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                                                                                                                                     | IRS                Employer                Identification                Number |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                                 |                                                                                                                                                                                                                                              |                                                                            |
| 1-13739                              | **UNISOURCE                ENERGY CORPORATION**(An                Arizona                Corporation)One                South                Church Avenue, Suite 100Tucson,                AZ                85701(520)                571-4000  | 86-0786732                                                                      |
|                                 |                                                                                                                                                                                                                                              |                                                                            |
| 1-5924                               | **TUCSON                ELECTRIC POWER COMPANY**(An                Arizona                Corporation)One                South                Church Avenue, Suite 100Tucson,                AZ                85701(520)                571-4000 | 86-0062700                                                                      |

| UniSource                Energy Corporation  | Large                Accelerated Filer  X |   Accelerated                Filer                __ | Non-accelerated                filer __      |
|----------------------------------------------|------------------------------------------------|----------------------------------------------------------------|----------------------------------------------|
| Tucson                Electric Power Company | Large                Accelerated Filer __      |   Accelerated                Filer                __ | Non-accelerated                filer  X |

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

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Table          of Contents

**Tableof      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 Credit                Facilities                                                                          | 16     |
| Note                4.   Business Segments                                                                                                  | 17     |
| Note                5.   Accounting for Derivative Instruments                and Trading Activities                                        | 18     |
| Note                6.   Income and Other                Taxes                                                                              | 19     |
| Note                7.   Commitments and                Contingencies                                                                       | 21     |
| Note                8.   Employee Benefits                Plans                                                                             | 23     |
| Note                9.   Share-Based Compensation                Plans                                                                      | 23     |
| Note                10. UniSource Energy Earnings Per Share                (EPS)                                                                      | 25     |
| Note                11. Discontinued Operations - Sale of Global                Solar                                                                 | 26     |
| Note                12. New Accounting Pronouncements                                                                                                 | 26     |
| Note                13. Supplemental Cash Flow                Information                                                                             | 28     |
| Note                14. Review by Independent Registered Public                Accounting Firm                                                        | 29     |
|                                                                                                                                                  |   |
| Item                2. - Management’s Discussion and Analysis of Financial                Condition and Results of Operations                   | 30     |
| UniSource                Energy Consolidated                                                                                                          | 30     |
| Overview                of Consolidated                Business                                                                                       | 30     |
| Outlook                and Strategies                                                                                                                 | 30     |
| Results                of Operations                                                                                                                  | 31     |
| Contribution                by Business                Segment                                                                                        | 32     |
| Liquidity                and Capital                Resources                                                                                         | 32     |
| Tucson                Electric Power Company                                                                                                          | 35     |
| Results                of Operations                                                                                                                  | 35     |
| Factors                Affecting Results of                Operations                                                                                 | 38     |
| Liquidity                and Capital                Resources                                                                                         | 41     |
| UNS                Gas                                                                                                                                | 44     |
| Results                of Operations                                                                                                                  | 44     |
| Factors                Affecting Results of                Operations                                                                                 | 45     |
| Liquidity                and Capital Resources                                                                                                        | 46     |
| UNS                Electric                                                                                                                           | 47     |
| Results                of Operations                                                                                                                  | 47     |
| Factors                Affecting Results of                Operations                                                                                 | 47     |
| Liquidity                and Capital                Resources                                                                                         | 48     |

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Table          of Contents

| Other                                                                                              | 49     |
|----------------------------------------------------------------------------------------------------|--------|
| Results                of Operations                                                               | 49     |
| Critical                Accounting                Estimates                                        | 50     |
| New                Accounting Pronouncements                                                       | 51     |
| Safe                Harbor for Forward-Looking                Statements                           | 51     |
|                                                                                               |   |
| Item                3. - Quantitative and Qualitative Disclosures about                Market Risk | 52     |
|                                                                                               |   |
| Item                4. - Controls and Procedures                                                   | 56     |
|                                                                                               |   |
| **PART                II - OTHER INFORMATION**                                                     |   |
|                                                                                               |   |
| Item                1. - Legal Proceedings                                                         | 57     |
|                                                                                               |   |
| Item                1A - Risk Factors                                                              | 57     |
|                                                                                               |   |
| Item                5. - Other Information                                                         | 57     |
| Non-GAAP                Measures                                                                   | 57     |
| Ratio                of Earnings to Fixed                Charges                                   | 61     |
| SEC                Reports Available on UniSource Energy’s                Website            | 61     |
|                                                                                               |   |
| Item                6. Exhibits                                                                    | 61     |
|                                                                                               |   |
| Signatures                                                                                         | 62     |
|                                                                                               |   |
| Exhibit                Index                                                                       | 63     |

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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.                                                                                                                                                                                                                     |
| AMT                                                       | Alternative                Minimum Tax.                                                                                                                                                                                                                            |
| BMGS                                                      | Black                Mountain Generating Station under development by UED.                                                                                                                                                                                         |
| Btu                                                       | British                thermal unit(s).                                                                                                                                                                                                                            |
| Capacity                                                  | The                ability                to produce power; the most power a unit can produce or the maximum                that                can be taken under a contract, measured in MWs.                                                                    |
| Citizens                                                  | Citizens                Communications Company.                                                                                                                                                                                                                    |
| Common                Stock                               | UniSource                Energy’s common stock, without par value.                                                                                                                                                                                           |
| Company                or                UniSource Energy | UniSource                Energy Corporation.                                                                                                                                                                                                                       |
| DSM                                                       | Demand                side                management.                                                                                                                                                                                                              |
| 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.                                                                                                                                             |
| ESP                                                       | Energy                Service Provider.                                                                                                                                                                                                                            |
| FAS                133                                    | Statement                of                Financial Accounting Standards No. 133: Accounting for Derivative                Instruments and Hedging Activities, as amended.                                                                                        |
| FERC                                                      | Federal                Energy Regulatory Commission.                                                                                                                                                                                                               |
| Fixed                CTC                                  | Competition                Transition Charge of approximately $0.009 per kWh that is included                in                TEP’s retail rate for the purpose of recovering TEP’s $450 million TRA by                December 31, 2008.             |
| Four                Corners                               | Four                Corners                Generating Station.                                                                                                                                                                                                     |
| 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.                           |
| Heating                Degree Days                        | An                index used                to measure the impact of weather on energy usage calculated by subtracting                the average of the high and low daily temperatures from                65.                                                   |
| IRS                                                       | Internal                Revenue Service.                                                                                                                                                                                                                           |
| kWh                                                       | Kilowatt-hour(s).                                                                                                                                                                                                                                                  |
| LIBOR                                                     | London                Interbank Offered Rate.                                                                                                                                                                                                                      |
| Luna                                                      | Luna                Energy                Facility.                                                                                                                                                                                                                |
| Mark-to-Market                Adjustments                 | Forward                energy sales and purchase contracts that are considered to be derivatives                are adjusted monthly by recording unrealized gains and losses to                reflect                the market prices at the end of each month. |
| MEG                                                       | Millennium                Environment Group, Inc., a wholly-owned subsidiary of Millennium,                which                manages and trades emission allowances and related financial                instruments.                                           |
| Millennium                                                | Millennium                Energy Holdings, Inc., a wholly-owned subsidiary of UniSource                Energy.                                                                                                                                                     |
| MMBtu                                                     | Million                British Thermal Units.                                                                                                                                                                                                                      |
| MW                                                        | Megawatt(s).                                                                                                                                                                                                                                                       |
| MWh                                                       | Megawatt-hour(s).                                                                                                                                                                                                                                                  |
| Navajo                                                    | Navajo                Generating Station.                                                                                                                                                                                                                          |
| PGA                                                       | Purchased                Gas                Adjuster, a retail rate mechanism designed to recover the cost of                gas                purchased for retail gas customers.                                                                                |
| PPFAC                                                     | Purchased                Power and Fuel Adjustment Clause.                                                                                                                                                                                                         |
| PWMT                                                      | Pinnacle                West                Marketing and Trading.                                                                                                                                                                                                 |

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| Rules                                                        | Retail                Electric Competition Rules.                                                                                                                                                                                                                                                                    |
|--------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Salt                River                Project             | A                public                power utility serving more than 900,000 customers in Phoenix,                Arizona.                                                                                                                                                                                         |
| San                Juan                                      | San                Juan                Generating Station.                                                                                                                                                                                                                                                           |
| Settlement                Agreement                          | TEP’s                Settlement Agreement approved by the ACC in November 1999 that provided                for electric retail competition and transition asset                recovery.                                                                                                                      |
| SO2                                                          | Sulfur                dioxide.                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                          |
| 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 arrangement 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.                                                                                                                                                                                                                                                    |
| TEP                                                          | Tucson                Electric Power Company, the principal subsidiary of UniSource                Energy.                                                                                                                                                                                                           |
| TEP                Credit                Agreement           | Amended                and                Restated Credit Agreement between TEP and a syndicate of Banks, dated                as                of August 11, 2006.                                                                                                                                                 |
| TEP                Revolving                Credit Facility  | Revolving                credit facility under the TEP Credit Agreement.                                                                                                                                                                                                                                             |
| Therm                                                        | A                unit of                heating value equivalent to 100,000 British thermal units                (Btu).                                                                                                                                                                                              |
| TOU                                                          | Time                of                use.                                                                                                                                                                                                                                                                           |
| TRA                                                          | Transition                Recovery Asset, a $450 million regulatory asset established in TEP’s                Settlement Agreement to be fully recovered by December 31,                2008.                                                                                                                  |
| Tri-State                                                    | Tri-State                Generation and Transmission Association.                                                                                                                                                                                                                                                    |
| UED                                                          | UniSource                Energy Development Company, a wholly-owned 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 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                    | Amended                and                Restated Credit Agreement between UniSource Energy and a syndicate                of                banks, dated as of August 11, 2006.                                                                                                                                    |
| UniSource                Energy                              | UniSource                Energy Corporation.                                                                                                                                                                                                                                                                         |
| UNS                Electric                                  | UNS                Electric,                Inc., a wholly-owned subsidiary of UES, which 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.                                                                                                                                                        |
| UNS                Gas/UNS                Electric Revolver  | Revolving                credit facility under the Amended and Restated Credit Agreement among                UNS                Gas and UNS Electric as borrowers, UES as guarantor, and a syndicate                of                banks, dated as of August 11, 2006.                                           |

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**Reportof      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**

**ITEM1. FINANCIAL        STATEMENTS **

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**UNISOURCEENERGY        CORPORATION**

**COMPARATIVECONDENSED        CONSOLIDATED STATEMENTS OF        INCOME**

|                                                                           |   | Three                  Months                  Ended         |        |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|
|                                                                           |   | March                  31,                                   |        |
|                                                                           |   | **2007**                                                     |        | **2006** |   |
|                                                                           |   | **(Unaudited)**                                              |        |
|                                                                           |   | -Thousands                  of                  Dollars-     |        |
|                                                                           |   | (Except                  Per                  Share Amounts) |        |
| **Operating                  Revenues**                                        |   |                                                         |        |   |   |
| Electric                  Retail Sales                                         |   | **$**                                                        | **195,750** |   | $ | 182,669 |   |
| Electric                  Wholesale Sales                                      |   |                                                         | **48,765**  |   |   | 56,687 |   |
| Gas                  Revenue                                                   |   |                                                         | **62,110**  |   |   | 62,815 |   |
| Other                  Revenues                                                |   |                                                         | **11,216**  |   |   | 3,255 |   |
| **Total                  Operating Revenues**                                  |   |                                                         | **317,841** |   |   | 305,426 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Operating                  Expenses**                                        |   |                                                         |        |   |   |   |   |
| Fuel                                                                           |   |                                                         | **61,080**  |   |   | 50,216 |   |
| Purchased                  Energy                                              |   |                                                         | **85,807**  |   |   | 82,155 |   |
| Other                  Operations and Maintenance                              |   |                                                         | **70,816**  |   |   | 53,815 |   |
| Depreciation                  and Amortization                                 |   |                                                         | **34,466**  |   |   | 30,757 |   |
| Amortization                  of Transition Recovery Asset                     |   |                                                         | **14,986**  |   |   | 11,842 |   |
| Taxes                  Other                  Than Income Taxes                |   |                                                         | **12,487**  |   |   | 12,553 |   |
| **Total                  Operating Expenses**                                  |   |                                                         | **279,642** |   |   | 241,338 |   |
| **Operating                  Income**                                          |   |                                                         | **38,199**  |   |   | 64,088 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Other                  Income (Deductions)**                                 |   |                                                         |        |   |   |   |   |
| Interest                  Income                                               |   |                                                         | **4,444**   |   |   | 4,927 |   |
| Other                  Income                                                  |   |                                                         | **1,315**   |   |   | 1,635 |   |
| Other                  Expense                                                 |   |                                                         | **(637**    | **)** |   | (728 | ) |
| **Total                  Other Income (Deductions)**                           |   |                                                         | **5,122**   |   |   | 5,834 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Interest                  Expense**                                          |   |                                                         |        |   |   |   |   |
| Long-Term                  Debt                                                |   |                                                         | **17,989**  |   |   | 18,684 |   |
| Interest                  on                  Capital Leases                   |   |                                                         | **16,152**  |   |   | 18,547 |   |
| Other                  Interest Expense                                        |   |                                                         | **1,761**   |   |   | 1,306 |   |
| Interest                  Capitalized                                          |   |                                                         | **(1,395**  | **)** |   | (1,912 | ) |
| **Total                  Interest Expense**                                    |   |                                                         | **34,507**  |   |   | 36,625 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Income                  From Continuing Operations Before Income Taxes**     |   |                                                         | **8,814**   |   |   | 33,297 |   |
| Income                  Tax                  Expense                           |   |                                                         | **3,871**   |   |   | 13,806 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Income                  From Continuing Operations**                         |   |                                                         | **4,943**   |   |   | 19,491 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Discontinued                  Operations - Net of Tax**                      |   |                                                         | **-**       |   |   | (2,669 | ) |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Net                  Income**                                                |   | **$**                                                        | **4,943**   |   | $ | 16,822 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Weighted-average                  Shares of Common Stock Outstanding (000)** |   |                                                         | **35,422**  |   |   | 35,116 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Basic                  Earnings (Loss) per Share**                           |   |                                                         |        |   |   |   |   |
| **Net                  Income from Continuing Operations**                     |   | **$**                                                        | **0.14**    |   | $ | 0.56 |   |
| **Discontinued                  Operations - Net of Tax**                      |   | **$**                                                        | **-**       |   | $ | (0.08 | ) |
| **Net                  Income**                                                |   | **$**                                                        | **0.14**    |   | $ | 0.48 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Diluted                  Earnings (Loss) per Share**                         |   |                                                         |        |   |   |   |   |
| **Net                  Income from Continuing Operations**                     |   | **$**                                                        | **0.14**    |   | $ | 0.52 |   |
| **Discontinued                  Operations - Net of Tax**                      |   | **$**                                                        | **-**       |   | $ | (0.07 | ) |
| **Net                  Income**                                                |   | **$**                                                        | **0.14**    |   | $ | 0.45 |   |
|                                                                           |   |                                                         |        |   |   |   |   |
| **Dividends                  Declared per Share**                              |   | **$**                                                        | **0.225**   |   | $ | 0.21 |   |

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**UNISOURCE        ENERGY        CORPORATION**

**COMPARATIVECONDENSED        CONSOLIDATED STATEMENTS        OF CASH FLOWS**

|                                                                                               |   | Three                  Months                  Ended     |         |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------------|
|                                                                                               |   | March                  31,                               |         |
|                                                                                               |   | **2007**                                                 |         | **2006** |   |
|                                                                                               |   | **(Unaudited)**                                          |         |
|                                                                                               |   | -Thousands                  of                  Dollars- |         |
| **Cash                  Flows from Operating Activities**                                          |   |                                                     |         |   |   |
| Cash                  Receipts                  from Electric Retail Sales                         |   | **$**                                                    | **228,431**  |   | $ | 211,011 |   |
| Cash                  Receipts                  from Electric Wholesale Sales                      |   |                                                     | **95,079**   |   |   | 78,805 |   |
| Cash                  Receipts                  from Gas Sales                                     |   |                                                     | **74,131**   |   |   | 66,344 |   |
| Interest                  Received                                                                 |   |                                                     | **8,930**    |   |   | 10,509 |   |
| Performance                  Deposits                                                              |   |                                                     | **(500**     | **)** |   | 3,323 |   |
| Sale                  of                  Excess Emission Allowances                               |   |                                                     | **2,050**    |   |   | 1,645 |   |
| Income                  Tax                  Refunds Received                                      |   |                                                     | **1,016**    |   |   | - |   |
| Other                  Cash                  Receipts                                              |   |                                                     | **12,478**   |   |   | 1,561 |   |
| Fuel                  Costs                  Paid                                                  |   |                                                     | **(61,829**  | **)** |   | (51,657 | ) |
| Purchased                  Energy Costs Paid                                                       |   |                                                     | **(132,549** | **)** |   | (109,932 | ) |
| Wages                  Paid,                  Net of Amounts Capitalized                           |   |                                                     | **(34,683**  | **)** |   | (27,978 | ) |
| Payment                  of                  Other Operations and Maintenance Costs                |   |                                                     | **(35,698**  | **)** |   | (33,371 | ) |
| Capital                  Lease                  Interest Paid                                      |   |                                                     | **(32,504**  | **)** |   | (36,617 | ) |
| Taxes                  Paid,                  Net of Amounts Capitalized                           |   |                                                     | **(25,432**  | **)** |   | (23,564 | ) |
| Interest                  Paid, Net of Amounts Capitalized                                         |   |                                                     | **(25,368**  | **)** |   | (24,425 | ) |
| Income                  Taxes                  Paid                                                |   |                                                     | **(7,476**   | **)** |   | (9,516 | ) |
| Net                  Cash Used                  by Operating Activities of Discontinued Operations |   |                                                     | **-**        |   |   | (2,710 | ) |
| Excess                  Tax                  Benefit from Stock Options Exercises                  |   |                                                     | **(325**     | **)** |   | (556 | ) |
| Other                  Cash                  Payments                                              |   |                                                     | **(1,007**   | **)** |   | (1,159 | ) |
| **Net                  Cash Flows – Operating Activities**                                   |   |                                                     | **64,744**   |   |   | 51,713 |   |
|                                                                                               |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Investing Activities**                                          |   |                                                     |         |   |   |   |   |
| Capital                  Expenditures                                                              |   |                                                     | **(50,195**  | **)** |   | (62,825 | ) |
| Proceeds                  from                  Investment in Springerville Lease Debt             |   |                                                     | **11,206**   |   |   | 10,028 |   |
| Other                  Cash                  Receipts                                              |   |                                                     | **10**       |   |   | 2,202 |   |
| Other                  Cash                  Payments                                              |   |                                                     | **(2,352**   | **)** |   | - |   |
| Investment                  in                  and Loans to Equity Investees                      |   |                                                     | **(66**      | **)** |   | (765 | ) |
| Net                  Cash Used                  by Investing Activities of Discontinued Operations |   |                                                     | **-**        |   |   | (46 | ) |
| **Net                  Cash Flows - Investing Activities**                                         |   |                                                     | **(41,397**  | **)** |   | (51,406 | ) |
|                                                                                               |   |                                                     |         |   |   |   |   |
| **Cash                  Flows from Financing Activities**                                          |   |                                                     |         |   |   |   |   |
| Repayments                  of                  Long-Term Debt                                     |   |                                                     | **(1,500**   | **)** |   | (1,250 | ) |
| Payments                  on                  Capital Lease Obligations                            |   |                                                     | **(55,869**  | **)** |   | (50,272 | ) |
| Proceeds                  from                  Borrowings under Revolving Credit Facilities       |   |                                                     | **91,000**   |   |   | 72,000 |   |
| Payments                  on                  Borrowings under Revolving Credit Facilities         |   |                                                     | **(60,000**  | **)** |   | (40,000 | ) |
| Proceeds                  from                  Stock Options Exercised                            |   |                                                     | **495**      |   |   | 2,391 |   |
| Excess                  Tax                  Benefit from Stock Options Exercises                  |   |                                                     | **325**      |   |   | 556 |   |
| Other                  Cash                  Receipts                                              |   |                                                     | **2,396**    |   |   | 3,422 |   |
| Payment                  of                  Debt Issue/Retirement Costs                           |   |                                                     | **(114**     | **)** |   | - |   |
| Common                  Stock                  Dividends Paid                                      |   |                                                     | **(7,933**   | **)** |   | (7,338 | ) |
| Other                  Cash                  Payments                                              |   |                                                     | **(2,060**   | **)** |   | (1,245 | ) |
| **Net                  Cash Flows - Financing Activities**                                         |   |                                                     | **(33,260**  | **)** |   | (21,736 | ) |
|                                                                                               |   |                                                     |         |   |   |   |   |
| Net                  Decrease                  in Cash and Cash Equivalents                        |   |                                                     | **(9,913**   | **)** |   | (21,429 | ) |
| Cash                  and Cash                  Equivalents, Beginning of Year                     |   |                                                     | **104,241**  |   |   | 144,679 |   |
| **Cash                  and Cash Equivalents, End of Period**                                      |   | **$**                                                    | **94,328**   |   | $ | 123,250 |   |

----

Table          of Contents

**UNISOURCE          ENERGY          CORPORATION**

**COMPARATIVECONDENSED          CONSOLIDATED BALANCE          SHEETS**

|                                                                               |   | March                  31,                                 |           | December                  31, |   |
|------------------------------------------------------------------------------------|--------|------------------------------------------------------------|----------------|-------------------------------|--------|
|                                                                               |   | **2007**                                                   |           | **2006**                      |   |
|                                                                               |   | **(Unaudited)**                                            |           |                          |   |
| **ASSETS**                                                                         |   | -                  Thousands                  of Dollars - |           |
| **Utility                  Plant**                                                 |   |                                                       |           |                          |   |
| Plant                  in                  Service                                 |   | **$**                                                      | **3,446,666**  |                          | $      | 3,410,638 |   |
| Utility                  Plant                  under Capital Leases               |   |                                                       | **702,337**    |                          |   | 702,337 |   |
| Construction                  Work in Progress                                     |   |                                                       | **151,286**    |                          |   | 135,431 |   |
| **Total                  Utility Plant**                                           |   |                                                       | **4,300,289**  |                          |   | 4,248,406 |   |
| Less                  Accumulated Depreciation and Amortization                    |   |                                                       | **(1,518,485** | **)**                         |   | (1,492,842 | ) |
| Less                  Accumulated Amortization of Capital Lease Assets             |   |                                                       | **(502,322**   | **)**                         |   | (495,944 | ) |
| **Total                  Utility Plant - Net**                                     |   |                                                       | **2,279,482**  |                          |   | 2,259,620 |   |
|                                                                               |   |                                                       |           |                          |   |   |   |
| **Investments                  and Other Property**                                |   |                                                       |           |                          |   |   |   |
| Investments                  in Lease Debt and Equity                              |   |                                                       | **169,780**    |                          |   | 181,222 |   |
| Other                                                                              |   |                                                       | **68,144**     |                          |   | 66,194 |   |
| **Total                  Investments and Other Property**                          |   |                                                       | **237,924**    |                          |   | 247,416 |   |
|                                                                               |   |                                                       |           |                          |   |   |   |
| **Current                  Assets**                                                |   |                                                       |           |                          |   |   |   |
| Cash                  and Cash                  Equivalents                        |   |                                                       | **94,328**     |                          |   | 104,241 |   |
| Trade                  Accounts Receivable                                         |   |                                                       | **106,954**    |                          |   | 124,789 |   |
| Unbilled                  Accounts Receivable                                      |   |                                                       | **47,415**     |                          |   | 58,499 |   |
| Allowance                  for                  Doubtful Accounts                  |   |                                                       | **(17,382**    | **)**                         |   | (16,859 | ) |
| Materials                  and                  Fuel Inventory                     |   |                                                       | **76,688**     |                          |   | 73,628 |   |
| Trading                  Assets - Derivative Instruments                           |   |                                                       | **13,141**     |                          |   | 26,387 |   |
| Current                  Regulatory Assets                                         |   |                                                       | **9,718**      |                          |   | 9,549 |   |
| Deferred                  Income Taxes - Current                                   |   |                                                       | **51,438**     |                          |   | 57,912 |   |
| Income                  Taxes                  - Current                           |   |                                                       | **26,234**     |                          |   | **-** |   |
| Interest                  Receivable - Current                                     |   |                                                       | **3,602**      |                          |   | 7,782 |   |
| Other                                                                              |   |                                                       | **9,655**      |                          |   | 9,982 |   |
| **Total                  Current Assets**                                          |   |                                                       | **421,791**    |                          |   | 455,910 |   |
|                                                                               |   |                                                       |           |                          |   |   |   |
| **Regulatory                  and Other Assets**                                   |   |                                                       |           |                          |   |   |   |
| Transition                  Recovery Asset                                         |   |                                                       | **86,640**     |                          |   | 101,626 |   |
| Income                  Taxes                  Recoverable Through Future Revenues |   |                                                       | **33,106**     |                          |   | 34,749 |   |
| Other                  Regulatory Assets                                           |   |                                                       | **54,630**     |                          |   | 54,848 |   |
| Other                  Assets                                                      |   |                                                       | **33,832**     |                          |   | 33,240 |   |
| **Total                  Regulatory and Other Assets**                             |   |                                                       | **208,208**    |                          |   | 224,463 |   |
|                                                                               |   |                                                       |           |                          |   |   |   |
| **Total                  Assets**                                                  |   | **$**                                                      | **3,147,405**  |                          | $      | 3,187,409 |   |

**(Continued)**

----

Table          of Contents

**UNISOURCE          ENERGY          CORPORATION**

**COMPARATIVE          CONDENSED          CONSOLIDATED BALANCE SHEETS**

|                                                                                |   | March                  31,                                 |          | December                  31, |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------------|-------------------------------|--------|
|                                                                                |   | **2007**                                                   |          | **2006**                      |   |
|                                                                                |   | **(Unaudited)**                                            |          |                          |   |
| **CAPITALIZATION                  AND OTHER LIABILITIES**                           |   | -                  Thousands                  of Dollars - |          |
| **Capitalization**                                                                  |   |                                                       |          |                          |   |
| Common                  Stock                                                       |   | **$**                                                      | **699,122**   |                          | $      | 697,426 |   |
| Accumulated                  Deficit                                                |   |                                                       | **(30,206**   | **)**                         |   | (27,913 | ) |
| Accumulated                  Other Comprehensive Loss                               |   |                                                       | **(15,649**   | **)**                         |   | (15,364 | ) |
| Common                  Stock                  Equity                               |   |                                                       | **653,267**   |                          |   | 654,149 |   |
| Capital                  Lease                  Obligations                         |   |                                                       | **534,344**   |                          |   | 588,771 |   |
| Long-Term                  Debt                                                     |   |                                                       | **1,175,670** |                          |   | 1,171,170 |   |
| **Total                  Capitalization**                                           |   |                                                       | **2,363,281** |                          |   | 2,414,090 |   |
|                                                                                |   |                                                       |          |                          |   |   |   |
| **Current                  Liabilities**                                            |   |                                                       |          |                          |   |   |   |
| Current                  Obligations under Capital Leases                           |   |                                                       | **62,470**    |                          |   | 59,090 |   |
| Borrowing                  Under Revolving Credit Facilities                        |   |                                                       | **75,000**    |                          |   | 50,000 |   |
| Current                  Maturities of Long-Term Debt                               |   |                                                       | **6,000**     |                          |   | 6,000 |   |
| Accounts                  Payable                                                   |   |                                                       | **97,857**    |                          |   | 102,829 |   |
| Income                  Taxes                  Payable                              |   |                                                       | **-**         |                          |   | 16,429 |   |
| Interest                  Accrued                                                   |   |                                                       | **20,935**    |                          |   | 52,392 |   |
| Trading                  Liabilities - Derivative Instruments                       |   |                                                       | **5,279**     |                          |   | 16,537 |   |
| Accrued                  Taxes                  Other than Income Taxes             |   |                                                       | **46,951**    |                          |   | 35,431 |   |
| Accrued                  Employee Expenses                                          |   |                                                       | **17,111**    |                          |   | 22,886 |   |
| Customer                  Deposits                                                  |   |                                                       | **20,991**    |                          |   | 19,767 |   |
| Current                  Regulatory Liabilities                                     |   |                                                       | **10,599**    |                          |   | 10,707 |   |
| Other                                                                               |   |                                                       | **5,312**     |                          |   | 3,852 |   |
| **Total                  Current Liabilities**                                      |   |                                                       | **368,505**   |                          |   | 395,920 |   |
|                                                                                |   |                                                       |          |                          |   |   |   |
| **Deferred                  Credits and Other Liabilities**                         |   |                                                       |          |                          |   |   |   |
| Deferred                  Income Taxes - Noncurrent                                 |   |                                                       | **145,967**   |                          |   | 126,883 |   |
| Pension                  and                  Other Post-Retirement Benefits        |   |                                                       | **107,929**   |                          |   | 105,085 |   |
| Regulatory                  Liability - Net Cost of Removal for Interim Retirements |   |                                                       | **86,248**    |                          |   | 85,394 |   |
| Other                  Regulatory Liabilities                                       |   |                                                       | **11,041**    |                          |   | 9,609 |   |
| Other                                                                               |   |                                                       | **64,434**    |                          |   | 50,428 |   |
| **Total                  Deferred Credits and Other Liabilities**                   |   |                                                       | **415,619**   |                          |   | 377,399 |   |
|                                                                                |   |                                                       |          |                          |   |   |   |
| **Commitments                  and Contingencies (Note 7)**                         |   |                                                       |          |                          |   |   |   |
|                                                                                |   |                                                       |          |                          |   |   |   |
| **Total                  Capitalization and Other Liabilities**                     |   | **$**                                                      | **3,147,405** |                          | $      | 3,187,409 |   |

**(Concluded)**

----

Table            of Contents

**UNISOURCE          ENERGY          CORPORATION**

**CONDENSEDCONSOLIDATED          STATEMENT OF CHANGES IN          STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME**

|                                                                                |   |                                                       |       |   |   |        |   | Accumulated   |        |          |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------------------------------|------------|--------|--------|-------------|--------|---------------|-------------|---------------|--------|
|                                                                                |   | Common                                                     |       |   |   |        |   | Other         |        | Total         |   |
|                                                                                |   | Shares                                                     |       | Common |   | Accumulated |   | Comprehensive |        | Stockholders' |   |
|                                                                                |   | Issued*                                                    |       | Stock  |   | Deficit     |   | Loss          |        | Equity        |   |
|                                                                                |   | **(Unaudited)**                                            |       |
|                                                                                |   | -                  Thousands                  of Dollars - |       |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |
| **Balances                  at December 31, 2006**                                  |   |                                                       | 35,190     |   | $      | 697,426     |   | $             | (27,913     | )             | $      | (15,364 | ) | $ | 654,149 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Adoption                  of                  FIN 48                                |   |                                                       |       |   |   |        |   |          | 696         |          |   |   |   |   | 696 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Comprehensive                  Income (Loss):                                       |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| 2007                  Year-to-Date Net Income                                       |   |                                                       | -          |   |   | -           |   |          | 4,943       |          |   | - |   |   | 4,943 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Unrealized                  Loss on Cash Flow Hedges                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| (net                  of                  $1,182 income taxes)                 |   |                                                       | -          |   |   | -           |   |          | -           |          |   | 1,804 |   |   | 1,804 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Reclassification                  of Unrealized Gain on                             |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Cash                  Flow                  Hedges to Net Income               |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| (net                  of                  $1,370 income taxes)                 |   |                                                       | -          |   |   | -           |   |          | -           |          |   | (2,089 | ) |   | (2,089 | ) |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |        |   |
| Total                  Comprehensive Income                                         |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   | 4,658 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| Dividends                  Declared                                                 |   |                                                       | -          |   |   |        |   |          | (7,932      | )             |   | - |   |   | (7,932 | ) |
| Shares                  Issued                  under Stock Compensation Plans      |   |                                                       | 5          |   |   |        |   |          | -           |          |   | - |   |   | - |   |
| Shares                  Issued                  for Stock Options                   |   |                                                       | 35         |   |   | 495         |   |          | -           |          |   | - |   |   | 495 |   |
| Stock                  Award                  Compensation Expense                  |   |                                                       |       |   |   | 876         |   |          |        |          |   |   |   |   | 876 |   |
| Tax                  Benefit                  Realized from Stock Options Exercised |   |                                                       | -          |   |   | 325         |   |          |        |          |   |   |   |   | 325 |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
|                                                                                |   |                                                       |       |   |   |        |   |          |        |          |   |   |   |   |   |   |
| **Balances                  at March 31, 2007**                                     |   |                                                       | **35,230** |   | **$**  | **699,122** |   | **$**         | **(30,206** | **)**         | **$**  | **(15,649** | **)** | **$** | **653,267** |   |

----

Table          of Contents

**TUCSON        ELECTRIC POWER COMPANY**

**COMPARATIVECONDENSED        CONSOLIDATED STATEMENTS OF        INCOME**

|                                                            |   | Three                  Months                  Ended     |        |
|-----------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                            |   | March                  31,                               |        |
|                                                            |   | **2007**                                                 |        | **2006** |   |
|                                                            |   | **(Unaudited)**                                          |        |
|                                                            |   | -Thousands                  of                  Dollars- |        |
| **Operating                  Revenues**                         |   |                                                     |        |   |   |
| Electric                  Retail Sales                          |   | **$**                                                    | **159,952** |   | $ | 148,934 |   |
| Electric                  Wholesale Sales                       |   |                                                     | **49,467**  |   |   | 56,480 |   |
| Other                  Revenues                                 |   |                                                     | **10,210**  |   |   | 3,401 |   |
| **Total                  Operating Revenues**                   |   |                                                     | **219,629** |   |   | 208,815 |   |
|                                                            |   |                                                     |        |   |   |   |   |
| **Operating                  Expenses**                         |   |                                                     |        |   |   |   |   |
| Fuel                                                            |   |                                                     | **61,080**  |   |   | 50,216 |   |
| Purchased                  Power                                |   |                                                     | **17,855**  |   |   | 13,628 |   |
| Other                  Operations and Maintenance               |   |                                                     | **59,130**  |   |   | 42,170 |   |
| Depreciation                  and Amortization                  |   |                                                     | **29,062**  |   |   | 26,501 |   |
| Amortization                  of Transition Recovery Asset      |   |                                                     | **14,986**  |   |   | 11,842 |   |
| Taxes                  Other                  Than Income Taxes |   |                                                     | **10,417**  |   |   | 10,487 |   |
| **Total                  Operating Expenses**                   |   |                                                     | **192,530** |   |   | 154,844 |   |
| **Operating                  Income**                           |   |                                                     | **27,099**  |   |   | 53,971 |   |
|                                                            |   |                                                     |        |   |   |   |   |
| **Other                  Income (Deductions)**                  |   |                                                     |        |   |   |   |   |
| Interest                  Income                                |   |                                                     | **3,714**   |   |   | 4,289 |   |
| Other                  Income                                   |   |                                                     | **751**     |   |   | 1,065 |   |
| Other                  Expense                                  |   |                                                     | **(406**    | **)** |   | (674 | ) |
| **Total                  Other Income (Deductions)**            |   |                                                     | **4,059**   |   |   | 4,680 |   |
|                                                            |   |                                                     |        |   |   |   |   |
| **Interest                  Expense**                           |   |                                                     |        |   |   |   |   |
| Long-Term                  Debt                                 |   |                                                     | **12,439**  |   |   | 12,649 |   |
| Interest                  on                  Capital Leases    |   |                                                     | **16,146**  |   |   | 18,539 |   |
| Other                  Interest Expense                         |   |                                                     | **1,559**   |   |   | 969 |   |
| Interest                  Capitalized                           |   |                                                     | **(875**    | **)** |   | (1,621 | ) |
| **Total                  Interest Expense**                     |   |                                                     | **29,269**  |   |   | 30,536 |   |
|                                                            |   |                                                     |        |   |   |   |   |
| **Income                  Before Income Taxes**                 |   |                                                     | **1,889**   |   |   | 28,115 |   |
| Income                  Tax                  Expense            |   |                                                     | **1,068**   |   |   | 11,528 |   |
|                                                            |   |                                                     |        |   |   |   |   |
| **Net                  Income**                                 |   | **$**                                                    | **821**     |   | $ | 16,587 |   |

----

Table          of Contents

**TUCSON ELECTRIC POWER      COMPANY**

**COMPARATIVECONDENSED          CONSOLIDATED STATEMENTS          OF CASH FLOWS**

|                                                                                              |   | Three                  Months                  Ended     |        |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                              |   | March                  31,                               |        |
|                                                                                              |   | **2007**                                                 |        | 2006 |   |
|                                                                                              |   | **(Unaudited)**                                          |        |
|                                                                                              |   | -Thousands                  of                  Dollars- |        |
| **Cash                  Flows from Operating Activities**                                         |   |                                                     |        |   |   |
| Cash                  Receipts                  from Electric Retail Sales                        |   | **$**                                                    | **188,194** |   | $ | 172,645 |   |
| Cash                  Receipts                  from Electric Wholesale Sales                     |   |                                                     | **95,079**  |   |   | 78,805 |   |
| Interest                  Received                                                                |   |                                                     | **8,153**   |   |   | 9,298 |   |
| Sale                  of                  Excess Emission Allowances                              |   |                                                     | **2,050**   |   |   | 1,645 |   |
| Other                  Cash                  Receipts                                             |   |                                                     | **11,955**  |   |   | 916 |   |
| Fuel                  Costs                  Paid                                                 |   |                                                     | **(61,829** | **)** |   | (51,657 | ) |
| Purchased                  Power Costs Paid                                                       |   |                                                     | **(59,164** | **)** |   | (41,142 | ) |
| Wages                  Paid,                  Net of Amounts Capitalized                          |   |                                                     | **(28,450** | **)** |   | (22,733 | ) |
| Payment                  of                  Other Operations and Maintenance Costs               |   |                                                     | **(32,362** | **)** |   | (27,632 | ) |
| Capital                  Lease                  Interest Paid                                     |   |                                                     | **(32,498** | **)** |   | (36,609 | ) |
| Taxes                  Paid,                  Net of Amounts Capitalized                          |   |                                                     | **(16,568** | **)** |   | (14,765 | ) |
| Interest                  Paid, Net of Amounts Capitalized                                        |   |                                                     | **(15,735** | **)** |   | (14,169 | ) |
| Income                  Taxes                  Paid                                               |   |                                                     | **(8,375**  | **)** |   | (10,675 | ) |
| Other                  Cash                  Payments                                             |   |                                                     | **(728**    | **)** |   | (767 | ) |
| **Net                  Cash Flows – Operating Activities**                                  |   |                                                     | **49,722**  |   |   | 43,160 |   |
|                                                                                              |   |                                                     |        |   |   |   |   |
| **Cash                  Flows from Investing Activities**                                         |   |                                                     |        |   |   |   |   |
| Capital                  Expenditures                                                             |   |                                                     | **(34,499** | **)** |   | (46,585 | ) |
| Proceeds                  from                  Investment in Springerville Lease Debt and Equity |   |                                                     | **11,206**  |   |   | 10,028 |   |
| Other                  Cash                  Payments                                             |   |                                                     | **(2,304**  | **)** |   | - |   |
| **Net                  Cash Flows - Investing Activities**                                        |   |                                                     | **(25,597** | **)** |   | (36,557 | ) |
|                                                                                              |   |                                                     |        |   |   |   |   |
| **Cash                  Flows from Financing Activities**                                         |   |                                                     |        |   |   |   |   |
| Payments                  on                  Capital Lease Obligations                           |   |                                                     | **(55,854** | **)** |   | (50,251 | ) |
| Proceeds                  from                  Borrowings under Revolving Credit Facility        |   |                                                     | **85,000**  |   |   | 60,000 |   |
| Payments                  on                  Borrowings under Revolving Credit Facility          |   |                                                     | **(40,000** | **)** |   | (35,000 | ) |
| Other                  Cash                  Receipts                                             |   |                                                     | **764**     |   |   | 4,774 |   |
| Other                  Cash                  Payments                                             |   |                                                     | **(404**    | **)** |   | (240 | ) |
| **Net                  Cash Flows - Financing Activities**                                        |   |                                                     | **(10,494** | **)** |   | (20,717 | ) |
|                                                                                              |   |                                                     |        |   |   |   |   |
| Net                  Increase                  (Decrease) in Cash and Cash Equivalents            |   |                                                     | **13,631**  |   |   | (14,114 | ) |
| Cash                  and Cash                  Equivalents, Beginning of Year                    |   |                                                     | **19,711**  |   |   | 53,433 |   |
| **Cash                  and Cash Equivalents, End of Period**                                     |   | **$**                                                    | **33,342**  |   | $ | 39,319 |   |

----

Table              of Contents

**TUCSON ELECTRIC            POWER            COMPANY**

**COMPARATIVECONDENSED                CONSOLIDATED BALANCE                SHEETS**

|                                                                                       |   | March                      31,                                       |           | December                      31, |   |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|----------------|-----------------------------------|--------|
|                                                                                       |   | **2007**                                                             |           | **2006**                          |   |
|                                                                                       |   | **(Unaudited)**                                                      |           |                              |   |
| **ASSETS**                                                                                 |   |  -                    Thousands                    of Dollars - |           |
| **Utility                      Plant**                                                     |   |                                                                 |           |                              |   |
| Plant                      in                      Service                                 |   | **$**                                                                | **3,060,884**  |                              | $      | 3,035,494 |   |
| Utility                      Plant                      under Capital Leases               |   |                                                                 | **701,631**    |                              |   | 701,631 |   |
| Construction                      Work in Progress                                         |   |                                                                 | **100,239**    |                              |   | 92,125 |   |
| **Total                      Utility Plant**                                               |   |                                                                 | **3,862,754**  |                              |   | 3,829,250 |   |
| Less                      Accumulated Depreciation and Amortization                        |   |                                                                 | **(1,467,226** | **)**                             |   | (1,446,229 | ) |
| Less                      Accumulated Amortization of Capital Lease Assets                 |   |                                                                 | **(501,990**   | **)**                             |   | (495,634 | ) |
| **Total                      Utility Plant - Net**                                         |   |                                                                 | **1,893,538**  |                              |   | 1,887,387 |   |
|                                                                                       |   |                                                                 |           |                              |   |   |   |
| **Investments                      and Other Property**                                    |   |                                                                 |           |                              |   |   |   |
| Investments                      in Lease Debt and Equity                                  |   |                                                                 | **169,780**    |                              |   | 181,222 |   |
| Other                                                                                      |   |                                                                 | **32,256**     |                              |   | 30,161 |   |
| **Total                      Investments and Other Property**                              |   |                                                                 | **202,036**    |                              |   | 211,383 |   |
|                                                                                       |   |                                                                 |           |                              |   |   |   |
| **Current                      Assets**                                                    |   |                                                                 |           |                              |   |   |   |
| Cash                      and Cash                      Equivalents                        |   |                                                                 | **33,342**     |                              |   | 19,711 |   |
| Trade                      Accounts Receivable                                             |   |                                                                 | **82,135**     |                              |   | 97,512 |   |
| Unbilled                      Accounts Receivable                                          |   |                                                                 | **28,600**     |                              |   | 35,115 |   |
| Allowance                      for                      Doubtful Accounts                  |   |                                                                 | **(16,703**    | **)**                             |   | (16,303 | ) |
| Intercompany                      Accounts Receivable                                      |   |                                                                 | **19,329**     |                              |   | 16,329 |   |
| Materials                      and                      Fuel Inventory                     |   |                                                                 | **67,434**     |                              |   | 63,629 |   |
| Current                      Regulatory Assets                                             |   |                                                                 | **9,718**      |                              |   | 9,549 |   |
| Income                      Tax                      Receivable                            |   |                                                                 | **36,697**     |                              |   | - |   |
| Deferred                      Income Taxes - Current                                       |   |                                                                 | **50,609**     |                              |   | 57,151 |   |
| Interest                      Receivable - Current                                         |   |                                                                 | **3,602**      |                              |   | 7,782 |   |
| Trading                      Assets - Derivative Instrument                                |   |                                                                 | **3,353**      |                              |   | 15,447 |   |
| Other                                                                                      |   |                                                                 | **9,611**      |                              |   | 8,833 |   |
| **Total                      Current Assets**                                              |   |                                                                 | **327,727**    |                              |   | 314,755 |   |
|                                                                                       |   |                                                                 |           |                              |   |   |   |
| **Regulatory                      and Other Assets**                                       |   |                                                                 |           |                              |   |   |   |
| Transition                      Recovery Asset                                             |   |                                                                 | **86,640**     |                              |   | 101,626 |   |
| Income                      Taxes                      Recoverable Through Future Revenues |   |                                                                 | **33,106**     |                              |   | 34,749 |   |
| Other                      Regulatory Assets                                               |   |                                                                 | **51,267**     |                              |   | 51,594 |   |
| Other                      Assets                                                          |   |                                                                 | **20,960**     |                              |   | 21,569 |   |
| **Total                      Regulatory and Other Assets**                                 |   |                                                                 | **191,973**    |                              |   | 209,538 |   |
|                                                                                       |   |                                                                 |           |                              |   |   |   |
| **Total                      Assets**                                                      |   | **$**                                                                | **2,615,274**  |                              | $      | 2,623,063 |   |

**(Continued)**

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Table                of Contents

**TUCSON            ELECTRIC POWER            COMPANY**

**COMPARATIVE                    CONDENSED                    CONSOLIDATED BALANCE SHEETS**

|                                                                                    |   | March                      31,                                           |          | December                      31, |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------------|-----------------------------------|--------|
|                                                                                    |   | **2007**                                                                 |          | **2006**                          |   |
|                                                                                    |   | **(Unaudited)**                                                          |          |                              |   |
| **CAPITALIZATION                      AND OTHER LIABILITIES**                           |   | -                      Thousands                      of Dollars -  |          |
| **Capitalization**                                                                      |   |                                                                     |          |                              |   |
| Common                      Stock                                                       |   | **$**                                                                    | **795,971**   |                              | $      | 795,971 |   |
| Capital                      Stock                      Expense                         |   |                                                                     | **(6,357**    | **)**                             |   | (6,357 | ) |
| Accumulated                      Deficit                                                |   |                                                                     | **(218,123**  | **)**                             |   | (219,640 | ) |
| Accumulated                      Other Comprehensive Loss                               |   |                                                                     | **(15,545**   | **)**                             |   | (15,260 | ) |
| Common                      Stock                      Equity                           |   |                                                                     | **555,946**   |                              |   | 554,714 |   |
| Capital                      Lease                      Obligations                     |   |                                                                     | **534,013**   |                              |   | 588,424 |   |
| Long-Term                      Debt                                                     |   |                                                                     | **821,170**   |                              |   | 821,170 |   |
| **Total                      Capitalization**                                           |   |                                                                     | **1,911,129** |                              |   | 1,964,308 |   |
|                                                                                    |   |                                                                     |          |                              |   |   |   |
| **Current                      Liabilities**                                            |   |                                                                     |          |                              |   |   |   |
| Current                      Obligations under Capital Leases                           |   |                                                                     | **62,378**    |                              |   | 58,999 |   |
| Borrowing                      Under Revolving Credit Facility                          |   |                                                                     | **75,000**    |                              |   | 30,000 |   |
| Accounts                      Payable                                                   |   |                                                                     | **70,675**    |                              |   | 69,019 |   |
| Intercompany                      Accounts Payable                                      |   |                                                                     | **11,725**    |                              |   | 10,743 |   |
| Income                      Taxes                      Payable                          |   |                                                                     | **-**         |                              |   | 8,409 |   |
| Interest                      Accrued                                                   |   |                                                                     | **18,724**    |                              |   | 45,613 |   |
| Accrued                      Taxes                      Other than Income Taxes         |   |                                                                     | **36,825**    |                              |   | 27,227 |   |
| Accrued                      Employee Expenses                                          |   |                                                                     | **15,102**    |                              |   | 21,102 |   |
| Trading                      Liabilities - Derivative Instruments                       |   |                                                                     | **1,542**     |                              |   | 11,163 |   |
| Other                                                                                   |   |                                                                     | **16,821**    |                              |   | 14,278 |   |
| **Total                      Current Liabilities**                                      |   |                                                                     | **308,792**   |                              |   | 296,553 |   |
|                                                                                    |   |                                                                     |          |                              |   |   |   |
| **Deferred                      Credits and Other Liabilities**                         |   |                                                                     |          |                              |   |   |   |
| Deferred                      Income Taxes - Noncurrent                                 |   |                                                                     | **172,503**   |                              |   | 155,253 |   |
| Regulatory                      Liability - Net Cost of Removal for Interim Retirements |   |                                                                     | **80,262**    |                              |   | 79,876 |   |
| Pension                      and                      Other Post-Retirement Benefits    |   |                                                                     | **102,338**   |                              |   | 99,832 |   |
| Other                                                                                   |   |                                                                     | **40,250**    |                              |   | 27,241 |   |
| **Total                      Deferred Credits and Other Liabilities**                   |   |                                                                     | **395,353**   |                              |   | 362,202 |   |
|                                                                                    |   |                                                                     |          |                              |   |   |   |
| **Commitments                      and Contingencies (Note 7)**                         |   |                                                                     |          |                              |   |   |   |
|                                                                                    |   |                                                                     |          |                              |   |   |   |
| **Total                      Capitalization and Other Liabilities**                     |   | **$**                                                                    | **2,615,274** |                              | $      | 2,623,063 |   |

**(Concluded)**

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Table          of Contents

**TUCSON          ELECTRIC POWER          COMPANY**

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

|                                                                   |                                                             |            |        |    |   |        |   | Accumulated   |         |          |   |
|------------------------------------------------------------------------|------------------------------------------------------------------|-----------------|-------------|---------|--------|-------------|--------|---------------|--------------|---------------|--------|
|                                                                   |                                                             |            |        | Capital |   |        |   | Other         |         | Total         |   |
|                                                                   |                                                             | Common          |        | Stock   |   | Accumulated |   | Comprehensive |         | Stockholder's |   |
|                                                                   |                                                             | Stock           |        | Expense |   | Deficit     |   | Loss          |         | Equity        |   |
|                                                                   |                                                             | **(Unaudited)** |        |
|                                                                   |  -                  Thousands                  of Dollars - |            |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |
| **Balances                  at December 31, 2006**                     |                                                             | $               | 795,971     |    | $      | (6,357      | )      | $             | (219,640     | )             | $      | (15,260 | ) | $ | 554,714 |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| Adoption                  of                  FIN 48                   |                                                             |            |        |    |   |        |   |          | 696          |          |   |   |   |   | 696 |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| Comprehensive                  Income:                                 |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| 2007                  Year-to-Date Net Income                          |                                                             |            | -           |    |   | -           |   |          | 821          |          |   | - |   |   | 821 |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| Unrealized                  Gain on Cash Flow Hedges                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| (net                  of                  $1,182 income taxes)    |                                                             |            | -           |    |   | -           |   |          | -            |          |   | 1,804 |   |   | 1,804 |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| Reclassification                  of Unrealized Loss on                |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| Cash                  Flow                  Hedges to Net Income  |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| (net                  of                  $1,370 income taxes)    |                                                             |            | -           |    |   | -           |   |          | -            |          |   | (2,089 | ) |   | (2,089 | ) |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |        |   |
| Total                  Comprehensive Income                            |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   | 536 |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
|                                                                   |                                                             |            |        |    |   |        |   |          |         |          |   |   |   |   |   |   |
| **Balances                  at March 31, 2007**                        |                                                             | **$**           | **795,971** |    | **$**  | **(6,357**  | **)**  | **$**         | **(218,123** | **)**         | **$**  | **(15,545** | **)** | **$** | **555,946** |   |

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Table          of Contents

**NOTES          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS **

----

**NOTE1. NATURE        OF OPERATIONS AND BASIS OF ACCOUNTING        PRESENTATION **

UniSource

**NOTE2. REGULATORY        MATTERS **

**ACCOUNTING        FOR RATE REGULATION**

*Accounting        for        the Effects of Certain Types of Regulation*

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Table            of Contents

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

----

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

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

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

**TEP        RATES        AND REGULATION**

**Future        Implications of Discontinuing Application of FAS 71**

**2006        Proceedings**

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

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

|   | · | Demand-Side                  Management (DSM), renewable energy standards (RES), and time of                  use                  tariffs (TOU). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

**TEP        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 Competition Transition charge                  (Fixed                  CTC); |
|--------|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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Table            of Contents

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

----

|   | ·   | 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**

**UNS        GAS        RATES AND REGULATION**

**Energy        Cost        Adjustment Mechanism: Purchased Gas Adjuster (PGA)**

|   | (1) | The                  **PGA                  factor**,                  computed                  monthly subject to limitations, equals a base cost of gas of $0.40                  per                  therm, or $4.00 per MMBtu, plus the difference between the twelve                  month                  rolling weighted average cost of gas over the base                  cost. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | When                  ACC-designated under- or over-recovery trigger points of $6.2 million                  and                  $4.5 million, respectively, are met, UNS Gas may request a **PGA                  surcharge or credit**                  with the                  goal of collecting or returning the amount deferred from or to                  customers                  over a period deemed appropriate by the                  ACC. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                 |                                                            |
|--------------------------------------------------------------------------------------|-----------------------------------------------------------------|
| **ACC                  approved PGA 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  |
| $0.05                                                                                | December                  2006                  - April 2007    |

**Future        Implications of Discontinuing Application of FAS 71**

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Table            of Contents

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

----

**General        Rate Case Filing **

**UNS        ELECTRIC RATES AND REGULATION**

**Energy        Cost        Adjustment Mechanism: Purchased Power Fuel Adjustment Clause        (PPFAC)**

**Future        Implications of Discontinuing Application of FAS 71**

**General        Rate Case Filing **

**NOTE3. DEBT        AND CREDIT FACILITIES**

**UNS        GAS/UNS        ELECTRIC REVOLVING CREDIT AGREEMENT**

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Table            of Contents

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

----

**NOTE4. BUSINESS        SEGMENTS **

|                                                                                                                                                                       |   | **Reportable                                      Segments**                                    |   |           |   |                                                  |   | **UniSource** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|----------------|--------|-------------------------------------------------------|--------|---------------|--------|
|                                                                                                                                                                       |   | **TEP**                                                                                         |   | **UNS****Gas** |   | **UNS                                      Electric** |   | **Other**     |   | **Reconciling                                      Adjustments** |   | **Energy                                      Consolidated** |   |
| **Income                                    Statement **                                                                                                              |   | -Millions                                      of                                      Dollars- |   |
| **Three                                      months ended March 31, 2007:**                                                                                                |   |                                                                                            |   |           |   |                                                  |   |          |   |   |   |   |   |
| Operating                                      Revenues - External                                                                                                         |   | $                                                                                               | 219    |           | $      | 63                                                    |   | $             | 36     |   | $ | - |   | $ | - |   | **$** | **318** |   |
| Operating                                      Revenues - Intersegment                                                                                                     |   |                                                                                            | 1      |           |   | -                                                     |   |          | -      |   |   | 4 |   |   | (5 | ) |   | **-** |   |
| Income                                      (Loss)                                      from ContinuingOperations                                      Before Income Taxes |   |                                                                                            | 2      |           |   | 8                                                     |   |          | 1      |   |   | (2 | ) |   | - |   |   | **9** |   |
| Net                                      Income                                      (Loss)                                                                                |   |                                                                                            | 1      |           |   | 5                                                     |   |          | -      |   |   | (1 | ) |   | - |   |   | **5** |   |
|                                                                                                                                                                       |   |                                                                                            |   |           |   |                                                  |   |          |   |   |   |   |   |   |   |   |   |   |   |
| **Three                                      months ended March 31, 2006:**                                                                                                |   |                                                                                            |   |           |   |                                                  |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Operating                                      Revenues - External                                                                                                         |   | $                                                                                               | 208    |           | $      | 63                                                    |   | $             | 34     |   | $ | - |   | $ | - |   | **$** | **305** |   |
| Operating                                      Revenues - Intersegment                                                                                                     |   |                                                                                            | 1      |           |   | -                                                     |   |          | -      |   |   | 3 |   |   | (4 | ) |   | **-** |   |
| Income                                      (Loss)                                      from ContinuingOperations                                      Before Income Taxes |   |                                                                                            | 28     |           |   | 8                                                     |   |          | 1      |   |   | (4 | ) |   | - |   |   | **33** |   |
| Discontinued                                      Operations - Net of Tax                                                                                                  |   |                                                                                            | -      |           |   | -                                                     |   |          | -      |   |   | (3 | ) |   | - |   |   | **(3** | **)** |
| Net                                      Income                                      (Loss)                                                                                |   |                                                                                            | 17     |           |   | 5                                                     |   |          | 1      |   |   | (6 | ) |   | - |   |   | **17** |   |
|                                                                                                                                                                       |   |                                                                                            |   |           |   |                                                  |   |          |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                                    Sheet **                                                                                                                 |   |                                                                                            |   |           |   |                                                  |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      Assets,                                      March 31, 2007                                                                     |   | $                                                                                               | 2,615  |           | $      | 251                                                   |   | $             | 203    |   | $ | 1,006 |   | $ | (928 | ) | **$** | **3,147** |   |
| Total                                      Assets,                                      December 31, 2006                                                                  |   |                                                                                            | 2,623  |           |   | 253                                                   |   |          | 195    |   |   | 1,038 |   |   | (922 | ) |   | **3,187** |   |

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Table            of Contents

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

----

**NOTE5. ACCOUNTING        FOR DERIVATIVE INSTRUMENTS AND TRADING        ACTIVITIES**

**TEP        FUEL        AND POWER TRANSACTIONS**

|   | · | **Normal                  Purchase and Sale**                  - A portion                  of TEP’s forward power contracts are considered to be normal purchases                  and                  sales and, therefore, are not required to be marked-to-market. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Cash                  Flow Hedges**                  - Some of                  TEP’s forward power contracts and all of the gas swap agreements are                  accounted for as cash flow hedges. Unrealized gains and losses                  resulting                  from the change in the fair value of derivatives that meet the                  criteria                  for cash flow hedge accounting are recorded in Other Comprehensive                  Income,                  rather than in current earnings. Unrealized gains and losses are                  reclassified into earnings when the related transactions settle                  or                  terminate. There were no gains or losses recognized in Net Income                  related                  to hedge ineffectiveness because all cash flow hedges are considered                  to be                  effective. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Other                  Derivatives**                  - The change                  in fair value (mark-to-market) of forward power contracts, which                  are not                  accounted for as normal purchases and sales or cash flow hedges,                  is                  recorded in Net Income. These derivatives include forward contracts                  for                  the purchase and sale of electricity with the intent of optimizing                  market                  opportunities, subject to specified risk parameters established                  and                  monitored by TEP’s Risk Management                  Committee. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                        |   | Three                  Months                  Ended    |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                                        |   | March                  31,                              |   |
|                                                                                                        |   | **2007**                                                |   | **2006** |   |
|                                                                                                        |   | -Millions                  of                  Dollars- |   |
| Net                  Unrealized (Loss) Gain on Forward Power Sales - Trading                  Contracts     |   | **$**                                                   | **(8** | **)** | $ | - |   |
| Net                  Unrealized (Loss) Gain on Forward Power Purchases - Trading                  Contracts |   |                                                    | **8**  |   |   | 1 |   |
| Pre-Tax                  Unrealized Gain on Trading Contracts Recorded in Earnings                          |   | **$**                                                   | **-**  |   | $ | 1 |   |
|                                                                                                        |   |                                                    |   |   |   |   |   |
| Net                  Unrealized (Loss) Gain on Forward Power Sales - Cash Flow                  Hedges      |   | **$**                                                   | **(1** | **)** | $ | 2 |   |
| Net                  Unrealized (Loss) Gain on Gas Price Swaps - Cash Flow                  Hedges          |   |                                                    | **4**  |   |   | (7 | ) |
| Pre-Tax                  Unrealized (Loss) Gain on Cash Flow Hedges                                         |   | **$**                                                   | **3**  |   | $ | (5 | ) |
| After                  Tax                  Unrealized (Loss) Gain on Cash Flow Hedges Recorded in OCI      |   | **$**                                                   | **2**  |   | $ | (3 | ) |

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Table            of Contents

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

----

|                                                            |   |                                                    |   |                                  |   |
|-----------------------------------------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------|--------|
|                                                            |   | March                  31,                              |   | December                  31,         |   |
|                                                            |   | **2007**                                                |   | **2006**                              |   |
|                                                            |   | **Trading                  Contracts**                  |   | **Cash                  Flow Hedges** |   | **Trading                  Contracts** |   | **Cash                  Flow Hedges** |   |
|                                                            |   | -Millions                  of                  Dollars- |   |
| Derivative                  Assets - Current                    |   | **$**                                                   | **1**  |                                  | **$**  | **3** |   | $ | 9 |   | $ | 6 |   |
| Derivative                  Liabilities - Current               |   |                                                    | **(1** | **)**                                 |   | **(1** | **)** |   | (9 | ) |   | (3 | ) |
| Net                  Current                  Derivative Assets |   | **$**                                                   | **-**  |                                  | **$**  | **2** |   | $ | - |   | $ | 3 |   |
|                                                            |   |                                                    |   |                                  |   |   |   |   |   |   |   |   |   |
| Derivative                  Liabilities - Noncurrent            |   | **$**                                                   | **-**  |                                  | **$**  | **-** |   | $ | - |   | $ | (1 | ) |

**UNS        ELECTRIC POWER SUPPLY TRANSACTIONS**

**MEG        TRADING        TRANSACTIONS**

|                                                                 |   |                                                            |   |                              |   |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                 |   | March                      31,                                  |   | December                      31, |   |
|                                                                 |   | **2007**                                                        |   | **2006**                          |   |
|                                                                 |   | -Millions                      of                      Dollars- |   |
| MEG:                                                                 |   |                                                            |   |                              |   |
| Trading                      Assets - Current                        |   | **$**                                                           | **10** |                              | $      | 11 |   |
| Trading                      Liabilities - Current                   |   |                                                            | **(4** | **)**                             |   | (5 | ) |
| Net                      Current                      Trading Assets |   | **$**                                                           | **6**  |                              | $      | 6 |   |

**NOTE6. INCOME        AND OTHER TAXES**

**INCOME        TAXES **

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Table            of Contents

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

----

|                                                                                           |   | **UniSource                  Energy**                |      | **TEP**                                                   |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|-----------|-----------------------------------------------------------|--------|
|                                                                                           |   | Three                  Months                  Ended |      | Three                  Months                  Ended      |   |
|                                                                                           |   | March                  31,                           |      | March                  31,                                |   |
|                                                                                           |   | **2007**                                             |      | **2006**                                                  |   | **2007** |   | **2006** |   |
|                                                                                           |   |                                                 |      | -Thousands                  of                  Dollars - |   |   |   |
|                                                                                           |   |                                                 |      |                                                      |   |   |   |   |   |
| **Federal                  Income Tax Expense (Benefit) at Statutory Rate**                    |   | **$**                                                | **3,085** |                                                      | $      | 11,649 |   | **$** | **661** |   | $ | 9,841 |   |
| State                  Income                  Tax Expense (Benefit), Net of Federal Deduction |   |                                                 | **407**   |                                                      |   | 1,536 |   |   | **87** |   |   | 1,293 |   |
| Depreciation                  Differences (Flow Through Basis)                                 |   |                                                 | **632**   |                                                      |   | 662 |   |   | **632** |   |   | 662 |   |
| Tax                  Credits                                                                   |   |                                                 | **(139**  | **)**                                                     |   | (130 | ) |   | **(139** | **)** |   | (130 | ) |
| Other                                                                                          |   |                                                 | **(114**  | **)**                                                     |   | 89 |   |   | **(173** | **)** |   | (138 | ) |
| **Total                  Federal and State Income Tax Expense (Benefit)**                      |   | **$**                                                | **3,871** |                                                      | $      | 13,806 |   | **$** | **1,068** |   | $ | 11,528 |   |

**ADOPTION        OF        FIN 48**

*Accounting        for        Uncertainty in Income Taxes - an interpretation of FAS 109*

**OTHER        TAX        MATTERS**

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

----

**NOTE7. COMMITMENTS        AND CONTINGENCIES**

**TEP        COMMITMENTS**

**Termination        of Power Purchases from Springerville Unit 3**

**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 **

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

----

**Postretirement        Benefit Costs at Navajo Generating Station**

**Environmental        Reclamation at Remote Generating Stations**

**TEP        Wholesale Accounts Receivable and Allowances**

**GUARANTEES        AND INDEMNITIES**

|   | · | UES’                  guarantee of senior unsecured notes issued in 2003 by UNS Gas ($100                  million) and UNS Electric ($60 million), |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UES’                  guarantee of a $60 million unsecured revolving credit agreement                  for UNS                  Gas and UNS Electric, |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | UniSource                  Energy’s guarantee of approximately $5 million in natural gas                  transportation and supply payments in addition to building and                  equipment                  lease payments for UNS Gas and UNS                  Electric. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table            of Contents

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

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**NOTE8. EMPLOYEE        BENEFITS PLANS**

**PENSION        BENEFIT PLANS**

**OTHER        POSTRETIREMENT BENEFIT PLANS**

*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  |   |
|                                                         |   | March                  31,                               |   | March                  31,                            |   |
|                                                         |   | **2007**                                                 |   | **2006**                                              |   | **2007** |   | **2006** |   |
|                                                         |   | -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 | ) |   | **-** |   |   | - |   |
| Recognized                  Actuarial Loss                   |   |                                                     | **1**  |                                                  |   | 1 |   |   | **-** |   |   | - |   |
| **Net                  Periodic Benefit Cost**               |   | **$**                                                    | **2**  |                                                  | $      | 3 |   | **$** | **1** |   | $ | 2 |   |

**NOTE9. SHARE-BASED        COMPENSATION        PLANS**

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

----

**STOCK        OPTIONS **

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

|                                                    |   | **Three                  Months Ended March 31, 2007**                |
|---------------------------------------------------------|--------|-----------------------------------------------------------------------|
|                                                    |   | **Total                  Stock Options Outstanding**                  |   | **Non-Vested                  Stock Options** |
|                                                    |   |                                                                  | Weighted |   |   | Weighted |
|                                                    |   |                                                                  | Average |   |   | Average |
|                                                    |   |                                                                  | Exercise |   |   | Grant                  Date |
|                                                    |   | Shares                                                                | Price |   |                    Shares | Value |
| Options                  Outstanding, December 31, 2006 |   | 1,388,328                                                   | $18.59 |   | 200,373   | $7.38 |
| Granted                                                 |   | 184,260                                                     | $37.88 |   | 184,260   | $8.13 |
| Exercised                  or                  Vested   |   | (35,300)                                          | $14.01 |   | -   | - |
| Forfeited                                               |   | (234)                                             | $12.28 |   | -   | - |
| Options                  Outstanding, March 31, 2007    |   | 1,537,054                                                   | $21.01 |   | 384,633   | $7.74 |
| Options                  Exercisable, March 31, 2007    |   |                      1,152,421     | $16.57 |   |   |   |

| Weighted                  Average Remaining Contractual Life at March 31, 2007:                                       | 5.3                  years |
|-----------------------------------------------------------------------------------------------------------------------|----------------------------|
| Weighted                  Average Remaining Contractual Life of Exercisable Shares at March                  31, 2007 | 3.9                  years |

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

----

| **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                 | 519,814                                  | 2.7                  years | $14.31 | 519,814 | $14.31 |
| $16.78                  -                  $18.84                 | 615,940                                  | 4.7                  years | $18.01 | 615,940 | $18.01 |
| $30.55                  -                  $37.88                 | 401,300                                  | 9.4                  years | $34.29 |   16,667 | $30.55 |

**PERFORMANCE        SHARES**

**SHARE-BASED        COMPENSATION EXPENSE**

**NOTE10. UNISOURCE        ENERGY EARNINGS PER SHARE        (EPS)**
** **

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

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|                                                                                                                                                       |   | Three                  Months                  Ended |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                                                                                                                       |   | March                  31,                           |       |
|                                                                                                                                                       |   | **2007**                                             |       | **2006** |   |
|                                                                                                                                                       |   | -                  In                  Thousands -   |       |
| Numerator:                                                                                                                                                 |   |                                                 |       |   |   |
| Net                  Income                                                                                                                                |   | **$**                                                | **4,943**  |   | $ | 16,822 |   |
| Income                  from                  Assumed Conversion of Convertible Senior Notes                                                               |   |                                                 | **-**      |   |   | 1,097 |   |
| Adjusted                  Numerator                                                                                                                        |   | **$**                                                | **4,943**  |   | $ | 17,919 |   |
|                                                                                                                                                       |   |                                                 |       |   |   |   |   |
| Denominator:                                                                                                                                               |   |                                                 |       |   |   |   |   |
| Weighted-average                  Shares of Common Stock Outstanding:                                                                                      |   |                                                 |       |   |   |   |   |
| Common                  Shares                  Issued                                                                                                     |   |                                                 | **35,213** |   |   | 34,925 |   |
| Fully                  Vested                  Deferred Stock Units                                                                                        |   |                                                 | **209**    |   |   | 191 |   |
| Total                  Weighted-average Shares of Common Stock Outstanding                                                                                 |   |                                                 | **35,422** |   |   | 35,116 |   |
| Effect                  of                  Dilutive Securities:                                                                                           |   |                                                 |            |   |   |  |   |
| Convertible                  Senior Notes                                                                                                                  |   |                                                 | **-**      |   |   | 4,000 |   |
| Options                  and                  Stock Issuable Under Employee Benefit Plans and                  the                  Directors’ Plans |   |                                                 | **607**    |   |   | 618 |   |
| Total                  Shares                                                                                                                              |   |                                                 | **36,029** |   |   | 39,734 |   |

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

|                                                                                        | -Millions                    of Dollars- |
|---------------------------------------------------------------------------------------------|------------------------------------------|
| Revenues                    from                    Discontinued Operations                 |                                     | $ | 1  |   |
|                                                                                        |                                     |   |   |   |
| Loss                    from                    Discontinued Operations                     |                                     | $ | (4) |   |
| Loss                    on Sale                    of Discontinued Operations               |                                     |   | (1) |   |
| Loss                    from                    Discontinued Operations Before Income Taxes |                                     |   | (5) |   |
| Income                    Tax                    Benefit                                    |                                     |   | (2) |   |
| Discontinued                    Operations - Net of Tax                                     |                                     | $ | (3) |   |

**NOTE12. NEW        ACCOUNTING        PRONOUNCEMENTS**

|   | · | FAS                  159,                  *The                  Fair                  Value Option for Financial Assets and Financial                  Liabilities*,                  issued                  February 2007, provides companies with the option, at specified                  election                  dates, to measure certain financial assets and liabilities and                  other items                  at fair value, with changes in fair value recognized in earnings                  as those                  changes occur. FAS 159 also establishes disclosure requirements                  that                  include displaying the fair value of those assets and liabilities                  for                  which the entity elected the fair value option on the face of the                  balance                  sheet and providing management’s reasons for electing the fair value                  option for each eligible item. The provisions of FAS 159 will become                  effective January 1, 2008. We are evaluating the impact of FAS                  159 on our                  financial statements, and will incorporate these additional disclosure                  requirements in our financial statements for the quarter ended                  March 31,                  2008. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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|   | · | FAS                    157,                    *Fair                    Value Measurement*, issued                    September 2006, defines fair value, establishes a framework for                    measuring                    fair value, and expands disclosures about fair value measurements.                     FAS 157 clarifies that the exchange price is the price in the                    principal                    market in which the reporting entity would transact for the asset                    or                    liability.  We are required to disclose inputs used to develop fair                    value measurements and the effect of any of our assumptions on                    earnings or                    changes in net assets for the period.  The provisions of FAS 157 will                    become effective January 1, 2008.  We are evaluating the impact of                    FAS 157 on our financial statements, and will incorporate these                    additional                    disclosure requirements in our financial statements for the quarter                    ended                    March 31, 2008. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                    the third                    quarter of 2006, the Pension Protection Act of 2006 was signed                    into law,                    which will be effective January 1, 2008. The new law will affect                    the                    manner in which many companies, including UniSource Energy and                    TEP,                    administer their pension plans. The legislation will require                    companies to                    increase the amount by which they fund their pension plans, increase                    premiums to the Pension Benefit Guaranty Corporation for defined                    benefit                    plans, amend plan documents and provide additional disclosures                    in                    regulatory filings and to plan participants. We are currently                    assessing                    the impact it may have on our financial                    statements. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**NOTE13. SUPPLEMENTAL        CASH FLOW        INFORMATION**

|                                                                                                                                    |   | **UniSource                  Energy**                    |        |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                                                                    |   | Three                  Months                  Ended     |        |
|                                                                                                                                    |   | March                  31,                               |        |
|                                                                                                                                    |   | **2007**                                                 |        | **2006** |   |
|                                                                                                                                    |   | -Thousands                  of                  Dollars- |        |
|                                                                                                                                    |   |                                                     |        |   |   |
| **Net                  Income**                                                                                                         |   | **$**                                                    | **4,943**   |   | $ | 16,822 |   |
| **Adjustments                  to Reconcile Net Income**                                                                                |   |                                                     |        |   |   |   |   |
|  **To                  Net Cash Flows**                                                                                            |   |                                                     |        |   |   |   |   |
| Discontinued                  Operations - Net of Tax                                                                                   |   |                                                     | **-**       |   |   | 2,669 |   |
| Depreciation                  and Amortization Expense                                                                                  |   |                                                     | **34,466**  |   |   | 30,757 |   |
| Depreciation                  Recorded to Fuel and Other O&M Expense                                                                |   |                                                     | **1,874**   |   |   | 1,910 |   |
| Amortization                  of Transition Recovery Asset                                                                              |   |                                                     | **14,986**  |   |   | 11,842 |   |
| Net                  Unrealized Loss (Gain) on TEP Forward Electric Sales                                                               |   |                                                     | **8,555**   |   |   | (84 | ) |
| Net                  Unrealized Gain on TEP Forward Electric Purchases                                                                  |   |                                                     | **(8,020**  | **)** |   | (886 | ) |
| Net                  Unrealized Loss on MEG Trading Activities                                                                          |   |                                                     | **2,135**   |   |   | 3,176 |   |
| Amortization                  of Deferred Debt-Related Costs included in Interest                  Expense                              |   |                                                     | **980**     |   |   | 1,180 |   |
| Provision                  for                  Bad Debts                                                                               |   |                                                     | **827**     |   |   | 830 |   |
| Deferred                  Income Taxes                                                                                                  |   |                                                     | **26,328**  |   |   | 28,131 |   |
| Pension                  and                  Postretirement Expense                                                                    |   |                                                     | **3,611**   |   |   | 4,437 |   |
| Pension                  and                  Postretirement Funding                                                                    |   |                                                     | **(767**    | **)** |   | (4,876 | ) |
| Stock                  Based                  Compensation Expense                                                                      |   |                                                     | **967**     |   |   | 253 |   |
| Excess                  Tax                  Benefit from Stock Option Exercises                                                        |   |                                                     | **(325**    | **)** |   | (556 | ) |
| Changes                  in                  Assets and Liabilities which Provided (Used)                                               |   |                                                     |        |   |   |   |   |
| Cash                  Exclusive of Changes Shown Separately                                                                             |   |                                                     |        |   |   |   |   |
| Accounts                  Receivable                                                                                                    |   |                                                     | **28,575**  |   |   | 7,326 |   |
| Materials                  and                  Fuel Inventory                                                                          |   |                                                     | **(3,060**  | **)** |   | (773 | ) |
| Over/Under                  Recovered Purchased Gas Cost                                                                                |   |                                                     | **(108**    | **)** |   | 4,587 |   |
| Accounts                  Payable                                                                                                       |   |                                                     | **(5,013**  | **)** |   | (26,604 | ) |
| Interest                  Accrued                                                                                                       |   |                                                     | **(25,562** | **)** |   | (26,023 | ) |
| Income                  Tax                  Receivable/Payable                                                                         |   |                                                     | **(29,285** | **)** |   | (24,882 | ) |
| Accrued                  Taxes                  Other Than Income Taxes                                                                 |   |                                                     | **11,520**  |   |   | 11,591 |   |
| Other                                                                                                                                   |   |                                                     | **(2,883**  | **)** |   | 13,596 |   |
| Net                  Cash Used                  by Operating Activities of Discontinued Operations Current                  Liabilities |   |                                                     | **-**       |   |   | (2,710 | ) |
| **Net                  Cash Flows - Operating Activities**                                                                              |   | **$**                                                    | **64,744**  |   | $ | 51,713 |   |

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

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|                                                                                                       |   | **TEP**                                                  |        |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                                       |   | Three                  Months                  Ended     |        |
|                                                                                                       |   | March                  31,                               |        |
|                                                                                                       |   | **2007**                                                 |        | **2006** |   |
|                                                                                                       |   | -Thousands                  of                  Dollars- |        |
|                                                                                                       |   |                                                     |        |   |   |
| **Net                  Income**                                                                            |   | **$**                                                    | **821**     |   | $ | 16,587 |   |
| **Adjustments                  to Reconcile Net Income**                                                   |   |                                                     |        |   |   |   |   |
|  **To                  Net Cash Flows**                                                               |   |                                                     |        |   |   |   |   |
| Depreciation                  and Amortization Expense                                                     |   |                                                     | **29,062**  |   |   | 26,501 |   |
| Depreciation                  Recorded to Fuel and Other O&M Expense                                   |   |                                                     | **1,519**   |   |   | 1,629 |   |
| Amortization                  of Transition Recovery Asset                                                 |   |                                                     | **14,986**  |   |   | 11,842 |   |
| Net                  Unrealized Loss (Gain) on TEP Forward Electric Sales                                  |   |                                                     | **8,555**   |   |   | (84 | ) |
| Net                  Unrealized Gain on TEP Forward Electric Purchases                                     |   |                                                     | **(8,020**  | **)** |   | (886 | ) |
| Amortization                  of Deferred Debt-Related Costs included in Interest                  Expense |   |                                                     | **662**     |   |   | 863 |   |
| Pension                  and                  Postretirement Expense                                       |   |                                                     | **3,171**   |   |   | 4,007 |   |
| Pension                  and                  Postretirement Funding                                       |   |                                                     | **(727**    | **)** |   | (4,486 | ) |
| Stock                  Based                  Compensation Expense                                         |   |                                                     | **753**     |   |   | 201 |   |
| Provision                  for                  Bad Debts                                                  |   |                                                     | **444**     |   |   | 366 |   |
| Deferred                  Income Taxes                                                                     |   |                                                     | **24,838**  |   |   | 24,850 |   |
| Changes                  in                  Assets and Liabilities which Provided (Used)                  |   |                                                     |        |   |   |   |   |
| Cash                  Exclusive of Changes Shown Separately                                                |   |                                                     |        |   |   |   |   |
| Accounts                  Receivable                                                                       |   |                                                     | **18,573**  |   |   | 6,849 |   |
| Materials                  and                  Fuel Inventory                                             |   |                                                     | **(3,805**  | **)** |   | (1,055 | ) |
| Accounts                  Payable                                                                          |   |                                                     | **1,610**   |   |   | (19,956 | ) |
| Interest                  Accrued                                                                          |   |                                                     | **(20,994** | **)** |   | (21,604 | ) |
| Income                  Tax                  Receivable/Payable                                            |   |                                                     | **(32,005** | **)** |   | (23,997 | ) |
| Accrued                  Taxes                  Other Than Income Taxes                                    |   |                                                     | **9,598**   |   |   | 9,206 |   |
| Other                                                                                                      |   |                                                     | **681**     |   |   | 12,327 |   |
| **Net                  Cash Flows - Operating Activities**                                                 |   | **$**                                                    | **49,722**  |   | $ | 43,160 |   |

**NOTE14. REVIEW        BY INDEPENDENT REGISTERED PUBLIC        ACCOUNTING FIRM**

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Table          of Contents

**ITEM2.      - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL      CONDITION AND RESULTS OF OPERATIONS **

----

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

| ·     | operating                results during the first quarter of 2007 compared with the same period                in                2006, |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

**UNISOURCEENERGY      CONSOLIDATED**

**OVERVIEWOF      CONSOLIDATED      BUSINESS**

**OUTLOOKAND      STRATEGIES**

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

| ·     | Expand                TEP’s                portfolio of generating and purchased power resources to meet growing                retail energy demand and respond to wholesale market                opportunities; |
|--------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·     | Expand                UNS                Electric’s portfolio of generating and purchased power resources to                substitute for the expiration of the full requirements contract with                Pinnacle West Marketing and Trading (PWMT) and to meet growing retail                energy demand; |
|--------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

| ·     | Resolve                the                uncertainty surrounding TEP’s rates for generation service after 2008,                while preserving TEP’s benefits under the Settlement                Agreement; |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·     | Receive                ACC                approval of rate increases for UNS Gas and UNS Electric to provide                adequate revenues to cover the rising cost of providing service to                their                customers; |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·     | Improve                capital structure; and |
|--------------------------------|-----------------------------------------------|

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

|                                           |   | Actual                  Year-to-Date March                  31,                  2007 |   | EstimateFull                  Year                  2007 |   |
|------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                           |   | -Millions                  of                  Dollars-                          |
| TEP                                            |   | $                                                                                     | 35     |                                                     | $      | 198 |   |
| UNS                  Gas                       |   |                                                                                  | 4      |                                                     |   | 38 |   |
| UNS                  Electric                  |   |                                                                                  | 10     |                                                     |   | 43 |   |
| Other                  (1)                     |   |                                                                                  | 1      |                                                     |   | 27 |   |
| UniSource                  Energy Consolidated |   | $                                                                                     | 50     |                                                     | $      | 306 |   |

**RESULTSOF      OPERATIONS**

**Executive      Overview**

*Tucson      Electric      Power Company, Results of Operations, *
*,      *
*      Tucson      Electric Power Company, Liquidity and Capital Resources, Financing      Activities*

*See      Other      Non-Reportable Segments, Results of Operations, Discontinued Operations - Global      Solar,*

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Table          of Contents

**CONTRIBUTIONBY      BUSINESS      SEGMENT**

|                                                                             |   | **Three                Months Ended****March                31,** |   |
|----------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                             |   | **2007**                                                          |   | **2006** |   |
|                                                                             |   | -Millions                of                Dollars-          |
| TEP                                                                              |   | $                                                                 | 1      |   | $ | 17 |   |
| UNS                Gas                                                           |   |                                                              | 5      |   |   | 5 |   |
| UNS                Electric                                                      |   |                                                              | -      |   |   | 1 |   |
| Other                (1)                                                         |   |                                                              | (1     | ) |   | (3 | ) |
| Consolidated                Net Income from Continuing                Operations |   | $                                                                 | 5      |   | $ | 20 |   |
| Discontinued                Operations (2)                                       |   |                                                              | -      |   |   | (3 | ) |
| Consolidated                Net Income                                           |   | $                                                                 | 5      |   | $ | 17 |   |

**LIQUIDITYAND      CAPITAL      RESOURCES**

**UniSource      Energy Consolidated Cash Flows**

| **Three                Months Ended March 31,**           |   | **2007**                                            |   | **2006** |   |
|-----------------------------------------------------------|--------|-----------------------------------------------------|--------|----------|--------|
|                                                      |   | -Millions                of                Dollars- |   |
| Cash                provided                by (used in): |   |                                                |   |     |   |   |   |
| Operating                Activities                       |   | $                                                   | 65     |     | $      | 52 |   |
| Investing                Activities                       |   |                                                | (41    | )        |   | (51 | ) |
| Financing                Activities                       |   |                                                | (33    | )        |   | (22 | ) |

| ·                    | fund                capital                expenditures; |
|----------------------------------------------------|----------------------------------------------------------|

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

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

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Table          of Contents

|   **Balances                As of****May                2, 2007** |   |                                                      | **Cash                and Cash Equivalents** |   |   | **Borrowings****under                Revolving****Credit                Facility** |   |   | **Amount                Available under Revolving Credit Facility** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------------------------|----------------------------------------------|--------|--------|------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|
|                                                                        |   | -Millions                of                Dollars-  |
| UniSource                Energy stand-alone                                 |   | $                                                         | 6                                            |   | $      | 12                                                                                 |   | $      | 58                                                                  |   |
| TEP                                                                         |   |                                                      | 9                                            |   |   | 70                                                                                 |   |   | 80                                                                  |   |
| UNS                Gas                                                      |   |                                                      | 22                                           |   |   | 0                                                                                  |   |   | 45                                                                  | (1)    |
| UNS                Electric                                                 |   |                                                      | 7                                            |   |   | 20                                                                                 |   |   | 25                                                                  | (1)    |
| Other                                                                       |   |                                                      | 24                                           | (2)    |   | NA                                                                                 |   |   | NA                                                                  |   |
| Total                                                                       |   | $                                                         | 68                                           |   |   |                                                                               |   |   |                                                                |   |

**Executive      Overview**

**Liquidity      Outlook**

*.      *

*Tucson      Electric      Power Company, Liquidity and Capital Resources*
*,      UNS Gas,      Liquidity and Capital Resources*
*UNS      Electric,      Liquidity and Capital Resources, and Other Non-Reportable Segments, Liquidity      and Capital Resources*

----

Table          of Contents

**Guarantees      and Indemnities**

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

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

| · | UniSource                Energy’s guarantee of approximately $5 million in natural gas and supply                payments and building lease payments for UNS Gas, UNS Electric and                a                subsidiary of Millennium. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Contractual      Obligations**

| · | In                April                2007, TEP entered into power supply agreements for the period June                through                September 2007. These contracts are indexed to natural gas prices.                TEP                estimates its minimum payments under these contracts to be $21 million. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                2006 and                in April 2007, UNS Electric entered into various power supply agreements                for periods of one to five years beginning in June 2008. Certain                of these                contracts are at a fixed price per MW and others are indexed to natural                gas prices. UNS Electric estimates its future minimum payments under                these                contracts to be $40 million in 2008, $58 million in 2009, $34 million                in                2010, $16 million in 2011, $9 million in 2012, and $9 million thereafter                based on natural gas prices at the date of the                contracts. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                April                2007,                Tri-State                Generation and Transmission Association (Tri-State) notified TEP                that                Tri-State will terminate, effective August 1, 2007, its power sale                agreement with TEP. Under the agreement, Tri-State provides TEP with                100                MW of system capacity. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table          of Contents

**Dividends      on Common Stock**

|  **Declaration                Date**      |  **Record                Date**            |  **Payment                Date**        | **Dividend                Amount****Per                Share of Common Stock** |
|------------------------------------------------|-------------------------------------------------|----------------------------------------------|--------------------------------------------------------------------------------|
| February                9,                2007 | February                20,                2007 | March                14,                2007 | $0.225                                                                         |

**Income      Tax      Position**

**TUCSONELECTRIC      POWER COMPANY**

**RESULTSOF      OPERATIONS**

| · | a                $4 million                decrease in total operating revenues less fuel and purchased power                expense                due to the following: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                $11                million increase in retail revenues due to cooler weather and customer                growth of 2%; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $7 million                increase in other revenues due primarily to fees and reimbursements                received from Tri-State for fuel and O&M costs related to                Springerville Unit 3, were offset by: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $7 million                decrease in wholesale revenues due primarily to lower excess energy                available to sell into the wholesale market. Wholesale revenues in                the                first quarter of 2007 included $2 million of transmission revenues                related                to Springerville Unit 3; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $4 million                increase in purchased power expense due primarily to lower coal plant                availability compared to last year;                and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                $11                million increase in fuel expense due to $9 million of gas-related                fuel                expense at Luna, a $1 million increase in other gas-related expenses                and                $1 million of fuel costs associated with Springerville Unit 3. Increases                in coal and rail costs at Sundt Unit 4 and higher mining costs at San                Juan, were offset by lower generating output, resulting in no change                to                TEP’s coal-related fuel expense. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | a                $17 million                increase in O&M expense. The quarter included $6 million of O&M                related to the planned maintenance outages at San Juan Unit 2 and                Springerville Unit 2. Other factors contributing to higher O&M include                operating expenses at Luna, which was not operational in the first                quarter                of 2006, and $4 million of expenses related to Springerville Unit                3 that                TEP incurred as the operator of the plant and for which TEP received                reimbursement from Tri-State. O&M expense in both the first quarters                of 2007 and 2006 included pre-tax gains of $2 million related to                the sale                of excess SO2                Emission                Allowances; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

Table          of Contents

**Utility      Sales and Revenues**

|                                                                                                  |   | **Sales**                                           |     | **Operating                  Revenue**                  |   |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|----------|---------------------------------------------------------|--------|
| **Three                  Months Ended March 31,**                                                     |   | **2007**                                            |     | **2006**                                                |   | **2007** |   | **2006** |   |
|                                                                                                  |   | -Millions                  of                  kWh- |     | -Millions                  of                  Dollars- |   |
| **Electric                  Retail Sales:**                                                           |   |                                                |     |                                                    |   |   |   |   |   |
| Residential                                                                                           |   |                                                | 774      |                                                    |   | 699 |   | $ | 65 |   | $ | 59 |   |
| Commercial                                                                                            |   |                                                | 415      |                                                    |   | 389 |   |   | 42 |   |   | 40 |   |
| Industrial                                                                                            |   |                                                | 531      |                                                    |   | 508 |   |   | 37 |   |   | 36 |   |
| Mining                                                                                                |   |                                                | 239      |                                                    |   | 224 |   |   | 12 |   |   | 10 |   |
| Public                  Authorities                                                                   |   |                                                | 53       |                                                    |   | 54 |   |   | 4 |   |   | 4 |   |
| **Total                  Electric Retail Sales**                                                      |   |                                                | 2,012    |                                                    |   | 1,874 |   | $ | 160 |   | $ | 149 |   |
| **Electric                  Wholesale Sales Delivered:**                                              |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Long-term                  Contracts                                                                  |   |                                                | 285      |                                                    |   | 292 |   |   | 14 |   |   | 14 |   |
| Other                  Sales                                                                          |   |                                                | 550      |                                                    |   | 720 |   |   | 32 |   |   | 40 |   |
| Transmission                                                                                          |   |                                                | -        |                                                    |   | - |   |   | 3 |   |   | 2 |   |
| Net                  Unrealized Gain (Loss) on Forward Sales and Purchases of                  Energy |   |                                                | -        |                                                    |   | - |   |   | - |   |   | 1 |   |
| **Total                  Electric Wholesale Sales**                                                   |   |                                                | 835      |                                                    |   | 1,012 |   |   | 49 |   |   | 57 |   |
| **Total                  Electric Sales**                                                             |   |                                                | 2,847    |                                                    |   | 2,886 |   | $ | 209 |   | $ | 206 |   |
|                                                                                                  |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| **Weather                  Data:**                                                                    |   |                                                | **2007** |                                                    |   | **2006** |   |   |   |   |   |   |   |
| **Heating                  Degree Days**                                                              |   |                                                |     |                                                    |   |   |   |   |   |   |   |   |   |
| Three                  Months                  Ended March 31                                         |   |                                                | 913      |                                                    |   | 723 |   |   |   |   |   |   |   |
| 10-Year                  Average                                                                      |   |                                                | 825      |                                                    |   | 812 |   |   |   |   |   |   |   |

**Mark-to-Market      Adjustments on Trading Activity**

|                                                                                              |   | **Three                Months Ended****March                31,** |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                                              |   | **2007**                                                          |   | **2006** |   |
|                                                                                              |   | -Millions                of                Dollars-               |   |
| Net                Unrealized Gain (Loss) onForward                Sales                of Energy |   | $                                                                 | (8     | ) | $ | - |   |
| Net                Unrealized (Loss) Gain onForward                Purchases of Energy            |   |                                                              | 8      |   |   | 1 |   |
| Net                Unrealized Gain (Loss)                                                         |   | $                                                                 | -      |   | $ | 1 |   |

----

Table          of Contents

**Operating      Expenses**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **Generation                and Purchased Power** |   |  **Expense**                                   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------------------------------------|--------|
| **Three                Months Ended March 31,**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **2007**                                          |   | **2006**                                            |   | **2007** |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | -Millions                of                kWh-   |   | -Millions                of                Dollars- |   |
| Coal-Fired                Generation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                              |   |                                                |   |   |   |   |   |
| Four                Corners                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                              | 179    |                                                |   | 205 |   | $ | 3 |   | $ | 3 |   |
| Navajo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                              | 290    |                                                |   | 279 |   |   | 4 |   |   | 4 |   |
| San                Juan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                              | 493    |                                                |   | 634 |   |   | 12 |   |   | 14 |   |
| Springerville                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                              | 1,418  |                                                |   | 1,527 |   |   | 24 |   |   | 25 |   |
| Sundt                Unit                4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                              | 164    |                                                |   | 153 |   |   | 6 |   |   | 3 |   |
| Total                Coal-Fired Generation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                              | 2,544  |                                                |   | 2,798 |   |   | 49 |   |   | 49 |   |
| Gas-Fired                Generation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                              |   |                                                |   |   |   |   |   |   |   |   |   |
| Luna                (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                              | 166    |                                                |   | 22 |   |   | 9 |   |   | - |   |
| Other                Gas                Units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                              | 14     |                                                |   | 13 |   |   | 2 |   |   | 1 |   |
| Total                Gas-Fired Generation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                              | 180    |                                                |   | 35 |   |   | 11 |   |   | 1 |   |
| Solar                and                Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                              | 2      |                                                |   | 2 |   |   | - |   |   | - |   |
| Total                Generation (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                              | 2,726  |                                                |   | 2,835 |   |   | 60 |   |   | 50 |   |
| Total                Purchased Power                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                              | 325    |                                                |   | 238 |   |   | 18 |   |   | 14 |   |
| Total                Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                              | 3,051  |                                                |   | 3,073 |   | $ | 78 |   | $ | 64 |   |
| Less                Line                Losses and Company Use                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                              | (204   | )                                                   |   | (187 | ) |   |   |   |   |   |   |
| Total                Energy                Sold                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                              | 2,847  |                                                |   | 2,886 |   |   |   |   |   |   |   |
|  (1)                   Gas-fired                generation for 2006 includes energy generated at Luna during its                test                phase, but does not include any associated costs which were capitalized                and reported as project costs. (2)                   Fuel                expense                in 2007 excludes $1 million related to Springerville 3; these expenses                are                reimbursed by Tri-State and recorded in Other                Revenue. |

*Coal      Supply*
* *

|                           |   | **Three                Months Ended March 31,** |   |
|--------------------------------|--------|-------------------------------------------------|--------|
|                           |   | **2007**                                        |   | **2006** |   |
|                           |   | -cents                per                kWh-   |   |
| Coal                           |   |                                            | 1.93   |   |   | 1.75 |   |
| Gas*                           |   |                                            | 6.11   |   |   | 7.69 |   |
| All                Fuels       |   |                                            | 2.20   |   |   | 1.76 |   |
| Purchased                Power |   |                                            | 5.54   |   |   | 5.46 |   |

----

Table          of Contents

**FACTORSAFFECTING      RESULTS OF      OPERATIONS**

**Competition**

*Rates,      Settlement Agreement*

**ACC      Order      to Review the Settlement Agreement**

*Rates,      Settlement Agreement*
*Competition*

| · | it                is just                and reasonable for TEP’s rates to remain at their current level, including                continued collection of the Fixed Competition Transition Charge (Fixed                CTC) ($0.009 per kWh), until the ACC issues a final order in this                matter; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | the                incremental revenue collected as a result of retaining the Fixed                CTC after                it would otherwise terminate (approximately May 2008) shall accrue                interest and may be subject to                refund; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | TEP                shall                file rate proposals on or before July 2,                2007; |
|--------|-------------------------------------------------------------------------------------------------------|

| · | TEP                shall                file a Demand Side Management (DSM) portfolio and a Renewable Energy                Action plan by July 2, 2007; and |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | all                existing                rights and claims of TEP, ACC Staff and other intervenors arising                out of                the Settlement Agreement and the decision approving the Settlement                Agreement are fully preserved. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table          of Contents

| · | Market-based                generation service rates; |
|--------|-------------------------------------------------------|

| · | Cost-of-service                rates including a regulatory asset and a purchased power and fuel                cost                mechanism; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

| · | A                hybrid case                with some generation assets under cost-of-service, including a regulatory                asset and a purchased power and fuel cost mechanism; and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Programs                for                implementing DSM, time of use tariffs and renewable energy                programs. |
|--------|--------------------------------------------------------------------------------------------------------------------------------|

**Rates**

| · | 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 the 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Market      Prices**

----

Table          of Contents

| **Average                Market Price for Around-the-Clock Energy** |   | **$/MWh**       |   |
|---------------------------------------------------------------------|--------|-----------------|--------|
| Quarter                ended                March 31, 2007          |   | $               | 50     |   |
| Quarter                ended                March 31, 2006          |   |            | 49     |   |
|                                                                |   |            |   |   |
| **Average                Market Price for Natural Gas**             |   | **$****/MMBtu** |   |
| Quarter                ended                March 31, 2007          |   | $               | 6.32   |   |
| Quarter                ended                March 31, 2006          |   |            | 7.14   |   |

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

| · | FERC                regulation of wholesale energy                markets; |
|--------|----------------------------------------------------------------------------|

| · | availability                of hydropower; |
|--------|--------------------------------------------|

| · | transmission                constraints; and |
|--------|----------------------------------------------|

| · | environmental                regulations and the cost of                compliance. |
|--------|-------------------------------------------------------------------------------------|

**Coal      Supply**

**Emission      Allowances**

----

Table          of Contents

|  **Delivery**         |  **Allowances                Sold** |  **Pre-tax                Gain** |
|----------------------------|------------------------------------------|---------------------------------------|
| 2006                       |                                     | -Millions-                            |
| 1st                Quarter |                  2,500              | $2                                    |
| 2nd                Quarter |  2,500                              |                  2               |
| 3rd                Quarter |                  5,000              |                  3               |
| Total                2006  | 10,000                                   | $7                                    |
|                       |                                     |                                  |
| 2007                       |                                     |                                  |
| 1st                Quarter |                  2,500              | $2                                    |
| 2nd                Quarter |                  2,500              |                  2               |
| 3rd                Quarter |  2,500                              |                  2               |
| 4th                Quarter |                  2,500              |                  2               |
| Total                2007  | 10,000                                   | $8                                    |

**LIQUIDITYAND      CAPITAL RESOURCES**

**TEP      Cash      Flows & Liquidity Outlook**

| **Three                Months Ended March 31,**                                                                                                              |   | **2007**                                            |   | **2006** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------|--------|
|                                                                                                                                                         |   | -Millions                of                Dollars- |   |
| Net                Cash                Flows - Operating Activities (GAAP)                                                                                   |   | $                                                   | 50     |     | $      | 43 |   |
| Amounts                from                Statements of Cash Flows:                                                                                         |   |                                                |   |     |   |   |   |
| Less:                Capital                Expenditures                                                                                                     |   |                                                | (34    | )        |   | (47 | ) |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)*                                                                          |   |                                                | 16     |     |   | (4 | ) |
| Amounts                from                Statements of Cash Flows:                                                                                         |   |                                                |   |     |   |   |   |
| Less:                Retirement of Capital Lease Obligations                                                                                                 |   |                                                | (56    | )        |   | (50 | ) |
| Plus:                Proceeds from Investment in Lease Debt                                                                                                  |   |                                                | 11     |     |   | 10 |   |
| Net                Cash                Flows after Capital Expenditures andRequired                Payments on Debt and Capital Lease Obligations(non-GAAP)* |   | $                                                   | (29    | )        | $      | (44 | ) |

----

Table          of Contents

| **Three                Months Ended March 31,**                                                                                                              |   | **2007**                                            |   | **2006** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------|--------|
|                                                                                                                                                         |   | -Millions                of                Dollars- |   |
| Net                Cash                Flows - Operating Activities (GAAP)                                                                                   |   | $                                                   | 50     |     | $      | 43 |   |
| Net                Cash                Flows - Investing Activities (GAAP)                                                                                   |   |                                                | (26    | )        |   | (37 | ) |
| Net                Cash                Flows - Financing Activities (GAAP)                                                                                   |   |                                                | (10    | )        |   | (21 | ) |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)*                                                                          |   |                                                | 16     |     |   | (4 | ) |
| Net                Cash                Flows after Capital Expenditures andRequired                Payments on Debt and Capital Lease Obligations(non-GAAP)* |   |                                                | (29    | )        |   | (44 | ) |

**Operating      Activities**

|   | · | a                $32 million                increase in cash receipts from electric retail and wholesale sales,                partially offset by a $28 million increase in fuel and purchased                energy                costs. TEP benefited from customer growth and cool winter weather,                as well                as the availability of Luna to offset a portion of TEP’s purchased power                requirements; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                $11                million increase in other cash receipts related to reimbursements                received                from Tri-State for the operation of Springerville Unit 3; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $3 million                decrease in total interest paid due to lower capital lease obligation                balances; offset by: |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $6 million                increase in wages paid, $2 million of which is related to payroll                costs at                Springerville Unit 3 that are reimbursed by Tri-State;                and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $5 million                increase in O&M costs related to plant outages and $2 million of costs                related to Springerville Unit 3 that are reimbursed by                Tri-State. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Investing      Activities**

**Financing      Activities**

|   | · | a                $20 million                increase in net proceeds from borrowings under the TEP Revolving                Credit                Facility; offset by |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

Table          of Contents

|  **Leased                Asset**                         |  **Capital                Lease Obligation Balance****at                March 31, 2007** |   **Expiration** |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------|----------------------------|
|                                                          | -                In Millions                -                                                 |                       |
| Springerville                Unit 1                           | $340                                                                                          | 2015                       |
| Springerville                Coal Handling Facilities         | 113                                                                                           | 2015                       |
| Springerville                Common Facilities                | 105                                                                                           | 2020                       |
| Sundt                Unit                4                    | 37                                                                                            | 2011                       |
| Other                Leases                                   | 1                                                                                             | 2008                       |
| Total                Capital                Lease Obligations | $596                                                                                          |                       |

|                                                  |   | **Lease                Debt Investment Balance** |   |
|-------------------------------------------------------|--------|--------------------------------------------------|--------|
| **Leased                Asset**                       |   | **March                31, 2007**                |   | **December                31, 2006** |   |
|                                                  |   | -                In Millions                -    |   |
| Investments                in Lease Debt:             |   |                                             |   |   |   |
| Springerville                Unit 1                   |   | $                                                | 71     |   | $ | 81 |   |
| Springerville                Coal Handling Facilities |   |                                             | 51     |   |   | 52 |   |
| Total                Investment in Lease Debt         |   | $                                                | 122    |   | $ | 133 |   |

**Income      Tax      Position**

*UniSource      Energy, Liquidity and Capital Resources, Income Tax Position,*

**Contractual      Obligations**

| · | In                April                2007, TEP entered into power supply agreements for the period June                through                September 2007. These contracts are indexed to natural gas prices.                TEP                estimates its minimum payments under these contracts to be $21                million. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                April                2007, Tri-State notified TEP that Tri-State will terminate, effective                August 1, 2007, its power sale agreement with TEP. Under the agreement,                Tri-State provides TEP with 100 MW of system                capacity. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends      on Common Stock.**

----

Table          of Contents

**UNSGAS**

**RESULTSOF      OPERATIONS**

|                                            |   | **Sales**                                            |   | **Revenue**                                           |   |
|-------------------------------------------------|--------|------------------------------------------------------|--------|-------------------------------------------------------|--------|
| **Three                Months Ended March 31,** |   | **2007**                                             |   | **2006**                                              |   | **2007** |   | **2006** |   |
|                                            |   | -                Millions of                Therms - |   | -                Millions of                Dollars - |   |
| **Retail                Therm Sales:**          |   |                                                 |   |                                                  |   |   |   |   |   |
| Residential                                     |   |                                                 | 34     |                                                  |   | 31 |   | $ | 41 |   | $ | 40 |   |
| Commercial                                      |   |                                                 | 12     |                                                  |   | 11 |   |   | 13 |   |   | 13 |   |
| Industrial                                      |   |                                                 | 1      |                                                  |   | 1 |   |   | 1 |   |   | 1 |   |
| Public                Authorities               |   |                                                 | 3      |                                                  |   | 3 |   |   | 3 |   |   | 4 |   |
| **Total                Retail Therm Sales**     |   |                                                 | 50     |                                                  |   | 46 |   |   | 58 |   |   | 58 |   |
| Transport                                       |   |                                                 | -      |                                                  |   | - |   |   | 1 |   |   | 1 |   |
| Negotiated                Sales Program (NSP)   |   |                                                 | 5      |                                                  |   | 5 |   |   | 3 |   |   | 4 |   |
| **Total                Therm Sales**            |   |                                                 | 55     |                                                  |   | 51 |   | $ | 62 |   | $ | 63 |   |

*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 March 31,**             |   | **2007**                                              |   | **2006** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|
|                                                        |   | -                Millions of                Dollars - |   |
| Gas                Revenues                                 |   | $                                                     | 62     |     | $      | 63 |   |
| Other                Revenues                               |   |                                                  | 1      |     |   | - |   |
| Total                Operating Revenues                     |   |                                                  | 63     |     |   | 63 |   |
| Purchased                Gas                Expense         |   |                                                  | 44     |     |   | 46 |   |
| Other                Operations and Maintenance Expense     |   |                                                  | 7      |     |   | 6 |   |
| Depreciation                and Amortization                |   |                                                  | 2      |     |   | 1 |   |
| Taxes                other                than Income Taxes |   |                                                  | 1      |     |   | 1 |   |
| Total                Operating Expenses                     |   |                                                  | 54     |     |   | 54 |   |
| Operating                Income                             |   |                                                  | 9      |     |   | 9 |   |
| Total                Interest Expense                       |   |                                                  | 1      |     |   | 1 |   |
| Income                Tax                Expense (Benefit)  |   |                                                  | 3      |     |   | 3 |   |
| **Net                Income**                               |   | $                                                     | 5      |     | $      | 5 |   |

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Table          of Contents

**FACTORSAFFECTING      RESULTS OF OPERATIONS**

**RATES      AND      REGULATION**

**Energy      Cost      Adjustment Mechanism**

*General      Rate      Case Filing*

**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%                                                      |

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Table          of Contents

**LIQUIDITYAND      CAPITAL RESOURCES**

**Liquidity      Outlook**

| **Three                Months Ended March 31,**                     |   | **2007**                                              |   | **2006** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|
|                                                                |   | -                Millions of                Dollars - |   |
| Net                Cash                Flows - Operating Activities |   | $                                                     | 10     |     | $      | 7 |   |
| Capital                Expenditures                                 |   |                                                  | 4      |     |   | 6 |   |

**UNS      Gas/UNS      Electric Revolver**

**Senior      Unsecured Notes **

**Dividends      on Common Stock **

*Senior      Unsecured Notes*

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Table          of Contents

**UNSELECTRIC**

**RESULTSOF      OPERATIONS**

|                                              |   | **Sales**                                             |   | **Revenue**                                               |   |
|---------------------------------------------------|--------|-------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| **Three                  Months Ended March 31,** |   | **2007**                                              |   | **2006**                                                  |   | **2007** |   | **2006** |   |
|                                              |   | -                  Millions of                  kWh - |   | -                  Millions of                  Dollars - |   |
| **Electric                  Retail Sales:**       |   |                                                  |   |                                                      |   |   |   |   |   |
| Residential                                       |   |                                                  | 181    |                                                      |   | 163 |   | $ | 18 |   | $ | 17 |   |
| Commercial                                        |   |                                                  | 131    |                                                      |   | 130 |   |   | 14 |   |   | 13 |   |
| Industrial                                        |   |                                                  | 47     |                                                      |   | 46 |   |   | 4 |   |   | 4 |   |
| Other                                             |   |                                                  | 1      |                                                      |   | 1 |   |   | - |   |   | - |   |
| **Total                  Electric Retail Sales**  |   |                                                  | 360    |                                                      |   | 340 |   | $ | 36 |   | $ | 34 |   |

| **Three                Months Ended March 31,**             |   | **2007**                                              |   | **2006** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|
|                                                        |   | -                Millions of                Dollars - |   |
| Electric                Revenues                            |   | $                                                     | 36     |     | $      | 34 |   |
| Other                Revenues                               |   |                                                  | -      |     |   | - |   |
| Total                Operating Revenues                     |   |                                                  | 36     |     |   | 34 |   |
| Purchased                Energy Expense                     |   |                                                  | 24     |     |   | 22 |   |
| Other                Operations and Maintenance Expense     |   |                                                  | 6      |     |   | 6 |   |
| Depreciation                and Amortization                |   |                                                  | 3      |     |   | 3 |   |
| Taxes                other                than Income Taxes |   |                                                  | 1      |     |   | 1 |   |
| Total                Operating Expenses                     |   |                                                  | 34     |     |   | 32 |   |
| Operating                Income                             |   |                                                  | 2      |     |   | 2 |   |
| Total                Interest Expense                       |   |                                                  | 2      |     |   | 1 |   |
| Income                Tax                Expense            |   |                                                  | -      |     |   | - |   |
| **Net                Income**                               |   | $                                                     | -      |     | $      | 1 |   |

**FACTORSAFFECTING      RESULTS OF      OPERATIONS**

**Competition**

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

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Table          of Contents

**Rates      and      Regulation**

|                                                                        |                                                        |
|-----------------------------------------------------------------------------|-------------------------------------------------------------|
| Test                year                                                    | 12                months                ended June 30, 2006 |
| Original                cost                rate base                       | $141                million                                 |
| Revenue                deficiency                                           | $8.5                million                                 |
| Total                rate                increase (over test year revenues) | 5.5%                                                        |
| Cost                of                long-term debt                        | 8.2%                                                        |
| Cost                of                equity                                | 11.8%                                                       |
| Actual                capital structure                                     | 49%                equity /                51% debt         |
| Weighted                average cost of capital                             | 9.9%                                                        |

| **Filing**                                                         | **Date**                                         |
|--------------------------------------------------------------------|--------------------------------------------------|
| ACC                Staff and                Intervenor testimony   | June                28,                2007      |
| UNS                Electric                rebuttal testimony      | August                14,                2007    |
| ACC                Staff and                Intervenor surrebuttal | August                24,                2007    |
| UNS                Electric                rejoinder testimony     | August                31,                2007    |
| Hearing                before ALJ                                  | September                10,                2007 |

**LIQUIDITYAND      CAPITAL      RESOURCES**

**Liquidity      Outlook**

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Table          of Contents

| **Three                Months Ended March 31,**                     |   | **2007**                                              |   | **2006** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|
|                                                                |   | -                Millions of                Dollars - |   |
| Net                Cash                Flows - Operating Activities |   | $                                                     | 6      |     | $      | 4 |   |
| Capital                Expenditures                                 |   |                                                  | 10     |     |   | 10 |   |

**UNS      Gas/UNS      Electric Revolver**

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

**Senior      Unsecured Notes **

**Contractual      Obligations**

**Dividends      on Common Stock**

*Senior      Unsecured Notes*

**OTHERNON-REPORTABLE      BUSINESS SEGMENTS**

**RESULTSOF      OPERATIONS**

| **Three                Months Ended March 31,**                           |   | **2007**                                              |   | **2006** |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------|--------|
|                                                                      |   | -                Millions of                Dollars - |   |
| UniSource                Energy Parent Company                            |   | $                                                     | (1     | )        | $      | (2 | ) |
| Millennium                Investments                                     |   |                                                  | -      |     |   | (1 | ) |
| UED                                                                       |   |                                                  | -      |     |   | - |   |
| Total                Other                Loss From Continuing Operations |   | $                                                     | -      |     | $      | (3 | ) |
| Discontinued                Operations - Net of Tax                       |   |                                                  | -      |     |   | (3 | ) |
| Total                Other                Net Loss                        |   | $                                                     | (1     | )        | $      | (6 | ) |

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Table          of Contents

**UniSource      Energy Parent Company**

**UED**

**Discontinued      Operations - Global Solar**

**FACTORS      AFFECTING RESULTS OF OPERATIONS**

**Millennium      Investments **

**LIQUIDITY      AND CAPITAL RESOURCES**

**CRITICALACCOUNTING      ESTIMATES**

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

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

|   | · | Pension                and                Other Postretirement Benefit Plan                Assumptions |
|--------|--------|--------------------------------------------------------------------------------------------------------|

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Table          of Contents

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

|   | · | Unbilled                Revenue - TEP, UNS Gas and UNS                Electric |
|--------|--------|--------------------------------------------------------------------------------|

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

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

**NEWACCOUNTING      PRONOUNCEMENTS**

|   | · | FAS                159, The                Fair Value Option for Financial Assets and Financial Liabilities,                issued                February 2007, provides companies with the option, at specified election                dates, to measure certain financial assets and liabilities and other                items                at fair value, with changes in fair value recognized in earnings                as those                changes occur. FAS 159 also establishes disclosure requirements that                include displaying the fair value of those assets and liabilities                for                which the entity elected the fair value option on the face of the                balance                sheet and providing management’s reasons for electing the fair value                option for each eligible item. The provisions of FAS 159 will become                effective January 1, 2008. We are evaluating the impact of FAS 159                on our                financial statements, and will incorporate these additional disclosure                requirements in our financial statements for the quarter ended March                31,                2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | FAS                  157, Fair                  Value Measurement, issued September 2006, defines fair value,                  establishes a framework for measuring fair value, and expands disclosures                  about fair value measurements.  FAS 157 clarifies that the exchange                  price is the price in the principal market in which the reporting                  entity                  would transact for the asset or liability.  We are required to                  disclose inputs used to develop fair value measurements and the                  effect of                  any of our assumptions on earnings or changes in net assets for                  the                  period.  FAS 157 is effective for financial statements issued                  for fiscal years beginning after November 15, 2007, and interim                  periods                  within those fiscal years.  We are evaluating the impact of FAS 157                  on our financial statements, and will incorporate these additional                  disclosure requirements in our financial statements for the quarter                  ended                  March 31, 2008. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                  the third                  quarter of 2006, the Pension Protection Act of 2006 was signed                  into law,                  which will be effective January 1, 2008. The new law will affect                  the                  manner in which many companies, including UniSource Energy and                  TEP,                  administer their pension plans. The legislation will require companies                  to                  increase the amount by which they fund their pension plans, increase                  premiums to the Pension Benefit Guaranty Corporation for defined                  benefit                  plans, amend plan documents and provide additional disclosures                  in                  regulatory filings and to plan participants. We are currently assessing                  the impact it may have on our financial                  statements. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SAFEHARBOR      FOR FORWARD-LOOKING      STATEMENTS**

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Table          of Contents

|   | 1. | Supply                and                demand conditions in wholesale energy markets, including volatility                in                market prices and illiquidity in markets, are affected by a variety                of                factors, which include the availability of generating capacity in                the                Western U.S., including hydroelectric resources, weather, natural                gas                prices, the extent of utility restructuring in various states,                transmission constraints, environmental regulations and cost of                compliance, FERC regulation of wholesale energy markets, and economic                conditions in the Western U.S. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | 9. | Changes                affecting the cost of competing energy alternatives, including changes                in                available generating technologies and changes in the cost of natural                gas. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10. | Changes                in                accounting principles or the application of such principles to our                businesses. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------|

|   | 11. | Changes                in                the depreciable lives of our assets. |
|--------|-----|-------------------------------------------------------------------------------|

|   | 12. | Unanticipated                changes in future liabilities relating to employee benefit plans                due to                changes in market values of retirement plan assets and health care                costs. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13. | The                outcome                of any ongoing or future                litigation. |
|--------|-----|-----------------------------------------------------------------------------------------------|

|   | 14. | 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. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**ITEM3.      - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK **

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*Safe      Harbor for      Forward-Looking Statements*

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Table          of Contents

**Risk      Management Committee**

**Commodity      Price Risk**

**TEP**

| **Three                Months Ended March 31,** | **2007**                                            | **2006** |
|-------------------------------------------------|-----------------------------------------------------|----------|
|                                            | -Millions                of                Dollars- |
| Net                Unrealized Gain (Loss)       | $(1)                                                | $2       |

| **Three                Months Ended March 31,** | **2007**                                            | **2006** |
|-------------------------------------------------|-----------------------------------------------------|----------|
|                                            | -Millions                of                Dollars- |
| Net                Unrealized Gain (Loss)       | $                -                                  | $1       |

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Table          of Contents

| **Three                Months Ended March 31,** | **2007**            | **2006**                                           | **2007**  | **2006** |
|-------------------------------------------------|---------------------|----------------------------------------------------|-----------|----------|
|                                            | -MWhs-              | %                of Total                Resources |
| Gas-Fired                Generation             |   180,000 |                  35,000                       | 6%        | 1%       |
| Purchased                Power                  |   325,000 | 238,000                                            | 11%  | 8%       |

| **Three                Months Ended March 31,** | **2007**                                            | **2006** |
|-------------------------------------------------|-----------------------------------------------------|----------|
|                                            | -Millions                of                Dollars- |
| Net                Unrealized Gain (Loss)       | $4                                                  | $(7)     |

|                                                                             |   | -                Millions of                Dollars -     |    |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|   Source                of                Fair Value At March 31, 2007 |   |  Maturity                0 -                6 months |    |  Maturity                6 -                12 months |   |  Maturityover                1                yr. |   |   Total |   |
| Prices                actively quoted                                            |   |                                                      |    |   |   |   |   |   |   |
| Electric                                                                         |   | $                                                         | 1       |   | $ | 1 |   | $ | - |   | $ | 2 |   |
| Gas                                                                              |   |                                                      | 1       |   |   | - |   |   | - |   |   | 1 |   |
| Prices                based                on models and other valuation methods |   |                                                      |  - |   |   |  - |   |   | - |   |   | - |   |
| Total                                                                            |   | $                                                         | 2       |   | $ | 1 |   | $ | - |   | $ | 3 |   |

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Table          of Contents

**UNS      Gas**

**UNS      Electric**

**MEG**

----

Table          of Contents

|                                                                             |   | Unrealized                Gain (Loss) of MEG’s Trading Activities |   |
|----------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                                                             |   | -                Millions of                Dollars -                   |   |
|   Source                of                Fair Value At March 31, 2007 |   |  Maturity                0 -                6 months               |   |  Maturity                6 -                12 months |   |  Maturityover                1                yr. |   | Total                Unrealized Gain (Loss) |   |
| Prices                actively quoted                                            |   | $                                                                       | 6      |   | $ | 2 |   | $ | - |   | $ | 8 |   |
| Prices                based                on models and other valuation methods |   |                                                                    | -      |   |   | 2 |   |   | - |   |   | 2 |   |
| Total                                                                            |   | $                                                                       | 6      |   | $ | 4 |   | $ | - |   | $ | 10 |   |

**Credit      Risk**

*.*

**ITEM4.      - CONTROLS AND PROCEDURES **

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Table          of Contents

**PARTII      - OTHER INFORMATION**

**ITEM1.      - LEGAL PROCEEDINGS **

----

*Note      7      of*
*Notes      to      Consolidated Financial Statements, Commitments and      Contingencies.*

**City      of      Tacoma**

**ITEM1A.      - RISK FACTORS **

----

**ITEM5.      - OTHER INFORMATION **

----

**NON-GAAP      MEASURES**

**Adjusted      EBITDA**

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Table          of Contents

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

|                                                                       |   | **UniSource                Energy**                               |   |
|----------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                       |   | **Three                Months Ended****March                31,** |   |
|                                                                       |   | **2007**                                                          |   | **2006** |   |
|                                                                       |   | -                Millions of                Dollars -             |   |
| Adjusted                EBITDA (non-GAAP)** ****(1)**                 |   | $                                                                 | 96     |   | $ | 116 |   |
| Net                Cash                Flows - Operating Activities (GAAP) |   | $                                                                 | 65     |   | $ | 52 |   |
| Net                Cash                Flows - Investing Activities (GAAP) |   | $                                                                 | (41    | ) | $ | (51 | ) |
| Net                Cash                Flows - Financing Activities (GAAP) |   | $                                                                 | (33    | ) | $ | (22 | ) |

|                                                                       |   | **TEP**                                                           |   |
|----------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                       |   | **Three                Months Ended****March                31,** |   |
|                                                                       |   | **2007**                                                          |   | **2006** |   |
|                                                                       |   | -                Millions of                Dollars -             |   |
| Adjusted                EBITDA (non-GAAP)** ****(1)**                 |   | $                                                                 | 77     |   | $ | 100 |   |
| Net                Cash                Flows - Operating Activities (GAAP) |   | $                                                                 | 50     |   | $ | 43 |   |
| Net                Cash                Flows - Investing Activities (GAAP) |   | $                                                                 | (26    | ) | $ | (37 | ) |
| Net                Cash                Flows - Financing Activities (GAAP) |   | $                                                                 | (10    | ) | $ | (21 | ) |

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

|                                                                                     |   | **UniSource                Energy**                               |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended****March                31,** |    |
|                                                                                     |   | **2007**                                                          |    | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars -             |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**** **                  |   | $                                                                 | 96      |   | $ | 116 |   |
| Amounts                from                the Income Statements:                        |   |                                                              |    |   |   |   |   |
| Less:                Income                Taxes                                         |   |                                                              | 4       |   |   | 14 |   |
| Less:                Total                Interest Expense                               |   |                                                              | 35      |   |   | 37 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                              | 8       |   |   | (13 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)** **                 |   |                                                              | **65**  |   |   | **52** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   |                                                              | **(41** | **)** |   | **(51** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   |                                                              | **(33** | **)** |   | **(22** | **)** |
| **Net                Decrease in Cash and Cash Equivalents**(GAAP)                       |   | **$**                                                             | **(9**  | **)** | **$** | **(21** | **)** |

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Table          of Contents

|                                                                                     |   | **TEP**                                                           |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended****March                31,** |    |
|                                                                                     |   | **2007**                                                          |    | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars -             |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**** **                  |   | $                                                                 | 77      |   | $ | 100 |   |
| Amounts                from                the Income Statements:                        |   |                                                              |    |   |   |   |   |
| Less:                Income                Taxes                                         |   |                                                              | 1       |   |   | 12 |   |
| Less:                Total                Interest Expense                               |   |                                                              | 29      |   |   | 31 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                              | 3       |   |   | (14 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)** **                 |   |                                                              | **50**  |   |   | **43** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   |                                                              | **(26** | **)** |   | **(37** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   |                                                              | **(10** | **)** |   | **(21** | **)** |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**                  |   |                                                              |    |   |   |   |   |
| (GAAP)                                                                                   |   | **$**                                                             | **14**  |   | **$** | **(15** | **)** |

**(1)**

**      Adjusted      EBITDA was calculated as follows:**

|                                                                                      |   | **UniSource                Energy**                               |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                                      |   | **Three                Months Ended****March                31,** |   |
|                                                                                      |   | **2007**                                                          |   | **2006** |   |
|                                                                                      |   | -                Millions of                Dollars -             |   |
| **Net                Income**(GAAP)                                                       |   | $                                                                 | 5      |   | $ | 17 |   |
| Amounts                from                the Income Statements:                         |   |                                                              |   |   |   |   |   |
| Less:                Discontinued Operations - Net of Tax                                 |   |                                                              | -      |   |   | (3 | ) |
| Plus:                 Income Taxes                                                   |   |                                                              | 4      |   |   | 14 |   |
| Total                Interest Expense                                                     |   |                                                              | 35     |   |   | 37 |   |
| Depreciation                and Amortization                                              |   |                                                              | 35     |   |   | 31 |   |
| Amortization                of Transition Recovery Asset                                  |   |                                                              | 15     |   |   | 12 |   |
| Depreciation                included in Fuel and Other O&M Expense               |   |                                                              |   |   |   |   |   |
| (see                Note 13                of Notes to Consolidated Financial Statements) |   |                                                              | 2      |   |   | 2 |   |
| **Adjusted                EBITDA**(non-GAAP)                                              |   | **$**                                                             | **96** |   | **$** | **116** |   |

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Table          of Contents

|                                                                                      |   | **TEP**                                                           |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                                      |   | **Three                Months Ended****March                31,** |   |
|                                                                                      |   | **2007**                                                          |   | **2006** |   |
|                                                                                      |   | -                Millions of                Dollars -             |   |
| **Net                Income**(GAAP)                                                       |   | $                                                                 | 1      |   | $ | 17 |   |
| Amounts                from                the Income Statements:                         |   |                                                              |   |   |   |   |   |
| Plus:                 Income Taxes                                                   |   |                                                              | 1      |   |   | 12 |   |
| Total                Interest Expense                                                     |   |                                                              | 29     |   |   | 31 |   |
| Depreciation                and Amortization                                              |   |                                                              | 29     |   |   | 26 |   |
| Amortization                of Transition Recovery Asset                                  |   |                                                              | 15     |   |   | 12 |   |
| Depreciation                included in Fuel and Other O&M Expense               |   |                                                              |   |   |   |   |   |
| (see                Note 13                of Notes to Consolidated Financial Statements) |   |                                                              | 2      |   |   | 2 |   |
| **Adjusted                EBITDA**(non-GAAP)                                              |   | **$**                                                             | **77** |   | **$** | **100** |   |

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

|                                                                          |   | **As                of****March                31,****2007** |   | **As                of****December                31,****2006** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                                                          |   | -                Millions of                Dollars -        |   |
| Net                Debt                (non-GAAP)                             |   | $                                                            | 1,295  |                                                            | $      | 1,335 |   |
| Total                Debt                and Capital Lease Obligations (GAAP) |   | $                                                            | 1,417  |                                                            | $      | 1,468 |   |

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

|                                                              |   | **As                of****March                31,****2007** |   | **As                of****December                31,****2006** |   |
|-------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                                              |   | -                Millions of                Dollars -        |   |
| **Total                Debt (GAAP)**                              |   | $                                                            | 821    |                                                            | $      | 821 |   |
|                                                              |   |                                                         |   |                                                            |   |   |   |
| Capital                Lease                Obligations           |   |                                                         | 534    |                                                            |   | 588 |   |
| Current                Portion - Capital Lease Obligations        |   |                                                         | 62     |                                                            |   | 59 |   |
| **Total                Debt and Capital Lease Obligations**(GAAP) |   |                                                         | 1,417  |                                                            |   | 1,468 |   |
|                                                              |   |                                                         |   |                                                            |   |   |   |
| Investment                in                Lease Debt            |   |                                                         | (122   | )                                                               |   | (133 | ) |
| **Net                Debt**(non-GAAP)                             |   | $                                                            | 1,295  |                                                            | $      | 1,335 |   |

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**Ratioof      Earnings to Fixed      Charges**

|                            | **3                Months Ended** | **12                Months Ended** |
|---------------------------------|-----------------------------------|------------------------------------|
|                            | **March                31, 2007** | **March                31, 2007**  |
| UniSource                Energy | 1.25                              | 1.58                               |
|                            |                              |                               |
| TEP                             | 1.06                              | 1.64                               |

**SECReports      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.*

**ITEM6.      - EXHIBITS**

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**SIGNATURES**

|                                   |   |   | UNISOURCE                ENERGY CORPORATION(Registrant)                                                                               |
|----------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:                 May 8, 2007 |   | /s/    | Kevin                P.                Larson                                                                                                   |
|                                   |   |   | Kevin                P.                LarsonSenior                Vice                President and Principal Financial                Officer |
|                                   |   |   |                                                                                                                                  |
|                                   |   |   | TUCSON                ELECTRIC POWER COMPANY(Registrant)                                                                              |
| Date:                 May 8, 2007 |   | /s/    | Kevin                P.                Larson                                                                                                   |
|                                   |   |   | Kevin                P.                LarsonSenior                Vice                President and Principal Financial                Officer |

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**EXHIBITINDEX**

| 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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