028 |   |
| **Cash                  and Cash Equivalents, End of Period**                                                              |   | **$**                                                    | **135,298**  |   | $ | 103,239 |   |

----

Table          of Contents

**UNISOURCE        ENERGY CORPORATION**

**COMPARATIVE          CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                       |   | June                  30,                                  |           | December                  31, |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|----------------|-------------------------------|--------|
|                                                                                                       |   | **2006**                                                   |           | **2005**                      |   |
|                                                                                                       |   | **(Unaudited)**                                            |
| **ASSETS**                                                                                                 |   | -                  Thousands                  of Dollars - |
| **Utility                  Plant**                                                                         |   |                                                       |           |                          |   |
|     Plant                  in                  Service                                 |   | **$**                                                      | **3,324,118**  |                          | $      | 3,167,900 |   |
|     Utility                  Plant                  under Capital Leases               |   |                                                       | **705,609**    |                          |   | 723,900 |   |
|     Construction                  Work in Progress                                     |   |                                                       | **98,131**     |                          |   | 160,186 |   |
| **        Total                  Utility Plant**                   |   |                                                       | **4,127,858**  |                          |   | 4,051,986 |   |
|     Less                  Accumulated Depreciation and Amortization                    |   |                                                       | **(1,445,620** | **)**                         |   | (1,408,158 | ) |
|     Less                  Accumulated Amortization of Capital Lease Assets             |   |                                                       | **(486,460**   | **)**                         |   | (472,367 | ) |
| **        Total                  Utility Plant - Net**             |   |                                                       | **2,195,778**  |                          |   | 2,171,461 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Investments                  and Other Property**                                                        |   |                                                       |           |                          |   |   |   |
|     Investments                  in                  Lease Debt and Equity             |   |                                                       | **193,825**    |                          |   | 156,301 |   |
|     Noncurrent                  Assets of Subsidiary Held for Sale                     |   |                                                       | **-**          |                          |   | 13,065 |   |
|     Other                                                                              |   |                                                       | **60,035**     |                          |   | 57,860 |   |
| **        Total                  Investments and Other Property**  |   |                                                       | **253,860**    |                          |   | 227,226 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Current                  Assets**                                                                        |   |                                                       |           |                          |   |   |   |
|     Cash                  and Cash                  Equivalents                        |   |                                                       | **135,298**    |                          |   | 144,679 |   |
|     Trade                  Accounts                  Receivable                        |   |                                                       | **112,120**    |                          |   | 99,338 |   |
|     Unbilled                  Accounts Receivable                                      |   |                                                       | **57,226**     |                          |   | 53,920 |   |
|     Allowance                  for                  Doubtful Accounts                  |   |                                                       | **(15,959**    | **)**                         |   | (15,037 | ) |
|     Materials                  and                  Fuel Inventory                     |   |                                                       | **68,685**     |                          |   | 65,716 |   |
|     Trading                  Assets                                                    |   |                                                       | **15,549**     |                          |   | 36,418 |   |
|     Current                  Regulatory Assets                                         |   |                                                       | **10,047**     |                          |   | 15,563 |   |
|     Deferred                  Income                  Taxes - Current                  |   |                                                       | **17,097**     |                          |   | 9,104 |   |
|     Interest                  Receivable - Current                                     |   |                                                       | **8,869**      |                          |   | 9,830 |   |
|     Current                  Assets                  of Subsidiary Held for Sale       |   |                                                       | **-**          |                          |   | 5,100 |   |
|     Other                                                                              |   |                                                       | **15,871**     |                          |   | 17,717 |   |
| **        Total                  Current Assets**                  |   |                                                       | **424,803**    |                          |   | 442,348 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Regulatory                  and Other Assets**                                                           |   |                                                       |           |                          |   |   |   |
|     Transition                  Recovery Asset                                         |   |                                                       | **138,490**    |                          |   | 167,611 |   |
|     Income                  Taxes                  Recoverable Through Future Revenues |   |                                                       | **38,040**     |                          |   | 39,936 |   |
|     Other                  Regulatory Assets                                           |   |                                                       | **20,186**     |                          |   | 20,944 |   |
|     Other                  Assets                                                      |   |                                                       | **49,042**     |                          |   | 57,254 |   |
| **        Total                  Regulatory and Other Assets**     |   |                                                       | **245,758**    |                          |   | 285,745 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Total                  Assets**                                                                          |   | **$**                                                      | **3,120,199**  |                          | $      | 3,126,780 |   |

**(Comparative          Condensed Consolidated Balance Sheets          Continued)**

----

Table          of Contents

**UNISOURCE        ENERGY CORPORATION**

**COMPARATIVE          CONDENSED CONSOLIDATED BALANCE SHEETS **

|                                                                                                              |   | June                  30,                                  |          | December                  31, |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------------|-------------------------------|--------|
|                                                                                                              |   | **2006**                                                   |          | **2005**                      |   |
|                                                                                                              |   | **(Unaudited)**                                            |
| **CAPITALIZATION                  AND OTHER LIABILITIES**                                                         |   | -                  Thousands                  of Dollars - |
| **Capitalization**                                                                                                |   |                                                       |          |                          |   |
|     Common                  Stock                                                             |   | **$**                                                      | **694,184**   |                          | $      | 689,185 |   |
|     Accumulated                  Deficit                                                      |   |                                                       | **(53,756**   | **)**                         |   | (65,861 | ) |
|     Accumulated                  Other Comprehensive Loss                                     |   |                                                       | **(14,532**   | **)**                         |   | (6,583 | ) |
|     Common                  Stock                  Equity                                     |   |                                                       | **625,896**   |                          |   | 616,741 |   |
|     Capital                  Lease                  Obligations                               |   |                                                       | **601,281**   |                          |   | 665,737 |   |
|     Long-Term                  Debt                                                           |   |                                                       | **1,209,920** |                          |   | 1,212,420 |   |
| **        Total                  Capitalization**                         |   |                                                       | **2,437,097** |                          |   | 2,494,898 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Current                  Liabilities**                                                                          |   |                                                       |          |                          |   |   |   |
|     Current                  Obligations under Capital Leases                                 |   |                                                       | **55,130**    |                          |   | 48,804 |   |
|     Borrowing                  Under                  Revolving Credit Facilities             |   |                                                       | **65,000**    |                          |   | 5,000 |   |
|     Current                  Maturities of Long-Term Debt                                     |   |                                                       | **5,000**     |                          |   | 5,000 |   |
|     Accounts                  Payable                                                         |   |                                                       | **81,481**    |                          |   | 98,085 |   |
|     Income                  Taxes                  Payable                                    |   |                                                       | **27,051**    |                          |   | 29,826 |   |
|     Interest                  Accrued                                                         |   |                                                       | **44,610**    |                          |   | 57,386 |   |
|     Trading                  Liabilities                                                      |   |                                                       | **13,533**    |                          |   | 27,300 |   |
|     Taxes                  Accrued                                                            |   |                                                       | **35,702**    |                          |   | 34,978 |   |
|     Accrued                  Employee Expenses                                                |   |                                                       | **17,177**    |                          |   | 16,052 |   |
|     Customer                  Deposits                                                        |   |                                                       | **16,818**    |                          |   | 15,463 |   |
|     Current                  Liabilities of Subsidiary Held for Sale                          |   |                                                       | **-**         |                          |   | 2,206 |   |
|     Other                                                                                     |   |                                                       | **7,881**     |                          |   | 3,933 |   |
| **        Total                  Current Liabilities**                    |   |                                                       | **369,383**   |                          |   | 344,033 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Deferred                  Credits and Other Liabilities**                                                       |   |                                                       |          |                          |   |   |   |
|     Deferred                  Income                  Taxes - Noncurrent                      |   |                                                       | **106,051**   |                          |   | 106,820 |   |
|     Regulatory                  Liability - Net Cost of Removal for Interim Retirements       |   |                                                       | **83,152**    |                          |   | 78,535 |   |
|     Noncurrent                  Liabilities of Subsidiary Held for Sale                       |   |                                                       | **-**         |                          |   | (11,539 | ) |
|     Other                                                                                     |   |                                                       | **124,516**   |                          |   | 114,033 |   |
| **        Total                  Deferred Credits and Other Liabilities** |   |                                                       | **313,719**   |                          |   | 287,849 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Commitments                  and Contingencies (Note 6)**                                                       |   |                                                       |          |                          |   |   |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Total                  Capitalization and Other Liabilities**                                                   |   | **$**                                                      | **3,120,199** |                          | $      | 3,126,780 |   |

**(Comparative          Condensed Consolidated Balance Sheets          Concluded)**

----

Table          of Contents

**UNISOURCE        ENERGY CORPORATION**

**CONDENSED          CONSOLIDATED STATEMENT OF CHANGES IN          STOCKHOLDERS' EQUITY AND COMPREHENSIVE          INCOME**

|                                                                     |   |   | Common                  Shares                  Issued*                         |   |   | CommonStock |   |   | AccumulatedDeficit |   |   | AccumulatedOtherComprehensiveLoss |   |   | TotalStockholders'Equity |   |
|--------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------------------|--------|--------|-----------------------------------|--------|--------|--------------------------|--------|
|                                                                     |   |   | **(Unaudited)**-                  Thousands                  of Dollars -  |   |
| **Balances                  at December 31, 2005**                       |   |   | 34,874                                                                          |   | $      | 689,185     |   | $      | (65,861            | )      | $      | (6,583                            | )      | $      | 616,741                  |   |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
| Comprehensive                  Income:                                   |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|  2006                  Year-to-Date Net Income                      |   |   | -                                                                               |   |   | -           |   |   | 26,820             |   |   | -                                 |   |   | 26,820                   |   |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                    Unrealized Loss on Cash Flow Hedges              |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                      (net of $5,082 income taxes)    |   |   | -                                                                               |   |   | -           |   |   | -                  |   |   | (7,751                            | )      |   | (7,751                   | )      |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                    Reclassification of Unrealized Gain on           |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                      Cash Flow Hedges to Net Income  |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                      (net of $130 income taxes)      |   |   | -                                                                               |   |   | -           |   |   | -                  |   |   | (198                              | )      |   | (198                     | )      |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
| Total                  Comprehensive Income                              |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   | 18,871                   |   |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
|                    Dividends Declared                               |   |   | -                                                                               |   |   | -           |   |   | (14,715            | )      |   | -                                 |   |   | (14,715                  | )      |
|  Shares                  Issued under Stock Compensation Plans      |   |   | 11                                                                              |   |   | -           |   |   | -                  |   |   | -                                 |   |   | -                        |   |
|  Shares                  Issued for Stock Options                   |   |   | 196                                                                             |   |   | 2,960       |   |   | -                  |   |   | -                                 |   |   | 2,960                    |   |
|  Tax                  Benefit Realized from Stock Options Exercised |   |   | -                                                                               |   |   | 869         |   |   | -                  |   |   | -                                 |   |   | 869                      |   |
|                    Other                                            |   |   | -                                                                               |   |   | 1,170       |   |   | -                  |   |   | -                                 |   |   | 1,170                    |   |
|                                                                     |   |   |                                                                            |   |   |        |   |   |               |   |   |                              |   |   |                     |   |
| **Balances                  at June 30, 2006**                           |   |   | **35,081**                                                                      |   | **$**  | **694,184** |   | **$**  | **(53,756**        | **)**  | **$**  | **(14,532**                       | **)**  | **$**  | **625,896**              |   |

----

Table          of Contents

**TUCSON        ELECTRIC POWER COMPANYCOMPARATIVE        CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

| Three                  Months                  Ended       |   |                       | Six                  Months                  Ended         |
|------------------------------------------------------------|--------|----------------------------|------------------------------------------------------------|
| June                  30,                                  |   |                       | June                  30,                                  |
| **2006**                                                   |   | **2005**                   |                                                       |   |   | **2006** |   | **2005** |
| **(Unaudited)**                                            |   |                       | **(Unaudited)**                                            |
| -                  Thousands                  of Dollars - |   |                       | -                  Thousands                  of Dollars - |
|                                                       |   |                       |                                                       | **Operating                  Revenues** |   |   |   |   |
| **$                  208,093**                             |   | $                  195,470 |                                                       |                    Electric Retail Sales |   | **$                  357,027** |   | $                  335,676 |
| **34,573**                                                 |   | 37,802                     |                                                       |                    Electric Wholesale Sales |   | **91,176** |   | 76,930 |
| **9,967**                                                  |   | 3,607                      |                                                       |  Other                  Revenues |   | **12,772** |   | 6,179 |
| **252,633**                                                |   | 236,879                    |                                                       | **                     Total Operating Revenues** |   | **460,975** |   | 418,785 |
|                                                       |   |                       |                                                       |   |   |   |   |   |
|                                                       |   |                       |                                                       | **Operating                  Expenses** |   |   |   |   |
| **69,142**                                                 |   | 55,863                     |                                                       |                    Fuel |   | **119,358** |   | 103,154 |
| **32,849**                                                 |   | 27,190                     |                                                       |                    Purchased Power |   | **46,004** |   | 40,051 |
| **49,824**                                                 |   | 47,213                     |                                                       |  Other                  Operations and Maintenance |   | **91,994** |   | 95,190 |
| **28,231**                                                 |   | 27,934                     |                                                       |                    Depreciation and Amortization |   | **54,732** |   | 57,954 |
| **17,279**                                                 |   | 14,136                     |                                                       |                    Amortization of Transition Recovery Asset |   | **29,121** |   | 23,623 |
| **10,353**                                                 |   | 10,418                     |                                                       |  Taxes                  Other Than Income Taxes |   | **20,840** |   | 21,567 |
| **207,678**                                                |   | 182,754                    |                                                       | **                     Total Operating Expenses** |   | **362,049** |   | 341,539 |
| **44,955**                                                 |   | 54,125                     |                                                       | **                       Operating Income** |   | **98,926** |   | 77,246 |
|                                                       |   |                       |                                                       |   |   |   |   |   |
|                                                       |   |                       |                                                       | **Other                  Income (Deductions)** |   |   |   |   |
| **4,301**                                                  |   | 4,903                      |                                                       |                    Interest Income |   | **8,590** |   | 9,719 |
| **-**                                                      |   | -                          |                                                       |                    Interest Income - Note Receivable from UniSource Energy |   | **-** |   | 1,684 |
| **1,309**                                                  |   | 1,142                      |                                                       |  Other                  Income |   | **2,374** |   | 1,798 |
| **(110)**                                                  |   | (676)                      |                                                       |  Other                  Expense |   | **(784)** |   | (999) |
| **5,500**                                                  |   | 5,369                      |                                                       | **                     Total Other Income (Deductions)** |   | **10,180** |   | 12,202 |
|                                                       |   |                       |                                                       |   |   |   |   |   |
|                                                       |   |                       |                                                       | **Interest                  Expense** |   |   |   |   |
| **13,055**                                                 |   | 14,458                     |                                                       |                    Long-Term Debt |   | **25,704** |   | 31,437 |
| **18,525**                                                 |   | 19,392                     |                                                       |                    Interest on Capital Leases |   | **37,064** |   | 39,129 |
| **-**                                                      |   | 5,427                      |                                                       |  Loss                  on Reacquired Debt |   | **-** |   | 5,427 |
| **897**                                                    |   | 467                        |                                                       |  Other                  Interest Expense |   | **1,866** |   | 1,217 |
| **(1,140)**                                                |   | (1,349)                    |                                                       |                    Interest Capitalized |   | **(2,761)** |   | (2,009) |
| **31,337**                                                 |   | 38,395                     |                                                       | **                     Total Interest Expense** |   | **61,873** |   | 75,201 |
|                                                       |   |                       |                                                       |   |   |   |   |   |
|                                                       |   |                       |                                                       |   |   |   |   |   |
| **19,118**                                                 |   | 21,099                     |                                                       | **Income                  Before Income Taxes** |   | **47,233** |   | 14,247 |
| **7,898**                                                  |   | 8,951                      |                                                       |  Income                  Tax Expense |   | **19,426** |   | 6,789 |
|                                                       |   |                       |                                                       |   |   |   |   |   |
| **$                  11,220**                              |   | $                  12,148  |                                                       | **Net                  Income** |   | **$                  27,807** |   | $                  7,458 |

----

Table          of Contents

**TUCSON        ELECTRIC POWER COMPANY**

**COMPARATIVE          CONDENSED CONSOLIDATED STATEMENTS OF          CASH FLOWS**

|                                                                                                               |   | Six                  Months                  Ended       |         |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------------|
|                                                                                                               |   | June                  30,                                |         |
|                                                                                                               |   | **2006**                                                 |         | **2005** |   |
|                                                                                                               |   | **(Unaudited)**                                          |         |
|                                                                                                               |   | -Thousands                  of                  Dollars- |         |
| **Cash                  Flows from Operating Activities**                                                          |   |                                                     |         |   |   |
|     Cash                  Receipts                  from Electric Retail Sales                 |   | **$**                                                    | **363,390**  |   | $ | 345,352 |   |
|     Cash                  Receipts                  from Electric Wholesale Sales              |   |                                                     | **132,098**  |   |   | 104,165 |   |
|     Interest                  Received                                                         |   |                                                     | **9,522**    |   |   | 10,906 |   |
|     Interest                  Received -- UniSource                                            |   |                                                     | -            |   |   | 11,013 |   |
|     Sale                  of Excess                  Emission Allowances                       |   |                                                     | **3,716**    |   |   | 5,018 |   |
|     Other                  Cash                  Receipts                                      |   |                                                     | **2,617**    |   |   | 1,831 |   |
|     Income                  Taxes                  Refunds Received                            |   |                                                     | **-**        |   |   | 713 |   |
|     Fuel                  Costs                  Paid                                          |   |                                                     | **(115,683** | **)** |   | (99,108 | ) |
|     Purchased                  Power                  Costs Paid                               |   |                                                     | **(73,503**  | **)** |   | (59,609 | ) |
|     Wages                  Paid, Net                  of Amounts Capitalized                   |   |                                                     | **(38,880**  | **)** |   | (41,486 | ) |
|     Payment                  of                  Other Operations and Maintenance Costs        |   |                                                     | **(59,782**  | **)** |   | (71,456 | ) |
|     Capital                  Lease                  Interest Paid                              |   |                                                     | **(39,853**  | **)** |   | (39,726 | ) |
|     Taxes                  Paid, Net                  of Amounts Capitalized                   |   |                                                     | **(51,657**  | **)** |   | (50,148 | ) |
|     Interest                  Paid,                  Net of Amounts Capitalized                |   |                                                     | **(21,834**  | **)** |   | (33,948 | ) |
|     Income                  Taxes                  Paid                                        |   |                                                     | **(10,675**  | **)** |   | (8,000 | ) |
|     Other                  Cash                  Payments                                      |   |                                                     | **(1,283**   | **)** |   | (1,797 | ) |
| **Net                  Cash Flows – Operating Activities**                                                   |   |                                                     | **98,193**   |   |   | 73,720 |   |
|                                                                                                               |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Investing Activities**                                                          |   |                                                     |         |   |   |   |   |
|     Capital                  Expenditures                                                      |   |                                                     | **(81,635**  | **)** |   | (67,410 | ) |
|     Payments                  for                  Investment in Springerville Lease Equity    |   |                                                     | **(48,025**  | **)** |   | - |   |
|     Proceeds                  from                  Investment in Springerville Lease Debt     |   |                                                     | **10,028**   |   |   | 8,251 |   |
|     Other                  Cash                  Payments                                      |   |                                                     | **(1,004**   | **)** |   | - |   |
|     Other                  Cash                  Receipts                                      |   |                                                     | **-**        |   |   | 6,708 |   |
| **Net                  Cash Flows - Investing Activities**                                                         |   |                                                     | **(120,636** | **)** |   | (52,451 | ) |
|                                                                                                               |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Financing Activities**                                                          |   |                                                     |         |   |   |   |   |
|     Proceeds                  from                  Borrowings under Revolving Credit Facility |   |                                                     | **105,000**  |   |   | 40,000 |   |
|     Equity                  Investment from UniSource Energy                                   |   |                                                     | -            |   |   | 110,000 |   |
|     Proceeds                  from                  Repayment of UniSource Energy Note         |   |                                                     | -            |   |   | 95,393 |   |
|     Repayments                  of                  Long-Term Debt                             |   |                                                     | -            |   |   | (281,766 | ) |
|     Payments                  on                  Capital Lease Obligations                    |   |                                                     | **(50,538**  | **)** |   | (48,560 | ) |
|     Payments                  on                  Borrowings under Revolving Credit Facility   |   |                                                     | **(45,000**  | **)** |   | - |   |
|     Other                  Cash                  Receipts                                      |   |                                                     | **9,209**    |   |   | 2,863 |   |
|     Payment                  of Debt                  Issue/Retirement Costs                   |   |                                                     | **(140**     | **)** |   | (5,203 | ) |
|     Other                  Cash                  Payments                                      |   |                                                     | **(494**     | **)** |   | (858 | ) |
| **Net                  Cash Flows - Financing Activities**                                                         |   |                                                     | **18,037**   |   |   | (88,131 | ) |
|                                                                                                               |   |                                                     |         |   |   |   |   |
| Net                  Decrease                  in Cash and Cash Equivalents                                        |   |                                                     | **(4,406**   | **)** |   | (66,862 | ) |
| Cash                  and Cash                  Equivalents, Beginning of Year                                     |   |                                                     | **53,433**   |   |   | 113,207 |   |
| **Cash                  and Cash Equivalents, End of Period**                                                      |   | **$**                                                    | **49,027**   |   | $ | 46,345 |   |

----

Table          of Contents

**TUCSON        ELECTRIC POWER COMPANY**

**COMPARATIVE          CONDENSED CONSOLIDATED BALANCE          SHEETS**

|                                                                                                       |   | June                  30,                                  |           | December                  31, |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|----------------|-------------------------------|--------|
|                                                                                                       |   | **2006**                                                   |           | **2005**                      |   |
|                                                                                                       |   | **(Unaudited)**                                            |           |
| **ASSETS**                                                                                                 |   | -                  Thousands of Dollars                  - |
| **Utility                  Plant**                                                                         |   |                                                       |           |                          |   |
|     Plant                  in                  Service                                 |   | **$**                                                      | **2,978,218**  |                          | $      | 2,861,511 |   |
|     Utility                  Plant                  under Capital Leases               |   |                                                       | **704,904**    |                          |   | 723,195 |   |
|     Construction                  Work in Progress                                     |   |                                                       | **79,247**     |                          |   | 132,427 |   |
| **        Total                  Utility Plant**                   |   |                                                       | **3,762,369**  |                          |   | 3,717,133 |   |
|     Less                  Accumulated Depreciation and Amortization                    |   |                                                       | **(1,407,649** | **)**                         |   | (1,378,362 | ) |
|     Less                  Accumulated Amortization of Capital Lease Assets             |   |                                                       | **(486,195**   | **)**                         |   | (472,149 | ) |
| **        Total                  Utility Plant - Net**             |   |                                                       | **1,868,525**  |                          |   | 1,866,622 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Investments                  and Other Property**                                                        |   |                                                       |           |                          |   |   |   |
|     Investments                  in                  Lease Debt and Equity             |   |                                                       | **193,825**    |                          |   | 156,301 |   |
|     Other                                                                              |   |                                                       | **27,360**     |                          |   | 26,405 |   |
| **        Total                  Investments and Other Property**  |   |                                                       | **221,185**    |                          |   | 182,706 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Current                  Assets**                                                                        |   |                                                       |           |                          |   |   |   |
|     Cash                  and Cash                  Equivalents                        |   |                                                       | **49,027**     |                          |   | 53,433 |   |
|     Trade                  Accounts                  Receivable                        |   |                                                       | **94,888**     |                          |   | 78,487 |   |
|     Unbilled                  Accounts Receivable                                      |   |                                                       | **43,682**     |                          |   | 29,658 |   |
|     Allowance                  for                  Doubtful Accounts                  |   |                                                       | **(14,861**    | **)**                         |   | (14,528 | ) |
|     Intercompany                  Accounts Receivable                                  |   |                                                       | **5,882**      |                          |   | 5,807 |   |
|     Materials                  and                  Fuel Inventory                     |   |                                                       | **60,571**     |                          |   | 57,815 |   |
|     Current                  Regulatory Assets                                         |   |                                                       | **10,047**     |                          |   | 9,663 |   |
|     Deferred                  Income                  Taxes - Current                  |   |                                                       | **15,771**     |                          |   | 10,684 |   |
|     Interest                  Receivable - Current                                     |   |                                                       | **8,651**      |                          |   | 9,747 |   |
|     Trading                  Assets                                                    |   |                                                       | **6,856**      |                          |   | 12,338 |   |
|     Other                                                                              |   |                                                       | **11,094**     |                          |   | 10,240 |   |
| **        Total                  Current Assets**                  |   |                                                       | **291,608**    |                          |   | 263,344 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Regulatory                  and Other Assets**                                                           |   |                                                       |           |                          |   |   |   |
|     Transition                  Recovery Asset                                         |   |                                                       | **138,489**    |                          |   | 167,611 |   |
|     Income                  Taxes                  Recoverable Through Future Revenues |   |                                                       | **38,040**     |                          |   | 39,936 |   |
|     Other                  Regulatory Assets                                           |   |                                                       | **19,809**     |                          |   | 20,634 |   |
|     Other                  Assets                                                      |   |                                                       | **32,127**     |                          |   | 34,582 |   |
| **        Total                  Regulatory and Other Assets**     |   |                                                       | **228,465**    |                          |   | 262,763 |   |
|                                                                                                       |   |                                                       |           |                          |   |   |   |
| **Total                  Assets**                                                                          |   | **$**                                                      | **2,609,783**  |                          | $      | 2,575,435 |   |

**(Comparative          Condensed Consolidated Balance Sheets          Continued)**

----

Table          of Contents

**TUCSON        ELECTRIC POWER COMPANY**

**COMPARATIVE          CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                              |   | June                  30,                                  |          | December                  31, |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------------|-------------------------------|--------|
|                                                                                                              |   | **2006**                                                   |          | **2005**                      |   |
|                                                                                                              |   | **(Unaudited)**                                            |
| **CAPITALIZATION                  AND OTHER LIABILITIES**                                                         |   | -                  Thousands of                  Dollars - |
| **Capitalization**                                                                                                |   |                                                       |          |                          |   |
|     Common                  Stock                                                             |   | **$**                                                      | **795,971**   |                          | $      | 795,971 |   |
|     Capital                  Stock                  Expense                                   |   |                                                       | **(6,357**    | **)**                         |   | (6,357 | ) |
|     Accumulated                  Deficit                                                      |   |                                                       | **(196,578**  | **)**                         |   | (224,385 | ) |
|     Accumulated                  Other Comprehensive Loss                                     |   |                                                       | **(14,126**   | **)**                         |   | (6,583 | ) |
|     Common                  Stock                  Equity                                     |   |                                                       | **578,910**   |                          |   | 558,646 |   |
|     Capital                  Lease                  Obligations                               |   |                                                       | **600,887**   |                          |   | 665,299 |   |
|     Long-Term                  Debt                                                           |   |                                                       | **821,170**   |                          |   | 821,170 |   |
| **        Total                  Capitalization**                         |   |                                                       | **2,000,967** |                          |   | 2,045,115 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Current                  Liabilities**                                                                          |   |                                                       |          |                          |   |   |   |
|     Current                  Obligations under Capital Leases                                 |   |                                                       | **55,041**    |                          |   | 48,718 |   |
|     Borrowing                  Under                  Revolving Credit Facility               |   |                                                       | **60,000**    |                          |   | - |   |
|     Accounts                  Payable                                                         |   |                                                       | **62,288**    |                          |   | 62,974 |   |
|     Intercompany                  Accounts Payable                                            |   |                                                       | **12,437**    |                          |   | 9,362 |   |
|     Income                  Taxes                  Payable                                    |   |                                                       | **18,615**    |                          |   | 17,111 |   |
|     Interest                  Accrued                                                         |   |                                                       | **37,292**    |                          |   | 50,230 |   |
|     Taxes                  Accrued                                                            |   |                                                       | **29,623**    |                          |   | 27,260 |   |
|     Accrued                  Employee Expenses                                                |   |                                                       | **15,574**    |                          |   | 14,585 |   |
|     Trading                  Liabilities                                                      |   |                                                       | **7,532**     |                          |   | 2,923 |   |
|     Other                                                                                     |   |                                                       | **11,946**    |                          |   | 10,687 |   |
| **        Total                  Current Liabilities**                    |   |                                                       | **310,348**   |                          |   | 243,850 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Deferred                  Credits and Other Liabilities**                                                       |   |                                                       |          |                          |   |   |   |
|     Deferred                  Income                  Taxes - Noncurrent                      |   |                                                       | **125,388**   |                          |   | 119,895 |   |
|     Regulatory                  Liability - Net Cost of Removal for Interim Retirements       |   |                                                       | **78,560**    |                          |   | 74,825 |   |
|     Other                                                                                     |   |                                                       | **94,520**    |                          |   | 91,750 |   |
| **        Total                  Deferred Credits and Other Liabilities** |   |                                                       | **298,468**   |                          |   | 286,470 |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Commitments                  and Contingencies (Note 6)**                                                       |   |                                                       |          |                          |   |   |   |
|                                                                                                              |   |                                                       |          |                          |   |   |   |
| **Total                  Capitalization and Other Liabilities**                                                   |   | **$**                                                      | **2,609,783** |                          | $      | 2,575,435 |   |

**(Comparative          Condensed Consolidated Balance Sheets Concluded)**

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Table          of Contents

**TUCSON        ELECTRIC POWER COMPANY**

**CONDENSED          CONSOLIDATED STATEMENT OF CHANGES IN          STOCKHOLDER'S EQUITY AND COMPREHENSIVE          INCOME**

|                                                                   |   |   | CommonStock                                                                     |   |   | CapitalStock                  Expense |   |   | Accumulated                  Deficit |   |   | Accumulated                            Other Comprehensive Loss |   |   | Total                          Stockholder's Equity |   |
|------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------|--------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|--------|-----------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
|                                                                   |   |   | **(Unaudited)**-                  Thousands                  of Dollars -  |   |
| **Balances                  at December 31, 2005**                     |   | $      | 795,971                                                                         |   | $      | (6,357                                | )      | $      | (224,385                             | )      | $      | (6,583                                                          | )      | $      | 558,646                                             |   |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| Comprehensive                  Income:                                 |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| 2006                  Year-to-Date Net Income                          |   |   | -                                                                               |   |   | -                                     |   |   | 27,807                               |   |   | -                                                               |   |   | 27,807                                              |   |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| Unrealized                  Loss on Cash Flow Hedges                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| (net                  of                  $4,816 income taxes)    |   |   | -                                                                               |   |   | -                                     |   |   | -                                    |   |   | (7,345                                                          | )      |   | (7,345                                              | )      |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| Reclassification                  of Unrealized Gain on                |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| Cash                  Flow                  Hedges to Net Income  |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| (net                  of $130                  income taxes)      |   |   | -                                                                               |   |   | -                                     |   |   | -                                    |   |   | (198                                                            | )      |   | (198                                                | )      |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| Total                  Comprehensive Income                            |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   | 20,264                                              |   |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
|                                                                   |   |   |                                                                            |   |   |                                  |   |   |                                 |   |   |                                                            |   |   |                                                |   |
| **Balances                  at June 30, 2006**                         |   | **$**  | **795,971**                                                                     |   | **$**  | **(6,357**                            | **)**  | **$**  | **(196,578**                         | **)**  | **$**  | **(14,126**                                                     | **)**  | **$**  | **578,910**                                         |   |

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Table              of Contents

**NOTES              TO CONDENSED              CONSOLIDATED FINANCIAL STATEMENTS  **

----

**NOTE        1. NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION**

**NOTE        2. REGULATORY MATTERS**

**REGULATORY        ACCOUNTING**

*Accounting        for        the Effects of Certain Types of Regulation*

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**IMPLICATIONS        OF DISCONTINUING APPLICATION OF FAS 71**

**TEP**

**UNS        Gas and        UNS Electric**

**RECENT        REGULATORY ACTION **

**     TEP        **

**             Settlement Agreement**

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

|   | · | 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 through a fixed competitive transition charge                  (fixed                  CTC); |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | capped                  rates                  for TEP retail customers through                  2008; |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | · | an                  ACC                  interim review of TEP retail rates in                  2004; |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | · | 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); |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | beginning                  in                  2009, TEP’s generation would be market based and its retail customers                  would pay the market rate for generation                  services. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**2004        General Rate Case Information**

**ACC        Order        to Review the Settlement Agreement**

| **Filing**                                                                    | **Date**                                            |
|-------------------------------------------------------------------------------|-----------------------------------------------------|
| TEP                  testimony                                                | August                  18,                  2006   |
| ACC                  staff and                  intervenor testimony          | November                  17,                  2006 |
| TEP                  rebuttal                  testimony                      | December                  6,                  2006  |
| ACC                  staff and                  intervenor rebuttal testimony | December                  18,                  2006 |
| TEP                  rejoinder                  testimony                     | December                  29,                  2006 |
| Hearings                  before ALJ                                          | January                  8,                  2007   |

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

|   | · | a                  complete                  explanation of its proposal, including an identification of all                  rate                  elements that it believes would apply to each of its standard offer                  customers effective January 1,                  2009; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | projected                  rate impacts on standard offer customers’ total bills having market-based                  generation rates as compared with cost-of-service generation                  rates; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                  explanation of how its proposals could be effective and lawful                  under the                  Track A, Track B and Phelps Dodge decisions;                  and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | how                  TEP                  proposes to implement demand side management, renewable energy                  standards                  and time of use tariffs. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**     UNS        Gas**

**Energy        Cost        Adjustment Mechanism**

| **Surcharge                  Amount****Per                  Therm** |  **Period                  In Effect**                     |
|---------------------------------------------------------------------|-----------------------------------------------------------------|
| $0.15                                                               | November                  2005                  - February 2006 |
| $0.25                                                               | March                  2006 -                  April 2006       |
| $0.30                                                               | May                  2006 -                  June 2006          |
| $0.35                                                               | July                  2006 -                  September 2006    |
| $0.25                                                               | October                  2006                  - November 2006  |
| $0.20                                                               | December                  2006                  - February 2007 |
| $0.25                                                               | March                  2007 -                  April 2007       |

**General        Rate Case Filing**

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

|                                                                            |                                                           |
|---------------------------------------------------------------------------------|----------------------------------------------------------------|
| Test                  year                                                      | Year                  ended                  December 31, 2005 |
| Original                  cost                  rate base                       | $162                  million                                  |
| Revenue                  deficiency                                             | $10                  million                                   |
| Total                  rate                  increase (over test year revenues) | 7%                                                             |
| Cost                  of                  debt                                  | 6.60%                                                          |
| Cost                  of                  equity                                | 11.00%                                                         |
| Hypothetical                  capital structure                                 | 50%                  equity /                  50% debt        |
| Weighted                  average cost of capital                               | 8.80%                                                          |

**NOTE        3.****DEBT        AND        CAPITAL LEASES**  

**SPRINGERVILLE        UNIT 1 LEASE EQUITY**

**SPRINGERVILLE        COMMON FACILITIES LEASES**

**TEP        CREDIT        AGREEMENT**

**UNS        GAS/UNS        ELECTRIC REVOLVER**

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**NOTE        4. BUSINESS SEGMENTS **

* *

----

Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

|                                                                                                                                         |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                         |   |                    **Reportable                    Segments**      |   |                                   |   |                                                        |   |                                     |   |
|                                                                                                                                         |   |                    **TEP**                                         |   |                    **UNS****Gas** |   |                    **UNS                    Electric** |   |                    **All****Other** |   |                    **Reconciling                    Adjustments** |   |  **UniSource****Energy                    Consolidated** |   |
|  **Income                  Statement**                                                                                                  |   |   -Millions                    of                    Dollars- |   |
| **Three                    months ended June 30, 2006:**                                                                                     |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |   |   |   |   |
| Operating                    Revenues - External                                                                                             |   | $                                                                       | 253    |                                   | $      | 26                                                          |   | $                                        | 39     |   | $ | - |   | $ | - |   | **$** | **318** |   |
| Operating                    Revenues - Intersegment                                                                                         |   |                                                                    | -      |                                   |   | -                                                           |   |                                     | -      |   |   | 4 |   |   | (4 | ) |   | **-** |   |
|  Income                    (Loss) from Continuing  Operations                    Before Income                    Taxes       |   |                                                                    | 19     |                                   |   | (2                                                          | )      |                                     | 2      |   |   | (2 | ) |   | - |   |   | **17** |   |
|                      Discontinued Operations - Net of Tax                                                                               |   |                                                                    | -      |                                   |   | -                                                           |   |                                     | -      |   |   | - |   |   | - |   |   | **-** |   |
|  Net                    Income (Loss)                                                                                                   |   |                                                                    | 11     |                                   |   | (1                                                          | )      |                                     | 1      |   |   | (1 | ) |   | - |   |   | **10** |   |
|                                                                                                                                         |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| **Three                    months ended June 30, 2005:**                                                                                     |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Operating                    Revenues - External                                                                                             |   | $                                                                       | 236    |                                   | $      | 27                                                          |   | $                                        | 36     |   | $ | - |   | $ | - |   | **$** | **299** |   |
| Operating                    Revenues - Intersegment                                                                                         |   |                                                                    | 1      |                                   |   | -                                                           |   |                                     | -      |   |   | 3 |   |   | (4 | ) |   | **-** |   |
|  Income                    (Loss) from Continuing  Operations                    Before Income                    Taxes       |   |                                                                    | 21     |                                   |   | -                                                           |   |                                     | 2      |   |   | (4 | ) |   | - |   |   | **19** |   |
|                      Discontinued Operations - Net of Tax                                                                               |   |                                                                    | -      |                                   |   | -                                                           |   |                                     | -      |   |   | (2 | ) |   | - |   |   | **(2** | **)** |
|  Net                    Income (Loss)                                                                                                   |   |                                                                    | 12     |                                   |   | -                                                           |   |                                     | 1      |   |   | (4 | ) |   | - |   |   | **9** |   |
|                                                                                                                                         |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| **Six                    months ended June 30, 2006:**                                                                                       |   |                                                                    |   |                                   |   |                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
|                      Operating Revenues - External                                                                                      |   | $                                                                       | 460    |                                   | $      | 90                                                          |   | $                                        | 73     |   | $ | - |   | $ | - |   | **$** | **623** |   |
|   Operating                    Revenues - Intersegment                                                                             |   |                                                                    | 1      |                                   |   | -                                                           |   |                                     | -      |   |   | 7 |   |   | (8 | ) |   | **-** |   |
|   Income                    (Loss) from Continuing  Operations                    Before Income                    Taxes |   |                                                                    | 47     |                                   |   | 6                                                           |   |                                     | 3      |   |   | (6 | ) |   | - |   |   | **50** |   |
|                      Discontinued Operations - Net of Tax                                                                               |   |                                                                    | -      |                                   |   | -                                                           |   |                                     | -      |   |   | (3 | ) |   | - |   |   | **(3** | **)** |
|  Net                    Income (Loss)                                                                                                   |   |                                                                    | 28     |                                   |   | 3                                                           |   |                                     | 2      |   |   | (6 | ) |   | - |   |   | **27** |   |

|                                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Six                    months ended June 30, 2005:**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Operating Revenues - External                                                                                |   | $      | 418    |   | $      | 74     |   | $      | 68     |   | $      | -      |   | $ | - |   | **$** | **560** |   |
|                      Operating Revenues - Intersegment                                                                            |   |   | 1      |   |   | -      |   |   | -      |   |   | 6      |   |   | (7 | ) |   | **-** |   |
|  Income                    (Loss) from Continuing  Operations                    Before Income                    Taxes |   |   | 14     |   |   | 7      |   |   | 2      |   |   | (7     | )      |   | - |   |   | **16** |   |
|                      Discontinued Operations - Net of Tax                                                                         |   |   | -      |   |   | -      |   |   | -      |   |   | (3     | )      |   | - |   |   | **(3** | **)** |
|  Net                    Income (Loss)                                                                                             |   |   | 7      |   |   | 4      |   |   | 1      |   |   | (6     | )      |   | - |   |   | **6** |   |
|                                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                    Sheet**                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                    Assets,                    June 30, 2006                                                                      |   | $      | 2,610  |   | $      | 228    |   | $      | 181    |   | $      | 1,016  |   | $ | (915 | ) | **$** | **3,120** |   |
| Total                    Assets,                    December 31, 2005                                                                  |   |   | 2,575  |   |   | 233    |   |   | 161    |   |   | 1,032  |   |   | (874 | ) |   | **3,127** |   |

**NOTE        5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND TRADING        ACTIVITIES**

** **
**TEP        INTEREST RATE SWAP**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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**TEP        FUEL        AND POWER TRANSACTIONS**

|                                                                                                                                                            |   |                                                    |   |                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                                                            |   | Three                  Months                  Ended    |   | Six                  Months                  Ended |   |
|                                                                                                                                                            |   | June                  30,                               |   | June                  30,                          |   |
|                                                                                                                                                            |   | **2006**                                                |   | **2005**                                           |   | **2006** |   | **2005** |   |
|                                                                                                                                                            |   | -Millions                  of                  Dollars- |   |
| Net                  Unrealized Gain (Loss) on Forward Power Sales -                    Derivative Contracts                                               |   | **$**                                                   | **1**  |                                               | $      | - |   | **$** | **1** |   | $ | (1 | ) |
| Net                  Unrealized Loss on Forward Power Purchases -                   Derivative Contracts                                                   |   |                                                    | **(2** | **)**                                              |   | (1 | ) |   | **(1** | **)** |   | - |   |
|   Pre-Tax                  Unrealized Loss on                  Derivative Contracts  Recorded                  in                  Earnings |   | **$**                                                   | **(1** | **)**                                              | $      | (1 | ) | **$** | **-** |   | $ | (1 | ) |
|                                                                                                                                                            |   |                                                    |   |                                               |   |   |   |   |   |   |   |   |   |
| Net                  Unrealized Gain on Forward Power Sales - Cash Flow                  Hedges                                                            |   | **$**                                                   | **-**  |                                               | $      | - |   | **$** | **2** |   | $ | - |   |
| Net                  Unrealized (Loss) Gain on Gas Price Swaps - Cash                  Flow Hedges                                                         |   |                                                    | **(7** | **)**                                              |   | (1 | ) |   | **(14** | **)** |   | 4 |   |
|   Pre-Tax                  Unrealized (Loss)                  Gain on Cash Flow   Hedges                                               |   | **$**                                                   | **(7** | **)**                                              | $      | (1 | ) | **$** | **(12** | **)** | $ | 4 |   |
|  After                  Tax                  Unrealized (Loss) Gain on Cash Flow Hedges                   Recorded in OCI                             |   | **$**                                                   | **(4** | **)**                                              | $      | - |   | **$** | **(7** | **)** | $ | 2 |   |

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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|                                                                           |   |                                                    |   |                                  |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                           |   | June                  30,                               |   | December                  31,         |   |
|                                                                           |   | **2006**                                                |   | **2005**                              |   |
|                                                                           |   | **Derivative                  Contracts**               |   | **Cash                  Flow Hedges** |   | **Derivative                  Contracts** |   | **Cash                  Flow Hedges** |   |
|                                                                           |   | -Millions                  of                  Dollars- |   |
| Derivative                  Assets - Current                                   |   | **$**                                                   | **4**  |                                  | **$**  | **3** |   | $ | 2 |   | $ | 10 |   |
| Derivative                  Liabilities - Current                              |   |                                                    | **(4** | **)**                                 |   | **(3** | **)** |   | (2 | ) |   | (1 | ) |
|   Net                  Current Derivative                  Assets    |   | **$**                                                   | **-**  |                                  | **$**  | **-** |   | $ | - |   | $ | 9 |   |
|                                                                           |   |                                                    |   |                                  |   |   |   |   |   |   |   |   |   |
| Derivative                  Assets - Noncurrent                                |   | **$**                                                   | **-**  |                                  | **$**  | **2** |   | $ | - |   | $ | 4 |   |
| Derivative                  Liabilities - Noncurrent                           |   |                                                    | **-**  |                                  |   | **(1** | **)** |   | - |   |   | (1 | ) |
|   Net                  Noncurrent Derivative                  Assets |   | **$**                                                   | **-**  |                                  | **$**  | **1** |   | $ | - |   | $ | 3 |   |

**UNS        GAS        SUPPLY TRANSACTIONS**

**UNS        ELECTRIC POWER SUPPLY TRANSACTIONS**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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|                                                                           |   |                                      |   |                                  |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------------------|--------|
|                                                                           |   | June                  30,                 |   | December                  31,         |   |
|                                                                           |   | **2006**                                  |   | **2005**                              |   |
|                                                                           |   | **Derivative                  Contracts** |   | **Cash                  Flow Hedges** |   | **Derivative                  Contracts** |   | **Cash                  Flow Hedges** |   |
| Derivative                  Assets - Noncurrent                                |   | **$**                                     | **2**  |                                  | **$**  | **1** |   | $ | - |   | $ | - |   |
| Derivative                  Liabilities - Noncurrent                           |   |                                      | **(2** | **)**                                 |   | **(1** | **)** |   | - |   |   | - |   |
|   Net                  Noncurrent Derivative                  Assets |   | **$**                                     | **-**  |                                  | **$**  | **-** |   | $ | - |   | $ | - |   |

**MEG        TRADING        TRANSACTIONS**

|                                                                        |   |   |                                                          |   |   |                                        |   |
|-----------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
|                                                                        |   |   | June                    30,**2006**                      |   |   | December                  31,**2005**  |   |
|                                                                        |   |   | -Millions                  of                  Dollars-  |   |
|  MEG:                                                                  |   |   |                                                          |   |   |                                        |   |
| Trading                  Assets - Current                                   |   | **$**  | **9**                                                         |   | $      | 24                                          |   |
| Trading                  Liabilities - Current                              |   |   | **(6**                                                        | **)**  |   | (24                                         | )      |
|   Net                  Current Trading                  Assets    |   | **$**  | **3**                                                         |   | $      | -                                           |   |
|                                                                        |   |   |                                                          |   |   |                                        |   |
| Trading                  Assets - Noncurrent                                |   | **$**  | **6**                                                         |   | $      | 14                                          |   |
| Trading                  Liabilities - Noncurrent                           |   |   | **-**                                                         |   |   | (1                                          | )      |
|   Net                  Noncurrent Trading                  Assets |   | **$**  | **6**                                                         |   | $      | 13                                          |   |

**NOTE        6. COMMITMENTS AND CONTINGENCIES **

**TEP        COMMITMENTS**

**Power        Purchase from Springerville Unit 3**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**TEP        Guarantee Home Program**

**UNS        ELECTRIC COMMITMENTS**

**TEP        CONTINGENCIES**

** Litigation        and Claims Related to San Juan Generating Station **

**Claims        Related to San Juan Coal Company**

**  Litigation        and Claims        Related to Navajo Generating Station**

**Postretirement        and Pension Benefit Costs at Navajo Generating Station**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**Environmental        Reclamation at Remote Generating Stations**

**RESOLUTION        OF SPRINGERVILLE COMMON FACILITIES LEASES CONTINGENCY**

**GUARANTEES        AND INDEMNITIES**

|   | · | UES’                  guarantee of $160 million of aggregate principal amount of senior                  unsecured notes issued by UNS Gas and UNS Electric to purchase                  the                  Citizens Arizona gas and electric utility assets, |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UES’                  guarantee of a $40 million unsecured revolving credit agreement                  for UNS                  Gas and UNS Electric, and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UniSource                  Energy’s guarantee of approximately $6 million in natural gas                  transportation and supply payments in addition to building and                  equipment                  lease payments for UNS Gas, UNS Electric, and subsidiaries of Millennium. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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**NOTE        7. DISCONTINUED OPERATIONS - SALE OF GLOBAL        SOLAR**

|                                                                                        |   | Three                    Months                    Ended    |   | Six                    Months                    Ended |   |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                                        |   | June                    30,                                 |   | June                    30,                            |   |
|                                                                                        |   | **2006**                                                    |   | **2005**                                               |   | **2006** |   | **2005** |   |
|                                                                                        |   | -Millions                    of                    Dollars- |   |
| Revenues                    from                    Discontinued Operations                 |   | **$**                                                       | **-**  |                                                   | $      | 1 |   | **$** | **1** |   | $ | 2 |   |
|                                                                                        |   |                                                        |   |                                                   |   |   |   |   |   |   |   |   |   |
| Loss                    from                    Discontinued Operations                     |   | **$**                                                       | **-**  |                                                   | $      | (3 | ) | **$** | **(4** | **)** | $ | (5 | ) |
| Loss                    on Sale                    of Discontinued Operations               |   |                                                        | **-**  |                                                   |   | - |   |   | **(1** | **)** |   | - |   |
| Loss                    from                    Discontinued Operations Before Income Taxes |   |                                                        | **-**  |                                                   |   | (3 | ) |   | **(5** | **)** |   | (5 | ) |
| Income                    Tax                    Benefit                                    |   |                                                        | **-**  |                                                   |   | (1 | ) |   | **(2** | **)** |   | (2 | ) |
| Discontinued                    Operations - Net of Tax                                     |   | **$**                                                       | **-**  |                                                   | $      | (2 | ) | **$** | **(3** | **)** | $ | (3 | ) |

**NOTE        8.        TEP****WHOLESALE        ACCOUNTS RECEIVABLE AND ALLOWANCES**

**NOTE        9. UNISOURCE ENERGY EARNINGS PER SHARE        (EPS)**
** **

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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|                                                                                                                                                                                                                                           |   | Three                  Months                  Ended |       | Six                  Months                  Ended |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|----------------------------------------------------|--------|
|                                                                                                                                                                                                                                           |   | June                  30,                            |       | June                  30,                          |   |
|                                                                                                                                                                                                                                           |   | **2006**                                             |       | **2005**                                           |   | **2006** |   | **2005** |   |
|                                                                                                                                                                                                                                           |   | -                  In                  Thousands -   |       | -                  In                  Thousands - |   |
| Numerator:                                                                                                                                                                                                                                     |   |                                                 |       |                                               |   |   |   |   |   |
|  Net                  Income                                                                                                                                                                                                              |   | **$**                                                | **9,998**  |                                               | $      | 9,468 |   | **$** | **26,820** |   | $ | 5,685 |   |
|  Income                  from Assumed Conversion of Convertible Senior                  Notes                                                                                                                                        |   |                                                 | **1,097**  |                                               |   | 1,097 |   |   | **2,195** |   |   | - |   |
| Adjusted                  Numerator                                                                                                                                                                                                            |   | **$**                                                | **11,095** |                                               | $      | 10,565 |   | **$** | **29,015** |   | $ | 5,685 |   |
|                                                                                                                                                                                                                                           |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
| Denominator:                                                                                                                                                                                                                                   |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
|  Weighted-average                  Shares of Common Stock Outstanding:                                                                                                                                                               |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
|   Common                  Shares                  Issued                                                                                                                                                                             |   |                                                 | **35,051** |                                               |   | 34,560 |   |   | **34,989** |   |   | 34,476 |   |
|   Fully                  Vested Deferred Stock                  Units                                                                                                                                                                |   |                                                 | **194**    |                                               |   | 195 |   |   | **192** |   |   | 193 |   |
|    Total                  Weighted-average                  Shares of Common   StockOutstanding                                                                                                                  |   |                                                 | **35,245** |                                               |   | 34,755 |   |   | **35,181** |   |   | 34,669 |   |
|  Effect                  of Dilutive Securities:                                                                                                                                                                                          |   |                                                 |       |                                               |   |   |   |   |   |   |   |   |   |
|     Convertible                  Senior Notes                                                                                                                                                                              |   |                                                 | **4,000**  |                                               |   | 4,000 |   |   | **4,000** |   |   | - |   |
|     Options                  and                  Stock Issuable under     Employee Benefit Plans                  and                  the                  Directors’ Plan |   |                                                 | **550**    |                                               |   | 698 |   |   | **584** |   |   | 722 |   |
| Total                  Shares                                                                                                                                                                                                                  |   |                                                 | **39,795** |                                               |   | 39,453 |   |   | **39,765** |   |   | 35,391 |   |

**NOTE        10. EMPLOYEE BENEFITS PLANS**

**PENSION        BENEFIT PLANS**

**           OTHER POSTRETIREMENT BENEFIT PLANS**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

*Employers’        Accounting for Postretirement Benefits Other Than Pensions*

**  COMPONENTS        OF NET        PERIODIC BENEFIT COST**

|                                                                          |   |  **Pension                  Benefits**          |   | **Other                  Postretirement****Benefits**    |   |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                          |   | Three                  Months                  Ended |   | Three                  Months                  Ended     |   |
|                                                                          |   | June                  30,                            |   | June                  30,                                |   |
|                                                                          |   | **2006**                                             |   | **2005**                                                 |   | **2006** |   | **2005** |   |
|                                                                          |   |                                                 |   | -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 | ) |   | **-** |   |   | - |   |
|   Prior                  Service Cost                  Amortization |   |                                                 | **1**  |                                                     |   | - |   |   | **(1** | **)** |   | - |   |
|   Recognized                  Actuarial                  Loss       |   |                                                 | **1**  |                                                     |   | 1 |   |   | **1** |   |   | - |   |
| **Net                  Periodic Benefit Cost**                                |   | **$**                                                | **3**  |                                                     | $      | 3 |   | **$** | **1** |   | $ | 2 |   |

|                                                                          |   |  **Pension                  Benefits**        |   | **Other                  Postretirement****Benefits**    |   |
|-------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                          |   | Six                  Months                  Ended |   | Six                  Months                  Ended       |   |
|                                                                          |   | June                  30,                          |   | June                  30,                                |   |
|                                                                          |   | **2006**                                           |   | **2005**                                                 |   | **2006** |   | **2005** |   |
|                                                                          |   |                                               |   | -Millions                  of                  Dollars - |   |   |   |
|                                                                          |   |                                               |   |                                                     |   |   |   |   |   |
| **Components                  of Net Periodic Benefit Cost**                  |   |                                               |   |                                                     |   |   |   |   |   |
|   Service                  Cost                                     |   | **$**                                              | **4**  |                                                     | $      | 3 |   | **$** | **1** |   | $ | 1 |   |
|   Interest                  Cost                                    |   |                                               | **6**  |                                                     |   | 6 |   |   | **2** |   |   | 2 |   |
|   Expected                  Return on Plan                  Assets  |   |                                               | **(7** | **)**                                                    |   | (6 | ) |   | **-** |   |   | - |   |
|   Prior                  Service Cost                  Amortization |   |                                               | **1**  |                                                     |   | 1 |   |   | **(1** | **)** |   | (1 | ) |
|   Recognized                  Actuarial                  Loss       |   |                                               | **2**  |                                                     |   | 2 |   |   | **1** |   |   | 1 |   |
| **Net                  Periodic Benefit Cost**                                |   | **$**                                              | **6**  |                                                     | $      | 6 |   | **$** | **3** |   | $ | 3 |   |

**NOTE        11. SHARE-BASED COMPENSATION        PLANS**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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**  STOCK        OPTIONS**

*Topic        14:        Share-Based Payment*

|                                                                                                                                      |   | 2006        |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
|                                                                                                                                      |   |        |
| Expected                  term                  (years)                                                                                   |   | 6           |
| Risk-free                  rate                                                                                                           |   | 4.97%       |
| Expected                  volatility                                                                                                      |   | 22.57%      |
| Expected                  dividend yield                                                                                                  |   | 2.45%       |
| Weighted-average                  grant-date fair value of options  granted                  during the                  period |   |  $7.38 |

|                                                                           |   | Six                  Months                  Ended June 30, |          |
|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------|---------------|
|                                                                           |   | **2006**                                                    |          | **2005** |   |
|                                                                           |   |                                                        |          | **Weighted** |   |   |   | Weighted |   |
|                                                                           |   |                                                        |          | **Average** |   |   |   | Average |   |
|                                                                           |   |                                                        |          | **Exercise** |   |   |   | Exercise |   |
|                                                                           |   | **Shares**                                                  |          | **Price** |   | Shares |   | Price |   |
| Options                  Outstanding,                                          |   |                                                        |          |   |   |   |   |   |   |
|   Beginning                  of                  Period              |   |                                                        | **1,537,041** |   | **$** | **16.75** |   |   | 2,076,055 |   | $ | 16.19 |   |
|    Granted                                                      |   |                                                        | **187,640**   |   | **$** | **30.55** |   |   | - |   |   | - |   |
|                      Exercised                                  |   |                                                        | **(196,189**  | **)** | **$** | **15.09** |   |   | (366,409 | ) | $ | 16.12 |   |
|                      Forfeited                                  |   |                                                        | **(1,646**    | **)** | **$** | **14.95** |   |   | (7,198 | ) | $ | 18.08 |   |
| Options                  Outstanding,                                          |   |                                                        |          |   |   |   |   |   |   |   |   |   |   |
|   End                  of                  Period                    |   |                                                        | **1,526,846** |   | **$** | **18.66** |   |   | 1,702,448 |   | $ | 16.20 |   |
| Options                  Exercisable,                                          |   |                                                        |          |   |   |   |   |   |   |   |   |   |   |
|   End                  of                  Period                    |   |                                                        | **1,289,206** |   | **$** | **16.35** |   |   | 1,694,976 |   | $ | 16.19 |   |
|                                                                           |   |                                                        |          |
| Weighted                  Average Remaining Contractual Life at June 30, 2006: |   | 5.31                  years                                 |          |

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

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|                                              | **Options                  Outstanding** | **Options                  Exercisable**                         |
|---------------------------------------------------|------------------------------------------|------------------------------------------------------------------|
| **Range                  of Exercise Prices**     | **Number                  of Shares**    | **Weighted-Average                  Remaining Contractual Life** |  **Weighted-Average                  Exercise Price** | **Number                  of Shares** | **Weighted-Average                  Exercise Price** |
| $11.00                  -                  $15.56 | 574,103                                  | 3.3                  years                                       | $14.29 | 574,103 | $14.29 |
| $16.69                  -                  $18.84 | 715,103                                  | 5.4                  years                                       | $18.01 | 715,103 | $18.01 |
| $30.55                  -                  $33.55 | 237,640                                  | 9.7                  years                                       | $31.18 | - | - |

**RESTRICTED        STOCK AND STOCK UNITS **

**PERFORMANCE        SHARES**

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Table            of Contents

**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**NOTE        12. INCOME AND OTHER TAXES**

**INCOME        TAXES**

|                                                                             |   | **UniSource                  Energy**                           |      |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|-----------|
|                                                                             |   | Three                  Months                  Ended            |      | Six                  Months                  Ended |   |
|                                                                             |   | June                  30,                                       |      | June                  30, |   |
|                                                                             |   | **2006**                                                        |      | **2005** |   | **2006** |   | **2005** |   |
|                                                                             |   |  -Thousands                  of                  Dollars - |      |
|                                                                             |   |                                                            |      |   |   |   |   |   |   |
| **Federal                  Income Tax Expense at Statutory Rate**                |   | **$**                                                           | **5,988** |   | $ | 5,826 |   | **$** | **16,095** |   | $ | 3,968 |   |
|                     State Income Tax Expense, Net of Federal Deduction |   |                                                            | **787**   |   |   | 766 |   |   | **2,115** |   |   | 522 |   |
|                     Depreciation Differences (Flow Through Basis)      |   |                                                            | **662**   |   |   | 736 |   |   | **1,325** |   |   | 1,416 |   |
|                     Amortization of Excess Deferred Income Tax         |   |                                                            | **(180**  | **)** |   | - |   |   | **(180** | **)** |   | - |   |
|                     Tax Credits                                        |   |                                                            | **(167**  | **)** |   | (130 | ) |   | **(429** | **)** |   | (261 | ) |
|                     Other                                              |   |                                                            | **21**    |   |   | (20 | ) |   | **241** |   |   | 7 |   |
| **Total                  Federal and State Income Tax Expense**                  |   | **$**                                                           | **7,111** |   | $ | 7,178 |   | **$** | **19,167** |   | $ | 5,652 |   |

|                                                                             |   | **TEP**                                                         |      |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|-----------|
|                                                                             |   | Three                  Months                  Ended            |      | Six                  Months                  Ended |   |
|                                                                             |   | June                  30,                                       |      | June                  30, |   |
|                                                                             |   | **2006**                                                        |      | **2005** |   | **2006** |   | **2005** |   |
|                                                                             |   |  -Thousands                  of                  Dollars - |      |
|                                                                             |   |                                                            |      |   |   |   |   |   |   |
| **Federal                  Income Tax Expense at Statutory Rate**                |   | **$**                                                           | **6,691** |   | $ | 7,385 |   | **$** | **16,532** |   | $ | 4,986 |   |
|                     State Income Tax Expense, Net of Federal Deduction |   |                                                            | **879**   |   |   | 971 |   |   | **2,173** |   |   | 655 |   |
|                     Depreciation Differences (Flow Through Basis)      |   |                                                            | **662**   |   |   | 736 |   |   | **1,325** |   |   | 1,416 |   |
|                     Amortization of Excess Deferred Income Tax         |   |                                                            | **(180**  | **)** |   | - |   |   | **(180** | **)** |   | - |   |
|                     Tax Credits                                        |   |                                                            | **(167**  | **)** |   | (130 | ) |   | **(429** | **)** |   | (261 | ) |
|                     Other                                              |   |                                                            | **13**    |   |   | (11 | ) |   | **5** |   |   | (7 | ) |
| **Total                  Federal and State Income Tax Expense**                  |   | **$**                                                           | **7,898** |   | $ | 8,951 |   | **$** | **19,426** |   | $ | 6,789 |   |

**OTHER        TAX        MATTERS**

**OTHER        TAXES**

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**NOTE        13. UTILITY PLANT AND JOINTLY-OWNED        FACILITIES**

|                                                                                  |   |   |                                                              |   |   |                           |   |   |                                |   |   |                                                 |   |
|---------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|--------------------------------|--------|--------|-------------------------------------|--------|--------|------------------------------------------------------|--------|
|                                                                                  |   |   | **TEP**                                                           |   |   | **UNS                    Gas** |   |   | **UNS                    Electric** |   |   | **UniSource                    Energy Consolidated** |   |
|                    **As                    of                    June 30, 2006** |   |   | T&D                                                           |   |   | Gen*                           |   |   | Total                    Plant      |   |   | Total                    Plant                  |   |   | Total                    Plant |   |   | All                    Other |   |   | TEP                    Gen* |   |   | Total                    Plant |   |
|                                                                                  |   |   | -Millions                    of                    Dollars-  |   |

| Gross                    Plant                    in Service                                                        |   | $      | 1,686 |   | $      | 1,292 |   | $      | 2,978 |   | $      | 190 |   | $      | 156 |   | $      | 2,032 |   | $      | 1,292 |   | $      | 3,324 |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|-------|--------|--------|-------|--------|--------|-------|--------|--------|-----|--------|--------|-----|--------|--------|-------|--------|--------|-------|--------|--------|-------|--------|
| Less                    Accumulated                     Depreciation and                     Amortization |   |   | 845   |   |   | 563   |   |   | 1,408 |   |   | 12  |   |   | 26  |   |   | 883   |   |   | 563   |   |   | 1,446 |   |
| Net                    Plant in                    Service                                                          |   | $      | 841   |   | $      | 729   |   | $      | 1,570 |   | $      | 178 |   | $      | 130 |   | $      | 1,149 |   | $      | 729   |   | $      | 1,878 |   |

|                                                                                      |   |   |                                                              |   |   |                           |   |   |                                |   |   |                                                 |   |
|-------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|--------------------------------|--------|--------|-------------------------------------|--------|--------|------------------------------------------------------|--------|
|                                                                                      |   |   | **TEP**                                                           |   |   | **UNS                    Gas** |   |   | **UNS                    Electric** |   |   | **UniSource                    Energy Consolidated** |   |
|                    **As                    of                    December 31, 2005** |   |   | T&D                                                           |   |   | Gen*                           |   |   | Total                    Plant      |   |   | Total                    Plant                  |   |   | Total                    Plant |   |   | All                    Other |   |   | TEP                    Gen* |   |   | Total                    Plant |   |
|                                                                                      |   |   | -Millions                    of                    Dollars-  |   |

| Gross                    Plant                    in Service                                                        |   | $      | 1,629 |   | $      | 1,233 |   | $      | 2,862 |   | $      | 180 |   | $      | 126 |   | $      | 1,935 |   | $      | 1,233 |   | $      | 3,168 |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|-------|--------|--------|-------|--------|--------|-------|--------|--------|-----|--------|--------|-----|--------|--------|-------|--------|--------|-------|--------|--------|-------|--------|
| Less                    Accumulated                     Depreciation and                     Amortization |   |   | 817   |   |   | 561   |   |   | 1,378 |   |   | 10  |   |   | 20  |   |   | 847   |   |   | 561   |   |   | 1,408 |   |
| Net                    Plant in                    Service                                                          |   | $      | 812   |   | $      | 672   |   | $      | 1,484 |   | $      | 170 |   | $      | 106 |   | $      | 1,088 |   | $      | 672   |   | $      | 1,760 |   |

**NOTE        14. NEW ACCOUNTING PRONOUNCEMENTS**

*Accounting        for        Certain Hybrid Financial Instruments*

*Accounting        for        Life Settlement Contracts by Third-Party Investors*

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

*How        Taxes        Collected from Customers and Remitted to Governmental Authorities Should        Be        Presented in the Income Statement (that Is, Gross versus Net        Presentation)*

|   | · | FIN                  48,                  *Accounting                  for Uncertainty in Income Taxes - an interpretation of FAS                  109*,                  issued July                  2006, prescribes a recognition threshold and measurement attribute                  for the                  financial statement recognition and measurement of a tax position                  taken in                  a tax return. We must determine whether it is "more-likely-than-not"                  that                  a tax position will be sustained upon examination, including resolution                  of                  any related appeals or litigation processes, based on the technical                  merits                  of the position. Once it is determined that a position meets the                  more-likely-than-not recognition threshold, the position is measured                  to                  determine the amount of benefit to recognize in the financial statements.                  Additionally, FIN 48 requires disclosure of a rollforward of total                  unrecognized tax benefits.  We do not believe the adoption of FIN 48                  will have a material effect on our financial position or results                  of                  operations. In anticipation of FIN 48, we have accounted for significant                  uncertain tax positions in a manner similar to that prescribed                  by FIN                  48.  FIN 48 is effective for fiscal years beginning after December                  15, 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**NOTES            TO            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

**NOTE        15. SUPPLEMENTAL CASH FLOW        INFORMATION**

|                                                                                                                                     |   | **UniSource                  Energy**                    |        |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                                                                     |   | Six                  Months                  Ended       |        |
|                                                                                                                                     |   | June                  30,                                |        |
|                                                                                                                                     |   | **2006**                                                 |        | **2005** |   |
|                                                                                                                                     |   | -Thousands                  of                  Dollars- |        |
|                                                                                                                                     |   |                                                     |        |   |   |
| **Net                  Income**                                                                                                          |   | **$**                                                    | **26,820**  |   | $ | 5,685 |   |
| **Adjustments                  to Reconcile Net Income**                                                                                 |   |                                                     |        |   |   |   |   |
|  **To                  Net Cash Flows**                                                                                             |   |                                                     |        |   |   |   |   |
|                      Discontinued Operations - Net of Tax                                                                 |   |                                                     | **2,669**   |   |   | 3,017 |   |
|                      Depreciation and Amortization Expense                                                                |   |                                                     | **63,437**  |   |   | 66,664 |   |
|                      Depreciation Recorded to Fuel and Other O&M Expense                                              |   |                                                     | **3,869**   |   |   | 2,765 |   |
|                      Amortization of Transition Recovery Asset                                                            |   |                                                     | **29,121**  |   |   | 23,623 |   |
|                      Net Unrealized (Gain) Loss on Forward Electric Sales                                                 |   |                                                     | **(1,118**  | **)** |   | 1,088 |   |
|                      Net Unrealized Loss on Forward Electric Purchases                                                    |   |                                                     | **970**     |   |   | - |   |
|                      Net Unrealized Loss (Gain) on MEG Trading Activities                                                 |   |                                                     | **2,945**   |   |   | (7,143 | ) |
|                      Amortization of Deferred Debt-Related Costs included in Interest                  Expense            |   |                                                     | **2,343**   |   |   | 2,004 |   |
|                      Loss on Reacquired Debt                                                                              |   |                                                     | **-**       |   |   | 5,427 |   |
|                      Provision for Bad Debts                                                                              |   |                                                     | **1,794**   |   |   | 1,372 |   |
|                      Deferred Income Taxes                                                                                |   |                                                     | **10,701**  |   |   | 10,587 |   |
|                      (Income) Loss from Equity Method Entities                                                            |   |                                                     | **(121**    | **)** |   | 687 |   |
|                      Excess Tax Benefit from Stock Option Exercises                                                       |   |                                                     | **(869**    | **)** |   | (1,874 | ) |
|                      Other                                                                                                |   |                                                     | **18,335**  |   |   | 9,887 |   |
|                      Changes in Assets and Liabilities which Provided (Used)                                              |   |                                                     |        |   |   |   |   |
|                        Cash Exclusive of Changes Shown Separately                                               |   |                                                     |        |   |   |   |   |
|                          Accounts Receivable                                                               |   |                                                     | **(18,739** | **)** |   | 3,201 |   |
|                          Materials and Fuel Inventory                                                      |   |                                                     | **(2,969**  | **)** |   | (5,855 | ) |
|                          Accounts Payable                                                                  |   |                                                     | **(16,149** | **)** |   | (28,358 | ) |
|                          Income Taxes Payable                                                              |   |                                                     | **(2,775**  | **)** |   | (18,755 | ) |
|                          Interest Accrued                                                             |   |                                                     | **(2,035**  | **)** |   | (3,767 | ) |
|                          Taxes Accrued                                                                |   |                                                     | **724**     |   |   | 308 |   |
|                          Other Current Assets                                                              |   |                                                     | **20,765**  |   |   | 75,662 |   |
|                          Other Current Liabilities                                                    |   |                                                     | **(12,042** | **)** |   | (53,497 | ) |
|                          Net Cash Used by Operating Activities of Discontinued                  Operations |   |                                                     | **(2,710**  | **)** |   | (3,395 | ) |
| **Net                  Cash Flows - Operating Activities**                                                                               |   | **$**                                                    | **124,966** |   | $ | 89,333 |   |

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**NOTES              TO              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
** **

----

|                                                                                                                          |   | **TEP**                                                  |        |
|-------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                                                          |   | Six                  Months                  Ended       |        |
|                                                                                                                          |   | June                  30,                                |        |
|                                                                                                                          |   | **2006**                                                 |        | **2005** |   |
|                                                                                                                          |   | -Thousands                  of                  Dollars- |        |
|                                                                                                                          |   |                                                     |        |   |   |
| **Net                  Income**                                                                                               |   | **$**                                                    | **27,807**  |   | $ | 7,458 |   |
| **Adjustments                  to Reconcile Net Income**                                                                      |   |                                                     |        |   |   |   |   |
|  **To                  Net Cash Flows**                                                                                  |   |                                                     |        |   |   |   |   |
|                      Depreciation and Amortization Expense                                                     |   |                                                     | **54,732**  |   |   | 57,954 |   |
|                      Depreciation Recorded to Fuel and Other O&M Expense                                   |   |                                                     | **3,266**   |   |   | 3,180 |   |
|                      Amortization of Transition Recovery Asset                                                 |   |                                                     | **29,121**  |   |   | 23,623 |   |
|                      Net Unrealized (Gain) Loss on TEP Forward Electric Sales                                  |   |                                                     | **(1,118**  | **)** |   | 1,088 |   |
|                      Net Unrealized Loss on TEP Forward Electric Purchases                                     |   |                                                     | **1,284**   |   |   | - |   |
|                      Amortization of Deferred Debt-Related Costs included in Interest                  Expense |   |                                                     | **1,709**   |   |   | 1,823 |   |
|                      Loss on Reacquired Debt                                                                   |   |                                                     | **-**       |   |   | 5,427 |   |
|                      Provision for Bad Debts                                                                   |   |                                                     | **848**     |   |   | 1,052 |   |
|                      Deferred Income Taxes                                                                     |   |                                                     | **7,247**   |   |   | 10,328 |   |
|                      Income from Equity Method Entities                                                        |   |                                                     | **(121**    | **)** |   | (45 | ) |
|                      Interest on Note Receivable from UniSource Energy                                         |   |                                                     | **-**       |   |   | (1,684 | ) |
|                      Other                                                                                     |   |                                                     | **10,704**  |   |   | 9,673 |   |
|                      Changes in Assets and Liabilities which Provided (Used)                                   |   |                                                     |        |   |   |   |   |
|                        Cash Exclusive of Changes Shown Separately                                    |   |                                                     |        |   |   |   |   |
|                          Accounts Receivable                                               |   |                                                     | **(36,863** | **)** |   | (17,748 | ) |
|                          Materials and Fuel Inventory                                      |   |                                                     | **(2,756**  | **)** |   | (4,068 | ) |
|                          Accounts Payable                                                  |   |                                                     | **(1,689**  | **)** |   | (12,438 | ) |
|                          Interest Accrued                                                  |   |                                                     | **(2,197**  | **)** |   | (6,668 | ) |
|                          Interest Received from UniSource Energy                           |   |                                                     | **-**       |   |   | 11,013 |   |
|                          Income Taxes Receivable                                           |   |                                                     | **-**       |   |   | (1,227 | ) |
|                          Income Taxes Payable                                              |   |                                                     | **1,504**   |   |   | (17,815 | ) |
|                          Taxes Accrued                                                     |   |                                                     | **2,363**   |   |   | 1,850 |   |
|                          Other Current Assets                                              |   |                                                     | **(142**    | **)** |   | 4,118 |   |
|                          Other Current Liabilities                                         |   |                                                     | **2,494**   |   |   | (3,174 | ) |
| **Net                  Cash Flows - Operating Activities**                                                                    |   | **$**                                                    | **98,193**  |   | $ | 73,720 |   |

**NOTE        16. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING        FIRM**

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Table            of Contents

**ITEM        2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION        AND RESULTS OF OPERATIONS**

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

|   | · | operating                  results during the second quarter and first six months of 2006                  compared                  with the same periods in 2005, |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

**UNISOURCE        ENERGY        CONSOLIDATED**

**OVERVIEW        OF CONSOLIDATED BUSINESS**

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Table              of              Contents

**OUTLOOK        AND STRATEGIES**

**Operating        Plans and Strategies**

|   | · | Efficiently                  manage our generation, transmission and distribution resources                  and look                  for ways to control our operating expenses while maintaining and                  enhancing                  reliability and profitability. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Expand                  TEP’s                  and 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 Salt River                  Project to                  support the construction of Springerville Unit                  4. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 generating                  assets. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Continue                  to                  integrate UNS Gas and UNS Electric with UniSource Energy’s other                  businesses. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Reduce                  debt. |
|--------|--------|-------------------------------|

|   | · | Promote                  economic development in our service                  territories. |
|--------|--------|--------------------------------------------------------------------------------------------|

|                                             |   | Actual                    Year-to-Date June                    30,                    2006 |   | EstimateFull                    Year                    2006 |   |
|--------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                             |   | -Millions                    of                    Dollars-                                |   |
| TEP                                              |   | $                                                                                          | 82     |                                                         | $      | 163 |   |
| UNS                    Gas                       |   |                                                                                       | 12     |                                                         |   | 25 |   |
| UNS                    Electric                  |   |                                                                                       | 19     |                                                         |   | 40 |   |
| UniSource                    Energy Consolidated |   | $                                                                                          | 113    |                                                         | $      | 228 |   |

**RESULTS        OF OPERATIONS**

**Executive        Overview**

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Table            of Contents

**CONTRIBUTION        BY BUSINESS SEGMENT**

|                                                                                        |   | **Three                  Months Ended June 30,**              |     | **Six                  Months EndedJune 30,**                 |     |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|----------|---------------------------------------------------------------|----------|
|                                                                                        |   | **2006**                                                      | **2005** |                                                          | **2006** | **2005** |   |
|                                                                                        |   |  -Millions                  of                  Dollars- |     |  -Millions                  of                  Dollars- |     |
| TEP                                                                                         |   | $11                                                           |     | $12                                                           |     | $28 |   | $7 |   |
| UNS                  Gas                                                                    |   |                                                          | (1       | )                                                             |     | - |   |   | 3 |   |   | 4 |   |
| UNS                  Electric                                                               |   |                                                          | 1        |                                                          |     | 1 |   |   | 2 |   |   | 1 |   |
| Other                  (1)                                                                  |   |                                                          | (1       | )                                                             |     | (2 | ) |   | (4 | ) |   | (3 | ) |
| Consolidated                  Net Income (Loss) from Continuing                  Operations |   | $                                                             | 10       |                                                          | $        | 11 |   | $ | 29 |   | $ | 9 |   |
| Discontinued                  Operations (2)                                                |   |                                                          | -        |                                                          |     | (2 | ) |   | (2 | ) |   | (3 | ) |
| Consolidated                  Net Income (Loss)                                             |   | $                                                             | 10       |                                                          | $        | 9 |   | $ | 27 |   | $ | 6 |   |

**Three        Months Ended June 30, 2006 Compared with the Three Months Ended June 30,        2005**

|   | · | a                  $3 million                  decrease in TEP’s gross margin (total operating revenues less fuel and                  purchased power expense) due to the                  following: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $13 million                  increase in retail revenues due to warmer weather and customer                  growth;                  offset by |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $3 million                  decrease in wholesale revenues due to lower excess capacity at                  TEP’s                  coal-fired generating plants due to outages and higher retail energy                  demand; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $13 million                  increase in expenses for fuel for TEP’s generating plants and a $6 million                  increase in purchased power costs. Scheduled maintenance outages                  at TEP’s                  coal-fired plants, a two week unplanned outage at Springerville                  Unit 2 in                  May of 2006 and other unplanned outages, combined with increased                  retail                  energy demand and wild fire-related transmission outages in northern                  Arizona, |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table              of              Contents

|   |   | resulted                  in                  higher usage of TEP’s gas-fired plants. The availability of Luna helped                  offset reliance on less-efficient gas plants and power purchases. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $4 million                  increase in other operations and maintenance (O&M) due primarily to                  outages at TEP coal plants and transmission costs associated with                  Luna; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $3 million                  increase in the amortization of TEP’s Transition Recovery Asset (TRA);                  and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $6 million                  decrease in total interest expense due to: costs incurred in the                  second                  quarter of 2005 related to various financing activities; lower                  fees under                  TEP’s new Credit Agreement entered into in May 2005; the repurchase                  and                  redemption of $225 million of TEP debt in May 2005; and lower capital                  lease obligation balances. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Six        Months        Ended June 30, 2006 Compared with the Six Months Ended June 30,        2005**

|   | · | a                  $20 million                  increase in TEP’s gross margin (total operating revenues less fuel and                  purchased power expense) due to the                  following: |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $21 million                  increase in retail revenues due to hot weather in May and June,                  as well as                  continued customer growth; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $14 million                  increase in wholesale revenues due to the higher use and availability                  of                  TEP’s coal-fired generating plants and increased wholesale activity.                  The                  longer duration and higher frequency of planned outages in 2005                  led to                  lower amounts of excess generation to sell into the wholesale market; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $16 million                  increase in fuel expense for TEP’s generating plants and a $6 million                  increase in purchased power costs due to higher retail energy demand,                  higher output from TEP’s generating plants and increased purchased power                  expense during the second quarter of                  2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $2 million                  decrease in O&M due primarily to fewer TEP coal plant outages in the                  first half of 2006 compared with the same period last                  year; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $3 million                  decline in depreciation and amortization due primarily to the extension                  of                  useful lives of certain generating assets at TEP in April 2005; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $5 million                  increase in the amortization of TEP’s TRA;                  and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $10 million                  decrease in total interest expense due to: costs incurred in the                  second                  quarter of 2005 related to various financing activities; lower                  fees under                  TEP’s new Credit Agreement entered into in May 2005; the repurchase                  and                  redemption of $278 million of TEP debt in the first six months                  of 2005;                  and lower capital lease obligation balances at TEP. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table              of              Contents

**LIQUIDITY        AND CAPITAL        RESOURCES**

**UNISOURCE        ENERGY CONSOLIDATED CASH FLOWS**

| **Six                  Months Ended June 30,**                |   | **2006**                                                |   | **2005** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------------|--------|----------|--------|
|                                                          |   | -Millions                  of                  Dollars- |   |
| Cash                  provided                  by (used in): |   |                                                    |   |     |   |
| Operating                  Activities                         |   | $                                                       | 125    |     | $      | 89 |   |
| Investing                  Activities                         |   |                                                    | (134   | )        |   | (75 | ) |
| Financing                  Activities                         |   |                                                    | (1     | )        |   | (66 | ) |

|   | · | fund                    capital                    expenditures at TEP, UNS Gas and UNS                    Electric; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|

|   | · | pay                    dividends                    to shareholders; and |
|--------|--------|--------------------------------------------------------------------------|

|   | · | reduce                    leverage. |
|--------|--------|-------------------------------------|

**Executive          Overview**

**Operating          Activities**

|   | · | a                    $22 million                    increase in cash receipts from retail electric sales due primarily                    to hot                    weather in May and June and customer growth at TEP and UNS                    Electric; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $20 million                    increase in cash receipts from UNS Gas’ retail sales due to the Purchased                    Gas Adjustor (PGA) surcharge adjustments that took effect in                    November 2005                    and customer growth; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $28 million                    increase in cash receipts from wholesale electric sales due to                    the higher                    amount of excess output from TEP’s coal-fired generating plants, increased                    wholesale trading activity and higher wholesale market prices                    for power; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $17 million                    increase in fuel costs paid due to the higher availability and                    use of                    TEP’s coal-fired generating plants, as well as the availability of                    the                    gas-fired Luna plant beginning in April                    2006; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $27 million                    increase in purchased energy costs paid due to higher wholesale                    trading                    activity at TEP and higher retail sales and natural gas prices                    at UNS Gas; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $14 million                    decrease in payments for O&M costs. O&M costs were higher in the                    first six months of 2005 due to higher frequency and duration                    of planned                    and unplanned outages at TEP’s coal                    plants; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table                of                Contents

|   | · | a                  $5 million                  decrease in total interest costs paid due to lower amounts of outstanding                  long-term debt and capital lease obligations;                  and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $10 million                  increase in total taxes paid, net of refunds, due to higher pre-tax                  income. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

**Investing        Activities**

|   | · | a                  $24 million                  increase in capital expenditures related to TEP’s share of the                  construction costs of |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | TEP’s                  purchase of a 14% equity interest in the Springerville Unit 1 Lease,                  which                  represents approximately 55 MW of capacity; offset                  by |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $4 million                  increase in proceeds from the return on investment from Millennium                  businesses; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | $16                  million                  of proceeds from the sale of Global                  Solar. |
|--------|--------|-----------------------------------------------------------------------------------------------------------|

**Financing        Activities**

|   | · | a                  $20 million                  increase in net proceeds from borrowings under revolving credit                  facilities; offset by |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $4 million                  decrease in proceeds from the exercise of stock                  options; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $2 million                  increase in TEP’s scheduled payments on capital lease obligations; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $2 million                  increase in dividends paid to UniSource Energy                  shareholders. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|

|   | · | $240                  million                  of proceeds related to debt issuances at UniSource Energy; offset                  by |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | · | $283                  million                  used to repay long-term debt at TEP and UniSource Energy;                  and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                  use of                  $12 million for debt issuance and retirement                  costs. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

----

Table                of                Contents

**GUARANTEES        AND INDEMNITIES**

|   | · | UES’                  guarantee of $160 million of senior unsecured notes issued by UNS                  Gas and                  UNS Electric to purchase the Citizens Communication Company (Citizens’)                  Arizona gas and electric system assets; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UES’                  guarantee of a $40 million revolving credit facility available                  to UNS Gas                  and UNS Electric; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UniSource                  Energy’s guarantee of approximately $6 million in natural gas and supply                  payments and building lease payments for UNS Gas and UNS Electric                  and a                  subsidiary of Millennium. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**CONTRACTUAL        OBLIGATIONS**

|   | · | TEP’s                  purchased power agreement with Tri-State for 100 MW of system capacity                  will become effective September 1, 2006. This contract allows Tri-State                  to                  reduce the contract capacity in increments of 25 MW with 90 days                  notice.                  To date, TEP has received no such notice. If Tri-State does not                  give                  notice to reduce capacity, the minimum capacity payments will be                  $10                  million for 2006, $31 million annually in 2007 through 2010, and                  $21                  million in 2011. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  June 2006,                  TEP refinanced variable rate notes underlying the Springerville                  Common                  Facilities Leases. A portion of the rent payable by TEP pursuant                  to the                  Springerville Common Facilities Leases is determined by the amount                  of                  interest payable on the variable rate lease debt. The notes were                  amended                  to provide that interest will be payable at LIBOR plus 1.5% for                  the next                  three years with the spread over LIBOR increasing every three years                  thereafter to 2% by June 2018. Prior to the refinancing, the interest                  rate                  was LIBOR plus 4%. TEP                  estimates                  its obligation using a forward LIBOR curve. At June 30, 2006, TEP’s                  obligations under the Springerville Common Facilities Leases total:                  $7                  million in 2006; $6 million in 2007; $6 million in 2008; $6 million                  in                  2009; $6 million in 2010; $6 million in 2011; and $145 million                  thereafter.                  TEP’s obligation does not include the impact of the 2006 interest rate                  swap. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table                of                Contents

| ·   | In                June 2006,                TEP purchased a 14% equity ownership interest in the Springerville                Unit 1                Leases. As a result, TEP amended the Springerville Unit 1 Lease related                to                such undivided interest to reduce TEP’s rent payable to equal the                scheduled amount of principal and interest payable on the debt issued                by                the owner trustee. At June 30, 2006, TEP’s obligations under the                Springerville Unit 1 Leases total: $85 million in 2006; $83 million                in                2007; $82 million in 2008; $30 million in 2009; $57 million in 2010;                $83                million in 2011; and $317 million                thereafter. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | In                May 2006,                UNS Electric entered into a 25 MW power supply agreement for the                period                June 2008 through December 2013. The                25 MW                consists of 10 MW at a fixed price with the remaining 15 MW price                indexed                to natural gas prices. UNS Electric’s minimum expected annual payment                under this contract is $9 million based on natural gas prices at                the date                of contract. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | TEP                entered                into operating leases in the first quarter 2006 for equipment at                Springerville totaling $2 million over three                years. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**DIVIDENDS        ON COMMON STOCK**

|  **Declaration                  Date**         |  **Record                  Date**              |  **Payment                  Date**          | **Dividend                  Amount****Per                  Share of Common Stock** |
|-----------------------------------------------------|-----------------------------------------------------|--------------------------------------------------|------------------------------------------------------------------------------------|
| February                  10,                  2006 | February                  21,                  2006 | March                  15,                  2006 | $0.21                                                                              |
| May                  5,                  2006       | May                  17,                  2006      | June                  9,                  2006   | $0.21                                                                              |

**INCOME        TAX        MATTERS**

----

Table                  of                  Contents

**TUCSON        ELECTRIC POWER COMPANY**

**RESULTS        OF OPERATIONS**

|                                                            |   | **Sales**                                           |     | **Operating                  Revenue**                  |   |
|-----------------------------------------------------------------|--------|-----------------------------------------------------|----------|---------------------------------------------------------|--------|
| **Three                  Months Ended June 30,**                |   | **2006**                                            |     | **2005**                                                |   | **2006** |   | **2005** |   |
|                                                            |   | -Millions                  of                  kWh- |     | -Millions                  of                  Dollars- |   |
| **Electric                  Retail Sales:**                     |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Residential                                                     |   |                                                | 1,012    |                                                    |   | 908 |   | $ | 94 |   | $ | 84 |   |
| Commercial                                                      |   |                                                | 526      |                                                    |   | 498 |   |   | 55 |   |   | 52 |   |
| Industrial                                                      |   |                                                | 586      |                                                    |   | 596 |   |   | 43 |   |   | 44 |   |
| Mining                                                          |   |                                                | 228      |                                                    |   | 224 |   |   | 11 |   |   | 10 |   |
| Public                  Authorities                             |   |                                                | 77       |                                                    |   | 66 |   |   | 5 |   |   | 5 |   |
| **Total                  Electric Retail Sales**                |   |                                                | 2,429    |                                                    |   | 2,292 |   | $ | 208 |   | $ | 195 |   |
| **Electric                  Wholesale Sales Delivered:**        |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Long-term                  Contracts                            |   |                                                | 245      |                                                    |   | 277 |   |   | 12 |   |   | 12 |   |
| Other                  Sales                                    |   |                                                | 410      |                                                    |   | 477 |   |   | 20 |   |   | 24 |   |
| Transmission                                                    |   |                                                | -        |                                                    |   | - |   |   | 2 |   |   | 2 |   |
| Net                  Unrealized Gain on Forward Sales of Energy |   |                                                | -        |                                                    |   | - |   |   | 1 |   |   | - |   |
| **Total                  Electric Wholesale Sales**             |   |                                                | 655      |                                                    |   | 754 |   |   | 35 |   |   | 38 |   |
| **Total                  Electric Sales**                       |   |                                                | 3,084    |                                                    |   | 3,046 |   | $ | 243 |   | $ | 233 |   |
|                                                            |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| **Weather                  Data:**                              |   |                                                | **2006** |                                                    |   | **2005** |   |   |   |   |   |   |   |
|  **Cooling                  Degree Days**                  |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Three                  Months                  Ended June 30,   |   |                                                | 543      |                                                    |   | 454 |   |   |   |   |   |   |   |
| 10-Year                  Average                                |   |                                                | 434      |                                                    |   | 434 |   |   |   |   |   |   |   |

*Factors          Affecting Results of Operations, Western Energy Markets, Market Prices,          *

----

Table                  of                  Contents

|                                                                   |   | **Sales**                                           |     | **Operating                  Revenue**                  |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------|----------|---------------------------------------------------------|--------|
| **Six                  Months Ended June 30,**                         |   | **2006**                                            |     | **2005**                                                |   | **2006** |   | **2005** |   |
|                                                                   |   | -Millions                  of                  kWh- |     | -Millions                  of                  Dollars- |   |
| **Electric                  Retail Sales:**                            |   |                                                |     |                                                    |   |   |   |   |   |
| Residential                                                            |   |                                                | 1,711    |                                                    |   | 1,558 |   | $ | 153 |   | $ | 140 |   |
| Commercial                                                             |   |                                                | 915      |                                                    |   | 849 |   |   | 95 |   |   | 88 |   |
| Industrial                                                             |   |                                                | 1,095    |                                                    |   | 1,108 |   |   | 79 |   |   | 79 |   |
| Mining                                                                 |   |                                                | 452      |                                                    |   | 444 |   |   | 21 |   |   | 21 |   |
| Public                  Authorities                                    |   |                                                | 130      |                                                    |   | 110 |   |   | 9 |   |   | 8 |   |
| **Total                  Electric Retail Sales**                       |   |                                                | 4,303    |                                                    |   | 4,069 |   | $ | 357 |   | $ | 336 |   |
| **Electric                  Wholesale Sales Delivered:**               |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Long-term                  Contracts                                   |   |                                                | 538      |                                                    |   | 585 |   |   | 26 |   |   | 27 |   |
| Other                  Sales                                           |   |                                                | 1,134    |                                                    |   | 930 |   |   | 60 |   |   | 47 |   |
| Transmission                                                           |   |                                                | -        |                                                    |   | - |   |   | 4 |   |   | 4 |   |
| Net                  Unrealized Gain (Loss) on Forward Sales of Energy |   |                                                | -        |                                                    |   | - |   |   | 1 |   |   | (1 | ) |
| **Total                  Electric Wholesale Sales**                    |   |                                                | 1,672    |                                                    |   | 1,515 |   |   | 91 |   |   | 77 |   |
| **Total                  Electric Sales**                              |   |                                                | 5,975    |                                                    |   | 5,584 |   | $ | 448 |   | $ | 413 |   |
|                                                                   |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| **Weather                  Data:**                                     |   |                                                | **2006** |                                                    |   | **2005** |   |   |   |   |   |   |   |
|                     **Cooling                  Degree Days** |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
|                     Six Months Ended June 30,                |   |                                                | 543      |                                                    |   | 454 |   |   |   |   |   |   |   |
|                     10-Year Average                          |   |                                                | 434      |                                                    |   | 434 |   |   |   |   |   |   |   |

*Factors        Affecting Results of Operations, Western Energy Markets, Market Prices,*

**OPERATING        EXPENSES**

**Fuel        and        Purchased Power Expense**

----

Table                    of                    Contents

|                                                               |   | **Generation                  and Purchased Power** |   |  **Expense**                                       |   |
|--------------------------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------------|--------|
| **Three                  Months Ended June 30,**                   |   | **2006**                                            |   | **2005**                                                |   | **2006** |   | **2005** |   |
|                                                               |   | -Millions                  of                  kWh- |   | -Millions                  of                  Dollars- |   |
| Coal-Fired                  Generation                             |   |                                                |   |                                                    |   |   |   |   |   |   |   |   |   |
|  Four                  Corners                                |   |                                                | 197    |                                                    |   | 186 |   | $ | 3 |   | $ | 3 |   |
|                    Navajo                                     |   |                                                | 300    |                                                    |   | 300 |   |   | 4 |   |   | 4 |   |
|  San                  Juan                                    |   |                                                | 625    |                                                    |   | 588 |   |   | 14 |   |   | 13 |   |
|                    Springerville                              |   |                                                | 1,201  |                                                    |   | 1,523 |   |   | 20 |   |   | 25 |   |
|  Sundt                  4                                     |   |                                                | 126    |                                                    |   | 170 |   |   | 3 |   |   | 3 |   |
| Total                  Coal-Fired Generation                       |   |                                                | 2,449  |                                                    |   | 2,767 |   |   | 44 |   |   | 48 |   |
| Gas-Fired                  Generation                              |   |                                                |   |                                                    |   |   |   |   |   |   |   |   |   |
| Luna                                                               |   |                                                | 202    |                                                    |   | - |   |   | 10 |   |   | - |   |
| Other                  Gas                  Units                  |   |                                                | 114    |                                                    |   | 89 |   |   | 10 |   |   | 8 |   |
| Total                  Gas-Fired Generation                        |   |                                                | 316    |                                                    |   | 89 |   |   | 20 |   |   | 8 |   |
| Solar                  and                  Other                  |   |                                                | 3      |                                                    |   | 3 |   |   | - |   |   | - |   |
| Total                  Generation                                  |   |                                                | 2,768  |                                                    |   | 2,859 |   |   | 64 |   |   | 56 |   |
| Purchased                  Power                                   |   |                                                | 554    |                                                    |   | 416 |   |   | 33 |   |   | 27 |   |
| Springerville                  3                                   |   |                                                | -      |                                                    |   | - |   |   | 5 |   |   | - |   |
| Total                  Resources                                   |   |                                                | 3,322  |                                                    |   | 3,275 |   | $ | 102 |   | $ | 83 |   |
| Less                  Line                  Losses and Company Use |   |                                                | (238   | )                                                       |   | (229 | ) |   |   |   |   |   |   |
| Total                  Energy                  Sold                |   |                                                | 3,084  |                                                    |   | 3,046 |   |   |   |   |   |   |   |

----

Table                    of                    Contents

|                                                                   |   | **Generation                    and Purchased Power**   |   |  **Expense**                                           |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|-------------------------------------------------------------|--------|
| **Six                    Months Ended June 30,**                       |   | **2006**                                                |   | **2005**                                                    |   | **2006** |   | **2005** |   |
|                                                                   |   | -Millions                    of                    kWh- |   | -Millions                    of                    Dollars- |   |
| Coal-Fired                    Generation                               |   |                                                    |   |                                                        |   |   |   |   |   |   |   |   |   |
|  Four                    Corners                                  |   |                                                    | 403    |                                                        |   | 381 |   | $ | 6 |   | $ | 5 |   |
|                      Navajo                                       |   |                                                    | 579    |                                                        |   | 542 |   |   | 8 |   |   | 7 |   |
|  San                    Juan                                      |   |                                                    | 1,259  |                                                        |   | 1,205 |   |   | 28 |   |   | 26 |   |
|                      Springerville                                |   |                                                    | 2,728  |                                                        |   | 2,667 |   |   | 45 |   |   | 45 |   |
|  Sundt                    4                                       |   |                                                    | 279    |                                                        |   | 377 |   |   | 6 |   |   | 7 |   |
| Total                    Coal-Fired Generation                         |   |                                                    | 5,248  |                                                        |   | 5,172 |   |   | 93 |   |   | 90 |   |
| Gas-Fired                    Generation                                |   |                                                    |   |                                                        |   |   |   |   |   |   |   |   |   |
| Luna                                                                   |   |                                                    | 225    |                                                        |   | - |   |   | 10 |   |   | - |   |
| Other                    Gas                    Units                  |   |                                                    | 125    |                                                        |   | 145 |   |   | 11 |   |   | 13 |   |
| Total                    Gas-Fired Generation                          |   |                                                    | 350    |                                                        |   | 145 |   |   | 21 |   |   | 13 |   |
| Solar                    and                    Other                  |   |                                                    | 5      |                                                        |   | 5 |   |   | - |   |   | - |   |
| Total                    Generation                                    |   |                                                    | 5,603  |                                                        |   | 5,322 |   |   | 114 |   |   | 103 |   |
| Purchased                    Power                                     |   |                                                    | 797    |                                                        |   | 681 |   |   | 46 |   |   | 40 |   |
| Springerville                    3                                     |   |                                                    | -      |                                                        |   | - |   |   | 5 |   |   | - |   |
| Total                    Resources                                     |   |                                                    | 6,400  |                                                        |   | 6,003 |   | $ | 165 |   | $ | 143 |   |
| Less                    Line                    Losses and Company Use |   |                                                    | (425   | )                                                           |   | (419 | ) |   |   |   |   |   |   |
| Total                    Energy                    Sold                |   |                                                    | 5,975  |                                                        |   | 5,584 |   |   |   |   |   |   |   |

|                               | **Three                    Months Ended June 30,**    | **Six                    Months****Ended                    June 30,** |
|------------------------------------|-------------------------------------------------------|------------------------------------------------------------------------|
|                               | **2006**                                              | **2005**                                                               | **2006** | **2005** |
|                               | -cents                    per                    kWh- | -cents                    per                    kWh-                  |
| Coal                               | 1.80                                                  | 1.73                                                                   | 1.77 | 1.74 |
| Gas*                               | 6.41                                                  | 8.99                                                                   | 6.48 | 8.97 |
| All                    fuels       | 2.32                                                  | 1.96                                                                   | 2.04 | 1.94 |
| Purchased                    Power | 5.96                                                  | 6.49                                                                   | 5.77 | 5.87 |

----

Table                      of                      Contents

**Other        Operating Expenses**

*Factors        Affecting Results of Operations, Emission Allowances, *

*Factors        Affecting Results of Operations, Emission Allowances, *

|   |   | **Estimated**                                                     |   | **Unamortized**                    |   |
|--------|--------|-------------------------------------------------------------------|--------|------------------------------------|--------|
|   |   | **TRA                    Amortization**                           |   | **TRA                    Balance** |   |
|   |   | -Millions                    of                    Dollars-  |
| 2006   |   | $                                                                 | 66     |                               | $      | 102 |   |
| 2007   |   |                                                              | 76     |                               |   | 26 |   |
| 2008   |   |                                                              | 26     |                               |   | - |   |

**Other            Income (Deductions)**

**Interest            Expense**

**Income            Tax            Expense**

----

Table                      of                      Contents

**FACTORS        AFFECTING RESULTS OF        OPERATIONS**

**COMPETITION**

*Rates*
*ACC        Order to        Review the Settlement Agreement, *

**RATES**

**Settlement        Agreement **

| ·   | 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 through a fixed competitive transition charge (fixed                CTC); |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | capped                rates                for TEP retail customers through 2008; |
|--------------------|-----------------------------------------------------------------------------------|
| ·   | an                ACC                interim review of TEP retail rates in                2004; |
|--------------------|-------------------------------------------------------------------------------------------------|
| ·   | 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                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); |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | transmission                and distribution services would remain subject to regulation on a                cost of                service basis; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | beginning                in                2009, TEP’s generation would be market based and its retail customers                would pay the market rate for generation                services. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**2004        General Rate Case Information**

----

Table                        of Contents

**ACC                        Order                        to Review the Settlement Agreement**

*Competition*

| **Filing**                                                                                                    | **Date**                                                                            |
|---------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|
| TEP                                  testimony                                                                | August                                  18,                                  2006   |
| ACC                                  staff and                                  intervenor testimony          | November                                  17,                                  2006 |
| TEP                                  rebuttal                                  testimony                      | December                                  6,                                  2006  |
| ACC                                  staff and                                  intervenor rebuttal testimony | December                                  18,                                  2006 |
| TEP                                  rejoinder                                  testimony                     | December                                  29,                                  2006 |
| Hearings                                  before ALJ                                                          | January                                  8,                                  2007   |

| ·   | a                                    complete                                    explanation of its proposal, including an identification                                    of all rate                                    elements that it |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | projected                                    rate impacts on standard offer customers’ total bills having                                    market-based |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | an                                    explanation of how its proposals could be effective                                    and lawful under the                                    Track A, Track B and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | how                                    TEP                                    proposes to implement demand side-management,                                    renewable energy standards                                    and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table                                        of                                        Contents

**WESTERN        ENERGY MARKETS**

**Market        Prices**

| **Average                    Market Price for Around-the-Clock Energy** |   | **$/MWh** |        |
|-------------------------------------------------------------------------|--------|-----------|-------------|
| Quarter                    ended                    June 30, 2006       |   | $         | 45          |   |
| Quarter                    ended                    June 30, 2005       |   |      | 45          |   |
|                                                                    |   |      |        |   |
| Six                    months                    ended June 30, 2006    |   | $         | 47          |   |
| Six                    months                    ended June 30, 2005    |   |      | 45          |   |
|                                                                    |   |      |        |   |
| **Average                    Market Price for Natural Gas**             |   |      | **$**/MMBtu |   |
| Quarter                    ended                    June 30, 2006       |   | $         | 5.55        |   |
| Quarter                    ended                    June 30, 2005       |   |      | 6.10        |   |
|                                                                    |   |      |        |   |
| Six                    months                    ended June 30, 2006    |   | $         | 6.34        |   |
| Six                    months                    ended June 30, 2005    |   |      | 5.83        |   |

| ·   | the                    availability and price of natural gas; |
|--------------------|---------------------------------------------------------------|
| ·   | weather; |
|--------------------|----------|
| ·   | continued                    population growth in the western U.S.; |
|--------------------|---------------------------------------------------------------------|
| ·   | economic                    conditions in the western U.S.; |
|--------------------|-------------------------------------------------------------|
| ·   | availability                    of generating capacity throughout the western                    U.S.; |
|--------------------|--------------------------------------------------------------------------------------------------------|
| ·   | the                    extent of                    electric utility industry restructuring in Arizona, California                    and other                    western states; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table                      of                      Contents

| ·   | the                effect of                FERC regulation of wholesale energy                markets; |
|--------------------|---------------------------------------------------------------------------------------------------------|
| ·   | availability                of hydropower; |
|--------------------|--------------------------------------------|
| ·   | transmission                constraints; and |
|--------------------|----------------------------------------------|
| ·   | environmental                regulations and the cost of                compliance. |
|--------------------|-------------------------------------------------------------------------------------|

**LUNA        ENERGY        FACILITY**

**COAL        SUPPLY**

**EMISSION        ALLOWANCES**

|   **Delivery**                             |   |   **Allowances                  Sold** |   | **Estimated****Pre-tax                  Gain (millions)** |   |
|------------------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------------------------|--------|
| 2005                                                 |   |                                             | 15,000 |                                                      | $      | 13 |   |
| 2006                                                 |   |                                             |   |                                                      |   |   |   |
|                    1st                  Quarter |   |                                             | 2,500  |                                                      |   | 2 |   |
|                    2nd                  Quarter |   |                                             | 2,500  |                                                      |   | 2 |   |
|                    3rd                  Quarter |   |                                             | 5,000  |                                                      |   | 3 |   |
| 2007                                                 |   |                                             | 10,000 |                                                      |   | 8 |   |

**SPRINGERVILLE        UNITS 3 AND 4 **

----

Table                          of                          Contents

**LIQUIDITY        AND CAPITAL        RESOURCES**

**TEP        CASH        FLOWS**

| **Six                    Months Ended June 30,**                                                                                                                                                        |   | **2006**                                                    |   | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|----------|--------|
|                                                                                                                                                                                                    |   | -Millions                    of                    Dollars- |   |
| Net                    Cash                    Flows - Operating Activities (GAAP)                                                                                                                      |   | $                                                           | 98     |     | $      | 74 |   |
| Amounts                    from                    Statements of Cash Flows:                                                                                                                            |   |                                                        |   |     |   |   |   |
| Less:                    Capital                    Expenditures                                                                                                                                        |   |                                                        | (82    | )        |   | (67 | ) |
| Net                    Cash                    Flows after Capital Expenditures (non-GAAP)*                                                                                                             |   |                                                        | 16     |     |   | 7 |   |
| Amounts                    from                    Statements of Cash Flows:                                                                                                                            |   |                                                        |   |     |   |   |   |
| Less:                    Retirement of Capital Lease Obligations                                                                                                                                        |   |                                                        | (51    | )        |   | (49 | ) |
| Plus:                    Proceeds from Investment in SpringervilleLease                    Debt                    and Equity                                                                           |   |                                                        | 10     |     |   | 8 |   |
| Net                    Cash                    Flows Available after Capital Expenditures and Required Payments                    on Debt                    and Capital Lease Obligations (non-GAAP)* |   | $                                                           | (25    | )        | $      | (34 | ) |

| **Six                    Months Ended June 30**                                                                                                                                                        |   | **2006**                                                    |   | **2005** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|----------|--------|
|                                                                                                                                                                                                   |   | -Millions                    of                    Dollars- |   |
| Net                    Cash                    Flows - Operating Activities (GAAP)                                                                                                                     |   | $                                                           | 98     |     | $      | 74 |   |
| Net                    Cash                    Flows - Investing Activities (GAAP)                                                                                                                     |   |                                                        | (121   | )        |   | (52 | ) |
| Net                    Cash                    Flows - Financing Activities (GAAP)                                                                                                                     |   |                                                        | 18     |     |   | (88 | ) |
| Net                    Cash                    Flows after Capital Expenditures (non-GAAP)                                                                                                             |   |                                                        | 16     |     |   | 7 |   |
| Net                    Cash                    Flows Available after Capital Expenditures and Required Payments                    on Debt                    and Capital Lease Obligations (non-GAAP) |   |                                                        | (25    | )        |   | (34 | ) |

**Operating        Activities**

| ·   | a                $16 million                increase in cash receipts from electric retail and wholesale sales,                net of                fuel and purchased energy costs, due primarily to retail customer                growth                and hot summer weather, the higher availability of excess power to                sell                into the wholesale market and higher wholesale power prices; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table                          of                          Contents

| ·   | a                $12 million                decrease in payments for O&M costs due to fewer coal plant outages                compared with last year; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | a                $12 million                decrease in total interest paid due to lower capital lease obligation                balances, lower long-term debt balances and lower annual fees under                TEP’s                Credit Agreement that was entered into in May                2005. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**:**

| ·   | $11                million                of interest received from UniSource Energy related to an inter-company                note repaid in the first quarter of 2005. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Investing        Activities**

| ·   |  a                $14 million increase in capital                expenditures related to TEP’s share of the construction costs of Luna, and                growth and maintenance of TEP’s electric system;                and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | TEP’s                purchase of a 14% equity interest in Springerville Unit 1 Lease,                which                represents 55 MW of capacity. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Financing        Activities**

| ·   | a                $20 million                increase in net proceeds from borrowings under TEP’s Revolving Credit                Facility; offset by |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | a                $2 million                increase in scheduled payments made on capital lease obligations; |
|--------------------|--------------------------------------------------------------------------------------------------------------|
| ·   | a                $110                million equity investment by UniSource Energy; and |
|--------------------|-----------------------------------------------------------------------------------------|
| ·   | proceeds                of                $95 million from UniSource Energy as a repayment for an inter-company                loan; offset by |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                use of                $282 million to repay long-term debt; and |
|--------------------|------------------------------------------------------------------------------------|
| ·   | $5                million                for debt issuance and retirement costs. |
|--------------------|----------------------------------------------------------------------------------|

----

Table                        of                        Contents

|  **Leased                    Asset**                             |   | **Capital                    Lease Obligation Balance at June 30, 2006** |   |   **Expiration** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                  |   | -                    In Millions                    -                    |   |                       |   |
| Springerville                    Unit 1                               |   | $                                                                        | 381    |                       |   | 2015 |   |
| Springerville                    Coal Handling Facilities             |   |                                                                     | 123    |                       |   | 2015 |   |
| Springerville                    Common Facilities                    |   |                                                                     | 105    |                       |   | 2020 |   |
| Sundt                    Unit                    4                    |   |                                                                     | 46     |                       |   | 2011 |   |
| Other                    Leases                                       |   |                                                                     | 1      |                       |   | 2008 |   |
| Total                    Capital                    Lease Obligations |   | $                                                                        | 656    |                       |   |   |   |

|                                                         |   | **Lease                    Debt and Equity Investment Balance** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
| **Leased                    Asset**                          |   | **June                    30, 2006**                            |   | **December                    31, 2005** |   |
|                                                         |   | -                    In Millions                    -           |   |
| Springerville                    Unit 1                      |   | $                                                               | 130    |   | $ | 91 |   |
| Springerville                    Coal Handling Facilities    |   |                                                            | 64     |   |   | 65 |   |
| Total                    Investment In Lease Debt and Equity |   | $                                                               | 194    |   | $ | 156 |   |

----

Table                      of                      Contents

**INCOME        TAX        MATTERS**

*UniSource        Energy, Liquidity and Capital Resources, Income Tax Matters, Internal Revenue        Service Matters,*

**CONTRACTUAL        OBLIGATIONS**

| ·   | TEP’s                purchased power agreement with Tri-State for 100 MW of system capacity                will become effective September 1, 2006. This contract allows Tri-State                to                reduce the contract capacity in increments of 25 MW with 90 days                notice.                To date, TEP has received no such notice. If Tri-State does not give                notice to reduce capacity, the minimum capacity payments will be                $10                million for 2006, $31 million annually in 2007 through 2010, and                $21                million in 2011. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At                  June 30,                  2006, TEP has commitments to pay various home builders $3 million                  in                  builder incentives through                  2007                  to construct TEP Guarantee Homes that meet the highest construction                  and                  energy-efficiency standards                  available.  |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | In                June 2006,                TEP refinanced variable rate notes underlying the Springerville Common                Facilities Leases. A portion of the rent payable by TEP pursuant                to the                Springerville Common Facilities Leases is determined by the amount                of                interest payable on the variable rate lease debt. The notes were                amended                to provide that interest will be payable at LIBOR plus 1.5% for the                next                three years with the spread over LIBOR increasing every three years                thereafter to 2% by June 2018. Prior to the refinancing, the interest                rate                was LIBOR plus 4%. TEP estimates its obligation using a forward LIBOR                curve. At June 30, 2006, TEP’s obligations under the Springerville Common                Facilities Leases total: $7 million in 2006; $6 million in 2007;                $6                million in 2008; $6 million in 2009; $6 million in 2010; $6 million                in                2011; and $145 million thereafter. TEP’s obligation does not include the                impact of the 2006 interest rate swap. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | In                June 2006,                TEP purchased a 14% equity ownership interest in the Springerville                Unit 1                Leases. As a result, TEP amended the Springerville Unit 1 Lease related                to                such interest to reduce TEP’s rent payable to equal the scheduled amount                of principal and interest payable on the debt issued by the owner                trustee.                At June 30, 2006, TEP’s obligations under the Springerville Unit 1 Leases                total: $85 million in 2006; $83 million in 2007; $82 million in 2008;                $30                million in 2009; $57 million in 2010; $83 million in 2011; and $317                million thereafter. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | TEP                entered                into operating leases in the first quarter 2006 for equipment at                Springerville totaling $2 million over three                years. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**DIVIDENDS        ON COMMON STOCK**

----

Table                      of                      Contents

**UNS        GAS**

**RESULTS        OF OPERATIONS**

**  Three        Months Ended June        30, 2006 Compared with the Three Months Ended June 30,        2005**

|                                                                         |   | **Sales**                                                |   | **Revenue**                                               |   |
|------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| **Three                  Months Ended June 30,**                             |   | **2006**                                                 |   | **2005**                                                  |   | **2006** |   | **2005** |   |
|                                                                         |   | -                  Millions of                  Therms - |   | -                  Millions of                  Dollars - |   |
| **Retail                  Therm Sales:**                                     |   |                                                     |   |                                                      |   |   |   |   |   |
|   Residential                                                      |   |                                                     | 9      |                                                      |   | 11 |   | $ | 14 |   | $ | 13 |   |
|   Commercial                                                       |   |                                                     | 5      |                                                      |   | 6 |   |   | 7 |   |   | 6 |   |
|   Industrial                                                       |   |                                                     | -      |                                                      |   | 1 |   |   | 1 |   |   | 1 |   |
|   Public                  Authorities                              |   |                                                     | 1      |                                                      |   | 1 |   |   | 1 |   |   | 1 |   |
| **Total                  Retail Therm Sales**                                |   |                                                     | 15     |                                                      |   | 19 |   |   | 23 |   |   | 21 |   |
|   Transport                                                        |   |                                                     | -      |                                                      |   | - |   |   | 1 |   |   | 1 |   |
|   Negotiated                  Sales Program                  (NSP) |   |                                                     | 4      |                                                      |   | 7 |   |   | 2 |   |   | 4 |   |
| **Total                  Therm Sales**                                       |   |                                                     | 19     |                                                      |   | 26 |   | $ | 26 |   | $ | 26 |   |

*Factors        Affecting Results of Operations, Rates and Regulation, Energy Cost Adjustment        Mechanism,*

*Factors        Affecting Results of Operations, Rates and Regulation, Energy Cost Adjustment        Mechanism,*

| **Three                  Months Ended June 30,**                             |   | **2006**                                                  |   | **2005** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                         |   | -                  Millions of                  Dollars - |   |
| Gas                  Revenues                                                |   | $                                                         | 26     |     | $      | 26 |   |
| Other                  Revenues                                              |   |                                                      | -      |     |   | 1 |   |
|   Total                  Operating                  Revenues       |   |                                                      | 26     |     |   | 27 |   |
| Purchased                  Gas                  Expense                      |   |                                                      | 18     |     |   | 17 |   |
| Other                  Operations and Maintenance Expense                    |   |                                                      | 6      |     |   | 5 |   |
| Depreciation                  and Amortization                               |   |                                                      | 2      |     |   | 2 |   |
| Taxes                  other                  than Income Taxes              |   |                                                      | 1      |     |   | 1 |   |
|   Total                  Other Operating                  Expenses |   |                                                      | 27     |     |   | 25 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
|     Operating                  Income                    |   |                                                      | (1     | )        |   | 2 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
| Total                  Interest Expense                                      |   |                                                      | 1      |     |   | 2 |   |
| Income                  Tax                  Expense (Benefit)               |   |                                                      | (1     | )        |   | - |   |
| **    Net                  Income**                      |   | $                                                         | (1     | )        | $      | - |   |

----

Table            of Contents

**Six        Months        Ended June 30, 2006 Compared with the Six Months Ended June 30,        2005**

|                                                                         |   | **Sales**                                                |   | **Revenue**                                               |   |
|------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| **Six                  Months Ended June 30,**                               |   | **2006**                                                 |   | **2005**                                                  |   | **2006** |   | **2005** |   |
|                                                                         |   | -                  Millions of                  Therms - |   | -                  Millions of                  Dollars - |   |
| **Retail                  Therm Sales:**                                     |   |                                                     |   |                                                      |   |   |   |   |   |
|   Residential                                                      |   |                                                     | 39     |                                                      |   | 41 |   | $ | 54 |   | $ | 44 |   |
|   Commercial                                                       |   |                                                     | 16     |                                                      |   | 16 |   |   | 20 |   |   | 15 |   |
|   Industrial                                                       |   |                                                     | 2      |                                                      |   | 2 |   |   | 2 |   |   | 1 |   |
|   Public                  Authorities                              |   |                                                     | 4      |                                                      |   | 4 |   |   | 5 |   |   | 3 |   |
| **Total                  Retail Therm Sales**                                |   |                                                     | 61     |                                                      |   | 63 |   |   | 81 |   |   | 63 |   |
|   Transport                                                        |   |                                                     | -      |                                                      |   | - |   |   | 1 |   |   | 2 |   |
|   Negotiated                  Sales Program                  (NSP) |   |                                                     | 9      |                                                      |   | 12 |   |   | 7 |   |   | 8 |   |
| **Total                  Therm Sales**                                       |   |                                                     | 70     |                                                      |   | 75 |   | $ | 89 |   | $ | 73 |   |

*Factors        Affecting Results of Operations, Rates and Regulation, Energy Cost Adjustment        Mechanism,*

| **Six                  Months Ended June 30,**                               |   | **2006**                                                  |   | **2005** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                         |   | -                  Millions of                  Dollars - |   |
| Gas                  Revenues                                                |   | $                                                         | 89     |     | $      | 73 |   |
| Other                  Revenues                                              |   |                                                      | 1      |     |   | 1 |   |
|   Total                  Operating                  Revenues       |   |                                                      | 90     |     |   | 74 |   |
| Purchased                  Gas                  Expense                      |   |                                                      | 64     |     |   | 48 |   |
| Other                  Operations and Maintenance Expense                    |   |                                                      | 12     |     |   | 11 |   |
| Depreciation                  and Amortization                               |   |                                                      | 3      |     |   | 3 |   |
| Taxes                  other                  than Income Taxes              |   |                                                      | 2      |     |   | 2 |   |
|   Total                  Other Operating                  Expenses |   |                                                      | 81     |     |   | 64 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
|     Operating                  Income                    |   |                                                      | 9      |     |   | 10 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
| Total                  Interest Expense                                      |   |                                                      | 3      |     |   | 3 |   |
| Income                  Tax                  Expense (Benefit)               |   |                                                      | 3      |     |   | 3 |   |
| **    Net                  Income**                      |   | $                                                         | 3      |     | $      | 4 |   |

**FACTORS        AFFECTING RESULTS OF OPERATIONS**

**RATES        AND        REGULATION**

**Energy        Cost        Adjustment Mechanism**

----

Table            of Contents

*General        Rate        Case Filing*

| **Surcharge                  Amount****Per                  Therm** |  **Period                  In Effect**                     |
|---------------------------------------------------------------------|-----------------------------------------------------------------|
| $0.15                                                               | November                  2005                  - February 2006 |
| $0.25                                                               | March                  2006 -                  April 2006       |
| $0.30                                                               | May                  2006 -                  June 2006          |
| $0.35                                                               | July                  2006 -                  September 2006    |
| $0.25                                                               | October                  2006                  - November 2006  |
| $0.20                                                               | December                  2006                  - February 2007 |
| $0.25                                                               | March                  2007 -                  April 2007       |

**General        Rate Case Filing **

|                                                                            |                                                           |
|---------------------------------------------------------------------------------|----------------------------------------------------------------|
| Test                  year                                                      | Year                  ended                  December 31, 2005 |
| Original                  cost                  rate base                       | $162                  million                                  |
| Revenue                  deficiency                                             | $10                  million                                   |
| Total                  rate                  increase (over test year revenues) | 7%                                                             |
| Cost                  of                  debt                                  | 6.60%                                                          |
| Cost                  of                  equity                                | 11.00%                                                         |
| Hypothetical                  capital structure                                 | 50%                  equity /                  50% debt        |
| Weighted                  average cost of capital                               | 8.80%                                                          |

**LIQUIDITY        AND CAPITAL        RESOURCES**

----

Table            of Contents

| **Six                  Months Ended June 30,**                          |   | **2006**                                                  |   | **2005** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                    |   | -                  Millions of                  Dollars - |   |
| Net                  Cash                  Flows - Operating Activities |   | $                                                         | 23     |     | $      | 14 |   |
| Capital                  Expenditures                                   |   |                                                      | 12     |     |   | 13 |   |

**  INCOME        TAX        MATTERS**

*UniSource        Energy, Liquidity and Capital Resources, Income Tax Matters, Internal Revenue        Service Matters,*

**  DIVIDENDS        ON COMMON STOCK**

*Senior        Unsecured Notes*

----

Table            of Contents

**UNS        ELECTRIC**

**RESULTS        OF OPERATIONS**

**Three        Months Ended June 30, 2006 Compared with the Three Months Ended June 30,        2005**

|                                               |   | **Sales**                                                 |   | **Revenue**                                                   |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **Three                    Months Ended June 30,** |   | **2006**                                                  |   | **2005**                                                      |   | **2006** |   | **2005** |   |
|                                               |   | -                    Millions of                    kWh - |   | -                    Millions of                    Dollars - |   |
| **Electric                    Retail Sales:**      |   |                                                      |   |                                                          |   |   |   |   |   |
|   Residential                            |   |                                                      | 193    |                                                          |   | 170 |   | $ | 19 |   | $ | 17 |   |
|   Commercial                             |   |                                                      | 164    |                                                          |   | 156 |   |   | 16 |   |   | 16 |   |
|   Industrial                             |   |                                                      | 49     |                                                          |   | 45 |   |   | 4 |   |   | 3 |   |
|   Other                                  |   |                                                      | 1      |                                                          |   | 1 |   |   | - |   |   | - |   |
| **Total                    Electric Retail Sales** |   |                                                      | 407    |                                                          |   | 372 |   | $ | 39 |   | $ | 36 |   |

| **Three                  Months Ended June 30,**                             |   | **2006**                                                  |   | **2005** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                         |   | -                  Millions of                  Dollars - |   |
| Electric                  Revenues                                           |   | $                                                         | 39     |     | $      | 36 |   |
| Other                  Revenues                                              |   |                                                      | 1      |     |   | - |   |
|   Total                  Operating                  Revenues       |   |                                                      | 40     |     |   | 36 |   |
| Purchased                  Energy Expense                                    |   |                                                      | 27     |     |   | 24 |   |
| Other                  Operations and Maintenance Expense                    |   |                                                      | 6      |     |   | 5 |   |
| Depreciation                  and Amortization                               |   |                                                      | 3      |     |   | 3 |   |
| Taxes                  other                  than Income Taxes              |   |                                                      | 1      |     |   | 1 |   |
|   Total                  Other Operating                  Expenses |   |                                                      | 37     |     |   | 33 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
|     Operating                  Income                    |   |                                                      | 3      |     |   | 3 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
| Total                  Interest Expense                                      |   |                                                      | 1      |     |   | 1 |   |
| Income                  Tax                  Expense                         |   |                                                      | 1      |     |   | 1 |   |
| **    Net                  Income**                      |   | $                                                         | 1      |     | $      | 1 |   |

**Six        Months        Ended June 30, 2006 Compared with the Six Months Ended June 30,        2005**

----

Table            of Contents

|                                               |   | **Sales**                                                 |   | **Revenue**                                                   |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **Six                    Months Ended June 30,**   |   | **2006**                                                  |   | **2005**                                                      |   | **2006** |   | **2005** |   |
|                                               |   | -                    Millions of                    kWh - |   | -                    Millions of                    Dollars - |   |
| **Electric                    Retail Sales:**      |   |                                                      |   |                                                          |   |   |   |   |   |
|   Residential                            |   |                                                      | 356    |                                                          |   | 321 |   | $ | 36 |   | $ | 33 |   |
|   Commercial                             |   |                                                      | 294    |                                                          |   | 278 |   |   | 29 |   |   | 29 |   |
|   Industrial                             |   |                                                      | 95     |                                                          |   | 87 |   |   | 7 |   |   | 6 |   |
|   Other                                  |   |                                                      | 2      |                                                          |   | 2 |   |   | 1 |   |   | - |   |
| **Total                    Electric Retail Sales** |   |                                                      | 747    |                                                          |   | 688 |   | $ | 73 |   | $ | 68 |   |

| **Six                  Months Ended June 30,**                               |   | **2006**                                                  |   | **2005** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                         |   | -                  Millions of                  Dollars - |   |
| Electric                  Revenues                                           |   | $                                                         | 73     |     | $      | 68 |   |
| Other                  Revenues                                              |   |                                                      | 1      |     |   | - |   |
|   Total                  Operating                  Revenues       |   |                                                      | 74     |     |   | 68 |   |
| Purchased                  Energy Expense                                    |   |                                                      | 49     |     |   | 45 |   |
| Other                  Operations and Maintenance Expense                    |   |                                                      | 12     |     |   | 12 |   |
| Depreciation                  and Amortization                               |   |                                                      | 6      |     |   | 5 |   |
| Taxes                  other                  than Income Taxes              |   |                                                      | 2      |     |   | 2 |   |
|   Total                  Other Operating                  Expenses |   |                                                      | 69     |     |   | 64 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
|     Operating                  Income                    |   |                                                      | 5      |     |   | 4 |   |
|                                                                         |   |                                                      |   |     |   |   |   |
| Total                  Interest Expense                                      |   |                                                      | 2      |     |   | 2 |   |
| Income                  Tax                  Expense                         |   |                                                      | 1      |     |   | 1 |   |
| **    Net                  Income**                      |   | $                                                         | 2      |     | $      | 1 |   |

**FACTORS        AFFECTING RESULTS OF        OPERATIONS**

**COMPETITION**

*Tucson        Electric        Power Company, Factors Affecting Results of Operations,        Competition,*

**RATES        AND        REGULATION**

**Energy        Cost        Adjustment Mechanism**

----

Table            of Contents

**General        Rate Case Filing**

**LIQUIDITY        AND CAPITAL        RESOURCES**

| **Six                  Months Ended June 30,**                          |   | **2006**                                                  |   | **2005** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                                                    |   | -                  Millions of                  Dollars - |   |
| Net                  Cash                  Flows - Operating Activities |   | $                                                         | 9      |     | $      | 9 |   |
| Capital                  Expenditures                                   |   |                                                      | 19     |     |   | 9 |   |

*UNS        Gas,        Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver*

**  INCOME        TAX        MATTERS**

*UniSource        Energy, Liquidity and Capital Resources, Income Tax Matters, Internal Revenue        Service Matters,*

**  DIVIDENDS        ON COMMON STOCK**

----

Table            of Contents

*Senior        Unsecured Notes*

**OTHER**

**RESULTS        OF OPERATIONS**

| **Three                  Months Ended June 30,** |   | **2006**                                                  |   | **2005** |   |
|--------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                             |   | -                  Millions of                  Dollars - |   |
| Millennium                  Investments          |   | $                                                         | 1      |     | $      | - |   |
| UniSource                  Energy Parent Company |   |                                                      | (2     | )        |   | (2 | ) |
|   Total                  Other         |   | $                                                         | (1     | )        | $      | (2 | ) |

| **Six                  Months Ended June 30,**   |   | **2006**                                                  |   | **2005** |   |
|--------------------------------------------------|--------|-----------------------------------------------------------|--------|----------|--------|
|                                             |   | -                  Millions of                  Dollars - |   |
| Millennium                  Investments          |   | $                                                         | -      |     | $      | (1 | ) |
| UniSource                  Energy Parent Company |   |                                                      | (3     | )        |   | (2 | ) |
|   Total                  Other         |   | $                                                         | (3     | )        | $      | (3 | ) |

**UniSource        Energy Parent Company**

**Millennium        Investments**

**FACTORS        AFFECTING RESULTS OF OPERATIONS**

**Millennium        Investments **

----

Table            of Contents

**LIQUIDITY        AND CAPITAL RESOURCES**

**CRITICAL        ACCOUNTING        ESTIMATES**

*2005        Annual        Report on Form 10-K, Note 1 of Notes to Consolidated Financial Statements        -        Nature of Operations and Summary of Significant Accounting        Estimates.*

**ACCOUNTING        FOR RATE REGULATION**

*Accounting        for        the Effects of Certain Types of Regulation*

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

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

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

**TEP**

----

Table            of Contents

**UNS        Gas and        UNS Electric**

**ACCOUNTING        FOR ASSET RETIREMENT OBLIGATIONS **

*Accounting        for        Asset Retirement Obligations*

**TEP**

*Accounting        for        Conditional Asset Retirement Obligations*

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*        Tucson        Electric Power Company, Factors Affecting Results of Operations, Rates,        Settlement Agreement, *
*.*

**UES**

**PENSION        AND        OTHER POST RETIREMENT BENEFIT PLAN ASSUMPTIONS**

**TEP**

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**UES**

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**ACCOUNTING        FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING        ACTIVITIES**

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*Accounting        for        Derivative Instruments and Hedging Activities*

*Market        Risks -        Interest Rate Risk *
*Commodity        Price        Risk *

**UNBILLED        REVENUE - TEP AND UES**

**PLANT        ASSET        DEPRECIABLE LIVES - TEP AND UES**

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**DEFERRED        TAX VALUATION - TEP AND MILLENNIUM **

*Notes        To        Condensed Consolidated Financial Statements*

**NEW        ACCOUNTING        PRONOUNCEMENTS**

|   | · | FAS                    155,                    *Accounting                    for Certain Hybrid Financial Instruments*, issued                    February 2006, permits fair value                    remeasurement for any hybrid financial instrument that contains an                    embedded derivative that had previously been bifurcated pursuant                    to                    Statement 133 and eliminates a restriction in Statement 140 on the                    passive derivative instruments that a qualifying special-purpose                    entity may hold.  FAS 155 is effective for all                    financial instruments acquired or issued or subject to remeasurement                    in fiscal year that begin after September 15, 2006.  We are                    evaluating the impact of FAS 155 on our financial                    statements. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | FSP                    FASB                    Technical Bulletin 85-4-1, *Accounting                    for Life Settlement Contracts by Third-Party Investors,*                    issued March                    2006, allows an investor to account for its investment in a life                    settlement contract using either the investment method or the                    fair value                    method in periods subsequent to the initial recognition of the                    investment.  Investments accounted for under the investment method                    are initially recorded at transaction price (the amount the investor                    pays                    to the insured party) plus any initial direct external costs.                     Subsequent costs to keep the policy in force are capitalized                    to the                    carrying amount.  When the insured dies, the investor recognizes, in                    the income statement, the difference between the carrying amount                    of the                    investment in the life settlement contract and the life insurance                    proceeds                    of the underlying life insurance policy.  Investments accounted for                    under the fair value method are initially recorded at transaction                    price                    and are subsequently remeasured to fair value each reporting                    period with                    changes in fair value recognized in earnings in the period of                    the                    change.  FSP FASB Technical Bulletin 85-4-1 is effective fiscal years                    beginning after June 15, 2006.  We are evaluating the impact of FSP                    FASB Technical Bulletin 85-4-1 on our financial                    statements. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Emerging                    Issues Task Force Issue 06-3 (EITF 06-3), *How Taxes Collected from                    Customers and Remitted to Governmental Authorities Should Be                    Presented in                    the Income Statement (that Is, Gross versus Net Presentation)*,                    ratified June 2006, requires disclosure of a company’s accounting policy                    decision to present taxes on either a gross (included in revenues                    and                    costs) or a net (excluded from revenues) basis. Additionally,                    a company                    must disclose the amounts of any taxes reported on a gross basis                    in                    interim and annual financial statements. EITF 06-3 is effective                    for                    interim and annual reporting periods beginning after December                    15, 2006.                    See Note 12. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | FIN                  48,                  *Accounting                  for Uncertainty in Income Taxes - an interpretation of FAS                  109*,                  issued July                  2006, prescribes a recognition threshold and measurement attribute                  for the                  financial statement recognition and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   |   | measurement                    of a tax position taken in a tax return. We must determine whether                    it is                    “more-likely-than-not” that a tax position will be sustained upon                    examination, including resolution of any related appeals or litigation                    processes, based on the technical merits of the position. Once                    it is                    determined that a position meets the more-likely-than-not recognition                    threshold, the position is measured to determine the amount of                    benefit to                    recognize in the financial statements. Additionally, FIN 48 requires                    disclosure of a rollforward of total unrecognized tax benefits.                     We                    do not                    believe the adoption of FIN 48 will have a material effect on                    our                    financial position or results of operations. In anticipation                    of FIN 48, we                    have accounted for significant uncertain tax positions in a manner                    similar                    to that prescribed by FIN 48.                     FIN 48 is                    effective for fiscal years beginning after December 15,                    2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  March                  2006, the FASB issued a proposed FAS titled *“Employers’                  Accounting for Defined Benefit Pension and Other Postretirement                  Plans - an                  amendment of FASB Statements No. 87, 88, 106 and 132(R).”*                  The most                  significant provision of this proposed statement would require                  us to                  recognize the overfunded or underfunded status of the defined benefit                  postretirement plans in our Consolidated Balance Sheet measured                  as the                  difference between the fair value of the plans assets and benefit                  obligation. For a pension plan, the benefit obligation would be                  the                  projected benefit obligation; for any other postretirement benefit                  plans,                  the benefit obligation would be the accumulated postretirement                  benefit                  obligation. An overfunded status would result in the recognition                  of an                  asset and an underfunded status would result in the recognition                  of a                  liability. The adjustment required to recognize an asset or liability                  upon                  adoption of this statement, as currently proposed, would result                  in an                  expense or benefit to other comprehensive income. The FASB has                  indicated                  that it expects to issue a final statement in the third quarter                  of 2006                  and that the statement would be effective for fiscal years ending                  after                  December 15, 2006, which would be the year ended December 31, 2006                  for                  UniSource Energy and TEP. We are evaluating the impact this proposed                  statement may have on our financial condition and results of operations.                  Based on our benefit obligations and fair value of plan assets                  as of                  December 31, 2005, the adoption of this proposed statement, as                  currently                  drafted, could result in the recognition of a substantial liability                  and a                  corresponding charge to other comprehensive income. However, the                  proposed                  statement would not have a material effect on our results of                  operations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SAFE        HARBOR FOR FORWARD-LOOKING        STATEMENTS**

|   | 1. | Supply                  and                  demand conditions in wholesale energy markets, including volatility                  in                  market prices and illiquidity in markets, which are affected by                  a variety                  of factors. These factors 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. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Effects                  of                  competition in retail and wholesale energy                  markets. |
|--------|----|-------------------------------------------------------------------------------------------------------------------|

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|   | 3. | Changes                  in                  economic conditions, demographic patterns and weather conditions                  in our                  retail service areas. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Effects                  of                  restructuring initiatives in the electric industry and other                  energy-related industries. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | The                  creditworthiness of the entities with which we transact business                  or have                  transacted business. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | 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. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | Changes                  in                  governmental policies and regulatory actions with respect to financing                  and                  rate structures. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Changes                  affecting the cost of competing energy alternatives, including                  changes in                  available generating technologies and changes in the cost of natural                  gas. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 9. | Changes                  in                  accounting principles or the application of such principles to                  our                  businesses. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10. | Changes                  in                  the depreciable lives of our assets. |
|--------|-----|-----------------------------------------------------------------------------------|

|   | 11. | Unanticipated                  changes in funding requirements, future liabilities and recorded                  expense                  relating to employee benefit plans due to changes in market values                  of                  retirement plan assets and health care costs, changes in accounting                  requirements of the FASB and new                  legislation. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 12. | The                  outcome                  of any ongoing or future                  litigation. |
|--------|-----|-----------------------------------------------------------------------------------------------------|

|   | 13. | 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. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**ITEM        3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET        RISK**

**MARKET        RISKS**

*Safe        Harbor for        Forward-Looking Statements*

**Risk        Management Committee**

**Commodity        Price Risk**

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**TEP**

|                             |   | Three                  Months                  Ended June 30, |   | Six                  Months                  EndedJune                  30, |   |
|----------------------------------|--------|---------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                             |   | 2006                                                          |   | 2005                                                                        |   | 2006 |   | 2005 |   |
|                             |   | -In                  Millions-                                |   | -In                  Millions-                                              |   |
| Unrealized                  Gain |   | $                                                             | -      |                                                                        | $      | - |   | $ | 2 |   | $ | - |   |

|                             |   | Three                  Months                  Ended June 30, |   | Six                  Months                  EndedJune                  30, |   |
|----------------------------------|--------|---------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                             |   | 2006                                                          |   | 2005                                                                        |   | 2006 |   | 2005 |   |
|                             |   | -In                  Millions-                                |   | -In                  Millions-                                              |   |
| Unrealized                  Loss |   | $                                                             | (1     | )                                                                           | $      | (1 | ) | $ | - |   | $ | (1 | ) |

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| **Six                  Months Ended June 30,** |   | **2006** |    | **2005**                                               |   | **2006** |   | **2005** |   |
|------------------------------------------------|--------|----------|---------|--------------------------------------------------------|--------|----------|--------|----------|--------|
|                                           |   | -MWh-    |    | %                  of Total                  Resources |
| Gas-Fired                  Generation          |   |     | 350,000 |                                                   |   | 145,000  |   |     | 5      | % |   | 2 | % |
| Purchased                  Power               |   |     | 797,000 |                                                   |   | 681,000  |   |     | 12     | % |   | 11 | % |

|                                    |   | Three                  Months                  Ended June 30, |   | Six                  Months                  EndedJune                  30, |   |
|-----------------------------------------|--------|---------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                                    |   | 2006                                                          |   | 2005                                                                        |   | 2006 |   | 2005 |   |
|                                    |   | -In                  Millions-                                |   | -In                  Millions-                                              |   |
| Unrealized                  (Loss) Gain |   | $                                                             | (7     | )                                                                           | $      | (1 | ) | $ | (14 | ) | $ | 4 |   |

**UES**

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**MEG**

|                                                                                 |   | Unrealized                  Gain (Loss) of MEG’s Trading Activities |   |
|--------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                                                 |   | -                  Millions of                  Dollars -                 |   |
|  Source                  of                  Fair Value At June 30, 2006        |   | Maturity                  0 -                  6 months                   |   | Maturity                  6 -                  12 months |   | Maturityover                  1                  yr. |   | Total                  Unrealized Gain (Loss) |   |
| Prices                  actively quoted                                              |   | $                                                                         | 2      |   | $ | 1 |   | $ | 2 |   | $ | 5 |   |
| Prices                  based                  on models and other valuation methods |   |                                                                      | -      |   |   | - |   |   | 4 |   |   | 4 |   |
| Total                                                                                |   | $                                                                         | 2      |   | $ | 1 |   | $ | 6 |   | $ | 9 |   |

**Credit        Risk**

**Interest        Rate Risk**

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**ITEM        4. - CONTROLS AND PROCEDURES **

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**PART        II - OTHER INFORMATION**

**ITEM        1. - LEGAL PROCEEDINGS**

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*Note        6        of*
*Notes        to        Consolidated Financial Statements, Commitments and        Contingencies.*

**Cross-Complaints        in Wholesale Electricity Antitrust Cases I and II**

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**City        of        Tacoma**

**ITEM        1A. - RISK FACTORS**

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**ITEM        4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

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| **Election                  of Directors**                 | **Votes                  For**       | **Votes                  Withheld**      |                |                   |
|------------------------------------------------------------|--------------------------------------|------------------------------------------|---------------------|------------------------|
| Lawrence                  J.                  Aldrich      | 31,166,104                           | 681,334                                  |                |                   |
| Barbara                  M.                  Baumann       | 31,367,626                           | 479,812                                  |                |                   |
| Larry                  W.                  Bickle          | 31,224,759                           | 622,679                                  |                |                   |
| Elizabeth                  T.                  Bilby       | 31,493,795                           | 353,643                                  |                |                   |
| Harold                  W.                  Burlingame     | 31,365,694                           | 481,744                                  |                |                   |
| John                  L.                  Carter           | 31,357,509                           | 489,929                                  |                |                   |
| Robert                  A.                  Elliott        | 31,462,261                           | 385,177                                  |                |                   |
| Daniel                  W.L.                  Fessler      | 31,565,821                           | 281,617                                  |                |                   |
| Kenneth                  Handy                             | 31,303,775                           | 543,663                                  |                |                   |
| Warren                  Y.                  Jobe           | 31,027,851                           | 819,587                                  |                |                   |
| James                  S.                  Pignatelli      | 31,458,545                           | 388,893                                  |                |                   |
| Joaquin                  Ruiz                              | 31,556,795                           | 290,643                                  |                |                   |
|                                                       |                                 |                                     |                |                   |
|                                                       |  **Votes                  For** |  **Votes                  Against** |  **Abstained** | **Broker****Non-Vote** |
| **2006                  Omnibus Stock and Incentive Plan** | 18,890,178                           | 1,918,948                                | 85,842              | 10,952,470             |

**ITEM        5. - OTHER INFORMATION**

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**NON-GAAP        MEASURES**

**Adjusted        EBITDA**

**Adjusted        EBITDA and Net Cash Flows - Operating Activities**

|                                                                           |   | **UniSource                  Energy**                     |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                                           |   | **Three                  Months Ended June 30,**          |   | **Six                  Months Ended****June                  30,** |   |
|                                                                           |   | **2006**                                                  |   | **2005** |   | **2006** |   | **2005** |   |
|                                                                           |   | -                  Millions of                  Dollars - |   |
| Adjusted                  EBITDA (non-GAAP)                                    |   | $                                                         | 107    |   | $ | 111 |   | $ | 221 |   | $ | 195 |   |
| Net                  Cash                  Flows - Operating Activities (GAAP) |   | $                                                         | 73     |   | $ | 49 |   | $ | 125 |   | $ | 89 |   |
| Net                  Cash                  Flows - Investing Activities (GAAP) |   | $                                                         | (83    | ) | $ | (43 | ) | $ | (134 | ) | $ | (74 | ) |
| Net                  Cash                  Flows - Financing Activities (GAAP) |   | $                                                         | 22     |   | $ | (107 | ) | $ | - |   | $ | (66 | ) |

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|                                                                           |   | **TEP**                                                   |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                                           |   | **Three                  Months Ended June 30,**          |   | **Six                  Months Ended****June                  30,** |   |
|                                                                           |   | **2006**                                                  |   | **2005** |   | **2006** |   | **2005** |   |
|                                                                           |   | -                  Millions of                  Dollars - |   |
| Adjusted                  EBITDA (non-GAAP)                                    |   | $                                                         | 96     |   | $ | 102 |   | $ | 196 |   | $ | 174 |   |
| Net                  Cash                  Flows - Operating Activities (GAAP) |   | $                                                         | 55     |   | $ | 37 |   | $ | 98 |   | $ | 74 |   |
| Net                  Cash                  Flows - Investing Activities (GAAP) |   | $                                                         | (84    | ) | $ | (32 | ) | $ | (120 | ) | $ | (53 | ) |
| Net                  Cash                  Flows - Financing Activities (GAAP) |   | $                                                         | 39     |   | $ | (78 | ) | $ | 18 |   | $ | (88 | ) |

**Reconciliation        of Adjusted EBITDA to Cash Flows from Operations**

|                                                                                         |   | **UniSource                  Energy**                     |    |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                         |   | **Three                  Months Ended June 30,**          |    | **Six                  Months Ended****June                  30,** |   |
|                                                                                         |   | **2006**                                                  |    | **2005** |   | **2006** |   | **2005** |   |
|                                                                                         |   | -                  Millions of                  Dollars - |    |
| **Adjusted                  EBITDA**(non-GAAP)** ****(1)**** **                    |   | $                                                         | 107     |   | $ | 111 |   | $ | 221 |   | $ | 195 |   |
| Amounts                  from                  the Income Statements:                        |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
|   Less:                  Income Taxes                                              |   |                                                      | 7       |   |   | 8 |   |   | 21 |   |   | 8 |   |
|   Less:                  Total Interest                  Expense                   |   |                                                      | 38      |   |   | 44 |   |   | 74 |   |   | 84 |   |
| Changes                  in                  Assets and Liabilities and Other Non-Cash Items |   |                                                      | 11      |   |   | (10 | ) |   | (1 | ) |   | (14 | ) |
| **Net                  Cash Flows - Operating Activities**(GAAP)** **                   |   |                                                      | **73**  |   |   | **49** |   |   | **125** |   |   | **89** |   |
| **Net                  Cash Flows - Investing Activities**(GAAP)                             |   |                                                      | **(83** | **)** |   | **(43** | **)** |   | **(134** | **)** |   | **(74** | **)** |
| **Net                  Cash Flows - Financing Activities**(GAAP)                             |   |                                                      | **22**  |   |   | **(107** | **)** |   | **-** |   |   | **(66** | **)** |
| **Net                  Increase (Decrease) in Cash and Cash Equivalents**(GAAP)              |   | **$**                                                     | **12**  |   | **$** | **(101** | **)** | **$** | **(9** | **)** | **$** | **(51** | **)** |

|                                                                                         |   | **TEP**                                                   |    |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                         |   | **Three                  Months Ended June 30,**          |    | **Six                  Months Ended****June                  30,** |   |
|                                                                                         |   | **2006**                                                  |    | **2005** |   | **2006** |   | **2005** |   |
|                                                                                         |   | -                  Millions of                  Dollars - |    |
| **Adjusted                  EBITDA**(non-GAAP)** ****(1)**** **                    |   | $                                                         | 96      |   | $ | 102 |   | $ | 196 |   | $ | 174 |   |
| Amounts                  from                  the Income Statements:                        |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
|   Less:                  Income                  Taxes                             |   |                                                      | 8       |   |   | 9 |   |   | 19 |   |   | 7 |   |
|   Less:                  Total Interest                  Expense                   |   |                                                      | 31      |   |   | 38 |   |   | 62 |   |   | 75 |   |
| Changes                  in                  Assets and Liabilities and Other Non-Cash Items |   |                                                      | (2      | ) |   | (18 | ) |   | (17 | ) |   | (18 | ) |
| **Net                  Cash Flows - Operating Activities**(GAAP)** **                   |   |                                                      | **55**  |   |   | **37** |   |   | **98** |   |   | **74** |   |
| **Net                  Cash Flows - Investing Activities**(GAAP)                             |   |                                                      | **(84** | **)** |   | **(32** | **)** |   | **(120** | **)** |   | **(53** | **)** |
| **Net                  Cash Flows - Financing Activities**(GAAP)                             |   |                                                      | **39**  |   |   | **(78** | **)** |   | **18** |   |   | **(88** | **)** |
| **Net                  Increase (Decrease) in Cash and Cash Equivalents**(GAAP)              |   | **$**                                                     | **10**  |   | **$** | **(73** | **)** | **$** | **(4** | **)** | **$** | **(67** | **)** |

**(1)**

**        Adjusted        EBITDA was calculated as follows:**

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|                                                                                                                            |   | **UniSource                  Energy**                     |    |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                                                            |   | **Three                  Months Ended June 30,**          |    | **Six                  Months Ended****June                  30,** |   |
|                                                                                                                            |   | **2006**                                                  |    | **2005** |   | **2006** |   | **2005** |   |
|                                                                                                                            |   | -                  Millions of                  Dollars - |    |
| **Net                  Income**(GAAP)                                                                                           |   | $                                                         | 10      |   | $ | 9 |   | $ | 27 |   | $ | 6 |   |
| Amounts                  from                  the Income Statements:                                                           |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
|   Less:  Discontinued                  Operations - Net of Tax                                              |   |                                                      | -       |   |   | (2 | ) |   | (3 | ) |   | (3 | ) |
|   Plus:  Income                  Taxes                                                                      |   |                                                      | 7       |   |   | 8 |   |   | 21 |   |   | 8 |   |
|       Total                  Interest Expense                                                     |   |                                                      | 38      |   |   | 44 |   |   | 74 |   |   | 84 |   |
|       Depreciation                  and                  Amortization                             |   |                                                      | 33      |   |   | 33 |   |   | 63 |   |   | 67 |   |
|       Amortization                  of Transition                  Recovery Asset                 |   |                                                      | 17      |   |   | 14 |   |   | 29 |   |   | 24 |   |
|       Depreciation                  included in                  Fuel and Other O&M           |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
|         Expense                  (see                  Note 15 of Notes to Consolidated |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
|         Financial                  Statements)                                          |   |                                                      | 2       |   |   | 1 |   |   | 4 |   |   | 3 |   |
| **Adjusted                  EBITDA**(non-GAAP)                                                                                  |   | **$**                                                     | **107** |   | **$** | **111** |   | **$** | **221** |   | **$** | **195** |   |

|                                                                                                                            |   | **TEP**                                                   |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                                                                                            |   | **Three                  Months Ended June 30,**          |   | **Six                  Months Ended****June                  30,** |   |
|                                                                                                                            |   | **2006**                                                  |   | **2005** |   | **2006** |   | **2005** |   |
|                                                                                                                            |   | -                  Millions of                  Dollars - |   |
| **Net                  Income**(GAAP)                                                                                           |   | $                                                         | 11     |   | $ | 12 |   | $ | 28 |   | $ | 7 |   |
| Amounts                  from                  the Income Statements:                                                           |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
|   Plus:  Income                  Taxes                                                                      |   |                                                      | 8      |   |   | 9 |   |   | 19 |   |   | 7 |   |
|       Total                  Interest Expense                                                     |   |                                                      | 31     |   |   | 38 |   |   | 62 |   |   | 75 |   |
|       Depreciation                  and                  Amortization                             |   |                                                      | 28     |   |   | 28 |   |   | 55 |   |   | 58 |   |
|       Amortization                  of Transition                  Recovery Asset                 |   |                                                      | 17     |   |   | 14 |   |   | 29 |   |   | 24 |   |
|       Depreciation                  included in                  Fuel and Other O&M           |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
|         Expense                  (see                  Note 15 of Notes to Consolidated |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
|         Financial                  Statements)                                          |   |                                                      | 1      |   |   | 1 |   |   | 3 |   |   | 3 |   |
| **Adjusted                  EBITDA**(non-GAAP)                                                                                  |   | **$**                                                     | **96** |   | **$** | **102** |   | **$** | **196** |   | **$** | **174** |   |

**Net        Debt        and Total Debt and Capital Lease Obligations - TEP**

|                                                                              |   | **As                  of****June                  30,****2006** |   | **As                  of                  December 31, 2005** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                                                              |   | -                  Millions of                  Dollars -       |   |
| Net                  Debt                  (non-GAAP)                             |   | $                                                               | 1,331  |                                                          | $      | 1,379 |   |
| Total                  Debt                  and Capital Lease Obligations (GAAP) |   | $                                                               | 1,477  |                                                          | $      | 1,535 |   |

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**Reconciliation        of Total Debt and Capital Lease Obligations to Net Debt**

|                                                                |   | **As                  of****June                  30,****2006** |   | **As                  of                  December 31, 2005** |   |
|---------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                                                |   | -                  Millions of                  Dollars -       |   |
| **Total                  Debt (GAAP)**                              |   | $                                                               | 821    |                                                          | $      | 821 |   |
|                                                                |   |                                                            |   |                                                          |   |   |   |
| Capital                  Lease                  Obligations         |   |                                                            | 601    |                                                          |   | 665 |   |
| Current                  Portion - Capital Lease Obligations        |   |                                                            | 55     |                                                          |   | 49 |   |
| **Total                  Debt and Capital Lease Obligations**(GAAP) |   |                                                            | 1,477  |                                                          |   | 1,535 |   |
|                                                                |   |                                                            |   |                                                          |   |   |   |
| Investment                  in                  Lease Debt          |   |                                                            | (146   | )                                                             |   | (156 | ) |
| **Net                  Debt**(non-GAAP)                             |   | $                                                               | 1,331  |                                                          | $      | 1,379 |   |

**Ratio        of Earnings to Fixed        Charges**

|                              | **6                  Months Ended** | **12                  Months Ended** |
|-----------------------------------|-------------------------------------|--------------------------------------|
|                              | **June                  30, 2006**  | **June                  30, 2006**   |
| UniSource                  Energy | 1.65                                | 1.78                                 |
|                              |                                |                                 |
| TEP                               | 1.73                                | 1.88                                 |

**SEC        Reports Available on UniSource Energy’s        Website**

*Information        contained at UniSource Energy’s website is not part of any report filed with the        SEC by UniSource Energy or TEP.*

**ITEM        6. - EXHIBITS **

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Table            of Contents

**SIGNATURES**

|                                          |   | UNISOURCE                    ENERGY CORPORATION(Registrant)                                                                                               |
|-----------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:                     August 8, 2006 | /s/    | Kevin                    P.                    Larson                                                                                                               |
|                                          |   | Kevin                    P.                    LarsonSenior                    Vice                    President and Principal Financial                    Officer |
|                                          |   |                                                                                                                                                           |
|                                          |   | TUCSON                    ELECTRIC POWER COMPANY(Registrant)                                                                                              |
| Date:                     August 8, 2006 | /s/    | Kevin                    P.                    Larson                                                                                                               |
|                                          |   | Kevin                    P.                    LarsonSenior                    Vice                    President and Principal Financial                    Officer |

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Table              of Contents

**EXHIBIT        INDEX**

| 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 of                  2002). |
|-----|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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