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                EmployerIdentification 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

**Table      of Contents**

| Definitions                                                                                                                         | iv                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| **--PART                  I --**                                                                                                              |
|                                                                                                                                          |                                                                                                                    |   |   |
| Reports                  of Independent Registered                  Public Accounting Firm                                                    | 1                                                                                                                       |
|                                                                                                                                          |                                                                                                                    |   |   |
| Item                  1. – Financial Statements                                                                                         | 3                                                                                                                       |
|                                                                                                                                          | UniSource                  Energy Corporation                                                                           |   |
|                                                                                                                                          | Comparative                  Condensed Consolidated                  Statements of Income                               | 3 |
|                                                                                                                                          |                                                                                                                    | Comparative                  Condensed Consolidated                  Statements of Cash Flows | 4 |
|                                                                                                                                          |                                                                                                                    | Comparative                  Condensed Consolidated Balance                  Sheets | 5 |
|                                                                                                                                          |                                                                                                                    | Condensed                    Consolidated Statement of Changes in Stockholders’ Equity and                    Comprehensive Income | 7 |
|                                                                                                                                          | Tucson                  Electric Power Company                                                                          |   |
|                                                                                                                                          |                                                                                                                    | Comparative                  Condensed Consolidated                  Statements of Income | 8 |
|                                                                                                                                          |                                                                                                                    | Comparative                  Condensed Consolidated                  Statements of Cash Flows | 9 |
|                                                                                                                                          |                                                                                                                    | Comparative                  Condensed Consolidated Balance                  Sheets | 10 |
|                                                                                                                                          |                                                                                                                    | Condensed                    Consolidated Statement of Changes in Stockholder’s Equity and                    Comprehensive Income | 12 |
|                                                                                                                                          | Notes                  to Condensed Consolidated Financial                  Statements                                  | 13 |
|                                                                                                                                          | Note                  1.   Nature of Operations and Basis of                  Accounting Presentation    | 13 |
|                                                                                                                                          | Note                  2.   Regulatory                  Matters                                           | 13 |
|                                                                                                                                          | Note                  3.   Debt and Credit                  Facilities                                   | 17 |
|                                                                                                                                          | Note                  4.   Business                  Segments                                            | 17 |
|                                                                                                                                          | Note                  5.   Accounting for Derivative                  Instruments and Trading Activities | 18 |
|                                                                                                                                          | Note                  6.   Income and Other                  Taxes                                       | 20 |
|                                                                                                                                          | Note                  7.   Commitments and                  Contingencies                                | 22 |
|                                                                                                                                          | Note                  8.   Employee Benefits                  Plans                                      | 24 |
|                                                                                                                                          | Note                  9.   Share-Based Compensation                  Plans                               | 25 |
|                                                                                                                                          | Note                  10. UniSource Energy Earnings Per Share                  (EPS)                                    | 27 |
|                                                                                                                                          | Note                  11. Discontinued Operations – Sale of Global                  Solar                         | 28 |
|                                                                                                                                          | Note                  12. New Accounting Pronouncements                                                                 | 28 |
|                                                                                                                                          | Note                  13. Supplemental Cash Flow                  Information                                           | 30 |
|                                                                                                                                          | Note                  14. Review by Independent Registered Public Accounting                  Firm                      | 31 |
|                                                                                                                                          |                                                                                                                    |   |   |
| Item                  2. – Management’s Discussion and Analysis of Financial                  Condition and Results of Operations | 32                                                                                                                      |
|                                                                                                                                          | UniSource                  Energy                  Consolidated                                                         | 32 |
|                                                                                                                                          |                                                                                                                    | Overview                  of Consolidated Business | 32 |
|                                                                                                                                          |                                                                                                                    | Outlook                  and Strategies | 32 |
|                                                                                                                                          |                                                                                                                    | Results                  of Operations | 33 |
|                                                                                                                                          |                                                                                                                    | Contribution                  by Business                  Segment | 34 |
|                                                                                                                                          |                                                                                                                    | Liquidity                  and Capital                  Resources | 34 |
|                                                                                                                                          | Tucson                  Electric Power Company                                                                          | 37 |
|                                                                                                                                          |                                                                                                                    | Results                  of Operations | 37 |
|                                                                                                                                          |                                                                                                                    | Factors                  Affecting Results of                  Operations | 43 |
|                                                                                                                                          |                                                                                                                    | Liquidity                  and Capital                  Resources | 48 |
|                                                                                                                                          | UNS                  Gas                                                                                                | 51 |
|                                                                                                                                          |                                                                                                                    | Results                  of Operations | 51 |
|                                                                                                                                          |                                                                                                                    | Factors                  Affecting Results of                  Operations | 53 |
|                                                                                                                                          |                                                                                                                    | Liquidity                  and Capital                  Resources | 54 |
|                                                                                                                                          | UNS                  Electric                                                                                           | 55 |
|                                                                                                                                          |                                                                                                                    | Results                  of Operations | 55 |
|                                                                                                                                          |                                                                                                                    | Factors                  Affecting Results of                  Operations | 57 |
|                                                                                                                                          |                                                                                                                    | Liquidity                  and Capital                  Resources | 58 |
|                                                                                                                                          | Other                  Non-Reportable Business Segments                                                                 | 59 |
|                                                                                                                                          | Results                  of Operations                                                                                  | 59 |
|                                                                                                                                          | Critical                  Accounting                  Estimates                                                         | 60 |

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Table            of Contents

|                                                                                                         | New                  Accounting                  Pronouncements              | 61     |
|--------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|
|                                                                                                         | Safe                  Harbor for Forward-Looking                  Statements | 61     |
|                                                                                                         |                                                                         |   |   |
| Item                  3. – Quantitative and Qualitative                  Disclosures about Market Risk | 62                                                                           |
|                                                                                                         |                                                                         |   |   |
| Item                  4. – Controls and                  Procedures                                    | 67                                                                           |
|                                                                                                         |                                                                         |   |   |
| **PART                  II – OTHER                  INFORMATION**                                      |
|                                                                                                         |                                                                         |   |   |
| Item                  1. – Legal                  Proceedings                                          | 68                                                                           |
|                                                                                                         |                                                                         |   |   |
| Item                  1A. – Risk Factors                                                               | 68                                                                           |
|                                                                                                         |                                                                         |   |   |
| Item                  5. – Other                  Information                                          | 68                                                                           |
|                                                                                                         | Non-GAAP                  Measures                                           | 68     |
|                                                                                                         | Ratio                  of Earnings to Fixed                  Charges         | 70     |
|                                                                                                         |                                                                         |   |   |
| Item                  6. Exhibits                                                                            | 71                                                                           |
|                                                                                                         |                                                                         |   |   |
| Signatures                                                                                                   | 71                                                                           |
|                                                                                                         |                                                                         |   |   |
| Exhibit                  Index                                                                               | 72                                                                           |

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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.                                                                                                                                                                                                                                                   |
| Cooling                  Degree Days                          | An                  index used                  to measure the impact of weather on energy usage calculated by                  Subtracting                  75 from the average of the high and daily low                  temperatures.                                                        |
| 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.                                                        |
| ICRA                                                          | Implementation                  Cost Regulatory Asset.                                                                                                                                                                                                                                           |
| 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.                                                                                                                                                                                                                                     |

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| PWMT                                                            | Pinnacle                  West                  Marketing and Trading.                                                                                                                                                                                                                                                           |
|-----------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| REST                                                            | Renewable                  Energy Standard and Tariff.                                                                                                                                                                                                                                                                           |
| RUCO                                                            | Residential                  Utility Consumer Office.                                                                                                                                                                                                                                                                            |
| Rules                                                           | Retail                  Electric Competition Rules.                                                                                                                                                                                                                                                                              |
| Salt                  River                  Project            | A                  public                  power utility serving more than 900,000 customers in Phoenix,                  Arizona.                                                                                                                                                                                               |
| San                  Juan                                       | San                  Juan                  Generating Station.                                                                                                                                                                                                                                                                   |
| 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.                                                                                                                                                                                                                                                            |
| Sundt                  Unit                  4                  | Unit                  4 of the                  H. Wilson Sundt Generating Station.                                                                                                                                                                                                                                              |
| TCRA                                                            | Termination                  Cost Regulatory Asset.                                                                                                                                                                                                                                                                              |
| 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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Table          of Contents

**Report      of Independent Registered Public      Accounting Firm**

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Table          of Contents

**Report      of      Independent Registered Public Accounting Firm**

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Table          of Contents

|                                                                                              |        |   |     |                                                           | PART                    I - FINANCIAL INFORMATION |   |                                                                             |   |       |          |   |
|---------------------------------------------------------------------------------------------------|-------------|--------|----------|----------------------------------------------------------------|---------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|------------|---------------|--------|
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |
| **ITEM                    1. FINANCIAL STATEMENTS**                                          |        |   |     |                                                           |                                              |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |
| **UNISOURCE                    ENERGY CORPORATION**                                               |        |   |     |                                                           |                                              |   |
| **COMPARATIVE                    CONDENSED CONSOLIDATED STATEMENTS                    OF INCOME** |        |   |     |                                                           |                                              |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |
| Three                    Months                    Ended                                          |        |   |     | Nine                    Months                    Ended        |                                              |
| September                    30,                                                                  |        |   |     | September                    30,                               |                                              |
| **2007**                                                                                          |        |   | **2006** |                                                           |                                              |   | **2007**                                                                         |   |       | **2006**      |   |
| **(Unaudited)**                                                                                   |        |   |     | **(Unaudited)**                                                |                                              |
| -Thousands                    of                    Dollars-                                      |        |   |     | -                    Thousands                    of Dollars - |                                              |
|                                                                                              |        |   |     |                                                           | **Operating                    Revenues**         |   |                                                                             |   |       |          |   |
| **$**                                                                                             | **320,238** |   |     | $                                                              | 298,641                                           |   |   Electric                    Retail Sales                             |   | **$**      | **765,450**   |   |   | $ | 728,697 |   |
| ** **                                                                                        | **46,225**  |   |     |                                                           | 40,616                                            |   |   Electric                    Wholesale Sales                          |   | ** ** | **139,515**   |   |   |   | 129,387 |   |
| ** **                                                                                        | **15,967**  |   |     |                                                           | 20,615                                            |   |   Gas                    Revenue                                       |   | ** ** | **100,927**   |   |   |   | 109,150 |   |
| ** **                                                                                        | **15,774**  |   |     |                                                           | 9,896                                             |   |   Other                    Revenues                                    |   | ** ** | **39,925**    |   |   |   | 23,352 |   |
| ** **                                                                                        | **398,204** |   |     |                                                           | 369,768                                           |   | **    Total                    Operating Revenues**          |   | ** ** | **1,045,817** |   |   |   | 990,586 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                              |   | **Operating                    Expenses**                                        |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **90,135**  |   |     |                                                           | 78,301                                            |   |   Fuel                                                                 |   | ** ** | **223,423**   |   |   |   | 197,660 |   |
| ** **                                                                                        | **104,428** |   |     |                                                           | 85,455                                            |   |   Purchased                    Energy                                  |   | ** ** | **271,464**   |   |   |   | 242,014 |   |
| ** **                                                                                        | **60,226**  |   |     |                                                           | 59,856                                            |   |   Other                    Operations and Maintenance                  |   | ** ** | **194,346**   |   |   |   | 175,406 |   |
| ** **                                                                                        | **34,513**  |   |     |                                                           | 33,330                                            |   |   Depreciation                    and Amortization                     |   | ** ** | **103,494**   |   |   |   | 96,767 |   |
| ** **                                                                                        | **25,739**  |   |     |                                                           | 21,959                                            |   |   Amortization                    of Transition Recovery Asset         |   | ** ** | **59,944**    |   |   |   | 51,080 |   |
| ** **                                                                                        | **11,555**  |   |     |                                                           | 10,232                                            |   |   Taxes                    Other Than Income Taxes                     |   | ** ** | **36,208**    |   |   |   | 35,145 |   |
| ** **                                                                                        | **326,596** |   |     |                                                           | 289,133                                           |   | **    Total                    Operating Expenses**          |   | ** ** | **888,879**   |   |   |   | 798,072 |   |
| ** **                                                                                        | **71,608**  |   |     |                                                           | 80,635                                            |   | **      Operating                    Income**      |   | ** ** | **156,938**   |   |   |   | 192,514 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                              |   | **Other                    Income (Deductions)**                                 |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **3,756**   |   |     |                                                           | 4,582                                             |   |   Interest                    Income                                   |   | ** ** | **12,656**    |   |   |   | 14,651 |   |
| ** **                                                                                        | **1,811**   |   |     |                                                           | 1,814                                             |   |   Other                    Income                                      |   | ** ** | **7,455**     |   |   |   | 5,436 |   |
| ** **                                                                                        | **(2,291**  | **)**  |     |                                                           | (206                                              | )      |   Other                    Expense                                     |   | ** ** | **(4,542**    | **)**  |   |   | (1,181 | ) |
| ** **                                                                                        | **3,276**   |   |     |                                                           | 6,190                                             |   | **    Total                    Other Income (Deductions)**   |   | ** ** | **15,569**    |   |   |   | 18,906 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                              |   | **Interest                    Expense**                                          |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **18,468**  |   |     |                                                           | 18,855                                            |   |   Long-Term                    Debt                                    |   | ** ** | **54,733**    |   |   |   | 56,747 |   |
| ** **                                                                                        | **16,112**  |   |     |                                                           | 17,974                                            |   |   Interest                    on Capital Leases                        |   | ** ** | **48,390**    |   |   |   | 55,047 |   |
| ** **                                                                                        | **-**       |   |     |                                                           | 1,080                                             |   |   Loss                    on Extinguishment of Debt                    |   | ** ** | **-**         |   |   |   | 1,080 |   |
| ** **                                                                                        | **1,355**   |   |     |                                                           | 4,303                                             |   |   Other                    Interest Expense                            |   | ** ** | **4,767**     |   |   |   | 6,876 |   |
| ** **                                                                                        | **(2,199**  | **)**  |     |                                                           | (1,304                                            | )      |   Interest                    Capitalized                              |   | ** ** | **(5,228**    | **)**  |   |   | (4,652 | ) |
| ** **                                                                                        | **33,736**  |   |     |                                                           | 40,908                                            |   | **    Total                    Interest Expense**            |   | ** ** | **102,662**   |   |   |   | 115,098 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **41,148**  |   |     |                                                           | 45,917                                            |   | **Income                    from Continuing Operations before Income Taxes**     |   | ** ** | **69,845**    |   |   |   | 96,322 |   |
| ** **                                                                                        | **15,731**  |   |     |                                                           | 17,714                                            |   |   Income                    Tax Expense                                |   | ** ** | **27,678**    |   |   |   | 38,630 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **25,417**  |   |     |                                                           | 28,203                                            |   | **Income                    from Continuing Operations**                         |   | ** ** | **42,167**    |   |   |   | 57,692 |   |
| ** **                                                                                        | **-**       |   |     |                                                           | -                                                 |   | **Discontinued                    Operations - Net of Tax**                      |   |       | -             |   |   |   | (2,669 | ) |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| **$**                                                                                             | **25,417**  |   |     | $                                                              | 28,203                                            |   | **Net                    Income**                                                |   | **$**      | **42,167**    |   |   | $ | 55,023 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| ** **                                                                                        | **35,514**  |   |     |                                                           | 35,308                                            |   | **Weighted-average                    Shares of Common Stock Outstanding (000)** |   | ** ** | **35,469**    |   |   |   | 35,223 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                              |   | **Basic                    Earnings (Loss) per Share**                           |   |       |          |   |   |   |   |   |
| **$**                                                                                             | **0.72**    |   |     | $                                                              | 0.80                                              |   | **  Income                    from Continuing Operations**             |   | **$**      | **1.19**      |   |   | $ | 1.64 |   |
|                                                                                              | -           |   |     |                                                           | -                                                 |   | **  Discontinued                    Operations - Net of Tax**          |   |       | -             |   |   |   | (0.08 | ) |
| **$**                                                                                             | **0.72**    |   |     | $                                                              | 0.80                                              |   | **  Net                    Income**                                    |   | **$**      | **1.19**      |   |   | $ | 1.56 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                              |   | **Diluted                    Earnings (Loss) per Share**                         |   |       |          |   |   |   |   |   |
| **$**                                                                                             | **0.66**    |   |     | $                                                              | 0.73                                              |   | **  Income                    from Continuing Operations**             |   | **$**      | **1.13**      |   |   | $ | 1.53 |   |
| ** **                                                                                        | **-**       |   |     |                                                           | -                                                 |   | **  Discontinued                    Operations - Net of Tax**          |   |       | -             |   |   |   | (0.07 | ) |
| **$**                                                                                             | **0.66**    |   |     | $                                                              | 0.73                                              |   | **  Net                    Income**                                    |   | **$**      | **1.13**      |   |   | $ | 1.46 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| **$**                                                                                             | **0.225**   |   |     | $                                                              | 0.21                                              |   | **Dividends                    Declared per Share**                              |   | **$**      | **0.675**     |   |   | $ | 0.63 |   |
|                                                                                              |        |   |     |                                                           |                                              |   |                                                                             |   |       |          |   |   |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.   |        |   |     |                                                           |                                              |   |                                                                             |   |

----

Table            of Contents

| **UNISOURCE                    ENERGY CORPORATION**                                                                                  |   |                                                         |         |   |     |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------------|--------|----------|--------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED STATEMENTS                    OF CASH FLOWS**                                |   |                                                         |         |   |
|                                                                                                                                 |   |                                                         |         |   |     |   |
|                                                                                                                                 |   | Nine                    Months                    Ended      |         |
|                                                                                                                                 |   | September                    30,                             |         |
|                                                                                                                                 |   | **2007**                                                     |         |   | **2006** |   |
|                                                                                                                                 |   | **(Unaudited)**                                              |         |
|                                                                                                                                 |   | -Thousands                    of                    Dollars- |         |
| **Cash                    Flows from Operating Activities**                                                                          |   |                                                         |         |   |     |   |
|      Cash                    Receipts from Electric Retail Sales                                            |   | **$**                                                        | **793,437**  |   |     | $      | 759,535 |   |
|      Cash                    Receipts from Electric Wholesale Sales                                         |   | ** **                                                   | **226,429**  |   |     |   | 180,832 |   |
|      Cash                    Receipts from Gas Sales                                                        |   | ** **                                                   | **135,886**  |   |     |   | 139,334 |   |
|      Cash                    Receipts from Operating SPV Unit 3                                             |   | ** **                                                   | **28,440**   |   |     |   | 2,132 |   |
|      Interest                    Received                                                                   |   | ** **                                                   | **18,349**   |   |     |   | 21,345 |   |
|      Performance                    Deposits Receipts                                                       |   | ** **                                                   | **7,554**    |   |     |   | 15,283 |   |
|      Sale                    of Excess Emission Allowances                                                  |   | ** **                                                   | **9,987**    |   |     |   | 7,081 |   |
|      Income                    Tax Refunds Received                                                         |   | ** **                                                   | **1,016**    |   |     |   | 553 |   |
|      Other                    Cash Receipts                                                                 |   | ** **                                                   | **8,529**    |   |     |   | 6,593 |   |
|      Purchased                    Energy Costs Paid                                                         |   | ** **                                                   | **(354,410** | **)**  |     |   | (288,399 | ) |
|      Fuel                    Costs Paid                                                                     |   | ** **                                                   | **(214,098** | **)**  |     |   | (184,417 | ) |
|      Payment                    of Other Operations and Maintenance Costs                                   |   | ** **                                                   | **(126,019** | **)**  |     |   | (107,754 | ) |
|      Taxes                    Paid, Net of Amounts Capitalized                                              |   | ** **                                                   | **(102,527** | **)**  |     |   | (98,886 | ) |
|      Wages                    Paid, Net of Amounts Capitalized                                              |   | ** **                                                   | **(83,332**  | **)**  |     |   | (77,429 | ) |
|      Interest                    Paid, Net of Amounts Capitalized                                           |   | ** **                                                   | **(59,186**  | **)**  |     |   | (58,504 | ) |
|      Capital                    Lease Interest Paid                                                         |   | ** **                                                   | **(53,482**  | **)**  |     |   | (62,780 | ) |
|      Income                    Taxes Paid                                                                   |   | ** **                                                   | **(20,923**  | **)**  |     |   | (40,220 | ) |
|      Performance                    Deposits Payments                                                       |   | ** **                                                   | **(7,900**   | **)**  |     |   | (9,617 | ) |
|      Excess                    Tax Benefit from Stock Options Exercised                                     |   | ** **                                                   | **(443**     | **)**  |     |   | (1,106 | ) |
|      Other                    Cash Payments                                                                 |   | ** **                                                   | **(3,770**   | **)**  |     |   | (3,575 | ) |
|      Net                    Cash Used by Operating Activities of Discontinued                    Operations |   | ** **                                                   | **-**        |   |     |   | (2,710 | ) |
| **Net                    Cash Flows – Operating Activities**                                                                   |   | ** **                                                   | **203,537**  |   |     |   | 197,291 |   |
|                                                                                                                                 |   |                                                         |         |   |     |   |   |   |
| **Cash                    Flows from Investing Activities**                                                                          |   |                                                         |         |   |     |   |   |   |
|      Capital                    Expenditures                                                                |   | ** **                                                   | **(181,894** | **)**  |     |   | (158,755 | ) |
|      Proceeds                    from Investment in Springerville Lease Debt                                |   | ** **                                                   | **27,732**   |   |     |   | 22,158 |   |
|      Proceeds                    from the Sale of Land and Buildings                                        |   | ** **                                                   | **2,524**    |   |     |   | 428 |   |
|      Return                    of Investment from Millennium Energy Business                                |   | ** **                                                   | **12**       |   |     |   | 4,743 |   |
|      Other                    Cash Receipts                                                                 |   | ** **                                                   | **1,951**    |   |     |   | 1,750 |   |
|      Payments                    for Investment in Springerville Lease Equity                               |   | ** **                                                   | **-**        |   |     |   | (48,025 | ) |
|      Sale                    of Subsidiary                                                                  |   | ** **                                                   | **-**        |   |     |   | 16,000 |   |
|      Other                    Cash Payments                                                                 |   | ** **                                                   | **(2,864**   | **)**  |     |   | (1,487 | ) |
|      Investment                    in and Loans to Equity Investees                                         |   | ** **                                                   | **(632**     | **)**  |     |   | (4,518 | ) |
|      Net                    Cash Used by Investing Activities of Discontinued                    Operations |   | ** **                                                   | **-**        |   |     |   | (46 | ) |
| **Net                    Cash Flows - Investing Activities**                                                                         |   | ** **                                                   | **(153,171** | **)**  |     |   | (167,752 | ) |
|                                                                                                                                 |   |                                                         |         |   |     |   |   |   |
| **Cash                    Flows from Financing Activities**                                                                          |   |                                                         |         |   |     |   |   |   |
|      Payments                    on Borrowings under Revolving Credit Facilities                            |   | ** **                                                   | **(159,000** | **)**  |     |   | (119,000 | ) |
|      Payments                    on Capital Lease Obligations                                               |   | ** **                                                   | **(71,533**  | **)**  |     |   | (61,175 | ) |
|      Common                    Stock Dividends Paid                                                         |   | ** **                                                   | **(23,829**  | **)**  |     |   | (14,715 | ) |
|      Repayments                    of Long-Term Debt                                                        |   | ** **                                                   | **(4,500**   | **)**  |     |   | (88,000 | ) |
|      Proceeds                    from Borrowings under Revolving Credit Facilities                          |   | ** **                                                   | **160,000**  |   |     |   | 155,000 |   |
|      Proceeds                    from Issuance of Long-Term Debt                                            |   | ** **                                                   | **-**        |   |     |   | 30,000 |   |
|      Proceeds                    from Stock Options Exercised                                               |   | ** **                                                   | **1,689**    |   |     |   | 3,682 |   |
|      Excess                    Tax Benefit from Stock Options Exercised                                     |   | ** **                                                   | **443**      |   |     |   | 1,106 |   |
|      Other                    Cash Receipts                                                                 |   | ** **                                                   | **7,228**    |   |     |   | 9,886 |   |
|      Payment                    of Debt Issue/Retirement Costs                                              |   | ** **                                                   | **(429**     | **)**  |     |   | (1,898 | ) |
|      Other                    Cash Payments                                                                 |   | ** **                                                   | **(5,452**   | **)**  |     |   | (3,851 | ) |
| **Net                    Cash Flows - Financing Activities**                                                                         |   | ** **                                                   | **(95,383**  | **)**  |     |   | (88,965 | ) |
|                                                                                                                                 |   |                                                         |         |   |     |   |   |   |
| Net                    Decrease                    in Cash and Cash Equivalents                                                      |   | ** **                                                   | **(45,017**  | **)**  |     |   | (59,426 | ) |
| Cash                    and Cash                    Equivalents, Beginning of Year                                                   |   | ** **                                                   | **104,241**  |   |     |   | 144,679 |   |
| **Cash                    and Cash Equivalents, End of Period**                                                                      |   | **$**                                                        | **59,224**   |   |     | $      | 85,253 |   |
|                                                                                                                                 |   |                                                         |         |   |     |   |   |   |
| See                    Note 13                    for supplemental cash flow information.                                            |   |                                                         |         |   |     |   |   |   |
|                                                                                                                                 |   |                                                         |         |   |     |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.                                      |   |                                                         |         |   |     |   |   |   |

----

Table            of Contents

| **UNISOURCE                    ENERGY CORPORATION**                                             |   |                                                           |           |   |                            |       |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|----------------|--------|---------------------------------|------------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED BALANCE                    SHEETS**     |   |                                                           |           |   |                            |       |
|                                                                                            |   |                                                           |           |   |                            |       |
|                                                                                            |   | September                    30,                               |           |   | December                    31, |       |
|                                                                                            |   | **2007**                                                       |           |   | **2006**                        |       |
|                                                                                            |   | **(Unaudited)**                                                |           |
| **ASSETS**                                                                                      |   | -                    Thousands                    of Dollars - |           |
| **Utility                    Plant**                                                            |   |                                                           |           |   |                            |       |
|   Plant                    in Service                                                 |   | **$**                                                          | **3,485,678**  |   |                            | $          | 3,410,638 |   |
|   Utility                    Plant under Capital Leases                               |   | ** **                                                     | **702,337**    |   |                            |       | 702,337 |   |
|   Construction                    Work in Progress                                    |   | ** **                                                     | **197,912**    |   |                            |       | 135,431 |   |
| **    Total                    Utility Plant**                              |   | ** **                                                     | **4,385,927**  |   |                            |       | 4,248,406 |   |
|   Less                    Accumulated Depreciation and Amortization                   |   | ** **                                                     | **(1,536,414** | **)**  |                            |       | (1,492,842 | ) |
|   Less                    Accumulated Amortization of Capital Lease Assets            |   | ** **                                                     | **(515,080**   | **)**  |                            |       | (495,944 | ) |
| **    Total                    Utility Plant - Net**                        |   | ** **                                                     | **2,334,433**  |   |                            |       | 2,259,620 |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| **Investments                    and Other Property**                                           |   |                                                           |           |   |                            |       |   |   |
|   Investments                    in Lease Debt and Equity                             |   | ** **                                                     | **152,781**    |   |                            |       | 181,222 |   |
|   Other                                                                               |   | ** **                                                     | **68,741**     |   |                            |       | 66,194 |   |
| **    Total                    Investments and Other Property**             |   | ** **                                                     | **221,522**    |   |                            |       | 247,416 |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| **Current                    Assets**                                                           |   |                                                           |           |   |                            |       |   |   |
|   Cash                    and Cash Equivalents                                        |   | ** **                                                     | **59,224**     |   |                            |       | 104,241 |   |
|   Trade                    Accounts Receivable                                        |   | ** **                                                     | **125,720**    |   |                            |       | 124,789 |   |
|   Unbilled                    Accounts Receivable                                     |   | ** **                                                     | **58,648**     |   |                            |       | 58,499 |   |
|   Allowance                    for Doubtful Accounts                                  |   | ** **                                                     | **(18,221**    | **)**  |                            |       | (16,859 | ) |
|   Materials                    and Fuel Inventory                                     |   | ** **                                                     | **82,938**     |   |                            |       | 73,628 |   |
|   Trading                    Assets - Derivative Instruments                          |   | ** **                                                     | **18,120**     |   |                            |       | 26,387 |   |
|   Current                    Regulatory Assets                                        |   | ** **                                                     | **9,621**      |   |                            |       | 9,549 |   |
|   Deferred                    Income Taxes - Current                                  |   | ** **                                                     | **54,747**     |   |                            |       | 57,912 |   |
|   Income                    Tax Receivable                                            |   | ** **                                                     | **13,974**     |   |                            | ** ** | **-** |   |
|   Interest                    Receivable - Current                                    |   | ** **                                                     | **3,016**      |   |                            |       | 7,782 |   |
|   Other                                                                               |   | ** **                                                     | **12,636**     |   |                            |       | 9,982 |   |
| **    Total                    Current Assets**                             |   | ** **                                                     | **420,423**    |   |                            |       | 455,910 |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| **Regulatory                    and Other Assets**                                              |   |                                                           |           |   |                            |       |   |   |
|   Transition                    Recovery Asset                                        |   | ** **                                                     | **41,682**     |   |                            |       | 101,626 |   |
|   Income                    Taxes Recoverable Through Future Revenues                 |   | ** **                                                     | **31,045**     |   |                            |       | 34,749 |   |
|   Other                    Regulatory Assets                                          |   | ** **                                                     | **54,706**     |   |                            |       | 54,848 |   |
|   Other                    Assets                                                     |   | ** **                                                     | **29,592**     |   |                            |       | 33,240 |   |
| **    Total                    Regulatory and Other Assets**                |   | ** **                                                     | **157,025**    |   |                            |       | 224,463 |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| **Total                    Assets**                                                             |   | **$**                                                          | **3,133,403**  |   |                            | $          | 3,187,409 |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements. |   |                                                           |           |   |                            |       |   |   |
|                                                                                            |   |                                                           |           |   |                            |       |   |   |
| **(Continued)**                                                                                 |

----

Table            of Contents

| **UNISOURCE                    ENERGY CORPORATION**                                               |   |                                                           |          |   |                            |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|---------------|--------|---------------------------------|--------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED BALANCE SHEETS**                          |   |                                                           |          |   |                            |   |
|                                                                                              |   |                                                           |          |   |                            |   |
|                                                                                              |   | September                    30,                               |          |   | December                    31, |   |
|                                                                                              |   | **2007**                                                       |          |   | **2006**                        |   |
|                                                                                              |   | **(Unaudited)**                                                |          |
| **CAPITALIZATION                    AND OTHER LIABILITIES**                                       |   | -                    Thousands                    of Dollars - |          |
| **Capitalization**                                                                                |   |                                                           |          |   |                            |   |
|   Common                    Stock                                                       |   | **$**                                                          | **701,719**   |   |                            | $      | 697,426 |   |
|   Accumulated                    Deficit                                                |   | ** **                                                     | **(8,879**    | **)**  |                            |   | (27,913 | ) |
|   Accumulated                    Other Comprehensive Loss                               |   | ** **                                                     | **(16,323**   | **)**  |                            |   | (15,364 | ) |
|   Common                    Stock Equity                                                |   | ** **                                                     | **676,517**   |   |                            |   | 654,149 |   |
|   Capital                    Lease Obligations                                          |   | ** **                                                     | **528,896**   |   |                            |   | 588,771 |   |
|   Long-Term                    Debt                                                     |   | ** **                                                     | **1,003,370** |   |                            |   | 1,171,170 |   |
| **    Total                    Capitalization**                               |   | ** **                                                     | **2,208,783** |   |                            |   | 2,414,090 |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| **Current                    Liabilities**                                                        |   |                                                           |          |   |                            |   |   |   |
|   Current                    Obligations under Capital Leases                           |   | ** **                                                     | **58,596**    |   |                            |   | 59,090 |   |
|   Borrowing                    Under Revolving Credit Facilities                        |   | ** **                                                     | **16,000**    |   |                            |   | 50,000 |   |
|   Current                    Maturities of Long-Term Debt                               |   | ** **                                                     | **204,300**   |   |                            |   | 6,000 |   |
|   Accounts                    Payable                                                   |   | ** **                                                     | **79,100**    |   |                            |   | 102,829 |   |
|   Income                    Taxes Payable                                               |   | ** **                                                     | **-**         |   |                            |   | 16,429 |   |
|   Interest                    Accrued                                                   |   | ** **                                                     | **25,884**    |   |                            |   | 52,392 |   |
|   Trading                    Liabilities - Derivative Instruments                       |   | ** **                                                     | **8,208**     |   |                            |   | 16,537 |   |
|   Accrued                    Taxes Other than Income Taxes                              |   | ** **                                                     | **49,101**    |   |                            |   | 35,431 |   |
|   Accrued                    Employee Expenses                                          |   | ** **                                                     | **19,227**    |   |                            |   | 22,886 |   |
|   Customer                    Deposits                                                  |   | ** **                                                     | **21,372**    |   |                            |   | 19,767 |   |
|   Current                    Regulatory Liabilities                                     |   | ** **                                                     | **14,222**    |   |                            |   | 10,707 |   |
|   Other                                                                                 |   | ** **                                                     | **7,124**     |   |                            |   | 3,852 |   |
| **    Total                    Current Liabilities**                          |   | ** **                                                     | **503,134**   |   |                            |   | 395,920 |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| **Deferred                    Credits and Other Liabilities**                                     |   |                                                           |          |   |                            |   |   |   |
|   Deferred                    Income Taxes - Noncurrent                                 |   | ** **                                                     | **145,215**   |   |                            |   | 126,883 |   |
|   Pension                    and Other Post-Retirement Benefits                         |   | ** **                                                     | **101,274**   |   |                            |   | 105,085 |   |
|   Regulatory                    Liability - Net Cost of Removal for Interim Retirements |   | ** **                                                     | **92,317**    |   |                            |   | 85,394 |   |
|   Other                    Regulatory Liabilities                                       |   | ** **                                                     | **10,094**    |   |                            |   | 9,609 |   |
|   Other                                                                                 |   | ** **                                                     | **72,586**    |   |                            |   | 50,428 |   |
| **    Total                    Deferred Credits and Other Liabilities**       |   | ** **                                                     | **421,486**   |   |                            |   | 377,399 |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| **Commitments                    and Contingencies (Note 7)**                                     |   |                                                           |          |   |                            |   |   |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| **Total                    Capitalization and Other Liabilities**                                 |   | **$**                                                          | **3,133,403** |   |                            | $      | 3,187,409 |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.   |   |                                                           |          |   |                            |   |   |   |
|                                                                                              |   |                                                           |          |   |                            |   |   |   |
| **(Concluded)**                                                                                   |

----

Table            of Contents

| **UNISOURCE                    ENERGY CORPORATION**                                                                                                       |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|------------|--------|--------|--------|-------------|-------------|--------|--------|---------------|--------|--------|---------------|-------------|
| **CONDENSED                    CONSOLIDATED STATEMENT OF CHANGES                    IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE                    INCOME** |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   | Accumulated   |   |   |          |        |
|                                                                                                                                                      |   | Common                                                         |       |   |   |   |        |        |   |   | Other         |   |   | Total         |        |
|                                                                                                                                                      |   | Shares                                                         |       |   | Common |   |        | Accumulated |   |   | Comprehensive |   |   | Stockholders' |        |
|                                                                                                                                                      |   | Issued*                                                        |       |   | Stock  |   |        | Deficit     |   |   | 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                                                                                                           |   |                                                           | -          |   |   |   | -           |        |   |   | 42,167        |   |   |          | -           |   |   |   | 42,167 |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Unrealized                    Loss on Cash Flow Hedges                                                                                                    |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of                    $2,158 income taxes)                                                                                        |   |                                                           | -          |   |   |   | -           |        |   |   | -             |   |   |          | (3,291      | ) |   |   | (3,291 | ) |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Reclassification                    of Unrealized Loss on                                                                                                 |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Cash                    Flow                    Hedges to Net Income                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of                    $1,439 income taxes)                                                                                        |   |                                                           | -          |   |   |   | -           |        |   |   | -             |   |   |          | 2,194       |   |   |   | 2,194 |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Employee                    Benefit Obligations                                                                                                           |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|      Amortization                    of net actuarial loss and prior service cost                                                |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |
| included                    in                    net periodic benefit cost                                                                               |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of $90                    income taxes)                                                                                           |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          | 138         |   |   |   | 138 |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Total                    Comprehensive Income                                                                                                             |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   | 41,208 |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Dividends                    Declared                                                                                                                     |   |                                                           | -          |   |   |   |        |        |   |   | (23,829       | )      |   |          |        |   |   |   | (23,829 | ) |
| Shares                    Issued                    under Stock Compensation Plans                                                                        |   |                                                           | 5          |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   | - |   |
| Shares                    Issued                    for Stock Options                                                                                     |   |                                                           | 100        |   |   |   | 1,689       |        |   |   |          |   |   |          |        |   |   |   | 1,689 |   |
| Stock                    Award                    Compensation Expense                                                                                    |   |                                                           |       |   |   |   | 2,161       |        |   |   |          |   |   |          |        |   |   |   | 2,161 |   |
| Tax                    Benefit                    Realized from Stock Options Exercised                                                                   |   |                                                           | -          |   |   |   | 443         |        |   |   |          |   |   |          |        |   |   |   | 443 |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| **Balances                    at September 30, 2007**                                                                                                     |   | ** **                                                     | **35,295** |   |   | **$**  | **701,719** |        |   | **$**  | **(8,879**    | **)**  |   | **$**         | **(16,323** | **)** |   | **$** | **676,517** |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| *                    UniSource                    Energy has 75 million authorized shares of common stock.                                                |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |
|                                                                                                                                                      |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.                                                           |   |                                                           |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |

----

Table            of Contents

| **TUCSON                    ELECTRIC POWER COMPANY**                                              |        |   |     |                                                           |                                      |   |
|---------------------------------------------------------------------------------------------------|-------------|--------|----------|----------------------------------------------------------------|-------------------------------------------|--------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED STATEMENTS                    OF INCOME** |        |   |     |                                                           |                                      |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |
| Three                    Months                    Ended                                          |        |   |     | Nine                    Months                    Ended        |                                      |
| September                    30,                                                                  |        |   |     | September                    30,                               |                                      |
| **2007**                                                                                          |        |   | **2006** |                                                           |                                      |   | **2007** |   |   | **2006** |   |
| **(Unaudited)**                                                                                   |        |   |     | **(Unaudited)**                                                |                                      |
| -                    Thousands                    of Dollars -                                    |        |   |     | -                    Thousands                    of Dollars - |                                      |
|                                                                                              |        |   |     |                                                           | **Operating                    Revenues** |   |   |   |   |   |   |
| **$**                                                                                             | **266,466** |   |     | $                                                              | 248,188                                   |   |   Electric                    Retail Sales |   | **$** | **635,818** |   |   | $ | 605,215 |   |
| ** **                                                                                        | **46,120**  |   |     |                                                           | 40,553                                    |   |   Electric                    Wholesale Sales |   | ** ** | **139,337** |   |   |   | 129,198 |   |
| ** **                                                                                        | **16,255**  |   |     |                                                           | 9,352                                     |   |   Other                    Revenues |   | ** ** | **41,686** |   |   |   | 22,124 |   |
| ** **                                                                                        | **328,841** |   |     |                                                           | 298,093                                   |   | **    Total                    Operating Revenues** |   | ** ** | **816,841** |   |   |   | 756,537 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                      |   | **Operating                    Expenses** |   |   |   |   |   |   |   |   |
| ** **                                                                                        | **90,135**  |   |     |                                                           | 78,302                                    |   |   Fuel |   | ** ** | **223,423** |   |   |   | 197,660 |   |
| ** **                                                                                        | **58,094**  |   |     |                                                           | 36,012                                    |   |   Purchased                    Power |   | ** ** | **115,111** |   |   |   | 79,485 |   |
| ** **                                                                                        | **47,845**  |   |     |                                                           | 47,337                                    |   |   Other                    Operations and Maintenance |   | ** ** | **159,569** |   |   |   | 139,331 |   |
| ** **                                                                                        | **29,392**  |   |     |                                                           | 28,772                                    |   |   Depreciation                    and Amortization |   | ** ** | **88,033** |   |   |   | 83,504 |   |
| ** **                                                                                        | **25,739**  |   |     |                                                           | 21,959                                    |   |   Amortization                    of Transition Recovery Asset |   | ** ** | **59,944** |   |   |   | 51,080 |   |
| ** **                                                                                        | **9,616**   |   |     |                                                           | 8,218                                     |   |   Taxes                    Other Than Income Taxes |   | ** ** | **30,222** |   |   |   | 29,058 |   |
| ** **                                                                                        | **260,821** |   |     |                                                           | 220,600                                   |   | **    Total                    Operating Expenses** |   | ** ** | **676,302** |   |   |   | 580,118 |   |
| ** **                                                                                        | **68,020**  |   |     |                                                           | 77,493                                    |   | **      Operating                    Income** |   | ** ** | **140,539** |   |   |   | 176,419 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                      |   | **Other                    Income (Deductions)** |   |   |   |   |   |   |   |   |
| ** **                                                                                        | **3,092**   |   |     |                                                           | 3,864                                     |   |   Interest                    Income |   | ** ** | **10,496** |   |   |   | 12,454 |   |
| ** **                                                                                        | **1,160**   |   |     |                                                           | 1,644                                     |   |   Other                    Income |   | ** ** | **3,913** |   |   |   | 4,018 |   |
| ** **                                                                                        | **(2,048**  | **)**  |     |                                                           | (247                                      | )      |   Other                    Expense |   | ** ** | **(3,725** | **)** |   |   | (1,031 | ) |
| ** **                                                                                        | **2,204**   |   |     |                                                           | 5,261                                     |   | **    Total                    Other Income (Deductions)** |   | ** ** | **10,684** |   |   |   | 15,441 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                      |   | **Interest                    Expense** |   |   |   |   |   |   |   |   |
| ** **                                                                                        | **12,651**  |   |     |                                                           | 12,965                                    |   |   Long-Term                    Debt |   | ** ** | **37,766** |   |   |   | 38,669 |   |
| ** **                                                                                        | **16,105**  |   |     |                                                           | 17,960                                    |   |   Interest                    on Capital Leases |   | ** ** | **48,371** |   |   |   | 55,024 |   |
| ** **                                                                                        | **-**       |   |     |                                                           | 685                                       |   |   Loss                    on Extinguishment of Debt |   | ** ** | **-** |   |   |   | 685 |   |
| ** **                                                                                        | **1,062**   |   |     |                                                           | 3,986                                     |   |   Other                    Interest Expense |   | ** ** | **4,020** |   |   |   | 5,852 |   |
| ** **                                                                                        | **(1,397**  | **)**  |     |                                                           | (1,197                                    | )      |   Interest                    Capitalized |   | ** ** | **(3,264** | **)** |   |   | (3,958 | ) |
| ** **                                                                                        | **28,421**  |   |     |                                                           | 34,399                                    |   | **    Total                    Interest Expense** |   | ** ** | **86,893** |   |   |   | 96,272 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                                        | **41,803**  |   |     |                                                           | 48,355                                    |   | **Income                    Before Income Taxes** |   | ** ** | **64,330** |   |   |   | 95,588 |   |
| ** **                                                                                        | **15,844**  |   |     |                                                           | 18,754                                    |   |   Income                    Tax Expense |   | ** ** | **25,279** |   |   |   | 38,180 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
| **$**                                                                                             | **25,959**  |   |     | $                                                              | 29,601                                    |   | **Net                    Income** |   | **$** | **39,051** |   |   | $ | 57,408 |   |
|                                                                                              |        |   |     |                                                           |                                      |   |   |   |   |   |   |   |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.   |        |   |     |                                                           |                                      |   |   |   |

----

Table            of Contents

| **TUCSON                    ELECTRIC POWER COMPANY**                                                   |   |                                                         |         |   |     |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------------|--------|----------|--------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED                    STATEMENTS OF CASH FLOWS**  |   |                                                         |         |   |     |   |
|                                                                                                   |   |                                                         |         |   |     |   |
|                                                                                                   |   | Nine                    Months                    Ended      |         |
|                                                                                                   |   | September                    30,                             |         |
|                                                                                                   |   | **2007**                                                     |         |   | **2006** |   |
|                                                                                                   |   | **(Unaudited)**                                              |         |
|                                                                                                   |   | -Thousands                    of                    Dollars- |         |
| **Cash                    Flows from Operating Activities**                                            |   |                                                         |         |   |     |   |
|      Cash                    Receipts from Electric Retail Sales              |   | **$**                                                        | **658,623**  |   |     | $      | 632,986 |   |
|      Cash                    Receipts from Electric Wholesale Sales           |   | ** **                                                   | **226,429**  |   |     |   | 180,832 |   |
|      Cash                    Receipts from Operating SPV Unit 3               |   | ** **                                                   | **28,440**   |   |     |   | 2,132 |   |
|      Interest                    Received                                     |   | ** **                                                   | **16,006**   |   |     |   | 18,446 |   |
|      Sale                    of Excess Emission Allowances                    |   | ** **                                                   | **9,987**    |   |     |   | 7,081 |   |
|      Other                    Cash Receipts                                   |   | ** **                                                   | **5,888**    |   |     |   | 4,720 |   |
|      Fuel                    Costs Paid                                       |   | ** **                                                   | **(214,099** | **)**  |     |   | (184,359 | ) |
|      Purchased                    Power Costs Paid                            |   | ** **                                                   | **(190,071** | **)**  |     |   | (129,453 | ) |
|      Payment                    of Other Operations and Maintenance Costs     |   | ** **                                                   | **(116,657** | **)**  |     |   | (95,570 | ) |
|      Taxes                    Paid, Net of Amounts Capitalized                |   | ** **                                                   | **(76,583**  | **)**  |     |   | (72,958 | ) |
|      Wages                    Paid, Net of Amounts Capitalized                |   | ** **                                                   | **(65,818**  | **)**  |     |   | (60,488 | ) |
|      Capital                    Lease Interest Paid                           |   | ** **                                                   | **(53,464**  | **)**  |     |   | (62,758 | ) |
|      Interest                    Paid, Net of Amounts Capitalized             |   | ** **                                                   | **(39,159**  | **)**  |     |   | (36,706 | ) |
|      Income                    Taxes and Related Interest Paid                |   | ** **                                                   | **(23,609**  | **)**  |     |   | (58,714 | ) |
|      Other                    Cash Payments                                   |   | ** **                                                   | **(2,769**   | **)**  |     |   | (1,690 | ) |
| **Net                    Cash Flows – Operating Activities**                                     |   | ** **                                                   | **163,144**  |   |     | $      | 143,501 |   |
|                                                                                                   |   |                                                         |         |   |     |   |   |   |
| **Cash                    Flows from Investing Activities**                                            |   |                                                         |         |   |     |   |   |   |
|      Capital                    Expenditures                                  |   | ** **                                                   | **(123,352** | **)**  |     |   | (111,463 | ) |
|      Payments                    for Investment in Springerville Lease Equity |   | ** **                                                   | **-**        |   |     |   | (48,025 | ) |
|      Proceeds                    from Investment in Springerville Lease Debt  |   | ** **                                                   | **27,732**   |   |     |   | 22,158 |   |
|      Proceeds                    from Sale of Land                            |   | ** **                                                   | **642**      |   |     |   | - |   |
|      Other                    Cash Payments                                   |   | ** **                                                   | **(2,444**   | **)**  |     |   | (1,004 | ) |
| **Net                    Cash Flows - Investing Activities**                                           |   | ** **                                                   | **(97,422**  | **)**  |     | $      | (138,334 | ) |
|                                                                                                   |   |                                                         |         |   |     |   |   |   |
| **Cash                    Flows from Financing Activities**                                            |   |                                                         |         |   |     |   |   |   |

|      Payments                    on Borrowings under Revolving Credit Facility |   | ** ** | **(134,000** | **)** |   |   | (100,000 | ) |
|---------------------------------------------------------------------------------------------------------|--------|------------|--------------|-------|--------|--------|----------|---|

|      Payments                      on Capital Lease Obligations |   | ** ** | **(71,464** | **)** |   |   | (61,111 | ) |
|------------------------------------------------------------------------------------------|--------|------------|-------------|-------|--------|--------|---------|---|

|      Proceeds                      from Borrowings under Revolving Credit Facility |   | ** ** | **120,000** |   |   |   | 105,000 |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------|-------------|--------|--------|--------|---------|--------|

|      Other                    Cash Receipts                            |   | ** ** | **11,206**  |   |   |   | 13,368  |   |
|-------------------------------------------------------------------------------------------------|--------|------------|-------------|--------|--------|--------|---------|--------|
|      Payment                    of Debt Issue/Retirement Costs         |   | ** ** | **(415**    | **)**  |   |   | (1,439  | )      |
|      Other                    Cash Payments                            |   | ** ** | **(783**    | **)**  |   |   | (863    | )      |
| **Net                    Cash Flows - Financing Activities**                                    |   | ** ** | **(75,456** | **)**  |   |   | (45,045 | )      |
|                                                                                            |   |       |        |   |   |   |    |   |
| Net                    Decrease                    in Cash and Cash Equivalents                 |   | ** ** | **(9,734**  | **)**  |   |   | (39,878 | )      |
| Cash                    and Cash                    Equivalents, Beginning of Year              |   | ** ** | **19,711**  |   |   |   | 53,433  |   |
| **Cash                    and Cash Equivalents, End of Period**                                 |   | **$**      | **9,977**   |   |   | $      | 13,555  |   |
|                                                                                            |   |       |        |   |   |   |    |   |
| See                    Note 13                    for supplemental cash flow information.       |   |       |        |   |   |   |    |   |
|                                                                                            |   |       |        |   |   |   |    |   |
| See                    Notes to                    Condensed Consolidated Financial Statements. |   |       |        |   |   |   |    |   |

----

Table            of Contents

| **TUCSON                    ELECTRIC POWER COMPANY**                                            |   |                                                                 |           |   |                            |       |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|----------------|--------|---------------------------------|------------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED BALANCE                    SHEETS**     |   |                                                                 |           |   |                            |       |
|                                                                                            |   |                                                                 |           |   |                            |       |
|                                                                                            |   | September                    30,                                     |           |   | December                    31, |       |
|                                                                                            |   | **2007**                                                             |           |   | **2006**                        |       |
|                                                                                            |   | **(Unaudited)**                                                      |           |
| **ASSETS**                                                                                      |   |  -                    Thousands                    of Dollars - |           |
| **Utility                    Plant**                                                            |   |                                                                 |           |   |                            |       |
|   Plant                    in Service                                                 |   | **$**                                                                | **3,085,103**  |   |                            | $          | 3,035,494 |   |
|   Utility                    Plant under Capital Leases                               |   | ** **                                                           | **701,631**    |   |                            |       | 701,631 |   |
|   Construction                    Work in Progress                                    |   | ** **                                                           | **126,377**    |   |                            |       | 92,125 |   |
| **    Total                    Utility Plant**                              |   | ** **                                                           | **3,913,111**  |   |                            |       | 3,829,250 |   |
|   Less                    Accumulated Depreciation and Amortization                   |   | ** **                                                           | **(1,480,200** | **)**  |                            |       | (1,446,229 | ) |
|   Less                    Accumulated Amortization of Capital Lease Assets            |   | ** **                                                           | **(514,701**   | **)**  |                            |       | (495,634 | ) |
| **    Total                    Utility Plant - Net**                        |   | ** **                                                           | **1,918,210**  |   |                            |       | 1,887,387 |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| **Investments                    and Other Property**                                           |   |                                                                 |           |   |                            |       |   |   |
|   Investments                    in Lease Debt and Equity                             |   | ** **                                                           | **152,781**    |   |                            |       | 181,222 |   |
|   Other                                                                               |   | ** **                                                           | **33,586**     |   |                            |       | 30,161 |   |
| **    Total                    Investments and Other Property**             |   | ** **                                                           | **186,367**    |   |                            |       | 211,383 |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| **Current                    Assets**                                                           |   |                                                                 |           |   |                            |       |   |   |
|   Cash                    and Cash Equivalents                                        |   | ** **                                                           | **9,977**      |   |                            |       | 19,711 |   |
|   Trade                    Accounts Receivable                                        |   | ** **                                                           | **104,549**    |   |                            |       | 97,512 |   |
|   Unbilled                    Accounts Receivable                                     |   | ** **                                                           | **46,068**     |   |                            |       | 35,115 |   |
|   Allowance                    for Doubtful Accounts                                  |   | ** **                                                           | **(16,646**    | **)**  |                            |       | (16,303 | ) |
|   Intercompany                    Accounts Receivable                                 |   | ** **                                                           | **17,411**     |   |                            |       | 16,329 |   |
|   Materials                    and Fuel Inventory                                     |   | ** **                                                           | **73,225**     |   |                            |       | 63,629 |   |
|   Current                    Regulatory Assets                                        |   | ** **                                                           | **9,259**      |   |                            |       | 9,549 |   |
|   Income                    Tax Receivable                                            |   | ** **                                                           | **16,714**     |   |                            | ** ** | **-** |   |
|   Deferred                    Income Taxes - Current                                  |   | ** **                                                           | **53,537**     |   |                            |       | 57,151 |   |
|   Interest                    Receivable - Current                                    |   | ** **                                                           | **3,016**      |   |                            |       | 7,782 |   |
|   Trading                    Assets - Derivative Instrument                           |   | ** **                                                           | **4,244**      |   |                            |       | 15,447 |   |
|   Other                                                                               |   | ** **                                                           | **11,254**     |   |                            |       | 8,833 |   |
| **    Total                    Current Assets**                             |   | ** **                                                           | **332,608**    |   |                            |       | 314,755 |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| **Regulatory                    and Other Assets**                                              |   |                                                                 |           |   |                            |       |   |   |
|   Transition                    Recovery Asset                                        |   | ** **                                                           | **41,682**     |   |                            |       | 101,626 |   |
|   Income                    Taxes Recoverable Through Future Revenues                 |   | ** **                                                           | **31,045**     |   |                            |       | 34,749 |   |
|   Other                    Regulatory Assets                                          |   | ** **                                                           | **49,435**     |   |                            |       | 51,594 |   |
|   Other                    Assets                                                     |   | ** **                                                           | **19,752**     |   |                            |       | 21,569 |   |
| **    Total                    Regulatory and Other Assets**                |   | ** **                                                           | **141,914**    |   |                            |       | 209,538 |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| **Total                    Assets**                                                             |   | **$**                                                                | **2,579,099**  |   |                            | $          | 2,623,063 |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements. |   |                                                                 |           |   |                            |       |   |   |
|                                                                                            |   |                                                                 |           |   |                            |       |   |   |
| **(Continued)**                                                                                 |

----

Table            of Contents

| **TUCSON                    ELECTRIC POWER COMPANY**                                              |                                                                                                                          |   |                                                                                                                          |
|---------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| **COMPARATIVE                    CONDENSED CONSOLIDATED BALANCE SHEETS**                          |                                                                                                                          |   |                                                                                                                          |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
|                                                                                              | September                    30,                                                                                              |   |   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                                                | **          (179,893)**                                                     |   |            (219,640)                                                   |
|   Accumulated                    Other Comprehensive Loss                               | **            (16,219)**                                          |   |             (15,260)                                              |
|   Common                    Stock Equity                                                | **           593,502**                                                 |   |             554,714                                               |
|   Capital                    Lease Obligations                                          | **528,620**                                                                                                                   |   | 588,424                                                                                                                       |
|   Long-Term                    Debt                                                     | **682,870**                                                                                                                   |   | 821,170                                                                                                                       |
| **    Total                    Capitalization**                               | **1,804,992**                                                                                                                 |   | 1,964,308                                                                                                                     |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| **Current                    Liabilities**                                                        |                                                                                                                          |   |                                                                                                                          |
|   Current                    Obligations under Capital Leases                           | **58,502**                                                                                                                    |   | 58,999                                                                                                                        |
|   Current                    Maturities of Long-Term Debt                               | **138,300**                                                                                                                   |   | **                    -** |
|   Borrowing                    Under Revolving Credit Facility                          | **16,000**                                                                                                                    |   |              30,000                                          |
|   Accounts                    Payable                                                   | **60,513**                                                                                                                    |   | 69,019                                                                                                                        |
|   Intercompany                    Accounts Payable                                      | **             11,466**                                      |   | 10,743                                                                                                                        |
|   Income                    Taxes Payable                                               | **                    -** |   | 8,409                                                                                                                         |
|   Interest                    Accrued                                                   | **23,530**                                                                                                                    |   | 45,613                                                                                                                        |
|   Accrued                    Taxes Other than Income Taxes                              | **40,944**                                                                                                                    |   | 27,227                                                                                                                        |
|   Accrued                    Employee Expenses                                          | **17,428**                                                                                                                    |   | 21,102                                                                                                                        |
|   Trading                    Liabilities - Derivative Instruments                       | **3,341**                                                                                                                     |   | 11,163                                                                                                                        |
|   Other                                                                                 | **15,823**                                                                                                                    |   | 14,278                                                                                                                        |
| **    Total                    Current Liabilities**                          | **385,847**                                                                                                                   |   | 296,553                                                                                                                       |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| **Deferred                    Credits and Other Liabilities**                                     |                                                                                                                          |   |                                                                                                                          |
|   Deferred                    Income Taxes - Noncurrent                                 | **163,627**                                                                                                                   |   | 155,253                                                                                                                       |
|   Regulatory                    Liability - Net Cost of Removal for Interim Retirements | **85,362**                                                                                                                    |   | 79,876                                                                                                                        |
|   Pension                    and Other Post-Retirement Benefits                         | **96,239**                                                                                                                    |   | 99,832                                                                                                                        |
|   Other                                                                                 | **43,032**                                                                                                                    |   | 27,241                                                                                                                        |
| **    Total                    Deferred Credits and Other Liabilities**       | **388,260**                                                                                                                   |   | 362,202                                                                                                                       |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| **Commitments                    and Contingencies (Note 7)**                                     |                                                                                                                          |   |                                                                                                                          |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| **Total                    Capitalization and Other Liabilities**                                 | ** $      2,579,099**                                                                      |   |  $      2,623,063                                                                          |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| See                    Notes to                    Condensed Consolidated Financial Statements.   |                                                                                                                          |   |                                                                                                                          |
|                                                                                              |                                                                                                                          |   |                                                                                                                          |
| **(Concluded)**                                                                                   |

----

Table            of Contents

| **TUCSON                    ELECTRIC POWER COMPANY**                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|-------------|--------|---------|--------|------------|-------------|--------|--------|---------------|--------|--------|---------------|-------------|
| **CONDENSED                    CONSOLIDATED STATEMENT OF CHANGES                    IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE                    INCOME** |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   | Accumulated   |   |   |          |        |
|                                                                                                                                                      |   |                                                           |        |   | Capital |   |       |        |   |   | Other         |   |   | Total         |        |
|                                                                                                                                                      |   | Common                                                         |        |   | Stock   |   |       | Accumulated |   |   | Comprehensive |   |   | Stockholder's |        |
|                                                                                                                                                      |   | Stock                                                          |        |   | Expense |   |       | Deficit     |   |   | 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                                                                                                           |   |                                                           | -           |   |    |   | -          |        |   |   | 39,051        |   |   |          | -           |   |   |   | 39,051 |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Unrealized                    Loss on Cash Flow Hedges                                                                                                    |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of                    $2,158 income taxes)                                                                                        |   |                                                           | -           |   |    |   | -          |        |   |   | -             |   |   |          | (3,291      | ) |   |   | (3,291 | ) |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Reclassification                    of Unrealized Loss on                                                                                                 |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Cash                    Flow                    Hedges to Net Income                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of                    $1,439 income taxes)                                                                                        |   |                                                           | -           |   |    |   | -          |        |   |   | -             |   |   |          | 2,194       |   |   |   | 2,194 |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Employee                    Benefit Obligations                                                                                                           |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
|     Amortization                    of net actuarial loss and prior service cost                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |
| included                    in                    net periodic benefit cost                                                                               |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                    of $90                    income taxes)                                                                                           |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          | 138         |   |   |   | 138 |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Total                    Comprehensive Income                                                                                                             |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   | 38,092 |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| **Balances                    at September 30, 2007**                                                                                                     |   | **$**                                                          | **795,971** |   |    | **$**  | **(6,357** | **)**       |   | **$**  | **(179,893**  | **)**  |   | **$**         | **(16,219** | **)** |   | **$** | **593,502** |   |
|                                                                                                                                                      |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| See                    Notes to                    Condensed Consolidated Financial Statements.                                                           |   |                                                           |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |

----

Table            of Contents

**NOTES              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –              Unaudited**

----

**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*

----

Table                of Contents

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

----

|   | · | 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**

**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; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|

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

**TEP                  Rate                  Proposal Filing**

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

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Table                of Contents

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

----

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

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

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

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

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

**Renewable              Energy Standard and Tariff**

**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. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table                of Contents

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

----

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

**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**

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Table                of Contents

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

----

**Renewable            Energy Standard and Tariff**

**NOTE3.  DEBT            AND CREDIT            FACILITIES**

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

**NOTE4.  BUSINESS            SEGMENTS**

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

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

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

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Table                of Contents

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

----

|                                                                                                                                                           |   | **Reportable                          Segments**                        |   |   |           |   |   | **UniSource**       |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|--------|----------------|--------|--------|---------------------|--------|
|                                                                                                                                                           |   | **TEP**                                                                 |   |   | **UNS****Gas** |   |   | **UNS****Electric** |   |   | **Other** |   |   | **Reconciling                          Adjustments** |   |   | **Energy                          Consolidated** |   |
| **Income                          Statement**                                                                                                                  |   | -Millions                          of                          Dollars- |   |
| **Three                          months ended September 30, 2007:**                                                                                            |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |
|  Operating                          Revenues -                          External                                                                          |   | $                                                                       | 327    |   |           | $      | 17     |                |   | $ | 54 |   |   | $ | - |   |   | $ | - |   |   | **$** | **398** |   |
|  Operating                          Revenues -                          Intersegment                                                                      |   |                                                                    | 2      |   |           |   | -      |                |   |   | - |   |   |   | 3 |   |   |   | (5 | ) |   | ** ** | **-** |   |
|  Income                          (Loss) from Continuing    Operations                          Before Income Taxes                    |   |                                                                    | 42     |   |           |   | (4     | )                   |   |   | 5 |   |   |   | (2 | ) |   |   | - |   |   | ** ** | **41** |   |
|  Net                          Income (Loss)                                                                                                               |   |                                                                    | 26     |   |           |   | (2     | )                   |   |   | 3 |   |   |   | (2 | ) |   |   | - |   |   | ** ** | **25** |   |
|                                                                                                                                                           |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Three                          months ended September 30, 2006:**                                                                                            |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |   | $                                                                       | 298    |   |           | $      | 21     |                |   | $ | 51 |   |   | $ | - |   |   | $ | - |   |   | **$** | **370** |   |
| Operating                          Revenues -                          Intersegment                                                                            |   |                                                                    | 1      |   |           |   | -      |                |   |   | - |   |   |   | 4 |   |   |   | (5 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |   |                                                                    | 48     |   |           |   | (3     | )                   |   |   | 4 |   |   |   | (3 | ) |   |   | - |   |   | ** ** | **46** |   |
| Net                          Income (Loss)                                                                                                                     |   |                                                                    | 30     |   |           |   | (2     | )                   |   |   | 2 |   |   |   | (2 | ) |   |   | - |   |   | ** ** | **28** |   |
|                                                                                                                                                           |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Nine                          months ended September 30, 2007:**                                                                                             |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |   | $                                                                       | 812    |   |           | $      | 103    |                |   | $ | 131 |   |   | $ | - |   |   | $ | - |   |   | **$** | **1,046** |   |
|   Operating                          Revenues - Intersegment                                                                                         |   |                                                                    | 5      |   |           |   | -      |                |   |   | - |   |   |   | 12 |   |   |   | (17 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |   |                                                                    | 64     |   |           |   | 2      |                |   |   | 8 |   |   |   | (4 | ) |   |   | - |   |   | ** ** | **70** |   |
| Net                          Income (Loss)                                                                                                                     |   |                                                                    | 39     |   |           |   | 1      |                |   |   | 5 |   |   |   | (3 | ) |   |   | - |   |   | ** ** | **42** |   |
|                                                                                                                                                           |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Nine                          months ended September 30, 2006:**                                                                                             |   |                                                                    |   |   |           |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |   | $                                                                       | 754    |   |           | $      | 111    |                |   | $ | 125 |   |   | $ | - |   |   | $ | - |   |   | **$** | **990** |   |
|   Operating                          Revenues - Intersegment                                                                                         |   |                                                                    | 2      |   |           |   | -      |                |   |   | - |   |   |   | 11 |   |   |   | (13 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |   |                                                                    | 96     |   |           |   | 3      |                |   |   | 7 |   |   |   | (10 | ) |   |   | - |   |   | ** ** | **96** |   |
| Discontinued                          Operations – Net of                          Tax                                                                   |   |                                                                    | -      |   |           |   | -      |                |   |   | - |   |   |   | (3 | ) |   |   | - |   |   | ** ** | **(3** | **)** |
| Net                          Income (Loss)                                                                                                                     |   |                                                                    | 57     |   |           |   | 2      |                |   |   | 4 |   |   |   | (8 | ) |   |   | - |   |   | ** ** | **55** |   |

|                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Balance                          Sheet**                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                          Assets, September 30,                          2007 |   | $      | 2,579  |   |   | $      | 242    |   |   | $      | 226    |   |   | $      | 1,064  |   |   | $      | (978 | ) |   | **$** | **3,133** |   |
| Total                          Assets, December 31,                          2006  |   |   | 2,623  |   |   |   | 253    |   |   |   | 195    |   |   |   | 1,038  |   |   |   | (922 | ) |   | ** ** | **3,187** |   |

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

**TEP            INTEREST RATE SWAP**

----

Table                of Contents

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

----

**TEP            FUEL            AND POWER TRANSACTIONS**

|   | · | **Normal                      Purchase and Sale** - TEP enters into energy contracts for the                      physical delivery or sale of power to support its retail load                      requirements.  These contracts qualify as “normal sales and                      purchases” and are therefore not required to be                      marked-to-market. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Cash                      Flow Hedges** - TEP enters into gas swap agreements and forward                      power contracts to hedge the cash flow risk associated with                      TEP’s summer                      load requirements and its forecasted excess generation. Changes                      in fair                      value of these instruments are recorded as unrealized gains                      and losses in                      Other Comprehensive Income. At September 30, 2007, the contracts                      accounted                      for as cash flow hedges will settle through the third quarter                      of                      2010.  There were no gains or losses recognized in Net Income                      related to hedge ineffectiveness because all cash flow hedges                      are                      considered to be effective. Unrealized gains and losses are                      reclassified                      into earnings when the hedged transactions settle or                      terminate. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Mark-to-Market                      Transactions** - The change in fair value (mark-to-market) of                      forward power contracts is recorded in Net Income. These derivatives                      include, but are not limited to, contracts for the purchase                      and sale of                      electricity with the intent of optimizing market opportunities,                      subject to                      specified risk parameters established and monitored by UniSource                      Energy’s                      Risk Management Committee. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Cash            Flow            Hedges**

|                                                                                                    |   |                                                                |   |   |                                                            |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------|--------|
|                                                                                                    |   | Three                        Months                        Ended    |   |   | Nine                        Months                        Ended |   |
|                                                                                                    |   | September                        30,                                |   |   | September                        30,                            |   |
|                                                                                                    |   | **2007**                                                            |   |   | **2006**                                                        |   |   | **2007** |   |   | **2006** |   |
|                                                                                                    |   | -Millions                        of                        Dollars- |   |
| Gain                        on                        Forward Power Sales & Purchases               |   | **$**                                                               | **1**  |   |                                                            | $      | 6 |   |   | **$** | **-** |   |   | $ | 7 |   |
| Loss                        on Gas                        Price Swaps                                   |   | ** **                                                          | **(3** | **)**  |                                                            |   | (1 | ) |   | ** ** | **(6** | **)** |   |   | (15 | ) |
|       Pre-Tax                        Gain (Loss) Recorded in OCI          |   | **$**                                                               | **(2** | **)**  |                                                            | $      | 5 |   |   | **$** | **(6** | **)** |   | $ | (8 | ) |
| After                        Tax                        Gain (Loss) on Cash Flow Hedges Recorded in OCI |   | **$**                                                               | **(1** | **)**  |                                                            | $      | 3 |   |   | **$** | **(3** | **)** |   | $ | (5 | ) |

|  Reclassification                        of Unrealized Loss on Cash Flow Hedges                        to Net                        Income |   | **$** | **7** |   |   | $ | 1 |   |   | **$** | **4** |   |   | $ | 1 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------|-------|--------|--------|---|---|--------|--------|-------|-------|--------|--------|---|---|--------|

**Mark-to-Market            Transactions**

|                                                                                         |   |                                                                |   |   |                                                            |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------|--------|
|                                                                                         |   | Three                        Months                        Ended    |   |   | Nine                        Months                        Ended |   |
|                                                                                         |   | September                        30,                                |   |   | September                        30,                            |   |
|                                                                                         |   | **2007**                                                            |   |   | **2006**                                                        |   |   | **2007** |   |   | **2006** |   |
|                                                                                         |   | -Millions                        of                        Dollars- |   |
| Gain                        (Loss)                        on Forward Power Sales             |   | **$**                                                               | **-**  |   |                                                            | $      | 6 |   |   | **$** | **7** |   |   | $ | 7 |   |
| Gain                        (Loss)                        on Forward Power Purchases         |   | ** **                                                          | **-**  |   |                                                            |   | (5 | ) |   | ** ** | **(7** | **)** |   |   | (6 | ) |
|       Pre-Tax                        Gain Recorded in Earnings |   | **$**                                                               | **-**  |   |                                                            | $      | 1 |   |   | **$** | **-** |   |   | $ | 1 |   |

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

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|                                                                                   |   |                                                            |   |   |                                       |       |
|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------|--------------------------------------------|------------|
|                                                                                   |   | **September                      30,2007**                      |   |   | **December                      31, 2006** |       |
|                                                                                   |   | **Mark-to-Market****Contracts**                                 |   |   | **Cash                      Flow Hedges**  |       |   | **Mark-to-Market****Contracts** |   |   | **Cash                      Flow Hedges** |   |
|                                                                                   |   | -Millions                      of                      Dollars- |   |
|    Derivative                      Assets – Current               |   | **$**                                                           | **3**  |   |                                       | **$**      | **2** |   |   | $ | 9 |   |   | $ | 6 |   |
|    Derivative                      Liabilities – Current          |   | ** **                                                      | **(2** | **)**  |                                       | ** ** | **(2** | **)** |   |   | (9 | ) |   |   | (3 | ) |
|       Net                      Current Derivative Assets |   | **$**                                                           | **1**  |   |                                       | **$**      | **-** |   |   | $ | - |   |   | $ | 3 |   |
|                                                                                   |   |                                                            |   |   |                                       |       |   |   |   |   |   |   |   |   |   |   |
|   Derivative                      Liabilities – Noncurrent             |   | **$**                                                           | **-**  |   |                                       | **$**      | **-** |   |   | $ | - |   |   | $ | (1 | ) |

**UNS            ELECTRIC POWER SUPPLY TRANSACTIONS**

**UNS            Electric**

**MEG            TRADING            TRANSACTIONS**

|                                                                                  |                                                                      |                                                                  |
|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------|-----------------------------------------------------------------------|
|                                                                                  | September                        30,                                      | December                        31,                                   |
|                                                                                  | ** 2007**                                                            | **2006**                                                              |
|                                                                                  | -Millions                        of                        Dollars-  |
|    Trading                        Assets – Current               | **$                         11**                                     | $                         11                                     |
|    Trading                        Liabilities – Current          | **                            (5)**                   |                             (5)                   |
|       Net                        Current Trading Assets | **                         $    6   **      |                          $    6    |

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

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**NOTE6.  INCOME            AND OTHER            TAXES**

**INCOME            TAXES**

|                                                                                                                    |   | **UniSource                      Energy**                    |       |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------|
|                                                                                                                    |   | Three                      Months                      Ended |       |   | Nine                      Months                      Ended |   |
|                                                                                                                    |   | September                      30,                           |       |   | September                      30, |   |
|                                                                                                                    |   | **2007**                                                     |       |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                    |   |                                                         |       |   | -Thousands                      of                      Dollars - |   |   |   |   |
|                                                                                                                    |   |                                                         |       |   |   |   |   |   |   |   |   |   |
| **Federal                      Income Tax Expense at Statutory Rate**                                                   |   | **$**                                                        | **14,401** |   |   | $ | 16,071 |   |   | **$** | **24,446** |   |   | $ | 33,713 |   |
|    State                      Income Tax Expense, Net of Federal Deduction                               |   | ** **                                                   | **1,893**  |   |   |   | 2,112 |   |   | ** ** | **3,213** |   |   |   | 4,430 |   |
|    Depreciation                      Differences (Flow Through Basis)                                    |   | ** **                                                   | **696**    |   |   |   | 662 |   |   | ** ** | **2,087** |   |   |   | 1,987 |   |
|    Amortization                      of Excess Deferred Income Tax                                       |   | ** **                                                   | **21**     |   |   |   | (90 | ) |   | ** ** | **(107** | **)** |   |   | (270 | ) |
|    Tax                      Credits                                                                      |   | ** **                                                   | **(1,739** | **)** |   |   | (127 | ) |   | ** ** | **(2,017** | **)** |   |   | (381 | ) |
|    Valuation                      Allowance                                                              |   | ** **                                                   | **-**      |   |   |   | (120 | ) |   | ** ** | **-** |   |   |   | (120 | ) |
|    Other                                                                                                 |   | ** **                                                   | **459**    |   |   |   | (794 | ) |   | ** ** | **56** |   |   |   | (729 | ) |
| **Total                      Federal and State Income Tax Expense Before Discontinued                      Operations** |   | **$**                                                        | **15,731** |   |   | $ | 17,714 |   |   | **$** | **27,678** |   |   | $ | 38,630 |   |

|                                                                                      |   | **TEP**                                                      |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------|
|                                                                                      |   | Three                      Months                      Ended |       |   | Nine                      Months                      Ended |   |
|                                                                                      |   | September                      30,                           |       |   | September                      30, |   |
|                                                                                      |   | **2007**                                                     |       |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                      |   |                                                         |       |   | -Thousands                      of                      Dollars - |   |   |   |   |
|                                                                                      |   |                                                         |       |   |   |   |   |   |   |   |   |   |
| **Federal                      Income Tax Expense at Statutory Rate**                     |   | **$**                                                        | **14,631** |   |   | $ | 16,924 |   |   | **$** | **22,516** |   |   | $ | 33,456 |   |
|    State                      Income Tax Expense, Net of Federal Deduction |   | ** **                                                   | **1,923**  |   |   |   | 2,224 |   |   | ** ** | **2,959** |   |   |   | 4,396 |   |
|    Depreciation                      Differences (Flow Through Basis)      |   | ** **                                                   | **696**    |   |   |   | 662 |   |   | ** ** | **2,087** |   |   |   | 1,987 |   |
|    Amortization                      of Excess Deferred Income Tax         |   | ** **                                                   | **21**     |   |   |   | (90 | ) |   | ** ** | **(107** | **)** |   |   | (270 | ) |
|    Tax                      Credits                                        |   | ** **                                                   | **(1,739** | **)** |   |   | (127 | ) |   | ** ** | **(2,017** | **)** |   |   | (381 | ) |
|    Valuation                      Allowance                                |   | ** **                                                   | **-**      |   |   |   | (120 | ) |   | ** ** | **-** |   |   |   | (120 | ) |
|    Other                                                                   |   | ** **                                                   | **312**    |   |   |   | (719 | ) |   | ** ** | **(159** | **)** |   |   | (888 | ) |
| **Total                      Federal and State Income Tax Expense**                       |   | **$**                                                        | **15,844** |   |   | $ | 18,754 |   |   | **$** | **25,279** |   |   | $ | 38,180 |   |

**ADOPTION            OF            FIN 48**

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

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**OTHER            TAX            MATTERS**

**NOTE7.  COMMITMENTS            AND            CONTINGENCIES**

**TEP  COMMITMENTS**

**Termination            of Power Purchases from Tri-State**

**UNS            ELECTRIC COMMITMENTS**

**UNS            GAS            COMMITMENTS**

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

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**TEP            CONTINGENCIES**

**Claims            Related to San Juan Coal Company**

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

**Postretirement            Benefit Costs at Navajo Generating Station**

**Environmental            Reclamation at Remote Generating Stations**

**TEP            Wholesale Accounts Receivable and Allowances**

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

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**RESOLUTION            OF TEP CONTINGENCIES**

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

**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                      lease payments                      for UNS Gas. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE8.  EMPLOYEE            BENEFITS            PLANS**

**PENSION            BENEFIT PLANS**

**OTHER            POSTRETIREMENT BENEFIT PLANS**

*Employers’Accounting for Postretirement Benefits Other Than Pensions*

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**COMPONENTS            OF NET PERIODIC BENEFIT COST**

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

|                                                                    |   | **Pension                      Benefits**                   |    |   | **Other                      Postretirement****Benefits**        |   |
|-------------------------------------------------------------------------|--------|-------------------------------------------------------------|---------|--------|------------------------------------------------------------------|--------|
|                                                                    |   | Nine                      Months                      Ended |    |   | Nine                      Months                      Ended      |   |
|                                                                    |   | September                      30,                          |    |   | September                      30,                               |   |
|                                                                    |   | **2007**                                                    |    |   | **2006**                                                         |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   |                                                        |    |   | -Millions                      of                      Dollars - |   |   |   |   |
|                                                                    |   |                                                        |    |   |                                                             |   |   |   |   |   |   |   |
| **Components                      of Net Periodic Benefit Cost**        |   |                                                        |    |   |                                                             |   |   |   |   |   |   |   |
| Service                      Cost                                       |   | **$**                                                       | **6**   |   |                                                             | $      | 6 |   |   | **$** | **1** |   |   | $ | 2 |   |
|    Interest                      Cost                    |   | ** **                                                  | **9**   |   |                                                             |   | 9 |   |   | ** ** | **3** |   |   |   | 3 |   |
|    Expected                      Return on Plan Assets   |   | ** **                                                  | **(11** | **)**  |                                                             |   | (10 | ) |   | ** ** | **-** |   |   |   | - |   |
|    Prior                      Service Cost Amortization  |   | ** **                                                  | **1**   |   |                                                             |   | 1 |   |   | ** ** | **(1** | **)** |   |   | (1 | ) |
|    Recognized                      Actuarial Loss        |   | ** **                                                  | **2**   |   |                                                             |   | 2 |   |   | ** ** | **-** |   |   |   | 1 |   |
| **Net                      Periodic Benefit                      Cost** |   | **$**                                                       | **7**   |   |                                                             | $      | 8 |   |   | **$** | **3** |   |   | $ | 5 |   |

**NOTE9.  SHARE-BASED            COMPENSATION            PLANS**

**STOCK            OPTIONS**

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|                                                                           | 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                           |

|                                                                                                                                                   |                           | **Nine                      Months Ended September 30, 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                                                                                            |                           | 1,388,001                                                             | $18.59 |   | 193,737 | $7.38 |
| Granted                                                                                                                                                |                           |                        184,260                                   | $37.88 |   | 184,260 | $8.13 |
| Exercised                      (or Vested)                                                                                                             |                           |                        (100,386)                                 | $16.82 |   |  (65,706) | $7.39 |
| Forfeited                                                                                                                                              |                           |                              (436) | $12.28 |   | - | - |
| Options                      Outstanding, September 30, 2007                                                                                           |                           | 1,471,439                                                             | $21.13 |   | 312,291 | $7.83 |
| Options                      Exercisable, September 30, 2007                                                                                           |                           | 1,159,148                                                             | $17.39 |   |   |   |
|                                                                                                                                                   |                           |
| Weighted                      Average Remaining Contractual Life at September 30, 2007                                                                 | 4.8                      years |
| Weighted                      Average Remaining Contractual Life of Exercisable Shares at                      September 30,                      2007 | 3.7                      years |

| **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 | 502,235                                              | 2.2                      years | $14.30 | 502,235 | $14.30 |
| $16.78                      -                      $18.84 | 574,540                                              | 4.3                      years | $18.02 | 574,540 | $18.02 |
| $30.55                      -                      $37.88 | 394,664                                              | 8.9                      years | $34.35 |   82,373 | $31.76 |

**PERFORMANCE            SHARES**

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

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**RESTRICTED            STOCK UNITS**

**SHARE-BASED            COMPENSATION EXPENSE (Stock Options, Performance Shares and Restricted            Stock            Units)**

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

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|                                                                                                                                                                   |   | Three                          Months                          Ended |       |   | Nine                          Months                          Ended |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|------------|--------|---------------------------------------------------------------------|--------|
|                                                                                                                                                                   |   | September                          30,                               |       |   | September                          30,                              |   |
|                                                                                                                                                                   |   | **2007**                                                             |       |   | **2006**                                                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                   |   | -                          In                          Thousands -   |       |   | -                          In                          Thousands -  |   |
| Numerator:                                                                                                                                                             |   |                                                                 |       |   |                                                                |   |   |   |   |   |   |   |
| Net                          Income                                                                                                                                    |   | **$**                                                                | **25,417** |   |                                                                | $      | 28,203 |   |   | **$** | **42,167** |   |   | $ | 55,023 |   |
| Assumed                          Conversion of Convertible Senior                          Notes – reduced interest                          expense (after-tax) |   | ** **                                                           | **1,097**  |   |                                                                |   | 1,097 |   |   | ** ** | **3,292** |   |   |   | 3,292 |   |
| Adjusted                          Numerator                                                                                                                            |   | **$**                                                                | **26,514** |   |                                                                | $      | 29,300 |   |   | **$** | **45,459** |   |   | $ | 58,315 |   |
|                                                                                                                                                                   |   |                                                                 |       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Denominator:                                                                                                                                                           |   |                                                                 |       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average                          Shares of Common Stock Outstanding:                                                                                          |   |                                                                 |       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
|    Common                          Shares Issued                                                                                                        |   | ** **                                                           | **35,286** |   |                                                                |   | 35,108 |   |   | ** ** | **35,250** |   |   |   | 35,028 |   |
|    Fully                          Vested Deferred Stock Units                                                                                           |   | ** **                                                           | **228**    |   |                                                                |   | 200 |   |   | ** ** | **219** |   |   |   | 195 |   |
| Total                          Weighted-average Shares of Common Stock Outstanding                                                                                     |   | ** **                                                           | **35,514** |   |                                                                |   | 35,308 |   |   | ** ** | **35,469** |   |   |   | 35,223 |   |
| Effect                          of                          Dilutive Securities:                                                                                       |   |                                                                 |       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
|   Convertible                          Senior Notes                                                                                                          |   | ** **                                                           | **4,000**  |   |                                                                |   | 4,000 |   |   | ** ** | **4,000** |   |   |   | 4,000 |   |
|   Options                          and Stock Issuable                          under the Share-based Compensation                          Plans             |   | ** **                                                           | **528**    |   |                                                                |   | 609 |   |   | ** ** | **583** |   |   |   | 592 |   |
| Total                          Shares                                                                                                                                  |   | ** **                                                           | **40,042** |   |                                                                |   | 39,917 |   |   | ** ** | **40,052** |   |   |   | 39,815 |   |

**NOTE11.  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**

|   | · | FSP                        FASB                        Interpretation (FIN) 39-1, issued April 2007, allows entities                        that are                        party to a master netting arrangement to offset the receivable                        or payable                        recognized upon payment or receipt of cash collateral against                        fair value                        amounts recognized for derivative instruments that have been                        offset under                        the same master netting arrangement.  Upon adoption of FSP FIN                        39-1, an entity is required to make an accounting policy                        decision to                        offset or not offset fair value amounts recognized for derivative                        instruments under master netting arrangements.  FSP FIN 39-1 is                        effective January 1, 2008.  The effect of initially applying FSP                        FIN 39-1 must be recognized retrospectively as a change in                        accounting                        principle, unless impracticable to do so.  We are evaluating the                        impact of FSP FIN 39-1 on our financial                        statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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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                        ending March 31,                        2008. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 elects                        the fair value                        option on the face of the balance sheet and providing management’s reasons                        for electing the fair value option for each 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 any additional disclosure requirements in our                        financial                        statements for the quarter ending March 31,                        2008. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                        the third                        quarter of 2006, the Pension Protection Act of 2006 (Pension                        Act) 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                        Pension Act requires companies to increase the funding of                        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 the Pension Act may have                        on our                        financial statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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**NOTE13.  SUPPLEMENTAL            CASH FLOW            INFORMATION**

|                                                                                                                                             |   | **UniSource                      Energy**                        |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|-------------|
|                                                                                                                                             |   | Nine                      Months                      Ended      |        |
|                                                                                                                                             |   | September                      30,                               |        |
|                                                                                                                                             |   | **2007**                                                         |        |   | **2006** |   |
|                                                                                                                                             |   | -Thousands                      of                      Dollars- |        |
|                                                                                                                                             |   |                                                             |        |   |   |   |
| **Net                      Income**                                                                                                              |   | **$**                                                            | **42,167**  |   |   | $ | 55,023 |   |
| **Adjustments                      to Reconcile Net Income**                                                                                     |   |                                                             |        |   |   |   |   |   |
|  **To Net Cash Flows**                                                                                                                      |   |                                                             |        |   |   |   |   |   |
|      Depreciation                      and Amortization Expense                                                         |   | ** **                                                       | **103,494** |   |   |   | 96,767 |   |
|      Depreciation                      Recorded to Fuel and Other O&M Expense                                       |   | ** **                                                       | **5,178**   |   |   |   | 5,760 |   |
|      Amortization                      of Transition Recovery Asset                                                     |   | ** **                                                       | **59,944**  |   |   |   | 51,080 |   |
|      Mark-to-Market                      Transactions                                                                   |   | ** **                                                       | **1,525**   |   |   |   | (371 | ) |
|      Net                      Unrealized Loss on MEG Trading Activities                                                 |   | ** **                                                       | **1,165**   |   |   |   | 3,056 |   |
|      Amortization                      of Deferred Debt-Related Costs included in Interest                      Expense |   | ** **                                                       | **2,879**   |   |   |   | 3,509 |   |
|      Loss                      on Extinguishment of Debt                                                                |   | ** **                                                       | **-**       |   |   |   | 1,080 |   |
| Provision                      for Bad Debts                                                                                                     |   | ** **                                                       | **2,333**   |   |   |   | 2,635 |   |
|      Deferred                      Income Taxes                                                                         |   | ** **                                                       | **24,830**  |   |   |   | 13,328 |   |
|      Pension                      and Postretirement Expense                                                            |   | ** **                                                       | **10,832**  |   |   |   | 13,195 |   |
|      Pension                      and Postretirement Funding                                                            |   | ** **                                                       | **(12,585** | **)** |   |   | (11,753 | ) |
|      Stock                      Based Compensation Expense                                                              |   | ** **                                                       | **2,372**   |   |   |   | 1,886 |   |
|      Excess                      Tax Benefit from Stock Option Exercises                                                |   | ** **                                                       | **(443**    | **)** |   |   | (1,106 | ) |
|      Changes                      in Assets and Liabilities which Provided (Used)                                       |   |                                                             |        |   |   |   |   |   |
|        Cash                      Exclusive of Changes Shown Separately                                        |   |                                                             |        |   |   |   |   |   |
|          Accounts                      Receivable                                                   |   | ** **                                                       | **(2,051**  | **)** |   |   | (26,821 | ) |
|          Materials                      and Fuel Inventory                                          |   | ** **                                                       | **(9,310**  | **)** |   |   | (4,215 | ) |
|          Over/Under                      Recovered Purchased Gas Cost                               |   | ** **                                                       | **3,515**   |   |   |   | 13,636 |   |
|          Accounts                      Payable                                                      |   | ** **                                                       | **(23,968** | **)** |   |   | (22,846 | ) |
|          Interest                      Accrued                                                      |   | ** **                                                       | **(14,271** | **)** |   |   | (17,192 | ) |
|          Income                      Tax Receivable/Payable                                         |   | ** **                                                       | **(17,025** | **)** |   |   | (10,493 | ) |
|          Accrued                      Taxes Other Than Income Taxes                                 |   | ** **                                                       | **13,670**  |   |   |   | 12,514 |   |
|      Other                                                                                                              |   | ** **                                                       | **9,286**   |   |   |   | 18,660 |   |
|   Discontinued                      Operations –                      Net of Tax                                                 |   | ** **                                                       | **-**       |   |   |   | 2,669 |   |
|      Net                      Cash Used by Operating Activities of Discontinued                      Operations         |   | ** **                                                       | **-**       |   |   |   | (2,710 | ) |
| **Net                      Cash Flows – Operating Activities**                                                                             |   | **$**                                                            | **203,537** |   |   | $ | 197,291 |   |

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Table                of Contents

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

----

|                                                                                                                |   | **TEP**                                                          |        |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|-------------|
|                                                                                                                |   | Nine                      Months                      Ended      |        |
|                                                                                                                |   | September                      30,                               |        |
|                                                                                                                |   | **2007**                                                         |        |   | **2006** |   |
|                                                                                                                |   | -Thousands                      of                      Dollars- |        |
|                                                                                                                |   |                                                             |        |   |   |   |
| **Net                      Income**                                                                                 |   | **$**                                                            | **39,051**  |   |   | $ | 57,408 |   |
| **Adjustments                      to Reconcile Net Income**                                                        |   |                                                             |        |   |   |   |   |   |
|  **To Net Cash Flows**                                                                                         |   |                                                             |        |   |   |   |   |   |
|      Depreciation                      and Amortization Expense                            |   | ** **                                                       | **88,033**  |   |   |   | 83,504 |   |
|      Depreciation                      Recorded to Fuel and Other O&M Expense          |   | ** **                                                       | **4,038**   |   |   |   | 4,812 |   |
|      Amortization                      of Transition Recovery Asset                        |   | ** **                                                       | **59,944**  |   |   |   | 51,080 |   |
|      Mark-to-Market                      Transactions                                      |   | ** **                                                       | **1,525**   |   |   |   | (954 | ) |
|      Amortization                      of Deferred Debt-Related Costs included in Interest |   | ** **                                                       | **2,004**   |   |   |   | 2,560 |   |
|      Pension                      and Postretirement Expense                               |   | ** **                                                       | **9,512**   |   |   |   | 11,942 |   |
|      Pension                      and Postretirement Funding                               |   | ** **                                                       | **(11,430** | **)** |   |   | (10,388 | ) |
|      Stock                      Based Compensation Expense                                 |   | ** **                                                       | **1,847**   |   |   |   | 1,489 |   |
| Loss                      on Extinguishment of                      Debt                                            |   | ** **                                                       | **-**       |   |   |   | 685 |   |
|      Provision                      for Bad Debts                                          |   | ** **                                                       | **1,197**   |   |   |   | 1,373 |   |
|      Deferred                      Income Taxes                                            |   | ** **                                                       | **15,598**  |   |   |   | 13,771 |   |
|      Changes                      in Assets and Liabilities which Provided (Used)          |   |                                                             |        |   |   |   |   |   |
|        Cash                      Exclusive of Changes Shown Separately           |   |                                                             |        |   |   |   |   |   |
|          Accounts                      Receivable                      |   | ** **                                                       | **(18,844** | **)** |   |   | (47,913 | ) |
|          Materials                      and Fuel Inventory             |   | ** **                                                       | **(9,596**  | **)** |   |   | (2,807 | ) |
|          Accounts                      Payable                         |   | ** **                                                       | **(8,506**  | **)** |   |   | (14,576 | ) |
|          Interest                      Accrued                         |   | ** **                                                       | **(9,846**  | **)** |   |   | (12,531 | ) |
|          Income                      Tax Receivable/Payable            |   | ** **                                                       | **(12,022** | **)** |   |   | (21,524 | ) |
|          Accrued                      Taxes Other Than Income Taxes    |   | ** **                                                       | **13,717**  |   |   |   | 12,139 |   |
|      Other                                                                                 |   | ** **                                                       | **(3,078**  | **)** |   |   | 13,431 |   |
| **Net                      Cash Flows – Operating Activities**                                                |   | **$**                                                            | **163,144** |   |   | $ | 143,501 |   |

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

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Table              of Contents

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

----

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

| · | operating                results during the third quarter and nine months ended September                30, 2007                compared with the same periods in                2006, |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

**UNISOURCE      ENERGY      CONSOLIDATED**

**OVERVIEW      OF CONSOLIDATED BUSINESS**

**OUTLOOK      AND 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, along with                programs                to expand renewable energy sources and demand side                management,  to meet growing retail energy demand and respond to                wholesale market opportunities; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Expand                UNS                Electric’s portfolio of generating and purchased power resources to                substitute for the May 2008 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

| · | Receive                ACC                approval of a rate increase for TEP, effective January 2009, that                resolves                the uncertainty surrounding TEP’s rates for generation service after 2008,                while providing adequate revenues to cover the rising cost of serving                its                customers and 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-DateSeptember                30,                2007 | EstimateFull                Year                2007 |
|----------------------------------------------|------------------------------------------------------------------------------------|------------------------------------------------------|
|                                         | -Millions                of                Dollars-                                |
| TEP                                          | $123                                                                               | $199                                                 |
| UNS                Gas                       |                    18                                               |                    33                 |
| UNS                Electric                  |                    31                                               |                    40                 |
| Other(1)                                     |                    10                                               |                    27                 |
| UniSource                Energy Consolidated | $182                                                                               | $299                                                 |

**RESULTS      OF OPERATIONS**

**Executive      Overview**

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Table          of Contents

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

**CONTRIBUTION      BY BUSINESS      SEGMENT**

|                                                                            | **Three                Months Ended****September                30,** | **Nine                Months Ended****September                30,** |
|---------------------------------------------------------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                            | **2007**                                                              | **2006**                                                             | **2007** | **2006** |
|                                                                            | -Millions                of                Dollars-                   | -Millions                of                Dollars-                  |
| TEP                                                                             | $26                                                                   | $30                                                                  | $39 | $57 |
| UNS                Gas                                                          |                   (2)                                       |                   (2)                                      |                   1 |                   2 |
| UNS                Electric                                                     |                   3                                         |                   2                                        |                   5 |                   4 |
| Other(1)                                                                        |                   (2)                                       |                   (2)                                      |                   (3) |                   (5) |
| Consolidated                Net Income fromContinuing                Operations |  $25                                                             |  $28                                                            |  $42 |  $58 |
| Discontinued                Operations (2)                                      |                   -                                         |                   -                                        |                   - |                   (3) |
| Consolidated                Net Income                                          | $25                                                                   | $28                                                                  | $42 | $55 |

**LIQUIDITY      AND CAPITAL      RESOURCES**

**UniSource      Energy Consolidated Cash Flows**

| **Nine                Months Ended September 30,**        | **2007**                                            | **2006**         |
|-----------------------------------------------------------|-----------------------------------------------------|------------------|
|                                                      | -Millions                of                Dollars- |
| Cash                provided                by (used in): |                                                |             |
| Operating                Activities                       | $204                                                | $197             |
| Investing                Activities                       |                  (153)                         |  (168)      |
| Financing                Activities                       |                   (95)                    |   (89) |

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

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

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

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Table          of Contents

|  **Balances  as                of****October                31, 2007** |  **Cash                and Cash****Equivalents**                 | **Borrowings****under                Revolving****Credit                Facility** | **Amount                Available****under                Revolving****Credit                Facility** |
|---------------------------------------------------------------------------------------|-----------------------------------------------------------------------|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                                  | -Millions                of                Dollars-                   |
| UniSource                Energy stand-alone                                           | $    1                                            | $  29                                                                    | $                 41                                                                               |
| TEP                                                                                   |                    13                                  |                    10                                               |                  140                                                                               |
| UNS                Gas                                                                |                    16                                  |                      -                                    |         34                (1)                                   |
| UNS                Electric                                                           |                      9                       |                    26                                               |         19                (1)                                   |
| Other                                                                                 |         24                (2) |                    NA                                               |                    NA                                                                    |
| Total                                                                                 | $  63                                                       |                                                                               |                                                                                                    |

**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*

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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                transportation and supply payments in addition to building lease                payments                for UNS Gas. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Contractual      Obligations**

| · | Effective                August 1, 2007, Tri-State Generation and Transmission Association                (Tri-State) terminated its power sale agreement with TEP.  Under                the agreement, Tri-State provided TEP with 100 MW of system capacity                from                September 1, 2006 until the termination of the                agreement. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                July 2007,                TEP entered into a power supply agreement for the period June through                September 2008.  This contract is indexed to natural gas                prices.  TEP estimates its minimum payments under this contract                to be $8 million based on natural gas prices as of September 30,                2007. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                July 2007,                TEP entered into an agreement to purchase 75,000 tons of coal from                the                McKinley Mine during the remainder of 2007.  TEP estimates the                minimum payments under this contract to be $2 million in                2007. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                June 2007,                UNS Gas entered into a pipeline capacity contract for the period                March                2008 through February 2020 with demand charges approximating $1 million                annually. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                May 2007,                TEP entered into a pipeline capacity contract for the period May                2007                through April 2008.  TEP expects the reservation charges under                this contract to approximate $3 million in 2007 and $1 million in                2008. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table            of Contents

| · | In                2006 and                in 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 $48 million in 2008, $59 million                in                2009, $38 million in 2010, $15 million in 2011, $8 million in 2012,                and $8                million thereafter based on natural gas prices as of September 30,                2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                2007, UNS                Gas entered into forward gas purchases with future minimum payments                approximating $6 million for the remainder of 2007, $17 million in                2008,                $12 million in 2009, and $7 million in                2010. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                March                2007, TEP entered into a one-year gas transportation                agreement.  TEP expects the minimum payments under this contract                to be less than $1 million in 2007 and less than $0.3 million in                2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | As                a result                of adopting FIN 48 on January 1, 2007, TEP estimates its net liability                for                uncertain tax positions is $7 million (reflecting a $13 million uncertain                tax liability and a $6 million uncertain tax receivable).  TEP                estimates its liability for uncertain tax positions will be settled                in                2008 or thereafter. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Under                  a                  settlement agreement signed in 2005 with the New Mexico Environmental                  Department and environmental activist groups, the co-owners of                  San Juan                  will install new technology at the generating station to reduce                  mercury,                  particulate matter, NOx and SO2 emissions.                   TEP's share of the cost of new pollution control equipment based                  on its                  ownership of San Juan has increased from $65 million over the next                  three                  years to $11 million in 2007, $55 million in 2008 and $14 million                  in 2009                  as a result of higher commodity prices, and construction and engineering                  costs. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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                                                                         |
| May                11,                2007      | May                23,                2007       | June                15,                2007      | $0.225                                                                         |
| September                4,                2007 | September                17,                2007 | September                28,                2007 | $0.225                                                                         |

**Income      Tax      Position**

**TUCSON      ELECTRIC POWER COMPANY**

**RESULTS      OF OPERATIONS**

**Three      Months Ended September 30**

|   | · | a                  $3 million                  decrease in total operating revenues less fuel and purchased power                  expense                  due to the following: |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | an                  $18                  million increase in retail revenues due to customer growth of 2%                  and a 27%                  increase in cooling degree days                  (CDD); |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | 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: |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table              of Contents

|  | · | a                  $6 million                  increase in wholesale revenues due primarily to higher short-term                  wholesale sales activity; offset by |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                  $22 million                  increase in purchased power expense due to higher short-term wholesale                  activity and an increase in purchase volumes to meet retail                  load; |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                  $12 million                  increase in fuel expense due to an increase in gas-fired generation                  to                  meet higher retail demand and higher coal and rail expenses compared                  with                  the third quarter of 2006.  See *Operating Expenses, Fuel and                  Purchased Power Expense*,                  below. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Other                factors                impacting third quarter 2007 results                include: |
|--------|----------------------------------------------------------------------------------------------------------|

|  | · | a                $1 million                increase in O&M expense due primarily to expenses related to                Springerville Unit 3 that TEP incurred as the operator of the plant                and                for which TEP received reimbursement from Tri-State and recorded                in other                operating revenue.  O&M expense in the third quarter of 2007                includes $6 million of expenses relate to Springerville 3 compared                with $3                million last year.  O&M expense in the third quarters of                2007 and 2006 was partially offset by pre-tax gains of $3 million                related                to the sale of excess SO2 Emission                Allowances; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $4 million                increase in the amortization of TEP’s                TRA. |
|--|--------|------------------------------------------------------------------------------------------------------------|

|  | · | a                $3 million                decrease in total other income due primarily to lower income on reduced                lease debt holdings and a $2 million increase in charitable contributions;                and |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $6 million                decrease in total interest expense due to lower balances on capital                lease                obligations.  In addition, third quarter 2006 interest expense                included a $2 million interest payment to the IRS for proposed adjustments                to previously filed tax returns and the write-off of fees related                to                amending TEP’s credit agreement. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Nine      Months      Ended September 30**

|   | · | a                $1 million                decrease in total operating revenues less fuel and purchased power                expense                due to the following: |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $31 million                increase in retail revenues due to hot weather during the third quarter,                cool weather during the first quarter and customer growth of                2%; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $10 million                increase in wholesale revenues.   Wholesale revenues in the                first nine months of 2007 and 2006 included $6 million and $1 million,                respectively, of transmission revenues related to Springerville Unit                3.  Wholesale revenues also benefited from higher short-term                wholesale sales activity; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $20 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; offset by: |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $36 million                increase in purchased power expense due to increased retail energy                demand                during the third quarter, higher short-term wholesale activity and                expenses related to the 100 MW purchased power contract with Tri-State                that commenced in September 2006 and ended August 1, 2007;                and |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $26 million                increase in fuel expense due to an increase in gas-fired generating                output, as well as increases in coal and rail expenses.  See                *Operating Expenses, Fuel and Purchased Power Expense*,                below. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table          of Contents

|  | · | a                  $20 million                  increase in O&M expense due in part to planned maintenance outages at                  San Juan Unit 2 and Springerville Unit 2 during the first quarter                  of                  2007.  Other factors contributing to higher O&M include                  operating expenses at Luna, and expenses related to Springerville                  Unit 3                  that TEP incurred as the operator of the plant and for which TEP                  received                  reimbursement from Tri-State.  TEP’s O&M expense in the                  first nine months of 2007 included $15 million related to the operating                  of                  Springerville Unit 3, compared with $4 million in the same period                  last                  year.  O&M expense in the first nine months of 2007 was                  partially offset by a pre-tax gain of $10 million related to the                  sale of                  excess SO2 Emission                  Allowances, compared with a pre-tax gain of $7 million in the same                  period                  last year; |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                  $9 million                  increase in the amortization of TEP’s Transition Recovery Asset                  (TRA); |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                  $5 million                  increase in depreciation and amortization due primarily to additions                  to                  plant in service; and |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $9 million                decrease in total interest expense due to lower balances on capital                lease                obligations.  In addition, interest expense in the first nine                months of 2006 included an interest payment to the IRS for proposed                adjustments to previously filed tax returns and the write-off of                fees                related to the amendment of TEP’s credit                agreement. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Utility      Sales and Revenues**

|                                                                                                                  |   | **Sales**                                           |   |   | **Operating                  Revenue**                  |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|---------------------------------------------------------|--------|
| **Three                  Months Ended Sept. 30,**                                                                     |   | **2007**                                            |   |   | **2006**                                                |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                  |   | -Millions                  of                  kWh- |   |   | -Millions                  of                  Dollars- |   |
| **Electric                  Retail Sales:**                                                                           |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |
| Residential                                                                                                           |   |                                                | 1,436  |   |                                                    |   | 1,297 |   |   | $ | 135 |   |   | $ | 122 |   |
| Commercial                                                                                                            |   |                                                | 620    |   |                                                    |   | 583 |   |   |   | 65 |   |   |   | 61 |   |
| Industrial                                                                                                            |   |                                                | 671    |   |                                                    |   | 657 |   |   |   | 49 |   |   |   | 49 |   |
| Mining                                                                                                                |   |                                                | 244    |   |                                                    |   | 236 |   |   |   | 12 |   |   |   | 11 |   |
| Public                  Authorities                                                                                   |   |                                                | 66     |   |                                                    |   | 65 |   |   |   | 5 |   |   |   | 5 |   |
| **Total                  Electric Retail Sales**                                                                      |   |                                                | 3,037  |   |                                                    |   | 2,838 |   |   | $ | 266 |   |   | $ | 248 |   |
| **Electric                  Wholesale Sales Delivered:**                                                              |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                  Contracts                                                                                  |   |                                                | 272    |   |                                                    |   | 255 |   |   |   | 15 |   |   |   | 13 |   |
| Other                  Sales                                                                                          |   |                                                | 525    |   |                                                    |   | 543 |   |   |   | 28 |   |   |   | 25 |   |
| Transmission                                                                                                          |   |                                                | -      |   |                                                    |   | - |   |   |   | 4 |   |   |   | 3 |   |
| **Total                  Electric Wholesale Sales**                                                                   |   |                                                | 797    |   |                                                    |   | 798 |   |   |   | 47 |   |   |   | 41 |   |
| **Total                  Electric                  Sales**                                                            |   |                                                | 3,834  |   |                                                    |   | 3,636 |   |   | $ | 313 |   |   | $ | 289 |   |
|                                                                                                                  |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Weather                  Data:**                                                                                    |   | **2007**                                            |   |   | **2006**                                                |   |   |   |   |   |   |   |   |   |
|    **Cooling                  Degree Days**                                                            |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
|    Three                  Months Ended Sept. 30,                                                       |   |                                                | 1,010  |   |                                                    |   | 795 |   |   |   |   |   |   |   |   |   |
|    10-Year                  Average for Three Months   Ended                  Sept. 30, |   |                                                | 942    |   |                                                    |   | 943 |   |   |   |   |   |   |   |   |   |

----

Table              of Contents

|                                                                                                                       |   | **Sales**                                           |   |   | **Operating                  Revenue**                  |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|---------------------------------------------------------|--------|
| **Nine                  Months Ended Sept. 30,**                                                                           |   | **2007**                                            |   |   | **2006**                                                |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                       |   | -Millions                  of                  kWh- |   |   | -Millions                  of                  Dollars- |   |
| **Electric                  Retail Sales:**                                                                                |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |
| Residential                                                                                                                |   |                                                | 3,209  |   |                                                    |   | 3,008 |   |   | $ | 293 |   |   | $ | 275 |   |
| Commercial                                                                                                                 |   |                                                | 1,575  |   |                                                    |   | 1,498 |   |   |   | 164 |   |   |   | 156 |   |
| Industrial                                                                                                                 |   |                                                | 1,798  |   |                                                    |   | 1,751 |   |   |   | 129 |   |   |   | 127 |   |
| Mining                                                                                                                     |   |                                                | 727    |   |                                                    |   | 688 |   |   |   | 36 |   |   |   | 33 |   |
| Public                  Authorities                                                                                        |   |                                                | 188    |   |                                                    |   | 195 |   |   |   | 14 |   |   |   | 14 |   |
| **Total                  Electric Retail Sales**                                                                           |   |                                                | 7,497  |   |                                                    |   | 7,140 |   |   | $ | 636 |   |   | $ | 605 |   |
| **Electric                  Wholesale Sales Delivered:**                                                                   |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                  Contracts                                                                                       |   |                                                | 812    |   |                                                    |   | 792 |   |   |   | 42 |   |   |   | 39 |   |
| Other                  Sales                                                                                               |   |                                                | 1,645  |   |                                                    |   | 1,651 |   |   |   | 86 |   |   |   | 84 |   |
| Transmission                                                                                                               |   |                                                | -      |   |                                                    |   | - |   |   |   | 11 |   |   |   | 6 |   |
| **Total                  Electric Wholesale Sales**                                                                        |   |                                                | 2,457  |   |                                                    |   | 2,443 |   |   |   | 139 |   |   |   | 129 |   |
| **Total                  Electric                  Sales**                                                                 |   |                                                | 9,954  |   |                                                    |   | 9,583 |   |   | $ | 775 |   |   | $ | 734 |   |
|                                                                                                                       |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
| **Weather                  Data:**                                                                                         |   | **2007**                                            |   |   | **2006**                                                |   |   |   |   |   |   |   |   |   |
|    **Cooling                  Degree Days**                                                                 |   |                                                |   |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |
|    Nine                  Months Ended Sept. 30,                                                             |   |                                                | 1,477  |   |                                                    |   | 1,338 |   |   |   |   |   |   |   |   |   |
|    10-Year                  Average for Nine Months    Ended                  Sept. 30, |   |                                                | 1,383  |   |                                                    |   | 1,377 |   |   |   |   |   |   |   |   |   |

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

|                                                                                      | Three                  Months                  Ended    | Nine                  Months                  Ended |
|-------------------------------------------------------------------------------------------|---------------------------------------------------------|-----------------------------------------------------|
|                                                                                      | September                  30,                          | September                  30,                      |
|                                                                                      | **2007**                                                | **2006**                                            | **2007** | **2006** |
|                                                                                      | -Millions                  of                  Dollars- |
| Gain                  (Loss)                  on Forward Power Sales & Purchases | $ -                                                | $1                                                  | $  - | $1 |

**Operating      Expenses**

----

Table            of Contents

|                                                                                                                                                                                                                                                                         |   | **Generation                and****Purchased                Power** |   |   | **Expense**                                         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
| **Three                Months Ended September 30,**                                                                                                                                                                                                                          |   | **2007**                                                            |   |   | **2006**                                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                         |   | -Millions                of                kWh-                     |   |   | -Millions                of                Dollars- |   |
| Coal-Fired                Generation                                                                                                                                                                                                                                         |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |
|    Four                Corners                                                                                                                                                                                                                                |   |                                                                | 210    |   |                                                |   | 209 |   |   | $ | 3 |   |   | $ | 3 |   |
|    Navajo                                                                                                                                                                                                                                                     |   |                                                                | 331    |   |                                                |   | 352 |   |   |   | 6 |   |   |   | 5 |   |
|    San                Juan                                                                                                                                                                                                                                    |   |                                                                | 628    |   |                                                |   | 681 |   |   |   | 14 |   |   |   | 15 |   |
|    Springerville                                                                                                                                                                                                                                              |   |                                                                | 1,584  |   |                                                |   | 1,569 |   |   |   | 26 |   |   |   | 26 |   |
|    Sundt                Unit 4                                                                                                                                                                                                                                |   |                                                                | 197    |   |                                                |   | 191 |   |   |   | 7 |   |   |   | 5 |   |
| Total                Coal-Fired Generation                                                                                                                                                                                                                                   |   |                                                                | 2,950  |   |                                                |   | 3,002 |   |   |   | 56 |   |   |   | 54 |   |
| Gas-Fired                Generation                                                                                                                                                                                                                                          |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                                                                         |   |                                                                | 236    |   |                                                |   | 175 |   |   |   | 15 |   |   |   | 9 |   |
| Other                Gas                Units                                                                                                                                                                                                                                |   |                                                                | 175    |   |                                                |   | 152 |   |   |   | 18 |   |   |   | 14 |   |
| Total                Gas-Fired Generation                                                                                                                                                                                                                                    |   |                                                                | 411    |   |                                                |   | 327 |   |   |   | 33 |   |   |   | 23 |   |
| Solar                and                Other                                                                                                                                                                                                                                |   |                                                                | 1      |   |                                                |   | 2 |   |   |   | - |   |   |   | - |   |
| Total                Generation (1)                                                                                                                                                                                                                                          |   |                                                                | 3,362  |   |                                                |   | 3,331 |   |   |   | 89 |   |   |   | 77 |   |
| Total                Purchased Power                                                                                                                                                                                                                                         |   |                                                                | 818    |   |                                                |   | 614 |   |   |   | 58 |   |   |   | 36 |   |
| Total                Resources                                                                                                                                                                                                                                               |   |                                                                | 4,180  |   |                                                |   | 3,945 |   |   | $ | 147 |   |   | $ | 113 |   |
| Less                Line                Losses and Company Use                                                                                                                                                                                                               |   |                                                                | (346   | )      |                                                |   | (309 | ) |   |   |   |   |   |   |   |   |
| Total                Energy                Sold                                                                                                                                                                                                                              |   |                                                                | 3,834  |   |                                                |   | 3,636 |   |   |   |   |   |   |   |   |   |
|   (1)Fuel                expense in the third                quarters of 2007 and 2006 excludes $1 million related to Springerville                Unit 3; these expenses are reimbursed by Tri-State and recorded in                Other                Revenue. |   |

*Coal      Supply*
* *

----

Table            of Contents

|                                                                                                                                                                                                                                                                                                     |   | **Generation                and****Purchased                Power** |   |   | **Expense**                                         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
| **Nine                Months Ended September 30,**                                                                                                                                                                                                                                                       |   | **2007**                                                            |   |   | **2006**                                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                     |   | -Millions                of                kWh-                     |   |   | -Millions                of                Dollars- |   |
| Coal-Fired                Generation                                                                                                                                                                                                                                                                     |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |
|    Four                Corners                                                                                                                                                                                                                                                            |   |                                                                | 510    |   |                                                |   | 612 |   |   | $ | 9 |   |   | $ | 9 |   |
|    Navajo                                                                                                                                                                                                                                                                                 |   |                                                                | 948    |   |                                                |   | 931 |   |   |   | 16 |   |   |   | 13 |   |
|    San                Juan                                                                                                                                                                                                                                                                |   |                                                                | 1,759  |   |                                                |   | 1,939 |   |   |   | 42 |   |   |   | 44 |   |
|    Springerville                                                                                                                                                                                                                                                                          |   |                                                                | 4,388  |   |                                                |   | 4,297 |   |   |   | 73 |   |   |   | 71 |   |
|    Sundt                Unit 4                                                                                                                                                                                                                                                            |   |                                                                | 558    |   |                                                |   | 470 |   |   |   | 18 |   |   |   | 11 |   |
| Total                Coal-Fired Generation                                                                                                                                                                                                                                                               |   |                                                                | 8,163  |   |                                                |   | 8,249 |   |   |   | 158 |   |   |   | 148 |   |
| Gas-Fired                Generation                                                                                                                                                                                                                                                                      |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                                                                                                     |   |                                                                | 586    |   |                                                |   | 400 |   |   |   | 35 |   |   |   | 18 |   |
| Other                Gas                Units                                                                                                                                                                                                                                                            |   |                                                                | 255    |   |                                                |   | 278 |   |   |   | 27 |   |   |   | 25 |   |
| Total                Gas-Fired Generation                                                                                                                                                                                                                                                                |   |                                                                | 841    |   |                                                |   | 678 |   |   |   | 62 |   |   |   | 43 |   |
| Solar                and                Other                                                                                                                                                                                                                                                            |   |                                                                | 6      |   |                                                |   | 7 |   |   |   | - |   |   |   | - |   |
| Total                Generation (1)                                                                                                                                                                                                                                                                      |   |                                                                | 9,010  |   |                                                |   | 8,934 |   |   |   | 220 |   |   |   | 191 |   |
| Purchased                Power                                                                                                                                                                                                                                                                           |   |                                                                | 1,772  |   |                                                |   | 1,411 |   |   |   | 115 |   |   |   | 79 |   |
| Total                Resources                                                                                                                                                                                                                                                                           |   |                                                                | 10,782 |   |                                                |   | 10,345 |   |   | $ | 335 |   |   | $ | 270 |   |
| Less                Line                Losses and Company Use                                                                                                                                                                                                                                           |   |                                                                | (828   | )      |                                                |   | (734 | ) |   |   |   |   |   |   |   |   |
| Total                Energy                Sold                                                                                                                                                                                                                                                          |   |                                                                | 9,954  |   |                                                |   | 9,611 |   |   |   |   |   |   |   |   |   |
|   (1)Fuel                expense in the first nine                months of 2007 and 2006 excludes $4 million and $7 million, respectively,                related to Springerville 3; these expenses are reimbursed by Tri-State                and                recorded in Other Revenue. |   |

*Coal      Supply*
* *

|                           | **Three                Months Ended****September                30,** | **Nine                Months Ended****September                30,** |
|--------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------------------|
|                           | **2007**                                                              | **2006**                                                             | **2007** | **2006** |
|                           | -cents                per                kWh-                         | -cents                per                kWh-                        |
| Coal                           | 1.90                                                                  |  1.80                                                           | 1.94 |  1.79 |
| Gas*                           | 8.03                                                                  |   7.12*                                                    | 7.37 |   6.60* |
| All                fuels       | 2.65                                                                  |  2.31                                                           | 2.44 |  2.14 |
| Purchased                Power | 7.09                                                                  |  5.86                                                           | 6.49 |  5.60 |

----

Table            of Contents

**FACTORS        AFFECTING RESULTS OF        OPERATIONS**

**FERC      Proceeding**

**Retail        Competition**

**TEP      Rate      Proposal Filing**

*Competition*

|                                                                         | **Date**                                        |
|------------------------------------------------------------------------------|-------------------------------------------------|
| ACC                Staff and                intervenor testimony             | February                22,                2008 |
| TEP                rebuttal                testimony                         | March                25,                2008    |
| ACC                Staff and                intervenor surrebuttal testimony | April                21,                2008    |
| TEP                rejoinder                testimony                        | May                5,                2008       |
| Hearings                before ALJ                                           | May                12,                2008      |

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|                                                           | **Market**                                                      |   | **Cost                of Service**                                          |   | **Hybrid**                                                                                  |
|----------------------------------------------------------------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Rate                increase                over current rates | 22%                                                             |   | 23%                                                                         |   | 15%                                                                                         |
|                                                           |                                                            |   |                                                                        |   |                                                                                        |
| Annual                revenue increase                         | $172                million                                     |   | $181                million                                                 |   | $117                million                                                                 |
|                                                           |                                                            |   |                                                                        |   |                                                                                        |
| Original                cost                rate base          | $540                million                                     |   | $983                million                                                 |   | $921                million                                                                 |
|                                                           |                                                            |   |                                                                        |   |                                                                                        |
| Fair                value                rate base*            | $777                million                                     |   | $1.42                billion                                                |   | $1.31                billion                                                                |
|                                                           |                                                            |   |                                                                        |   |                                                                                        |
| Rate                base                composition            | Distribution                and Local Generation assets         |   | Distribution                and Generation assets                           |   | Distribution                and Generation assets (excluding Navajo and Four Corners)  |
| TCRA                                                           | N/A                                                             |   | $788                million;                not included in rate base  |   | N/A                                                                                         |
| ICRA                                                           | $14                million                included in rate base |   | $47                million                included in rate base             |   | $47                million                included in rate base                             |
|  PPFAC                                                    |  N/A                                                       |   |  Yes                                                                   |   |  Yes                                                                                   |

**Renewable      Energy Standard and Tariff**

----

Table            of Contents

**Market      Prices**

| **Average                Market Price for Around-the-Clock Energy** | **$/MWh**                |
|---------------------------------------------------------------------|--------------------------|
| Quarter                ended September 30,                2007      | $55                      |
| Quarter                ended September 30,                2006      |                  55 |
|                                                                |                     |
| Nine                months ended September 30,                2007  | $53                      |
| Nine                months ended September 30,                2006  |                  50 |

| **Average                Market Price for Natural Gas**            | **$/MMBtu**                |
|--------------------------------------------------------------------|----------------------------|
| Quarter                ended September 30,                2007     | $5.47                      |
| Quarter                ended September 30,                2006     |  5.93                 |
|                                                               |                       |
| Nine                months ended September 30,                2007 | $6.13                      |
| Nine                months ended September 30,                2006 |                  6.21 |

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

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Table            of Contents

**Coal      Supply**

**Emission      Allowances**

|  **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                   |                  7,500              |      5       |
|     3rd                Quarter |                  5,000              |      3       |
|     4th                Quarter |                  2,500              |      2       |
|  Total                2007                    | 17,500                                   |  $12                             |

**LIQUIDITY      AND CAPITAL      RESOURCES**

**TEP      Cash      Flows & Liquidity Outlook**

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Table            of Contents

| **Nine                Months Ended September 30,**                                                                                                                            | **2007**                                            | **2006**                             |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|--------------------------------------|
|                                                                                                                                                                          | -Millions                of                Dollars- |
| Net                Cash                Flows – Operating Activities (GAAP)                                                                                              | $  163                                    | $                144                 |
| Amounts                from                Statements of Cash Flows:                                                                                                          |                                                |                                 |
| Less:                Capital                Expenditures                                                                                                                      |                   (123)                   |                  (111)          |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)*                                                                                           |                    40                |                    33 |
| Amounts                from                Statements of Cash Flows:                                                                                                          |                                                |                                 |
| Less:                Retirement of Capital Lease                Obligations                                                                                                   |                   (71)                    |                   (61)     |
| Plus:  Proceeds                from Investment                in Springerville     Lease                Debt and Equity                    |                   28                      |                    22 |
| Net                Cash                Flows after Capital Expenditures and Required Payments on Debt and                Capital                Lease Obligations (non-GAAP)* |  $  (3)                              |  $                 (6)     |

| **Nine                Months Ended September 30,**                                                                                                                           | **2007**                                                | **2006**                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|---------------------------------------------------|
|                                                                                                                                                                         | -Millions                of                Dollars-     |
| Net                Cash                Flows – Operating Activities (GAAP)                                                                                             | $                163                                    | $144                                              |
| Net                Cash                Flows – Investing Activities (GAAP)                                                                                             |                    (97)                  |                  (138)                       |
| Net                Cash                Flows – Financing Activities (GAAP)                                                                                             |                    (75)                  |                    (45)            |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)                                                                                           |                    40                    |                    33              |
| Net                Cash                Flows after Capital Expenditures and Required Payments on Debt and                Capital                Lease Obligations (non-GAAP) |                       (3) |                      (6) |

**Operating      Activities**

|   | · | a                $71 million                increase in cash receipts from electric retail and wholesale sales,                offset                by a $90 million increase in fuel and purchased energy                costs.  TEP was negatively impacted by generating plant outages                during the first quarter, as well as mild weather during the second                quarter; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $26 million                increase in cash receipts related to reimbursements received from                Tri-State for the operation of Springerville Unit                3; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $3 million                increase in proceeds from the sale of excess SO2 emission                allowances; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | an                $8 million                decrease in total interest paid due to lower capital lease obligation                balances; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $5 million                increase in wages paid, part of which is related to payroll costs                at                Springerville Unit 3 that are reimbursed by                Tri-State; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $35 million                decrease in income taxes paid due to lower taxable income and payments                made last year for amended tax returns;                and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $21 million                increase in O&M costs related to Springerville Unit 3 that are                reimbursed by Tri-State as well as costs associated with plant                outages. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table            of Contents

**Investing      Activities**

**Financing      Activities**

|   | · | a                $19 million                increase in net proceeds from borrowings under the TEP Revolving                Credit                Facility; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $10 million                increase in scheduled payments made on capital lease                obligations. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|

|  **Leased                Asset**                         | **Capital                Lease Obligation Balance****at                September 30, 2007** |  **Expiration** |
|---------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------------------|
|                                                          | -                In Millions                -                                               |                 |
| Springerville                Unit 1                           | $346                                                                                        | 2015                 |
| Springerville                Coal Handling Facilities         |                   99                                                              | 2015                 |
| Springerville                Common Facilities                |  105                                                                                   | 2020                 |
| Sundt                Unit                4                    |                   36                                                              | 2011                 |
| Other                Leases                                   |                     1                                                   | 2008                 |
| Total                Capital                Lease Obligations | $587                                                                                        |                 |

|                                                                     | **Lease                Debt Investment Balance** |
|--------------------------------------------------------------------------|--------------------------------------------------|
| **Leased                Asset**                                          | **September                30, 2007**            | **December                31, 2006** |
|                                                                     | -                In Millions                -    |
| Investments                in Lease Debt:                                |                                             |   |
|                    Springerville Unit 1                   | $  71                                  | $  81 |
|                    Springerville Coal Handling Facilities |                    34             |                    52 |
| Total                Investment in Lease Debt                            | $105                                             | $133 |

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Table            of Contents

**Income        Tax        Position**

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

**Contractual      Obligations**

| · | Effective                August 1, 2007, Tri-State Generation and Transmission Association                (Tri-State) terminated its power sale agreement with TEP.  Under                the agreement, Tri-State provided TEP with 100 MW of system capacity                from                September 1, 2006 until the termination of the                agreement. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                July 2007,                TEP entered into a power supply agreement for the period June through                September 2008.  This contract is indexed to natural gas                prices.  TEP estimates its minimum payments under this contract                to be $8 million based on natural gas prices as of September 30,                2007. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                July 2007,                TEP entered into an agreement to purchase 75,000 tons of coal from                the                McKinley Mine during the remainder of 2007.  TEP estimates the                minimum payments under this contract to be $2 million in                2007. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                May 2007,                TEP entered into a pipeline capacity contract for the period May                2007                through April 2008.  TEP expects the reservation charges under                this contract to approximate $3 million in 2007 and $1 million in                2008. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                March                2007, TEP entered into a one-year gas transportation                agreement.  TEP expects the minimum payments under this contract                to be less than $1 million in 2007 and less than $0.3 million in                2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | As                a result                of adopting FIN 48 on January 1, 2007, TEP estimates its net liability                for                uncertain tax positions is $7 million (reflects a $13 million uncertain                tax liability and a $6 million uncertain tax receivable).  TEP                estimates its liability for uncertain tax positions will be settled                in                2008 or thereafter. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Under                    a                    settlement agreement signed in 2005 with the New Mexico Environmental                    Department and environmental activist groups, the co-owners of                    San Juan                    will install new technology at the generating station to reduce                    mercury,                    particulate matter, NOx and SO2 emissions.                     TEP's share of the cost of new pollution control equipment based                    on its                    ownership of San Juan has increased from $65 million over the                    next three                    years to $11 million in 2007, $55 million in 2008 and $14 million                    in 2009                    as a result of higher commodity prices, and construction and                    engineering                    costs. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends          on Common Stock**

**UNS      GAS**

**RESULTS      OF OPERATIONS**

----

Table            of Contents

|                                                            | **Sales**                                                                             | **Revenue**                                                          |
|-----------------------------------------------------------------|---------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| **Three                Months Ended September 30,**             | **2007**                                                                              | **2006**                                                             | **2007** | **2006** |
|                                                            |         -                Millions of Therms - |      -                Millions of Dollars - |
| **Retail                Therm Sales:**                          |                                                                                  |                                                                 |   |   |
|    Residential                                   |                  5                                                               |                  6                                              | $                   9   | $                10 |
|    Commercial                                    |                  4                                                               |                  4                                              |                    4 |                    6 |
|    Industrial                                    |                  -                                                               |                  1                                              |                    - |                    1 |
|    Public                Authorities             |                  1                                                               |                  -                                              |                    1 |                    1 |
| **Total                Retail Therm Sales**                     | 10                                                                                    | 11                                                                   |                  14 |                  18 |
|    Transport                                     |                  -                                                               |                  -                                              |                    - |                    1 |
|    Negotiated                Sales Program (NSP) |                  3                                                               |                  3                                              |                    2 |                    2 |
| **Total                Therm Sales**                            | 13                                                                                    | 14                                                                   | $                16 | $                21 |

*Factors Affecting Results of Operations,      Rates and Regulation, Purchased Gas Adjustment Mechanism,*

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

| **Three                Months Ended September 30,**                                                | **2007**                                              | **2006**                                    |
|----------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------------------|
|                                                                                               | -                Millions of                Dollars - |
| Gas                Revenues                                                                        | $                16                                   | $  21                             |
| Other                Revenues                                                                      |                    1                   |                     -   |
|      Total                Operating Revenues                              |                  17                              |                   21              |
| Purchased                Gas                Expense                                                |                  10                              |                   14              |
| Other                Operations and Maintenance Expense                                            |                    6                   |                     6   |
| Depreciation                and Amortization                                                       |                    2                   |                     1   |
| Taxes                other                than Income Taxes                                        |                    1                   |                     1   |
|      Total                Other Operating Expenses                        |                  19                              |                   22              |
|                                                                                               |                                                  |                                        |
|           Operating                Income (Loss) |                    (2)                 |                     (1) |
| Other                Income                                                                        |                    -                   |                     -   |
| Total                Interest Expense                                                              |                    2                   |                     2   |
| Income                Tax                Expense (Benefit)                                         |                    (2)                 |                     (1) |
| **           Net                (Loss)**    | $  (2)                                      | $   (2)                      |

**Nine      Months      Ended September 30, 2007 Compared with the Nine Months Ended September 30,      2006**

----

Table            of Contents

|                                                            | **Sales**                                                                             | **Revenue**                                                          |
|-----------------------------------------------------------------|---------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| **Nine                Months Ended September 30,**              | **2007**                                                                              | **2006**                                                             | **2007** | **2006** |
|                                                            |         -                Millions of Therms - |      -                Millions of Dollars - |
| **Retail                Therm Sales:**                          |                                                                                  |                                                                 |   |   |
|    Residential                                   | 48                                                                                    | 45                                                                   | $                  62 | $                  65 |
|    Commercial                                    | 21                                                                                    | 20                                                                   |                    23 |                    26 |
|    Industrial                                    |                  1                                                               |                  2                                              |                      1 |                      2 |
|    Public                Authorities             |                  4                                                               |                  5                                              |                      5 |                      5 |
| **Total                Retail Therm Sales**                     | 74                                                                                    | 72                                                                   |                    91 |                    98 |
|    Transport                                     |                  -                                                               |                  -                                              |                      2 |                      2 |
|    Negotiated                Sales Program (NSP) | 13                                                                                    | 13                                                                   |       8 |                      9 |
| **Total                Therm Sales**                            | 87                                                                                    | 85                                                                   | $                101 | $                109 |

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

| **Nine                Months Ended September 30,**                                              | **   2007**                            | **2006**                                        |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------------|-------------------------------------------------|
|                                                                                            | -                Millions of                Dollars - |
| Gas                Revenues                                                                     | $                101                                  | $                109                            |
| Other                Revenues                                                                   |                      2       |                      2 |
|      Total                Operating Revenues                           |                   103                       |                   111                 |
| Purchased                Gas                Expense                                             |                    69                  |                    78            |
| Other                Operations and Maintenance Expense                                         |                    20                  |                    18            |
| Depreciation                and Amortization                                                    |                      6       |                      5 |
| Taxes                other                than Income Taxes                                     |                      2       |                      2 |
|      Total                Other Operating Expenses                     |                     97            |                  103                       |
|           Operating                Income     |                      6       |                      8 |
| Other                Income                                                                     |                      1       |                      - |
| Total                Interest Expense                                                           |                      5       |                      5 |
| Income                Tax                Expense (Benefit)                                      |                      1       |                      1 |
| **           Net                Income** | $                   1                  | $                   2            |

**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**RATES      AND      REGULATION**

**Energy      Cost      Adjustment Mechanism**

----

Table            of Contents

*General        Rate Case Filing*

**General      Rate Case Filing**

|  Test                year –                December 31, 2005     | Requestedby                UNS                Gas   | ALJRecommendation                                   |
|-----------------------------------------------------------------------------|-----------------------------------------------------|-----------------------------------------------------|
| Original                cost                rate base                       | $162                million                         | $154                million                         |
| Revenue                deficiency                                           | $9                million                           | $5                million                           |
| Total                rate                increase (over test year revenues) | 7%                                                  | 4%                                                  |
| Cost                of                debt                                  | 6.60%                                               | 6.60%                                               |
| Cost                of                equity                                | 11.00%                                              | 10.00%                                              |
| Hypothetical                capital structure                               | 50%                equity /                50% debt | 50%                equity /                50% debt |
| Weighted                average cost of capital                             | 8.80%                                               | 8.30%                                               |

**LIQUIDITY      AND CAPITAL      RESOURCES**

**Liquidity      Outlook**

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Table            of Contents

| **Nine                Months Ended September 30,**                        | **2007**                                              | **2006** |
|---------------------------------------------------------------------------|-------------------------------------------------------|----------|
|                                                                      | -                Millions of                Dollars - |
| Net                Cash                Flows – Operating Activities | $19                                                   | $26      |
| Capital                Expenditures                                       |   18                                        |  19 |

**UNS      Gas/UNS      Electric Revolver**

**Senior      Unsecured Notes**

**Contractual      Obligations**

| · | In                June 2007,                UNS Gas entered into a pipeline capacity contract for the period                March                2008 through February 2020 with demand charges approximating $1 million                annually. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                2007, UNS                Gas entered into forward gas purchases with future minimum payments                approximating $6 million for the remainder of 2007, $17 million in                2008,                $12 million in 2009, and $7 million in                2010. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends      on Common Stock**

*Senior Unsecured Notes*

**UNS      ELECTRIC**

**RESULTS      OF OPERATIONS**

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Table            of Contents

|                                                | **Sales**                                         | **Revenue**                                           |
|-----------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|
| **Three                Months Ended September 30,** | **2007**                                          | **2006**                                              | **2007** | **2006** |
|                                                | -                Millions of                kWh - | -                Millions of                Dollars - |
| **Electric                Retail Sales:**           |                                              |                                                  |   |   |
|    Residential                       | 314                                               | 293                                                   | $  31 | $                 29 |
|    Commercial                        | 187                                               | 178                                                   |                   19 |                    17 |
|    Industrial                        |  54                                          |  50                                              |                     4 |                     4 |
|    Other                             |                   -                     |                   1                         |                     - |                     - |
| **Total                Electric Retail Sales**      | 555                                               | 522                                                   | $  54 | $                 50 |

| **Three                Months Ended September 30,**                                             | **   2007**                            | **2006**                                  |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------------|-------------------------------------------|
|                                                                                            | -                Millions of                Dollars - |
| Electric                Revenues                                                                | $  54                                       | $  50                           |
| Other                Revenues                                                                   |      1                       |                     1 |
|      Total                Operating Revenues                           |    55                                  |                   51            |
| Purchased                Energy Expense                                                         |    37                                  |                   35            |
| Other                Operations and Maintenance Expense                                         |      8                       |                     7 |
| Depreciation                and Amortization                                                    |      3                       |                     3 |
| Taxes                other                than Income Taxes                                     |      1                       |                     1 |
|      Total                Other Operating Expenses                     |    49                                  |                   46            |
|                                                                                            |                                                  |                                      |
|           Operating                Income     |      6                       |                     5 |
| Other                Income                                                                     |      -                       |                     - |
| Total                Interest Expense                                                           |      1                       |                     1 |
| Income                Tax                Expense                                                |      2                       |                     2 |
| **           Net                Income** |  $  3                                  | $                  2            |

**Nine      Months      Ended September 30, 2007 Compared with the Nine Months Ended September 30,      2006**

|                                               | **Sales**                                         | **Revenue**                                           |
|----------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|
| **Nine                Months Ended September 30,** | **2007**                                          | **2006**                                              | **2007** | **2006** |
|                                               | -                Millions of                kWh - | -                Millions of                Dollars - |
| **Electric                Retail Sales:**          |                                              |                                                  |   |   |
|    Residential                      |                   693                   |                   650                       | $  69 | $                 65 |
|    Commercial                       |                   482                   |                   472                       |     49 |                   47 |
|    Industrial                       |                   149                   |                   145                       |                    12 |                   11 |
|    Other                            |                      2   |                      2       |      - |                    - |
| **Total                Electric Retail Sales**     | 1,326                                             | 1,269                                                 | $                130 | $123 |

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Table            of Contents

| **Nine                Months Ended September 30,**                                              | **   2007**                            | **2006**                                                |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------------------------------|
|                                                                                            | -                Millions of                Dollars - |
| Electric                Revenues                                                                | $  130                                      |   $                123                        |
| Other                Revenues                                                                   |        1           |          2 |
|      Total                Operating Revenues                           |     131                           |      125                       |
| Purchased                Energy Expense                                                         |       87                |        84            |
| Other                Operations and Maintenance Expense                                         |       21                |        19            |
| Depreciation                and Amortization                                                    |      10                      |          8 |
| Taxes                other                than Income Taxes                                     |        3           |          3 |
|      Total                Other Operating Expenses                     |     121                           |      114                       |
|           Operating                Income     |      10                      |        11            |
| Other                Income                                                                     |        2           |          - |
| Total                Interest Expense                                                           |        4           |          4 |
| Income                Tax                Expense                                                |        3           |          3 |
| **           Net                Income** |    $  5                      |    $    4            |

**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**Competition**

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

**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%                                                        |

----

Table            of Contents

**LIQUIDITY      AND CAPITAL      RESOURCES**

**Liquidity      Outlook**

| **Nine                Months Ended September 30,**                        | **2007**                                              | **2006**           |
|---------------------------------------------------------------------------|-------------------------------------------------------|--------------------|
|                                                                      | -                Millions of                Dollars - |
| Net                Cash                Flows – Operating Activities | $19                                                   | $                9 |
| Capital                Expenditures                                       |                  31                              |  29           |

**UNS      Gas/UNS      Electric Revolver**

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

----

Table            of Contents

**Senior        Unsecured Notes**

**Contractual      Obligations**

**Dividends      on Common Stock**

*Senior Unsecured Notes*

**OTHER      NON-REPORTABLE BUSINESS SEGMENTS**

**RESULTS      OF OPERATIONS**

| **Three                Months Ended September 30,**      | **2007**                                              | **2006**              |
|----------------------------------------------------------|-------------------------------------------------------|-----------------------|
|                                                     | -                Millions of                Dollars - |
| Millennium                Investments                    | $    -                            | $   -  |
| UniSource                Energy Parent Company           |                    (1)                 |    (2) |
|      Total                Other | $   (1)                                | $                (2)  |

| **Nine                Months Ended September 30,**       | **2007**                                              | **2006**                        |
|----------------------------------------------------------|-------------------------------------------------------|---------------------------------|
|                                                     | -                Millions of                Dollars - |
| Millennium                Investments                    | $    1                            | $   -            |
| UniSource                Energy Parent Company           |     (3)                           |                   (5) |
|      Total                Other | $   (2)                                | $                (5)            |

**UniSource      Energy Parent Company**

**UED**

----

Table            of Contents

**Discontinued      Operations – Global Solar**

**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**Millennium      Investments**

**LIQUIDITY      AND CAPITAL      RESOURCES**

**CRITICAL      ACCOUNTING      ESTIMATES**

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

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

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

|   | · | 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 |
|--------|--------|------------------------------------------------------|

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Table            of Contents

**NEW      ACCOUNTING      PRONOUNCEMENTS**

| · | FSP                  FASB                  Interpretation (FIN) 39-1, issued April 2007, allows entities that                  are                  party to a master netting arrangement to offset the receivable                  or payable                  recognized upon payment or receipt of cash collateral against fair                  value                  amounts recognized for derivative instruments that have been offset                  under                  the same master netting arrangement in accordance with FASB Interpretation                  39.  Upon adoption of FSP FIN 39-1, an entity is required to                  make an accounting policy decision to offset or not offset fair                  value                  amounts recognized for derivative instruments under master netting                  arrangements.  FSP FIN 39-1 is effective January 1,                  2008.  The effect of initially applying FSP FIN 39-1 must be                  recognized retrospectively as a change in accounting principle,                  unless                  impracticable to do so.  We are evaluating the impact of FSP FIN                  39-1 on our financial statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 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                  ending                  March 31, 2008. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 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 ending 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 this law may have on our financial                  statements. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SAFE      HARBOR FOR FORWARD-LOOKING      STATEMENTS**

----

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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

*Safe Harbor for      Forward-Looking Statements*

**Risk      Management Committee**

----

Table            of Contents

**Commodity      Price Risk**

**TEP**

|                           | **Three                Months Ended****September                30,** | **Nine                Months Ended****September                30,** |
|--------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------------------|
|                           | 2007                                                                  | 2006                                                                 | 2007 | 2006 |
|                           | -In                Millions-                                          | -In                Millions-                                         |
| Unrealized                Gain | $                  1                                        | $                  6                                       | $                  - | $                  7 |

----

Table            of Contents

|                           | **Three                Months Ended****September                30,** | **Nine                Months Ended****September                30,** |
|--------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------------------|
|                           | 2007                                                                  | 2006                                                                 | 2007 | 2006 |
|                           | -In                Millions-                                          | -In                Millions-                                         |
| Unrealized                Gain | $                   -                                  | $                  1                                       | $                   - | $   1 |

| **Nine                Months Ended September 30,** | **2007**                  | **2006**                                           | **2007**             | **2006**                   |
|----------------------------------------------------|---------------------------|----------------------------------------------------|----------------------|----------------------------|
|                                               |  -MWhs-              | %                of Total                Resources |
| Gas-Fired                Generation                |    841,000 |    678,000                          |    8% |     6% |
| Purchased                Power                     | 1,772,000                 | 1,411,000                                          |  16%            |   14%            |

|                                  | **Three                Months Ended****September                30,** | **Nine                Months Ended****September                30,** |
|---------------------------------------|-----------------------------------------------------------------------|----------------------------------------------------------------------|
|                                  | 2007                                                                  | 2006                                                                 | 2007 | 2006 |
|                                  | -In                Millions-                                          | -In                Millions-                                         |
| Unrealized                (Loss) Gain | $  (3)                                                      | $                (1)                                                 | $  (6) | $                (15) |

|                                                                             | **Unrealized                Gain (Loss) of TEP’s****Hedging                and Trading Activities** |
|----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                                             | -                Millions of                Dollars -                                                     |
|  Source                of                Fair Value At Sept. 30, 2007       | Maturity                0 –                6months                                                  | Maturity 6                – 12months | Maturityover                1                yr. | TotalUnrealizedGain                (Loss) |
| Prices                actively quoted                                            | $     2                                                                          | $   (1) | $    - | $      1 |
| Prices                based                on models and other valuation methods |                       -                                                     |                        - |                      - |                        - |
| Total                                                                            | $     2                                                                          | $   (1) | $    - | $      1 |

----

Table            of Contents

|                                                                              | -                Millions of                Dollars - |
|-----------------------------------------------------------------------------------|-------------------------------------------------------|
| Change                in                Market Price As of September 30, 2007     | 10%                Increase                           | 10%                Decrease |
| **Non-Cash                Flow Hedges**                                           |                                                  |   |
|     Forward                power sales and purchase contracts |  $                1                              | $(1) |
|     Gas                swap agreements                        |     -                             |    - |
|                                                                              |                                                  |   |
| **Cash                Flow Hedges**                                               |                                                  |   |
|    Forward                power sales and purchase contracts       |  $                (1)                            | $                1 |
|    Gas                swap agreements                              |     3                             |   (3) |

**UNS      Gas**

**UNS      Electric**

----

Table              of Contents

**MEG**

|                                                                             | Unrealized                Gain (Loss) of MEG’s Trading Activities |
|----------------------------------------------------------------------------------|-------------------------------------------------------------------------|
|                                                                             | -                Millions of                Dollars -                   |
|   Source                of                Fair Value At Sept. 30, 2007 |  Maturity                0 –                6months          |  Maturity  6                – 12months |  Maturityover                1                yr. | TotalUnrealizedGain                (Loss) |
| Prices                actively quoted                                            | $  7                                                          | $                - | $                - | $ 7 |
| Prices                based                on models and other valuation methods |                   3                                           |                  - |   - |                   3 |
| Total                                                                            | $10                                                                     | $                - | $                - | $10 |

**Credit      Risk**

*.*

----

Table            of Contents

**ITEM        4. – CONTROLS AND PROCEDURES**

----

----

Table            of Contents

**PART      II – OTHER      INFORMATION**

**ITEM        1. – LEGAL PROCEEDINGS **

----

*Note      7      of*

*Notes      to      Consolidated Financial Statements, Commitments and      Contingencies.*

**ITEM        1A. – RISK FACTORS **

----

**ITEM        5. – OTHER INFORMATION **

----

**NON-GAAP        MEASURES**

**Adjusted      EBITDA**

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

|                                                                    |   | **UniSource                Energy**                                   |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                                                    |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|                                                                    |   | **2007**                                                              |   |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   | -                Millions of                Dollars -                 |   |
|   Adjusted                EBITDA (non-GAAP)                   |   | $                                                                     | 138    |   |   | $ | 144 |   |   | $ | 341 |   |   | $ | 366 |   |
|   Net                Cash Flows - Operating Activities (GAAP) |   | $                                                                     | 84     |   |   | $ | 72 |   |   | $ | 204 |   |   | $ | 197 |   |
|   Net                Cash Flows - Investing Activities (GAAP) |   | $                                                                     | (47    | ) |   | $ | (34 | ) |   | $ | (153 | ) |   | $ | (168 | ) |
|   Net                Cash Flows - Financing Activities (GAAP) |   | $                                                                     | (74    | ) |   | $ | (88 | ) |   | $ | (95 | ) |   | $ | (89 | ) |

|                                                                    |   | **TEP**                                                               |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                                                    |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|                                                                    |   | **2007**                                                              |   |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   | -                Millions of                Dollars -                 |   |
|   Adjusted                EBITDA (non-GAAP)                   |   | $                                                                     | 126    |   |   | $ | 136 |   |   | $ | 303 |   |   | $ | 331 |   |
|   Net                Cash Flows - Operating Activities (GAAP) |   | $                                                                     | 70     |   |   | $ | 45 |   |   | $ | 163 |   |   | $ | 143 |   |
|   Net                Cash Flows - Investing Activities (GAAP) |   | $                                                                     | (25    | ) |   | $ | (18 | ) |   | $ | (97 | ) |   | $ | (138 | ) |
|   Net                Cash Flows - Financing Activities (GAAP) |   | $                                                                     | (77    | ) |   | $ | (63 | ) |   | $ | (75 | ) |   | $ | (45 | ) |

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Table            of Contents

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

|                                                                                     |   | **UniSource                Energy**                                   |    |
|------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended****September                30,** |    |   | **Nine                Months Ended****September                30,** |   |
|                                                                                     |   | **2007**                                                              |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars -                 |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**                            |   | $                                                                     | 138     |   |   | $ | 144 |   |   | $ | 341 |   |   | $ | 366 |   |
| Amounts                from                the Income Statements:                        |   |                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income                Taxes                                 |   |                                                                  | 16      |   |   |   | 18 |   |   |   | 28 |   |   |   | 39 |   |
|   Less:  Total                Interest Expense                       |   |                                                                  | 34      |   |   |   | 41 |   |   |   | 103 |   |   |   | 115 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                                  | (4      | ) |   |   | (13 | ) |   |   | (6 | ) |   |   | (15 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)                           |   | ** **                                                            | **84**  |   |   | ** ** | **72** |   |   | ** ** | **204** |   |   | ** ** | **197** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   | ** **                                                            | **(47** | **)** |   | ** ** | **(34** | **)** |   | ** ** | **(153** | **)** |   | ** ** | **(168** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   | ** **                                                            | **(74** | **)** |   | ** ** | **(88** | **)** |   | ** ** | **(95** | **)** |   | ** ** | **(89** | **)** |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**(GAAP)            |   | **$**                                                                 | **(37** | **)** |   | **$** | **(50** | **)** |   | **$** | **(44** | **)** |   | **$** | **(59** | **)** |

|                                                                                     |   | **TEP**                                               |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended September 30,**   |    |   | **Nine                Months Ended September 30,** |   |
|                                                                                     |   | **2007**                                              |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars - |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**                            |   | $                                                     | 126     |   |   | $ | 136 |   |   | $ | 303 |   |   | $ | 331 |   |
| Amounts                from                the Income Statements:                        |   |                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income                Taxes                                 |   |                                                  | 16      |   |   |   | 19 |   |   |   | 25 |   |   |   | 38 |   |
|   Less:  Total                Interest Expense                       |   |                                                  | 28      |   |   |   | 34 |   |   |   | 87 |   |   |   | 96 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                  | (12     | ) |   |   | (38 | ) |   |   | (28 | ) |   |   | (54 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)                           |   | ** **                                            | **70**  |   |   | ** ** | **45** |   |   | ** ** | **163** |   |   | ** ** | **143** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   | ** **                                            | **(25** | **)** |   | ** ** | **(18** | **)** |   | ** ** | **(97** | **)** |   | ** ** | **(138** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   | ** **                                            | **(77** | **)** |   | ** ** | **(63** | **)** |   | ** ** | **(75** | **)** |   | ** ** | **(45** | **)** |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**(GAAP)            |   | **$**                                                 | **(31** | **)** |   | **$** | **(36** | **)** |   | **$** | **(9** | **)** |   | **$** | **(40** | **)** |

**(1)      Adjusted EBITDA      was calculated as follows:**

|                                                                                                                                                   |   | **UniSource                Energy**                                   |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|
|                                                                                                                                                   |   | **Three                Months Ended****September                30,** |    |   | **Nine                Months Ended****September                30,** |   |
|                                                                                                                                                   |   | **2007**                                                              |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                   |   | -                Millions of                Dollars -                 |    |
| **Net                Income**(GAAP)                                                                                                                    |   | $                                                                     | 25      |   |   | $ | 28 |   |   | $ | 42 |   |   | $ | 55 |   |
| Amounts                from                the Income Statements:                                                                                      |   |                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:                Discontinued Operations – Net of Tax                                                                            |   |                                                                  | -       |   |   |   | - |   |   |   | - |   |   |   | (3 | ) |
|   Plus:  Income                Taxes                                                                                               |   |                                                                  | 16      |   |   |   | 18 |   |   |   | 28 |   |   |   | 39 |   |
|            Total                Interest Expense                                                |   |                                                                  | 34      |   |   |   | 41 |   |   |   | 103 |   |   |   | 115 |   |
|            Depreciation                and Amortization                                         |   |                                                                  | 35      |   |   |   | 33 |   |   |   | 103 |   |   |   | 97 |   |
|            Amortization                of Transition Recovery Asset                             |   |                                                                  | 26      |   |   |   | 22 |   |   |   | 60 |   |   |   | 51 |   |
|            Depreciation                included in Fuel and Other O&M                       |   |                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Expense                (see Note 13 of Notes to Consolidated |   |                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Financial                Statements)                         |   |                                                                  | 2       |   |   |   | 2 |   |   |   | 5 |   |   |   | 6 |   |
| **Adjusted                EBITDA**(non-GAAP)                                                                                                           |   | **$**                                                                 | **138** |   |   | **$** | **144** |   |   | **$** | **341** |   |   | **$** | **366** |   |

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|                                                                                                                                                   |   | **TEP**                                               |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                                                                                                                   |   | **Three                Months Ended September 30,**   |    |   | **Nine                Months Ended September 30,** |   |
|                                                                                                                                                   |   | **2007**                                              |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                   |   | -                Millions of                Dollars - |    |
| **Net                Income**(GAAP)                                                                                                                    |   | $                                                     | 26      |   |   | $ | 30 |   |   | $ | 39 |   |   | $ | 57 |   |
| Amounts                from                the Income Statements:                                                                                      |   |                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Plus:  Income                Taxes                                                                                               |   |                                                  | 16      |   |   |   | 19 |   |   |   | 25 |   |   |   | 38 |   |
|             Total                Interest Expense                                          |   |                                                  | 28      |   |   |   | 34 |   |   |   | 87 |   |   |   | 96 |   |
|             Depreciation                and Amortization                                   |   |                                                  | 29      |   |   |   | 29 |   |   |   | 88 |   |   |   | 84 |   |
|             Amortization                of Transition Recovery Asset                       |   |                                                  | 26      |   |   |   | 22 |   |   |   | 60 |   |   |   | 51 |   |
|             Depreciation                included in Fuel and Other O&M                 |   |                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Expense                (see Note 13 of Notes to Consolidated |   |                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                Financial                Statements)                         |   |                                                  | 1       |   |   |   | 2 |   |   |   | 4 |   |   |   | 5 |   |
| **Adjusted                EBITDA**(non-GAAP)                                                                                                           |   | **$**                                                 | **126** |   |   | **$** | **136** |   |   | **$** | **303** |   |   | **$** | **331** |   |

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

|                                                                          |   | **As                of****September                30,****2007** |   |   | **As                of****December                31,****2006** |   |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------|--------|
|                                                                          |   | -                Millions of                Dollars -            |   |
| Net                Debt                (non-GAAP)                             |   | $                                                                | 1,304  |   |                                                            | $      | 1,335 |   |
| Total                Debt                and Capital Lease Obligations (GAAP) |   | $                                                                | 1,409  |   |                                                            | $      | 1,468 |   |

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

|                                                              |   | **As                of****September                30,****2007** |   |   | **As                of****December                31,****2006** |   |
|-------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------|--------|
|                                                              |   | -                Millions of                Dollars -            |   |
| **Total                Debt (GAAP)**                              |   | $                                                                | 821    |   |                                                            | $      | 821 |   |
|                                                              |   |                                                             |   |   |                                                            |   |   |   |
| Capital                Lease                Obligations           |   |                                                             | 529    |   |                                                            |   | 588 |   |
| Current                Portion – Capital Lease Obligations  |   |                                                             | 59     |   |                                                            |   | 59 |   |
| **Total                Debt and Capital Lease Obligations**(GAAP) |   |                                                             | 1,409  |   |                                                            |   | 1,468 |   |
|                                                              |   |                                                             |   |   |                                                            |   |   |   |
| Investment                in                Lease Debt            |   |                                                             | (105   | )      |                                                            |   | (133 | ) |
| **Net                Debt**(non-GAAP)                             |   | $                                                                | 1,304  |   |                                                            | $      | 1,335 |   |

**Ratio      of Earnings to Fixed      Charges**

|                            | **Nine                Months Ended**  | **Twelve                Months Ended** |
|---------------------------------|---------------------------------------|----------------------------------------|
|                            | **September                30, 2007** | **September                30, 2007**  |
| UniSource                Energy | 1.649                                 | 1.601                                  |
|                            |                                  |                                   |
| TEP                             |  1.714                           | 1.602                                  |

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**ITEM        6. – EXHIBITS **

----

**SIGNATURES**

|                                               | UNISOURCE                  ENERGY CORPORATION        (Registrant)    |
|----------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
| Date:  November                  2, 2007 | /s/                                                                                                                    | Kevin                  P.                  Larson |
|                                               |                                                                                                                   | Kevin                  P.                  LarsonSenior                  Vice                  President and PrincipalFinancial                  Officer |
|                                               |                                                                                                                   |     |
|                                               | TUCSON                  ELECTRIC POWER COMPANY        (Registrant)   |
| Date:  November                  2, 2007 | /s/                                                                                                                    | Kevin                  P.                  Larson |
|                                               |                                                                                                                   | Kevin                  P.                  LarsonSenior                  Vice                  President and PrincipalFinancial                  Officer |

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**EXHIBIT      INDEX**

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

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

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

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

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

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

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

| *32 | -- | Statements                of Corporate Officers (pursuant to Section 906                of the Sarbanes-Oxley Act of                2002). |
|-----|----|--------------------------------------------------------------------------------------------------------------------------------------------|

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