Table          of Contents

**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 100        Tucson,                    AZ  85701        (520)                    571-4000  | 86-0786732                                                              |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                    |
| 1-5924                                   | **        TUCSON                    ELECTRIC POWER COMPANY**        (An                    Arizona                    Corporation)        One                    South                    Church Avenue, Suite 100        Tucson,                    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                                                                        | 16 |
|                                                                                                                                                                 | Note                    4.   Business                    Segments                                                                                 | 16 |
|                                                                                                                                                                 | Note                    5.   Accounting for Derivative                    Instruments and Trading Activities                                      | 18 |
|                                                                                                                                                                 | Note                    6.   Income and Other                    Taxes                                                                            | 20 |
|                                                                                                                                                                 | Note                    7.   Commitments and                    Contingencies                                                                     | 21 |
|                                                                                                                                                                 | Note                    8.   Employee Benefits                    Plans                                                                           | 23 |
|                                                                                                                                                                 | Note                    9.   Share-Based Compensation                    Plans                                                                    | 24 |
|                                                                                                                                                                 | Note                    10. UniSource Energy Earnings Per Share                    (EPS)                                                                         | 26 |
|                                                                                                                                                                 | Note                    11. Discontinued Operations – Sale of Global                    Solar                                                              | 27 |
|                                                                                                                                                                 | Note                    12. New Accounting Pronouncements                                                                                                        | 27 |
|                                                                                                                                                                 | Note                    13. Supplemental Cash Flow                    Information                                                                                | 29 |
|                                                                                                                                                                 | Note                    14. Review by Independent Registered Public                    Accounting Firm                                                           | 30 |
|                                                                                                                                                                 |                                                                                                                                                             |
| Item                    2. – Management’s                    Discussion and Analysis of Financial Condition and Results of                    Operations | 31                                                                                                                                                               |
|                                                                                                                                                                 | UniSource                    Energy Consolidated                                                                                                                 | 31 |
|                                                                                                                                                                 | Overview                    of Consolidated Business                                                                                                             | 31 |
|                                                                                                                                                                 | Outlook                    and Strategies                                                                                                                        | 31 |
|                                                                                                                                                                 | Results                    of Operations                                                                                                                         | 32 |
|                                                                                                                                                                 | Contribution                    by Business                    Segment                                                                                           | 33 |
|                                                                                                                                                                 | Liquidity                    and Capital                    Resources                                                                                            | 33 |
|                                                                                                                                                                 | Tucson                    Electric Power Company                                                                                                                 | 36 |
|                                                                                                                                                                 | Results                    of Operations                                                                                                                         | 36 |
|                                                                                                                                                                 | Factors                    Affecting Results of                    Operations                                                                                    | 41 |
|                                                                                                                                                                 | Liquidity                    and Capital Resources                                                                                                               | 46 |
|                                                                                                                                                                 | UNS                    Gas                                                                                                                                       | 49 |
|                                                                                                                                                                 | Results                    of Operations                                                                                                                         | 49 |
|                                                                                                                                                                 | Factors                    Affecting Results of                    Operations                                                                                    | 50 |
|                                                                                                                                                                 | Liquidity                    and Capital                    Resources                                                                                            | 51 |
|                                                                                                                                                                 | UNS                    Electric                                                                                                                                  | 53 |
|                                                                                                                                                                 | Results                    of Operations                                                                                                                         | 53 |
|                                                                                                                                                                 | Factors                    Affecting Results of                    Operations                                                                                    | 54 |
|                                                                                                                                                                 | Liquidity                    and Capital                    Resources                                                                                            | 55 |

|   | Other | 57 |
|--------|-------|----|

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Table              of Contents

|                                                                                                             |                                                                             | Results                    of Operations | 57 |
|------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|------------------------------------------|----|
|                                                                                                             | Critical                    Accounting Estimates                                 | 58                                       |
|                                                                                                             | New                    Accounting Pronouncements                                 | 58                                       |
|                                                                                                             | Safe                    Harbor for Forward-Looking                    Statements | 59                                       |
|                                                                                                             |                                                                             |
| Item                    3. – Quantitative and Qualitative Disclosures                    about Market Risk | 60                                                                               |
|                                                                                                             |                                                                             |
| Item                    4. – Controls and                    Procedures                                    | 64                                                                               |
|                                                                                                             |
| **PART                    II – OTHER INFORMATION**                                                         |
|                                                                                                             |                                                                             |
| Item                    1. – Legal Proceedings                                                             | 65                                                                               |
|                                                                                                             |                                                                             |
| Item                    1A. – Risk Factors                                                                 | 65                                                                               |
|                                                                                                             |                                                                             |
| Item                    4. – Submission of Matters to a Vote of                    Security Holders        | 65                                                                               |
|                                                                                                             |                                                                             |
| Item                    5. – Other Information                                                             | 65                                                                               |
|                                                                                                             | Non-GAAP                    Measures                                             | 65                                       |
|                                                                                                             | Ratio                    of Earnings to Fixed                    Charges         | 68                                       |

| Item                    6. Exhibits | 68     |
|-------------------------------------|--------|
|                                |   |
| Signatures                          | 69     |
|                                |   |
| Exhibit                    Index    | 70     |

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

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| PPFAC                                                               | Purchased                    Power and Fuel Adjustment Clause.                                                                                                                                                                                                                                                                               |
|---------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                                                                | Transition                    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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**Report      of Independent Registered Public Accounting      Firm**

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Table          of Contents

**Report      of      Independent Registered Public Accounting Firm**

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Table          of Contents

**PART            I - FINANCIAL INFORMATION**

**ITEM            1.  FINANCIAL STATEMENTS **

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**UNISOURCE              ENERGY CORPORATION**

**COMPARATIVE              CONDENSED CONSOLIDATED STATEMENTS OF              INCOME**

| Three                        Months                        Ended      |        |   |     | Six                        Months                        Ended         |                                          |
|-----------------------------------------------------------------------|-------------|--------|----------|------------------------------------------------------------------------|-----------------------------------------------|
| June                        30,                                       |        |   |     | June                        30,                                        |                                          |
| **2007**                                                              |        |   | **2006** |                                                                   |                                          |   | **2007** |   |   | **2006** |   |
| **(Unaudited)**                                        |        |   |     | **(Unaudited)**                                         |                                          |
| -Thousands                        of                        Dollars - |        |   |     | -                        Thousands                        of Dollars - |                                          |
|                                                                  |        |   |     |                                                                   | **Operating                        Revenues** |   |   |   |   |   |   |
| **$**                                                                 | **249,462** |   |     | $                                                                      | 247,387                                       |   |   Electric                        Retail Sales |   | **$** | **445,212** |   |   | $ | 430,056 |   |
| ** **                                                            | **44,525**  |   |     |                                                                   | 31,867                                        |   |   Electric                        Wholesale Sales |   | ** ** | **93,290** |   |   |   | 88,554 |   |
| ** **                                                            | **22,850**  |   |     |                                                                   | 25,720                                        |   |   Gas                        Revenue |   | ** ** | **84,960** |   |   |   | 88,535 |   |
| ** **                                                            | **12,935**  |   |     |                                                                   | 10,417                                        |   |   Other                        Revenues |   | ** ** | **24,151** |   |   |   | 13,672 |   |
| ** **                                                            | **329,772** |   |     |                                                                   | 315,391                                       |   | **    Total                        Operating Revenues** |   | ** ** | **647,613** |   |   |   | 620,817 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                  |        |   |     |                                                                   |                                          |   | **Operating                        Expenses** |   |   |   |   |   |   |   |   |
| ** **                                                            | **72,208**  |   |     |                                                                   | 69,143                                        |   |   Fuel |   | ** ** | **133,288** |   |   |   | 119,359 |   |
| ** **                                                            | **81,229**  |   |     |                                                                   | 74,403                                        |   |   Purchased                        Energy |   | ** ** | **167,036** |   |   |   | 156,558 |   |
| ** **                                                            | **63,304**  |   |     |                                                                   | 61,735                                        |   |   Other                        Operations and Maintenance |   | ** ** | **134,120** |   |   |   | 115,550 |   |
| ** **                                                            | **34,515**  |   |     |                                                                   | 32,680                                        |   |   Depreciation                        and Amortization |   | ** ** | **68,981** |   |   |   | 63,437 |   |
| ** **                                                            | **19,219**  |   |     |                                                                   | 17,279                                        |   |   Amortization                        of Transition Recovery Asset |   | ** ** | **34,205** |   |   |   | 29,121 |   |
| ** **                                                            | **12,166**  |   |     |                                                                   | 12,360                                        |   |   Taxes                        Other Than Income Taxes |   | ** ** | **24,653** |   |   |   | 24,913 |   |
| ** **                                                            | **282,641** |   |     |                                                                   | 267,600                                       |   | **    Total                        Operating Expenses** |   | ** ** | **562,283** |   |   |   | 508,938 |   |
| ** **                                                            | **47,131**  |   |     |                                                                   | 47,791                                        |   | **      Operating                        Income** |   | ** ** | **85,330** |   |   |   | 111,879 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                  |        |   |     |                                                                   |                                          |   | **Other                        Income (Deductions)** |   |   |   |   |   |   |   |   |
| ** **                                                            | **4,456**   |   |     |                                                                   | 5,142                                         |   |   Interest                        Income |   | ** ** | **8,900** |   |   |   | 10,069 |   |
| ** **                                                            | **4,328**   |   |     |                                                                   | 1,987                                         |   |   Other                        Income |   | ** ** | **5,643** |   |   |   | 3,622 |   |
| ** **                                                            | **(1,614**  | **)**  |     |                                                                   | (246                                          | ) |   Other                        Expense |   | ** ** | **(2,251** | **)** |   |   | (974 | ) |
| ** **                                                            | **7,170**   |   |     |                                                                   | 6,883                                         |   | **    Total                        Other Income (Deductions)** |   | ** ** | **12,292** |   |   |   | 12,717 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                  |        |   |     |                                                                   |                                          |   | **Interest                        Expense** |   |   |   |   |   |   |   |   |
| ** **                                                            | **18,276**  |   |     |                                                                   | 19,208                                        |   |   Long-Term                        Debt |   | ** ** | **36,265** |   |   |   | 37,892 |   |
| ** **                                                            | **16,126**  |   |     |                                                                   | 18,526                                        |   |   Interest                        on Capital Leases |   | ** ** | **32,278** |   |   |   | 37,073 |   |
| ** **                                                            | **1,651**   |   |     |                                                                   | 1,267                                         |   |   Other                        Interest Expense |   | ** ** | **3,412** |   |   |   | 2,573 |   |
| ** **                                                            | **(1,634**  | **)**  |     |                                                                   | (1,436                                        | ) |   Interest                        Capitalized |   | ** ** | **(3,029** | **)** |   |   | (3,348 | ) |
| ** **                                                            | **34,419**  |   |     |                                                                   | 37,565                                        |   | **    Total                        Interest Expense** |   | ** ** | **68,926** |   |   |   | 74,190 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
| ** **                                                            | **19,882**  |   |     |                                                                   | 17,109                                        |   | **Income                        from Continuing Operations before Income Taxes** |   | ** ** | **28,696** |   |   |   | 50,406 |   |
| ** **                                                            | **8,076**   |   |     |                                                                   | 7,111                                         |   |   Income                        Tax Expense |   | ** ** | **11,947** |   |   |   | 20,917 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
| ** **                                                            | **11,806**  |   |     |                                                                   | 9,998                                         |   | **Income                        from Continuing Operations** |   | ** ** | **16,749** |   |   |   | 29,489 |   |
| ** **                                                            | **-**       |   |     |                                                                   | -                                             |   | **Discontinued                        Operations - Net of Tax** |   |   | - |   |   |   | (2,669 | ) |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
| **$**                                                                 | **11,806**  |   |     | $                                                                      | 9,998                                         |   | **Net                        Income** |   | **$** | **16,749** |   |   | $ | 26,820 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
| ** **                                                            | **35,472**  |   |     |                                                                   | 35,245                                        |   | **Weighted-average                        Shares of Common Stock Outstanding (000)** |   | ** ** | **35,447** |   |   |   | 35,181 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                  |        |   |     |                                                                   |                                          |   | **Basic                        Earnings (Loss) per Share** |   |   |   |   |   |   |   |   |
| **$**                                                                 | **0.33**    |   |     | $                                                                      | 0.28                                          |   | **  Income                        from Continuing Operations** |   | **$** | **0.47** |   |   | $ | 0.84 |   |
|                                                                  | -           |   |     |                                                                   | -                                             |   | **  Discontinued                        Operations - Net of Tax** |   |   | - |   |   |   | (0.08 | ) |
| **$**                                                                 | **0.33**    |   |     | $                                                                      | 0.28                                          |   | **  Net                        Income** |   | **$** | **0.47** |   |   | $ | 0.76 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                  |        |   |     |                                                                   |                                          |   | **Diluted                        Earnings (Loss) per Share** |   |   |   |   |   |   |   |   |
| **$**                                                                 | **0.32**    |   |     | $                                                                      | 0.28                                          |   | **  Income                        from Continuing Operations** |   | **$** | **0.46** |   |   | $ | 0.80 |   |
| ** **                                                            | **-**       |   |     |                                                                   | -                                             |   | **  Discontinued                        Operations - Net of Tax** |   |   | - |   |   |   | (0.07 | ) |
| **$**                                                                 | **0.32**    |   |     | $                                                                      | 0.28                                          |   | **  Net                        Income** |   | **$** | **0.46** |   |   | $ | 0.73 |   |
|                                                                  |        |   |     |                                                                   |                                          |   |   |   |   |   |   |   |   |   |   |
| **$**                                                                 | **0.225**   |   |     | $                                                                      | 0.21                                          |   | **Dividends                        Declared per Share** |   | **$** | **0.45** |   |   | $ | 0.42 |   |

----

Table                of Contents

**UNISOURCE              ENERGY CORPORATION**

**COMPARATIVE              CONDENSED CONSOLIDATED STATEMENTS OF CASH              FLOWS**

|                                                                                                                                         |   |       |   Six                        Months Ended                  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|----------------------------------------------------------------------|--------|
|                                                                                                                                         |   |       | June                        30,                                      |   |
|                                                                                                                                         |   |       | **2007**                                                             |   |   |   | **2006** |   |
|                                                                                                                                         |   |       |   **(Unaudited)**                           |   |
|                                                                                                                                         |   |       | -Thousands                        of                        Dollars- |   |
|  **Cash                      Flows from Operating Activities**                                                                          |   |       |                                                                 |   |   |   |   |   |
|      Cash                        Receipts from Electric Retail Sales                                                |   | **$**      | **461,510**                                                          |   |   | $ | 438,716 |   |
|      Cash                        Receipts from Electric Wholesale Sales                                             |   | ** ** | **158,217**                                                          |   |   |   | 132,098 |   |
|      Cash                        Receipts from Gas Sales                                                            |   | ** ** | **114,813**                                                          |   |   |   | 115,687 |   |
|      Interest                        Received                                                                       |   | ** ** | **10,068**                                                           |   |   |   | 11,705 |   |
|      Performance                        Deposits                                                                    |   | ** ** | **(2,500**                                                           | **)**  |   |   | 5,083 |   |
|      Sale                        of Excess Emission Allowances                                                      |   | ** ** | **6,920**                                                            |   |   |   | 3,716 |   |
|      Income                        Tax Refunds Received                                                             |   | ** ** | **1,016**                                                            |   |   |   | 553 |   |
|      Other                        Cash Receipts                                                                     |   | ** ** | **23,671**                                                           |   |   |   | 3,802 |   |
|      Fuel                        Costs Paid                                                                         |   | ** ** | **(124,525**                                                         | **)**  |   |   | (115,683 | ) |
|      Purchased                        Energy Costs Paid                                                             |   | ** ** | **(225,584**                                                         | **)**  |   |   | (187,974 | ) |
|      Wages                        Paid, Net of Amounts Capitalized                                                  |   | ** ** | **(59,416**                                                          | **)**  |   |   | (50,177 | ) |
|      Payment                        of Other Operations and Maintenance Costs                                       |   | ** ** | **(80,292**                                                          | **)**  |   |   | (68,156 | ) |
|      Capital                        Lease Interest Paid                                                             |   | ** ** | **(33,891**                                                          | **)**  |   |   | (39,862 | ) |
|      Taxes                        Paid, Net of Amounts Capitalized                                                  |   | ** ** | **(74,971**                                                          | **)**  |   |   | (72,089 | ) |
|      Interest                        Paid, Net of Amounts Capitalized                                               |   | ** ** | **(34,830**                                                          | **)**  |   |   | (33,724 | ) |
|      Income                        Taxes Paid                                                                       |   | ** ** | **(17,823**                                                          | **)**  |   |   | (12,312 | ) |
|      Net                        Cash Used by Operating Activities of Discontinued                        Operations |   | ** ** | **-**                                                                |   |   |   | (2,710 | ) |
|      Excess                        Tax Benefit from Stock Options Exercises                                         |   | ** ** | **(440**                                                             | **)**  |   |   | (869 | ) |
|      Other                        Cash Payments                                                                     |   | ** ** | **(2,497**                                                           | **)**  |   |   | (2,826 | ) |
| **Net                        Cash Flows – Operating Activities**                                                                       |   | ** ** | **119,446**                                                          |   |   |   | 124,978 |   |
|                                                                                                                                         |   |       |                                                                 |   |   |   |   |   |
| **Cash                        Flows from Investing Activities**                                                                              |   |       |                                                                 |   |   |   |   |   |
|      Capital                        Expenditures                                                                    |   | ** ** | **(118,522**                                                         | **)**  |   |   | (113,463 | ) |
|      Proceeds                        from Investment in Springerville Lease Debt                                    |   | ** ** | **11,206**                                                           |   |   |   | 10,028 |   |
|      Proceeds                        from the Sale of Land                                                          |   | ** ** | **2,018**                                                            |   |   |   | - |   |
|      Return                        of Investment from Millennium Energy Business                                    |   | ** ** | **10**                                                               |   |   |   | 4,743 |   |
|      Other                        Cash Receipts                                                                     |   | ** ** | **2,467**                                                            |   |   |   | 2,178 |   |
|      Payments                        for Investment in Springerville Lease Equity                                   |   | ** ** | **-**                                                                |   |   |   | (48,025 | ) |
|      Sale                        of Subsidiary                                                                      |   | ** ** | **-**                                                                |   |   |   | 16,000 |   |
|      Other                        Cash Payments                                                                     |   | ** ** | **(2,657**                                                           | **)**  |   |   | (1,487 | ) |
|      Investment                        in and Loans to Equity Investees                                             |   | ** ** | **(366**                                                             | **)**  |   |   | (3,876 | ) |
|      Net                        Cash Used by Investing Activities of Discontinued                        Operations |   | ** ** | **-**                                                                |   |   |   | (46 | ) |
| **Net                        Cash Flows - Investing Activities**                                                                             |   | ** ** | **(105,844**                                                         | **)**  |   |   | (133,948 | ) |
|                                                                                                                                         |   |       |                                                                 |   |   |   |   |   |
| **Cash                        Flows from Financing Activities**                                                                              |   |       |                                                                 |   |   |   |   |   |
|      Payments                        on Capital Lease Obligations                                                   |   | ** ** | **(55,900**                                                          | **)**  |   |   | (50,580 | ) |
|      Payments                        on Borrowings under Revolving Credit Facilities                                |   | ** ** | **(77,000**                                                          | **)**  |   |   | (57,000 | ) |
|      Common                        Stock Dividends Paid                                                             |   | ** ** | **(15,878**                                                          | **)**  |   |   | (14,715 | ) |
|      Repayments                        of Long-Term Debt                                                            |   | ** ** | **(3,000**                                                           | **)**  |   |   | (2,500 | ) |
|      Proceeds                        from Borrowings under Revolving Credit Facilities                              |   | ** ** | **128,000**                                                          |   |   |   | 117,000 |   |
|      Proceeds                        from Stock Options Exercised                                                   |   | ** ** | **1,345**                                                            |   |   |   | 2,961 |   |
|      Excess                        Tax Benefit from Stock Options Exercises                                         |   | ** ** | **440**                                                              |   |   |   | 869 |   |
|      Other                        Cash Receipts                                                                     |   | ** ** | **4,940**                                                            |   |   |   | 6,507 |   |
|      Payment                        of Debt Issue/Retirement Costs                                                  |   | ** ** | **(285**                                                             | **)**  |   |   | (140 | ) |
|      Other                        Cash Payments                                                                     |   | ** ** | **(4,375**                                                           | **)**  |   |   | (2,813 | ) |
| **Net                        Cash Flows - Financing Activities**                                                                             |   | ** ** | **(21,713**                                                          | **)**  |   |   | (411 | ) |
|                                                                                                                                         |   |       |                                                                 |   |   |   |   |   |
| Net                        Decrease                        in Cash and Cash Equivalents                                                      |   | ** ** | **(8,111**                                                           | **)**  |   |   | (9,381 | ) |
| Cash                        and Cash                        Equivalents, Beginning of Year                                                   |   | ** ** | **104,241**                                                          |   |   |   | 144,679 |   |
| **Cash                        and Cash Equivalents, End of Period**                                                                          |   | **$**      | **96,130**                                                           |   |   | $ | 135,298 |   |

----

Table                of Contents

**UNISOURCE              ENERGY CORPORATION**

**COMPARATIVE              CONDENSED CONSOLIDATED BALANCE              SHEETS**

|                                                                                     |   | June                        30,                                              |           |   | December                        31, |       |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|----------------|--------|-------------------------------------|------------|
|                                                                                     |   | **2007**                                                                     |           |   | **2006**                            |       |
|                                                                                     |   | **(Unaudited)**                                               |           |
| **ASSETS**                                                                               |   |  -                        Thousands                        of Dollars - |           |
| **Utility                        Plant**                                                 |   |                                                                         |           |   |                                |       |
|   Plant                        in Service                                      |   | **$**                                                                        | **3,480,327**  |   |                                | $          | 3,410,638 |   |
|   Utility                        Plant under Capital Leases                    |   | ** **                                                                   | **702,337**    |   |                                |       | 702,337 |   |
|   Construction                        Work in Progress                         |   | ** **                                                                   | **178,344**    |   |                                |       | 135,431 |   |
| **    Total                        Utility Plant**                   |   | ** **                                                                   | **4,361,008**  |   |                                |       | 4,248,406 |   |
|   Less                        Accumulated Depreciation and Amortization        |   | ** **                                                                   | **(1,539,091** | **)**  |                                |       | (1,492,842 | ) |
|   Less                        Accumulated Amortization of Capital Lease Assets |   | ** **                                                                   | **(508,701**   | **)**  |                                |       | (495,944 | ) |
| **    Total                        Utility Plant - Net**             |   | ** **                                                                   | **2,313,216**  |   |                                |       | 2,259,620 |   |
|                                                                                     |   |                                                                         |           |   |                                |       |   |   |
| **Investments                        and Other Property**                                |   |                                                                         |           |   |                                |       |   |   |
|   Investments                        in Lease Debt and Equity                  |   | ** **                                                                   | **169,543**    |   |                                |       | 181,222 |   |
|   Other                                                                        |   | ** **                                                                   | **68,794**     |   |                                |       | 66,194 |   |
| **    Total                        Investments and Other Property**  |   | ** **                                                                   | **238,337**    |   |                                |       | 247,416 |   |
|                                                                                     |   |                                                                         |           |   |                                |       |   |   |
| **Current                        Assets**                                                |   |                                                                         |           |   |                                |       |   |   |
|   Cash                        and Cash Equivalents                             |   | ** **                                                                   | **96,130**     |   |                                |       | 104,241 |   |
|   Trade                        Accounts Receivable                             |   | ** **                                                                   | **108,660**    |   |                                |       | 124,789 |   |
|   Unbilled                        Accounts Receivable                          |   | ** **                                                                   | **60,873**     |   |                                |       | 58,499 |   |
|   Allowance                        for Doubtful Accounts                       |   | ** **                                                                   | **(17,701**    | **)**  |                                |       | (16,859 | ) |
|   Materials                        and Fuel Inventory                          |   | ** **                                                                   | **81,208**     |   |                                |       | 73,628 |   |
|   Trading                        Assets - Derivative Instruments               |   | ** **                                                                   | **16,619**     |   |                                |       | 26,387 |   |
|   Current                        Regulatory Assets                             |   | ** **                                                                   | **9,947**      |   |                                |       | 9,549 |   |
|   Deferred                        Income Taxes - Current                       |   | ** **                                                                   | **57,245**     |   |                                |       | 57,912 |   |
|   Income                        Taxes - Current                                |   | ** **                                                                   | **22,610**     |   |                                | ** ** | **-** |   |
|   Interest                        Receivable - Current                         |   | ** **                                                                   | **7,202**      |   |                                |       | 7,782 |   |
|   Other                                                                        |   | ** **                                                                   | **11,939**     |   |                                |       | 9,982 |   |
| **    Total                        Current Assets**                  |   | ** **                                                                   | **454,732**    |   |                                |       | 455,910 |   |
|                                                                                     |   |                                                                         |           |   |                                |       |   |   |
| **Regulatory                        and Other Assets**                                   |   |                                                                         |           |   |                                |       |   |   |
|   Transition                        Recovery Asset                             |   | ** **                                                                   | **67,421**     |   |                                |       | 101,626 |   |
|   Income                        Taxes Recoverable Through Future Revenues      |   | ** **                                                                   | **32,061**     |   |                                |       | 34,749 |   |
|   Other                        Regulatory Assets                               |   | ** **                                                                   | **53,683**     |   |                                |       | 54,848 |   |
|   Other                        Assets                                          |   | ** **                                                                   | **36,612**     |   |                                |       | 33,240 |   |
| **    Total                        Regulatory and Other Assets**     |   | ** **                                                                   | **189,777**    |   |                                |       | 224,463 |   |
|                                                                                     |   |                                                                         |           |   |                                |       |   |   |
| **Total                        Assets**                                                  |   | **$**                                                                        | **3,196,062**  |   |                                | $          | 3,187,409 |   |

**(Continued)**

----

Table                of Contents

**UNISOURCE              ENERGY CORPORATION**

**COMPARATIVE              CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                  |   | June                        30,                                        |          |   | December                        31, |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|---------------|--------|-------------------------------------|--------|
|                                                                                                  |   | **2007**                                                               |          |   | **2006**                            |   |
|                                                                                                  |   | **(Unaudited)**                                         |          |
| **CAPITALIZATION                        AND OTHER LIABILITIES**                                       |   | -                        Thousands                        of Dollars - |          |
| **Capitalization**                                                                                    |   |                                                                   |          |   |                                |   |
|   Common                        Stock                                                       |   | **$**                                                                  | **700,870**   |   |                                | $      | 697,426 |   |
|   Accumulated                        Deficit                                                |   | ** **                                                             | **(26,345**   | **)**  |                                |   | (27,913 | ) |
|   Accumulated                        Other Comprehensive Loss                               |   | ** **                                                             | **(18,405**   | **)**  |                                |   | (15,364 | ) |
|   Common                        Stock Equity                                                |   | ** **                                                             | **656,120**   |   |                                |   | 654,149 |   |
|   Capital                        Lease Obligations                                          |   | ** **                                                             | **541,026**   |   |                                |   | 588,771 |   |
|   Long-Term                        Debt                                                     |   | ** **                                                             | **1,186,170** |   |                                |   | 1,171,170 |   |
| **    Total                        Capitalization**                               |   | ** **                                                             | **2,383,316** |   |                                |   | 2,414,090 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Current                        Liabilities**                                                        |   |                                                                   |          |   |                                |   |   |   |
|   Current                        Obligations under Capital Leases                           |   | ** **                                                             | **62,100**    |   |                                |   | 59,090 |   |
|   Borrowing                        Under Revolving Credit Facilities                        |   | ** **                                                             | **83,000**    |   |                                |   | 50,000 |   |
|   Current                        Maturities of Long-Term Debt                               |   | ** **                                                             | **6,000**     |   |                                |   | 6,000 |   |
|   Accounts                        Payable                                                   |   | ** **                                                             | **95,897**    |   |                                |   | 102,829 |   |
|   Income                        Taxes Payable                                               |   | ** **                                                             | **-**         |   |                                |   | 16,429 |   |
|   Interest                        Accrued                                                   |   | ** **                                                             | **37,333**    |   |                                |   | 52,392 |   |
|   Trading                        Liabilities - Derivative Instruments                       |   | ** **                                                             | **11,748**    |   |                                |   | 16,537 |   |
|   Accrued                        Taxes Other than Income Taxes                              |   | ** **                                                             | **35,413**    |   |                                |   | 35,431 |   |
|   Accrued                        Employee Expenses                                          |   | ** **                                                             | **20,719**    |   |                                |   | 22,886 |   |
|   Customer                        Deposits                                                  |   | ** **                                                             | **21,666**    |   |                                |   | 19,767 |   |
|   Current                        Regulatory Liabilities                                     |   | ** **                                                             | **12,018**    |   |                                |   | 10,707 |   |
|   Other                                                                                     |   | ** **                                                             | **4,462**     |   |                                |   | 3,852 |   |
| **    Total                        Current Liabilities**                          |   | ** **                                                             | **390,356**   |   |                                |   | 395,920 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Deferred                        Credits and Other Liabilities**                                     |   |                                                                   |          |   |                                |   |   |   |
|   Deferred                        Income Taxes - Noncurrent                                 |   | ** **                                                             | **143,115**   |   |                                |   | 126,883 |   |
|   Pension                        and Other Post-Retirement Benefits                         |   | ** **                                                             | **108,152**   |   |                                |   | 105,085 |   |
|   Regulatory                        Liability - Net Cost of Removal for Interim Retirements |   | ** **                                                             | **88,399**    |   |                                |   | 85,394 |   |
|   Other                        Regulatory Liabilities                                       |   | ** **                                                             | **15,403**    |   |                                |   | 9,609 |   |
|   Other                                                                                     |   | ** **                                                             | **67,321**    |   |                                |   | 50,428 |   |
| **    Total                        Deferred Credits and Other Liabilities**       |   | ** **                                                             | **422,390**   |   |                                |   | 377,399 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Commitments                        and Contingencies (Note 7)**                                     |   |                                                                   |          |   |                                |   |   |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Total                        Capitalization and Other Liabilities**                                 |   | **$**                                                                  | **3,196,062** |   |                                | $      | 3,187,409 |   |

**(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                                             |   |                                                                                                                         | -          |   |   |   | -           |        |   |   | 16,749        |   |   |          | -           |   |   |   | 16,749 |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Unrealized                        Loss on Cash Flow Hedges                                      |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                        of $705                        income taxes)                        |   |                                                                                                                         | -          |   |   |   | -           |        |   |   | -             |   |   |          | (1,076      | ) |   |   | (1,076 | ) |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Reclassification                        of Unrealized Gain on                                   |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Cash                        Flow                        Hedges to Net Income                    |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                        of                        $1,349 income taxes)                      |   |                                                                                                                         | -          |   |   |   | -           |        |   |   | -             |   |   |          | (2,057      | ) |   |   | (2,057 | ) |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |                             |   |
| Total                        Comprehensive Income                                               |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   | 13,616 |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Employee                        Benefit Obligations                                             |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Amortization                        of net actuarial loss and prior service cost                |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |
| included                        in                        net periodic benefit cost             |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| (net                        of $60                        income taxes)                         |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          | 92          |   |   |   | 92 |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Dividends                        Declared                                                       |   |                                                                                                                         | -          |   |   |   |        |        |   |   | (15,877       | )      |   |          |        |   |   |   | (15,877 | ) |
| Shares                        Issued                        under Stock Compensation Plans      |   |                                                                                                                         | 5          |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   | - |   |
| Shares                        Issued                        for Stock Options                   |   |                                                                                                                         | 80         |   |   |   | 1,345       |        |   |   |          |   |   |          |        |   |   |   | 1,345 |   |
| Stock                        Award                        Compensation Expense                  |   |                                                                                                                         |       |   |   |   | 1,659       |        |   |   |          |   |   |          |        |   |   |   | 1,659 |   |
| Tax                        Benefit                        Realized from Stock Options Exercised |   |                                                                                                                         | -          |   |   |   | 440         |        |   |   |          |   |   |          |        |   |   |   | 440 |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                            |   |                                                                                                                         |       |   |   |   |        |        |   |   |          |   |   |          |        |   |   |   |   |   |
| **Balances                        at June 30, 2007**                                            |   | ** **                                                                                                                   | **35,275** |   |   | **$**  | **700,870** |        |   | **$**  | **(26,345**   | **)**  |   | **$**         | **(18,405** | **)** |   | **$** | **656,120** |   |

----

Table                of Contents

**TUCSON              ELECTRIC POWER COMPANY**

**COMPARATIVE              CONDENSED CONSOLIDATED STATEMENTS OF              INCOME**

| Three                          Months                          Ended       |        |   |     | Six                          Months                          Ended         |                                            |
|----------------------------------------------------------------------------|-------------|--------|----------|----------------------------------------------------------------------------|-------------------------------------------------|
| June                          30,                                          |        |   |     | June                          30,                                          |                                            |
| **2007**                                                                   |        |   | **2006** |                                                                       |                                            |   | **2007** |   |   | **2006** |   |
| **(Unaudited)**                                                       |        |   |     | **(Unaudited)**                                                       |                                            |
| -                          Thousands                          of Dollars - |        |   |     | -                          Thousands                          of Dollars - |                                            |
|                                                                       |        |   |     |                                                                       | **Operating                          Revenues** |   |   |   |   |   |   |
| **$**                                                                      | **209,400** |   |     | $                                                                          | 208,093                                         |   |   Electric                          Retail Sales |   | **$** | **369,352** |   |   | $ | 357,027 |   |
| ** **                                                                 | **43,750**  |   |     |                                                                       | 32,165                                          |   |   Electric                          Wholesale Sales |   | ** ** | **93,217** |   |   |   | 88,645 |   |
| ** **                                                                 | **15,221**  |   |     |                                                                       | 9,371                                           |   |   Other                          Revenues |   | ** ** | **25,431** |   |   |   | 12,772 |   |
| ** **                                                                 | **268,371** |   |     |                                                                       | 249,629                                         |   | **    Total                          Operating Revenues** |   | ** ** | **488,000** |   |   |   | 458,444 |   |
|                                                                       |        |   |     |                                                                       |                                            |   |   |   |   |   |   |   |   |   |   |
|                                                                       |        |   |     |                                                                       |                                            |   | **Operating                          Expenses** |   |   |   |   |   |   |   |   |
| ** **                                                                 | **72,208**  |   |     |                                                                       | 69,142                                          |   |   Fuel |   | ** ** | **133,288** |   |   |   | 119,358 |   |
| ** **                                                                 | **39,162**  |   |     |                                                                       | 29,845                                          |   |   Purchased                          Power |   | ** ** | **57,017** |   |   |   | 43,473 |   |
| ** **                                                                 | **52,594**  |   |     |                                                                       | 49,824                                          |   |   Other                          Operations and Maintenance |   | ** ** | **111,724** |   |   |   | 91,994 |   |
| ** **                                                                 | **29,579**  |   |     |                                                                       | 28,231                                          |   |   Depreciation                          and Amortization |   | ** ** | **58,641** |   |   |   | 54,732 |   |
| ** **                                                                 | **19,219**  |   |     |                                                                       | 17,279                                          |   |   Amortization                          of Transition Recovery Asset |   | ** ** | **34,205** |   |   |   | 29,121 |   |
| ** **                                                                 | **10,189**  |   |     |                                                                       | 10,353                                          |   |   Taxes                          Other Than Income Taxes |   | ** ** | **20,606** |   |   |   | 20,840 |   |
| ** **                                                                 | **222,951** |   |     |                                                                       | 204,674                                         |   | **    Total                          Operating Expenses** |   | ** ** | **415,481** |   |   |   | 359,518 |   |
| ** **                                                                 | **45,420**  |   |     |                                                                       | 44,955                                          |   | **      Operating                          Income** |   | ** ** | **72,519** |   |   |   | 98,926 |   |
|                                                                       |        |   |     |                                                                       |                                            |   |   |   |   |   |   |   |   |   |   |
|                                                                       |        |   |     |                                                                       |                                            |   | **Other                          Income (Deductions)** |   |   |   |   |   |   |   |   |
| ** **                                                                 | **3,690**   |   |     |                                                                       | 4,301                                           |   |   Interest                          Income |   | ** ** | **7,404** |   |   |   | 8,590 |   |
| ** **                                                                 | **2,002**   |   |     |                                                                       | 1,309                                           |   |   Other                          Income |   | ** ** | **2,753** |   |   |   | 2,374 |   |
| ** **                                                                 | **(1,271**  | **)**  |     |                                                                       | (110                                            | ) |   Other                          Expense |   | ** ** | **(1,677** | **)** |   |   | (784 | ) |
| ** **                                                                 | **4,421**   |   |     |                                                                       | 5,500                                           |   | **    Total                          Other Income (Deductions)** |   | ** ** | **8,480** |   |   |   | 10,180 |   |
|                                                                       |        |   |     |                                                                       |                                            |   |   |   |   |   |   |   |   |   |   |
|                                                                       |        |   |     |                                                                       |                                            |   | **Interest                          Expense** |   |   |   |   |   |   |   |   |
| ** **                                                                 | **12,676**  |   |     |                                                                       | 13,055                                          |   |   Long-Term                          Debt |   | ** ** | **25,115** |   |   |   | 25,704 |   |
| ** **                                                                 | **16,120**  |   |     |                                                                       | 18,525                                          |   |   Interest                          on Capital Leases |   | ** ** | **32,266** |   |   |   | 37,064 |   |
| ** **                                                                 | **1,399**   |   |     |                                                                       | 897                                             |   |   Other                          Interest Expense |   | ** ** | **2,958** |   |   |   | 1,866 |   |
| ** **                                                                 | **(992**    | **)**  |     |                                                                       | (1,140                                          | ) |   Interest                          Capitalized |   | ** ** | **(1,867** | **)** |   |   | (2,761 | ) |
| ** **                                                                 | **29,203**  |   |     |                                                                       | 31,337                                          |   | **    Total                          Interest Expense** |   | ** ** | **58,472** |   |   |   | 61,873 |   |
|                                                                       |        |   |     |                                                                       |                                            |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                 | **20,638**  |   |     |                                                                       | 19,118                                          |   | **Income                          Before Income Taxes** |   | ** ** | **22,527** |   |   |   | 47,233 |   |
| ** **                                                                 | **8,367**   |   |     |                                                                       | 7,898                                           |   |   Income                          Tax Expense |   | ** ** | **9,435** |   |   |   | 19,426 |   |
|                                                                       |        |   |     |                                                                       |                                            |   |   |   |   |   |   |   |   |   |   |
| **$**                                                                      | **12,271**  |   |     | $                                                                          | 11,220                                          |   | **Net                          Income** |   | **$** | **13,092** |   |   | $ | 27,807 |   |

----

Table                of Contents

**TUCSON              ELECTRIC POWER COMPANY**

**COMPARATIVE              CONDENSED CONSOLIDATED STATEMENTS OF CASH              FLOWS**

|                                                                                                          |   | Six                        Months                        Ended       |         |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------------|
|                                                                                                          |   | June                        30,                                 |         |
|                                                                                                          |   | **2007**                                                             |         |   | **2006** |   |
|                                                                                                          |   | **(Unaudited)**                                                 |         |
|                                                                                                          |   | -Thousands                        of                        Dollars- |         |
| **Cash                        Flows from Operating Activities**                                               |   |                                                                 |         |   |   |   |
|      Cash                        Receipts from Electric Retail Sales                 |   | **$**                                                                | **380,576**  |   |   | $ | 363,390 |   |
|      Cash                        Receipts from Electric Wholesale Sales              |   | ** **                                                           | **158,217**  |   |   |   | 132,098 |   |
|      Interest                        Received                                        |   | ** **                                                           | **8,476**    |   |   |   | 9,522 |   |
|      Sale                        of Excess Emission Allowances                       |   | ** **                                                           | **6,920**    |   |   |   | 3,716 |   |
|      Other                        Cash Receipts                                      |   | ** **                                                           | **22,060**   |   |   |   | 2,617 |   |
|      Fuel                        Costs Paid                                          |   | ** **                                                           | **(124,525** | **)** |   |   | (115,683 | ) |
|      Purchased                        Power Costs Paid                               |   | ** **                                                           | **(106,577** | **)** |   |   | (73,503 | ) |
|      Wages                        Paid, Net of Amounts Capitalized                   |   | ** **                                                           | **(47,277**  | **)** |   |   | (38,880 | ) |
|      Payment                        of Other Operations and Maintenance Costs        |   | ** **                                                           | **(74,181**  | **)** |   |   | (59,782 | ) |
|      Capital                        Lease Interest Paid                              |   | ** **                                                           | **(33,879**  | **)** |   |   | (39,853 | ) |
|      Taxes                        Paid, Net of Amounts Capitalized                   |   | ** **                                                           | **(54,389**  | **)** |   |   | (51,645 | ) |
|      Interest                        Paid, Net of Amounts Capitalized                |   | ** **                                                           | **(24,264**  | **)** |   |   | (21,834 | ) |
|      Income                        Taxes Paid                                        |   | ** **                                                           | **(16,017**  | **)** |   |   | (10,675 | ) |
|      Other                        Cash Payments                                      |   | ** **                                                           | **(1,937**   | **)** |   |   | (1,283 | ) |
| **Net                        Cash Flows – Operating Activities**                                        |   | ** **                                                           | **93,203**   |   |   |   | 98,205 |   |
|                                                                                                          |   |                                                                 |         |   |   |   |   |   |
| **Cash                        Flows from Investing Activities**                                               |   |                                                                 |         |   |   |   |   |   |
|      Capital                        Expenditures                                     |   | ** **                                                           | **(82,397**  | **)** |   |   | (81,635 | ) |
|      Payments                        for Investment in Springerville Lease Equity    |   | ** **                                                           | **-**        |   |   |   | (48,025 | ) |
|      Proceeds                        from Investment in Springerville Lease Debt     |   | ** **                                                           | **11,206**   |   |   |   | 10,028 |   |
|      Proceeds                        from Sale of Land                               |   | ** **                                                           | **642**      |   |   |   | - |   |
|      Other                        Cash Payments                                      |   | ** **                                                           | **(2,325**   | **)** |   |   | (1,004 | ) |
|      Other                        Cash  Receipts                           |   | ** **                                                           | **8**        |   |   |   | - |   |
| **Net                        Cash Flows - Investing Activities**                                              |   | ** **                                                           | **(72,866**  | **)** |   |   | (120,636 | ) |
|                                                                                                          |   |                                                                 |         |   |   |   |   |   |
| **Cash                        Flows from Financing Activities**                                               |   |                                                                 |         |   |   |   |   |   |
|      Proceeds                        from Borrowings under Revolving Credit Facility |   | ** **                                                           | **105,000**  |   |   |   | 105,000 |   |
|      Payments                        on Capital Lease Obligations                    |   | ** **                                                           | **(55,854**  | **)** |   |   | (50,538 | ) |
|      Payments                        on Borrowings under Revolving Credit Facility   |   | ** **                                                           | **(52,000**  | **)** |   |   | (45,000 | ) |
|      Other                        Cash Receipts                                      |   | ** **                                                           | **4,727**    |   |   |   | 9,197 |   |
|      Payment                        of Debt Issue/Retirement Costs                   |   | ** **                                                           | **(271**     | **)** |   |   | (140 | ) |
|      Other                        Cash Payments                                      |   | ** **                                                           | **(533**     | **)** |   |   | (494 | ) |
| **Net                        Cash Flows - Financing Activities**                                              |   | ** **                                                           | **1,069**    |   |   |   | 18,025 |   |
|                                                                                                          |   |                                                                 |         |   |   |   |   |   |
| Net                        Increase/(Decrease) in Cash and Cash Equivalents                                   |   | ** **                                                           | **21,406**   |   |   |   | (4,406 | ) |
| Cash                        and Cash                        Equivalents, Beginning of Year                    |   | ** **                                                           | **19,711**   |   |   |   | 53,433 |   |
| **Cash                        and Cash Equivalents, End of Period**                                           |   | **$**                                                                | **41,117**   |   |   | $ | 49,027 |   |

----

Table                of Contents

**TUCSON              ELECTRIC POWER COMPANY**

**COMPARATIVE              CONDENSED CONSOLIDATED BALANCE              SHEETS**

|                                                                                     |   | June                        30,                                        |           |   | December                        31, |       |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|----------------|--------|-------------------------------------|------------|
|                                                                                     |   | **2007**                                                               |           |   | **2006**                            |       |
|                                                                                     |   | **(Unaudited)**                                                   |           |
| **ASSETS**                                                                               |   | -                        Thousands                        of Dollars - |           |
| **Utility                        Plant**                                                 |   |                                                                   |           |   |                                |       |
|   Plant                        in Service                                      |   | **$**                                                                  | **3,084,547**  |   |                                | $          | 3,035,494 |   |
|   Utility                        Plant under Capital Leases                    |   | ** **                                                             | **701,631**    |   |                                |       | 701,631 |   |
|   Construction                        Work in Progress                         |   | ** **                                                             | **112,259**    |   |                                |       | 92,125 |   |
| **    Total                        Utility Plant**                   |   | ** **                                                             | **3,898,437**  |   |                                |       | 3,829,250 |   |
|   Less                        Accumulated Depreciation and Amortization        |   | ** **                                                             | **(1,482,337** | **)**  |                                |       | (1,446,229 | ) |
|   Less                        Accumulated Amortization of Capital Lease Assets |   | ** **                                                             | **(508,345**   | **)**  |                                |       | (495,634 | ) |
| **    Total                        Utility Plant - Net**             |   | ** **                                                             | **1,907,755**  |   |                                |       | 1,887,387 |   |
|                                                                                     |   |                                                                   |           |   |                                |       |   |   |
| **Investments                        and Other Property**                                |   |                                                                   |           |   |                                |       |   |   |
|   Investments                        in Lease Debt and Equity                  |   | ** **                                                             | **169,543**    |   |                                |       | 181,222 |   |
|   Other                                                                        |   | ** **                                                             | **33,878**     |   |                                |       | 30,161 |   |
| **    Total                        Investments and Other Property**  |   | ** **                                                             | **203,421**    |   |                                |       | 211,383 |   |
|                                                                                     |   |                                                                   |           |   |                                |       |   |   |
| **Current                        Assets**                                                |   |                                                                   |           |   |                                |       |   |   |
|   Cash                        and Cash Equivalents                             |   | ** **                                                             | **41,117**     |   |                                |       | 19,711 |   |
|   Trade                        Accounts Receivable                             |   | ** **                                                             | **90,326**     |   |                                |       | 97,512 |   |
|   Unbilled                        Accounts Receivable                          |   | ** **                                                             | **48,302**     |   |                                |       | 35,115 |   |
|   Allowance                        for Doubtful Accounts                       |   | ** **                                                             | **(16,493**    | **)**  |                                |       | (16,303 | ) |
|   Intercompany                        Accounts Receivable                      |   | ** **                                                             | **16,861**     |   |                                |       | 16,329 |   |
|   Materials                        and Fuel Inventory                          |   | ** **                                                             | **70,920**     |   |                                |       | 63,629 |   |
|   Current                        Regulatory Assets                             |   | ** **                                                             | **9,878**      |   |                                |       | 9,549 |   |
|   Income                        Tax Receivable                                 |   | ** **                                                             | **27,104**     |   |                                | ** ** | **-** |   |
|   Deferred                        Income Taxes - Current                       |   | ** **                                                             | **56,148**     |   |                                |       | 57,151 |   |
|   Interest                        Receivable - Current                         |   | ** **                                                             | **7,202**      |   |                                |       | 7,782 |   |
|   Trading                        Assets - Derivative Instrument                |   | ** **                                                             | **3,735**      |   |                                |       | 15,447 |   |
|   Other                                                                        |   | ** **                                                             | **10,532**     |   |                                |       | 8,833 |   |
| **    Total                        Current Assets**                  |   | ** **                                                             | **365,632**    |   |                                |       | 314,755 |   |
|                                                                                     |   |                                                                   |           |   |                                |       |   |   |
| **Regulatory                        and Other Assets**                                   |   |                                                                   |           |   |                                |       |   |   |
|   Transition                        Recovery Asset                             |   | ** **                                                             | **67,421**     |   |                                |       | 101,626 |   |
|   Income                        Taxes Recoverable Through Future Revenues      |   | ** **                                                             | **32,061**     |   |                                |       | 34,749 |   |
|   Other                        Regulatory Assets                               |   | ** **                                                             | **49,850**     |   |                                |       | 51,594 |   |
|   Other                        Assets                                          |   | ** **                                                             | **19,816**     |   |                                |       | 21,569 |   |
| **    Total                        Regulatory and Other Assets**     |   | ** **                                                             | **169,148**    |   |                                |       | 209,538 |   |
|                                                                                     |   |                                                                   |           |   |                                |       |   |   |
| **Total                        Assets**                                                  |   | **$**                                                                  | **2,645,956**  |   |                                | $          | 2,623,063 |   |

**(Continued)**

----

Table                of Contents

**TUCSON              ELECTRIC POWER COMPANY**

**COMPARATIVE              CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                  |   | June                        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                                                |   | ** **                                                             | **(205,852**  | **)**  |                                |   | (219,640 | ) |
|   Accumulated                        Other Comprehensive Loss                               |   | ** **                                                             | **(18,301**   | **)**  |                                |   | (15,260 | ) |
|   Common                        Stock Equity                                                |   | ** **                                                             | **565,461**   |   |                                |   | 554,714 |   |
|   Capital                        Lease Obligations                                          |   | ** **                                                             | **540,726**   |   |                                |   | 588,424 |   |
|   Long-Term                        Debt                                                     |   | ** **                                                             | **821,170**   |   |                                |   | 821,170 |   |
| **    Total                        Capitalization**                               |   | ** **                                                             | **1,927,357** |   |                                |   | 1,964,308 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Current                        Liabilities**                                                        |   |                                                                   |          |   |                                |   |   |   |
|   Current                        Obligations under Capital Leases                           |   | ** **                                                             | **62,006**    |   |                                |   | 58,999 |   |
|   Borrowing                        Under Revolving Credit Facility                          |   | ** **                                                             | **83,000**    |   |                                |   | 30,000 |   |
|   Accounts                        Payable                                                   |   | ** **                                                             | **69,455**    |   |                                |   | 69,019 |   |
|   Intercompany                        Accounts Payable                                      |   | ** **                                                             | **9,458**     |   |                                |   | 10,743 |   |
|   Income                        Taxes Payable                                               |   | ** **                                                             | **-**         |   |                                |   | 8,409 |   |
|   Interest                        Accrued                                                   |   | ** **                                                             | **30,652**    |   |                                |   | 45,613 |   |
|   Accrued                        Taxes Other than Income Taxes                              |   | ** **                                                             | **29,525**    |   |                                |   | 27,227 |   |
|   Accrued                        Employee Expenses                                          |   | ** **                                                             | **18,946**    |   |                                |   | 21,102 |   |
|   Trading                        Liabilities - Derivative Instruments                       |   | ** **                                                             | **7,213**     |   |                                |   | 11,163 |   |
|   Other                                                                                     |   | ** **                                                             | **16,310**    |   |                                |   | 14,278 |   |
| **    Total                        Current Liabilities**                          |   | ** **                                                             | **326,565**   |   |                                |   | 296,553 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Deferred                        Credits and Other Liabilities**                                     |   |                                                                   |          |   |                                |   |   |   |
|   Deferred                        Income Taxes - Noncurrent                                 |   | ** **                                                             | **166,523**   |   |                                |   | 155,253 |   |
|   Regulatory                        Liability - Net Cost of Removal for Interim Retirements |   | ** **                                                             | **81,933**    |   |                                |   | 79,876 |   |
|   Pension                        and Other Post-Retirement Benefits                         |   | ** **                                                             | **102,573**   |   |                                |   | 99,832 |   |
|   Other                                                                                     |   | ** **                                                             | **41,005**    |   |                                |   | 27,241 |   |
| **    Total                        Deferred Credits and Other Liabilities**       |   | ** **                                                             | **392,034**   |   |                                |   | 362,202 |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Commitments                        and Contingencies (Note 7)**                                     |   |                                                                   |          |   |                                |   |   |   |
|                                                                                                  |   |                                                                   |          |   |                                |   |   |   |
| **Total                        Capitalization and Other Liabilities**                                 |   | **$**                                                                  | **2,645,956** |   |                                | $      | 2,623,063 |   |

**(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                                                                                                                                                                                                                      |         |                                                                   | -           |   |    |   | -          |        |   |   | 13,092        |   |   |          | -           |   |   |   | 13,092 |   |
|                                                                                                                                                                                                                                                                     |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Unrealized                        Gain on Cash Flow Hedges (net                        of $705                        income taxes)                                                                                                                                      |    | -                                                                      |        |   |    | -      |       |        |   | -      |          |   |   | (1,076        | )      |   |   | (1,076 | )  |
|                                                                                                                                                                                                                                                                          |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |  |   |   |   |   |
| Reclassification                        of Unrealized Loss on Cash                        Flow                        Hedges to Net Income (net of $1,349 income                        taxes)                                                                      |         |                                                                   | -           |   |    |   | -          |        |   |   | -             |   |   |          | (2,057      | ) |   |   | (2,057 | ) |
|                                                                                                                                                                                                                                                                     |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| Employee                        Benefit ObligationsAmortization                        of net actuarial loss and                        prior                        service cost included in net periodic benefit cost (net of $60                        income taxes) |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          | 92          |   |   |   | 92 |   |
|                                                                                                                                                                                                                                                                     |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |                             |   |
| Total                        Comprehensive Income                                                                                                                                                                                                                        |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   | 10,051 |   |
|                                                                                                                                                                                                                                                                     |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
|                                                                                                                                                                                                                                                                     |         |                                                                   |        |   |    |   |       |        |   |   |          |   |   |          |        |   |   |   |   |   |
| **Balances                        at June 30, 2007**                                                                                                                                                                                                                     |         | **$**                                                                  | **795,971** |   |    | **$**  | **(6,357** | **)**       |   | **$**  | **(205,852**  | **)**  |   | **$**         | **(18,301** | **)** |   | **$** | **565,461** |   |

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Table                  of Contents

| **NOTES                            TO CONDENSED CONSOLIDATED FINANCIAL                            STATEMENTS** |   |
|----------------------------------------------------------------------------------------------------------------|--------|

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

**NOTE                2.  REGULATORY MATTERS**

**ACCOUNTING                FOR RATE REGULATION**

*Accounting for the Effects of Certain Types of Regulation*

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

----

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

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

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

**TEP                RATES                AND REGULATION**

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

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

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

| ·   | Demand-Side                          Management (DSM), renewable energy standards (RES), 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. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

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

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

**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)**

----

**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**

**NOTE                3.  DEBT AND CREDIT                FACILITIES**

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

**NOTE                4.  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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**                  **

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|                                                                                                                                                           | ** ** | **    Reportable                          Segments   ** | ** ** | ** ** | ** **           | ** ** | ** ** | ** **                                                             | ** ** | ** ** | ** UniSource** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------|----------------------|------------|------------|------------------------------------------------------------------------|------------|------------|---------------------|------------|
| ** **                                                                                                                                                     | ** ** | ** TEP**                                                                              | ** ** | ** ** | **UNS****Gas ** | ** ** | ** ** | ** UNS****Electric**                                              | ** ** | ** ** | ** Other**     | ** ** | ** ** | **Reconciling****Adjustments ** | ** ** | ** ** | **Energy****Consolidated ** |   |
|  Income                        Statement                                                                                                                  |       |                                                                                       |       |       |                 |       |       |    -Millions                          of Dollars-  |       |       |                |       |   |   |   |
| **Three                          months ended June 30, 2007:**                                                                                                 |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |       | $                                                                                          | 266        |       |                 | $          | 23         |                                                                   |       | $          | 41                  |       |   | $ | - |   |   | $ | - |   |   | **$** | **330** |   |
| Operating                          Revenues -                          Intersegment                                                                            |       |                                                                                       | 2          |       |                 |       | -          |                                                                   |       |       | -                   |       |   |   | 4 |   |   |   | (6 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |       |                                                                                       | 21         |       |                 |       | (2         | )                                                                      |       |       | 3                   |       |   |   | (2 | ) |   |   | - |   |   | ** ** | **20** |   |
| Net                          Income (Loss)                                                                                                                     |       |                                                                                       | 12         |       |                 |       | (1         | )                                                                      |       |       | 2                   |       |   |   | (1 | ) |   |   | - |   |   | ** ** | **12** |   |
|                                                                                                                                                           |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Three                          months ended June 30, 2006:**                                                                                                 |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |       | $                                                                                          | 250        |       |                 | $          | 26         |                                                                   |       | $          | 39                  |       |   | $ | - |   |   | $ | - |   |   | **$** | **315** |   |
| Operating                          Revenues -                          Intersegment                                                                            |       |                                                                                       | -          |       |                 |       | -          |                                                                   |       |       | -                   |       |   |   | 4 |   |   |   | (4 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |       |                                                                                       | 19         |       |                 |       | (2         | )                                                                      |       |       | 2                   |       |   |   | (2 | ) |   |   | - |   |   | ** ** | **17** |   |
| Net                          Income (Loss)                                                                                                                     |       |                                                                                       | 11         |       |                 |       | (1         | )                                                                      |       |       | 1                   |       |   |   | (1 | ) |   |   | - |   |   | ** ** | **10** |   |
|                                                                                                                                                           |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Six                          months ended June 30, 2007:**                                                                                                   |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |       | $                                                                                          | 485        |       |                 | $          | 86         |                                                                   |       | $          | 76                  |       |   | $ | - |   |   | $ | - |   |   | **$** | **647** |   |
|   Operating                          Revenues - Intersegment                                                                                         |       |                                                                                       | 3          |       |                 |       | -          |                                                                   |       |       | -                   |       |   |   | 8 |   |   |   | (11 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |       |                                                                                       | 23         |       |                 |       | 6          |                                                                   |       |       | 3                   |       |   |   | (3 | ) |   |   | - |   |   | ** ** | **29** |   |
| Net                          Income (Loss)                                                                                                                     |       |                                                                                       | 13         |       |                 |       | 3          |                                                                   |       |       | 2                   |       |   |   | (1 | ) |   |   | - |   |   | ** ** | **17** |   |
|                                                                                                                                                           |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Six                          months ended June 30, 2006:**                                                                                                   |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                          Revenues -                          External                                                                                |       | $                                                                                          | 457        |       |                 | $          | 90         |                                                                   |       | $          | 74                  |       |   | $ | - |   |   | $ | - |   |   | **$** | **621** |   |
|   Operating                          Revenues - Intersegment                                                                                         |       |                                                                                       | 1          |       |                 |       | -          |                                                                   |       |       | -                   |       |   |   | 7 |   |   |   | (8 | ) |   | ** ** | **-** |   |
| Income                          (Loss) from                          Continuing    Operations                          Before Income Taxes |       |                                                                                       | 47         |       |                 |       | 6          |                                                                   |       |       | 3                   |       |   |   | (6 | ) |   |   | - |   |   | ** ** | **50** |   |
| Discontinued                          Operations - Net of                          Tax                                                                         |       | -                                                                                          |       |       |                 | -          |       |                                                                   |       | -          |                |       |   | (3 | ) |   |   | - |   |   | ** ** | **(3** | **)** |
| Net                          Income (Loss)                                                                                                                     |       |                                                                                       | 28         |       |                 |       | 3          |                                                                   |       |       | 2                   |       |   |   | (6 | ) |   |   | - |   |   | ** ** | **27** |   |
|                                                                                                                                                           |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |    |
|                            **Balance                        Sheet**                                                                             |       |                                                                                       |       |       |                 |       |       |                                                                   |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                              Total Assets, June 30, 2007                                                                              |       | $                                                                                          | 2,646      |       |                 | $          | 244        |                                                                   |       | $          | 221                 |       |   | $ | 1,024 |   |   | $ | (939 | ) |   | $ | 3,196 |   |
|                              Total Assets, December 31, 2006                                                                          |       |                                                                                       | 2,623      |       |                 |       | 253        |                                                                   |       |       | 195                 |       |   |   | 1,038 |   |   |   | (922 | ) |   |   | 3,187 |   |

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

**TEP                INTEREST RATE SWAP**

**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 June 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    | Six                          Months                          Ended |
|   | June                          30,                                       | June                          30,                                  |
|   | **2007**                                                                | **2006**                                                           | **2007** | **2006** |
|   | -Millions                          of                          Dollars- |

| Gain                          (Loss)                          on Forward Power Sales & Purchases                                                 |   | **$**      | **-**   |   |   | $      | -   |   |   | **$**      | **(1)** |   |   | $      | 2   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|--------|--------|-----|--------|--------|------------|---------|--------|--------|--------|---------------|--------|
| Loss                          on Gas                          Price Swaps                                                                            |   | ** ** | **(6)** |   |   |   | (7) |   |   | ** ** | **(2)** |   |   |   | (14)          |   |
|       Pre-Tax                          Loss Recorded in OCI                                                            |   | **$**      | **(6)** |   |   | $      | (7) |   |   | **$**      | **(3)** |   |   | $      | (12)          |   |
| After                          Tax                          Loss on Cash Flow Hedges Recorded in OCI                                                 |   | **$**      | **(4)** |   |   | $      | (4) |   |   | **$**      | **(2)** |   |   | $      | (7)           |   |
|  Reclassification                          of Unrealized Gain on Cash Flow    Hedges                          to Net Income |   | **$**      | **-**   |   |   | $      | -   |   |   | **$**      | **3**   |   |   | $      | -             |   |

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**Mark-to-Market                Transactions**

|   |                                                                    |                                                               |
|--------|-------------------------------------------------------------------------|--------------------------------------------------------------------|
|   | Three                          Months                          Ended    | Six                          Months                          Ended |
|   | June                          30,                                       | June                          30,                                  |
|   | **2007**                                                                | **2006**                                                           | **2007** | **2006** |
|   | -Millions                          of                          Dollars- |

| Gain                          (Loss)                          on Forward Power Sales                  |   | **$**      | **1**   |   |   | $      | 1   |   |   | **$**      | **(8)** |   |   | $      | 1   |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|--------|--------|-----|--------|--------|------------|---------|--------|--------|--------|-----|--------|
|  Gain                          (Loss) on Forward Power Purchases                                 |   | ** ** | **(1)** |   |   |   | (2) |   |   | ** ** | **8**   |   |   |   | (1) |   |
|       Pre-Tax                          Gain (Loss) Recorded in Earnings |   | **$**      | **-**   |   |   | $      | (1) |   |   | **$**      | **-**   |   |   | $      | -   |   |

|                                                                                       |       |       |                                                                     |                                                                                                  |       |       |                                                   |       |
|--------------------------------------------------------------------------------------------|------------|------------|--------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------|------------|--------------------------------------------------------|------------|
|                                                                                       |       |       | **June                          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               |       | **$**      | **2**                                                                    |                                                                                                  |       | **$**      | **2**                                                  |       |   | $ | 9 |   |   | $ | 6 |   |
|    Derivative                          Liabilities – Current          |       | ** ** | **(2)**                                                                  |                                                                                                  |       | ** ** | **(5)**                                                |       |   |   | (9) |   |   |   | (3) |   |
|       Net                          Current Derivative Assets |       | **$**      | **-**                                                                    |                                                                                                  |       | **$**      | **(3)**                                                |       |   | $ | - |   |   | $ | 3 |   |
|                                                                                       |       |       |                                                                     |                                                                                                  |       |       |                                                   |       |   |   |   |   |   |   |   |   |
|    Derivative                          Liabilities – Noncurrent       |       | **$**      | **-**                                                                    |                                                                                                  |       | **$**      | **(1)**                                                |       |   | $ | - |   |   | $ | (1) |   |

**UNS                ELECTRIC POWER SUPPLY TRANSACTIONS**

**MEG                TRADING                TRANSACTIONS**

|                                                                                    |   |                                                                    |    |   |                                  |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|---------|--------|---------------------------------------|--------|
|                                                                                    |   | June                          30,                                       |    |   | December                          31, |   |
|                                                                                    |   | **2007**                                                                |    |   | **2006**                              |   |
|                                                                                    |   | -Millions                          of                          Dollars- |    |
|    Trading                          Assets – Current               |   | **$**                                                                   | **13**  |   |                                  | $      | 11 |   |
|    Trading                          Liabilities – Current          |   | ** **                                                              | **(4)** |   |                                  |   | (5) |   |
|       Net                          Current Trading Assets |   | **$**                                                                   | **9**   |   |                                  | $      | 6 |   |

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**NOTE                        6.  INCOME AND OTHER                        TAXES**

**INCOME                TAXES**

|                                                                                                                               |   | **UniSource                          Energy**                        |      |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-----------|
|                                                                                                                               |   | Three                          Months                          Ended |      |   | Six                          Months                          Ended |   |
|                                                                                                                               |   | June                          30,                                    |      |   | June                          30, |   |
|                                                                                                                               |   | **2007**                                                             |      |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                               |   |                                                                 |      |   | -Thousands                          of                          Dollars - |   |   |   |   |
|                                                                                                                               |   |                                                                 |      |   |   |   |   |   |   |   |   |   |
| **Federal                          Income Tax Expense at Statutory Rate**                                                          |   | **$**                                                                | **6,956** |   |   | $ | 5,988 |   |   | **$** | **10,044** |   |   | $ | 17,634 |   |
|    State                          Income Tax Expense, Net of Federal Deduction                                      |   | ** **                                                           | **915**   |   |   |   | 787 |   |   | ** ** | **1,320** |   |   |   | 2,326 |   |
|    Depreciation                          Differences (Flow Through Basis)                                           |   | ** **                                                           | **696**   |   |   |   | 662 |   |   | ** ** | **1,391** |   |   |   | 1,325 |   |
|    Amortization                          of Excess Deferred Income Tax                                              |   | ** **                                                           | **(64**   | **)** |   |   | (180 | ) |   | ** ** | **(129** | **)** |   |   | (180 | ) |
|    Tax                          Credits                                                                             |   | ** **                                                           | **(139**  | **)** |   |   | (167 | ) |   | ** ** | **(278** | **)** |   |   | (429 | ) |
|    Other                                                                                                            |   | ** **                                                           | **(288**  | **)** |   |   | 21 |   |   | ** ** | **(401** | **)** |   |   | 241 |   |
| **Total                          Federal and State Income Tax Expense Before****Discontinued                          Operations** |   | **$**                                                                | **8,076** |   |   | $ | 7,111 |   |   | **$** | **11,947** |   |   | $ | 20,917 |   |

|                                                                                          |   | **TEP**                                                              |      |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-----------|
|                                                                                          |   | Three                          Months                          Ended |      |   | Six                          Months                          Ended |   |
|                                                                                          |   | June                          30,                                    |      |   | June                          30, |   |
|                                                                                          |   | **2007**                                                             |      |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                          |   |                                                                 |      |   | -Thousands                          of                          Dollars - |   |   |   |   |
|                                                                                          |   |                                                                 |      |   |   |   |   |   |   |   |   |   |
| **Federal                          Income Tax Expense at Statutory Rate**                     |   | **$**                                                                | **7,222** |   |   | $ | 6,691 |   |   | **$** | **7,885** |   |   | $ | 16,532 |   |
|    State                          Income Tax Expense, Net of Federal Deduction |   | ** **                                                           | **949**   |   |   |   | 879 |   |   | ** ** | **1,036** |   |   |   | 2,173 |   |
|    Depreciation                          Differences (Flow Through Basis)      |   | ** **                                                           | **696**   |   |   |   | 662 |   |   | ** ** | **1,391** |   |   |   | 1,325 |   |
|    Amortization                          of Excess Deferred Income Tax         |   | ** **                                                           | **(64**   | **)** |   |   | (180 | ) |   | ** ** | **(129** | **)** |   |   | (180 | ) |
|    Tax                          Credits                                        |   | ** **                                                           | **(139**  | **)** |   |   | (167 | ) |   | ** ** | **(278** | **)** |   |   | (429 | ) |
|    Other                                                                       |   | ** **                                                           | **(297**  | **)** |   |   | 13 |   |   | ** ** | **(470** | **)** |   |   | 5 |   |
| **Total                          Federal and State Income Tax Expense**                       |   | **$**                                                                | **8,367** |   |   | $ | 7,898 |   |   | **$** | **9,435** |   |   | $ | 19,426 |   |

**ADOPTION                OF                FIN 48**

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

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**OTHER                TAX                MATTERS**

**NOTE                7.  COMMITMENTS AND                CONTINGENCIES**

**TEP  COMMITMENTS**

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

**UNS                ELECTRIC COMMITMENTS**

**UNS                GAS                COMMITMENTS**

**TEP                CONTINGENCIES**

**Claims                Related to San Juan Coal Company**

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Table                    of Contents

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**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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Table                    of Contents

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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                          and equipment                          lease payments for UNS Gas and UNS                          Electric. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE                8.  EMPLOYEE BENEFITS                PLANS**

**PENSION                BENEFIT PLANS**

**OTHER                POSTRETIREMENT BENEFIT PLANS**

*Employers’Accounting for Postretirement Benefits Other Than Pensions*

**COMPONENTS                OF NET PERIODIC BENEFIT COST**

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

----

|                                                                            |   | **Pension                          Benefits**                        |    |   | **Other                          Postretirement****Benefits**            |   |
|---------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------------|--------|
|                                                                            |   | Three                          Months                          Ended |    |   | Three                          Months                          Ended     |   |
|                                                                            |   | June                          30,                                    |    |   | June                          30,                                        |   |
|                                                                            |   | **2007**                                                             |    |   | **2006**                                                                 |   |   | **2007** |   |   | **2006** |   |
|                                                                            |   |                                                                 |    |   | -Millions                          of                          Dollars - |   |   |   |   |
|                                                                            |   |                                                                 |    |   |                                                                     |   |   |   |   |   |   |   |
| **Components                          of Net Periodic Benefit Cost**            |   |                                                                 |    |   |                                                                     |   |   |   |   |   |   |   |
| Service                          Cost                                           |   | **$**                                                                | **2**   |   |                                                                     | $      | 2 |   |   | **$** | **-** |   |   | $ | - |   |
|    Interest                          Cost                        |   | ** **                                                           | **3**   |   |                                                                     |   | 3 |   |   | ** ** | **1** |   |   |   | 1 |   |
|    Expected                          Return on Plan Assets       |   | ** **                                                           | **(3)** |   |                                                                     |   | (4) |   |   | ** ** | **-** |   |   |   | - |   |
|    Prior                          Service Cost Amortization      |   | ** **                                                           | **1**   |   |                                                                     |   | 1 |   |   | ** ** | **-** |   |   |   | (1) |   |
|    Recognized                          Actuarial Loss            |   | ** **                                                           | **-**   |   |                                                                     |   | 1 |   |   | ** ** | **-** |   |   |   | 1 |   |
| **Net                          Periodic Benefit                          Cost** |   | **$**                                                                | **3**   |   |                                                                     | $      | 3 |   |   | **$** | **1** |   |   | $ | 1 |   |

|                                                                            |   | **Pension                          Benefits**                      |    |   | **Other                          Postretirement****Benefits**            |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------------|--------|
|                                                                            |   | Six                          Months                          Ended |    |   | Six                          Months                          Ended       |   |
|                                                                            |   | June                          30,                                  |    |   | June                          30,                                        |   |
|                                                                            |   | **2007**                                                           |    |   | **2006**                                                                 |   |   | **2007** |   |   | **2006** |   |
|                                                                            |   |                                                               |    |   | -Millions                          of                          Dollars - |   |   |   |   |
|                                                                            |   |                                                               |    |   |                                                                     |   |   |   |   |   |   |   |
| **Components                          of Net Periodic Benefit Cost**            |   |                                                               |    |   |                                                                     |   |   |   |   |   |   |   |
| Service                          Cost                                           |   | **$**                                                              | **4**   |   |                                                                     | $      | 4 |   |   | **$** | **1** |   |   | $ | 1 |   |
|    Interest                          Cost                        |   | ** **                                                         | **6**   |   |                                                                     |   | 6 |   |   | ** ** | **2** |   |   |   | 2 |   |
|    Expected                          Return on Plan Assets       |   | ** **                                                         | **(7)** |   |                                                                     |   | (7) |   |   | ** ** | **-** |   |   |   | - |   |
|    Prior                          Service Cost Amortization      |   | ** **                                                         | **1**   |   |                                                                     |   | 1 |   |   | ** ** | **(1)** |   |   |   | (1) |   |
|    Recognized                          Actuarial Loss            |   | ** **                                                         | **1**   |   |                                                                     |   | 2 |   |   | ** ** | **-** |   |   |   | 1 |   |
| **Net                          Periodic Benefit                          Cost** |   | **$**                                                              | **5**   |   |                                                                     | $      | 6 |   |   | **$** | **2** |   |   | $ | 3 |   |

**NOTE                9.  SHARE-BASED COMPENSATION                PLANS**

**STOCK                OPTIONS**

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

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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                               |

|                                                                                                                                                          |   | **Six                          Months Ended June 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                                                                                               |   |                                                            | 1,388,328 |   |   | $ | 18.59 |   |   |   | 193,737 |   |   | $ | 7.38 |
| Granted                                                                                                                                                       |   |                                                            | 184,260 |   |   | $ | 37.88 |   |   |   | 184,260 |   |   | $ | 8.13 |
| Exercised                          (or Vested)                                                                                                                |   |                                                            | (80,324 | ) |   | $ | 16.74 |   |   |   | (49,039 | ) |   | $ | 7.39 |
| Forfeited                                                                                                                                                     |   |                                                            | (234 | ) |   | $ | 12.28 |   |   |   | - |   |   |   | - |
| Options                          Outstanding, June 30, 2007                                                                                                   |   |                                                            | 1,492,030 |   |   | $ | 21.07 |   |   |   | 328,958 |   |   | $ | 7.80 |
| Options                          Exercisable, June 30, 2007                                                                                                   |   |                                                            | 1,163,072 |   |   | $ | 17.15 |   |   |   |   |   |   |   |   |
|                                                                                                                                                          |   |                                                            |   |   |
| Weighted                          Average Remaining Contractual Life at June 30, 2007:                                                                        |   |                                                            | 5.0                          years |
| Weighted                          Average Remaining Contractual Life of Exercisable Shares                          at June 30,                          2007 |   |                                                            | 3.8                          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                 | 508,826                                          | 2.5                          years | $14.31 | 508,826 | $14.31 |
| $16.78                          -                          $18.84                 | 588,540                                          | 4.5                          years | $18.02 | 588,540 | $18.02 |
| $30.55                          -                          $37.88                 | 394,664                                          | 9.2                          years | $34.35 |   65,706 | $31.31 |

**PERFORMANCE                SHARES**

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

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**RESTRICTED                STOCK UNITS**

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

**NOTE                10.  UNISOURCE ENERGY EARNINGS PER SHARE                (EPS)**

|                                                                                                                                                                                                                       |   | Three                          Months                          Ended |       |   | Six                          Months                          Ended |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|------------|--------|--------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                       |   | June                          30,                                    |       |   | June                          30,                                  |   |
|                                                                                                                                                                                                                       |   | **2007**                                                             |       |   | **2006**                                                           |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                       |   | -                          In                          Thousands -   |       |   | -                          In                          Thousands - |   |
| Numerator:                                                                                                                                                                                                                 |   |                                                                 |       |   |                                                               |   |   |   |   |   |   |   |
| Net                          Income                                                                                                                                                                                        |   | **$**                                                                | **11,806** |   |                                                               | $      | 9,998 |   |   | **$** | **16,749** |   |   | $ | 26,820 |   |
| Assumed                          Conversion of                          Convertible Senior Notes – reduced        interest                          expense (after-tax) |   | ** **                                                           | **1,097**  |   |                                                               |   | 1,097 |   |   | ** ** | **-** |   |   |   | 2,195 |   |
| Adjusted                          Numerator                                                                                                                                                                                |   | **$**                                                                | **12,903** |   |                                                               | $      | 11,095 |   |   | **$** | **16,749** |   |   | $ | 29,015 |   |
|                                                                                                                                                                                                                       |   |                                                                 |       |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Denominator:                                                                                                                                                                                                               |   |                                                                 |       |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average                          Shares of Common Stock Outstanding:                                                                                                                                              |   |                                                                 |       |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
|    Common                          Shares Issued                                                                                                                                                            |   | ** **                                                           | **35,251** |   |                                                               |   | 35,051 |   |   | ** ** | **35,232** |   |   |   | 34,989 |   |
|    Fully                          Vested Deferred Stock Units                                                                                                                                               |   | ** **                                                           | **221**    |   |                                                               |   | 194 |   |   | ** ** | **215** |   |   |   | 192 |   |

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

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|                                                                                                                                                             |   |       |       |   |   |   |   |   |   |       |       |   |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|--------|--------|--------|--------|--------|------------|------------|--------|--------|--------|--------|--------|
| Total                          Weighted-average Shares of Common Stock Outstanding                                                                               |   | ** ** | **35,472** |   |   |   | 35,245 |   |   | ** ** | **35,447** |   |   |   | 35,181 |   |
| Effect                          of                          Dilutive Securities:                                                                                 |   |       |       |   |   |   |   |   |   |       |       |   |   |   |   |   |
| Convertible                          Senior Notes                                                                                                                |   | ** ** | **4,000**  |   |   |   | 4,000  |   |   | ** ** | **-**      |   |   |   | 4,000  |   |
| Options                          and                          Stock Issuable under Employee Benefit Plans and the Directors’                          Plan |   | ** ** | **615**    |   |   |   | 550    |   |   | ** ** | **611**    |   |   |   | 584    |   |
| Total                          Shares                                                                                                                            |   | ** ** | **40,087** |   |   |   | 39,795 |   |   | ** ** | **36,058** |   |   |   | 39,765 |   |

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

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

**NOTE                12.  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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**NOTES                                    TO                                    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

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

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**NOTE                13.  SUPPLEMENTAL CASH FLOW                INFORMATION**

|                                                                                                                                                     |   | **UniSource                          Energy**                            |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|-------------|
|                                                                                                                                                     |   | Six                          Months                          Ended       |        |
|                                                                                                                                                     |   | June                          30,                                        |        |
|                                                                                                                                                     |   | **2007**                                                                 |        |   | **2006** |   |
|                                                                                                                                                     |   | -Thousands                          of                          Dollars- |        |
|                                                                                                                                                     |   |                                                                     |        |   |   |   |
|  **Net                          Income**                                                                                                            |   | **$**                                                                    | **16,749**  |   |   | $ | 26,820 |   |
| **Adjustments                          to Reconcile Net Income**                                                                                         |   |                                                                     |        |   |   |   |   |   |
|  **To Net Cash Flows**                                                                                                                              |   |                                                                     |        |   |   |   |   |   |
|   Discontinued                          Operations –                          Net of Tax                                                 |   | ** **                                                               | **-**       |   |   |   | 2,669 |   |
|      Depreciation                          and Amortization Expense                                                             |   | ** **                                                               | **68,981**  |   |   |   | 63,437 |   |
|      Depreciation                          Recorded to Fuel and Other O&M Expense                                           |   | ** **                                                               | **3,482**   |   |   |   | 3,869 |   |
|      Amortization                          of Transition Recovery Asset                                                         |   | ** **                                                               | **34,205**  |   |   |   | 29,121 |   |
|      Net                          Unrealized Loss (Gain) on TEP Forward Electric Sales                                          |   | ** **                                                               | **7,940**   |   |   |   | (1,118 | ) |
|      Net                          Unrealized Loss (Gain) on TEP Forward Electric Purchases                                      |   | ** **                                                               | **(7,655**  | **)** |   |   | 970 |   |
|      Net                          Unrealized Loss on MEG Trading Activities                                                     |   | ** **                                                               | **2,106**   |   |   |   | 2,945 |   |
|      Amortization                          of Deferred Debt-Related Costs included in Interest                          Expense |   | ** **                                                               | **1,927**   |   |   |   | 2,343 |   |
| Provision                          for Bad Debts                                                                                                         |   | ** **                                                               | **1,371**   |   |   |   | 1,794 |   |
|      Deferred                          Income Taxes                                                                             |   | ** **                                                               | **20,582**  |   |   |   | 10,701 |   |
|      Pension                          and Postretirement Expense                                                                |   | ** **                                                               | **7,221**   |   |   |   | 8,799 |   |
|      Pension                          and Postretirement Funding                                                                |   | ** **                                                               | **(2,316**  | **)** |   |   | (8,885 | ) |
|      Stock                          Based Compensation Expense                                                                  |   | ** **                                                               | **1,809**   |   |   |   | 1,435 |   |
|      Excess                          Tax Benefit from Stock Option Exercises                                                    |   | ** **                                                               | **(440**    | **)** |   |   | (869 | ) |
|      Changes                          in Assets and Liabilities which Provided (Used)                                           |   |                                                                     |        |   |   |   |   |   |
|        Cash                          Exclusive of Changes Shown Separately                                            |   |                                                                     |        |   |   |   |   |   |
|          Accounts                          Receivable                                                       |   | ** **                                                               | **13,226**  |   |   |   | (18,733 | ) |
|          Materials                          and Fuel Inventory                                              |   | ** **                                                               | **(7,580**  | **)** |   |   | (2,969 | ) |
|          Over/Under                          Recovered Purchased Gas Cost                                   |   | ** **                                                               | **1,311**   |   |   |   | 9,344 |   |
|          Accounts                          Payable                                                          |   | ** **                                                               | **(6,932**  | **)** |   |   | (16,143 | ) |
|          Interest                          Accrued                                                          |   | ** **                                                               | **(2,822**  | **)** |   |   | (2,035 | ) |
|          Income                          Tax Receivable/Payable                                             |   | ** **                                                               | **(25,661** | **)** |   |   | (2,775 | ) |
|          Accrued                          Taxes Other Than Income Taxes                                     |   | ** **                                                               | **(18**     | **)** |   |   | 724 |   |
|      Other                                                                                                                      |   | ** **                                                               | **(8,040**  | **)** |   |   | 16,244 |   |
|      Net                          Cash Used by Operating Activities of Discontinued                          Operations         |   | ** **                                                               | **-**       |   |   |   | (2,710 | ) |
| **Net                          Cash Flows – Operating Activities**                                                                                 |   | **$**                                                                    | **119,446** |   |   | $ | 124,978 |   |

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

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|                                                                                                                    |   | **TEP**                                                                  |        |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|-------------|
|                                                                                                                    |   | Six                          Months                          Ended       |        |
|                                                                                                                    |   | June                          30,                                        |        |
|                                                                                                                    |   | **2007**                                                                 |        |   | **2006** |   |
|                                                                                                                    |   | -Thousands                          of                          Dollars- |        |
|                                                                                                                    |   |                                                                     |        |   |   |   |
| **Net                          Income**                                                                                 |   | **$**                                                                    | **13,092**  |   |   | $ | 27,807 |   |
| **Adjustments                          to Reconcile Net Income**                                                        |   |                                                                     |        |   |   |   |   |   |
|  **To Net Cash Flows**                                                                                             |   |                                                                     |        |   |   |   |   |   |
|      Depreciation                          and Amortization Expense                            |   | ** **                                                               | **58,641**  |   |   |   | 54,732 |   |
|      Depreciation                          Recorded to Fuel and Other O&M Expense          |   | ** **                                                               | **2,749**   |   |   |   | 3,266 |   |
|      Amortization                          of Transition Recovery Asset                        |   | ** **                                                               | **34,205**  |   |   |   | 29,121 |   |
|      Net                          Unrealized Loss (Gain) on TEP Forward Electric Sales         |   | ** **                                                               | **7,940**   |   |   |   | (1,118 | ) |
|      Net                          Unrealized Loss (Gain) on TEP Forward Electric Purchases     |   | ** **                                                               | **(7,655**  | **)** |   |   | 1,284 |   |
|      Amortization                          of Deferred Debt-Related Costs included in Interest |   | ** **                                                               | **1,331**   |   |   |   | 1,709 |   |
|      Pension                          and Postretirement Expense                               |   | ** **                                                               | **6,342**   |   |   |   | 7,961 |   |
|      Pension                          and Postretirement Funding                               |   | ** **                                                               | **(2,484**  | **)** |   |   | (6,559 | ) |
|      Stock                          Based Compensation Expense                                 |   | ** **                                                               | **1,409**   |   |   |   | 1,133 |   |
|      Provision                          for Bad Debts                                          |   | ** **                                                               | **478**     |   |   |   | 848 |   |
|      Deferred                          Income Taxes                                            |   | ** **                                                               | **16,234**  |   |   |   | 7,247 |   |
|      Changes                          in Assets and Liabilities which Provided (Used)          |   |                                                                     |        |   |   |   |   |   |
|        Cash                          Exclusive of Changes Shown Separately           |   |                                                                     |        |   |   |   |   |   |
|          Accounts                          Receivable                      |   | ** **                                                               | **(6,289**  | **)** |   |   | (36,857 | ) |
|          Materials                          and Fuel Inventory             |   | ** **                                                               | **(7,291**  | **)** |   |   | (2,756 | ) |
|          Accounts                          Payable                         |   | ** **                                                               | **436**     |   |   |   | (2,816 | ) |
|          Interest                          Accrued                         |   | ** **                                                               | **(2,724**  | **)** |   |   | (2,197 | ) |
|          Income                          Tax Receivable/Payable            |   | ** **                                                               | **(22,412** | **)** |   |   | 1,504 |   |
|          Accrued                          Taxes Other Than Income Taxes    |   | ** **                                                               | **2,298**   |   |   |   | 2,363 |   |
|      Other                                                                                     |   | ** **                                                               | **(3,097**  | **)** |   |   | 11,533 |   |
| **Net                          Cash Flows – Operating Activities**                                                |   | **$**                                                                    | **93,203**  |   |   | $ | 98,205 |   |

**NOTE                14.  REVIEW BY INDEPENDENT REGISTERED PUBLIC                ACCOUNTING FIRM**

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Table                    of Contents

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

----

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

| · | operating                results during the second quarter and six months ended June 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 expiration of the full requirements contract with                Pinnacle West Marketing and Trading (PWMT) and to meet growing retail                energy demand; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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-DateJune                30,                2007 |   |   | EstimateFull                Year                2007 |   |
|----------------------------------------------|--------|-------------------------------------------------------------------------------|--------|--------|------------------------------------------------------|--------|
|                                         |   | -Millions                of                Dollars-                           |   |
| TEP                                          |   | $                                                                             | 82     |   |                                                 | $      | 199 |   |
| UNS                Gas                       |   |                                                                          | 11     |   |                                                 |   | 33 |   |
| UNS                Electric                  |   |                                                                          | 21     |   |                                                 |   | 40 |   |
| Other(1)                                     |   |                                                                          | 5      |   |                                                 |   | 27 |   |
| UniSource                Energy Consolidated |   | $                                                                             | 119    |   |                                                 | $      | 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****June                30,** |   |   | **Six                Months Ended****June                30,** |   |
|----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------|----------------------------------------------------------------|--------|
|                                                                                   |   | **2007**                                                         |   |   | **2006**                                                       |   |   | **2007** |   |   | **2006** |   |
|                                                                                   |   | -Millions                of                Dollars-              |   |   | -Millions                of                Dollars-            |   |
| TEP                                                                                    |   | $                                                                | 12     |   |                                                           | $      | 11 |   |   | $ | 13 |   |   | $ | 28 |   |
| UNS                Gas                                                                 |   |                                                             | (1     | )      |                                                           |   | (1 | ) |   |   | 3 |   |   |   | 3 |   |
| UNS                Electric                                                            |   |                                                             | 2      |   |                                                           |   | 1 |   |   |   | 2 |   |   |   | 2 |   |
| Other(1)                                                                               |   |                                                             | (1     | )      |                                                           |   | (1 | ) |   |   | (1 | ) |   |   | (4 | ) |
| Consolidated                Net Income (Loss) fromContinuing                Operations |   | $                                                                | 12     |   |                                                           | $      | 10 |   |   | $ | 17 |   |   | $ | 29 |   |
| Discontinued                Operations (2)                                             |   |                                                             | -      |   |                                                           |   | - |   |   |   | - |   |   |   | (2 | ) |
| Consolidated                Net Income (Loss)                                          |   | $                                                                | 12     |   |                                                           | $      | 10 |   |   | $ | 17 |   |   | $ | 27 |   |

**LIQUIDITY      AND CAPITAL RESOURCES**

**UniSource      Energy Consolidated Cash Flows**

| **Six              Months Ended June 30,**                |   | ** 2007**                                                                                                                                                                                                                        | ** ** | ** ** | ** 2006**       |   |
|-----------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------------|--------|
|                                                      |   |                                            -Millions                of                Dollars- |       |
| Cash                provided                by (used in): |   |                                                                                                                                                       |       |
| Operating                Activities                       |   | $                119                                                                                                                                                                                                                  |       |       | $                125 |   |
| Investing                Activities                       |   |  (106                                                                                                                                                                                                                            | )          |       |  (134           | )      |
| Financing                Activities                       |   |  (22                                                                                                                                                                                                                             | )          |       |  (-             | )      |

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

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

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

----

Table          of Contents

|   **Balances as                of****August                3, 2007** |   **Cash                and Cash Equivalents** |  **Borrowings****under                Revolving****Credit                Facility** |  **Amount                Available****under                Revolving****Credit                Facility** |
|-------------------------------------------------------------------------------------|----------------------------------------------------------|------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                                                                | -Millions                of                Dollars-      |
| UniSource                Energy stand-alone                                         | $     1                         |                                                                                     | $                 20                                                                                     | $   50 |   |
| TEP                                                                                 | 24                                                       |                                                                                     |    48                                                                                          | 102 |   |
| UNS                Gas                                                              | 22                                                       |                                                                                     |      -                                                                               | 45 | (1)  |
| UNS                Electric                                                         | 8                                                        |                                                                                     |                   23                                                                                | 22 | (1)  |
| Other                                                                               | 24                                                       | (2)                                                                                      |                   NA                                                                                | NA |   |
| Total                                                                               | $   79                                    |                                                                                     |                                                                                                          |   |

**Executive      Overview**

**Liquidity      Outlook**

*.  *

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

----

Table          of Contents

**Guarantees      and Indemnities**

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

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

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

**Contractual      Obligations**

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

| · | In                April                2007, TEP entered into power supply agreements for the period July                through                September 2007.  These contracts are indexed to natural gas                prices.  TEP estimates its minimum payments under these                contracts to be $21 million based on natural gas prices as of June                30,                2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                2006 and                in April 2007, UNS Electric entered into various power supply agreements                for periods of one to five years beginning in June                2008.  Certain of these contracts are at a fixed price per MW                and others are indexed to natural gas prices.  UNS Electric                estimates its future minimum payments under these contracts to be                $36                million in 2008, $53 million in 2009, $31 million in 2010, $15 million                in                2011, $8 million in 2012, and $8 million thereafter based on natural                gas                prices as of June 30, 2007. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                April                2007, Tri-State Generation and Transmission Association (Tri-State)                notified TEP that Tri-State is terminating its power sale agreement                with                TEP effective August 1, 2007 for the remainder of the five-year |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table          of Contents

|   | term.                 Under the agreement, Tri-State provided TEP with 100 MW of system                capacity                beginning September 1, 2006. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | In                2007, UNS                Gas entered into forward gas purchases with future minimum payments                approximating $3 million for the remainder of 2007, $11 million in                2008,                $11 million in 2009, and $6 million in                2010. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 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                2009 or thereafter. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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                                                                         |

**Income      Tax      Position**

**TUCSON      ELECTRIC POWER COMPANY**

**RESULTS      OF OPERATIONS**

**Three      Months Ended June 30**

|   | · | a                  $1 million                  increase in retail revenues due to customer growth of 2% offset                  by a 14%                  reduction in cooling degree days                  (CDD); |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $6 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; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $12 million                    increase in wholesale revenues due primarily to higher excess                    energy                    available to sell into the wholesale market.  Wholesale revenues                    in the second quarter of 2007 included $2 million of transmission                    revenues                    related to Springerville Unit 3; partially offset                    by: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $9 million                  increase in purchased power expense due primarily to demand charges                  of $8                  million related to the 100 MW purchased power contract with Tri-State                  that                  commenced in September 2006; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                  $3 million                  increase in fuel expense.  Coal-related fuel expense increased                  $9 million due to a 9% increase in coal-fired generation and higher                  coal                  and rail expenses.  The higher use and availability of TEP’s                  coal-fired generating units led to a 21% decrease in gas-fired                  generating                  output and a $2 million decrease in gas-related fuel                  expense.  Also, TEP recorded fuel expenses related to the                  operation of Springerville Unit 3 of $1 million in the second quarter                  this                  year, compared with $6 million last year; TEP received reimbursement                  for                  these expenses from Tri-State. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

| ·   | a                $3 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.  O&M                expense in the second quarter of 2007 includes a pre-tax gain of                $5                million related to the sale of excess SO2 Emission                Allowances,                compared with a pre-tax gain of $2 million in the same period last                year;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a                $2 million                increase in the amortization of TEP’s                TRA. |
|--------------------|------------------------------------------------------------------------------------------------------------|

**Six      Months      Ended June 30**

|   | · | a                    $2 million                    increase in total operating revenues less fuel and purchased                    power expense                    due to the following: |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $12 million                    increase in retail revenues due to higher kWh sales in the first                    quarter                    driven by cool weather and customer growth of                    2%; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $5 million                    increase in wholesale revenues due primarily to an increase in                    excess                    energy available to sell into the wholesale market during the                    second                    quarter of 2007.  TEP experienced several planned and unplanned                    coal plant outages during the second quarter of 2006, which limited                    wholesale sales opportunities.  Wholesale revenues in the first                    six months of 2007 included $4 million of transmission revenues                    related to                    Springerville Unit 3; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $13 million                    increase in other revenues due primarily to fees and reimbursements                    received from Tri-State for fuel and O&M costs related to                    Springerville Unit 3, were offset                    by: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $14 million                    increase in purchased power expense due primarily to the 100                    MW purchased                    power contract with Tri-State that commenced in September 2006;                    and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                    $14 million                    increase in fuel expense. Coal-related fuel expense increased                    $9 million                    due to higher coal-fired generation, as well as higher coal and                    rail                    costs.  Gas-related fuel expense increased $8 million due to the                    use of Luna, which was not operational during the first three                    months of                    2006.   Also, TEP recorded fuel expenses related to the                    operation of Springerville Unit 3 of $2 million in the first                    six months of                    this year, compared with $6 million in the same period last year;                    TEP                    received reimbursement for these expenses from                    Tri-State. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Other                factors                impacting the results of the first six months of 2007                include: |
|--------|---------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 $9 million of expenses related to                Springerville Unit 3 that TEP incurred as the operator of the plant                and                for which TEP received reimbursement from Tri-State.  O&M                expense in the first six months of 2007 includes a pre-tax gain of                $7                million related to the sale of excess SO2 Emission                Allowances,                compared with a pre-tax gain of $4 million in the same period last                year; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a                $5 million                increase in the amortization of TEP’s Transition Recovery Asset (TRA);                and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a                $4 million                increase in depreciation and amortization due primarily to additions                to                plant in service. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

**Utility      Sales and Revenues**

|                                                                                                 |       |                                                     |       |       |                                                         |       |       |           |       |       |           |   |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------|--------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|--------|
|                                                                                                 |       | ** Sales**                           |       |       |     **Operating                Revenue** | ** ** |
| ** Three              Months Ended June 30,**                                                   | ** ** | ** 2007**                                           | ** ** | ** ** | ** 2006**                                               | ** ** | ** ** | ** 2007** | ** ** | ** ** | ** 2006** |   |
|                                                                                                 |       |  -Millions                of kWh-    |       |       | -Million                of                Dollars-      |       |
|  **Electric              Retail Sales:**                                                        |       |                                                     |       |       |                                                         |       |
| Residential                                                                                          |       |                                                     | 999        |       |                                                         |       | 1,012      |           |       | $          | 93             |   |   | $ | 94 |   |
| Commercial                                                                                           |       |                                                     | 540        |       |                                                         |       | 526        |           |       |       | 56             |   |   |   | 55 |   |
| Industrial                                                                                           |       |                                                     | 596        |       |                                                         |       | 586        |           |       |       | 43             |   |   |   | 43 |   |
| Mining                                                                                               |       |                                                     | 244        |       |                                                         |       | 228        |           |       |       | 12             |   |   |   | 11 |   |
| Public                Authorities                                                                    |       |                                                     | 69         |       |                                                         |       | 77         |           |       |       | 5              |   |   |   | 5 |   |
| **Total                Electric Retail Sales**                                                       |       |                                                     | 2,448      |       |                                                         |       | 2,429      |           |       | $          | 209            |   |   | $ | 208 |   |
| **Electric                Wholesale Sales Delivered:**                                               |       |                                                     |       |       |                                                         |       |       |           |       |       |           |   |   |   |   |   |
| Long-term                Contracts                                                                   |       |                                                     | 255        |       |                                                         |       | 245        |           |       |       | 13             |   |   |   | 12 |   |
| Other                Sales                                                                           |       |                                                     | 570        |       |                                                         |       | 402        |           |       |       | 28             |   |   |   | 18 |   |
| Transmission                                                                                         |       |                                                     | -          |       |                                                         |       | -          |           |       |       | 4              |   |   |   | 2 |   |
| **Total                Electric Wholesale Sales**                                                    |       |                                                     | 825        |       |                                                         |       | 647        |           |       |       | 45             |   |   |   | 32 |   |
| **Total                Electric                Sales**                                               |       |                                                     | 3,273      |       |                                                         |       | 3,076      |           |       | $          | 254            |   |   | $ | 240 |   |
|                                                                                                 |       |                                                     |       |       |                                                         |       |       |           |       |       |           |   |   |   |   |   |
| **Weather                Data:**                                                                     |       | **2007**                                                 |       |       | **2006**                                                     |       |       |           |       |       |           |   |   |   |
|    **Cooling                Degree Days**                                             |       |                                                     |       |       |                                                         |       |       |           |       |       |           |   |   |   |   |   |
|    Three                Months Ended June 30,                                         |       |                                                     | 465        |       |                                                         |       | 543        |           |       |       |           |   |   |   |   |   |
|    10-Year                Average for Three Months Ended                June 30, |       |                                                     | 440        |       |                                                         |       | 434        |           |       |       |           |   |   |   |   |   |

|                                                                                               |       |    ** Sales**                        | ** ** | ** ** | **    Operating              Revenue**   | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------|--------------------------------------------------------------|------------|
| ** Six              Months              Ended June 30,**                                      | ** ** | ** 2007**                                           |       | ** ** | **2006**                                                     | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
|                                                                                               |       |  -Millions                of kWh-    |       |       |  -Millions                of Dollars-    |       |
| **Electric                Retail Sales:**                                                          |       |                                                     |       |       |                                                         |       |   |   |   |   |   |   |
| Residential                                                                                        |       |                                                     | 1,773      |       |                                                         |       | 1,711 |   |   | $ | 158 |   |   | $ | 153 |   |
| Commercial                                                                                         |       |                                                     | 955        |       |                                                         |       | 915 |   |   |   | 98 |   |   |   | 95 |   |
| Industrial                                                                                         |       |                                                     | 1,127      |       |                                                         |       | 1,095 |   |   |   | 80 |   |   |   | 79 |   |
| Mining                                                                                             |       |                                                     | 483        |       |                                                         |       | 452 |   |   |   | 24 |   |   |   | 21 |   |
| Public                Authorities                                                                  |       |                                                     | 122        |       |                                                         |       | 130 |   |   |   | 9 |   |   |   | 9 |   |
| **Total                Electric Retail Sales**                                                     |       |                                                     | 4,460      |       |                                                         |       | 4,303 |   |   | $ | 369 |   |   | $ | 357 |   |
| **Electric                Wholesale Sales Delivered:**                                             |       |                                                     |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term                Contracts                                                                 |       |                                                     | 540        |       |                                                         |       | 538 |   |   |   | 27 |   |   |   | 26 |   |
| Other                Sales                                                                         |       |                                                     | 1,120      |       |                                                         |       | 1,131 |   |   |   | 60 |   |   |   | 59 |   |
| Transmission                                                                                       |       |                                                     | -          |       |                                                         |       | - |   |   |   | 7 |   |   |   | 4 |   |
| **Total                Electric Wholesale Sales**                                                  |       |                                                     | 1,660      |       |                                                         |       | 1,659 |   |   |   | 94 |   |   |   | 89 |   |
| **Total                Electric                Sales**                                             |       |                                                     | 6,120      |       |                                                         |       | 5,962 |   |   | $ | 463 |   |   | $ | 446 |   |
|                                                                                               |       |                                                     |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Weather                Data:**                                                                   |       | **2007**                                                 |       |       | **2006**                                                     |       |   |   |   |   |   |   |   |   |
|    **Cooling                Degree Days**                                           |       |                                                     |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|    Six                Months Ended June 30,                                         |       |                                                     | 467        |       |                                                         |       | 543 |   |   |   |   |   |   |   |   |   |
|    10-Year                Average for Six Months Ended                June 30, |       |                                                     | 441        |       |                                                         |       | 434 |   |   |   |   |   |   |   |   |   |

----

Table          of Contents

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

|                                                                                               |   | **Three                Months Ended****June                30** |   |   | **Six                Months Ended****June                30,** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------|----------------------------------------------------------------|--------|
|                                                                                               |   | **2007**                                                        |   |   | **2006**                                                       |   |   | **2007** |   |   | **2006** |   |
|                                                                                               |   | -Millions-                                                      |   |   | -Millions-                                                     |   |
| Net                Unrealized (Loss) Gain on  Forward                Sales of Energy     |   |                                                            | $1     |   |                                                           |   | $1 |   |   |   | $(8 | ) |   |   | $1 |   |
| Net                Unrealized (Loss) Gain on  Forward                Purchases of Energy |   |                                                            | (1     | )      |                                                           |   | (2 | ) |   |   | 8 |   |   |   | (1 | ) |
| Net                Unrealized Gain (Loss)                                                          |   |                                                            | $-     |   |                                                           |   | $(1 | ) |   |   | $- |   |   |   | $- |   |

**Operating      Expenses**

|                                                                                                                                                                                                                                                                                                        |   | **Generation                and****Purchased                Power** |   |   | **Expense**                                         |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
| **Three                Months Ended June 30,**                                                                                                                                                                                                                                                              |   | **2007**                                                            |   |   | **2006**                                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                        |   | -Millions                of                kWh-                     |   |   | -Millions                of                Dollars- |   |
| Coal-Fired                Generation                                                                                                                                                                                                                                                                        |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |
|    Four                Corners                                                                                                                                                                                                                                                               |   |                                                                | 121    |   |                                                |   | 197 |   |   | $ | 2 |   |   | $ | 3 |   |
|    Navajo                                                                                                                                                                                                                                                                                    |   |                                                                | 326    |   |                                                |   | 300 |   |   |   | 6 |   |   |   | 4 |   |
|    San                Juan                                                                                                                                                                                                                                                                   |   |                                                                | 639    |   |                                                |   | 625 |   |   |   | 16 |   |   |   | 14 |   |
|    Springerville                                                                                                                                                                                                                                                                             |   |                                                                | 1,385  |   |                                                |   | 1,201 |   |   |   | 23 |   |   |   | 20 |   |
|    Sundt                Unit 4                                                                                                                                                                                                                                                               |   |                                                                | 197    |   |                                                |   | 126 |   |   |   | 6 |   |   |   | 3 |   |
| Total                Coal-Fired Generation                                                                                                                                                                                                                                                                  |   |                                                                | 2,668  |   |                                                |   | 2,449 |   |   |   | 53 |   |   |   | 44 |   |
| Gas-Fired                Generation                                                                                                                                                                                                                                                                         |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                                                                                                        |   |                                                                | 184    |   |                                                |   | 202 |   |   |   | 11 |   |   |   | 10 |   |
| Other                Gas                Units                                                                                                                                                                                                                                                               |   |                                                                | 66     |   |                                                |   | 114 |   |   |   | 7 |   |   |   | 10 |   |
| Total                Gas-Fired Generation                                                                                                                                                                                                                                                                   |   |                                                                | 250    |   |                                                |   | 316 |   |   |   | 18 |   |   |   | 20 |   |
| Solar                and                Other                                                                                                                                                                                                                                                               |   |                                                                | 3      |   |                                                |   | 3 |   |   |   | - |   |   |   | - |   |
| Total                Generation (1)                                                                                                                                                                                                                                                                         |   |                                                                | 2,921  |   |                                                |   | 2,768 |   |   |   | 71 |   |   |   | 64 |   |
| Total                Purchased Power                                                                                                                                                                                                                                                                        |   |                                                                | 629    |   |                                                |   | 554 |   |   |   | 40 |   |   |   | 33 |   |
| Total                Resources                                                                                                                                                                                                                                                                              |   |                                                                | 3,550  |   |                                                |   | 3,322 |   |   | $ | 111 |   |   |   | 97 |   |
| Less                Line                Losses and Company Use                                                                                                                                                                                                                                              |   |                                                                | (277   | )      |                                                |   | (238 | ) |   |   |   |   |   |   |   |   |
| Total                Energy                Sold                                                                                                                                                                                                                                                             |   |                                                                | 3,273  |   |                                                |   | 3,084 |   |   |   |   |   |   |   |   |   |
|   (1)Fuel                expense in the second                quarters of 2007 and 2006 excludes $1 million and $6 million,                respectively, related to Springerville Unit 3; these expenses are                reimbursed by Tri-State and recorded in Other                Revenue. |   |

*Coal Supply*
* *

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Table          of Contents

|                                                                                                                                                                                                                                                                                              |   | **Generation                and****Purchased                Power** |   |   | **Expense**                                         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
| **Six                Months Ended June 30,**                                                                                                                                                                                                                                                      |   | **2007**                                                            |   |   | **2006**                                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                              |   | -Millions                of                kWh-                     |   |   | -Millions                of                Dollars- |   |
| Coal-Fired                Generation                                                                                                                                                                                                                                                              |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |
|    Four                Corners                                                                                                                                                                                                                                                     |   |                                                                | 300    |   |                                                |   | 403 |   |   | $ | 5 |   |   | $ | 6 |   |
|    Navajo                                                                                                                                                                                                                                                                          |   |                                                                | 617    |   |                                                |   | 579 |   |   |   | 10 |   |   |   | 8 |   |
|    San                Juan                                                                                                                                                                                                                                                         |   |                                                                | 1,131  |   |                                                |   | 1,259 |   |   |   | 28 |   |   |   | 28 |   |
|    Springerville                                                                                                                                                                                                                                                                   |   |                                                                | 2,803  |   |                                                |   | 2,728 |   |   |   | 47 |   |   |   | 45 |   |
|    Sundt                Unit 4                                                                                                                                                                                                                                                     |   |                                                                | 361    |   |                                                |   | 279 |   |   |   | 12 |   |   |   | 6 |   |
| Total                Coal-Fired Generation                                                                                                                                                                                                                                                        |   |                                                                | 5,212  |   |                                                |   | 5,248 |   |   |   | 102 |   |   |   | 93 |   |
| Gas-Fired                Generation                                                                                                                                                                                                                                                               |   |                                                                |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
| Luna                                                                                                                                                                                                                                                                                              |   |                                                                | 350    |   |                                                |   | 225 |   |   |   | 20 |   |   |   | 10 |   |
| Other                Gas                Units                                                                                                                                                                                                                                                     |   |                                                                | 80     |   |                                                |   | 125 |   |   |   | 9 |   |   |   | 11 |   |
| Total                Gas-Fired Generation                                                                                                                                                                                                                                                         |   |                                                                | 430    |   |                                                |   | 350 |   |   |   | 29 |   |   |   | 21 |   |
| Solar                and                Other                                                                                                                                                                                                                                                     |   |                                                                | 5      |   |                                                |   | 5 |   |   |   | - |   |   |   | - |   |
| Total                Generation (1)                                                                                                                                                                                                                                                               |   |                                                                | 5,647  |   |                                                |   | 5,603 |   |   |   | 131 |   |   |   | 114 |   |
| Purchased                Power                                                                                                                                                                                                                                                                    |   |                                                                | 953    |   |                                                |   | 797 |   |   |   | 57 |   |   |   | 46 |   |
| Total                Resources                                                                                                                                                                                                                                                                    |   |                                                                | 6,600  |   |                                                |   | 6,400 |   |   | $ | 188 |   |   | $ | 160 |   |
| Less                Line                Losses and Company Use                                                                                                                                                                                                                                    |   |                                                                | (480   | )      |                                                |   | (425 | ) |   |   |   |   |   |   |   |   |
| Total                Energy                Sold                                                                                                                                                                                                                                                   |   |                                                                | 6,120  |   |                                                |   | 5,975 |   |   |   |   |   |   |   |   |   |
|  (1)Fuel                expense in the first six                months of 2007 and 2006 excludes $2 million and $6 million, respectively,                related to Springerville 3; these expenses are reimbursed by Tri-State                and                recorded in Other Revenue. |   |

*Coal      Supply*
* *

|                           | **Three                Months****Ended                June 30,** | **Six                Months****Ended                June 30,** |
|--------------------------------|------------------------------------------------------------------|----------------------------------------------------------------|
|                           | **2007**                                                         | **2006**                                                       | **2007** | **2006** |
|                           | -cents                per                kWh-                    | -cents                per                kWh-                  |
| Coal                           | 1.99                                                             | 1.80                                                           | 1.96 | 1.77 |
| Gas*                           | 7.20                                                             | 6.41                                                           | 6.74 | 6.48 |
| All                fuels       | 2.43                                                             | 2.32                                                           | 2.32 | 2.04 |
| Purchased                Power | 6.36                                                             | 5.96                                                           | 5.98 | 5.77 |

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**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**Competition**

**TEP      Rate      Proposal Filing**

*Competition*

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Table          of Contents

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Table          of Contents

|                                                           |  **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                                                                                   |

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Table          of Contents

**Renewable      Energy Standard and Tariff**

**Market      Prices**

| **Average                Market Price for Around-the-Clock Energy** | **$/MWh**        |
|---------------------------------------------------------------------|------------------|
| Quarter                ended June 30,                2007           | $55              |
| Quarter                ended June 30,                2006           | 45               |
|                                                                |             |
| Six                months ended June 30,                2007        | $52              |
| Six                months ended June 30,                2006        | 47               |
|                                                                |             |
| **Average                Market Price for Natural Gas**             | **$/MMBtu**      |
| Quarter                ended June 30,                2007           | $6.59            |
| Quarter                ended June 30,                2006           |   5.55 |
|                                                                |             |
| Six                months ended June 30,                2007        | $6.46            |
| Six                months ended June 30,                2006        |   6.34 |

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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 | 2,500                                    |      2       |
| 4th                Quarter | 2,500                                    |      2       |
| Total                2007  | 15,000                                   |  $11                             |

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**LIQUIDITY      AND CAPITAL RESOURCES**

**TEP      Cash      Flows & Liquidity Outlook**

| **Six                Months Ended June 30,**                                                                                                                                  |   | **2007**                                            |   |   | **2006** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|----------|--------|
|                                                                                                                                                                          |   | -Millions                of                Dollars- |   |
| Net                Cash                Flows – Operating Activities (GAAP)                                                                                              |   | $                                                   | 93     |   |     | $      | 98 |   |
| Amounts                from                Statements of Cash Flows:                                                                                                          |   |                                                |   |   |     |   |   |   |
| Less:                Capital                Expenditures                                                                                                                      |   |                                                | (82    | )      |     |   | (82 | ) |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)*                                                                                           |   |                                                | 11     |   |     |   | 16 |   |
| Amounts                from                Statements of Cash Flows:                                                                                                          |   |                                                |   |   |     |   |   |   |
| Less:                Retirement of Capital Lease                Obligations                                                                                                   |   |                                                | (56    | )      |     |   | (51 | ) |
| Plus:  Proceeds                from Investment                in Springerville     Lease                Debt and Equity                    |   |                                                | 11     |   |     |   | 10 |   |
| Net                Cash                Flows after Capital Expenditures and Required Payments on Debt and                Capital                Lease Obligations (non-GAAP)* |   | $                                                   | (34    | )      |     | $      | (25 | ) |

| **Six                Months Ended June 30**                                                                                                                                  |   | **2007**                                            |   |   | **2006** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|----------|--------|
|                                                                                                                                                                         |   | -Millions                of                Dollars- |   |
| Net                Cash                Flows – Operating Activities (GAAP)                                                                                             |   | $                                                   | 93     |   |     | $      | 98 |   |
| Net                Cash                Flows – Investing Activities (GAAP)                                                                                             |   |                                                | (73    | )      |     |   | (121 | ) |
| Net                Cash                Flows – Financing Activities (GAAP)                                                                                             |   |                                                | 1      |   |     |   | 18 |   |
| Net                Cash                Flows after Capital Expenditures (non-GAAP)                                                                                           |   |                                                | 11     |   |     |   | 16 |   |
| Net                Cash                Flows after Capital Expenditures and Required Payments on Debt and                Capital                Lease Obligations (non-GAAP) |   |                                                | (34    | )      |     |   | (25 | ) |

**Operating      Activities**

|  | · | a                $43 million                increase in cash receipts from electric retail and wholesale sales,                mostly                offset by a $42 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                $19 million                increase in other cash receipts related to reimbursements received                from                Tri-State for the operation of Springerville Unit                3; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | · | a                $4 million                decrease in total interest paid due to lower capital lease obligation                balances; offset by: |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | an                $8 million                increase in wages paid, part of which is related to payroll costs                at                Springerville Unit 3 that are reimbursed by                Tri-State; |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $5 million                increase in income taxes paid due to an increase in estimated tax                payments; and |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $14 million                increase in O&M costs related to plant outages and $9 million of costs                related to Springerville Unit 3 that are reimbursed by                Tri-State. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Investing      Activities**

**Financing      Activities**

|  | · | a                $7 million                decrease in net proceeds from borrowings under the TEP Revolving                Credit                Facility; |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $5 million                increase in scheduled payments made on capital lease obligations;                and |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                $4 million                decrease in other cash receipts related to lower receipts from                inter-company payables. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   **Leased                Asset**                   |  **Capital                Lease Obligation Balance****at                June 30, 2007**                  |   **Expiration** |
|---------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|----------------------------|
|                                                          | -                In Millions                -                                                                 |                       |
| Springerville                Unit 1                           |             $346                                  |                       | 2015 |
| Springerville                Coal Handling Facilities         |               113                       |                       | 2015 |
| Springerville                Common Facilities                |               107                       |                       | 2020 |
| Sundt                Unit                4                    |                 36            |                       | 2011 |
| Other                Leases                                   |                   1 |                       | 2008 |
| Total                Capital                Lease Obligations |             $603                                  |                       |   |

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Table          of Contents

|                                                              | **Lease                Debt Investment Balance** |
|-------------------------------------------------------------------|--------------------------------------------------|
| **Leased                Asset**                                   | **June                30, 2007**                 | **December                31, 2006** |
|                                                              | -                In Millions                -    |
| Investments                in Lease Debt:                         |                                             |   |
|   Springerville                Unit 1                   | $  71                                  |   | $  81 |   |
|   Springerville                Coal Handling Facilities | 51                                               |   | 52 |   |
| Total                Investment in Lease Debt                     | $122                                             |   | $133 |   |

**Income      Tax      Position**

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

**Contractual      Obligations**

| ·   | In                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                April                2007, TEP entered into power supply agreements for the period July                through                September 2007.  These contracts are indexed to natural gas                prices.  TEP estimates its minimum payments under these                contracts to be $21 million based on natural gas prices as of June                30,                2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | 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                2009 or thereafter. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends      on Common Stock**

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Table          of Contents

**UNS      GAS**

**RESULTS      OF OPERATIONS**

|                                                            | **          Sales**                 | **       Revenue**                |
|-----------------------------------------------------------------|---------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| **Three                Months Ended June 30,**                  | **2007**                                                                              | **2006**                                                             | **2007** | **2006** |
|                                                            |         -                Millions of Therms - |      -                Millions of Dollars - |
| **Retail                Therm Sales:**                          |                                                                                  |                                                                 |   |   |
|    Residential                                   |    9                                                                   |                                                                 |   9 |   |        $                12 |   |     $                14 |   |
|    Commercial                                    |           5                         |                                                                 |   5 |   |      6 |   |      7 |   |
|    Industrial                                    |    -                                                                   |                                                                 |   - |   |      - |   |      1 |   |
|    Public                Authorities             | 1                                                                                     |                                                                 |   1 |   |      1 |   |      1 |   |
| **Total                Retail Therm Sales**                     |   15                                                                        |                                                                 |        15 |   |    19 |   |    23 |   |
|    Transport                                     |     -                                                             |                                                                 |   - |   |      1 |   |      1 |   |
|    Negotiated                Sales Program (NSP) |     5                                                             |                                                                 |   4 |   |      3 |   |          2 |   |
| **Total                Therm Sales**                            |   20                                                                        |                                                                 |         19 |   | $                23 |   |     $                26 |   |

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

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

| **Three                Months Ended June 30,**                                                  |   | **2007**                                              |   |   | **2006** |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------|----------|--------|
|                                                                                            |   | -                Millions of                Dollars - |   |
| Gas                Revenues                                                                     |   | $                                                     | 23     |   |     | $      | 26 |   |
| Other                Revenues                                                                   |   |                                                  | -      |   |     |   | - |   |
|      Total                Operating Revenues                           |   |                                                  | 23     |   |     |   | 26 |   |
| Purchased                Gas                Expense                                             |   |                                                  | 15     |   |     |   | 18 |   |
| Other                Operations and Maintenance Expense                                         |   |                                                  | 6      |   |     |   | 6 |   |
| Depreciation                and Amortization                                                    |   |                                                  | 2      |   |     |   | 2 |   |
| Taxes                other                than Income Taxes                                     |   |                                                  | 1      |   |     |   | 1 |   |
|      Total                Other Operating Expenses                     |   |                                                  | 24     |   |     |   | 27 |   |
|                                                                                            |   |                                                  |   |   |     |   |   |   |
|           Operating                Income     |   |                                                  | (1     | )      |     |   | (1 | ) |
| Other                Income                                                                     |   |                                                  | 1      |   |     |   | - |   |
| Total                Interest Expense                                                           |   |                                                  | 2      |   |     |   | 1 |   |
| Income                Tax                Expense (Benefit)                                      |   |                                                  | (1     | )      |     |   | (1 | ) |
| **           Net                Income** |   | $                                                     | (1     | )      |     | $      | (1 | ) |

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Table          of Contents

**Six      Months      Ended June 30, 2007 Compared with the Six Months Ended June 30,      2006**

|                                                            | **          Sales**                 | **       Revenue**                |
|-----------------------------------------------------------------|---------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| **Six                Months Ended June 30,**                    | **2007**                                                                              | **2006**                                                             | **2007** | **2006** |
|                                                            |         -                Millions of Therms - |      -                Millions of Dollars - |
| **Retail                Therm Sales:**                          |                                                                                  |                                                                 |   |   |
|    Residential                                   |   43                                                                        |   39                                                       |        $                53 |     $                54 |
|    Commercial                                    |   17                                                                        |   16                                                       |    19 |    20 |
|    Industrial                                    |     1                                                             |     2                                            |      1 |      2 |
|    Public                Authorities             |     4                                                             |     4                                            |      4 |      5 |
| **Total                Retail Therm Sales**                     |   65                                                                        |           61       |    77 |     81 |
|    Transport                                     |     -                                                             |      -                                      |      1 |       1 |
|    Negotiated                Sales Program (NSP) |   10                                                                        |     9                                            |      7 |           7 |
| **Total                Therm Sales**                            |   75                                                                        |           70       | $                85 |      $                89 |

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

| **Six                Months Ended June 30,**                                                    |   | **2007**                                              |   |   | **2006** |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------|----------|--------|
|                                                                                            |   | -                Millions of                Dollars - |   |
| Gas                Revenues                                                                     |   | $                                                     | 85     |   |     | $      | 89 |   |
| Other                Revenues                                                                   |   |                                                  | 1      |   |     |   | 1 |   |
|      Total                Operating Revenues                           |   |                                                  | 86     |   |     |   | 90 |   |
| Purchased                Gas                Expense                                             |   |                                                  | 59     |   |     |   | 64 |   |
| Other                Operations and Maintenance Expense                                         |   |                                                  | 13     |   |     |   | 12 |   |
| Depreciation                and Amortization                                                    |   |                                                  | 4      |   |     |   | 3 |   |
| Taxes                other                than Income Taxes                                     |   |                                                  | 2      |   |     |   | 2 |   |
|      Total                Other Operating Expenses                     |   |                                                  | 78     |   |     |   | 81 |   |
|                                                                                            |   |                                                  |   |   |     |   |   |   |
|           Operating                Income     |   |                                                  | 8      |   |     |   | 9 |   |
| Other                Income                                                                     |   |                                                  | 1      |   |     |   | - |   |
| Total                Interest Expense                                                           |   |                                                  | 3      |   |     |   | 3 |   |
| Income                Tax                Expense (Benefit)                                      |   |                                                  | 3      |   |     |   | 3 |   |
| **           Net                Income** |   | $                                                     | 3      |   |     | $      | 3 |   |

**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**RATES      AND      REGULATION**

**Energy      Cost      Adjustment Mechanism**

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Table          of Contents

*General      Rate Case Filing*

**General      Rate Case Filing**

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

**LIQUIDITY      AND CAPITAL RESOURCES**

**Liquidity      Outlook**

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Table          of Contents

| **Six                Months Ended June 30,**                              | **2007**                                              | **2006**       |
|---------------------------------------------------------------------------|-------------------------------------------------------|----------------|
|                                                                      | -                Millions of                Dollars - |
| Net                Cash                Flows – Operating Activities | $17                                                   | $23            |
| Capital                Expenditures                                       |   11                                        |   12 |

**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 $3 million for the remainder of 2007, $11 million in                2008,                $11 million in 2009, and $6 million in                2010. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends      on Common Stock**

*Senior Unsecured Notes*

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Table          of Contents

**UNS      ELECTRIC**

**RESULTS      OF OPERATIONS**

|                                           | **Sales**                                         | **Revenue**                                           |
|------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|
| **Three                Months Ended June 30,** | **2007**                                          | **2006**                                              | **2007** | **2006** |
|                                           | -                Millions of                kWh - | -                Millions of                Dollars - |
| **Electric                Retail Sales:**      |                                              |                                                  |   |   |
|    Residential                  | 198                                               | 193                                                   | $  20 | $                19 |
|    Commercial                   | 163                                               | 163                                                   |     16 | 16 |
|    Industrial                   |   48                                    | 49                                                    |       4 | 4 |
|    Other                        |     1                         | 1                                                     |       - | - |
| **Total                Electric Retail Sales** |  410                                         | 406                                                   | $  40 | $                39 |

| **Three                Months Ended June 30,**                                                  | **   2007**                            | **2006**                                                                              |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                                                            | -                Millions of                Dollars - |
| Electric                Revenues                                                                | $  40                                       | $39                                                                                   |
| Other                Revenues                                                                   |      -                       |     1                                                             |
|      Total                Operating Revenues                           |    40                                  | 40                                                                                    |
| Purchased                Energy Expense                                                         |    27                                  | 27                                                                                    |
| Other                Operations and Maintenance Expense                                         |      7                       | 6                                                                                     |
| Depreciation                and Amortization                                                    |      3                       | 3                                                                                     |
| Taxes                other                than Income Taxes                                     |      1                       | 1                                                                                     |
|      Total                Other Operating Expenses                     |    38                                  | 37                                                                                    |
|                                                                                            |                                                  |                                                                                  |
|           Operating                Income     |      2                       | 3                                                                                     |
| Other                Income                                                                     |      2                       |               - |
| Total                Interest Expense                                                           |      1                       | 1                                                                                     |
| Income                Tax                Expense                                                |      1                       | 1                                                                                     |
| **           Net                Income** |  $  2                                  | $1                                                                                    |

**Six      Months      Ended June 30, 2007 Compared with the Six Months Ended June 30,      2006**

----

Table          of Contents

|                                           | **Sales**                                         | **Revenue**                                           |
|------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|
| **Six                Months Ended June 30,**   | **2007**                                          | **2006**                                              | **2007** | **2006** |
|                                           | -                Millions of                kWh - | -                Millions of                Dollars - |
| **Electric                Retail Sales:**      |                                              |                                                  |   |   |
|    Residential                  | 380                                               | 356                                                   | $                39 | $36 |
|    Commercial                   | 294                                               | 294                                                   |    30 | 29 |
|    Industrial                   |   95                                    | 95                                                    |      7 | 7 |
|    Other                        |     1                         | 2                                                     |      - | 1 |
| **Total                Electric Retail Sales** |  770                                         | 747                                                   | $                76 | $73 |

| **Six                Months Ended June 30,**                                                    | **   2007**                            | **2006**                                    |
|-------------------------------------------------------------------------------------------------|-------------------------------------------------------|---------------------------------------------|
|                                                                                            | -                Millions of                Dollars - |
| Electric                Revenues                                                                | $  76                                       |   $  73                 |
| Other                Revenues                                                                   |      1                       |        1 |
|      Total                Operating Revenues                           |    77                                  |      74            |
| Purchased                Energy Expense                                                         |    51                                  |      49            |
| Other                Operations and Maintenance Expense                                         |    13                                  |      12            |
| Depreciation                and Amortization                                                    |      6                       |        6 |
| Taxes                other                than Income Taxes                                     |      2                       |        2 |
|      Total                Other Operating Expenses                     |    72                                  |      69            |
|                                                                                            |                                                  |                                        |
|           Operating                Income     |      5                       |        5 |
| Other                Income                                                                     |      2                       |        - |
| Total                Interest Expense                                                           |      3                       |        2 |
| Income                Tax                Expense                                                |      2                       |        1 |
| **           Net                Income** |  $  2                                  |    $  2            |

**FACTORS      AFFECTING RESULTS OF      OPERATIONS**

**Competition**

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

**Rates      and      Regulation**

----

Table          of Contents

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

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

**LIQUIDITY      AND CAPITAL RESOURCES**

**Liquidity      Outlook**

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Table          of Contents

| **Six                Months Ended June 30,**                              | **2007**                                                       | **2006** |
|---------------------------------------------------------------------------|----------------------------------------------------------------|----------|
|                                                                      | -                Millions of                Dollars -          |
| Net                Cash                Flows – Operating Activities |         $11            | $9       |
| Capital                Expenditures                                       |           21 |  19 |

**UNS      Gas/UNS      Electric Revolver**

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

**Senior      Unsecured Notes**

**Contractual      Obligations**

| ·   | In                2006 and                in April 2007, UNS Electric entered into various power supply agreements                for periods of one to five years beginning in June                2008.  Certain of these contracts are at a fixed price per MW                and others are indexed to natural gas prices.  UNS Electric                estimates its future minimum payments under these contracts to be                $36                million in 2008, $53 million in 2009, $31 million in 2010, $15 million                in                2011, $8 million in 2012, and $8 million thereafter based on natural                gas                prices as of June 30, 2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Dividends      on Common Stock**

*Senior Unsecured Notes*

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Table          of Contents

**OTHER      NON-REPORTABLE BUSINESS      SEGMENTS**

**RESULTS      OF OPERATIONS**

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

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

**UniSource      Energy Parent Company**

**UED**

**Discontinued      Operations – Global Solar**

**FACTORS      AFFECTING RESULTS OF OPERATIONS**

**Millennium      Investments**

----

Table          of Contents

**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 |
|--|--------|------------------------------------------------------|

**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 |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

|   | 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 it may have on our financial                statements. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SAFE      HARBOR FOR FORWARD-LOOKING      STATEMENTS**

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

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Table          of Contents

| 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**

**Commodity      Price Risk**

**TEP**

----

Table          of Contents

|                                  | **Three                Months****Ended                June 30,** | **Six                Months Ended****June                30,** |
|---------------------------------------|------------------------------------------------------------------|----------------------------------------------------------------|
|                                  | 2007                                                             | 2006                                                           | 2007 | 2006 |
|                                  | -In                Millions-                                     | -In                Millions-                                   |
| Unrealized                Gain (Loss) | $  -                                                   | $  -                                                 | $  (1) | $  2 |

|                                    | **Three                  Months****Ended                  June 30,** | **Six                  Months Ended****June                  30,** |
|-----------------------------------------|----------------------------------------------------------------------|--------------------------------------------------------------------|
|                                    | 2007                                                                 | 2006                                                               | 2007 | 2006 |
|                                    | -In                  Millions-                                       | -In                  Millions-                                     |
| Unrealized                  Gain (Loss) | $  -                                                       | $  (1)                                                   | $  - | $  - |

| **Six                Months Ended June 30,** | **2007**            | **2006**                                           | **2007**             | **2006**        |
|----------------------------------------------|---------------------|----------------------------------------------------|----------------------|-----------------|
|                                         |  -MWhs-        | %                of Total                Resources |
| Gas-Fired                Generation          |   430,000 | 350,000                                            |    7% |   5%  |
| Purchased                Power               |   953,000 | 797,000                                            |  14%            |   12% |

----

Table          of Contents

|                                  | **Three                Months**** Ended                June 30,** | **Six                Months Ended**** June                30,** |
|---------------------------------------|------------------------------------------------------------------------|----------------------------------------------------------------------|
|                                  | 2007                                                                   | 2006                                                                 | 2007 | 2006 |
|                                  | -In                Millions-                                           | -In                Millions-                                         |
| Unrealized                (Loss) Gain | $  (6)                                                       | $                (7)                                                 | $  (2) | $                (14) |

|                                                                                        | **Unrealized                Gain (Loss) of TEP’s****Hedging                and Trading Activities** |
|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                                                        | -                Millions of                Dollars -                                                     |
|  Source                of                Fair Value At June 30, 2007                   | Maturity                0 –                6 months                                                 | Maturity  6                – 12 months | Maturity                over                1 yr. | TotalUnrealizedGain                (Loss) |
| Prices                actively quoted                                                       | $(4)                                                                                                      | $ - | $   (1) | $(5) |
| Prices                based                on models and other valuation  methods |   1                                                                                             |  - |            - |              1 |
| Total                                                                                       | $(3)                                                                                                      | $ - | $   (1) | $(4) |

|                                                                              | -                Millions of                Dollars - |
|-----------------------------------------------------------------------------------|-------------------------------------------------------|
| Change                in                Market Price As of June 30, 2007          | 10%                Increase                           | 10%                Decrease |
| **Non-Cash                Flow Hedges**                                           |                                                  |   |
|     Forward                power sales and purchase contracts |  $                -                              | $                - |
|     Gas                swap agreements                        |    1                                   |  (1) |
|                                                                              |                                                  |   |
| **Cash                Flow Hedges**                                               |                                                  |   |
|    Forward                power sales and purchase contracts       |  $                -                              | $                - |
|    Gas                swap agreements                              | 6                                                     |  (6) |

**UNS      Gas**

----

Table          of Contents

**UNS      Electric**

**MEG**

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

----

Table          of Contents

**Credit      Risk**

*.*

**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        4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY        HOLDERS**

----

| **Election                of Directors**                    | **Votes                For**       | **Votes                Withheld**      |                |
|-------------------------------------------------------------|------------------------------------|----------------------------------------|---------------------|
| Lawrence                J.                Aldrich           | 28,510,261                         | 368,109                                |                |
| Barbara                M.                Baumann            | 28,525,470                         | 352,900                                |                |
| Larry                W.                Bickle               | 28,534,129                         | 344,241                                |                |
| Elizabeth                T.                Bilby            | 28,530,065                         | 348,305                                |                |
| Harold                W.                Burlingame          | 28,534,226                         | 344,144                                |                |
| John                L.                Carter                | 27,964,649                         | 913,721                                |                |
| Robert                A.                Elliott             | 28,545,363                         | 333,007                                |                |
| Daniel                W.L.                Fessler           | 28,534,874                         | 343,496                                |                |
| Kenneth                Handy                                | 28,501,105                         | 377,265                                |                |
| Warren                Y.                Jobe                | 28,533,798                         | 344,572                                |                |
| James                S.                Pignatelli           | 27,832,084                         |    1,046,286            |                |
| Joaquin                Ruiz                                 | 28,520,454                         | 357,913                                |                |
|                                                        |  **Votes                For** |  **Votes                Against** |  **Abstained** |
| **Ratify                Selection of Independent Auditors** | 27,945,188                         | 897,212                                | 35,970              |

**ITEM        5. – OTHER INFORMATION**

----

**NON-GAAP      MEASURES**

**Adjusted      EBITDA**

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Table          of Contents

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

|                                                                    |   | **UniSource                Energy**                              |   |
|-------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
|                                                                    |   | **Three                Months Ended****June                30,** |   |   | **Six                Months Ended****June                30,** |   |
|                                                                    |   | **2007**                                                         |   |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   | -                Millions of                Dollars -            |   |
|   Adjusted                EBITDA (non-GAAP)                   |   | $                                                                | 110    |   |   | $ | 107 |   |   | $ | 204 |   |   | $ | 221 |   |
|   Net                Cash Flows - Operating Activities (GAAP) |   | $                                                                | 55     |   |   | $ | 73 |   |   | $ | 120 |   |   | $ | 125 |   |
|   Net                Cash Flows - Investing Activities (GAAP) |   | $                                                                | (64    | ) |   | $ | (83 | ) |   | $ | (106 | ) |   | $ | (134 | ) |
|   Net                Cash Flows - Financing Activities (GAAP) |   | $                                                                | 11     |   |   | $ | 22 |   |   | $ | (22 | ) |   | $ | - |   |

|                                                                    |   | **TEP**                                                          |   |
|-------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
|                                                                    |   | **Three                Months Ended****June                30,** |   |   | **Six                Months Ended****June                30,** |   |
|                                                                    |   | **2007**                                                         |   |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   | -                Millions of                Dollars -            |   |
|   Adjusted                EBITDA (non-GAAP)                   |   | $                                                                | 99     |   |   | $ | 97 |   |   | $ | 176 |   |   | $ | 196 |   |
|   Net                Cash Flows - Operating Activities (GAAP) |   | $                                                                | 43     |   |   | $ | 55 |   |   | $ | 93 |   |   | $ | 98 |   |
|   Net                Cash Flows - Investing Activities (GAAP) |   | $                                                                | (47    | ) |   | $ | (84 | ) |   | $ | (73 | ) |   | $ | (120 | ) |
|   Net                Cash Flows - Financing Activities (GAAP) |   | $                                                                | 12     |   |   | $ | 39 |   |   | $ | 1 |   |   | $ | 18 |   |

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

|                                                                                     |   | **UniSource                Energy**                              |    |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended****June                30,** |    |   | **Six                Months Ended****June                30,** |   |
|                                                                                     |   | **2007**                                                         |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars -            |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**                            |   | $                                                                | 110     |   |   | $ | 107 |   |   | $ | 204 |   |   | $ | 221 |   |
| Amounts                from                the Income Statements:                        |   |                                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income                Taxes                                 |   |                                                             | 8       |   |   |   | 7 |   |   |   | 12 |   |   |   | 21 |   |
|   Less:  Total                Interest Expense                       |   |                                                             | 34      |   |   |   | 38 |   |   |   | 69 |   |   |   | 74 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                             | (13     | ) |   |   | 11 |   |   |   | (3 | ) |   |   | (1 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)                           |   | ** **                                                       | **55**  |   |   | ** ** | **73** |   |   | ** ** | **120** |   |   | ** ** | **125** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   | ** **                                                       | **(64** | **)** |   | ** ** | **(83** | **)** |   | ** ** | **(106** | **)** |   | ** ** | **(134** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   | ** **                                                       | **11**  |   |   | ** ** | **22** |   |   | ** ** | **(22** | **)** |   | ** ** | **-** |   |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**(GAAP)            |   | **$**                                                            | **2**   |   |   | **$** | **12** |   |   | **$** | **(8** | **)** |   | **$** | **(9** | **)** |

|                                                                                     |   | **TEP**                                                          |    |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|---------|
|                                                                                     |   | **Three                Months Ended****June                30,** |    |   | **Six                Months Ended****June                30,** |   |
|                                                                                     |   | **2007**                                                         |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                     |   | -                Millions of                Dollars -            |    |
| **Adjusted                EBITDA**(non-GAAP)** ****(1)**                            |   | $                                                                | 99      |   |   | $ | 97 |   |   | $ | 176 |   |   | $ | 196 |   |
| Amounts                from                the Income Statements:                        |   |                                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Less:  Income                Taxes                                 |   |                                                             | 8       |   |   |   | 8 |   |   |   | 9 |   |   |   | 19 |   |
|   Less:  Total                Interest Expense                       |   |                                                             | 29      |   |   |   | 31 |   |   |   | 58 |   |   |   | 62 |   |
| Changes                in                Assets and Liabilities and Other Non-Cash Items |   |                                                             | (19     | ) |   |   | (3 | ) |   |   | (16 | ) |   |   | (17 | ) |
| **Net                Cash Flows - Operating Activities**(GAAP)                           |   | ** **                                                       | **43**  |   |   | ** ** | **55** |   |   | ** ** | **93** |   |   | ** ** | **98** |   |
| **Net                Cash Flows - Investing Activities**(GAAP)                           |   | ** **                                                       | **(47** | **)** |   | ** ** | **(84** | **)** |   | ** ** | **(73** | **)** |   | ** ** | **(120** | **)** |
| **Net                Cash Flows - Financing Activities**(GAAP)                           |   | ** **                                                       | **12**  |   |   | ** ** | **39** |   |   | ** ** | **1** |   |   | ** ** | **18** |   |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**(GAAP)            |   | **$**                                                            | **8**   |   |   | **$** | **10** |   |   | **$** | **21** |   |   | **$** | **(4** | **)** |

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

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Table          of Contents

|                                                                                              |   | **UniSource                Energy**                              |    |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|---------|
|                                                                                              |   | **Three                Months Ended****June                30,** |    |   | **Six                Months Ended****June                30,** |   |
|                                                                                              |   | **2007**                                                         |    |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                              |   | -                Millions of                Dollars -            |    |
| **Net                Income**(GAAP)                                                               |   | $                                                                | 12      |   |   | $ | 10 |   |   | $ | 17 |   |   | $ | 27 |   |
| Amounts                from                the Income Statements:                                 |   |                                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                Discontinued Operations – Net of Tax                                   |   |                                                             | -       |   |   |   | - |   |   |   | - |   |   |   | (3 | ) |
| Plus:                 Income Taxes                                                           |   |                                                             | 8       |   |   |   | 7 |   |   |   | 12 |   |   |   | 21 |   |
| Total                Interest Expense                                                             |   |                                                             | 34      |   |   |   | 38 |   |   |   | 69 |   |   |   | 74 |   |
| Depreciation                and Amortization                                                      |   |                                                             | 35      |   |   |   | 33 |   |   |   | 69 |   |   |   | 63 |   |
| Amortization                of Transition Recovery Asset                                          |   |                                                             | 19      |   |   |   | 17 |   |   |   | 34 |   |   |   | 29 |   |
| Depreciation                included in Fuel and Other O&M                                    |   |                                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expense                (see                Note 13 of Notes to Consolidated Financial Statements) |   |                                                             | 2       |   |   |   | 2 |   |   |   | 3 |   |   |   | 4 |   |
| **Adjusted                EBITDA**(non-GAAP)                                                      |   | **$**                                                            | **110** |   |   | **$** | **107** |   |   | **$** | **204** |   |   | **$** | **221** |   |

|                                                                                              |   | **TEP**                                                          |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
|                                                                                              |   | **Three                Months Ended****June                30,** |   |   | **Six                Months Ended****June                30,** |   |
|                                                                                              |   | **2007**                                                         |   |   | **2006** |   |   | **2007** |   |   | **2006** |   |
|                                                                                              |   | -                Millions of                Dollars -            |   |
| **Net                Income**(GAAP)                                                               |   | $                                                                | 12     |   |   | $ | 11 |   |   | $ | 13 |   |   | $ | 28 |   |
| Amounts                from                the Income Statements:                                 |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Plus:  Income                Taxes                                                      |   |                                                             | 8      |   |   |   | 8 |   |   |   | 9 |   |   |   | 19 |   |
| Total                Interest Expense                                                             |   |                                                             | 29     |   |   |   | 31 |   |   |   | 58 |   |   |   | 62 |   |
| Depreciation                and Amortization                                                      |   |                                                             | 30     |   |   |   | 28 |   |   |   | 59 |   |   |   | 55 |   |
| Amortization                of Transition Recovery Asset                                          |   |                                                             | 19     |   |   |   | 17 |   |   |   | 34 |   |   |   | 29 |   |
| Depreciation                included in Fuel and Other O&M                                    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expense                (see                Note 13 of Notes to Consolidated Financial Statements) |   |                                                             | 1      |   |   |   | 2 |   |   |   | 3 |   |   |   | 3 |   |
| **Adjusted                EBITDA**(non-GAAP)                                                      |   | **$**                                                            | **99** |   |   | **$** | **97** |   |   | **$** | **176** |   |   | **$** | **196** |   |

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

|                                                                          | **As                of****June                30,****2007** | **As                of****December                31, 2006** |
|-------------------------------------------------------------------------------|-------------------------------------------------------------|--------------------------------------------------------------|
|                                                                          | -                Millions of                Dollars -       |
| Net                Debt                (non-GAAP)                             | $1,302                                                      | $1,335                                                       |
| Total                Debt                and Capital Lease Obligations (GAAP) | $1,424                                                      | $1,468                                                       |

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Table          of Contents

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

|                                                              |   | **As                of****June                30,****2007** |   |  **As              of              December 31, 2006**  |
|-------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|-------------------------------------------------------------------|
|                                                              |   | -                Millions of                Dollars -       |   |
| **Total                Debt (GAAP)**                              |   | $                                                           | 821    |                                                              |   | $ | 821 |   |
|                                                              |   |                                                        |   |                                                              |   |   |   |   |
| Capital                Lease                Obligations           |   |                                                        | 541    |                                                              |   |   | 588 |   |
| Current                Portion – Capital Lease Obligations  |   |                                                        | 62     |                                                              |   |   | 59 |   |
| **Total                Debt and Capital Lease Obligations**(GAAP) |   |                                                        | 1,424  |                                                              |   |   | 1,468 |   |
|                                                              |   |                                                        |   |                                                              |   |   |   |   |
| Investment                in                Lease Debt            |   |                                                        | (122   | )                                                                 |   |   | (133 | ) |
| **Net                Debt**(non-GAAP)                             |   | $                                                           | 1,302  |                                                              |   | $ | 1,335 |   |

**Ratio      of Earnings to Fixed      Charges**

|                            | **6                Months Ended** | **12                Months Ended** |
|---------------------------------|-----------------------------------|------------------------------------|
|                            | **June                30, 2007**  | **June                30, 2007**   |
| UniSource                Energy | 1.401                             | 1.606                              |
|                            |                              |                               |
| TEP                             | 1.373                             | 1.665                              |

**ITEM        6. – EXHIBITS**

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Table          of Contents

**SIGNATURES**

|                                        |   |   | UNISOURCE                  ENERGY CORPORATION(Registrant)                                                                                      |
|---------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:                   August 7, 2007 |   | /s/    | Kevin                  P.                  Larson                                                                                                        |
|                                        |   |   | Kevin                  P.                  LarsonSenior                  Vice                  President and PrincipalFinancial                  Officer |
|                                        |   |   |                                                                                                                                           |
|                                        |   |   | TUCSON                  ELECTRIC POWER COMPANY(Registrant)                                                                                     |
| Date:                   August 7, 2007 |   | /s/    | Kevin                  P.                  Larson                                                                                                        |
|                                        |   |   | Kevin                  P.                  LarsonSenior                  Vice                  President and PrincipalFinancial                  Officer |

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Table          of Contents

**EXHIBIT      INDEX**

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

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

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

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

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

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

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

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

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