UniSource Energy Reports Third Quarter 2006 Earnings.

TUCSON, Ariz. -- UniSource Energy Corp. (NYSE: UNS) reported earnings today for the third quarter of 2006 of $28 million, or $0.80 per basic share of common stock. During the same period last year, the company reported earnings of $18 million, or $0.53 per basic share.

The strong performance of coal-fired generating plants serving Tucson Electric Power Co. (TEP), UniSource Energy's largest subsidiary, and the addition of the Luna Energy Facility (Luna) to TEP's generating fleet contributed to the year-over-year increase in third-quarter earnings.

"Our plants provided us with a steady supply of power when we needed it the most," said James S. Pignatelli, Chairman, President and CEO of UniSource Energy. "That output and the energy we received from Luna helped reduce our reliance on less-efficient gas-fired units and market power during periods of peak demand."

TEP also gained access to 100 MW of system capacity from Tri-State Generation and Transmission Association (Tri-State) during the third quarter in association with the commencement of commercial operations at Springerville Generating Station (SGS) Unit 3. Tri-State, a wholesale power cooperative, is leasing the new 400-MW coal-fired unit from a financial owner and controlling its output. TEP operates all three SGS units and will do the same for SGS Unit 4, which Phoenix-based Salt River Project plans to complete by late 2009.

Last year, an unplanned outage at SGS Unit 2 and mark-to-market adjustments on forward energy transactions reduced the Company's pre-tax earnings by $22 million during the third quarter of 2005. The absence of those negative impacts contributed significantly to the year-over-year increase in third-quarter earnings in 2006.

Cooler summer temperatures led to a slight reduction in TEP's retail revenues during the third quarter of 2006 despite 2 percent annual growth in the utility's customer base. Cooling degree days in TEP's southern Arizona service territory fell 22 percent from the same period last year and were 16 percent below average.

Tucson Electric Power Co.

TEP reported earnings for the third quarter of 2006 of $30 million, or $0.84 per basic UniSource Energy share, compared with $20 million, or $0.59 per basic share, during the same period last year.

Factors affecting TEP's third quarter 2006 results include:

* Retail customer growth of 2 percent and a 24 percent increase in kWh sales to TEP's mining customers was offset by mild summer weather, leading to a small decline in TEP's retail revenues compared with the third quarter of 2005;

* Solid operating performance at TEP's coal-fired generating plants and the availability of power from Luna contributed to a $10 million decrease in fuel and purchased power costs;

* A net unrealized gain of $1 million on forward sales and purchases of energy compared with a net unrealized loss of $8 million in the third quarter of 2005. Forward energy sales in 2005 that were made before Gulf Coast hurricanes drove up wholesale power prices, contributed to the large mark-to-market adjustment last year;

* A $12 million increase in operating and maintenance expenses due primarily to higher operating costs at generating plants;

* A $3 million contribution related to SGS Unit 3. Tri-State reimburses TEP for O&M expenses and its share of the common costs and pays transmission and operating fees. The reimbursement of O&M expenses and operating fees are recorded in other revenue, while the associated costs are recorded in fuel and O&M

* A $2 million increase in expenses related to the amortization of the Transition Recovery Asset.

UNS Gas

UNS Gas reported net losses of $2 million in the third quarters of 2006 and 2005. Retail therm sales increased approximately 6 percent from the same period last year but were offset by higher fuel costs. UNS Gas' retail customer base grew nearly 5 percent since the same period last year.

UNS Electric

UNS Electric reported earnings of $2 million in the third quarters of 2006 and 2005. This quarter's results include a $1 million net unrealized loss related to a mark-to-market adjustment on forward energy purchases.

UNS Electric's customer base grew by about 5 percent since the same period last year.

Year-to-Date Earnings

UniSource Energy's consolidated year-to-date earnings through September 30, 2006, were $55 million, or $1.56 per basic share of common stock. During the same period last year, UniSource Energy reported earnings of $24 million, or $0.69 per basic share.

Earnings Per Basic Share Summary

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Earnings Outlook

UniSource Energy affirmed its 2006 full-year earnings outlook to be between $1.75 and $2.15 per basic share.

Numerous factors can affect UniSource Energy's ability to reach the 2006 estimate. Factors include, but are not limited to: changes in accounting standards; uncertainties in the wholesale power market; regulatory decisions; performance of TEP's generating plants; weather; pace and strength of the regional economy; fuel and purchased power expense; changes to long-term contracts; and changes in asset depreciable lives.

UniSource Energy's earnings are subject to the seasonal energy sales of its utilities. Generally, TEP records a significant portion of its earnings during the third quarter as a result of peak energy usage during the summer.

Conference Call and Webcast

UniSource Energy officials will discuss the company's 2006 third quarter earnings and its outlook for 2006 on Thursday, Nov. 2. The conference call will be hosted by James S. Pignatelli, UniSource Energy's Chairman, President and CEO. The live telephone and audio-only webcast is scheduled for Thursday, Nov 2, beginning at 11:00 a.m. EST.

Telephone Access

To listen to the live conference call, dial 877-582-0446 five to 10 minutes prior to the event and reference confirmation code 9855742. A telephone replay will be available for seven days starting November 2. To listen to the replay, dial 800-642-1687 and reference confirmation code 9855742.

Internet Access

A live audio-only webcast of the presentation is available through a link at uns.com. Listeners are encouraged to visit the Web site at least 30 minutes before the presentation to register, download and install any necessary audio software. A recording of the webcast will be available for 30 days through a link at uns.com.

UniSource Energy's primary subsidiaries include TEP, which serves approximately 389,000 customers in southern Arizona, and UES, a provider of natural gas and electric service for approximately 235,000 customers in northern and southern Arizona. For more information about UniSource Energy and its subsidiaries, visit uns.com.

This news release contains forward-looking information that involves risks and uncertainties, that include, but are not limited to: changes in accounting standards; the outcome of regulatory proceedings; the ongoing restructuring of the electric industry; regional economic and market conditions which could affect customer growth and the cost of fuel and power supplies; changes to long-term contracts; performance of TEP's generating plants; the weather; changes in asset depreciable lives; changes related to the recognition of unbilled revenue; the cost of debt and equity capital; and other factors listed in UniSource Energy's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The preceding factors may cause future results to differ materially from outcomes currently expected by UniSource Energy.

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